<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

[X]      Annual report under section 13 or 15(d) of the Securities Exchange Act
         of 1934 for the fiscal year ended December 31, 2000

         Transition report under section 13 or 15(d) of the Securities Exchange
         Act of 1934 for the transition period from _________ to ______________

                         Commission file number: 0-30568

                           VITAL LIVING PRODUCTS, INC.
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

      DELAWARE                                           56-1683886
------------------------                    -----------------------------------
(State of incorporation)                    (I.R.S. Employer Identification No.)

    5001 SMITH FARM ROAD, MATTHEWS, NC                          28104
---------------------------------------                       --------
(Address of principal executive offices)                      (Zip Code)

         Company's telephone number, including area code:  (704) 821-3200

         Securities registered pursuant to Section 12(b) of the Act:  None

         Securities registered pursuant to Section 12(g) of the Act: Common
         Stock, par value $.01 per share

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the Company'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. [X]

         The issuer's revenues for its most recent fiscal year were $1,295,937.
The aggregate market value of shares of the issuer's $.01 par value Common
Stock, its only outstanding class of common equity, held by non-affiliates as of
March 12, 2001 was $1,777,886.

         The number of issued and outstanding shares of the issuer's $.01 par
value Common Stock, its only outstanding class of common equity, as of March 12,
2001 was 3,150,826 shares.

         The indicated portions of the following documents are incorporated by
reference into the indicated parts of this Annual Report on Form 10-K:

<TABLE>
<CAPTION>

                                                                         Parts Into Which
                      Incorporated Documents                               Incorporated
                      ----------------------                             ----------------
         <S>                                                             <C>
         Proxy Statement for the Annual Meeting of Shareholders to           Part III
         be held June 25, 2001

</TABLE>

         Transitional Small Business Disclosure Format (Check one): Yes   No [X}
                                                                       ---

<PAGE>   2
                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS

         Vital Living Products, Inc. (the "Company", which may be referred to as
"we", "us" or "our"), was incorporated in North Carolina in January 1990. On
December 23, 1991 the Company merged into a Delaware corporation bearing the
same name as a result of which the Company became a Delaware corporation.

         We do business under the name American Water Service and sell a variety
of water treatment and testing products and services, including home water test
kits, water treatment equipment and high purity drinking water vended from
machines placed at retail locations.

         We began as a manufacturer and distributor of two proprietary drinking
water programs: The Drinking Water Machine(TM) and The Raindrop Shoppe(TM). The
Drinking Water Machine(TM) was the first in-store water bottling program for
grocery stores. The Raindrop Shoppe(TM) provided consumers with an in-store
water vending program.

         In April 1992, we consummated an initial public offering of our shares
of common stock at $3.25 per share. During the first twelve months of trading on
the Nasdaq Stock Market our stock price fell to $.25 per share. The following
year operational losses completely depleted all cash raised from the initial
public offering.

         In March 1993, the chairman of our board, C. Wilbur Peters, made
changes in management personnel, personally assumed the role of president and
chief executive officer and began funding the Company's operations using his own
financial resources. Soon thereafter, the Company halted placements of the
unprofitable Drinking Water Machine(TM) and Raindrop Shoppe(TM) and began
installing self-serve coin-operated water vending machines on revenue share
programs with retailers.

         In March 1994, our common stock, trading as low as $.04 per share,
ceased to be traded on the Nasdaq Stock Market. Since then it has been traded on
the Nasdaq OTC Bulletin Board. Vending machine installations continued to grow,
however, and in 1994 we began selling water treatment equipment for home and
commercial use.

         In 1995 we began developing a line of home water test kits designed to
enable consumers to test the safety and quality of their home's tap water. In
late 1996 we launched the first of our PurTest(R) line of home water testing
products, our PurTest(R) Bacteria test kit. By the fall of 1997 we had a
comprehensive home water test kit product line on the market. Since then,
because we believe the continued development of our PurTest(R) line of products
offers the best opportunity to grow our business, it has been our primary focus.

WATER TESTING PRODUCTS

         We are currently the only U.S. provider of a comprehensive set of home
water test kits. Our PurTest(R) line of test kits includes: PurTest(R) Bacteria,
Nitrate, Nitrite; PurTest(R) Lead; PurTest(R) Iron Hardness Plus; PurTest(R)
Pesticide; PurTest(R) Arsenic; and PurTest(R) Home Water Analysis Kit.

         Concern with the safety of water is growing in the United States as
well as in other countries. According to a recent study conducted by the Water
Quality Association, a water industry group, many Americans are concerned about
their water and want to know more about what is in their water. In the


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<PAGE>   3
United States there are over 16 million private drinking wells which the
Environmental Protection Agency (the "EPA") recommends be tested annually for
nitrates and coliform bacteria and more frequently for pesticides if a problem
is suspected. We developed our PurTest(R) line of home water test kits to
provide people concerned with the safety of their water with an alternative to
laboratory testing:

         -        Our PurTest(R) Bacteria, Nitrate, Nitrite test kit utilizes
                  EPA based methods to determine the absence or presence of
                  coliform bacteria and instantly shows whether or not water is
                  above or below the EPA safe standards for nitrates or
                  nitrites. This test kit typically retails for around $13.00.

         -        Our PurTest(R) Pesticide test kit tests for 13 triazine
                  elements and produces results in less than eight minutes. This
                  test kit typically retails for around $13.00.

         -        Our PurTest(R) Iron Hardness Plus test kit instantly tests for
                  eight items including iron, hardness, copper, nitrates,
                  nitrites, chlorine, water pH, and alkalinity. This test kit
                  typically retails for around $6.00.

         -        Our PurTest(R) Lead test kit detects lead down to the EPA safe
                  standard of 15 ppb (parts per billion) and produces results in
                  less than one hour. This test kit typically retails for around
                  $15.00.

         -        Our PurTest(R) Arsenic test kit detects arsenic down to the
                  World Health Organization safe standard of 10 ppb (parts per
                  billion) and produces results in minutes. This test kit
                  typically retails for around $13.00.

         -        Our comprehensive PurTest(R) Home Water Analysis kit includes
                  the Bacteria, Nitrate, Nitrite kit, Iron Hardness Plus kit,
                  and Lead test kit, allowing the user to screen water for 12
                  contaminants and conditions without needing to use a
                  laboratory. This comprehensive test kit typically retails for
                  around $30.00.

         We market our PurTest(R) line of products as a quick and inexpensive
alternative to laboratory testing. Recommended uses include initial and regular
follow-up testing to ensure continued water safety as well as testing following
the installation of water treatment products to verify treatment effectiveness.
Each of our test kits includes a toll-free number the customer can call to
obtain free advice from our trained employees regarding water safety and
available water treatment products.

         PurTest(R) products are available through our website (www.purtest.com)
and nationwide at retailers including Ace Hardware, Do It Best, Lowe's, Menards,
Meijers and many Home Depots, as well as water treatment dealers, water well
drillers and other independent retailers and building centers. Through various
international distributors, PurTest(R) products are sold internationally in 18
countries.

         We manufacture some component parts for PurTest(R) products ourselves.
Other components are manufactured for us to our specifications by various
suppliers. The principal active components are test strips, chemicals and
powders designed to react with water samples. The test strips, chemicals and
powders contain compounds that cause the test strip or water sample to change
color to indicate the amount of the items being tested that is contained in the
sample.


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<PAGE>   4
         Some of these test strips, chemicals and powders are supplied to us on
an exclusive basis pursuant to marketing and manufacturing agreements we have
entered into with four different suppliers which prohibit the supplier from
selling them to other manufacturers or directly to consumers. We consider such
exclusive arrangements to be important because of the time and effort invested
in locating such suppliers, developing specifications and coordinating product
development with such suppliers, and to keep competitors from obtaining the
benefit of our product development work without making such investment
themselves. We have one contract with a supplier of test strips which has a
five-year term expiring in July 2004 and which automatically renews for one year
terms unless it is terminated at least 60 days prior to its expiration. The
remaining three contracts, each with a supplier of powder, are intended to be
long-term but permit the supplier to terminate on 120 days notice. However, if
any such contract is so terminated the supplier is required to provide us with
all technical information necessary for us to either produce the powder
ourselves, or have another supplier produce the powder for us.

         All component parts we use, including those supplied to us on an
exclusive basis, can be purchased from other manufacturers. We believe the
arrangements we have developed with our suppliers are adequate to meet our
current needs. There can be no assurance, however, that we could obtain
component parts from other manufacturers on terms as favorable as those we have
with our current suppliers. We assemble and package the final product at our
facilities in Matthews, North Carolina.

WATER TREATMENT EQUIPMENT AND SERVICES

         We also sell and service water treatment products for both home and
office use. Our Puritron(TM) unit utilizes reverse osmosis technology to produce
high purity drinking water at a location's primary drinking water faucet by
filtering out contaminants such as dirt, sediment, dissolved solids, viruses,
organic molecules, pesticides and chlorine. We sell Puritron(TM) units at
wholesale to water treatment dealers for about $250 and will sell a unit to a
retail customer with installation for around $600. We also offer Puritron(TM)
service plans to customers for $20 to $30 per month. All new Puritron(TM) units
we sell to consumers come with a five year limited warranty.

         Our PurGuard(R) unit utilizes ultraviolet technology to treat bacteria
in water and is designed to treat water at its entry point into a household so
that treated water is available throughout the household. We sell PurGuard(R)
units at wholesale to water treatment dealers for between $200 and $300 and will
sell a unit to a retail customer with installation for between $600 and $800. We
also offer PurGuard(R) service plans to customers for $19.95 per month. All new
PurGuard(R) units we sell come with a seven year limited warranty.

         We also offer a complete line of point of entry water treatment
products including among other items softeners, neutralizers and iron filters
and sell other water treatment products including replacement bulbs and filters
and American Aqua(R) brand counter-top and shower head filtration products. We
offer financing on the installed water treatment products we sell to customers
with satisfactory credit ratings.

         On a parts and labor basis, within the greater Charlotte, North
Carolina region we service all water treatment products we sell as well as all
other water treatment products available on the market.

         Because we install and service most water treatment units we sell
directly, our retail water treatment equipment business is limited
geographically primarily to the greater Charlotte, North Carolina region.
However, our full line of water treatment products is available for purchase
though our website and our PurGuard(R) line of products is sold nationwide by
Lowe's and by many water treatment dealers.


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<PAGE>   5
         We assemble some of our water treatment units at our facilities in
Matthews, North Carolina. Other units are built for us to our specifications by
various suppliers. We believe other sources of supply for such products are
available and therefore do not believe the loss of any one of our current
suppliers would have a material adverse effect on our operations.

VENDING MACHINES AND MISTING SYSTEMS

         We also sell drinking water dispensed to consumers through self-service
vending machines as well as high purity water used by grocery stores in
produce-misting systems. Our vending machines dispense high quality, low priced
drinking water under the brand name "America's Purist Water." We charge around
$.35 per gallon for water dispensed by our machines.

         We place our vending machines inside or outside retail stores and have
revenue sharing arrangements with the stores. Establishments with whom we have
such agreements include K-Mart, Harris Teeter, Kroger, Winn Dixie and Family
Dollar. In some locations, in addition to vending water to consumers, our
machines are used to purify water used in produce-misting systems we maintain
for grocers. In other locations, we place machines used solely to provide water
for produce-misting systems.

         Our vending machines utilize a combination of reverse osmosis,
activated carbon, sediment filtration and/or ultra violet disinfection to
process and treat water.

         We had approximately 150 vending and misting units in operation as of
December 31, 2000 placed in various locations in Georgia, North Carolina, South
Carolina, Tennessee, Virginia and West Virginia.

         Our water vending and misting units are built for us to our
specifications by various suppliers. We believe other sources of supply are
available and therefore do not believe the loss of any one of our current
suppliers would have a material adverse effect on our operations.

MAJOR CUSTOMERS

         Sales to two major customers comprised approximately 16% and 10% of our
total 2000 sales. Sales to three major customers comprised approximately 18%,
13% and 13% of our total 1999 sales.

COMPETITION

         While there are various companies that offer home water testing kits
that compete directly with one or more of our individual PurTest(R) products,
our PurTest(R) product line is the most comprehensive set of home water test
kits available to U.S. retailers and consumers. Because we are able to offer
retailers the ability to purchase a comprehensive line of products from a single
supplier we believe retailers are more likely to purchase product from us so
they may avoid having to deal with multiple suppliers. By adding to their
product offerings, however, other firms could develop similarly comprehensive
lines of products. Also, companies not currently involved in the home water test
kit market could enter it by developing competing lines of products. Potential
competitors could include larger companies which have greater financial,
development, marketing and distribution resources than we do.

         In addition, laboratory testing which is available nationwide competes
directly with our water test kit business. In many locations, laboratory testing
is offered by health departments and other governmental agencies or by local
commercial laboratories that will test water for a fee. There are also a number
of


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laboratories that offer mail-order water testing services. In many areas
water treatment equipment dealers offer free home water testing as a part of
their marketing efforts.

         We believe our home water test kits offer significant competitive
advantages over laboratory testing. Our test kits are generally less expensive
than other available testing services and are also more convenient since the
user performs the test right at the source without needing to bring or mail a
sample to a laboratory or schedule an appointment with a technician. Our
PurTest(R) products also generally produce results much more quickly than
laboratory alternatives. Because PurTest(R) products are utilized at the home
there is no danger of sample contamination as can happen when samples are sent
through the mail to laboratories. Also, users of our PurTest(R) products, unlike
users of the free water testing performed by water treatment dealers, can
quickly and inexpensively test their water without being subject to any unwanted
sales pitch.

         The water treatment industry is highly competitive. Our water treatment
equipment business competes with many local, regional and national water
treatment dealers and their franchisees. Some of our competitors are larger
companies which have significantly greater resources than we do. We believe that
because our current supply arrangements are favorable we are able to offer more
competitive prices on our water treatment products than many of our competitors
and that our PurGuard(R) unit features technology superior to that of many
competing products. We also believe our ability to service all makes and models
of water treatment equipment gives us a competitive advantage over many other
water treatment equipment servicers.

         Our water vending business competes in the non-sparkling segment of the
highly competitive bottled water market with companies that deliver water to
homes and offices, off-the-shelf marketers and other vending machine operators
as well as with water treatment products similar to our Puritron(TM) and
PurGuard(R) units available on the market. Many of our vending business's
competitors, including water vending companies like Glacier Water Services
(Glacier), as well as bottled water companies like the Perrier Group (Poland
Spring), have significantly greater resources than we do. In addition, there are
a number of smaller companies that place water vending machines in territories
we serve and compete directly with our vending business. Because our vending
business's primary competitive advantage over water delivery services and
off-the-shelf marketers is price, a substantial decline in the price of either
delivered or off-the-shelf bottled water could adversely affect the demand for
water dispensed from our vending machines.

REGULATION

         The water industry is subject to a variety of federal, state and local
laws and regulations. Various state laws and regulations require us to obtain
licenses for our vending machines, pay annual license and inspection fees,
comply with certain detailed design and quality standards regarding our vending
machines and our vended water, and continuously control the quality of our
vended water. In some states our vending machines are subject to routine and
random state-conducted regulatory quality inspections. Installation of our water
treatment products is generally subject to local plumbing codes. Although we
believe we are operating in substantial compliance with these laws and
regulations, they and their interpretations and enforcement are subject to
change. There can be no assurance that additional or more stringent requirements
will not be imposed on our operations in the future. Failure to comply with such
current or future laws and regulations could result in the imposition of fines,
a temporary shutdown of our vending operations, the loss of certification to
sell our vended water or, even in the absence of governmental action, a
reduction in our profit margins based on increases in licensing or inspection
fees payable by us or other additional compliance costs.


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<PAGE>   7
EMPLOYEES

         As of December 31, 2000, we had a total of 18 full time employees and
one part time employee. None of our employees is covered by a collective
bargaining agreement. We believe that our relations with our employees are good.

ITEM 2.           DESCRIPTION OF PROPERTY

         Our principal office and operating facilities are located in Matthews,
North Carolina, in a building that we lease. The building, which contains
approximately 2,300 square feet of office and 10,700 square feet of warehouse
space, is in good condition. Our lease is for a term ending March 31, 2002,
subject to extension at our option for an additional two years, at a monthly
rate of $3,400. We believe that our current facilities will be adequate to meet
our needs for the foreseeable future and that suitable additional or alternative
space will be available if needed.

ITEM 3.           LEGAL PROCEEDINGS

         We are not currently party to any material legal proceedings. However,
we are currently and may from time to time in the future become a party to
various legal proceedings incidental to our business.

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

         Not applicable.
                                     PART II


ITEM 5.           MARKET FOR COMMON EQUITY AND OTHER STOCKHOLDER MATTERS

         As of March 12, 2001, the Company had issued and outstanding 3,150,826
shares of common stock held by approximately 153 holders of record.

         From March 1994 through May 2000 our common stock was quoted on the
Nasdaq OTC Bulletin Board under the symbol "VLPI". From May 2000 through
September 2000 our common stock was quoted in the "pink sheets" maintained by
the National Quotation Bureau, LLC. Since September 2000 our common stock has
been quoted on the Nasdaq OTC Bulletin Board. The range of high and low sales
prices for the common stock as quoted on the OTC Bulletin Board or in the "pink
sheets" are listed below for the periods indicated. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

<TABLE>
<CAPTION>
Fiscal Year 1999:          Quarter Ended:
----------------           -------------
<S>                        <C>                        <C>       <C>
First Quarter              March 31, 1999             $0.75     $0.25
Second Quarter             June 30, 1999              $0.56     $0.40
Third Quarter              September 30, 1999         $0.69     $0.44
Fourth Quarter             December 31, 1999          $3.00     $0.44
</TABLE>

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<TABLE>
<CAPTION>

Fiscal Year 2000:          Quarter Ended:
----------------           -------------
<S>                        <C>                        <C>       <C>
First Quarter              March 31, 2000             $3.38     $1.75
Second Quarter             June 30, 2000              $2.06     $0.88
Third Quarter              September 30, 2000         $1.50     $0.55
Fourth Quarter             December 31, 2000          $1.38     $0.50
</TABLE>

         We have never declared or paid any cash dividends on our common stock.
We currently anticipate that we will retain any future earnings to fund the
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Our Certificate of Incorporation provides
that we may not pay dividends on our common stock unless we have first paid all
accrued dividends on our Series A, Class B preferred stock and have first paid
dividends of $12.00 per share during the calendar year on our Series B, Class B
preferred stock. Accrued dividends on our Series A, Class B preferred stock
totaled $1,150,000 at December 31, 2000, and no dividends have been paid on our
Series B, Class B preferred stock during 2001 through March 2001. Additionally,
under the terms of certain Secured Convertible Debentures issued by us on
February 23, 2001, so long as such debentures remain outstanding we are
prohibited from paying any dividends on our common stock without the consent of
the holders of such debentures. Payment of future dividends, if any, will be at
the discretion of our board of directors after taking into account various
factors, including the restrictions described above, our earnings, financial
conditions, operating results and current and anticipated cash needs.

         On December 1, 2000 we entered into a consulting agreement with a
financial advisor pursuant to which we agreed as partial consideration for the
services to be rendered to us under the agreement to issue to such firm 52,500
shares of our common stock. Such shares were issued on March 5, 2001.

         The securities described above were issued in reliance upon the
exemption from the registration provisions of the Securities Act of 1933
provided for by Section 4(2) thereof for transactions not involving a public
offering.

ITEM  6.          MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following discussion should be read in conjunction with the
Company's Financial Statements and the related notes thereto attached hereto
beginning at page 12.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
2000

         Increasing sales of our PurTest(R) line of products was our primary
focus in 1999 and 2000. We sought to increase sales primarily by developing
relationships with regional chain stores like Meijers which began selling
PurTest(R) products in the summer of 1999 and national chain stores like
Menards, which began selling PurTest(R) products in September 1999. We also
sought to increase consumer awareness of PurTest(R) products by obtaining
endorsements from organizations like the American Quality Institute, which
awarded the PurTest(R) product line its "Consumer Product Award" for 1999 and
2000, and "Today's Homeowner" magazine which selected our PurTest(R) product
line as one of its "Best New Products for 1999."

         Revenues from operations for 2000 decreased 15% to $1,658,035 from
$1,947,021 in 1999. The decrease in operating revenues was primarily the result
of a 21% decrease in sales of our PurTest(R) line of products, which fell from
$1,196,090 in 1999 to $950,621 in 2000. Sales of our PurTest(R) products
declined principally because in the third quarter of 1999 we had a large initial
PurTest(R) order from a national chain store of $362,261, whereas in 2000 we did
not receive any similar orders. Reorders for


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PurTest(R) products from existing customers rose to approximately $800,000 in
2000 from approximately $650,000 in 1999. Revenues from the sales and service of
water treatment equipment increased 4.4% from $411,563 in 1999 to $429,847 in
2000. Due chiefly to a shift in focus and resources toward development of our
PurTest(R) line of products, revenues from our water vending and misting
operations decreased 18% from $339,367 in 1999 to $277,569 in 2000.

         Primarily as a result of the decrease in sales of PurTest(R) products
in 2000, gross margin decreased to 28% from 32% in 1999.

         Loss from operations increased to $722,456 in 2000 from $431,572 in
1999. Expense items contributing to this loss included payroll costs of $389,017
up 11% from $351,961 in 1999; sales and marketing costs for our PurTest(R) line
totaling $256,326 in 2000, down 16% from $304,936 in 1999; and professional
fees, primarily associated with our filing of a registration statement on Form
10-SB to register our common stock under the Securities Exchange Act of 1934 and
our exploration of additional financing sources which were $216,712 in 2000, up
from $91,161 in 1999. We anticipate incurring a relatively high level of
professional fees associated with our becoming a public reporting company and
our continued exploration of additional financing sources (see discussion below
under LIQUIDITY AND CAPITAL RESOURCES).

         Net loss for 2000 was $793,761, compared to a net loss of $795,119 in
1999. Net loss was impacted by an increase in loss from operations which was
$722,456 in 2000 compared to $431,572 in 1999 mitigated by a decrease in
interest expense from $369,951 in 1999 to $77,329 in 2000. Interest expense was
reduced as a result of the elimination during 1999 of debt owed to C. Wilbur
Peters, Chairman of our board. On June 30, 1999 Mr. Peters forgave approximately
$2,150,000 of our debt to him and on November 5, 1999 Mr. Peters released and
discharged the balance due on our $3,035,529 promissory note to him in exchange
for our issuing 31,290 shares of our Series B, Class B preferred stock to Mr.
Peters.

         In February 2001 we issued to certain investors $225,000 of convertible
debentures and warrants to purchase an aggregate of 150,000 shares of common
stock (see discussion below under LIQUIDITY AND CAPITAL RESOURCES). Upon the
conversion of the debentures and the exercise of the warrants the investors may
acquire shares of our common stock at a discount below the fair market value of
such shares. Due to the preferential conversion feature of the debentures and
the below fair market value exercise price of the warrants, we will record
approximately $225,000 of interest expense and additional paid in capital in the
first quarter of 2001. This debt issuance cost represents the value attributed
to the conversion feature of the debentures and the warrants, and it has been
limited to the amount of the proceeds allocated to the securities. In connection
with the sale of the debentures we agreed to file with the Securities and
Exchange Commission a registration statement for the resale of the shares of
common stock issuable upon conversion of the debentures and exercise of the
warrants. Upon the effectiveness of such registration statement we will issue to
the investors an additional $225,000 of debentures and warrants to purchase an
additional 150,000 shares of common stock. When we issue such debentures and
warrants, which is expected to occur in the second quarter of 2001, we expect to
record approximately $225,000 of interest expense and additional paid in
capital.

LIQUIDITY AND CAPITAL RESOURCES

         We have incurred operating losses each year since our inception.
Throughout that time C. Wilbur Peters, chairman of our board, or entities
controlled by Mr. Peters have funded our operations by lending money to us and
by leasing equipment to us used in our business.

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<PAGE>   10

As of June 30, 1999 our total indebtedness to Mr. Peters for money borrowed and
for accrued and unpaid amounts due under equipment leases was approximately
$5,180,000. On June 30, 1999 Mr. Peters forgave approximately $2,150,000 of our
debt to him and on November 5, 1999 Mr. Peters released and discharged the
balance due on our $3,035,529 promissory note to him in exchange for our issuing
31,290 shares of our Series B, Class B preferred stock to Mr. Peters. On July 1,
1999, we established a line of credit with Mr. Peters in the amount of $750,000
evidenced by a promissory note bearing interest at the LIBOR Market Index Rate
plus 1.50%, due and payable on June 30, 2001. At December 31, 2000, the
outstanding balance of that note was approximately $760,396. On February 21,
2001 Mr. Peters executed an amendment to the promissory note extending its term
to February 23, 2003. Under a $400,000 promissory note dated September 1, 1992
issued by us to CTF, Inc., a non-profit corporation controlled by Mr. Peters, we
owed approximately $407,762 at December 31, 2000. On February 21, 2001 CTF, Inc.
executed an amendment to the promissory note extending its term to February 23,
2003. This note bears interest at prime plus 2%. Additionally, during the first
quarter of 2001 CTF, Inc. made total demand loans to the Company of $117,748. We
have repaid in full all such demand loans.

         Pursuant to a Securities Purchase Agreement dated February 23, 2001
(the "Securities Purchase Agreement"), on such date we received a $225,000
private equity investment from several investment funds through the issuance of
$225,000 aggregate principal amount of 12% Secured Convertible Debentures due
February 23, 2002 (the "Debentures"), which are convertible into shares of our
common stock at a conversion price of the lesser of $.278 and fifty percent of
the average of the lowest three inter-day trading prices for our common stock
during the twenty trading day period ending one trading day prior to the date of
conversion. In connection with the sale of the Debentures we also issued to the
investors three-year warrants (the "Warrants") to purchase an aggregate of
150,000 shares of common stock at an exercise price equal to the lesser of $.229
and the average of the lowest three inter-day trading prices for our common
stock during the ten trading day period ending one trading day prior to the date
of exercise.

         In connection with the sale of the Debentures we also entered into a
Registration Rights Agreement with the investors (the "Registration Rights
Agreement") pursuant to which we agreed to file with the Securities and Exchange
Commission a registration statement for the resale of the shares of common stock
issuable upon conversion of the Debentures and exercise of the Warrants.
Pursuant to the terms of the Securities Purchase Agreement, upon the declaration
of effectiveness of the registration statement to be filed pursuant to the
Registration Rights Agreement and provided certain other customary closing
conditions are satisfied, the investors will be obligated to purchase, and the
Company shall be obligated to sell and issue to the investors, additional
Debentures in the aggregate principal amount of $225,000 and additional Warrants
to purchase an aggregate of 150,000 shares of common stock, with the closing of
such purchase to occur within ten business days of the effective date of the
registration statement.

         Net cash used by operating activities was $629,162 in 2000 and $242,333
in 1999. In both such years cash to fund such negative cash flows was obtained
from the loans made to us by Mr. Peters described above. We do not expect
positive cash flows from our operations during 2001 and into 2002. Even if we
are successful in continuing to expand our product distribution, we expect that
such expansion will continue to require additional cash. We believe that our
cash on hand, cash generated from operations, and cash generated from the sale
the Debentures described above will enable us to continue our operations through
the summer of 2001. No assurance can be given, however, that such funds will
satisfy our needs for such period or that, if needed, additional funds will be
available. We expect to require additional financing to fund our operations at
some point during the summer of 2001 and, to the extent that the Debentures have
not been converted into shares of our common stock, we will require additional
financing to repay the Debentures when due on February 23, 2002. However, the
Securities Purchase Agreement requires us to obtain the consent of the investors
party to that agreement prior to negotiating or contracting with any third party
to obtain additional equity financing or debt financing with an equity component
until 180 days after the effective date of the registration statement that we
are required to file under the Registration Rights Agreement. We intend to
explore various financing alternatives, including obtaining an


                                       10
<PAGE>   11
equity credit line, the sale of convertible debt securities and the private
placement of our equity securities. We have not yet received any commitments for
additional financing and there is no assurance we will be able to obtain such
financing. If we are unable to obtain any such additional necessary financing
our financial condition and results of operations could be materially adversely
affected and in order to continue as a going concern we might be required to
substantially reduce expenses by among other things curtailing our efforts to
increase sales of our PurTest(R) and PurGuard(R) product lines.

CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION

         Statements in this report as to projections of future financial or
economic performance of the Company, and statements of our plans and objectives
for future operations are "forward looking" statements, and are being provided
in reliance upon the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Important factors that could cause actual results
or events to differ materially from those projected, estimated, assumed or
anticipated in any such forward looking statements include: general economic
conditions in our markets including inflation; recession; increased competition
from existing competitors and from any new entrants in our markets; any loss of
key management personnel; changes in governmental regulations applicable to our
business; and the availability of additional funding necessary to support our
operations.

ITEM 7.           FINANCIAL STATEMENTS


The following financial statements are included herein:

<TABLE>
<CAPTION>
                                                              Page
                                                              ----
              <S>                                             <C>
              Independent Auditor's Report                    F-1

              Balance Sheet                                   F-2

              Statement of Operations                         F-4

              Statement of Changes in Stockholders' Equity    F-5

              Statement of Cash Flows                         F-6

              Notes to Financial Statements                   F-8
</TABLE>


                                       11
<PAGE>   12
WAGNER NOBLE & COMPANY
     CERTIFIED PUBLIC ACCOUNTANTS

                          INDEPENDENT AUDITOR'S REPORT


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

We have audited the accompanying balance sheet of Vital Living Products, Inc. as
of December 31, 2000, and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2000 and
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vital Living Products, Inc. as
of December 31, 2000, and the results of its operations and its cash flows for
the years ended December 31, 2000 and 1999, in conformity with generally
accepted accounting principles.

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
and has a net capital deficiency that 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.


Charlotte, North Carolina,                             Wagner Noble & Company
February 26, 2001.


                                      F-1



<PAGE>   13
                           VITAL LIVING PRODUCTS, INC.

                                  BALANCE SHEET

                                DECEMBER 31, 2000


                                     ASSETS


<TABLE>
<S>                                                                                <C>
 CURRENT ASSETS:
   Cash                                                                            $    400
   Accounts receivable, less allowance for doubtful accounts of $13,782             174,265
   Installment accounts receivable                                                   11,459
   Prepaid expense                                                                    2,987
   Inventory                                                                        291,986
                                                                                   --------
      Total current assets                                                          481,097

PROPERTY AND EQUIPMENT:
   Office furniture and equipment                                                    43,067
   Warehouse equipment                                                              107,646
   Computer equipment                                                               190,816
   Vehicles                                                                         113,954
   Water service equipment                                                          429,158
   Leasehold improvements                                                            22,557
                                                                                   --------
                                                                                    907,198
   Less accumulated depreciation                                                    717,589
                                                                                   --------
     Net property and equipment                                                     189,609

 OTHER ASSETS:
   Installment accounts receivable                                                   12,137
   Deferred costs, net of accumulated amortization of $51,070                        19,157
                                                                                   --------
                                                                                     31,294
                                                                                   --------
                                                                                   $702,000
                                                                                   ========
</TABLE>


The accompanying notes to financial statements are an integral part of this
statement.


                                       F-2
<PAGE>   14
                           VITAL LIVING PRODUCTS, INC.

                                  BALANCE SHEET

                                DECEMBER 31, 2000


                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<S>                                                                                               <C>
 CURRENT LIABILITIES:
   Bank overdrafts                                                                                $      8,969
   Payable to related party                                                                             26,778
   Trade accounts payable                                                                              131,863
   Accrued interest payable to related parties                                                          17,198
   Demand note payable to related party                                                                 10,252
   Accrued dividends                                                                                 1,173,000
   Accrued payroll and payroll taxes                                                                    19,286
   Current portion of long-term notes payable                                                           13,253
    Other accrued liabilities                                                                           19,578
                                                                                                  ------------
      Total current liabilities                                                                      1,420,177

LONG-TERM NOTES PAYABLE:
   Notes payable to related parties                                                                  1,150,000
   Vehicle loans payable                                                                                8,659
                                                                                                  ------------
     Total long-term notes payable                                                                   1,158,659

REDEEMABLE PREFERRED STOCK, Class A, $.01 par value,
   3,303,375 shares authorized, issued and outstanding                                                  33,034

 STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value, 20,000,000 shares authorized;
     3,422,173 shares issued and 3,098,326 outstanding                                                  34,221
   Preferred stock - Class B, convertible, $.01 par value, 1,000,000 shares authorized
     Series A - 575,000 shares outstanding                                                           1,150,000
     Series B - 31,290 shares outstanding                                                            1,783,935
   Paid-in capital                                                                                   7,962,201
   Treasury stock, 323,847 shares, at cost                                                             (75,000)
   Retained earnings (deficit)                                                                     (12,765,227)
                                                                                                  ------------
     Total stockholders' equity                                                                     (1,909,870)
                                                                                                  ------------
                                                                                                  $    702,000
                                                                                                  ============
</TABLE>


The accompanying notes to financial statements are an integral part of this
statement.


                                       F-3
<PAGE>   15
                           VITAL LIVING PRODUCTS, INC

                            STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                               2000                    1999
                                                                           -----------             -----------
<S>                                                                        <C>                     <C>
REVENUES:
   Product sales                                                           $ 1,295,937             $ 1,521,004
   Service revenues                                                            362,098                 426,017
                                                                           -----------             -----------
      Total revenues                                                         1,658,035               1,947,021

COST OF GOODS SOLD:
   Direct material costs                                                       673,335                 747,137
   Labor, taxes and fringes                                                    321,006                 293,785
   Travel, vehicle and other costs                                             117,207                  82,812
   Lawsuit settlement costs                                                         --                  62,407
   Research and development costs                                                   --                  47,000
   Depreciation                                                                 81,187                  94,302
                                                                           -----------             -----------
     Total cost of goods sold                                                1,192,735               1,327,443
                                                                           -----------             -----------

GROSS MARGIN                                                                   465,300                 619,578

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES:
   Salaries, taxes and fringes                                                 389,017                 351,961
   Sales commissions and brokerage costs                                       115,527                 111,616
   Marketing, advertising and promotion expenses                               256,326                 304,936
   Travel and vehicle costs                                                     40,378                  47,051
   Professional fees and costs                                                 216,712                  91,161
   Bad debt expense                                                              3,413                   5,198
   Office and telephone costs                                                  128,659                 110,959
   Depreciation and amortization                                                16,999                  12,206
   Insurance and other expenses                                                 20,725                  16,062
                                                                           -----------             -----------
      Total selling, general and administrative expenses                     1,187,756               1,051,150

                                                                           -----------             -----------
INCOME (LOSS) FROM OPERATIONS                                                 (722,456)               (431,572)

OTHER REVENUES (EXPENSES):
    Interest expense                                                           (77,329)               (369,951)
    Other                                                                        6,024                   6,404
                                                                           -----------             -----------
     Total other revenues (expenses)                                           (71,305)               (363,547)
                                                                           -----------             -----------

NET INCOME (LOSS) BEFORE INCOME TAXES                                         (793,761)               (795,119)

INCOME TAX (PROVISION) BENEFIT                                                      --                      --
                                                                           -----------             -----------

NET INCOME (LOSS)                                                          $  (793,761)            $  (795,119)
                                                                           ===========             ===========

BASIC INCOME (LOSS) PER COMMON SHARE                                       $     (0.30)            $     (0.31)
                                                                           ===========             ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                   3,094,081               2,996,451
                                                                           ===========             ===========

</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

                                      F-4

<PAGE>   16
                           VITAL LIVING PRODUCTS, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                           Common Stock
                                       ----------------------                           Retained      Class A      Class B
                                        Number of      $.01     Paid-in    Treasury     Earnings     Preferred    Preferred
                                         Shares     Par Value  Capital       Stock      (Deficit)      Stock       Stock
                                       ----------   --------- ----------   --------    ------------  ---------   ----------
<S>                                    <C>          <C>       <C>          <C>         <C>           <C>         <C>
BALANCE, December 31, 1998              3,320,298   $33,203   $4,376,961   ($75,000)   ($10,900,347)   $33,034   $1,150,000
Dividends accrued on Series A,
   Class B, preferred stock at
   $.16 per share                              --        --           --         --        (138,000)        --           --
Issue of Series B, Class B
  Preferred stock, 31,290 shares
   in exchange for debt                        --        --           --         --              --         --           --

Debt forgiveness                               --        --    3,461,504         --              --         --           --

Services provided at no charge by
  stockholder                                  --        --       33,140         --              --         --           --

Net loss for the year ended
   December 31, 1999                           --        --           --         --        (795,119)        --           --

                                        ---------   -------   ----------   --------    ------------    -------   ----------
BALANCE, December 31, 1999              3,320,298   $33,203   $7,871,605   ($75,000)   ($11,833,466)   $33,034   $1,150,000
                                        =========   =======   ==========   ========    ============    =======   ==========

Dividends accrued on Series A,
   Class B, preferred stock at
   $.16 per share                              --        --           --         --        (138,000)        --           --

Reclassification of Class A,
   preferred stock                             --        --           --         --              --    (33,034)          --

Services provided at no charge by
  stockholder                                  --        --       35,408         --              --         --           --

Options granted to non-employees for
  services provided                            --        --       43,238         --              --         --           --

Issue of common stock, 101,875 shares     101,875     1,018       11,950         --              --         --           --

Net loss for the year ended
   December 31, 2000                           --        --           --         --        (793,761)        --           --

                                        ---------   -------   ----------   --------    ------------    -------   ----------
BALANCE, December 31, 2000              3,422,173   $34,221   $7,962,201   ($75,000)   ($12,765,227)   $    --   $1,150,000
                                        =========   =======   ==========   ========    ============    =======   ==========


<CAPTION>
                                            CLASS B, SER B           TOTAL
                                              PREFERRED           STOCKHOLDERS'
                                                STOCK                EQUITY
                                            --------------        -------------
<S>                                         <C>                   <C>
BALANCE, December 31, 1998                     $       --          ($5,382,149)
Dividends accrued on Series A,
   Class B, preferred stock at
   $.16 per share                                      --             (138,000)
Issue of Series B, Class B
  Preferred stock, 31,290 shares
   in exchange for debt                         1,783,935            1,783,935

Debt forgiveness                                       --            3,461,504

Services provided at no charge by
  stockholder                                          --               33,140

Net loss for the year ended
   December 31, 1999                                   --             (795,119)

                                               ----------          -----------
BALANCE, December 31, 1999                     $1,783,935          ($1,036,689)
                                               ==========          ===========

Dividends accrued on Series A,
   Class B, preferred stock at
   $.16 per share                                      --             (138,000)

Reclassification of Class A,
   preferred stock                                     --              (33,034)

Services provided at no charge by
  stockholder                                          --               35,408

Options granted to non-employees for
  services provided                                    --               43,238

Issue of common stock, 101,875 shares                  --               12,968

Net loss for the year ended
   December 31, 2000                                   --             (793,761)

                                               ----------          -----------
BALANCE, December 31, 2000                     $1,783,935          ($1,909,870)
                                               ==========          ===========
</TABLE>


The accompanying notes to financial statements are an integral part of this
statement.

                                       F-5
<PAGE>   17
                           VITAL LIVING PRODUCTS, INC.

                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>

                                                                                     2000                   1999
                                                                                  -----------           -----------
<S>                                                                               <C>                   <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
    Cash received from customers and others                                       $ 1,654,136           $ 2,001,000
    Cash paid to suppliers and employees                                           (2,219,458)           (2,191,264)
    Interest paid                                                                     (63,840)              (52,069)
                                                                                  -----------           -----------
       Net cash used by operating activities                                         (629,162)             (242,333)

 CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                                (82,946)              (54,740)
    Payments for trademarks and product design costs                                   (4,931)                   --
    Cash received from sale of fixed asset                                              1,642                    --
                                                                                  -----------           -----------
       Net cash used by investing activities                                          (86,235)              (54,740)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Draw on bank overdraft, net                                                        (29,657)               (8,844)
   Net proceeds from demand notes payable to related parties                          722,500               316,252
   Payments on notes payable                                                          (19,475)               (6,203)
   Proceeds from new borrowings                                                        28,800                    --
   Proceeds from common stock options exercised                                        12,968                    --
   Payments on obligations under capital leases payable to related party                   --                (8,997)
                                                                                  -----------           -----------
      Net cash provided by financing activities                                       715,137               292,208
                                                                                  -----------           -----------

NET DECREASE IN CASH                                                                     (261)               (4,865)

CASH, beginning of period                                                                 661                 5,526
                                                                                  -----------           -----------

CASH, end of period                                                               $       400           $       661
                                                                                  ===========           ===========

</TABLE>

NONCASH TRANSACTIONS:
  Preferred Class B, Series A dividends of $138,000 were accrued during each
   year ended December 31, 2000 and 1999.

  Certain salaries to Company employees totaling $35,408 and $33,140 were paid
   by a stockholder during the year ended December 31, 2000 and 1999,
   respectively.

  In 1999, approximately $2,150,000 of capital lease obligations and related
   accrued interest plus accrued interest on a demand note payable were all
   forgiven by the related party to whom these amounts were owed.

  Options were granted to non-employees for services provided during the year
   ended December 31, 2000. The value of the options is approximately $43,000,
   which was recorded as an expense.

  Certain equipment purchases at a cost of approximately $26,000 remained in
     payables at year end December 31, 2000.


                                    Continued
                                       F-6

<PAGE>   18


                           VITAL LIVING PRODUCTS, INC.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999


RECONCILIATION OF NET INCOME (LOSS) TO
   NET CASH USED BY OPERATING ACTIVITIES:

<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                                ---------           ---------
<S>                                                                             <C>                 <C>
Net income (loss)                                                               $(793,761)          $(795,119)
Adjustments to reconcile net income (loss) to net cash
  used by operating activities:
     Depreciation and amortization                                                 98,186             106,507
     Gain on sale of fixed assets                                                    (844)                 --
     Services provided at no charge by stockholder                                 35,408              33,140
     Services provided by non-employees in exchange
        for stock options                                                          43,238                  --
     (Increase) decrease in accounts receivable                                    (9,080)             52,773
     Increase in inventory                                                        (11,914)            (47,594)
     (Increase) decrease in prepaid expenses                                       (2,987)             28,247
     Increase in payable to related party                                           4,231                  --
     Increase in trade accounts payable                                            46,281               7,961
     Increase (decrease) in accrued interest payable to related party              13,489              (6,425)
     Increase (decrease) in accrued payroll and payroll taxes                       2,486             (18,624)
     Increase (decrease) in other accrued liabilities                             (53,895)             72,494
     Interest expense included in debt forgiveness                                     --             324,307
                                                                                ---------           ---------
        Net cash used by operating activities                                   $(629,162)          $(242,333)
                                                                                =========           =========
</TABLE>


The accompanying notes to financial statements are an integral part of this
statement.


                                      F-7
<PAGE>   19
                           VITAL LIVING PRODUCTS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
       NATURE OF BUSINESS - Vital Living Products, Inc. sells various water
         testing materials, including kits which test for lead, pesticides,
         bacteria, iron and other substances and conditions; vending machines,
         which dispense purified and filtered water at various locations,
         including grocery stores and shopping centers; and misting apparatus.
         It also sells and services water treatment equipment and water
         softeners and filters. The Company operates under the name American
         Water Service.

     RECEIVABLES, INSTALLMENT RECEIVABLES AND RESERVE FOR BAD DEBTS - The
         Company records amounts receivable for all earned revenues which have
         not been collected. Installment receivables result from installment
         equipment purchase contracts. These contracts generally have terms from
         36 to 60 months, require interest payments calculated at 16% and
         require monthly installment payments of principal and interest. The
         purchased equipment under contract secures these receivables. The
         Company maintains an allowance for bad debts to reflect all receivables
         at estimated collectible balances.

       INVENTORY - Inventories include both raw materials and finished goods,
         each at first-in first-out cost, which is not in excess of market. The
         valuation of finished goods inventory includes the labor and overhead
         required for its production.

       PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
         Depreciation is provided by using both straight-line and accelerated
         methods over the estimated useful lives of the assets, which are:

<TABLE>
         <S>                                          <C>
         Office furniture and equipment               5 to 7 years
         Warehouse equipment                          7 years
         Computer equipment                           5 years
         Vehicles                                     5 years
         Water service equipment                      4 years
         Leasehold improvements                       39 years
</TABLE>

       DEFERRED COSTS - The Company has incurred certain costs related to
         product design, patents and trademarks. Management believes that these
         costs will be recovered through future operations, and accordingly, has
         capitalized them as described in Note 6.

       REVENUE RECOGNITION - Service revenues are from equipment which is
         installed in customers' facilities. This equipment may be rented from
         month-to-month and service revenues are recognized as earned and billed
         monthly. Revenues from product sales are recognized when such products
         are sold and shipped to customers.


                                      F-8
<PAGE>   20
       WARRANTY COSTS - The Company sells certain water purification equipment
         subject to warranties which extend from five to seven years. Warranty
         costs are nominal and are recorded in the period in which they are
         incurred.

       MARKETING, ADVERTISING AND PROMOTION COSTS - The Company expenses all
         marketing, advertising and promotion costs as incurred.

       STOCK-BASED COMPENSATION - The Company has a compensatory stock option
         plan under which it grants options to employees and agents. As all
         options granted to employees are at exercise prices which are equal to
         or less than fair market value of the stock, the Company records no
         expense related to such grants. See Note 8. Stock options granted are
         valued using the Black Scholes valuation model and quoted prices for
         the Company's stock. When options are granted to non-employees, the
         transaction is accounted for based on the fair value of the
         consideration (goods and services) received or the fair value of the
         options granted, whichever is more reliably measurable.

       INCOME TAXES - Income taxes are provided for the tax effects of
         transactions reported in the financial statements and consist of taxes
         currently due plus deferred taxes related primarily to certain related
         party payables not currently deductible for tax return purposes and to
         net operating loss carryforwards available to offset income in future
         years. The deferred tax assets represent the future tax return
         consequences of those differences. Valuation allowances are
         established, if necessary, to reduce the deferred tax assets to the
         amount that will more likely than not be realized.

       CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows,
         the Company considers all highly liquid debt instruments to be cash
         equivalents.

       ESTIMATES - The preparation of financial statements in conformity with
         generally accepted accounting principles requires management to make
         estimates that affect the reported amounts of assets and liabilities
         and disclosure of contingent assets and liabilities at the date of the
         financial statements and the reported amounts of revenues and expenses
         during the reporting period. Actual results could differ from those
         estimates.


2.  COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN:
       As shown in the accompanying financial statements, the Company has
         incurred recurring losses from operations and resulting cash flow
         deficits. It also has current liabilities significantly in excess of
         current assets and a significant deficit in total stockholders' equity.
         These factors raise substantial doubt about the Company's ability to
         continue as a going concern as of December 31, 2000.

       Management continues to focus on its marketing and sales of water testing
         kits, which represent a relatively new product line. Management
         believes that this new line will help the Company to achieve
         profitability. The Company's ultimate ability to become profitable,
         however, is contingent on its achieving significantly higher sales
         levels. Until that occurs and until the Company generates positive cash
         flow from operations, additional outside funding will continue to be
         required.


                                      F-9
<PAGE>   21
       The Company expects to require additional financing to fund its
         operations during fiscal year 2001. In February 2001, the Company
         entered in to an equity financing agreement with a private equity
         investment fund, whereby the Company will receive an initial cash
         infusion in the aggregate of $450,000 in exchange for its issuance of
         convertible debentures and warrants to the investment fund. (See Note
         16.)

       If, under this new financing agreement and/or subsequent financing
         agreements, the Company cannot meet its cash requirements for the
         coming year, its financial condition and results of operations could be
         materially adversely affected and it may be unable to continue as a
         going concern. The financial statements do not include any adjustments
         that might be necessary if the Company is unable to continue as a going
         concern.


3.   FORGIVENESS OF DEBT - CONTRIBUTION OF CAPITAL:
       In June 1999, the Company entered into an agreement with Wilbur Peters, a
         related party and stockholder, under which it agreed to issue a new
         note to Mr. Peters for $3,035,535 in exchange for various notes,
         accrued interest, and other obligations totaling approximately
         $5,180,000. As a part of this transaction, Mr. Peters released the
         Company from approximately $2,150,000 in obligations (net), with the
         Company recording this amount as additional paid-in capital. This note
         provided for the payment of interest at 6% per year. Interest was to be
         paid semiannually, and the note was to mature on June 30, 2001.

       In November 1999, Mr. Peters and the Company agreed to exchange this
         note, accrued interest on this note since June 30, and certain
         equipment for 31,290 shares of the Company's Class B, Series B
         preferred stock (see Note 9). The Company estimated the fair market
         value of the stock to be $1,783,395, which represented a discount of
         approximately 40% from its redemption price. It recorded the shares
         issued at that value and reclassified the balance of the indebtedness
         to additional paid in capital. Total debt reclassified to additional
         paid in capital for the year ended December 31, 1999, totaled
         $3,461,504.


4.  RELATED PARTY TRANSACTIONS:
       At December 31, 2000, the Company had approximately $750,000 in
         borrowings outstanding on a $750,000 revolving line of credit from
         Wilbur Peters. This line of credit is unsecured and provides that
         advances will be made at the discretion of the lender and requires
         monthly interest payments at the LIBOR rate plus 1.5%. Interest accrued
         at December 31, 2000, was $9,406. Interest expense on this note totals
         approximately $33,300 and $3,600 for the years ended December 31, 2000
         and 1999, respectively.

       The Company had borrowings from CTF, Inc., an affiliate of Mr. Peters,
         for $400,000 with accrued interest of $7,762 at December 31, 2000.
         Interest expense for this note of approximately $44,000 and $41,100 was
         recorded during the years ended December 31, 2000 and 1999,
         respectively. The unsecured note is due on demand and has an interest
         rate of prime plus 2%.


                                      F-10
<PAGE>   22
       In connection with the February 2001 financing described in Note 16, the
         lenders for each of these notes agreed to extend the due dates to
         February 2003, at which time the entire balance will become payable.
         Accordingly, these notes payable have been reflected as long-term in
         the accompanying balance sheet.

       The Company leased vending machines, misting machinery and purification
         equipment, and four service vans from Mr. Peters through June 30, 1999.
         These obligations including accrued interest were forgiven by Mr.
         Peters in the agreement described in Note 3.

       CTF, Inc. owns the preferred Series A Class B stock and is owed
         $1,173,000 in accrued dividends.  (See Note 9.)

       The salaries for the chief financial officer and vice-president of the
         Company and certain accounting personnel were paid by companies with
         which Mr. Peters is affiliated. These salaries, which were $35,408 and
         $33,140 for the years ended December 31, 2000 and 1999, respectively,
         have been recorded in the statements of operations, and the Company has
         also recorded additional capital contributions from Mr. Peters in these
         amounts.

       During the year ended December 31, 2000, the Company entered into a
         $100,000 line of credit arrangement with CTF, Inc. The Company had
         approximately $10,300 in borrowings outstanding on this line at
         December 31, 2000. This line of credit provides that advances will be
         made at the discretion of the lender and requires monthly interest
         payments at 9.5%. Interest expense on this note totals approximately
         $30 for the year ended December 31, 2000, and this interest payable was
         accrued at December 31, 2000. This note is due and payable on or before
         May 1, 2001.

       At December 31, 2000, Don Podrebarac, President of the Company, was owed
         approximately $26,000 by the Company for equipment purchased during the
         year and other expenses which have not yet been reimbursed.


5.  INVENTORY:
       The Company's inventories as of December 31, 2000, consisted of the
following components:


<TABLE>
                     <S>                               <C>
                     Water testing kits                $189,797
                     Water treatment parts               72,079
                     Bottles and other                   30,110
                                                       --------
                                                       $291,986
                                                       ========
</TABLE>


                                      F-11

<PAGE>   23
6.  DEFERRED COSTS:
       Deferred costs as of December 31, 2000, consists of the items shown
         below. These are being amortized on a straight-line basis over their
         estimated useful lives of from 5 to 17 years. Amortization expense
         recorded during the year ended December 31, 2000, totaled $5,218.


<TABLE>
                     <S>                               <C>
                     Product design costs              $12,157
                     Patents and trademarks             37,370
                     Non-compete agreement              14,500
                     Other                               6,200
                                                       -------
                                                        70,227
                     Less accumulated amortization      51,070
                                                       -------
                      Net deferred costs               $19,157
                                                       =======
</TABLE>

7.  LONG-TERM DEBT:
       The Company has two notes payable to a bank at December 31, 2000,
         totaling $15,775 and $6,137. The interest rate on both notes is 3.9%.
         Monthly payments of principal and interest total $1,203. These loans
         are secured by two vehicles at December 31, 2000 and mature as follows:

<TABLE>
<CAPTION>
                          Year            Amount
                          -----         ---------
                          <S>           <C>
                          2001          $  13,253
                          2002              8,659
                                        ---------
                                        $  21,912
                                        =========
</TABLE>

       See Note 4 for discussion of related party notes payable.


8.  COMMON STOCK OUTSTANDING, STOCK OPTION PLAN AND LOSS PER COMMON SHARE:
       The Company has 20,000,000 shares of authorized common stock, of which
         3,098,326 shares are issued and outstanding and 323,847 shares are
         issued and held as treasury shares. A total of 4,970,056 common shares
         have been reserved for future issuance of stock through the exercise of
         stock options and the conversion of Class B preferred stock, as
         described below.

       Additionally, the Company has reserved 5,000,000 shares for issuance in
         connection with the convertible debentures and warrants described in
         Note 16.

       The 1991 Stock Option Plan provides for granting options for up to
         3,150,000 shares of the Company's common stock to key employees,
         directors, consultants, and agents of the Company. Options to be
         granted may be either incentive or non-statutory stock options, and
         restrictions apply to both the grant and exercise of options. As of the
         date of this report, options for 1,896,293 shares have been granted to
         employees and agents. Options extend contractually for ten years.
         Non-qualified options vest fully at the time of grant while incentive
         stock options issued to employees vest ratably over four years. The
         following is a summary of option activity during the years ended
         December 31, 2000 and 1999.


                                      F-12
<PAGE>   24

       Activity for non-qualified stock options (primarily non-employees) was as
follows:

<TABLE>
<CAPTION>
                                            December 31, 2000              December 31, 1999
                                        --------------------------     --------------------------
                                                          Exercise                       Exercise
                                          Shares           Price*         Shares          Price*
                                        ----------        --------      ----------       --------
<S>                                     <C>               <C>           <C>              <C>
Outstanding at beginning of year         1,953,668         $0.192        1,943,668        $0.188
Granted                                     10,000          1.500           10,000         1.000
Granted                                     10,000          2.500               --            --
Exercised                                 (100,000)         0.125               --            --
                                        ----------         ------       ----------        ------
Outstanding at end of year               1,873,668          0.214        1,953,668         0.192
                                        ==========         ======       ==========        ======
Exercisable at end of year
*weighted average                        1,873,668         $0.214        1,953,668        $0.192
                                        ==========         ======       ==========        ======
</TABLE>







       Activity for incentive stock options (granted to employees) was as
follows:

<TABLE>
<CAPTION>
                                           December 31, 2000            December 31, 1999
                                        -----------------------      -----------------------
                                                       Exercise                    Exercise
                                        Shares          Price         Shares         Price
                                        -------        --------      -------       ---------
<S>                                     <C>            <C>           <C>           <C>
Outstanding at beginning of year         32,500         $0.25         48,500         $0.25
Granted                                  22,000          1.56             --            --
Exercised                                (1,875)         0.25             --            --
Expired or forfeited                         --          0.25        (16,000)         0.25
                                        -------         -----        -------         -----
Outstanding at end of year               52,625         $0.81         32,500         $0.25
                                        =======         =====        =======         =====
Exercisable at end of year               14,375         $0.25          8,125         $0.25
                                        =======         =====        =======         =====
</TABLE>


       Exercise prices for options outstanding at December 31, 2000, range from
$.125 to $2.50 per share. Total shares by exercise price are as follows:

<TABLE>
<CAPTION>
                                Options         Options        Remaining
             Exercise Price    Outstanding    Exercisable   Contractual Life*
             --------------   ------------    -----------   ----------------
             <S>              <C>             <C>           <C>
                 0.125         1,720,000        1,720,000        6.5 yrs
                 0.250            32,625           16,375          7 yrs
                 1.000            10,000           10,000          9 yrs
                 1.500            10,000           10,000         10 yrs
                 1.560            22,000               --         10 yrs
                 2.500            10,000           10,000         10 yrs
                 1.120           121,668          121,668          2 yrs
                              ----------       ----------
                               1,926,293        1,888,043
                              ==========       ==========
</TABLE>
     *weighted average


                                      F-13
<PAGE>   25

       The Company has recorded no compensation expense under this plan during
         2000 or 1999, as options have been granted at prices which are less
         than or equal to fair market value of the stock at the dates of the
         grant. Since the Company is not required to adopt the fair value based
         recognition provisions prescribed under Statement of Financial
         Accounting Standards No. 123, Accounting for Stock-Based Compensation,
         it has elected only to comply with the disclosure requirements set
         forth in the statement.

       During 2000 and 1999, the Company granted options for 30,000 shares to a
         vendor. Exercise price of these options is $1.00, $1.50, and $2.50 per
         share for each set of 10,000 options. At the grant date, the fair
         market value of the Company's common stock was $0.4375, $2.12 and $1.75
         per share. Based on the value of services received from this vendor and
         the amount paid in cash by the Company, the Company determined the
         value of the options granted to approximate $43,200. Accordingly,
         expense in this amount was recorded on the income statement for the
         year ended December 31, 2000.

       During 2000, the Company granted options for 22,000 shares to employees.
         Using the Black Scholes valuation model, it calculated the value of
         those options to be approximately $1.57 each. This valuation included
         the following assumptions: risk-free interest rate - 6.0%; expected
         life - 4 years; expected volatility - 105%; expected dividends - none.
         The Company estimated that 60% of these options will vest. Exercise
         price of these options is $.25 per share. At the grant date, the fair
         market value of the Company's common stock was approximately $1.56 per
         share.

       Had the Company recorded expense for these grants under FASB Statement
         123, it would have recorded additional compensation cost of $6,994 and
         $1,819 in 2000 and 1999, respectively. Pro-forma net income (loss) and
         per share amounts for each year would be as follows:

<TABLE>
<CAPTION>
                                                               2000               1999
                                                           -----------         ----------
                     <S>                                   <C>                <C>
                     Net Income (Loss), as reported        $  (793,761)        $  (795,119)
                     Pro-forma Net Income (Loss)           $  (800,755)        $  (796,938)

                     Pro-forma Basic Income (Loss)
                       per Common Share                    $     (0.30)        $     (0.31)
</TABLE>

       Basic earnings (loss) per common share has been computed based on the
         weighted average number of common shares outstanding. As there were no
         changes in common stock outstanding during the year ended December 31,
         1999, the weighted average number of common shares outstanding for 1999
         is the same as common shares issued and outstanding at year end 1999.
         Weighted average shares outstanding for 2000 is determined by
         calculating the number of months the respective shares were outstanding
         during the year, multiplying by the number of shares outstanding and
         dividing by twelve.

       No calculation has been presented for diluted earnings per share for
         either period. The inclusion of shares for the effect of any options or
         preferred stock would be anti-dilutive because the Company has losses
         for both years. The calculation of basic earnings (loss) per common
         share is based on the Company's net income (loss) adjusted for the
         amount of preferred dividends accrued ($138,000) during each of the
         years ended December 31, 2000 and 1999.


                                      F-14
<PAGE>   26
9.  PREFERRED STOCK:
       During 1992, the Company authorized 3,303,375 shares of Class A preferred
         stock with a par value of one cent per share. Each share of this class
         of stock, which is non-voting and has no dividend rights, has a
         liquidation preference of $.01 per share and is convertible at the
         holder's option into one share of the Company's common stock. However,
         all outstanding shares of Class A preferred stock are currently held in
         escrow under an agreement with its original holders which prohibits the
         holders from converting the shares as long as they are being held in
         escrow. Since certain financial thresholds were not met in prior years,
         under the terms of the escrow agreement the shares of Class A preferred
         stock are required to be released from escrow to the Company and the
         Company is required to redeem such shares at $.01 per share ($33,034 in
         the aggregate). During 2000, the Company's Board of Directors approved
         the release of the certificates representing the outstanding shares of
         Class A preferred stock so that it may redeem such shares. Such
         preferred stock has been reclassified from stockholders' equity in the
         accompanying balance sheets as a result of the Board's actions.

       Also, the Company has authorized 1,000,000 shares of Class B preferred
         stock with a par value of one cent per share. Its Series A shares have
         a liquidation preference of $.01 per share ($5,750 in aggregate),
         provide for the payment of dividends at 12% per annum, are redeemable
         at any time at the Company's option at $2.00 per share ($1,150,000 in
         aggregate), and are convertible by the holder into shares of common
         stock at a ratio of 4/9 of a share of common for each preferred share
         tendered. Holders of this Series A, Class B preferred stock have the
         right to elect a majority of the Board of Directors. Dividends accrued
         on these shares through December 31, 2000, totaled $1,173,000 ($2.04
         per share), including dividends accrued of $138,000 for each year 2000
         and 1999.

       In November 1999, the Company issued 31,290 shares of its new Series B,
         Class B preferred shares in exchange for a note payable and equipment
         held by Wilbur Peters. The note totaled $3,035,535, and the Company
         discounted the preferred stock exchanged for these to $1,783,935, to
         reflect the estimated fair market value of the stock. This new series
         of stock is non-voting. Dividends are non-cumulative, and any dividends
         to be paid on these shares are subordinate to all accrued dividends on
         the Company's Series A, Class B preferred stock. Dividends on these
         shares may not exceed $12 per year per share.

       The Class B, Series B shares carry a $10 per share ($312,900 in
         aggregate) liquidation preference, and they may be redeemed by the
         Company at $100 per share ($3,129,000 in aggregate). After one year
         from the date of issuance, each share became convertible by the holder
         into 50 shares of the Company's common stock. No dividends have been
         declared on this class of stock since its issuance.


10.  FINANCIAL INSTRUMENTS:
       Except for accrued dividends, the Company estimates the fair value of all
         financial instruments to be equal to the book value reflected in the
         accompanying financial statements. The Company estimates that the fair
         value of accrued dividends is less than their carrying amount as they
         will not be paid until future periods. As the timing of such payment
         cannot presently be determined, it is not practicable to calculate a
         net present value of the liability or to estimate its fair value.


                                     F-15
<PAGE>   27
11.  OPERATING LEASES:
       The Company leases its office and warehouse space under a lease which
         extends through March 31, 2002. This lease requires monthly payments of
         $3,400. Rent expense, for the years ended December 31, 2000 and 1999,
         was approximately $40,200 and $38,000, respectively. Future rent
         payments under the terms of the lease agreement for the years ending
         December 31, 2001 and 2002 are approximately $41,000 and $10,000,
         respectively.


12.  INCOME TAXES:
       At December 31, 2000, net noncurrent deferred tax assets of approximately
         $2,777,000 resulted primarily from net operating losses. A valuation
         allowance for the entire $2,777,000 has also been established due to
         the Company's uncertain financial condition. (See Note 2.)

       The components of the net noncurrent deferred tax assets and related
         valuation allowance are as follows:

<TABLE>
<S>                                            <C>
 Deferred tax assets:
  Federal                                      $  2,670,000
  State                                             107,000
                                               ------------
    Total deferred tax assets                     2,777,000
Valuation allowance                               2,777,000
                                               ------------
    Net deferred tax assets                    $         --
                                               ============
</TABLE>

       At December 31, 1999, the Company had net noncurrent deferred tax assets
         of approximately $2,610,000, along with a corresponding valuation
         allowance of the same amount. The $167,000 increase in the noncurrent
         deferred tax assets as of December 31, 2000, and the deferred tax
         provision which would be reflected on the Company's statement of
         operations has been offset by a corresponding increase in the valuation
         allowance. The statement of operations therefore reflects no deferred
         tax provision.

       As the Company has essentially no taxable income to date on a cumulative
         basis, it has recorded no current provision for income taxes for the
         years ended December 31, 2000 and 1999. Significant differences existed
         in the year ended December 31, 1999, between the loss reported in the
         Company's financial statements and its tax returns. These include the
         debt forgiveness income from a related party and utilization of net
         operating loss carryforwards. For the year ended December 31, 2000,
         there were no significant differences between losses reported in the
         Company's financial statements and its tax return.


                                      F-16
<PAGE>   28

       As of December 31, 2000, the Company has net operating loss carryforwards
         of approximately $7,862,000 for federal income tax purposes.

<TABLE>
<CAPTION>
                                             Net operating loss
                     Year of expiration            amount
                 ------------------------    -------------------
                 <S>                         <C>
                            2006               $    643,000
                            2007                  3,573,000
                            2008                    835,000
                            2009                    541,000
                            2010                    559,000
                            2011                    242,000
                            2017                    441,000
                            2018                    280,000
                            2020                    748,000
                                               ------------
                                               $  7,862,000
                                               ============
</TABLE>

       Various state net operating loss carryforwards are also available for use
         in reducing apportioned state taxable income. The most significant of
         these is approximately $1,500,000 in North Carolina.

       The deferred tax benefit (provision) for the years ended December 31,
         2000 and 1999 are as follows:
<TABLE>
<CAPTION>

                                                            2000                1999
                                                         -----------         -----------
               <S>                                       <C>                 <C>
               Deferred tax benefit (provision) -
                    Federal                              $   120,000         $  (938,000)
                    State                                     47,000            (334,000)
                                                         -----------         -----------
                                                             167,000          (1,272,000)
               Change in valuation allowance                (167,000)          1,272,000
                                                         -----------         -----------
               Net deferred tax provision                $        --         $        --
                                                         ===========         ===========
</TABLE>

       The deferred provisions for 2000 and 1999 differ from amounts which would
         be calculated at statutory rates due to changes in the valuation
         allowance and the expiration of loss carryforwards for state purposes.
         In 1999, a portion of the debt forgiveness described in Note 3 was
         treated as income for tax return purposes and had the effect of
         increasing the deferred tax provision by $1,543,000, before reflecting
         the change in the valuation allowance.


                                      F-17

<PAGE>   29
13.  SUPPLEMENTARY FINANCIAL INFORMATION:

       Marketing, advertising and promotion costs include the following for
         the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                   2000            1999
                                                 --------        --------
               <S>                               <C>             <C>
               Advertising                       $ 58,159        $ 49,625
               Promotions                          22,527         162,545
               Trade shows                         62,576          43,077
               Public relations and other         113,064          49,689
                                                 --------        --------
                                                 $256,326        $304,936
                                                 ========        ========
</TABLE>









14.  MAJOR CUSTOMERS:
       Sales to two major customers comprised approximately 16% and 10% of total
         sales for the year ended December 31, 2000. Sales to three major
         customers comprised approximately 18%, 13% and 13% of total sales for
         the year ended December 31, 1999.


15.  COMMITMENTS AND CONTINGENCIES:
       The Company is involved in commercial litigation in the normal course of
         its business. The Company does not expect any losses which would
         materially affect the financial statements for the year ended December
         31, 2000, as presented.

       A significant portion of the Company's sales market is in hardware and
         home center stores. Therefore, the Company's ability to make future
         sales is dependent upon these retail markets.

       In December 2000, the Company entered into an agreement with a financial
         advisor for assistance with obtaining new financing (see Note 16). In
         exchange for services to be rendered over a three month period, the
         Company is to issue 52,500 shares of common stock to them and pay cash
         fees of $7,500 per month. For the year ended December 31, 2000, the
         Company has accrued $18,438, which represents one third of the expected
         cost under this arrangement.


16. SUBSEQUENT EVENT - ISSUANCE OF CONVERTIBLE DEBENTURES AND WARRANTS:
       In February 2001, the Company entered into an arrangement with an
         investment group which provides for borrowings of up to $450,000 under
         convertible debentures. These debentures, which require the payment of
         interest at 12% per year, will become due in February 2002. They are
         secured by substantially all company assets and provide for certain
         restrictions on additional borrowings, issuance of equity securities,
         and payment of dividends on common stock. The debentures are
         convertible into the Company's common stock at the lesser of $.278 per
         share or 50% of market price for that stock, as defined.


                                      F-18
<PAGE>   30
       As a part of this transaction, the debenture holders will receive
         warrants for purchase of up to 300,000 shares of the Company's common
         stock. These warrants may be exercised at any time within three years
         of their issuance at prices equal to the lesser of $.229 per share or
         50% of market price, as defined.

       Upon the closing of this arrangement, the investors purchased $225,000 of
         debentures and received warrants for 150,000 shares of common stock.
         Based on stock prices prior to the date of this report, these
         debentures could be converted into approximately 960,000 shares of the
         Company's common stock. In the cases of both the debentures and
         warrants, investors may acquire shares of the Company's common stock at
         discounts below their market value. Due to the preferential conversion
         feature of the debentures, the Company will record approximately
         $225,000 of interest expense and additional paid-in capital at the time
         of their issuance.

       The Company has agreed to file a registration statement with the
         Securities and Exchange Commission to register for resale all shares
         which may be issued under the convertible debentures and warrants. When
         such registration statement becomes effective, the investors are to
         purchase the remaining $225,000 of debentures, and they will receive
         the remaining 150,000 warrants. Based on stock prices in effect prior
         to the date of this report, these additional debentures could likewise
         be converted into approximately 960,000 shares of common stock. The
         Company will record additional interest expense and paid-in capital of
         approximately $225,000 upon the sale of these debentures.


                                      F-19
<PAGE>   31
ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURES.

             Not applicable.

                                    PART III

ITEMS 9-12.

         Items 9-12 are incorporated herein by reference to the sections
captioned "Principal Holders of Common Stock and Holdings of Management,"
"Election of Directors," "Certain Relationships and Related Party Transactions,"
"Executive Compensation," "Director Compensation," "Employment Arrangements" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held June 25, 2001. Such
Proxy Statement will be filed with the Commission prior to April 30, 2001.

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

(a)      Exhibits

<TABLE>
<CAPTION>
         Exhibit No.       Document Description
         -----------       --------------------
         <S>               <C>
         3.1               Certificate of Incorporation (Exhibit 2.1 to the
                           Company's Form 10-SB filed March 14, 2000)

         3.2               Certificate of Designation Setting Forth the
                           Preferences, Rights and Limitations of Series A, Class B
                           Preferred Stock of Vital Living Products, Inc. (Exhibit
                           2.2 to the Company's Form 10-SB filed March 14, 2000)

         3.3               Certificate of Designation of Series B, Class B
                           Preferred Stock Setting Forth the Powers, Preferences,
                           Rights, Qualifications, Limitations and Restrictions of
                           such Series of Class B Preferred Stock (Exhibit 2.3 to
                           the Company's Form 10-SB filed March 14, 2000)

         3.4               Bylaws of Vital Living Products, Inc. (Exhibit 2.4 to
                           the Company's Form 10-SB filed March 14, 2000)

         4.1               Form of Secured Convertible Debenture dated as of
                           February 23, 2001 (Exhibit 4.1 to the Company's Form 8-K
                           filed March 1, 2001)

         4.2               Schedule identifying omitted Secured Convertible
                           Debentures dated as of February 23, 2001 which are
                           substantially identical to the Form of Secured
                           Convertible Debenture described in Exhibit 4.1 (filed
                           herewith)

         10.1*             Vital Living Products, Inc. 1991 Stock Option Plan
                           (Exhibit 6.1 to the Company's Form 10-SB filed March 14,
                           2000)
</TABLE>


                                       12
<PAGE>   32

<TABLE>
            <S>         <C>
            10.2        Instrument of Forgiveness of Indebtedness dated June 30,
                        1999 by C. Wilbur Peters (Exhibit 6.2 to the Company's
                        Form 10-SB filed March 14, 2000)

            10.3        Note in favor of C. Wilbur Peters dated June 30, 1999
                        (Exhibit 6.3 to the Company's Form 10-SB filed March 14,
                        2000)

            10.4        Revolving Credit Note dated July 1, 1999 in favor of C.
                        Wilbur Peters (Exhibit 6.4 to the Company's Form 10-SB
                        filed March 14, 2000)

            10.5        Exchange Agreement dated November 5, 1999 between the
                        Company and C. Wilbur Peters (Exhibit 6.5 to the
                        Company's Form 10-SB filed March 14, 2000)

            10.6        Promissory Note in favor of CTF, Inc. dated September 1,
                        1992 (Exhibit 6.6 to the Company's Form 10-SB filed
                        March 14, 2000)

            10.7        Escrow Agreement dated March 31, 1992 between the
                        Company, Henry H. Mummaw, Brian E. Huey, Joseph W.
                        Mummaw, Larry C. Pratt, CTF, Inc., J.W. Gant &
                        Associates, Inc. and First Union National Bank (Exhibit
                        6.7 to the Company's Form 10-SB filed March 14, 2000)

            10.8        First Amendment to Promissory Note in favor of CTF, Inc.
                        dated February 21, 2001 (filed herewith)

            10.9        First Amendment to Promissory Note in favor of C. Wilbur
                        Peters dated February 21, 2001 (filed herewith)

            10.10       Securities Purchase Agreement dated as of February 23,
                        2001 between the Company, AJW Partners, LLC, Millennium
                        Capital Partners II, LLC and Equilibrium Equity, LLC
                        (Exhibit 10.1 to the Company's Form 8-K filed March 1,
                        2001)

            10.11       Registration Rights Agreement dated as of February 23,
                        2001 between the Company, AJW Partners, LLC, Millennium
                        Capital Partners II, LLC and Equilibrium Equity, LLC
                        (Exhibit 10.2 to the Company's Form 8-K filed March 1,
                        2001)

            10.12       Form of Stock Purchase Warrant dated as of February 23,
                        2001 (Exhibit 10.3 to the Company's Form 8-K filed March
                        1, 2001)

            10.13       Schedule identifying omitted Stock Purchase Warrants
                        dated as of February 23, 2001 which are substantially
                        identical to the Form of Stock Purchase Warrant
                        described in Exhibit 10.12 (filed herewith)

            10.14       Security Agreement dated as of February 23, 2001 between
                        the Company, AJW Partners, LLC, Millennium Capital
                        Partners II, LLC and Equilibrium Equity, LLC (filed
                        herewith)
</TABLE>

(b)      Reports on Form 8-K

         The Company did not file any reports on Form 8-K during the year ended
December 31, 2000.


--------------

         *        Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K.


                                       13
<PAGE>   33

                                   SIGNATURES

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

                              VITAL LIVING PRODUCTS, INC.



                              By:  /s/ Donald R. Podrebarac
                                   -------------------------------------------
                                       Donald R. Podrebarac
                                       Chief Executive Officer and President

Dated:  March 27, 2001

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Company and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
               Signature                            Capacity                          Date
               ---------                            --------                          ----



<S>                                        <C>                                     <C>
/s/ Donald R. Podrebarac                   Director, Chief                         March 27, 2001
------------------------------------       Executive Officer and President
Donald R. Podrebarac                       (Principal Executive Officer)



/s/ C. Wilbur Peters                       Director, Chairman and Treasurer        March 22, 2001
------------------------------------
C. Wilbur Peters



/s/ Larry C. Pratt                         Vice President, Secretary and           March 27, 2001
------------------------------------       Director (Principal Financial
Larry C. Pratt                             Officer)



/s/ Phil Divine                            Director                                March 16, 2001
------------------------------------
Phil Divine



/s/ Duane G. Hansen                        Director                                March 16, 2001
------------------------------------
Duane G. Hansen
</TABLE>


                                       14
<PAGE>   34

                       SECURITIES AND EXCHANGE COMMISSION
                                Washington, D. C.

                          ANNUAL REPORT ON FORM 10-KSB

                                                                     Commission
For the fiscal year ended                                           File Number
December 31, 2000                                                       0-30568


                           VITAL LIVING PRODUCTS, INC.

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
         Exhibit No.       Document Description
         ----------        --------------------
         <S>               <C>
         3.1               Certificate of Incorporation (Exhibit 2.1 to the Company's
                           Form 10-SB filed March 14, 2000)

         3.2               Certificate of Designation Setting Forth the Preferences,
                           Rights and Limitations of Series A, Class B Preferred Stock of
                           Vital Living Products, Inc. (Exhibit 2.2 to the Company's Form
                           10-SB filed March 14, 2000)

         3.3               Certificate of Designation of Series B, Class B Preferred
                           Stock Setting Forth the Powers, Preferences, Rights,
                           Qualifications, Limitations and Restrictions of such Series of
                           Class B Preferred Stock (Exhibit 2.3 to the Company's Form
                           10-SB filed March 14, 2000)

         3.4               Bylaws of Vital Living Products, Inc. (Exhibit 2.4 to the
                           Company's Form 10-SB filed March 14, 2000)

         4.1               Form of Secured Convertible Debenture dated as of February 23,
                           2001 (Exhibit 4.1 to the Company's Form 8-K filed March 1,
                           2001)

         4.2               Schedule identifying omitted Secured Convertible Debentures
                           dated as of February 23, 2001 which are substantially
                           identical to the Form of Secured Convertible Debenture
                           described in Exhibit 4.1 (filed herewith)

         10.1              Vital Living Products, Inc. 1991 Stock Option Plan (Exhibit
                           6.1 to the Company's Form 10-SB filed March 14, 2000)

         10.2              Instrument of Forgiveness of Indebtedness dated June 30, 1999
                           by C. Wilbur Peters (Exhibit 6.2 to the Company's Form 10-SB
                           filed March 14, 2000)

         10.3              Note in favor of C. Wilbur Peters dated June 30, 1999 (Exhibit
                           6.3 to the Company's Form 10-SB filed March 14, 2000)

         10.4              Revolving Credit Note dated July 1, 1999 in favor of C. Wilbur
                           Peters (Exhibit 6.4 to the Company's Form 10-SB filed March
                           14, 2000)
</TABLE>


                                       15
<PAGE>   35

<TABLE>
         <S>               <C>
         10.5              Exchange Agreement dated November 5, 1999 between the Company
                           and C. Wilbur Peters (Exhibit 6.5 to the Company's Form 10-SB
                           filed March 14, 2000)

         10.6              Promissory Note in favor of CTF, Inc. dated September 1, 1992
                           (Exhibit 6.6 to the Company's Form 10-SB filed March 14, 2000)

         10.7              Escrow Agreement dated March 31, 1992 between the Company,
                           Henry H. Mummaw, Brian E. Huey, Joseph W. Mummaw, Larry C.
                           Pratt, CTF, Inc., J.W. Gant & Associates, Inc. and First Union
                           National Bank (Exhibit 6.7 to the Company's Form 10-SB filed
                           March 14, 2000)

         10.8              First Amendment to Promissory Note in favor of CTF, Inc. dated
                           February 21, 2001 (filed herewith)

         10.9              First Amendment to Promissory Note in favor of C. Wilbur
                           Peters dated February 21, 2001 (filed herewith)

         10.10             Securities Purchase Agreement dated as of February 23, 2001
                           between the Company, AJW Partners, LLC, Millennium Capital
                           Partners II, LLC and Equilibrium Equity, LLC (Exhibit 10.1 to
                           the Company's Form 8-K filed March 1, 2001)

         10.11             Registration Rights Agreement dated as of February 23,
                           2001 between the Company, AJW Partners, LLC, Millennium Capital
                           Partners II, LLC and Equilibrium Equity, LLC (Exhibit 10.2 to
                           the Company's Form 8-K filed March 1, 2001)

         10.12             Form of Stock Purchase Warrant dated as of February 23, 2001
                           (Exhibit 10.3 to the Company's Form 8-K filed March 1, 2001)

         10.13             Schedule identifying omitted Stock Purchase Warrants dated as
                           of February 23, 2001 which are substantially identical to the
                           Form of Stock Purchase Warrant described in Exhibit 10.12
                           (filed herewith)

         10.14             Security Agreement dated as of February 23, 2001 between the
                           Company, AJW Partners, LLC, Millennium Capital Partners II,
                           LLC and Equilibrium Equity, LLC (filed herewith)
</TABLE>


                                       16