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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K/A

For Annual and Transition Reports Pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934

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

For the Fiscal Year Ended December 31, 1999
OR

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

For the transition period from  to

COMMISSION FILE NUMBER 0-18160

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OMNI NUTRACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

UTAH(State of incorporation)

87-0468225(I.R.S. Employer Identification No.)


5310 Beethoven Street
Los Angeles, California 90066(Address of principal executive offices)

Registrant's telephone number, including area code: (310) 306-3636

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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(Title of class)

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements or the past 90 days.
Yes: / /  No: /x/

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes: /x/  No: / /

As
of November 1, 2000, 32,767,507 shares of the registrant's Common Stock, par value $0.01, were outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the registrant (i.e., excluding shares held by executive officers, directors, and control persons as defined in Rule 405) on that date was $16,589,363 (computed
based upon the closing price for the Common Stock on the Nasdaq National Market on that date.)

On
November 7, 2000, trading in the Company's common stock was halted by NASDAQ, and the Company's common stock was delisted from trading from NASDAQ on November 17,
2000. The common stock is currently quoted in the "Pink Sheets" published by the National Quotation Bureau.

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OMNI NUTRACEUTICALS, INC.  INDEX TO FORM 10-K

|                              |  |                                                                                      |  | PAGE
|----------------------------- |  | ------------------------------------------------------------------------------------ |  | ----
|PART 1                        |  |                                                                                     
|Item 1                        |  | Business                                                                             |  | 3   
|Item 2                        |  | Properties                                                                           |  | 16  
|Item 3                        |  | Legal Proceedings                                                                    |  | 16  
|Item 4                        |  | Submission of Matters to a Vote of Security Holders                                  |  | 18  
|PART II                       |  |                                                                                     
|Item 5                        |  | Market for the Registrant's Common Stock and Related Stockholder Matters             |  | 18  
|Item 6                        |  | Selected Financial Data                                                              |  | 21  
|Item 7                        |  | Management's Discussion and Analysis of Financial Condition and Results of Operation |  | 22  
|Item 7a                       |  | Quantitative and Qualitative Disclosure about Market Risk                            |  | 29  
|Item 8                        |  | Financial Statements and Supplementary Data                                          |  | 29  
|Item 9                        |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |  | 29  
|PART III                      |  |                                                                                     
|Item 10                       |  | Directors and Executive Officers of the Registrant                                   |  | 30  
|Item 11                       |  | Executive Compensation                                                               |  | 33  
|Item 12                       |  | Security Ownership of Certain Beneficial Owners and Management                       |  | 36  
|Item 13                       |  | Certain Relationships and Related Transactions                                       |  | 38  
|PART IV                       |  |                                                                                     
|Item 14                       |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     |  | 40  
|Exhibit Index                 |  | 41                                                                                  
|Index to Financial Statements |  | F-1                                                                                 
|Financial Statements          |  | F-3                                                                                 
|Signature Page                |  | F-33                                                                                

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PART I

THIS ANNUAL REPORT ON FORM 10-K INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS ANNUAL REPORT,
INCLUDING, WITHOUT LIMITATION, THOSE REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS, MARKETING AND PRODUCT INTRODUCTION AND DEVELOPMENT PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS,
ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED UNDER "BUSINESS-RISKS RELATED TO THE BUSINESS OF THE
COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THE ANNUAL REPORT.

ITEM 1. BUSINESS

GENERAL

On July 16, 1996, 4Health, Inc., ("4Health") emerged from an earlier merger between 4Health Inc., a California corporation ("Old
4Health"), and Surgical Technologies, Inc., a Utah corporation ("SGTI"). Subsequent to this merger, SGTI changed its name to 4Health, Inc. Old 4Health was incorporated and commenced
operations on February 17, 1993. Irwin Naturals, Inc., ("Irwin Naturals") was organized in August 1995 and formulated and distributed nutritional supplements through the food,
drug and mass market, internationally and through health food stores.

Omni
Nutraceuticals, Inc., a Utah corporation (the "Company" or "Omni"), is the surviving corporation of a merger (the "Merger") of 4Health, Inc, and Irwin Naturals, a
California corporation,
consummated June 30, 1998. Pursuant to the Merger, Irwin Naturals was merged with and into 4Health. Upon consummation of the Merger, 4Health changed its name to Irwin
Naturals/4Health, Inc. On August 20, 1999, the Company changed its name to Omni Nutraceuticals, Inc. The Merger was accounted for under the
"pooling-of-interests" method of accounting, in accordance with generally accepted accounting principles. The merger resulted in the issued and outstanding shares of common
stock, no par value per share, of Irwin Naturals being converted into an aggregate 15,750,000 shares of 4Health Common Stock.

The
Company is a supplier and formulator of branded natural health, herbal and nutritional supplements designed and formulated to address the dietary needs of the general public. The
Company's products are produced primarily from natural ingredients and are formulated for the purposes of achieving specific dietary or nutritional goals. All of these products fall into Primary
Standard Industrial Classification Code Number 325411 and are substantially similar in that they are essentially all natural nutritional supplements and they all fall under the DSHEA regulations
contained in the Dietary Supplement Health Education Act of 1994 ("DSHEA"). The Company sells these products to health food stores, both directly and through distributors, mass merchandisers and
distributors who sell into foreign countries. During 1999, the Company began an Internet initiative by the creation of HealthZone.com via the acquisition of Health & Vitamins
Express, Inc. HealthZone.com is an online retail store and information source for vitamins, supplements, minerals and other natural and healthy living products.

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During 2000, the Company continued to build its Internet presence through the acquisitions of Internet related companies discussed elsewhere herein. On February 2, 2001, the
Company entered into and simultaneously closed a Purchase Agreement with Vitacost.com, Inc. ("Vitacost"), an on-line marketer of vitamins and nutritional products, whereby Vitacost
acquired substantially all of the operating assets of the combined Internet operations of the Company in exchange for 6,800,000 shares of Vitacost common stock. This transaction is described in more
detail elsewhere herein.

The
Company utilizes its marketing expertise to position and sell its portfolio of branded products. The Company is continuing to build its portfolio of consumer brands. The Company
aims to achieve brand growth through advertising, attractive packaging and favorable shelf positioning. This goal, however, has not been achieved to the extent planned principally due to continuing
cash flow problems, which have caused significant reductions in the amount of brand advertising. This, in turn, has resulted in the exercise of greater flexibility in allowing certain customers
returns and allowances for product that was, in hindsight, oversold by the company during a period of significant management change and to support ongoing customer relationships. The effect was to
grant greater customer deductions during 1999 and 2000 than had been granted prior to that time, or are being granted currently. Also see Item 7 Managements Discussion and Analysis of financial
Condition and Results of Operations.

The
process of building the Company's brands may be augmented through targeted brand acquisitions. The sales, marketing and distribution infrastructure is designed to integrate new
brands with minor incremental costs and synergistic potential, although additional funds to implement a realistic advertising program will be required to fully realize the "brand equity" the Company
believes it has the potential to realize. Historically, the Company has distributed its products though three main segments: mass market retailers (51.5% of 1999 shipments), specialty health food
stores (40.7% of 1999 shipments), and internationally (7.8% of 1999 shipments). With increased advertising in the future, the Company should be able to convey the effectiveness of its products. The
Company has established its reputation with retailers through quality products, timely delivery and superior packaging. Through its ability to position products in the marketplace and its strong
reputation, the Company has been able to secure favorable shelf spacing from many of its retail customers.

The
Company is positioned to pursue a distribution strategy of multiple brands within multiple retail channels and via the Internet. Since the Merger, the Company has expanded its
consumer base, and now offers products in distinct product categories.

COMPETITION

The industry in which the Company operates is highly competitive and fragmented. It is estimated that nearly 900 companies are involved in the manufacturing or
wholesale of supplements to the mass markets. Of those 900, eleven companies comprise 25% of the market with the remaining 75% comprised mostly of companies generating less than $20 million in
total annual sales.

The
ten largest competitors are large well-capitalized companies that have the ability to change and shape the industry.

In
the health and natural food sector these include: Nature's Way (Murdock Madaus Schwabe), Rainbow Light Nutritional Systems (Nutraceuticals, Inc.) Solgar (American Home
Products), Nature's Herbs and Twinlabs (Twin Laboratories, Inc.)

In
the mass market sector the competitors include: Whitehall Robins Healthcare (American Home Products, Bayer AG (Bayer Corp.), Mead Johnson Nutritionals (Bristol Myers Squibb Co.),
Johnson & Johnson, Inc. and Leiner Health Products Group, Inc.

The
Company continues to be a leader in internal cleansing products and intends to leverage this success to launch other products. The Company's Nature's Secret® and
Harmony Formula® brand lines

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have built strong brand loyalty with retailers, practitioners and customers by delivering quality products, excellent customer service and an emphasis on health through education.

In
the food, drug and mass market, the Company faces increased competition where many of its competitors are significantly larger and have greater financial resources. The Company
believes it will be able to compete successfully in this mass market in the future because of its unique formulations and packaging, product quality, and good relationships with distributors and store
buyers.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The business is to some extent cyclical, but not necessarily seasonal. The following table sets forth, certain unaudited results of operations for each quarter
during 1998 and 1999. The unaudited information has been prepared on the same basis as the audited financial statements appearing elsewhere in this report and includes all adjustments which management
considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of the results to be attained for any future period. See
also Item 7., Managements' Discussion and Analysis of Financial Condition and Results of Operations.Amounts for the year ended December 31, 1999 have been restated, as described in
Note 2 to the Consolidated Financial Statements.

|                                            |  | QUARTERS ENDED 1999 (as Restated) |           
|------------------------------------------- |  | --------------------------------- | ----------
|
|Net sales                                   |  | $                                 | 6,991,000 
|Gross profit                                |  |                                   | 3,584,000 
|Loss from operations                        |  |                                   | (1,065,000
|Other income (expense), net                 |  |                                   | 411,000   
|                                            |  |                                   |           
|Loss before (benefit) for income taxes      |  |                                   | (654,000  
|Benefit for income taxes                    |  |                                   |          
|                                            |  |                                   |           
|Net loss                                    |  | $                                 | (654,000  
|                                            |  |                                   |           
|Net loss per common share-Basic and Diluted |  | $                                 | (0.02     
|                                            |  |                                   |           

|                                                          |  | QUARTERS ENDED 1998 |          
|--------------------------------------------------------- |  | ------------------- | ---------
|
|Net sales                                                 |  | $                   | 8,746,000
|Gross profit                                              |  |                     | 5,107,000
|Income (loss) from operations                             |  |                     | 1,610,000
|Other (expense) income, net                               |  |                     | (7,000   
|                                                          |  |                     |          
|Income (loss) before provision (benefit) for income taxes |  |                     | 1,603,000
|Provision (benefit) for income taxes                      |  |                     | (34,000  
|                                                          |  |                     |          
|Net income (loss)                                         |  | $                   | 1,637,000
|                                                          |  |                     |          
|Net income (loss) per common shareBasic and Diluted      |  | $                   | 0.06     
|                                                          |  |                     |          

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INFLATION

Management believes that the effect of inflation will not have a significant impact on the Company's financial position or results of operations.

CUSTOMER GUARANTY OF SATISFACTION; RIGHT OF RETURN

In an effort to build customer confidence and satisfaction, the Company warrants satisfaction and grants to its customers at the retail consumer level the
right of return for full credit if the end user is not satisfied with the quality of the product. Historically, this policy has generated insignificant total returns to the Company. During 1999, the
Company granted to certain customers a full right of return of products that did not sell through at the retail level ("guaranteed sales"), which was not known to the current management. Further, due
to product introductions in 1999 that proved unsuccessful, the Company has also been liberal with granting allowances or credits to retailers in 2000. As discussed more fully below, a significant
amount of such allowances were granted during the first quarter of 2000. The guaranteed sales made in 1999 and certain allowances granted during the first quarter of 2000 are the subject of the
restatements that were made to certain quarterly reports on Forms 10-Q in 1999 and on Form 10-K for the year 1999.

In
1999, the Company's sales and marketing leadership changed. The marketing and sales leadership of the Company during most of 1999 and part of 2000 developed several product
offerings that were not successful. In order to protect the Company's relationship with the trade, as well as to ensure a strong reputation to secure future sales, the interim sales and marketing
management during this period guaranteed sell through and authorized returns for certain products which did not sell. At the end of the first quarter of 2000, management again changed in the sales and
marketing area. It became necessary at this time to continue for a limited period with the flexible stance on returns in order to further support and protect the Company's relationship with the trade.

Starting
in July 2000, one of the Company's large customers started deducting significant amounts from cash remittances. In addition, certain of the Company's other customers
began taking deductions against cash remittances that were in excess of historical amounts experienced by the Company. In August 2000, the Company conducted an investigation of its 1999 and
2000 sales practices and determined that sales to certain customers were made with rights of return and guarantees. As part of its investigation, the Company reviewed substantially all of the customer
deductions taken in 2000 and determined that certain amounts related not only to "guaranteed" sales, but also to other customer allowances and concessions granted by prior management in the first
quarter of 2000.

The
Company has determined the effect of these deductions on its previously issued financial statements and has restated the accompanying financial statements for the year ended
December 31, 1999. Revenues from any products with "guaranteed" sales have been deferred until the sell through of the product at the customer level and the related product has been treated as
consigned inventory. In situations in which allowances and concessions were granted early in 2000 related to sales in 1999, the reserves for such allowances and concessions have been increased as of
December 31, 1999. In situations in which additional allowances or concessions were granted subsequent to the original issuance of the 1999 financial statements relating to sales made in prior
periods, reserves have been increased in the period that such decisions were made and the amounts became known. Also see Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations.

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RECENT DEVELOPMENTS

On February 15, 1999, the Company acquired by way of a merger with and into its California subsidiary, HealthZone.com, Health & Vitamin
Express, Inc. ("HVE"), a California on-line retailer of health products, in consideration for the issuance of 363,636 shares of common stock of the Company issued in a private
placement to the three shareholders of HVE, with a further contingent issue of 363,636 shares of common stock depending upon HVE meeting certain performance criteria (and assuming a $10 million
investment in its subsidiary by the Company within 36 months) and the assumption of approximately $571,000 of debt.

Pursuant
to a Settlement, Termination and Mutual Release Agreement dated April 13, 2000, 363,636 additional shares were issued in settlement of a lawsuit filed on
December 23, 1999 by the former owners of HVE. In connection with the settlement, all other rights and obligations that existed under the February 15, 1999 Merger Agreement were
terminated.

On
March 10, 1999, the Company acquired certain assets and liabilities of Inholtra Investment Holdings and Trading, N.V., Inholtra Inc. and Inholtra Natural,
 Ltd., including the Inholtra-registered trademark brand of anti-joint pain product and associated trademarks and patent for $13.3 million. This was initially seller financed
with a short term promissory note, and subsequently refinanced in June 1999 with a $20 million secured asset based term and revolving credit facility. See Item 7 Management's Discussion
and Analysis of Financial Condition and Results of Operations.

During
the first quarter of 2000, the Company completed two transactions involving the sale of equity securities, which resulted in aggregate proceeds of $5,100,000 to the Company and
the issuance of a 10% minority interest in its subsidiary HealthZone.com.

On
January 24, 2000, the Company completed an equity transaction whereby 2,000,000 shares of the newly created 5% Convertible Preferred Stock, Series A ("Preferred Shares") and seven
year warrants to purchase up to an aggregate of 775,000 shares of common stock at an exercise price of $2.25 per share were sold, subject to adjustment. The aggregate purchase price for the Preferred
Shares and warrants was $2,000,000. In connection with this financing, HealthZone.com sold 222,222 shares of its common stock, representing approximately 10% of the then outstanding number of shares,
and a seven-year warrant to purchase up to 37,000 shares of its common stock to the investors for 1,000,000. On March 24, 2000, all of the issued and outstanding Preferred Shares were
converted into 2,016,438 shares of common stock.

In
connection with the equity financing completed on October 27, 2000 and described elsewhere herein, certain of the Company's major stockholders, including those participating
in this transaction, executed agreements ("lock up agreements") specifying, among other things, that they would not sell, transfer or otherwise dispose of substantially any shares of common stock
until September 25, 2001. On January 15, 2001, the Company was informed by one of the parties that a requirement for the continued effectiveness of the agreements had not been met. After
review, it was determined on January 17, 2001 that the agreements were void.

On
March 29, 2000, the Company completed a private placement of its securities whereby 700,000 shares of common stock of the Company were sold for an aggregate purchase price
of $2,100,000. The Company used the proceeds from the sale of its securities to reduce indebtedness and for working capital purposes. The principal investor in this transaction also executed a lock up
agreement as described above.

During
the first three quarters of 2000, the Company continued to implement a strategic initiative to build a presence in the Internet sector of the vitamin, food supplements and
Nutraceuticals industry. In March 2000, the Company announced the acquisition of Vitamin Discount Connection, an Internet "e-tailer" and mail order retailer of nutritional and
health-related products. The Company issued 190,000 shares of common stock in connection with this acquisition, which closed in November 2000.

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That was followed, in April 2000, with the announcement of the acquisitions of SmartBasics, another e-tailer and mail order retailer of nutritional and health-related products, and
HealthShop.com, an e-tailer of similar products. On May 25, 2000, the Company issued 170,000 shares of common stock in connection with the acquisition of
SmartBasics.com, Inc. and on May 22, 2000, the Company issued 838,951 shares of common stock in connection with the acquisition of HealthShop.com. All such acquisitions were accounted
for using the purchase method of accounting.

The
Company's Internet operations consisted of the HealthZone.com, SmartBasics, Vitamin Discount Connection and HealthShop businesses. On February 2, 2001, the Company entered
into and simultaneously closed an agreement with Vitacost.com, Inc. ("Vitacost"), an on-line marketer of vitamins and nutritional products, whereby Vitacost acquired substantially
all of the operating assets of the combined Internet operations in exchange for 6,800,000 shares of Vitacost common stock. The agreement contained an optional repurchase right giving the Company, at
any time after four years from the closing, the right to demand Vitacost repurchase the stock for $3,400,000 in cash or, at their option, a 60 month note requiring equal monthly payments of
$56,667. The agreement also contained an optional redemption right, giving Vitacost the right to redeem the stock, at any time up to four years from the closing. If this option is exercised between
the closing and the first anniversary thereof, the price is $7,000,000, which compounds at the rate of 10% for each year up to $9,317,000 on the fourth
anniversary of the closing. The stock received by the Company represents approximately 19.9% of the total Vitacost common stock outstanding and, accordingly, this investment will be recorded on the
cost basis. As long as the Company continues to hold at least a 10% interest, it will have one of the five available seats on the Vitacost.Board of Directors. Additionally, the Company has certain
anti-dilution rights in the event Vitacost raises additional equity. The net loss from these discontinued operations, including amortization of acquisition costs, was approximately
$1,133,000 for the year ended December 31, 1999 and is estimated to be approximately $1,085,000 for the nine months ended September 30, 2000, respectively. The estimated loss for the
fourth quarter of 2000, up to the measurement date of December 1, 2000, approximates $307,000. It is currently estimated that there will be a gain on Discontinued Operations, representing the
difference between the appraised value of the Vitacost.com common stock received and the net assets remaining on the Company's books, including intangibles, which approximates $69,000, including
approximately two months of operating losses estimated at $277,000. The Internet operations will be presented as discontinued operations in the December 31, 2000 Form 10-K
and retroactively reflected in the financial statements of the prior periods in the Company's future reporting.

Late
in the first quarter of 2000, management changed significantly. The Chairman, President and CEO and Chief Financial Officer and other senior members of management resigned or
were terminated and were replaced with a new team led by co-founder and former CEO, Klee Irwin. In May 2000, Christof Ballin became President. Mr. Ballin has over
12 years of executive-level experience in this industry. He previously worked for Allergan in Asia. On January 4, 2001, Mr. Ballin announced his resignation as President and a
Director of the Company, effective January 19, 2001. Herm Rosenman was also hired in May 2000 as Chief Financial Officer. Mr. Rosenman has held senior executive positions at
several public companies and was formerly a partner at Coopers & Lybrand (now known as PricewaterhouseCoopers LLP).

On
October 23, 2000, the Company reached an agreement with its lender, First Source Financial, Inc., to amend its existing term debt and revolving credit agreements. The
major amendments included increased cash availability up to the line maximum of $7 million; extension of the term of the agreements from April 30, 2001 to July 30, 2002; agreement
to permit all of the proceeds of the preferred stock financing to be used by the Company entirely for working capital purposes; and deferral of a total of approximately $1,556,000 of principal
repayments until June 15, 2001. In addition, the lender waived any and all defaults then in existence.

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On October 27, 2000, the Company completed a $3 million private equity financing. This private placement consisted of the sale of 3,000 shares of Series A
Convertible Preferred Stock ("Series A") and warrants to acquire an aggregate of 600,000 shares of the Company's common stock to ten investors ("Holders") for $3,000,000. The Company used the net
proceeds of approximately $2,720,000, after certain fees and expenses, for working capital purposes.

On
November 17, 2000, Nasdaq delisted the Company's Common Stock from the NASDAQ National Market System.

Some
of the reasons given by NASDAQ include:



In
March 2000, the Company announced the proposed acquisition of Vitamin Discount Connection, an Internet "e-tailer" and mail order retailer of nutritional and health-related
products. The Company issued 190,000 shares of Common Stock in exchange for certain assets and the assumption of the seller's liabilities of $115,000. This acquisition was completed on
November 16, 2000.

During
the fourth quarter of 2000, the Company entered into four agreements with vendors to convert a portion of the debt due them to common stock of the Company. In total,
approximately 271,500 shares were issued in exchange for approximately $496,000 in debt. The shares were issued to these suppliers at or above the quoted market price on the date of each agreement.

During
the fourth quarter of 2000, approximately 155,500 shares of common stock were issued to five holders for services totaling approximately $211,000.

On
January 19, 2001 a lawsuit was filed in Los Angeles County Superior Court: Unified Western Grocers, Inc. (Plaintiff) v. Omni Nutraceuticals, Inc., Case No. 01 000066. The
complaint seeks recovery of approximately $20,000, including legal fees for amounts which the plaintiff claims are owed for an open account. The Company denies that the amount is due to the plaintiff.
A responsive pleading was filed by the Company on February 14, 2001. At present, Management does not believe that the outcome of this litigation is likely to materially impact the Company.

On
January 23, 2001, the Labor Commissioner of the State of California entered a judgment against the Company in the amount of approximately $42,000 in the action: Richard F.
Lynch v. Omni Nutraceuticals, Inc. Labor Commissioner, State of California, State Case No. 05-19487 ICC. The
Company denies any amounts are due Lynch. The Company has filed an appeal, which required posting a bond in the amount of the judgment, seeking a new trail in the Superior Court. The final outcome of
this case is uncertain, but appears unlikely that it will have a material impact on the Company.

A
judgment was recently entered against the Company for approximately $117,000, plus an undetermined amount for attorney's fees, interest and costs, in a matter entitled: Pacific
Foods of Oregon, Inc. v. Omni Nutraceuticals, Inc., United States District Court, District of Oregon, Case No. CV 00-1014 JO. This case involves the Company's open account with
the plaintiff. The Company has not yet received a copy of either the complaint of the judgment, but recently received a Notice of Deposition with respect to a Judgment Debtor Examination. It is
currently too early to assess the outcome of this matter.

On
February 2, 2001, the Company entered into and simultaneously closed a Purchase Agreement with Vitacost.com, Inc. ("Vitacost"), an on-line marketer of
vitamins and nutritional products, whereby Vitacost acquired substantially all of the operating assets of the Company's combined Internet

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operations in exchange for 6,800,000 shares of Vitacost common stock. The agreement contains an optional repurchase right giving the Company, at any time after four years from the closing, the right
to demand Vitacost repurchase the stock the Company acquired for $3,400,000 in cash or, at their option, a 60 month note requiring equal monthly payments of $56,667. The agreement also contains
an optional redemption right, giving Vitacost the right to redeem the stock the Company acquired, at any time up to four years from the closing. If this option is exercised between the closing and the
first anniversary thereof, the price is $7,000,000, which compounds at the rate of 10% for each year up to $9,317,000 on the fourth anniversary of the closing. The stock the Company received
represents approximately 19.9% of the total Vitacost common stock outstanding and, accordingly, the Company will record this investment on the cost basis. As long as the Company continues to hold at
least a 10% interest, the Company will have one of the five available seats on the Vitacost Board of Directors. Additionally, the Company has certain anti-dilution rights in the event
Vitacost raises additional equity. The net loss from these discontinued operations, including amortization of acquisition costs, was approximately $1,133,000 for the year ended December 31,
1999 and is estimated to be approximately $1,085,000 (unaudited) for the nine months ended September 30, 2000, respectively. The estimated loss for the fourth quarter of 2000, up to the
measurement date of December 1, 2000, approximates $307,000. It is currently estimated that there will be a gain on Discontinued Operations, representing the difference between the appraised
value of the Vitacost.com common stock received and the net assets remaining on the Company's books, including intangibles, and approximates $69,000, including approximately two months of operating
losses estimated at $277,000. The Internet operations will be presented as discontinued operations in the December 31, 2000 Form 10-K and retroactively reflected in the
Company's financial statements of the prior periods in the Company's future reporting.

On
February 21, 2001, the Company was advised of a lawsuit:Media Networks, Inc. v. Omni Nutraceuticals, Inc., Los Angeles Superior Court Case No. BC
241503, for amounts due on open account pursuant to an agreement filed December 8, 2000. The complaint seeks a total of approximately $480,000, including interest, attorneys
and collection fees, for which plaintiff has filed a Request for Entry of Default and Judgment. Efforts are in process to have the plaintiff agree to set aside the default if already entered, and to
file a motion to set aside the default if it has been entered. Based on the information currently available, the Company is unable to evaluate the likelihood of an unfavorable outcome.

On
February 21, 2001, the Company received a demand letter from counsel representing the majority of the former owners of Smart Basics, Inc. (dba SmartBasics.com), an Internet
retailer acquired by the Company on May 25, 2000, claiming, among other things, misrepresentations in connection with the transaction in which these individuals exchanged their ownership
interests in Smart Basics, Inc. for common stock of the Company. The demand letter seeks unspecified relief or, in the alternative, rescission of the original transaction. Smart Basics, Inc., together
with the Companies other Internet properties, was sold to Vitacost.com on February 2, 2001.

The
demand letter threatens that a legal action will commence on February 28, 2001, unless substantial progress is made towards resolving this claim. Based on the information
currently available, the Company is unable to determine the likelihood of an unfavorable outcome to this matter.

RISK FACTORS

The Company Has A History of Operating Losses.

The Company has reported losses in two of the last three fiscal years, in addition to losses in each of the reported quarters of the year 2000. Towards the end
of the first quarter of the year 2000, management implemented an operating plan to improve the financial results of the business, concentrating initially on major cost reductions. In addition, a
strategic plan to consolidate Internet-based retailers in this industry was implemented to realize the scale of economies that might be

10

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achieved through the combination of these businesses. The Company is also focusing on product margins, which have been gradually eroding as the mix of products sold changes and the competition for
retail shelf space erodes pricing.

There
can be no assurance that the Company will be successful in improving its pricing or cost structures, or that it will achieve profitability.

The Company May Require Additional Capital.

As of December 31, 1999, current liabilities exceeded current assets by approximately $8,558,000. The balance due under the Secured Credit Agreement
approximates $18,853,000 as of December 31, 1999 and requires a payment of approximately $1,556,000 on June 15, 2001 and monthly payments of the principal of approximately $195,000
commencing in July, 2001. The Company may not be able to make these payments when due and there can be no assurance that it will be able to secure additional debt or equity financing to repay this
debt or otherwise refinance it.

Risks Relating to Delisting of the Common Stock from NASDAQ.

On November 7, 2000, NASDAQ notified the Company that it had halted trading in the Company's common stock, until such time as it received additional
information, based on the Company's announcement made on October 17, 2000, that its 1999 financial statements would be restated. In addition to the restated financial statements, the Company
will have to meet certain other NASDAQ listing qualifications to resume trading on that exchange.

The
Company's Common Stock was delisted from trading in the NASDAQ National Market System on November 17, 2000. The Company's Common Stock is currently published in the "Pink
Sheets" maintained by the National Quotation Bureau, which is generally considered to be a less efficient market than NASDAQ or other national exchanges, and may cause difficulty in conducting trades
and in obtaining future financing. Further, the Company's securities are subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934 (the
"Exchange Act"), as amended. The penny stock rules apply to non-NASDAQ companies whose common stock trades at less than $5.00 per share or those which have tangible net worth less than
$5,000,000 ($2,000,000 if the company has been operating for three or more years). Such rules require, among other things, that brokers who trade "penny stock" to persons other than "established
customers" must complete certain documentation, make suitability inquiries of investors and furnish quote information under certain circumstances. Many brokers have decided not to trade "penny stock"
because of such requirements and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that the Company remains subject to the "penny
stock rules" for any significant period, there may develop an adverse impact on the market, if any, for the Company's securities. Because the Company's securities are subject to the "penny stock
rules," investors will find it more difficult to dispose of the securities of the Company. Further for companies whose securities are quoted
in the "Pink Sheets," it is more difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii) to obtain capital.

The Issuance of Additional Shares of Common Stock Upon Conversion of Preferred Stock May Cause Significant Dilution of Existing Shareholders' Interests and Exert Downward
Pressure on the Price of The Company's Common Stock.

Significant
dilution of existing shareholders' interests may occur if the Company issues additional shares of Common Stock underlying the outstanding shares of its 6% Convertible
Preference Shares ("Preferred Stock") outstanding. The number of shares of common stock issuable upon conversion of the outstanding Preferred Stock is less than 10% of the outstanding Common Stock as
of October 27,

11

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2000. However, the number of shares of Common Stock issuable upon conversion of the Preferred Stock may constitute a significantly greater percentage of the total outstanding shares of Common Stock,
as such conversion is based on a formula tied to the market price of the common stock. The formula provides, specifically, that the number of shares of common stock issuable upon the conversion of one
share of Preferred Stock is calculated as $1,000 (plus any accrued and unpaid dividends on such share) divided by the conversion price. The conversion price is equal to the lesser of (1) 115%
of the average of the two lowest bid prices in ten days preceding the closing of the issuance of the share of Preferred Stock being converted, or (2) 80% of the average of the two lowest
closing bid prices of the common stock during the five days preceding the date of conversion. Therefore, it is likely that the Preferred Stock will convert to common stock at a rate which may be below
the prevailing market price of the common stock at the time of conversion.

The
exact number of shares of common stock into which currently outstanding Preferred Stock may ultimately be convertible, will vary over time as the result of ongoing changes in the
trading price of the Common Stock. Decreases in the trading price of the Common Stock are likely to result in increases in the number of shares of common stock issuable upon conversion of the
Preferred Stock. The following consequences could result:



The
Securities Purchase Agreement, dated October 27, 2000, provides, in part, that to the extent that the number of shares required to be issued in connection with conversions
of Preferred Stock exceeds 19.9% or approximately 6,520,700 shares of Common Stock outstanding at the closing, the Company is required to redeem the Preferred Stock representing such excess common
shares at 140% of its face amount, plus accrued dividends. If this were to occur, the Company may not have adequate cash to redeem such excess and would be in breach of the terms of the Preferred
Stock agreements.

Holders of Preferred Stock Could Seek to Manipulate the Stock Price Through Short Sales.

Holders of Preferred Stock could potentially seek to manipulate the market price of the Company's common stock downward so as to increase the number of common
shares they would receive upon converting their Preferred Stock. For example, just before converting their Preferred Stock, holders might engage in short sales in an effort to cause a market price
decline.

Future Sales or Issuances of Shares Could Affect The Company's Stock Price.

If the Company's stockholders sell substantial amounts of common stock in the public market, the market price of the common stock could fall. These sales also
might make it more difficult to sell equity or equity-related securities in the future at a time and price that is deemed appropriate. As of November 1, 2000, subject to shareholder approval,
the Company has an authorized capitalization of 5,000,000 shares of Preferred Stock, 3,000 shares of which are issued and outstanding, and 100,000,000 shares of common stock, of which 32,767,507
shares are issued and outstanding, 4,500,000 shares have

12

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been reserved for issuance on the exercise of outstanding options, and 2,325,000 shares are reserved for issuance on the potential exercise of outstanding warrants. Accordingly, as of
November 1, 2000, assuming the conversion of all of the Series A Convertible Preferred Stock and all of the warrants issued in connection therewith, there would be 5,000,000 shares of
Preferred Stock and 53,757,493 shares of common stock available for issuance upon such terms and conditions as the Board of Directors may determine in accordance with Utah Law. There is no requirement
to obtain stockholder approval for the issuance of additional shares. It should be noted that the availability of additional shares could render it more difficult or discourage a takeover attempt. For
example, the issuance of additional common stock or Preferred Stock convertible into common stock in a public or private sale, merger, or similar transaction would increase the number of outstanding
shares of common stock and thereby could dilute the proportionate interest of any party attempting to gain control of the Company.

The Company's Chief Executive Officer and Chairman of the Board Votes a Majority of the Shares, Which Could Discourage an Acquisition of the Company or Make Removal of
Incumbent Management More Difficult.

Klee Irwin, Chief Executive Officer, beneficially owns approximately 41.5% of the outstanding common stock on November 1, 2000 and holds an irrevocable
proxy to vote an aggregate of approximately 4.1% of the outstanding Common Stock on behalf of American Equities, LLC and Corporate Financial Enterprises, Inc. Andrew Vollero, Jr., Chairman of
the Board of Directors currently holds an irrevocable proxy to vote an aggregate of approximately 20.2% of the outstanding Common Stock on November 1, 2000, on behalf of R. Lindsey Duncan and
Cheryl Wheeler Duncan in accordance with a Voting Agreement dated March 1, 2000. Together they will therefore be able to control all matters requiring approval by the Company's stockholders,
including the election of directors and the approval of mergers or other business combination transactions.

The Articles of Incorporation and Utah Law Contain Provisions That Could Delay or Prevent an Acquisition of the Company.

The articles of incorporation and by-laws contain provisions that may discourage third parties from seeking to acquire the Company. These
provisions include:



The
Company is also afforded the protections of the Utah Revised Business Corporation Act. This statute contains provisions that impose restrictions on shareholder action to acquire
control of the Company. The effect of the provisions of the articles of incorporation and by-laws and Utah law may discourage third parties from acquiring control of the Company.

The Company May Face Costly Product Liability and Other Legal Claims by Consumers.

The Company's products are particularly susceptible to product liability claims. Any claim of product liability by a consumer, regardless of merit, could be
costly financially and could divert the attention of management. It could also create negative publicity, which would harm the Company's business. Although the Company maintains product liability
insurance, it may not be sufficient to cover a claim if one is made.

13

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Like other retailers, distributors and manufacturers of products that are ingested, the Company faces an inherent risk of exposure to product liability claims in the event that the
use of the products results in injury. The Company may be subjected to various product liability claims, including claims that the products which the Company sells contain contaminants, are improperly
labeled or include inadequate instructions as to use or inadequate warnings concerning side effects and interactions with other substances. The Company cannot predict whether product liability claims
will be brought against the Company in the future or the effect of any resulting adverse publicity on the business. Moreover, the Company may not have adequate resources in the event of a successful
claim. The Company does not have formal indemnification arrangements with the third-party vendors from which products are sourced. If insurance protection is inadequate and third-party vendors do not
indemnify the Company, the successful assertion of product liability claims could result in potentially significant monetary damages.

Although
many of the ingredients in the products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, some of the products
contain innovative ingredients or combinations of ingredients. There is little long-term experience with human consumption of some of these innovative product ingredients or combinations
in concentrated form. In addition, interactions of these products with other similar products, prescription medicines and over-the-counter drugs have not been fully explored.
Although the manufacturer may perform research and tests in connection with the formulation and production of the products, there are no conclusive clinical studies regarding many of the Company's
products.

Because
the Company deals with a large number of end users, it has a significant level of legal exposure. The most serious area of exposure is in relation to product advertising
claims and the product quality. People may purchase products from the Company expecting certain physical results, unique to nutritional products and if they do not perceive the results to be in
accordance with the claims made on the packaging or on the Company's Web site, certain individuals or groups of individuals may seek monetary retribution. This may also be the case if the Company
ships a product that is tainted in some way. The Company has exposure for product claims and product quality from at least four distinct groups: (1) Government; the FDA, FTC, state and local
departments of health, and state and local district attorneys which have the authority to sue or levy fines against private companies that may violate one of the numerous and complex laws governing
the advertising and distribution of vitamin and supplement products; (2) Watchdog Groups; many organizations exist which work with attorneys to pursue companies that violate various regulations
to the detriment of the public; (3) Competitors; the Company's competitors may bring suits against the Company citing areas of law such as the Lanham Act, which prohibits companies from making
advertising claims that are misleading and place competitors at a disadvantage who are not making such claims; and (4) Consumers and Class Action Groups; any consumer or group of consumers can
bring charges against the Company for claims regarding product quality or advertising claims and these individuals or groups often have access to free legal support from law firms which take a
percentage of the settlement or judgment instead of hourly fees. The Company expects to have insurance coverage that will protect the Company from losses from any of the above instances of litigation.
However, the Company has no assurance that the Company's insurance company will comply with coverage in all instances or that such coverage will be adequate to cover all potential losses.

No Long-Term Contracts with Manufacturers or Distributors.

The Company purchases all of its products from third-party manufacturers pursuant to purchase orders but without any long term manufacturing agreements. In the
event that a current manufacturer is unable to meet the manufacturing and delivery requirements at some time in the future, the Company may suffer interruptions of delivery of certain products while
it establishes an alternative source. To limit the exposure to this type of interruption, for all large volume products, two third-party

14

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manufacturers have been established. For smaller volume products, the selection of alternative manufacturing sources may be delayed while a review is completed of the proposed manufacturers quality
control, raw material sources, and manufacturing and delivery capabilities. The Company also relies on third-party carriers for product shipments, including shipments to and from distribution
facilities. The Company is therefore subject to the risks, including employee strikes and inclement weather, associated with the carrier's ability to provide delivery services to meet the Company's
fulfillment and shipping needs. Failure to deliver products to customers in a timely and accurate manner would harm the Company's reputation, business and results of operations.

Concentration of Customers.

The Company shipped approximately 18.6% and 13.3% of its total shipments to a single customer (GNC) during 1999 and 1998, respectively. Shipments to GNC during
the first two quarters of the year 2000 were approximately 27.0% and 21.2%, respectively. There are no long-term contractual relationships with this customer. The loss of this customer
would have a significant impact on the business.

Reliance on Limited Number of Products

The Company currently offers approximately 313 products and derived more than 30.5% of its shipments during 1999 from the sale of two products, Ultimate
Cleanse® and Inholtra®. As a result of there being a limited number of individual products from which substantial revenue is derived, the risks associated with the business
increase, since a decline in market demand for one or more products could have a significant adverse impact on the results of operations.

15

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Dependence on Management

The Company is dependent on its management for substantially all of its business activities, including the development of new products and the advancement of
its identity and recognition in the nutritional supplement industry. The loss of the service of certain members of management such as Mr. Klee Irwin, the Chief Executive Officer, could have a
material adverse effect on the business, operations and financial condition. The Company currently has no long-term agreement with any executive officer or key employee. Qualified
technical personnel are likely to remain a limited resource for the foreseeable future. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be
costly and difficult. The Company may not be able to hire the necessary personnel to implement its business strategy, or it may need to provide higher compensation to such personnel than is currently
anticipated. If the Company fails to attract and retain sufficient numbers of highly skilled employees, it may be unable to attract customers and increase sales.

Expansion of Distribution Channels

The Company anticipates expanding its current distribution channels by adding new customers to its current classes of trade, introducing new nutraceutical
products, and in general, expanding its activities and operations.

While
the Company has been successful in expanding its markets and distributors to date, there can be no assurance that it will be able to continue to expand in these areas, or that
the results of these efforts will be successful in generating incremental profitable revenue.

Difficulty of Strict Compliance With Government Regulations

The processing, formulation, packaging, labeling and advertising of the Company's products are subject to governmental regulation. Congress has recognized the
potential impact of dietary supplements in promoting the health of US citizens by enacting DSHEA. Because of the broad language of certain sections of DSHEA and the regulations that implement it, it
is difficult for any company manufacturing or making dietary supplements to remain in strict compliance.

The Company May Have Difficulties In Managing Its Growth.

The Company has implemented a growth strategy that is primarily aimed at growth through acquisition. In the core business, this may involve the acquisition of
either individual or groups of brands or other businesses. There can be no assurance that any such acquisitions can be properly integrated with the Company's operations to realize any incremental
benefit or that they will prove to be profitable.

Due
to the current financial position, acquisition of any other businesses is highly dependent on the price of the common stock, which is used as the "currency" in these acquisitions.
There is no assurance that the price of the Company's common stock will achieve a level that will enable the Company to use it to acquire other companies. Further, there can further be no assurance
that the Company will be able to properly effect such a consolidation or that, if it can, that such a consolidation will be successful.

The Company Expects Its Quarterly Financial Results to Fluctuate

4Health was organized in February 1993, Irwin Naturals was organized in August 1995 and HealthZone.com was organized in February 1999.
Since the businesses have been in operation for a limited amount of time, there can be no assurance that the Company will be able to operate profitably in the future. The Company is not able to give
investors a historical platform on which to base an evaluation of its business strategy. The Company has a limited insight into trends that may emerge and

16

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affect its business. An investor in the common stock must consider the risks and difficulties frequently encountered by early stage companies. These challenges include the:



The
Company cannot be certain that its business model will be successful or that it will successfully address these and other challenges, risks and uncertainties.

If The Company is Unable to Attract and Train Adequate Numbers of Customer Service Personnel, It May Not Be Able to Provide Sufficient Customer Service.

The
business depends in part on the ability to maintain superior customer service. If the Company is unable to attract and train adequate numbers of customer service personnel, its
efforts to establish its brands may be harmed and the business results may be impaired. The Company will need to commit significant additional financial resources to attract and train customer service
personnel in order to provide customers with high quality customer service.

If The Company Engages in Any Acquisitions, It Will Incur A Variety of Costs, and the Anticipated Benefits of the Acquisition May Never Be Realized.

If appropriate opportunities present themselves, the Company may attempt to acquire businesses, technologies, services or products that it believes are a
strategic fit with its business. The Company currently has no binding commitments or agreements with respect to any material acquisitions. If the Company does undertake any transaction of this sort,
the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures which may absorb significant management attention that
would otherwise be available for the ongoing development of the business. Moreover, the anticipated benefits of any acquisition may fail to be realized. Future acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of additional debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could adversely
affect the business, results of operations and financial condition.

In
addition, recent proposed changes in the Financial Accounting Standards Board rules for merger accounting may affect the Company's ability to make acquisitions or to be acquired.
For example, the elimination of the "pooling" method of accounting for mergers could increase the amount

17

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of goodwill that would be required to be recorded in a merger with another company, which would have an adverse financial impact on future operating results. Further, accounting rule changes that
reduce the availability of write-offs for in-process research and development costs in connection with an acquisition, could result in the capitalization and amortization of
these costs and negatively impact the results of operations in future periods.

The Company Does Not Intend to Pay Any Dividends

The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings to fund growth and,
therefore, does not expect to pay
any dividends in the foreseeable future. Consequently, Investors only will realize an economic gain on their investment in the common stock if the price appreciates. Investors should not purchase the
common stock with the expectation of receiving cash dividends.

ITEM 2. PROPERTIES

The Company's principal offices are located at 5310 Beethoven Street, Los Angeles, California, 90066 in a building and warehouse leased by the Company at a
monthly rental charge of $39,000. This is a five-year lease subject to escalation. In addition, in 1999 the Company owned a building in Boulder, Colorado and leased warehouse space in
Broomfield, Colorado. On March 25, 1999, the Company completed the sale of its former 4Health, Inc. corporate facility located in Boulder Colorado (the "Property"). The sale price for
the Property was $2,350,000, which consisted of (i) cash consideration of $600,000 that was received at closing, (ii) assumption of a $1,300,000 existing first mortgage loan on the
Property made by the buyer, and (iii) the receipt of a $450,000 promissory note secured by a second trust deed in the Property. The note receivable was to be paid in monthly installments of
$3,688, including the principal and interest at a rate of 71/2% per annum, until March 1, 2002 when the note was to be payable in full. On July 12, 2000 this note was paid
in full.

In
November 1999 the Company entered into a 5-year lease of its office facilities in Broomfield, Colorado. The lease agreement calls for escalating lease payment over the
term of the lease as follows:

Schedule of Escalation
for Broomfield, Colorado OfficeYear 1

$
29,456Year 2

$
29,456Year 3

$
31,560Year 4

$
31,560Year 5

$
32,612


The
company is in the process of assigning its right under this lease to a third party.

|Location                |  | Size           |  | Function                                    
|----------------------- |  | -------------- |  | --------------------------------------------
|Los Angeles, California |  | 52,000 sq. ft. |  | Corporate Headquarters & Distribution Center
|Broomfield, Colorado    |  | 3,500 sq. ft.  |  | Midwest Office                              

ITEM 3. LEGAL PROCEEDINGS

On December 23, 1999, a lawsuit was filed against the Company and certain officers by the former shareholders of Health & Vitamin Express
alleging various causes of action. The proposed terms of the settlement provided that the Company immediately issue the 363,636 shares of common stock which could have been issuable to the former
shareholders of HVE for future earnings. As such, the Company estimated and recorded an expense and offsetting contingency of $1,200,000 in the accompanying balance sheet at December 31, 1999,
in connection with this claim. Pursuant to the

18

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Settlement, Termination and Mutual Release Agreement dated April 13, 2000, 363,636 additional shares were issued in settlement of this lawsuit. In connection with the settlement, all other
rights and obligations that existed under the February 15, 1999 Merger Agreement were terminated.

On
September 18, 2001 the Company was served in a lawsuit:Veromax International, LLC (Plaintiff) v. Omni Nutraceuticals, Inc.
(Defendant), currently pending in the Circuit Court of Maryland for Baltimore County, Case No. 03-C-00-009605. The litigation
concerns a Distribution Agreement between Veromax and Omni, dated September 10, 1999, wherein Omni was appointed the exclusive distributor for the product Veromax. In the litigation, Veromax
International seeks to terminate the Distribution Agreement and seeks damages for breach of contract including the Company's failure to meet minimum purchase commitments. The Company contends that it
is not in breach of the agreement between the parties, that the distributorship is still valid, and it should continue to sell the product. It anticipates filing a cross-complaint against the
plaintiff for the plaintiff's breach of contract and seeking substantial damages. Management intends to vigorously defend this lawsuit and is working to resolve
the dispute without further litigation. While it is far too early to predict an outcome, if this matter is ultimately found in favor of the plaintiff, it could have a material adverse affect on the
Company's financial position.

On
January 19, 2001 a lawsuit was filed in Los Angeles County Superior Court: Unified Western Grocers, Inc. (Plaintiff) v. Omni Nutraceuticals, Inc., Case
No. 01 000066. The complaint seeks recovery of approximately $20,000, including legal fees for amounts which the plaintiff claims are owed for an open account. The Company denies that the
amount is due to the plaintiff. A responsive pleading was filed by the Company on February 14, 2001. At present, Management does not believe that the outcome of this litigation is likely to
materially impact the Company.

On
January 23, 2001, the Labor Commissioner of the State of California entered a judgment against the Company in the amount of approximately $42,000 in the action: Richard F.
Lynch v. Omni Nutraceuticals, Inc., Labor Commissioner, State of California, State Case No. 05-19487 ICC. The Company denies any amounts are due Lynch. The Company has filed
an appeal, which required posting a bond in the amount of the judgment, seeking a new trial in the Superior Court. The final outcome of this case is uncertain, but appears unlikely that it will have a
material impact on the Company.

A
judgment was recently entered against the Company for approximately $117,000, plus an undetermined amount for attorneys fees, interest and costs, in a matter entitled: Pacific Foods
of Oregon, Inc. v. Omni Nutraceuticals, Inc., United States District Court, District of Oregon, Case No. CV 00-1014 JO. This case involves the Company's open account
with the plaintiff. The Company has not yet received a copy of either the complaint or the judgment, but recently received a Notice of Deposition with respect to a Judgment Debtor Examination. It is
currently too early to assess the outcome of this matter.

On
February 21, 2001, the Company was advised of a lawsuit:Media Networks, Inc. v. Omni Nutraceuticals, Inc., Los Angeles Superior Court Case No. BC
241503, for amounts due on open account pursuant to an agreement filed December 8, 2000. The complaint seeks a total of approximately $480,000, including interest, attorneys
and collection fees, for which plaintiff has filed a Request for Entry of Default and Judgment. Efforts are in process to have the plaintiff agree to set aside the default if already entered, and to
file a motion to set aside the default if it ahs been entered. Based on the information currently available, the Company is unable to evaluate the likelihood of an unfavorable outcome.

On
February 21, 2001, the Company received a demand letter from counsel representing the majority of the former owners of Smart Basics, Inc. (dba SmartBasics.com), an Internet
retailer acquired by the
Company on May 25, 2000, claiming, among other things, misrepresentations in connection with the transaction in which these individuals exchanged their ownership interests in Smart

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Basics, Inc. for common stock of the Company. The demand letter seeks unspecified relief or, in the alternative, rescission of the original transaction. Smart Basics, Inc., together with the Companies
other Internet properties, was sold to Vitacost.com on February 2, 2001.

The
demand letter threatens that a legal action will commence on February 28, 2001, unless substantial progress is made towards resolving this claim. Based on the information
currently available, the Company is unable to determine the likelihood of an unfavorable outcome to this matter.

From
time to time the Company is a party to legal proceedings that it considers routine litigation incidental to its business. Management believes that the likely outcome of such
litigation will not have a material adverse effect on the Company's business or results of operations.

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

On December 22, 1999, a Special Meeting in Lieu of an Annual Meeting was held at Omni headquarters for the following purposes: (i) to ratify an
amendment to Article III of the Company's Bylaws eliminating Section 3.14 providing for an Executive Committee of the Board of Directors; (ii) to elect Mr. Santo P. Panzarella to
the Board of Directors of Omni Nutraceuticals as a Class III director; (iii) to ratify amendments to the Long Term Stock Incentive Plan of Omni Nutraceuticals increasing the number of
shares of Common Stock that may be awarded under the Plan to 4,500,000, including 1,000,000 shares that may be granted to non-employee directors; and (iv) to ratify the selection of
Arthur Andersen LLP, independent public accountants, as Omni Nutraceuticals' independent auditors for the fiscal year 1999. The matters were voted upon at the meeting, and the number of votes cast
for, against or withheld, as to each matter, where applicable, are set forth below.

|PROPOSAL                                                                                            |  | Votes For  |  | Votes Against |  | Votes Withheld
|--------------------------------------------------------------------------------------------------- |  | ---------- |  | ------------- |  | --------------
|To ratify an amendment to Article III of the Company's Bylaws                                       |  | 22,350,092 |  | 31,890        |  | 130,950       
|To elect Mr. Santo P. Panzarella to the Board
of Directors                                          |  | 22,062,992 |  |              |  | 449,940       
|To ratify amendments to the Long-Term Stock Incentive Plan                                          |  | 21,625,572 |  | 755,610       |  | 131,750       
|To ratify selection of Arthur Andersen LLP, independent public accountants for the fiscal
year 1999 |  | 22,469,070 |  | 41,962        |  | 1,900         

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock commenced trading on the Nasdaq National Market tier of the Nasdaq Stock Market under the stock symbol HHHH on July 17, 1996.
On August 20, 1999, the Company changed its stock symbol to OMNT. On April 1, 2000, the Company changed its symbol to ZONE.

On
November 7, 2000, NASDAQ notified the Company that it had halted trading in the Company's common stock.

On
November 17, 2000, NASDAQ informed the Company that it would delist the Company's common stock from its National Market System, effective November 17, 2000. Although
the Company intends to appeal this action, such an appeal does not act as a stay. Accordingly, trading in the Company's common stock is currently conducted on the "pink sheets". The new symbol is
ZONE.OB.

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The high and low closing bid prices reported for the period between January 1, 1998 and September 30, 2000 appear in the following table:

Fiscal Year

Quarter

High

Low1998

1st

$
5.875

$
4.5001998

2nd

$
9.500

$
4.8751998

3rd

$
7.500

$
2.7501998

4th

$
6.938

$
3.0001999

1st

$
8.000

$
3.4381999

2nd

$
2.500

$
1.5001999

3rd

$
2.500

$
1.5001999

4th

$
2.313

$
1.1252000

1st

$
8.625

$
1.3752000

2nd

$
7.375

$
3.7502000

3rd

$
4.188

$
1.375


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As
of November 1, 2000, there were approximately 187 stockholders on record of the Company's Common Stock, exclusive of stockholders who hold title to their shares in street
name. The last reported sales transaction in the Company's common stock at the close of the market on February 20, 2001 was $0.25.

SALES OF RESTRICTED SECURITIES

During the year ended December 31, 1999, and subsequently, the Company completed the following transactions:

On
February 15, 1999, the Company acquired by way of a merger with and into its California subsidiary, HealthZone.com, Health & Vitamin Express, Inc. ("HVE"), a
California on-line retailer of health products, in consideration for the issuance of 363,636 shares of common stock of the Company issued in a private placement to the three shareholders
of HVE. These shares were issued in a transaction intended to qualify for the exemption from registration afforded by Section 4(2) of the Securities Act of 1993 and Rule 506 promulgated
thereunder. Refer to the March 31, 1999 quarterly report filed on Form 10Q.

During
the year ended December 31, 1999, the Company issued 53,000 shares of common stock valued at prices ranging from $1.43 to $2.37 per share to consultants in order to
settle certain obligations. The shares were issued in a transaction intended to qualify for the exemption from registration under the Securities Act of 1933, as amended, afforded by Section 4(2)
thereof.

On
January 5, 2000, as compensation for continuing service on the Board of Directors, the Company issued to Mr. Andrew Vollero Jr., 25,000 restricted shares of the
Company's $.01 par value common stock. The shares were issued in a transaction intended to qualify for the exemption from registration under the Securities Act of 1933, as amended, afforded by Section
4(2) thereof.

On
January 24, 2000, the Company completed an equity transaction whereby the Company issued 2,000,000 shares of its newly created 5% Convertible Preferred Stock,
Series A ("Preferred Shares") and seven year warrants to purchase 550,000 shares of common stock at an exercise price of $2.25 per share, subject to adjustment. The aggregate purchase price for
the Preferred Shares and warrants sold by the Company was $3,000,000. Concurrently, HealthZone.com issued 222,222 shares of its common
stock (approximately 10% of shares outstanding) and a seven-year warrant to purchase up to 37,000 shares of its common stock. In connection with the above transaction, the Company
(i) provided the investor the right to elect one director, (ii) provided the investor certain registration rights, (iii) amended its Articles of Incorporation to provide for the
Preferred Shares, (iv) amended the Settlement Agreement between the Company and Klee Irwin as it related to certain funding provisions of HealthZone.com, and (v) entered into two
separate consulting agreements, one of which required the Company to issue 50,000 shares of its common stock. Further, in connection with the above transaction, the Chairman (Duncan) and the former
Chief Executive Officer (Irwin), both significant shareholders, each sold 220,000 (totaling 440,000) shares of their personally held Company common stock to the investing parties for $250,000
(totaling $500,000). On March 24, 2000, all of the issued and outstanding Preferred Shares, plus accrued dividends, were converted into 2,016,438 shares of common stock. Since the conversion
rate was significantly below the trading price of the Company's common stock when the Preferred was issued, the Company recognized a preferred dividend of $1,950,000, which is reflected as a reduction
in net income available to common stockholders.

On
March 12, 2000, the Company entered into a two year Consulting Agreement with Liviakis Financial Communications, Inc. ("LFC") and, in connection therewith, authorized the
issuance of 1,200,000 restricted shares of Common Stock to LFC in consideration of and as a retainer for, consulting services to be rendered to the Company by LFC. Pursuant to the provisions of the
Consulting Agreement, LFC is entitled to receive a 2.5% finder's fee in connection with any debt or equity financing for the Company from a source introduced to the Company by LFC and a 2% finder's

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fee in connection with any acquisition by the Company, or its nominee, of a candidate introduced to the Company or its nominee by LFC. The Company also agreed to reimburse LFC for
pre-approved extraordinary expenses incurred by LFC on behalf of the Company.

On
March 27, 2000, the Company sold 700,000 shares of common stock in a private placement for aggregate proceeds of $2,100,000. The shares were issued in a transaction intended
to qualify for the exemption from registration under the Securities Act of 1933, as amended, afforded by Section 4(2) thereof. The investor was also provided certain registration rights in
connection with this transaction.

On
October 27, 2000, the Company completed a $3 million private equity financing. This private placement consisted of the sale of 3,000 shares of Series A
Convertible Preferred Stock ("Series A") and warrants to acquire an aggregate of 600,000 shares of the Company's common stock to ten investors ("Holders") for $3,000,000. The Company used the net
proceeds of the offering of approximately $2,720,000, after certain fees and expenses, for working capital purposes. Among other rights granted to the Holders, the Company is required to file a
registration statement for the common stock into which the Series A is convertible within 30 days after the closing.

DIVIDEND POLICY

The Company has never paid dividends with respect to the Company's Common Stock. There are no restrictions on the declaration or payment of dividends in the
articles of incorporation or bylaws of the Company, however, for the foreseeable future, the Board of Directors intends to retain all of the Company's earnings for use in the expansion of the
Company's business. The Company is also currently proscribed from issuing cash dividends on its Common Stock under the terms of its Credit Facility with its bank.

REGISTRAR AND TRANSFER AGENT

The registrar and transfer and warrant agent for the Company is ComputerShare Investor Services, 12039 Alameda Pkwy, Suite Z-2 Lakewood, CO, 80228,
telephone number (303) 234-5300.

ITEM 6. SELECTED FINANCIAL DATA

The following selected statements of operations data for the three years ended December 31, 1999, 1998 and 1997 and the selected balance sheet data as of
December 31, 1999 and 1998 have been derived from the audited financial statements of the Company included herein ("Financial Statements"). The selected statements of operations data for the two years
ended December 31, 1995 and the selected balance sheet data as of December 31, 1995, and 1996 have been derived from audited financial statements of the Company not included elsewhere
herein. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial
Statements and notes thereto included elsewhere in this Form 10-K. Certain amounts in prior years have been reclassified to conform to the current year presentation.

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YEARS ENDING DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)

|Statement of Operations Data                                                      |  | 1999 |         | 1998 |   | 1997   |   | 1996 |        | 1995 |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | - | ---- | ------ | ---- | -
|
|Net sales                                                                         |  | $    | 31,217  |      | $ | 30,547 |   | $    | 29,353 |      | $
|Gross profit                                                                      |  |      | 15,017  |      |   | 18,007 |   |      | 16,050 |      |  
|Operating (loss) income                                                           |  |      | (10,500 | )    |   | 1,827  |   |      | (4,638 | )    |  
|Other income (expense), net                                                       |  |      | (829    | )    |   | (209   | ) |      | (79    | )    |  
|Income (loss) before provision (benefit) for income taxes                         |  |      | (11,329 | )    |   | 1,618  |   |      | (4,717 | )    |  
|Provision (benefit) for income taxes                                              |  |      | (274    | )    |   | 600    |   |      |       |      |  
|Net income (loss)                                                                 |  |      | (11,055 | )    |   | 1,018  |   |      | (4,717 | )    |  
|Pro forma provision for income taxes (unaudited)                                  |  |      | N/A     |      |   | 1,345  |   |      | 765    |      |  
|Pro forma net income (loss) (unaudited)                                           |  |      | N/A     |      |   | 273    |   |      | (5,482 | )    |  
|PER SHARE DATA:                                                                   |  |      |         |      |   |        |   |      |        |      |  
|Historical Earnings (loss) per common shareBasic and diluted                     |  | $    | (0.39   | )    | $ | 0.04   |   | $    | (0.17  | )    | $
|ProForma Earnings (loss) per common shareBasic and diluted (unaudited)           |  |      | N/A     |      | $ | 0.01   |   | $    | (0.20  | )    |  
|Historical                                                                        |  |      |         |      |   |        |   |      |        |      |  
|Weighted average number of shares of common stock outstandingBasic               |  |      | 28,177  |      |   | 27,747 |   |      | 27,365 |      |  
|Weighted average number of shares of common stock outstandingDiluted             |  |      | 28,177  |      |   | 28,221 |   |      | 27,365 |      |  
|Pro forma                                                                         |  |      |         |      |   |        |   |      |        |      |  
|Weighted average number of shares of common stock outstandingBasic (unaudited)   |  |      | N/A     |      |   | 27,747 |   |      | 27,365 |      |  
|Weighted average number of shares of common stock outstandingDiluted (unaudited) |  |      | N/A     |      |   | 28,221 |   |      | 27,365 |      |  

YEARS ENDING DECEMBER 31
(in thousands)

|Balance Sheet Data                     |  | 1999 |        | 1998 |   | 1997   |  | 1996 |        | 1995
|-------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----
|
|Working Capital (Deficit)              |  | $    | (8,558 | )    | $ | 4,395  |  | $    | 3,588  |     
|Total Assets                           |  |      | 29,533 |      |   | 13,087 |  |      | 11,337 |     
|Long Term Debt, Net of Current Portion |  |      | 10,187 |      |   | 1,423  |  |      | 1,298  |     
|Shareholders' Investment               |  |      | (316   | )    |   | 5,869  |  |      | 5,387  |     

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

|Years Ending December 31                        |  | 1999  |    | 1998 |    | 1997  |   
|----------------------------------------------- |  | ----- | -- | ---- | -- | ----- | --
|
|Net Sales                                       |  | 100   | %  | 100  | %  | 100   | % 
|Cost of Sales                                   |  | 51.9  | %  | 41.0 | %  | 45.3  | % 
|Gross Profit                                    |  | 48.1  | %  | 59.0 | %  | 54.7  | % 
|Selling, General and Administrative Expenses    |  | 76.6  | %  | 53.0 | %  | 59.6  | % 
|Loss on write off of Goodwill                   |  |      |    |     |    | 10.9  | % 
|Loss on Intangibles                             |  | 1.3   | %  |     |    |      |   
|Legal Settlement                                |  | 3.8   | %  |     |    |      |   
|Income (loss) from operations                   |  | (33.6 | )% | 6.0  | %  | (15.8 | )%
|Other income (expense), net                     |  | (2.7  | )% | (0.7 | )% | (0.3  | )%
|Income (loss) before provision for income taxes |  | (36.3 | )% | 5.3  | %  | (16.1 | )%
|Provision Benefit for income taxes              |  | (.9   | )% | 2.0  | %  |      |   
|Net income (loss)                               |  | (35.4 | )% | 3.3  | %  | (16.1 | )%

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OVERVIEW

The Company is a supplier and formulator of branded natural health, herbal and nutritional supplements designed and formulated to address the dietary needs of
the general public. The Company's products are produced principally from natural ingredients and are formulated for the purposes of achieving specific dietary or nutritional goals. All of the products
fall into Primary Standard Industrial Classification Code Number 325411 and are substantially similar in that they are essentially all natural nutritional supplements. The Company has historically and
continues to sell these products to health food stores, both directly and through distributors, mass merchandisers and distributors who sell into foreign countries.

Omni
is a Utah Corporation, and was formerly known as Irwin Naturals/4Health Inc., which was formerly known as 4Health, Inc. Omni is the surviving corporation of a
merger (the "Merger") of 4Health, Inc., a Utah corporation ("4Health") with Irwin Naturals, Inc., a California corporation ("Irwin Naturals") consummated June 30, 1998. Pursuant
to the Merger that was accounted for as a pooling of interests 4 Health issued 15,750,000 shares of common stock in exchange for all the outstanding shares of Irwin Naturals.

Effective
March 12, 2000, both the Company's Chairman of the Board, R. Lindsey Duncan and its President and Chief Executive Officer, Louis Mancini ceased to be employed.
Mr. Mancini was replaced by Mr. Klee Irwin as President and Chief Executive Officer.

On
March 12, 2000, the Board also authorized the termination of the Settlement Agreement dated October 8, 1999, between the Company and Mr. and Mrs. Klee Irwin,
and the ancillary agreements executed and delivered by the Company in connection therewith. On October 8, 1999, the Company and Mr. Klee Irwin had entered into a settlement agreement
(the "Settlement Agreement") in order to resolve certain mutual claims that had arisen between the Company and Mr. Irwin.

Starting
in July 2000, one of the Company's large customers started deducting significant amounts from cash remittances. In addition, certain of the Company's other customers
began taking deductions against cash remittances that were in excess of historical amounts the Company had experienced. In August 2000, the Company conducted an investigation of its 1999 and
2000 sales practices and
determined that sales to certain customers were made with rights of return and "guarantees" of sell-through to consumers. As part of its investigation, the Company reviewed substantially
all of the customer deductions taken in 2000 and determined that certain amounts related not only to "guaranteed" sales, but also to other customer allowances and concessions granted by prior
management in the first quarter of 2000.

The
Company has determined the effect of these deductions on its previously issued financial statements and has restated the accompanying financial statements for the year ended
December 31, 1999. Revenues from any products with "guaranteed" sales have been deferred until the sell through of the product at the customer level and the related product has been treated as
consigned inventory. In situations in which the Company granted allowances and concessions early in 2000 related to sales in 1999, the Company has increased its reserves for such allowances and
concessions as of December 31, 1999. In situations in which the Company granted additional allowances or concessions subsequent to the original issuance of the financial statements relating to
sales made in prior periods, the Company has increased its reserves in the period such decisions were made and the amounts became known.

The
effect of the adjustments was to restate the Company's financial statements for the third and fourth quarters of 1999 and the first and second quarters of 2000. The cumulative net
impact on the Company's statements of operations from July 1, 1999 through December 31, 1999 includes the reduction of approximately $2.2 million of gross profit; approximately
$1.9 million deferred from previously recorded sales now treated as "guaranteed sales," and an additional $0.3 million of reserves for allowances granted to customers for sales in prior
periods.

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RESULTS OF OPERATIONS

1999 Compared to 1998

Consolidated net sales for the year ended December 31, 1999 were $31,217,000 with an operating loss of $10,500,000 and a net loss of $11,055,000, or
$(0.39) per basic and diluted share. Consolidated net sales for the same period in the prior year were $30,547,000 with operating income of $1,827,000 and net income of $1,018,000 or $.04 per basic
and diluted share. The net loss for 1999 was impacted by a $648,000 loss in operations from the Company's Internet subsidiary HealthZone.com, goodwill amortization of $640,000, a $390,000 loss
incurred with the write off of intangibles, non-cash warrant
and option compensation costs of $832,000 and $288,000 related to the relocation of the Company's corporate and warehouse facilities.

Net
sales for the year ended December 31, 1999 increased by $670,000, or 2.2% to $31,217,000 from $30,547,000 for the comparable period in 1998. The increase in sales related
to the introduction of the Company's newly acquired Inholtra pain relieving product partially offset by an increase of over $2 million in allowances to customers for returns and allowances and
deferral of over $2.8 million of sales with explicit right of return.

Gross
profit for the year ended December 31, 1999 decreased by $2,990,000, or 16.6%, to $15,017,000 from $18,007,000 for the comparable period in 1998. Gross profits as a
percentage of sales for the year ended December 31, 1999 decreased to 48.1% from 59.0% in the comparable period in 1998. The decrease in the margin relates to: (i) pricing concessions
related to 1999 sales in conjunction with new product introductions that did not sell through as well as expected, (ii) sales adjustments given to certain customers, (iii) an overall
shift in product mix to certain items which have a lower margin, and (iv) the write-off of inventory related to intangible assets also written off.

Sales
and marketing expenses for the year ended December 31, 1999, increased by $2,838,000 or 41.8%, to $9,631,000 from $6,793,000 for the comparable period in 1998. The
increase primarily relates to wages, advertising and other costs incurred on marketing and media campaigns to (i) launch the introduction of Inholtra, (ii) launch the Company's new
products, Cholestaid and Veromax, for the fourth quarter 1999 and fiscal 2000, (iii) media and advertising campaigns to support certain of the Company's other products, and (iv) 
continual repackaging and redesign of the Company's core product lines.

General
and administrative expenses for the year ended December 31, 1999, increased by $2,328,000, or 31.5% to $9,720,000 from $7,392,000 for the comparable period in 1998.
Included in 1999 general and administrative expenses were: (i) legal and professional fees of $806,000, (ii) $717,000 in costs incurred on the Company's HealthZone.com operations,
(iii) $415,000 for consulting costs incurred to implement the Company's acquisition of Inholtra and other products, (iv) approximately $1,136,000 in provisions for uncollectable
receivables, (v) $903,000 of non-cash warrant and compensation costs, and (vi) a $300,000 charge related to the relocation of the Company's corporate and warehouse
facilities. The prior year included $1,021,000 of costs associated with the merger described above. Distribution costs for the year ended December 31, 1999 increased $1,594,000 or 146%, to
$2,686,000 from $1,092,000 from the comparable period in 1998. The increase primarily relates to higher expenditures for freight, compensation, fulfillment and other distribution costs associated with
efforts to promote new and existing products to new customers.

Depreciation
and amortization for the year ended December 31, 1999, increased by $989,000 to $1,892,000 from $903,000 for the comparable period in 1998. The increase
specifically relates to amortization costs relating to the Inholtra and HVE acquisitions.

Interest
expense for the year ending December 31, 1999 increased $1,176,000 to $1,339,000 from $163,000 for the comparable period in 1998. This increase is consistent with the
increase in the utilization of the Company's line of credit, the incurrence of the Inholtra acquisition debt and the term

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loan incurred to refinance the Inholtra acquisition debt in 1999. Other income included a $481,000 gain on the sale of the former 4Health corporate headquarters building located in Boulder, Colorado.

1998 Compared to 1997

Net Sales for the year ended December 31, 1998 rose to $30,547,000 from $29,353,000, an increase of 4.1% when compared to 1997. Several products were
repositioned and remarketed after the merger as a result of management's focus on optimizing each product's potential. This repositioning resulted in a one-time reduction of $387,000
(1.3%) in net sales. The improvement in net sales between periods was due primarily to an increase in the mass market business, with strong first quarter sales indicative of a high level of interest
in several major products introduced in the last half of 1997, greater market penetration, and a strong focus on expanding into drug and discount chains in the second, third, and fourth quarters. In
addition, the last half of the year saw the promising early signs of acceptance of the Company's newly introduced Nutrition Bar. The relatively stable health food store sales are a reflection of
continued competitive pressures and an overall weakness in this sector of the marketplace. International sales improved over 1997 as the newly installed International Sales Division staff expanded
strongly into several new strategic markets.

Gross
Profit Margins rose to $18,007,000 in 1998 from $16,050,000 in 1997, an increase of 12.2%. The post-merger product re-positioning resulted in a
one-time $172,000 (1.1%) decrease in Gross Margins. Gross Margin as a percentage of net sales increased to 59% of net sales in 1998 from 54.7% of net sales in 1997. This increase was due
primarily to an improved product sales mix, and reflective of continued internal efforts to lower the cost of the core products. Improved margins were particularly evident in the Nature's
Secret® and Harmony Formula® branded products.

Sales
and marketing expenses for the year ended December 31, 1998 decreased by $3,050,000, or 31.0% to $6,793,000 from $9,843,000 for the comparable period in 1997. Much of the
decrease in Sales and Marketing expense was attributable to the synergies achieved as a result of the merger.

General
and administrative expenses for the year ended December 31, 1998, increased by $1,744,000, or 22.8% to $9,387,000 from $7,643,000 for the comparable period in 1997. The
1998 General and Administrative expenses, when adjusted for merger related expenses of $1,614,000, were $7,773,000, a net increase of $130,000 compared to the 1997 General and Administrative expenses
of $7,643,000. Included in the 1997 General & Administrative expenses are Research & Development (R&D) expenses of $418,000. R&D expenses decreased to $29,000 in 1998 as the
Company relied on existing, developed products. Much of the remainder of the decrease was attributable to the synergies achieved as a result of the merger.

During
1997, the Company wrote off goodwill in the amount of $3,202,000 in connection with the 1996 merger with SGTI. There was no similar expense in 1998.

LIQUIDITY AND CAPITAL RESOURCES

As of November 1, 2000, the Company had approximately, $180,000 in cash and cash equivalents and approximately $3,100,000 under the revolving credit
line available. The increase in cash and cash equivalents primarily relates to the receipt of approximately $2,720,000 of net proceeds from the October 27, 2000 private placement. As of
September 30, 2000, the Company had total current liabilities of $20,536,000, $7,340,000 of which consisted of accounts payable to vendors. Further as of September 30, 2000, the Company
had a working capital deficit of $10,819,000, and an accumulated deficit of $33,651,000. The Company estimates that, based on the current rate of negative cash flow from operations, the cash and that
available under the revolving credit line as of November 21, 2000 (approximately $2,000,000) will be sufficient to provide a source of working capital through approximately March 31,
2001. However, this estimate does not give effect to payments, which may be made to vendors to reduce outstanding accounts payables. Further, there can be no assurances that the

27

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vendors will continue to supply the Company with goods and services in the event that such accounts payables are not reduced, which may have an adverse effect on the Company's continued operations. In
addition, based on the past practice of the Company's largest customers to take deductions against accounts receivables to the Company, although the Company believes that it has identified and
reserved for such deductions, such practices may have an adverse effect on the Company's future cash flow.

During
the nine months ended September 30, 2000, the Company experienced negative cash flow from operations of $3,371,000. The sale of equity securities and issuance of a
minority interest in the Company's subsidiary, HealthZone.com in January, 2000, and the sale of common stock in March 2000
provided an aggregate of approximately $5,424,000 in proceeds to the Company. Approximately $3,273,000 of these proceeds were used for the repayment of an existing line of credit and other long term
borrowings, as well as for costs incurred with the financings.

The
current credit facility consists of a $13 million (original amount) term loan ("Term Loan") and up to a $7 million revolving loan ("Revolving Loan"). The
$13 million Term Loan was payable in quarterly installments of $583,333 that began October 15, 1999 and were to increase to $750,000 on October 15, 2002 until the loan was paid in full
on April 15, 2004. The credit facility also contained certain financial and other covenants or restrictions, including the maintenance of certain financial ratios, limitations on capital
expenditures, restrictions on acquisitions, limitations on incurrence of indebtedness, and restrictions on dividends paid by the Company. As of March 31, 2000, the Company was in violation of
several of the covenants.

On
May 8, 2000, the Company's credit facility was amended. As a condition of the waiver of certain covenant defaults, the amendment changed the term date of both loans to
April 30, 2001, when the loans are payable in full. Further, the Term Loan amortization and interest payment schedule was changed from quarterly to monthly. The amendment also required the
Company to meet revised financial covenants. As of June 30, 2000, the Company was in violation of several of the revised covenants.

On
October 23, 2000, the credit facility was further amended with respect to both its term debt and revolving credit agreements. In addition, the lender waived any and all
defaults then in existence. The major amendments of the Waiver and Amendment No. 4 to Secured Credit Agreement included an increase in the availability of the line up to the maximum credit
limit of $7 million, an extension of both the revolving and term debt agreements from April 30, 2001 to July 30, 2002 and an agreement to permit the October, 2000 equity
financing, to be used for working capital purposes. Also see the financial statement footnote "Subsequent Events". In addition, the Company and the lender agreed that all principal payments due under
the loan would be deferred until June 15, 2001. The total of the deferred payments will be approximately $1.56 million. The lender also allowed the Company to use the proceeds from a
private placement of securities, closed on October 27, 2000, resulting in net proceeds of approximately $2,720,000 to the Company, for working capital purposes. The lender charged the Company a
fee for the restructuring of the indebtedness of approximately $131,000, payable in six equal installments commencing April 15, 2001.

On
January 24, 2000, the Company sold 2,000,000 shares of the Company's newly created 5% $.01 par Convertible Preferred Stock for $2,900,000 and sold seven year warrants to
purchase 500,000 shares of common stock at $2.25 per share for $100,000. In connection with the issuance of the preferred stock, the Company issued common stock representing an approximate 10%
interest in the Company's wholly owned subsidiary, HealthZone.com, to the same investors. The Company incurred issuance costs of $100,000, which consisted of legal and placement agent fees. On March
24, 2000, the Company converted all of these preferred shares, plus accrued dividends, for 2,016,438 shares of its common
stock. Since the conversion rate was significantly below the trading price of the Company's common stock when the Preferred was issued, the Company recognized a preferred dividend of $1,950,000, which
is reflected as a reduction in net income available to common stockholders.

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On
March 27, 2000, the Company sold 700,000 shares of common stock to individual investors organized by LFC in a private placement for aggregate proceeds of $2,100,000.

In
separate agreements, two of the Company's trade creditors agreed to convert a portion of their debt in exchange for Common Stock of the Company and to accept a substantially
reduced cash payment and/or note for the balance of the obligation of the company. On September 7, 2000, approximately $985,000 of debt had been converted in exchange for approximately 328,300
shares of Common Stock, or approximately $3.00 per share. Both agreements contain provisions that may require future adjustments to the cash amounts they received, contingent on their realization upon
disposition of the common stock they received pursuant to their respective agreements.

On
October 27, 2000, the Company entered into a Securities Purchase Agreement with several "accredited investors" ("Holders") whereby the Holders purchased 3000 shares of the
Company's newly-issued Series A Convertible Preferred Stock resulting in gross proceeds of $3,000,000 to the Company. In addition, the Buyers received warrants to purchase up to 600,000 shares
of Common Stock at an exercise price of approximately $0.96 per share. The Company received net proceeds from this transaction of $2,720,000, after fees, costs and expenses of issuance. An additional
50,000 warrants were issued to an intermediary on the same terms as were granted to the Buyers.

The
Preferred Stock is convertible into Common Stock on the following basis. The number of shares of Common Stock to be issued is equal to the stated value of the number of shares of
Preferred Stock being converted, together with any accrued dividends (the "Additional Amount") thereon, divided by the "Conversion Price". The Conversion Price is equal to the lesser of
(i) 115% of the average of the two lowest bid prices quoted on the exchange where the Company's Common Stock is traded during the ten days preceding the closing or, (ii) 80% of the
average of the two lowest bid prices of the Common Stock during the five days preceding conversion. Pursuant to the Securities Purchase Agreement and related documents, the Company is required to
file a registration statement, registering for resale the number of common shares issuable assuming a market price of of $.50 per share upon conversion of all of the Preferred Stock, plus the
exercise, at the contractual rate of approximately $0.96, of all of the warrants issued in connection therewith.

The
Preferred Stock may be redeemed by the Company at any time after closing at a price per share equal to the greater of (i) $1,400, plus an Additional Amount per Share,
defined as 6% of the face amount of the Preferred Stock being redeemed, multiplied by the number of days since the closing, divided by 365 (the "Optional Redemption Price") or, (ii) the market
price of the Common Stock into which the Preferred Stock being redeemed could be converted as of the date of the notice of optional redemption. On the fourth anniversary of the Issue date, any
existing shares of Preferred Stock,
together with the additional amount, must either be converted into Common Stock pursuant to the conversion formula or redeemed for cash at the Optional Redemption Price.

In
the event any conversion of Preferred Stock would result in the issuance of more than 19.9% of the number of shares of common stock outstanding on the date of the closing, the
Preferred Stock representing such excess must be redeemed, in cash for $1,400.00 per share, plus the additional amount.

A
registration statement is required to be filed within 30 days of the closing to cover the common stock underlying the conversion of the Preferred Stock ("Conversion Shares")
and the exercise of the warrants, and such indeterminate number of shares of common stock issuable pursuant to the anti-dilution adjustment provisions of the Preferred Stock and warrants.
For registration purposes only, the number of Conversion Shares to be registered is calculated based upon an assumed conversion price per share of $0.50 As of the date of the filing of this
registration statement, which covers the shares and warrants issued in connection with this transaction., the Company is in default of this provision of the Preferred Stock Agreements.

29

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The Securities Purchase Agreement includes certain provisions for liquidated damages against the Company if a registration statement for the related securities is not filed within
30 days or declared effective within 90 days after October 27, 2000. These liquidated damages provisions require the Company to pay an additional amount to the Holders equal to:
(a) in the event of a late filing, 1% of the gross purchase price for such securities from the period commencing October 27, 2000 through the 30th day following such date
and each 30th day thereafter (each a "Computation Date"), if the registration statement is not filed by such Computation Date, and (b) in the event of a late effective date, 1% of
the gross purchase price for such securities from the period commencing on the previous Computation Date through the 30th day following such date and each 30th day
thereafter, if the registration statement is not declared effective by the relevant Computation Date. The Company may also be liable for certain liquidated damages in the event the Company fails to
issue timely shares of common stock upon conversion of the Preferred Stock or exercise of the warrants. These liquidated damages may be paid by the Company either in cash or in Common Stock, at the
option of the Company. There can be no assurances as to whether the Company will incur such liquidated damages, or if so, as to the amount of such liquidated damages.

The
Company has primarily funded its operations to date through internally generated capital, bank loans or private equity financing. The Company's future capital requirements will
depend on many factors, including the nature and timing of orders from customers, collection of trade accounts receivable, the expansion of sales and marketing efforts, costs associated with entering
into new channels of distribution, and the status of competing products. Management believes that additional
investment capital will be required to permit the Company to meet its business objectives in the near term. Such funds may be raised either through debt or equity offerings, or some combination of the
two. However, there is no assurance that the Company will be able to secure such funds on commercially reasonable terms, if at all. If not successful in securing additional funds, the Company may be
forced to dispose of its assets outside of its normal course of business and/or resort to bankruptcy protection.

The
Company's auditors have included an explanatory paragraph in their report of Independent Public Accountants included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1999, as amended, to the effect that the Company's losses from operations for the year ended December 31, 1999, and the
working capital deficit and the retained deficit at December 31, 1999 raise substantial doubt about the Company's ability to continue as a going concern.

On
November 7, 2000, the NASDAQ/NMS halted trading in the Company's Stock. NASDAQ delisted the Common Stock from trading on November 17, 2000. The Company's Common Stock
is currently quoted in the "Pink Sheets," which are published by the National Quotation Bureau. The company believes that the delisting by NASDAQ is likely to have an adverse effect on the market for
the company's Common Stock and on the Company's ability to raise additional capital.

NEW AUTHORITATIVE PRONOUNCEMENTS

In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Investments and Hedging Activities," and SFAS No. 137, which delayed the effective date of SFAS No. 133. The Company will adopt the standard in
January 2001. Management does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations.

In
December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and disclosure of revenue
in financial statements. Changes in accounting to apply the guidance in SAB No. 101 may be accounted for as a change in accounting principle effective January 1, 2000. Management has not yet
determined the complete impact of SAB No. 101 on the Company; however, management does not expect that

30

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application of SAB No. 101 will have a material effect on the Company's revenue recognition and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's primary market risk exposure is interest rate risk. As of December 31, 1999, all of the Company's debt obligations were subject to
variable interest rates. The Company will monitor the level of risk by keeping variable rate exposures at acceptable levels.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following Consolidated Financial Statements are filed with this Annual Report as pages F-1 through F-32. The Index to Financial
Statements appears on page F-1 of this Annual Report.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On April 14, 2000, the Company reported that it changed its auditing firm from Arthur Andersen LLP to Singer, Lewak, Greenbaum & Goldstein, LLP.
In connection with the change, there were no disagreements with the former auditors on any matters. At the conclusion of their audits of the Company's financial statements for the years ended
December 31, 1998 and 1999, Arthur Andersen issued to the Company's Board of Directors two letters setting forth material weaknesses in the Company's system of internal controls. The letters
specifically stated the existence of a lack of accounting and financial reporting infrastructure, a lack of governance, a need for strategies, a business plan and a lack of internal communication and
oversight. The Company has begun to address and correct the weaknesses identified in those letters.

31

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table lists the names, ages, and positions of the Company's directors, executive officers and other significant employees who were employed in
1999 and 2000.

|Name                     |  | Age |  | Officer
Since |  | Director
Since |  | Position                                       
|------------------------ |  | --- |  | ------------- |  | -------------- |  | -----------------------------------------------
|Mr. Andrew Vollero, Jr.  |  | 63  |  |              |  | 1999           |  | Chairman of the Board                          
|Mr. Klee Irwin           |  | 35  |  | 1998          |  | 1998           |  | Chief Executive Officer, Director              
|Mr. Albert Kashani       |  | 40  |  |              |  | 2000           |  | Director                                       
|Mr. Christof Ballin (1)  |  | 35  |  | 2000          |  | 2000           |  | Director, President                            
|Mr. Marty Sumichrast (2) |  | 58  |  |              |  | 2000           |  | Director                                       
|Mr. R. Lindsey Duncan(3) |  | 38  |  | 1993          |  | 1993           |  | Chairman of the Board, Director                
|Mr. Louis Mancini (4)    |  | 55  |  | 1999          |  | 1999           |  | President and Chief Executive Officer, Director
|Mr. Herm Rosenman        |  | 53  |  | 2000          |  |               |  | Chief Operating and Financial Officer          
|Mr. Jonathan Diamond (5) |  | 41  |  |              |  | 1998           |  | Director                                       
|Mr. James Jeffs (6)      |  | 49  |  |              |  | 1998           |  | Director                                       
|Mr. Santo Panzarella (7) |  | 60  |  |              |  | 1999           |  | Director                                       
|Mr. Thomas Aarts         |  | 42  |  |               |  | 2000           |  | Director                                       
|Ms. Rebecca Pearman      |  | 33  |  |              |  | 2001           |  | Director                                       

---

|(1) |  | Served as President and a Director until January 19, 2001                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Served as a Director until April 10, 2000                                                                                        
|(3) |  | Served as Chairman of the Board and a Director until March 12, 2000                                                              
|(4) |  | Served as a Director until October 1999. Served as President and Chief Executive Officer from April 20, 1999 until March 12, 2000
|(5) |  | Served as a Director until March 3, 2000                                                                                         
|(6) |  | Served as a Director until July 1999                                                                                             
|(7) |  | Served as a Director from December 22, 1999 until February 20, 2000                                                              

Mr. Andrew Vollero, Jr.Mr. Vollero became Chairman of the Board of Omni
Nutraceuticals on March 12, 2000, and has served as a Director since 1999. Mr. Vollero is an independent general management consultant and private investor specializing in the small business
area since 1970. During that period, Mr. Vollero has worked with over 100 companies, mostly privately held and in non-high tech industries. Since 1994, Mr. Vollero has served
as a Board member of AC International, A.C. Vroman, Inc., Vroman Real Estate Ventures, Magnum Air and Rahn Industries. Mr. Vollero is a graduate of Yale and Harvard Business School.

Mr. Klee Irwin.Mr. Irwin served as the President and Chief Executive Officer of Omni Nutraceuticals from
June 30, 1998 until April 20, 1999. Prior to June 30, 1998, Mr. Irwin served as the President and Chief Executive Officer of Irwin Naturals, which he founded in 1995. Prior
to his involvement in Irwin Naturals, beginning in 1989, Mr. Irwin served as a vice president of sales and marketing and general manager of Helsneva Labs, a division of Pantron I Corp., a
privately held consumer products company.
Mr. Irwin served as the Chief Executive Officer and a Director of HealthZone.com, the Company's e-commerce subsidiary in 1999 and rejoined the Company as the Chief Executive Officer
and President in March 2000.

Mr. Albert Kashani.Mr. Kashani became a director on March 12, 2000. He has been specializing in transactional and
business litigation matters at his own practice, the Law Offices of Albert R. Kashani. From 1991 to the present, Mr. Kashani has been a principal executive officer of Menorah Fusing &
Services, Inc., a clothing interlining business, and its predecessors. From 1995 to 1998, Mr. Kashani was a tax consultant at Ernst & Young, LLP in Los Angeles. In 1988,
Mr. Kashani founded Torina, Inc., a

32

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clothing manufacturing company. Mr. Kashani received his Bachelor of Arts degree in Economics from California State University, Northridge, in 1992, and graduated from University of Southern
California Law Center in 1995. Mr. Kashani is currently a member of the Board of Directors of two other publicly traded companies, named Electronic Components & Systems, Inc. and
Integrated Communication Networks, Inc.

Mr. Herm Rosenman.Mr. Rosenman joined the Company on May 27, 2000. He was formerly President and Chief Executive
of several companies including, among others, Primedex Health Systems, Inc. and Bikers Dream, Inc. He was also Chief Financial Officer at Rexene Corp., a Fortune 1000 company, and a
partner for many years at Coopers & Lybrand (currently known as PricewaterhouseCoopers LLP). Mr. Rosenman, who received his undergraduate degree from Pace University and his MBA from The
Wharton School, serves as a director on two private company Boards.

Mr. Christof Ballin.Mr. Christof Ballin became a director on March 12, 2000. He graduated from California State
University Fullerton with a Bachelor of Arts degree in International Business. He has over 10 years of management experience within the healthcare field and is a former Managing Director, South
East Asia, of Allergan, Inc., which is a U.S. Fortune 500 Specialty Healthcare Company. Mr. Ballin is currently the Chairman and CEO of the American Academy of Nutrition, College of
Nutrition which is a Nationally Accredited Distance Education College focused on the field of Nutrition. In May 2000, Mr. Ballin was appointed President of the company. On
January 4, 2001, Mr. Ballin announced his resignation as President and a director of the Company, effective January 19, 2001.

Mr. Martin A. Sumichrast.Mr. Sumichrast became a director on March 12, 2000. He is the co-founder,
Chairman of the Board, Chief Executive Officer and President of Global Capital Partners, Inc. Mr. Sumichrast has held various positions at Global Capital Partners, Inc. since its
inception in 1993. Mr. Sumichrast is a Director of EBI Securities Corporation and Chairman of MoneyZone.com.

Mr. Louis Mancini.Mr. Mancini served as the President and COO, then as CEO from October 1998 to March 12,
2000. Mr. Mancini was previously President and CEO of General Nutrition Centers, where he had served in various capacities for over 21 years. Since 1995, Mr. Mancini has been a
director of Sports Club, Inc.

Mr. James Jeffs.Mr. Jeffs is the Managing Director of the Whittier Trust Company, an investment management firm based
in Pasadena, California. Prior to joining the Whittier Trust Company, Mr. Jeffs created the private capital management division at Trust Services of America (TSA) served as its Chief Investment
Officer and President of TSA Capital Management.

Mr. Jonathon Diamond.Mr. Diamond has served as the Chairman and Managing Partner of J. Diamond Group, L.P., a media
entertainment investment partnership from January 1993 through June 1995, and as Vice Chairman of N2K Inc., a media and entertainment company from June 1995 to March 1999.
Mr. Diamond is currently the Chairman of CDNow, a media entertainment company and a successor by way of merger of N2K Inc., a position he has held since March 1999.

Mr. Thomas Aarts.Mr. Aarts is Co-Founder and President of Nutrition Business International (NBI) and
Executive Editor ofNutrition Business Journal.Prior to starting NBI, he was Director of New Ventures and a project manager for Environmental Business
International (EBI). Prior to coming to EBI, Mr. Aarts was an assistant to the CEO of Browning-Ferris Industries and also worked for Mercer Management Consulting and for Johnson &
Johnson.

R. Lindsey Duncan.Mr. Duncan is the founder of 4Health and is a nutritionist certified by the National Institute of Nutritional
Education, an industry accrediting body. Since 1993, Mr. Duncan has been the President, Chief Executive Officer, and Chairman of the Board of 4Health, Inc. Since the
mid-1980s, he has owned, operated, and been the principal nutritionist of Home Nutrition Clinic, Santa

33

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Monica, California. In January 1988, Mr. Duncan began formulating his own nutritional supplements and in 1993, he organized 4health, Inc. (a California corporation and a
predecessor to the Company.) Mr. Duncan is a member of the National Nutritional Foods Association, the American Herbal Products Association, and the Herb Research Foundation.

Ms. Rebecca Pearman.Ms. Pearman has worked for Omni Nutraceuticals or a predecessor or an affiliated business for at
least the last five years. She served as General Manager for Irwin Naturals from its inception in 1994 until leaving for the UK in 1996 to start Applied Nutrition, UK LLC, a division of
Irwin Naturals. She returned to the US in 1997 to become Vice President of the Applied Nutrition Division of Irwin Naturals. In 2000, Ms. Pearman became General Manager/VP operations of
American Brand Labs, a company owned by an affiliate. On February 1, 2001, Ms. Pearman was named President of the Irwin Naturals Division of the Company.

The
Board of Directors met 19 times during 1999 for regular Board of Directors meetings. All directors attended 100% of the aggregate of (i) the total number of meetings of the
Board of Directors held while they were members and (ii) the total number of meetings held by all Committees of the Board of Directors on which they served as members. In addition, on several
occasions, the Board of Directors gave their unanimous written consent on issues involving normal corporate business. The Board of Directors has three standing committees, the Audit Committee, the
Compensation Committee, and the Long-Term Stock Incentive Plan Administration Committee ("LTSIP Administration Committee"). During 1999, the Audit Committee and the LTSIP Administration
Committee were composed of Messrs. Diamond and Jeffs. The Audit and LTSIP Administration Committees did not meet during 1999, the functions of such committees being performed by the Board of
Directors as a whole. The LTSIP Administration Committee is responsible for overseeing the Company's Long-Term Stock Incentive Plan (the "LTSIP") including, subject to the express terms of
the LTSIP, making awards, interpreting the LTSIP, amending and rescinding rules and other duties related to the proper implementation of the LTSIP. During 1999, the Compensation Committee was composed
of Messrs. Duncan and Irwin. The Compensation Committee met once in 1999. The primary responsibility of the Compensation Committee is to establish and review the compensation policies of the
Company, including those for executives. During 1999, the Company did not have a nominating committee, the functions of such a committee being performed by the Board of Directors as a whole.

In
1999, the LTSIP provided that upon assuming office, each non-employee director would be granted a non-qualified option to acquire 5,000 shares of Common
Stock at an exercise price equal to 100% of the fair market value on the date of grant. One-half of the grant shall become exercisable upon completion of one year of service as a director
and the remaining balance upon completion of two years of service as a director. All options have a five-year expiration term.

In
December 1999, the LTSIP was amended to grant 75,000 options at market price at the time of grant over three years to new directors.

Directors
do not receive compensation for attending meetings of the Board of Directors. Directors are reimbursed for their reasonable travel and lodging expenses incurred in attending
meetings.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16(a) of the Securities Exchange Act of 1934, executive officers, directors and 10% shareholders of the Company are required to file
reports on Form 3, 4 and 5 of their beneficial holdings and transactions in the Company Common Stock. With the exception of Form 3's required to be filed by Messrs. Vollero and
Panzarella on becoming directors in October 1999 and a Form 4 filing required to have been made by Mr. Irwin in connection with a sale of common stock in September 1999
pursuant to Rule 144 and a capital contribution to the Company in October, 1999, during 1999, all such reports were filed in a timely manner.

34

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ITEM 11. EXECUTIVE COMPENSATION

The following table shows, for the years ended December 31, 1999, 1998 and 1997 the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for the year, to Company's four most highly compensated executive officers (the "Named Individuals") during 1999:

|                      |  | SUMMARY COMPENSATION TABLE
|--------------------- |  | --------------------------
|
|
|
|
|
|R. Lindsey Duncan (2) |  | 1999                      
|                      |  | 1998                      
|                      |  | 1997                      
|Klee Irwin (1)        |  | 1999                      
|                      |  | 1998                      
|                      |  | 1997                      
|Louis Mancini (3)     |  | 1999                      
|                      |  | 1998                      
|Rockwell Schutjer (4) |  | 1999                      
|                      |  | 1998                      
|                      |  | 1997                      
|                      |  | 1996                      

---

|(1) |  | Mr. Irwin's employment ceased on April 20, 1999, and his options have expired unexercised.                                  
|--- |  | ----------------------------------------------------------------------------------------------------------------------------
|(2) |  | Mr. Duncan's options remain exercisable subject to the terms of the Withdrawal Agreement.                                   
|(3) |  | Mr. Mancini's options were cancelled pursuant to the Termination Agreement.                                                 
|(4) |  | Mr. Schutjer's employment with Omni Nutraceuticals ceased on July 15, 1999. Mr. Schutjer's options have expired unexercised.

OPTION GRANTS

The following table presents information with respect to the Named Individuals concerning the exercise of options during 1999 and unexercised options held as
of December 31, 1999.

Individual Grants

|                  |  |         |  |   |  |   |      |  |   |      |  | Potential Realizable
Value at Assumed
Annual Rates
of Stock
Price Appreciation for
Option Term
|----------------- |  | ------- |  | - |  | - | ---- |  | - | ---- |  | ----------------------------------------------------------------------------------------------
|
|
|
|
|
|R. Lindsey Duncan |  | 550,000 |  |  |  | $ | 2.00 |  | $ | 2.00 |  | 6/30/03                                                                                       

35

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OPTION EXERCISES AND HOLDINGS

The following table presents information with respect to the Named Individuals concerning the exercise of options during 1999 and unexercised options held as
of February 15, 2000:

|                  |  |   |  |   |   | Number of Unexercised
In-The-Money Options at
December 31, 1999 (1) |           |  |        | 
|----------------- |  | - |  | - | - | ------------------------------------------------------------------- | --------- |  | ------ | 
|
|
|
|R. Lindsey Duncan |  | 0 |  | $ | 0 |                                                                     | 1,003,029 |  | 33,334 | 

---

|(1) |  | Based on the closing market price of $1.125 per share for the Company's Common Stock as of December 31, 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

R. Lindsey Duncan, and Klee Irwin, the Company's current Chief Executive Officer, served on the Compensation Committee of the Board of Directors during 1999.

EMPLOYMENT AGREEMENTS

Upon the consummation of the Merger, both Mr. R. Lindsey Duncan and Mr. Klee Irwin entered into substantially similar three-year
employment agreements with Omni Nutraceuticals. In 1999, Mr. Duncan was employed as Chairman of the Board and as a member of the Executive Committee with all duties and responsibilities
normally associated with this position. Mr. Irwin was employed as the Chief
Executive Officer and as a member of the Executive Committee with all duties and responsibilities normally associated with this position until April 20, 1999. On that date, Mr. Irwin
resigned, as Chief Executive Officer of Omni Nutraceuticals and his employment agreement was terminated effective April 20, 1999. In connection with his resignation the Board of Directors appointed
him as Chief Executive Officer of HealthZone.com, the Company's wholly owned e-commence subsidiary. In October 1998 (as revised in June 1999), Omni Nutraceuticals entered
into an agreement to hire Mr. Louis Mancini as President and Chief Operating Officer and, subsequently, Chief Executive Officer.

These
employment agreements provided for: (i) annual salaries of $225,000, and $300,000 for Messrs. Duncan and Mancini, respectively; (ii) the right for
Mr. Duncan to receive an annual bonus equal to 2% of the consolidated earnings before income taxes in excess of $6,000,000 and the right for Mr. Mancini to receive an annual bonus of 2%
of earnings before depreciation, interest, individual taxes and amortization above six (6), eight (8), twelve (12) and fourteen (14) million dollars for the years 1999-2002,
respectively; and (iii) the right to participate in all retirement and welfare, benefit, fringe, perquisite and other plans and programs applicable generally to other key executives in effect
at any time. In addition, all the above are entitled to reimbursement for their reasonable business expenses.

Under
his terminated employment agreement Mr. Irwin received an annual salary of $350,000 and the right to the same annual bonus and to participate in the same retirement and
welfare, benefit, fringe, perquisite and other plans and programs as Mr. Duncan. All of the Employment Agreements have been terminated. See "Item 13. Certain Relationships and Related
TransactionsIrwin Settlement Agreement" and "Recent Changes in Management" below.

36

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RECENT CHANGES IN MANAGEMENT

Mr. Duncan's Withdrawal

Effective
on March 12, 2000 (the "Effective Date"), Mr. R. Lindsay Duncan, the former Chairman of the Board of Omni, and his spouse, Cheryl Wheeler, entered into an
Agreement dated March 11, 2000 (the "Withdrawal Agreement") with the Company, pursuant to which (i) Mr. Duncan agreed to resign from the Board of Directors of the Company (the
"Board"), terminate his employment agreement with the Company (the "Employment Agreement") and cease all further involvement with the Company, and (ii) Mr. Duncan and Cheryl Wheeler
both agreed to (A) vote their respective shares of the common stock of the Company (or give their written consent) on all matters on the same proportionate basis as the remaining shareholders
of the Company vote their shares (or give their written consent) on such
matters for a period of five years from the Effective Date, and (B) appoint Andrew Vollero, Jr., currently a director of the Company, as attorney-in-fact for each of
them to vote their shares of Common Stock (or give their written consent) as aforesaid.

Mr. Duncan's
agreement to resign from the Board and terminate the Employment Agreement was conditioned upon the occurrence of certain enumerated events, circumstances or
conditions, each of which occurred or was satisfied or waived on or before March 12, 2000, including the following:

(i)
The execution and delivery by the Company of an indemnity agreement indemnifying Mr. Duncan and related persons for losses in connection with his services to the Company (the
"Indemnity Agreement").

(ii)
In settlement of the remaining obligations owed Mr. Duncan under the Employment Agreement, the extension of the exercise and expiration dates of all of his existing stock options
to purchase 1,003,029 shares of the Common Stock to the seventh anniversary of the Effective Date.

(iii)
The receipt by Mr. Duncan of $1,500,000 in net proceeds from the sale of shares of Common Stock owned by Mr. Duncan at a price of $3.00 per share in one or more transactions
which were not required to be aggregated with sales made by Mr. Duncan pursuant to Rule 144 promulgated under the Securities Act of 1993, as amended.

(iv)
The execution and delivery by American Equities LLC and Corporate Financial Enterprises, Inc. (collectively, the "Investors") of a term sheet providing for the purchase by the
Investors from the Company of 2,000,000 shares of 5% Convertible Preferred Stock, Series A and warrants to purchase up to 500,000 shares of Common Stock for an aggregate purchase price of $2,000,000.

(v)
The execution and delivery by each of the Investors to Mr. Duncan of a General Release.

(vi)
The execution and delivery by the Company and Mr. Duncan of a Registration Rights Agreement (the "Registration Rights Agreement").

(vii)
The termination of the Voting Agreement dated October 8, 1999 by and between Mr. Duncan and Klee and Margareth Irwin.

(viii)
The execution and delivery by each of Klee Irwin and Mr. Duncan of mutual General Releases.

All
of the above conditions were satisfied or waived and Mr. Duncan resigned from the Board and terminated the Employment Agreement effective March 12, 2000.

At
a meeting of the Board held on March 12, 2000 (the "Board Meeting"), at which the Withdrawal Agreement and the ancillary agreements executed and delivered by the Company in
connection therewith were approved, ratified and adopted, the Board filled the vacancies created by the resignations of Mr. Santo P. Panzarella as a Class III director and Mr. Jonathan
Diamond as a Class II director, with the election of Messrs. Christof Ballin and Albert Kashani, respectively. Upon Mr. Duncan's resignation as a Class I director, the
vacancy created thereby was filled with the appointment of Mr. Martin Sumichrast. Each of these individuals was appointed to serve in such

37

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respective capacities for the remaining balance of his respective term of office until his successor has been duly elected and has qualified.

At
the Board Meeting, the Board terminated Mr. Louis Mancini's employment as President and Chief Executive Officer of the Company and Mr. Klee Irwin was appointed to
fill the vacancy created thereby. The Company negotiated a settlement with Mr. Mancini regarding the terms under which his employment has been terminated. Pursuant to the terms of the
settlement, Mr. Mancini is entitled to (i) payment of unpaid salary, vacation and sick pay in an amount of $22,644.23; (ii) cancellation of all Mr. Mancini's stock options
outstanding other than 50,000 previously vested options at $2.50 per share provided they are exercised prior to December 31, 2000; (iii) forgiveness by the Company of an outstanding
indebtedness in the original principal amount of $350,000 made to Mr. Mancini by the Company; (iv) waiver by Mr. Mancini of any and all other compensation and/or benefits by the
Company or any of its subsidiaries; and (v) mutual releases between Mr. Mancini and the Company, R. Lindsey Duncan and his spouse, Klee Irwin and his spouse and Andrew Vollero,
Jr.

At
the Board Meeting, the Board also authorized the termination of that certain Settlement Agreement dated October 8, 1999, by and among the Company and Mr. And
Mrs. Klee Irwin, and the ancillary agreements executed and delivered by the Company in connection therewith. See Item 13 "Certain Relationships and Related Transactions."

By
letter dated April 10, 2000, Mr. Martin Sumichrast resigned, for personal reasons, as a director of the Company. Mr. Sumichrast did not resign because of any
disagreement with the Company on any matter relating to the Company's operations, policies or practices or otherwise any other matter required to be disclosed.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table includes information as of March 31, 2000 concerning the beneficial ownership of the holdings of Common Stock by (i) all
persons who are known by Omni Nutraceuticals to hold five percent or more of the outstanding shares of Common Stock, (ii) each of the directors of Omni Nutraceuticals, (iii) each
executive officer of Omni Nutraceuticals, and (iv) all directors and executive officers of Omni Nutraceuticals as a group. Except as otherwise indicated, all shares are owned directly, and the
persons named in the table have sole voting and investing power with respect to shares shown as beneficially owned by them.

|Name and Address of Beneficial Owner
Principal Shareholder                        |  | Shares Beneficially Owned |  | Percent |  
|--------------------------------------------------------------------------------- |  | ------------------------- |  | ------- | -
|R. Lindsey Duncan
1750 Chastain Pkwy, Pacific Palisades, CA 90066 (1) (2) (3) (4) |  | 5,806,369                 |  | 20.1    | %
|Klee and Margareth Irwin
7825 Veragua Drive, Playa del Rey, CA 90293              |  | 14,688,335                |  | 43.5    | %
|Directors and Executive Officers                                                  |  |                           |  |         |  
|Klee Irwin (5)                                                                    |  | See Above                 |  |         |  
|Louis Mancini (2)(7)                                                              |  | 0                         |  |         |  
|Christof Ballin (6)                                                               |  | 75,000                    |  | *       |  
|Martin Sumichrast (6)                                                             |  | 0                         |  | *       |  
|Jonathan Diamond                                                                  |  | 25,000                    |  | *       |  
|Santos Panzarella                                                                 |  | 25,000                    |  | *       |  
|Andrew Vollero (3)                                                                |  | 25,000                    |  | *       |  
|                                                                                  |  |                           |  |         |  
|All Directors and Officers As A Group                                             |  | 20,644,704                |  | 71.4    | %

---

|* |  | Less than 1%
|- |  | ------------

38

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|(1) |  | Includes 405,439 shares of Common Stock owned by Cheryl Duncan, Mr. Duncan's wife. Mr. Duncan disclaims ownership of such shares.                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Options have been cancelled pursuant to Termination Agreement.                                                                                                                                                                                                                                  
|(3) |  | Became a director of Omni Nutraceuticals effective October 8, 1999. In addition, Mr. Vollero may be deemed to be the beneficial owner of 5,806,369 shares of common stock registered in the names of R. Lindsey Duncan and Cheryl Wheeler over which Mr.
Vollero exercises an irrevocable proxy.
|(4) |  | Served as an executive officer of Omni Nutraceuticals during 1999 and appears in the Summary Compensation Table. Resigned effective March 12, 2000.                                                                                                                                             
|(5) |  | Resigned as an officer of Omni Nutraceuticals effective April 20, 1999. Became Chief Executive Officer of the Company on March 12, 2000.                                                                                                                                                        
|(6) |  | Became a director on March 12, 2000. Includes options that are presently exercisable.                                                                                                                                                                                                           
|(7) |  | Served as an executive officer during 1999 and appears in the Summary Compensation Table. His employment was terminated effective March 12, 2000.                                                                                                                                               

Other Beneficial Owners

The following persons are known to the Company as the investors in the Series A Convertible Preferred Stock. Their beneficial interest in the common
stock of the Company, computed based on conversion of their holdings of preferred stock into common stock at last reported sales transaction on the close of the market on November 22, 2000 is
shown below. The company has no knowledge regarding whether these persons have filed Form 13(d) reporting their respective stock holdings in the Company.

Shares Beneficially
Owned

% of TotalAlborz Select Opportunities Fund (1)

2,977,777

7.1Bond Street Partners Limited (2)

744,444

1.8Onkar Holdings, Inc. (3)

1,488,889

3.6Christian Sidnaoue (4)

148,889

.4Bank Insignor de Beaufort, N.V. (2)

744,444

1.8Spiga, Ltd. (5)

1,191,111

2.8Magic Investments (6)

223,334

.6Lina Abballe (7)

1,116,666

2.7Eagle Securities Intl., Inc. (4)

148,889

.4Euro Asset Management (4)

148,889

.4


---

|(1) |  | includes 200,000 warrant shares
|--- |  | -------------------------------
|(2) |  | includes 50,000 warrant shares 
|(3) |  | includes 100,000 warrant shares
|(4) |  | includes 10,000 warrant shares 
|(5) |  | includes 80,000 warrant shares 
|(6) |  | includes 15,000 warrant shares 
|(7) |  | includes 75,000 warrant shares 

39

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In June and October 1998, the Company entered into employment agreements with the former Chairman of the Board, current Chief Executive Officer and
former Chief Executive Officer and President (see Note 12 of Notes to Financial Statements). All such employment agreements have been terminated.

On
October 8, 1999, the Company and Mr. Klee Irwin entered into a settlement agreement (the "Settlement Agreement') in order to resolve certain mutual claims that had arisen
between the Company and Mr. Irwin. Among the principal terms of the settlement were the following:

(a) The
Company agreed to provide Mr. Irwin with the following severance benefits: (a) a monthly payment in the same amount that he received under his former employment
agreement, for the period commencing October 1, 1999 until the earlier of (i) April 16, 2000 or (ii) the sale, merger, bankruptcy
or other transaction involving HealthZone.com which results in HealthZone.com being capitalized at more than $1,700,000; (b) continued coverage for Mr. Irwin and members of his immediate family under
the Company's health insurance plans, and (c) the continued provision of an automobile until November 22, 1999.

(b) Mr.
Irwin agreed to assume the defense of a claim asserted by the former shareholders of Health and Vitamin Express, Inc. ("HVE"), a company acquired by
HealthZone.com in February 1999, and in connection therewith agreed to indemnify the Company from any liability associated therewith except that the Company agreed to issue up to 363,636 shares of
common stock to the former HVE shareholders in settlement of their claim.

(c) Mr.
Irwin agreed to reimburse the Company for any excess tax payments made on his and his wife's behalf since October 17, 1997 attributable to all periods prior to
the merger of Irwin Naturals with and into 4Health, Inc.

(d) Mr.
Irwin agreed to fund substantially all the net operating losses of HealthZone.com pending its spin-off or sale by means of purchases of shares of HealthZone.com
common stock at a price per share based upon a base valuation (as adjusted) for HealthZone.com of $3,500,000, until at least $280,000 in aggregate common stock purchases have been made, after which
such price per share shall be based upon the greater of such base valuation (as adjusted) or HealthZone.com's then market value.

(e) Mr.
Irwin agreed that he would guarantee a market value for the Company's ownership interest in HealthZone.com of $2.3 million as of one year after a spin-off of
HealthZone.com or October 8, 2001, and further agreed that he would place in escrow 1,022,222 shares of his common stock as security for such guarantee at such time as the Company first filed a
registration statement with the Securities and Exchange Commission relating to the proposed spin-off of HealthZone.com.

(f)  The
Company, HealthZone.com and Mr. Irwin entered into a Tax Allocation and Indemnification Agreement pursuant to which the Company and HealthZone.com allocated
certain tax liabilities and attributes between themselves and HealthZone.com indemnified the Company for any liability associated with the spin-off not qualifying as a tax free transaction under
Section 355 of the Internal Revenue Code of 1986, as amended, with Mr. Irwin guaranteeing HealthZone.com's indemnification obligation in the event of its bankruptcy.

(g) The
Company and Mr. Irwin issued mutual releases and indemnified each other against certain claims. As security for his indemnification obligations Mr. Irwin placed
in escrow with Wells Fargo Bank 1,000,000 shares of his common stock, 500,000 shares of which would be released on December
31, 1999 (in the absence of any claims for indemnification asserted by the Company) and the balance would be released on March 31, 2000 (in the absence of any claims for indemnification asserted by
the Company).

40

---

(h) The Company granted Mr. Irwin a "call" option on the Company's shares of HealthZone.com for the greater of $2.3 million or HealthZone.com's market value commencing
March 31, 2000 if the spin-off is not consummated before then.

(i)  Mr.
Irwin granted the Company a "put" option on its shares of HealthZone.com for $2.3 million commencing June 1, 2000 if the spin-off is not consummated before
then or the Company's shares of HealthZone.com are not sold for at least $2,300,000.

(j)  The
Company agreed to bear the first $100,000 in expenses incurred by the Company attributable to the spin-off and HealthZone.com agreed to bear all documented and
reasonable costs and expenses incurred by the Company in excess of such $100,000 payment of such excess costs to be personally guaranteed by Mr. Irwin.

On
or about the date of the Settlement, Mr. Irwin made a capital contribution of approximately $410,000, and returned 941,436 shares of Omni Nutraceutical common stock to the
Company. The Company has set aside 363,363 of these shares to be issued, if necessary, to the former owners of HVE, and the remainder will be reflected as treasury stock.

In
connection with the settlement, Mr. Irwin and Omni's chairman R. Lindsey Duncan, who together own approximately 74% of the outstanding shares of voting capital stock of
Omni, each entered into a five-year voting agreement pursuant to which Mr. Irwin has agreed to certain stand-still provisions and he and Mr. Duncan have agreed to vote their
respective shares of Omni common stock frothier respective nominees for Class I and II directors and the candidate for Class III director nominated by the two Class II directors.

Effective
March 12, 2000, the Settlement Agreement and all ancillary agreements thereto, including the Voting Agreement between Mr. Duncan and Mr. Irwin, were
terminated.

41

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

| | (1)  |  | Financial Statements. See Index to Financial Statements (and Financial Statement Schedules) at page 27 of this Form 10-K.                                                                                                                                      
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2)  |  | All other schedules required by Form 10-K Annual Report have been omitted because they were not applicable, were included in the notes to the financial statements, or were not required under the instructions contained in Regulation S-X.                   
| | (3)  |  | Exhibits. See Exhibit Index below this Form 10-K.                                                                                                                                                                                                              
| | (4)  |  | Form 8-K dated April 14, 2000 regarding the issuance of equity securities to American Equities LLP and Corporate Financial Enterprises, Inc.                                                                                                                   
| | (5)  |  | Form 8-K dated April 14, 2000 regarding changes in management and other issues.                                                                                                                                                                                
| | (6)  |  | On August 8, 2000, the Company filed a Form 8-K regarding its engagement of Rabobank to explore strategic alternatives for the Company.                                                                                                                        
| | (7)  |  | On November 2, 2000, the Company filed a Form 8-K indicating it was in the process of finalizing adjustments that had an estimated cumulative impact approximating $3 million, and which it believed would result in restatement of previously filed
documents.
| | (8)  |  | On October 3, 2000, the Company filed a From 8-K regarding the completion, on October 27, 2000, of a private placement of its newly- created Series A Convertible Preferred Stock.                                                                             
| | (9)  |  | On November 6, 2000, the Company filed a Form 8-K regarding Waiver and Amendment No. 4 to Secured Credit Agreement, which further amended the terms of the Company's term debt and revolving credit agreement.                                                 
| | (10) |  | On November 13, 2000, the Company filed a Form 8-K regarding the halt of trading in the Company's common stock on the Nasdaq Stock Market.                                                                                                                     
| | (11) |  | On November 17, 2000, the Company filed a Form 8-K regarding the delisting from the Nasdaq National Market System of the Company's common stock.                                                                                                               

42

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EXHIBIT INDEX

|Exhibit # |  | Sec
Ref. # |  | Title of Document                                                                                                                                                           |  | Location                                        
|--------- |  | ---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------
|Item 2.   |  |            |  | Plan of Acquisition, Reorganization, Liquidation, or Succession                                                                                                             |  |                                                 
|2.01      |  | 2          |  | Agreement and Plan of Merger dated April 10, 1996, by and between 4health, Inc., and Surgical Technologies, Inc. as amended June 4, 1996                                    |  | Incorporated by Reference (4)                   
|2.04      |  | 2          |  | Amended and Restated Agreement and Plan of Merger dated December 24, 1997, signed January 7, 1998, by and between 4Health, Inc. and Irwin Naturals as amended April 2, 1998 |  | Incorporated by Reference (7)                   
|2.05      |  | 2          |  | Agreement to Purchase Asset of Inholtra Naturals Limited                                                                                                                    |  | Incorporated by Reference (17)                  
|2.06      |  | 2          |  | Agreement & Plan of Merger with Health & Vitamin Express Inc. ("HVE")                                                                                                       |  | Incorporated by Reference (17)                  
|Item 3.   |  |            |  | Articles of Incorporation and Bylaws                                                                                                                                        |  |                                                 
|3.01      |  | 3          |  | Articles of Incorporation of Surgical Subsidiary, Inc., a Utah Corporation now known as Surgical Technologies, Inc. Irwin Naturals/4Health, Inc.                            |  | Incorporated by Reference (5)                   
|3.02      |  | 3          |  | Articles of Merger and related Plan of Merger                                                                                                                               |  | Incorporated by Reference (5)                   
|3.03      |  | 3          |  | Bylaws                                                                                                                                                                      |  | Incorporated by Reference (5)                   
|3.04      |  | 3          |  | Articles of Merger and related Plan of Merger                                                                                                                               |  | Incorporated by Reference (4)                   
|3.05      |  | 3          |  | Form of Articles of Merger and related Plan of Merger                                                                                                                       |  | Incorporated by Reference (7)                   
|3.06      |  | 3          |  | BylawsChange to By-Laws Eliminating Executive Committee Approved by Shareholders in December 1999                                                                          |  | Incorporated by Reference to Proxy Statement(15)
|3.07      |  | 3          |  | Form of Articles of Merger and related Plan of Merger Amendment to Articles Changing Name and Authorizing the Series A Preferred Stock                                      |  | Incorporated by Reference to 8K(14)             
|Item 4.   |  |            |  | Instruments Defining the Rights of Security Holders                                                                                                                         |  |                                                 
|4.01      |  | 4          |  | Form of Warrant Agreement between 4Health, Inc. and Zions First National Bank with related form of Warrant                                                                  |  | Incorporated by Reference (4)                   
|4.02      |  | 4          |  | Form of Sale Restriction Agreement respecting shareholders of both Surgical Technologies, Inc., and 4Health, Inc.                                                           |  | Incorporated by Reference (4)                   
|4.03      |  | 4          |  | Form of Consent, Approval, and Irrevocable Proxy respecting certain Surgical stockholders with related schedule                                                             |  | Incorporated by Reference (4)                   
|          |  |            |  |                                                                                                                                                                             |  |                                                 

43

---

|4.04     |  | 4  |  | Form of Consent, Approval, and Irrevocable Proxy respecting certain 4Health stockholders with related schedule                                                                                           |  | Incorporated by Reference (4) 
|-------- |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------
|4.05     |  | 4  |  | Specimen Common Stock Certificate                                                                                                                                                                        |  | Incorporated by Reference (4) 
|4.06     |  | 4  |  | Specimen Warrant Certificate                                                                                                                                                                             |  | Incorporated by Reference (4) 
|4.07     |  | 4  |  | Warrant certificates between 4Health and Allen & Company Incorporated dated April 15, 1997                                                                                                               |  | Incorporated by Reference (6) 
|4.08     |  | 4  |  | Warrant certificates between American Equities and Corporate Financial Enterprises                                                                                                                       |  | Incorporated by Reference (6) 
|4.09     |  |    |  | Registration Rights Agreements with American Equities and Corporate Financial Enterprises                                                                                                                |  | Incorporated by Reference (4) 
|4.10     |  |    |  | Lindsey Duncan Withdrawal Agreement                                                                                                                                                                      |  | Incorporated by Reference (4) 
|4.11     |  |    |  | Voting Agreement Between Lindsey Duncan and Klee Irwin                                                                                                                                                   |  | Incorporated by Reference (4) 
|Item 5.  |  |    |  | Other Items                                                                                                                                                                                              |  |                               
|5.01     |  | 5  |  | Summary of Revolving Line of Credit Agreement between 4Health and Norwest Business Credit, Inc.                                                                                                          |  | Incorporated by Reference (1) 
|Item 10. |  |    |  | Material Contracts                                                                                                                                                                                       |  |                               
|10.01    |  | 10 |  | 1996 Long-Term Stock Incentive Plan                                                                                                                                                                      |  | Incorporated by Reference (4) 
|10.02    |  | 10 |  | Form of Option granted to Rockwell D. Schutjer                                                                                                                                                           |  | Incorporated by Reference (4) 
|10.03    |  | 10 |  | Form of Proprietary Information, Inventions, and Non-Competition Agreement between 4Health and R. Lindsey Duncan                                                                                         |  | Incorporated by Reference (4) 
|10.04    |  | 10 |  | Form of Employment Agreement between the Surviving Corporation and Rockwell Schutjer                                                                                                                     |  | Incorporated by Reference (4) 
|10.05    |  | 10 |  | Deed of Trust Note and related Deed of Trust, Assignment of Rents, Security Agreement, and Fixture Filing, dated February 20, 1997, in the principal amount of $1,350,000 due Standard Insurance Company |  | Incorporated by Reference (3) 
|10.06    |  | 10 |  | Form of Non-Negotiable Promissory Note                                                                                                                                                                   |  | Incorporated by Reference (7) 
|10.07    |  | 10 |  | Promissory Note to issued into Inholtra Naturals Limited                                                                                                                                                 |  | *                             
|10.10    |  | 10 |  | Settlement Agreement; Indemnity Agreement with Lindsey Duncan; Lou Mancini Termination Agreement; Andrew Vollero, Jr. Stock Option Agreement                                                             |  | Incorporated by Reference (18)
|         |  |    |  |                                                                                                                                                                                                          |  |                               

44

---

|10.11    |  | 10 |  | Indemnity Agreement with Klee Irwin dated April 19, 1999                                                                                                    |  | Incorporated by Reference (10)
|-------- |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------
|10.12    |  | 10 |  | Secured Credit Agreement by and among Irwin Naturals4Health, Inc as Borrower, and First Source Financial LLP, as Agent and Lender dated as of June 10, 1999 |  | Incorporated by Reference (11)
|10.13    |  | 10 |  | Settlement Agreement dated October 8, 1999 between Omni Nutraceuticals, Inc, and Klee Irwin                                                                 |  | Incorporated by Reference (12)
|10.14    |  | 10 |  | Tax Indemnification and Allocation Agreement dated October 8, 1999 between Omni Nutraceuticals, Inc and Klee Irwin                                          |  | Incorporated by Reference (12)
|10.15    |  | 10 |  | Voting Agreement dated October 8, 19999 by and among Klee Irwin and Margareth Irwin and R. Lindsey Duncan                                                   |  | Incorporated by Reference (12)
|10.16    |  | 10 |  | Escrow Agreement dated October 8, 1999 by and among Klee Irwin, Wells Fargo Bank as the Escrow Agent and Omni Nutraceuticals.                               |  | Incorporated by Reference 912)
|10.17    |  | 10 |  | Amendment No.1 to Settlement Agreement dated October 8, 1999 between Omni Nutraceuticals, Inc. and Klee Irwin                                               |  | Incorporated by Reference (14)
|10.18    |  | 10 |  | Consulting Agreement by and between Omni Nutraceuticals, Inc. and corporate financial Enterprises, Inc dated as of January 24, 2000                         |  | Incorporated by Reference (14)
|10.19    |  | 10 |  | Consulting Agreement by and between Omni Nutraceuticals, Inc. and Montfort Investements dated as of January 24, 2000                                        |  | Incorporated by Reference (14)
|10.20    |  | 10 |  | Lock up Agreement by Klee Irwin and R. Lindsey Duncan                                                                                                       |  | Incorporated by Reference (14)
|10.21    |  | 10 |  | Indemnity Agreement between Omni Nutraceuticals, Inc. and Reid Breitman                                                                                     |  | Incorporated by Reference (14)
|10.22    |  | 10 |  | Agreement dated March 11, 20000 among the company, R. Lindsey Duncan and Cheryl Wheeler                                                                     |  | Incorporated by Reference (15)
|10.23    |  | 10 |  | Indemnity Agreement dated March 11, 20000 between the Company and R. Lindsey Duncan                                                                         |  | Incorporated by Reference (15)
|10.24    |  | 10 |  | Term Sheet dated March 11, 22000 between the Company and American Equities, LLC                                                                             |  | Incorporated by Reference (15)
|10.25    |  | 10 |  | Registration Rights Agreement dated March 11, 2000 among the Company, R. Lindsey Duncan and Cheryl Wheeler                                                  |  | Incorporated by Reference (15)
|10.26    |  | 10 |  | Consulting Agreement between the Company and Liviakis Financial Communications, Inc.                                                                        |  | Incorporated by Reference (15)
|10.27    |  | 10 |  | Termination Agreement between the company and Louis Mancini                                                                                                 |  | Incorporated by Reference (15)
|Item 20. |  |    |  | Other Documents or Statements to Security Holders                                                                                                           |  |                               
|         |  |    |  |                                                                                                                                                             |  |                               

45

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|20.01    |  | 20 |  | Notice of change of transfer and warrant agent |  | Incorporated by Reference (2)
|-------- |  | -- |  | ---------------------------------------------- |  | -----------------------------
|Item 23. |  |    |  |                                                |  |                              
|23       |  | 23 |  | Consent of Independent Public Accountant       |  | This filing                  

---

|(1)  |  | Incorporated by reference from 4Health's report on Form 10-Q for the quarter ended September 30, 1997.                          
|---- |  | --------------------------------------------------------------------------------------------------------------------------------
|(2)  |  | Incorporated by reference from 4Health's report on Form 10-Q for the quarter ended March 31, 1997.                              
|(3)  |  | Incorporated by reference from 4Health's report on Form 10-K for the year ended December 31, 1996.                              
|(4)  |  | Incorporate by reference from Surgical's registration statement on Form S-4 filed with the Commission, SEC file number 33-03243.
|(5)  |  | Incorporated by reference from Surgical's report on Form 10-K for the year ended March 31, 1994.                                
|(6)  |  | Incorporated by reference from Schedule 13D filed with the Commission by Allen & Company Incorporated on April 18, 1997.        
|(7)  |  | Proxy Statement of 4Health, Inc. dated June, 1998.                                                                              
|(8)  |  | Incorporated by reference from Irwin Naturals/4/Health Annual Report on Form 10-K for the year ended December 31, 1998.         
|(9)  |  | Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998.                          
|(10) |  | Incorporated by reference from the Company's report on Form 8-K filed on June 7, 1999.                                          
|(11) |  | Incorporated by reference from the Company's report on Form 8-K filed on July 22, 1999.                                         
|(12) |  | Incorporated by reference from the Company's report on Form 8-K filed on October 28, 1999.                                      
|(13) |  | Incorporated by reference from the Company's proxy statement filed on December 10, 1999.                                        
|(14) |  | Incorporated by reference from the Company's report on Form 8-K filed on January 31, 2000.                                      
|(15) |  | Incorporated by reference from the Company's report on Form 8-K filed on April 14, 2000.                                        
|(16) |  | Incorporated by reference from the Company's report on Form 10-K filed for December 31, 1999.                                   
|(17) |  | Incorporated by reference from the Company's report on Form 10-K/A, dated August 20, 1999, for the year ended December 31, 1998.
|(18) |  | Incorporated by reference from the Company's report on Form 8-K date August 25, 1999.                                           

46

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INDEX TO FINANCIAL STATEMENTS

|                                                                                                                      |  | PAGE
|--------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Public Accountants                                                                              |  | F-2 
|Consolidated Balance Sheets as of December 31, 1999 and 1998                                                          |  | F-3 
|Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999               |  | F-4 
|Consolidated Statements of Shareholders' Investment for each of the three years in the period ended December 31, 1999 |  | F-5 
|Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999               |  | F-6 
|Notes to Consolidated Financial Statements                                                                            |  | F-8 

F-1

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
Omni Nutraceuticals, Inc.:

We
have audited the accompanying consolidated balance sheets, as restated (see Note 2), of Omni Nutraceuticals, Inc. (a Utah corporation) and Subsidiary (the Company) as
of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' investment and cash flows, as restated (see Note 2), for each of the three years in
the period ended December 31, 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our 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 Omni Nutraceuticals, Inc. and Subsidiary as of
December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, for the
year ended December 31, 1999, the Company incurred a loss from operations of $10,500,000, and at December 31, 1999, the Company had a working capital deficit of $8,558,000 and a retained
deficit of $19,748,000 which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to continue as a going concern.

/s/
ARTHUR ANDERSEN LLP

Los
Angeles, California
April 12, 2000
(except for the matters discussed
in Note 2, as to which the
date is February 16, 2001)

F-2

---

OMNI NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                    |                           | December 31, 1999 |             | December 31, 1998 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ----------------- | ----------- | ----------------- | -
|
|ASSETS                                                                                                                                                              |                           |                   |             |                   |  
|CURRENT ASSETS                                                                                                                                                      |                           |                   |             |                   |  
|Cash                                                                                                                                                                |                           | $                 |            |                   | $
|Accounts receivable, net of reserves and allowances of $3,460,000 at 1999 and $1,131,000 at 1998                                                                    |                           |                   | 2,685,000   |                   |  
|Inventories                                                                                                                                                         |                           |                   | 7,869,000   |                   |  
|Prepaid expenses and other                                                                                                                                          |                           |                   | 539,000     |                   |  
|Current portion of receivables from officers and shareholders                                                                                                       |                           |                   |            |                   |  
|Current portion of note receivable                                                                                                                                  |                           |                   | 11,000      |                   |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|                                                                                                                                                                    | Total Current Assets      |                   |             | 11,104,000        |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|Building held for sale                                                                                                                                              |                           |                   |            |                   |  
|Property and equipment, net                                                                                                                                         |                           |                   | 1,516,000   |                   |  
|Trademarks, net of accumulated amortization of $726,000 at 1999 and $13,000 at 1998                                                                                 |                           |                   | 12,798,000  |                   |  
|Intangibles, net of accumulated amortization of $307,000 at 1998                                                                                                    |                           |                   |            |                   |  
|Goodwill, net of accumulated amortization of $484,000 at 1999                                                                                                       |                           |                   | 2,422,000   |                   |  
|Finance fees, net of accumulated amortization of $110,000 at 1999                                                                                                   |                           |                   | 934,000     |                   |  
|Other assets                                                                                                                                                        |                           |                   | 320,000     |                   |  
|Receivables from officers and shareholder, net of current portion                                                                                                   |                           |                   |            |                   |  
|Note receivable, net of current portion                                                                                                                             |                           |                   | 439,000     |                   |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|                                                                                                                                                                    |                           | $                 | 29,533,000  |                   | $
|                                                                                                                                                                    |                           |                   |             |                   |  
|LIABILITIES AND SHAREHOLDERS' INVESTMENT                                                                                                                            |                           |                   |             |                   |  
|CURRENT LIABILITIES                                                                                                                                                 |                           |                   |             |                   |  
|Cash overdraft                                                                                                                                                      |                           | $                 | 165,000     |                   | $
|Accounts payable                                                                                                                                                    |                           |                   | 7,176,000   |                   |  
|Accrued liabilities                                                                                                                                                 |                           |                   | 2,875,000   |                   |  
|Line of credit                                                                                                                                                      |                           |                   | 6,436,000   |                   |  
|Current portion of term loan                                                                                                                                        |                           |                   | 2,332,000   |                   |  
|Current portion of notes payable                                                                                                                                    |                           |                   | 176,000     |                   |  
|Income taxes payable                                                                                                                                                |                           |                   | 52,000      |                   |  
|Customer deposits                                                                                                                                                   |                           |                   | 450,000     |                   |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|                                                                                                                                                                    | Total current liabilities |                   |             | 19,662,000        |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|Term loan, net of current portion                                                                                                                                   |                           |                   | 10,085,000  |                   |  
|Notes payable, net of current portion                                                                                                                               |                           |                   | 102,000     |                   |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                       |                           |                   |             |                   |  
|SHAREHOLDERS' INVESTMENT                                                                                                                                            |                           |                   |             |                   |  
|Shares issuable under legal settlement                                                                                                                              |                           |                   | 1,200,000   |                   |  
|Preferred stock; $1 par value; 5,000,000 shares authorized; Issued and outstanding, none                                                                            |                           |                   |            |                   |  
|Common Stock; $.01 par value; 50,000,000 shares authorized; Issued27,352,009 at 1999 and 27,857,139 at 1998; Outstanding27,261,119 at 1999 and 27,766,249 at 1998 |                           |                   | 274,000     |                   |  
|Additional paid-in capital                                                                                                                                          |                           |                   | 18,008,000  |                   |  
|Treasury stock, 90,890 shares at cost                                                                                                                               |                           |                   | (50,000     | )                 |  
|Retained deficit                                                                                                                                                    |                           |                   | (19,748,000 | )                 |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|                                                                                                                                                                    |                           |                   | (316,000    | )                 |  
|                                                                                                                                                                    |                           |                   |             |                   |  
|                                                                                                                                                                    |                           | $                 | 29,533,000  |                   | $
|                                                                                                                                                                    |                           |                   |             |                   |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-3

---



OMNI NUTRACEUTICALS, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS  FOR EACH OF THE THREE YEARS  IN THE PERIOD ENDED DECEMBER 31, 1999

|                                                          |                                     | 1999 |             | 1998       |   | 1997       |           
|--------------------------------------------------------- | ----------------------------------- | ---- | ----------- | ---------- | - | ---------- | ----------
|
|Net Sales                                                 |                                     | $    | 31,217,000  |            | $ | 30,547,000 |           
|Cost of Sales                                             |                                     |      | 16,200,000  |            |   | 12,540,000 |           
|                                                          |                                     |      |             |            |   |            |           
|                                                          | Gross profit                        |      |             | 15,017,000 |   |            | 18,007,000
|                                                          |                                     |      |             |            |   |            |           
|Costs and Expenses:                                       |                                     |      |             |            |   |            |           
|                                                          | Selling, general and administrative |      |             | 23,927,000 |   |            | 16,180,000
|                                                          | Loss on write-off of intangibles    |      |             | 390,000    |   |            |          
|                                                          | Loss on write-off of goodwill       |      |             |           |   |            |          
|                                                          | Legal settlement                    |      |             | 1,200,000  |   |            |          
|                                                          |                                     |      |             |            |   |            |           
|                                                          |                                     |      | 25,517,000  |            |   | 16,180,000 |           
|                                                          |                                     |      |             |            |   |            |           
|Income (loss) from operations                             |                                     |      | (10,500,000 | )          |   | 1,827,000  |           
|                                                          |                                     |      |             |            |   |            |           
|Other Income (Expense):                                   |                                     |      |             |            |   |            |           
|                                                          | Interest income                     |      |             | 32,000     |   |            | 10,000    
|                                                          | Interest expense                    |      |             | (1,339,000 | ) |            | (163,000  
|                                                          | Other                               |      |             | 478,000    |   |            | (56,000   
|                                                          |                                     |      |             |            |   |            |           
|                                                          |                                     |      | (829,000    | )          |   | (209,000   | )         
|                                                          |                                     |      |             |            |   |            |           
|Income (loss) before provision (benefit) for income taxes |                                     |      | (11,329,000 | )          |   | 1,618,000  |           
|Provision (benefit) for income taxes                      |                                     |      | (274,000    | )          |   | 600,000    |           
|                                                          |                                     |      |             |            |   |            |           
|Net income (loss)                                         |                                     | $    | (11,055,000 | )          | $ | 1,018,000  |           
|                                                          |                                     |      |             |            |   |            |           
|Pro forma for Merger (see note 12):                       |                                     |      |             |            |   |            |           
|Income (loss) before provision for income taxes           |                                     |      |             |            |   | 1,618,000  |           
|Pro forma provision for income taxes (unaudited)          |                                     |      | N/A         |            |   | 1,345,000  |           
|                                                          |                                     |      |             |            |   |            |           
|Pro forma net income (loss) (unaudited)                   |                                     |      | N/A         |            | $ | 273,000    |           
|                                                          |                                     |      |             |            |   |            |           
|Earnings (loss) per common share                          |                                     |      |             |            |   |            |           
|                                                          | Basichistorical                    |      | $           | (0 .39     | ) | $          | 0.04      
|                                                          | Dilutedhistorical                  |      | $           | (0.39      | ) | $          | 0.04      
|                                                          | Basicpro forma                     |      |             | N/A        |   | $          | 0.01      
|                                                          | Dilutedpro forma                   |      |             | N/A        |   | $          | 0.01      
|Weighted Average Shares Outstanding                       |                                     |      |             |            |   |            |           
|                                                          | Basichistorical                    |      |             | 28,177,000 |   |            | 27,747,000
|                                                          | Dilutedhistorical                  |      |             | 28,177,000 |   |            | 28,221,000
|                                                          | Basicpro forma                     |      |             | N/A        |   |            | 27,747,000
|                                                          | Basicpro forma                     |      |             | N/A        |   |            | 28,221,000

THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-4

---



OMNI NUTRACEUTICALS, INC.  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT  FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999

|                                                                                                    |  | Shares Issuable Under Legal Settlement |           | Common Stock |            |   |   | Treasury Stock |   |   |            |   |       
|--------------------------------------------------------------------------------------------------- |  | -------------------------------------- | --------- | ------------ | ---------- | - | - | -------------- | - | - | ---------- | - | ------
|
|
|BALANCE, December 31, 1996                                                                          |  | $                                      |          |              | 27,210,374 |   | $ | 272,000        |   | $ | 11,235,000 |   | 90,890
|Issuance of common stock in connection with exercise of stock options                               |  |                                        |          |              | 108,424    |   |   | 1,000          |   |   | 151,000    |   |      
|Compensation expense incurred in connection with warrants issued for investment banking services    |  |                                        |          |              |           |   |   |               |   |   | 275,000    |   |      
|Distributions                                                                                       |  |                                        |          |              |           |   |   |               |   |   |           |   |      
|Issuance of common stock to old 4Health Shareholders pursuant to a realignment of equity interests  |  |                                        |          |              | 500,000    |   |   | 5,000          |   |   | (5,000     | ) |      
|Net loss                                                                                            |  |                                        |          |              |           |   |   |               |   |   |           |   |      
|                                                                                                    |  |                                        |           |              |            |   |   |                |   |   |            |   |       
|BALANCE, December 31, 1997                                                                          |  |                                        |          |              | 27,818,798 |   |   | 278,000        |   |   | 11,656,000 |   | 90,890
|Issuance of common stock in connection with exercise of stock options                               |  |                                        |          |              | 38,341     |   |   | 1,000          |   |   | 172,000    |   |      
|Compensation expense incurred in connection with issuance of stock options                          |  |                                        |          |              |           |   |   |               |   |   | 6,000      |   |      
|Compensation expense incurred in connection with warrants issued for investment banking services    |  |                                        |          |              |           |   |   |               |   |   | 388,000    |   |      
|Distributions                                                                                       |  |                                        |          |              |           |   |   |               |   |   |           |   |      
|Effect of Irwin Naturals termination of its "S" Corporation election                                |  |                                        |          |              |           |   |   |               |   |   | 2,111,000  |   |      
|Net income                                                                                          |  |                                        |          |              |           |   |   |               |   |   |           |   |      
|                                                                                                    |  |                                        |           |              |            |   |   |                |   |   |            |   |       
|BALANCE, December 31, 1998                                                                          |  |                                        |          |              | 27,857,139 |   |   | 279,000        |   |   | 14,333,000 |   | 90,890
|Issuance of common stock in connection with HVE acquisition                                         |  |                                        |          |              | 363,636    |   |   | 4,000          |   |   | 2,269,000  |   |      
|Issuance of common stock in connection with exercise of stock options                               |  |                                        |          |              | 19,670     |   |   |               |   |   | 85,000     |   |      
|Issuance of common stock for services                                                               |  |                                        |          |              | 53,000     |   |   | 1,000          |   |   | 174,000    |   |      
|Compensation expense incurred in connection with with issuance of warrants and options for services |  |                                        |          |              |           |   |   |               |   |   | 832,000    |   |      
|363,636 shares issuable under legal settlement (see Note 13)                                        |  |                                        | 1,200,000 |              |           |   |   |               |   |   |           |   |      
|Capital contribution and return of shares (see Note 14)                                             |  |                                        |          |              | (941,436   | ) |   | (10,000        | ) |   | 315,000    |   |      
|Net loss (as Restated, see Note 2)                                                                  |  |                                        |          |              |           |   |   |               |   |   |           |   |      
|                                                                                                    |  |                                        |           |              |            |   |   |                |   |   |            |   |       
|BALANCE, December 31, 1999, (as Restated, see
Note 2)                                               |  | $                                      | 1,200,000 |              | 27,352,009 |   | $ | 274,000        |   | $ | 18,008,000 |   | 90,890
|                                                                                                    |  |                                        |           |              |            |   |   |                |   |   |            |   |       

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

F-5

---



OMNI NUTRACEUTICALS, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999

|                                                                                                   |                                                               | 1999                  |             | 1998      |            | 1997       |          
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------- | ----------- | --------- | ---------- | ---------- | ---------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |                                                               |                       |             |           |            |            |          
|Net income (loss)                                                                                  |                                                               | $                     | (11,055,000 | )         | $          | 1,018,000  |          
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                               |                       |             |           |            |            |          
|                                                                                                   | Depreciation and amortization                                 |                       |             | 1,892,000 |            |            | 550,000  
|                                                                                                   | Provision for reserves and allowances                         |                       |             | 3,450,000 |            |            | 2,116,000
|                                                                                                   | (Gain) loss on disposal of building, property and equipment   |                       |             | (478,000  | )          |            | 10,000   
|                                                                                                   | Loss on write-off of intangibles                              |                       |             | 390,000   |            |            |         
|                                                                                                   | Loss on write-off of goodwill                                 |                       |             |          |            |            |         
|                                                                                                   | Legal settlement                                              |                       |             | 1,200,000 |            |            |         
|                                                                                                   | Issuance of warrants and options as compensation for services |                       |             | 832,000   |            |            | 394,000  
|                                                                                                   | Issuance of common stock for services                         |                       |             | 175,000   |            |            |         
|                                                                                                   | Write-off of notes receivable                                 |                       |             | 389,000   |            |            |         
|                                                                                                   | (Increase) decrease in:                                       |                       |             |           |            |            |          
|                                                                                                   |                                                               | Accounts receivable   |             |           | (112,000   | )          |          
|                                                                                                   |                                                               | Inventory             |             |           | (5,014,000 | )          |          
|                                                                                                   |                                                               | Prepaid and other     |             |           | (405,000   | )          |          
|                                                                                                   | Increase (decrease) in:                                       |                       |             |           |            |            |          
|                                                                                                   |                                                               | Cash overdraft        |             |           | 165,000    |            |          
|                                                                                                   |                                                               | Accounts payable      |             |           | 4,539,000  |            |          
|                                                                                                   |                                                               | Accrued liabilities   |             |           | 1,933,000  |            |          
|                                                                                                   |                                                               | Income taxes payable  |             |           | (386,000   | )          |          
|                                                                                                   |                                                               | Deferred income taxes |             |           |           |            |          
|                                                                                                   |                                                               |                       |             |           |            |            |          
|Net cash provided by (used in) operating activities                                                |                                                               |                       | (2,485,000  | )         |            | 1,044,000  |          
|                                                                                                   |                                                               |                       |             |           |            |            |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |                                                               |                       |             |           |            |            |          
|Purchases of property and equipment                                                                |                                                               |                       | (1,396,000  | )         |            | (350,000   | )        
|Net proceeds from disposition of building, property and equipment                                  |                                                               |                       | 494,000     |           |            |           |          
|Net cash paid for purchase of Inholtra and HVE                                                     |                                                               |                       | (13,493,000 | )         |            |           |          
|Collection of note receivable                                                                      |                                                               |                       | 68,000      |           |            | 14,000     |          
|Other assets                                                                                       |                                                               |                       | (265,000    | )         |            |           |          
|Receivables from officers and shareholders                                                         |                                                               |                       | 322,000     |           |            | (672,000   | )        
|                                                                                                   |                                                               |                       |             |           |            |            |          
|Net cash provided by (used in) investing activities                                                |                                                               |                       | (14,270,000 | )         |            | (1,008,000 | )        
|                                                                                                   |                                                               |                       |             |           |            |            |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |                                                               |                       |             |           |            |            |          
|Proceeds from exercise of options                                                                  |                                                               |                       | 85,000      |           |            | 173,000    |          
|Net borrowings under line of credit                                                                |                                                               |                       | 5,436,000   |           |            | 259,000    |          
|Borrowings under term loan                                                                         |                                                               |                       | 13,000,000  |           |            |           |          
|Payments under term loan                                                                           |                                                               |                       | (583,000    | )         |            |           |          
|Borrowings under notes payable                                                                     |                                                               |                       | 10,000,000  |           |            | 592,000    |          
|Repayments of notes payable                                                                        |                                                               |                       | (10,870,000 | )         |            | (168,000   | )        

F-6

---

|Costs incurred with financing                       |  |   | (1,044,000 | ) |   |           |   |   |          |  
|--------------------------------------------------- |  | - | ---------- | - | - | ---------- | - | - | --------- | -
|Capital contribution from shareholder               |  |   | 305,000    |   |   |           |   |   |          |  
|Distributions to shareholders                       |  |   |           |   |   | (1,103,000 | ) |   | (579,000  | )
|                                                    |  |   |            |   |   |            |  
|Net cash provided by (used in) financing activities |  |   | 16,329,000 |   |   | (247,000   | ) |   | 342,000   |  
|                                                    |  |   |            |   |   |            |  
|Net (decrease) in cash                              |  |   | (426,000   | ) |   | (211,000   | ) |   | (731,000  | )
|Cash at beginning of year                           |  |   | 426,000    |   |   | 637,000    |   |   | 1,368,000 |  
|                                                    |  |   |            |   |   |            |  
|Cash at end of year                                 |  | $ |           |   | $ | 426,000    |   | $ | 637,000   |  
|                                                    |  |   |            |   |   |            |  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

|                               |              | 1999 |   | 1998      |  | 1997
|------------------------------ | ------------ | ---- | - | --------- |  | ----
|Cash paid during the year for: |              |      |   |           |  |     
|                               | Interest     |      | $ | 1,326,000 |  | $   
|                               | Income taxes |      | $ | 40,000    |  | $   

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During 1999, in connection with the sale of the Company's facility in Boulder, Colorado, (i) a note receivable of $450,000 was received from the buyer,
and (ii) $1,300,000 of debt was assumed by the buyer.

During
1999, in connection with the acquisition of Health and Vitamin Express Inc., the Company (i) issued 363,636 shares of the Company's common stock valued at
$2,273,000, and (ii) assumed $571,000 of debt.

During
1999, the Company acquired property and equipment totaling $126,000 under capital lease obligations.

THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-7

---



OMNI NUTRACEUTICALS, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 1999

1. BUSINESSES AND LIQUIDITY/GOING CONCERN

Business and Organization

Omni Nutraceuticals, Inc. (the "Company" "Omni") is a formulator and supplier of branded natural health, herbal and nutritional supplement products. The
Company's products are sold through mass retail, specialty natural health, nutrition and food retail stores, and via the Internet.

Omni
is a Utah corporation, and was formerly known as Irwin Naturals/4Health Inc, which was formerly known as 4Health, Inc. Omni is the surviving corporation of a merger (the
"Merger") of 4Health, Inc., a Utah corporation ("4Health") with Irwin Naturals, Inc., a California corporation ("Irwin Naturals") consummated June 30, 1998. Pursuant to the Merger
that was accounted for as a pooling of interests, 4Health issued 15,750,000 shares of common stock in exchange for all the outstanding shares of Irwin Naturals. The accompanying financial statements
for 1998 and 1997 have been restated to include the financial position and results of operations for both companies as if the Merger was consummated at the beginning of all periods presented. In
August 1999, the Company changed its name to Omni Nutraceuticals, Inc. On March 21, 2000, the Company announced it intended to change its name to HealthZone.com.

Net
sales and net income (loss) of the combining companies for 1998 and 1997 are as follows (individual line items, other than the totals, for the year ended December 31, 1998
are unaudited):

|                   |                                      | December 31,
1998 |   | December 31,
1997 |  
|------------------ | ------------------------------------ | ----------------- | - | ----------------- | -
|Net Sales          |                                      |                   |   |                   |  
|                   | 4Health (pre-merger)                 |                   | $ | 6,373,000         |  
|                   | Irwin Naturals (pre-merger)          |                   |   | 9,291,000         |  
|                   | Irwin Naturals/4Health (post-merger) |                   |   | 14,883,000        |  
|                   |                                      |                   |   |                   |  
|                   | Total                                |                   | $ | 30,547,000        |  
|                   |                                      |                   |   |                   |  
|Net Income (Loss): |                                      |                   |   |                   |  
|                   | 4Health (pre-merger)                 |                   | $ | (900,000          | )
|                   | Irwin Naturals (pre-merger)          |                   |   | 1,070,000         |  
|                   | Irwin Naturals/4Health (post-merger) |                   |   | 848,000           |  
|                   |                                      |                   |   |                   |  
|                   | Total                                |                   | $ | 1,018,000         |  
|                   |                                      |                   |   |                   |  

Liquidity/Going Concern

The Company has incurred losses from operations in two of the last three years. For the year ended December 31, 1999, the Company incurred a loss from
operations of $10,500,000, and at December 31, 1999, the Company had a working capital deficit of $8,558,000 and a retained deficit of $19,748,000 that raise substantial doubt about its ability
to continue as a going concern. In addition, the Company used cash in operations of $2,485,000 and used cash for investing activities, primarily acquisitions, of $14,270,000. The Company had net cash
outflows in each of the last three years. Due to the Company's operating losses, a large portion of the trade accounts payable is past due at December 31, 1999. The Company had a cash overdraft
of $165,000 at December 31, 1999. Further, availability under the
Company's line of credit is limited. At December 31, 1999, the Company had $6,436,000 outstanding out of a maximum of $7,000,000 under the facility.

F-8

---

Management's plans in regard to these items include the following:



There
are no assurances that the capital already raised by the Company in conjunction with the expense reductions will be sufficient to fund the Company's operations through 2000. In
addition, there are no assurances that the Company will be able to successfully achieve the sales benchmarks necessary to raise the additional $2,000,000 or successfully raise other additional private
placement funds. Further, there is no assurance that management will be able to successfully enter the e-commerce marketplace. The failure of the Company to successfully achieve one or all
of the above items will have a material impact on the Company's financial position and results of operations. The accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

2.  RESTATEMENT OF 1999 FINANCIAL STATEMENTS

Starting in July 2000, one of the Company's large customers started deducting significant amounts from cash remittances. In addition, certain of the
Company's other customers began taking deductions against cash remittances that were in excess of historical amounts experienced. In August 2000, the Company launched an investigation of its
1999 and 2000 sales practices and determined that sales to certain customers were made with rights of return and "guarantees" of sell-through to consumers. As part of its investigation,
substantially all of the customer deductions taken in 2000 were reviewed and it was determined that certain amounts related not only to "guaranteed" sales, but also to other customer allowances and
concessions granted by prior management in the first quarter of 2000 prior to the original issuance of the Company's 1999 financial statements. Substantially all of these arrangements were previously
unknown to the current management team.

The
Company has determined the effect of these deductions on its previously issued financial statements and has restated the accompanying financial statements for the year ended
December 31, 1999. Revenues from any products with "guaranteed" sales have been deferred until the sell through of the product at the customer level and the related product has been treated as
consigned inventory. In situations in which allowances and concessions related to 1999 sales were granted early in 2000, prior to the original issuance of the Company's 1999 financial statements, the
reserves for such allowances and

F-9

---

concessions have been increased as of December 31, 1999. In situations in which additional allowances or concessions were granted subsequent to the original issuance of the 1999 financial
statements
relating to sales made in prior periods, the reserves have been increased in the period such decisions were made and the amounts became determinable.

The
effect of the restatement on net sales, cost of sales, gross profit, net loss, basic and diluted loss per common share, accounts receivable and inventories as of and for the year
ended December 1999 is as follows:

|                       |         | As Originally Reported |            | Restatement Adjustments |   | As Restated |      
|---------------------- | ------- | ---------------------- | ---------- | ----------------------- | - | ----------- | -----
|Net Sales              |         | $                      | 35,308,000 |                         | $ | (4,091,000  | )    
|Cost of Sales          |         |                        | 18,097,000 |                         |   | (1,897,000  | )    
|Gross Profit           |         |                        | 17,211,000 |                         |   | (2,194,000  | )    
|Net Loss               |         |                        | (8,861,000 | )                       |   | (2,194,000  | )    
|Loss Per Common Share: |         |                        |            |                         |   |             |      
|                       | Basic   |                        |            | (0.31                   | ) |             | (0.08
|                       | Diluted |                        |            | (0.31                   | ) |             | (0.08
|Accounts receivable    |         |                        | 6,776,000  |                         |   | (4,091,000  | )    
|Inventories            |         |                        | 5,972,000  |                         |   | 1,897,000   |      

In
addition, in the originally filed financial statements and footnotes, the Company did not account for and disclose two stock option grants to employees. The first grant for 100,000
options was on February 15, 1999. The second grant, also for 100,000 options, was on January 10, 2000. These option grants did not impact the Company's statement of operations; however,
the footnote disclosures related to stock options have been revised to reflect these grants.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles Of Consolidation

The accompanying consolidated financial statements include the accounts of Omni Nutraceuticals, Inc. and its wholly owned subsidiary, HealthZone.com.
All significant intercompany accounts and transactions have been eliminated. Subsequent to December 31, 1999, the Company entered into a transaction where 222,222 shares, which represents
approximately 10% of the outstanding shares of its HealthZone.com subsidiary, were issued to a third party as part of a financing transaction (see Note 17).

Revenue Recognition

The Company recognizes revenue at the time products are shipped unless sales are made under "guaranteed" sales arrangements. Revenue for these guaranteed sales
has been deferred until the product has been sold at the retail level. Based on historical experience, reserves are established for sales returns, allowances and discounts related to sales made
without guarantees at the time such sales are recorded. During the years ended December 31, 1999, 1998 and 1997, the Company provided $3,450,000, $2,116,000 and $2,549,000, respectively, for
returns and allowances, including allowances for doubtful accounts, and incurred related write-offs of $1,121,000, $1,426,000 and $2,288,000, respectively.

F-10

---

Straight-Line Rent

Certain of the Company's operating leases include scheduled increasing monthly payments. In accordance with accounting principles generally accepted in the
United States, the Company has accounted for the leases to provide straight-line charges to operations over the lives of the leases.

Inventories

Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or market. Inventories at December 31,
1999 and 1998 are summarized as follows:

1999

1998Raw Materials

$
2,135,000

$
803,000Finished Goods


5,734,000


2,052,000$
7,869,000

$
2,855,000


Property And Equipment

Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful
lives of the assets, which range from three to ten years. Depreciation and amortization expenses are included in selling, general and administrative expenses in the accompanying statements of
operations.

When
an asset is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss are included in results of
operations. Repairs
and maintenance are charged to expense as incurred and major replacements or betterments are capitalized.

Long-Lived Assets

The Company follows Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which required impairment losses to be recorded on long-lived assets used in operation when indicators of impairment are present.

Goodwill

Goodwill is recorded at cost and is being amortized on straight-line basis over five years. The recoverability of goodwill is assessed periodically
based on management estimates of undiscounted future operating income or from sales of equity from the acquired business to which the goodwill relates.

Financing Fees

Financing fees incurred with the acquisition of the Company's existing credit facility have been deferred and are being amortized over the life of the debt.

Patents And Trademarks

Costs associated with the establishment and defense of trademarks have been capitalized and are being amortized over periods of fifteen to seventeen years
using the straight-line method.

F-11

---

Advertising

The Company expenses advertising costs as incurred. These costs include promotional literature, direct mailing brochures, telemarketing and trade shows. Costs
incurred relating to the production of television commercials are deferred until the commercial has aired. The Company incurred $3,191,000, $1,920,000, and $3,114,000 for advertising expenses in 1999,
1998 and 1997, respectively.

Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation" (SFAS 123) in fiscal
1996. As allowed by SFAS 123, the Company has elected to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and comply with the pro forma disclosure requirements of the new standard (see No. 14).

Income Taxes

The Company records its provision for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized based on
the anticipated future tax effects arising from financial reporting basis and tax basis of the Company's assets and liabilities at currently enacted tax rates.

Earnings per Share

Earnings per share calculations are in accordance with SFAS No. 128, "Earnings per Share." "Basic" earnings per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the year. "Diluted" earnings (loss) per share is computed by dividing net income (loss) by the total of weighted average number of
common shares outstanding plus the dilutive effect of outstanding stock options and warrants (applying the treasury stock method). For the years ended December 31, 1999 and 1997, the effect of
stock options and warrants were not included as the results would be antidilutive.

A
reconciliation of the "basic" weighted average number of common shares outstanding to the "diluted" weighted average number of common shares outstanding for each of the three years
in the period ended December 31, 1999 follows:

|                                                              |  | 1999       |  | 1998       |  | 1997      
|------------------------------------------------------------- |  | ---------- |  | ---------- |  | ----------
|Weighted average number of common shares outstandingBasic    |  | 28,177,000 |  | 27,747,000 |  | 27,365,000
|Dilutive effect of outstanding stock options                  |  |           |  | 474,000    |  |          
|                                                              |  |            |  |            |  |           
|Weighted average number of common shares outstandingDilutive |  | 28,177,000 |  | 28,221,000 |  | 27,365,000
|                                                              |  |            |  |            |  |           

For
the year ended December 31, 1998, 497,000 options have been excluded from the calculation of dilutive shares applying for treasury stock method as the option exercise
prices were greater than average market price for the period and therefore anti-dilutive.

Pro Forma Statements of Operations

From January 1, 1997 through June 30, 1998, Irwin Naturals had elected treatment as an S corporation under provisions of the Internal
Revenue Code. Effective June 30, 1998, Irwin Naturals terminated its S corporation election and become a C corporation. See Note 12 for explanation of pro forma provision
for income taxes and the related pro forma net income (loss).

F-12

---

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, 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.

Fair Value Of Financial Instruments And Concentration Of Credit Risk

The Company's financial instruments consist of cash, short-term trade receivables and payables and short-term and long-term
debt. The carrying values for all such instruments, considering the terms, approximate fair value at December 31, 1999 and 1998.

Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. Accounts receivable are subject to
credit limits, ongoing credit evaluations and account monitoring procedures to minimize the risk of loss. In certain instances, customer deposits are obtained which would also reduce the risk of loss.
Collateral is generally not required.

The
Company sells the majority of its products and services to various customers, which include a variety of large companies and distributors throughout the United States, and to a
limited extent, foreign customers. In 1999, 1998, and 1997, sales to the Company's largest customer accounted for 11.6% 13.3%, and 15.6%, respectively, of total net sales. At December 31, 1998,
one customer represented 36.4% of accounts receivable. No customers represented more than 10% of accounts receivable at December 31, 1999. In 1999, 1998, and 1997 sales to foreign customers
accounted for 8.5%, 10%, and 14.1%, respectively, of total net sales.

During
1999, approximately 64% of the Company's total purchases were from four suppliers. Management believes that if the Company were unable to make further purchases from these
suppliers, it would be able to find alternative suppliers with terms and quality levels similar to those currently in place.

Statements of Cash Flows

The Company prepares its statements of cash flows using the indirect method as prescribed by Statement of Financial Accounting Standards (SFAS) No. 95.
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

New Authoritative Pronouncements

In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. Changes in accounting to apply the guidance in SAB No. 101 may be accounted for as a change in accounting principle effective
January 1, 2000. Management has not yet determined the complete impact of SAB No. 101 on the Company; however, management does not expect that application of SAB No. 101 will have
a material effect on the Company's revenue recognition and results of operations.

Reclassifications

Certain amounts in prior years have been reclassified to conform to the current year's presentation.

F-13

---

4.  SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

The Company recorded the following significant adjustments in the fourth quarter of fiscal 1999:

| |  |  | Legal settlement (see Note 13)                                                                         |  | $ | 1,200,000
| | - |  | ------------------------------------------------------------------------------------------------------ |  | - | ---------
| |  |  | Provision for doubtful accounts for large customer balances deemed
uncollectable in the fourth quarter |  |   | 916,000  
| |  |  | Provision for discounts and rebates tied to fourth quarter sales                                       |  |   | 1,121,000
| |   |  |                                                                                                        |  |  
| |   |  |                                                                                                        |  | $ | 3,237,000
| |   |  |                                                                                                        |  |  

5.  BUSINESS COMBINATIONS

Health & Vitamin Express Inc.

On February 15, 1999, the Company, through its newly formed wholly owned subsidiary, HealthZone.com, purchased for $2,880,000 the issued and outstanding
shares of Health & Vitamin Express, Inc. (HVE), an e-commerce distribution company. The purchase consideration consisted of the issuance of 363,636 shares of the Company's
common stock valued at $2,273,000 ($6.25 per share) and the assumption of $571,000 of debt. The Company has accounted for the acquisition as a purchase, and the excess purchase price, including
acquisition costs, of $2,906,000 over the fair value of net assets acquired has been allocated to goodwill and is being amortized over 5 years.

In
addition to the 363,636 shares issued upon acquisition, the Company may contingently issue to the sellers of HVE (i) up to 272,727 shares of the Company's common stock based
upon certain revenue thresholds during first 42 months subsequent to February 15, 1999 (the "Revenue" shares), and (ii) up to
90,909 shares of the Company's common stock based upon certain profit thresholds during the first seven years subsequent to February 15, 1999 (the "Profit" shares). The Company has the right to
repurchase up to 65% of the shares issued for a period of one (1) year following the date of issuance at a purchase price of $13.75 per share (the "Repurchase Price"). The repurchase price may
be adjusted if upon repurchase the closing bid price of the Company's common stock as quoted on the Nasdaq National Market System exceeds $20 per share (the "Market Price"), the Company will pay to
the sellers 50% of the difference between the Market Price and $20 per share. Furthermore, in the event Revenue and Profit shares are issued because of a funding failure discussed below, the
repurchase price shall be reduced to $9.63 per share. The Company has granted to the Sellers certain "demand registration rights" and "piggyback registration rights" on these shares, if issued, in the
event the Company undertakes a sale of its securities to the public.

In
addition, the Company is obligated to invest or contribute to HVE operations a minimum of (A) $4,000,000 during the 18 months subsequent to February 15, 1999
and (B) $10,000,000 (inclusive of the $4,000,000 provided in clause (A) above) during the 36 months subsequent to February 15, 1999. If the Company fails to make the
investments or contributions defined above, the Sellers of HVE will automatically receive the maximum allowable shares subject to issuance under the provisions of the Revenue and Profit Shares. The
former shareholders of HVE have filed a lawsuit against the Company asserting certain claims under this agreement. The Company is currently in settlement discussions with the plaintiffs and have
proposed a settlement (see Note 13).

Inholtra

On March 10, 1999, the Company purchased for $13,250,000 certain assets and liabilities of Inholtra Investment Holdings and Trading, N.V.,
Inholtra, Inc., and Inholtra Natural, Ltd. (collectively

F-14

---

the Sellers). The purchase price consisted of the payment of $3,250,000 in cash at closing, and the issuance of a $10,000,000 promissory note. The promissory note was refinanced on June 10,
1999 in connection with the Company's new banking facility (see Note 9). The Company has accounted for the acquisition as a purchase. The purchase price has been allocated to the patents and
trademarks associated with the Inholtra product, and is being amortized over a fifteen-year period. In connection with this acquisition, the Company entered into a consulting agreement
with a former employee of the Sellers. The two-year agreement requires annual consulting fees of $60,000.

The
table below reflects the unaudited pro forma combined results of the Company after giving effect to i) the March 10, 1999 acquisition of Inholtra, and ii) the
February 15, 1999 acquisition of Health & Vitamin Express, Inc, had the acquisitions taken place at the beginning of fiscal 1998. The pro forma financial information does not necessarily
reflect the operating results that would have occurred had
the acquisition taken place from the beginning of each period presented, nor is such information indicative of future operating results.

(Unaudited)1999

1998(in 000's)

(in 000's)Net sales

$
32,069

$
36,048Cost of sales


16,599


15,296Selling, general and administrative


24,423


19,490Write-off of intangibles


390


Legal settlement


1,200


Income (loss) from operations


(10,543
)

1,262Other expense


(1,055
)

(1,291
)Benefit for income taxes


(274
)

Net loss

$
(11,324
)
$
(29
)Loss per share

$
(0.40
)
$
(0.00
)


The
above amount includes adjustments for $283,000 and $1,466,000 for additional goodwill amortization in 1999 and 1998, respectively, and $220,000 and $1,060,000 for additional
interest expense in 1999 and 1998, respectively.

F-15

---

6.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31;

1999

1998Machinery and equipment

$
303,000

$
355,000Furniture and equipment


1,438,000


758,000Leasehold improvements


910,000


303,0002,651,000


1,416,000LessAccumulated depreciation and amortization


(1,135,000
)

(789,000
)$
1,516,000

$
627,000


7.  BUILDING HELD FOR SALE/NOTE RECEIVABLE

On March 25, 1999, the Company completed the sale of its former 4Health, Inc. corporate facility located in Boulder, Colorado (the "Property").
The sales price for the Property was $2,350,000, which consisted of (i) cash consideration of $600,000 that was paid at closing, (ii) assumption of a $1,300,000 exiting first mortgage
loan on the Property by the buyer, and (iii) the receipt of a $450,000 promissory note secured by a second trust deed in the Property. The note receivable is to be paid in monthly installments
of $3,688, including principal and interest at a rate of 71/2% per annum, until March 1, 2002 when the note is payable in full. The Company's results of operations for the first
quarter of 1999 include a gain of $481,000 that resulted from the sale of this Property.

8.  RECEIVABLES FROM OFFICERS AND SHAREHOLDER

Receivables from officers and shareholder consisted of the following at December 31; 1998:

1998Receivable from the Chief Executive Officer, bearing interest at an annual rate of 8 percent, collected in full in October 1999

$
322,000Receivable from the President, bearing interest at an annual rate of 8 percent, $175,000 forgiven during 1999 in connection with the President's continued employment and $175,000 forgiven in connection with the
termination of the President's employment (see Note 13)


350,000672,000Lesscurrent portion


(497,000
)$
175,000


9.  CREDIT FACILITY

As of December 31, 1998, the Company had outstanding borrowings of $1,000,000 under a revolving line of credit with a bank. In February 1999, the
outstanding balance was paid in full and the line was closed. On February 1, 1999, the Company obtained a new line of credit with a different bank. The line of credit agreement was subsequently
amended in March 1999, and then again on May 9, 1999. Maximum borrowings under the amended line of credit were limited to $5,000,000 based on eligible accounts receivable and
inventories. Borrowings under the line accrued interest at an annual rate of either prime plus .25 percent or LIBOR plus 2.0 percent. The amended line of credit was to expire on
June 30, 1999.

On
June 10, 1999, the Company secured a new loan from a lending institution that provides up to $20 million dollars of financing. The loan was subsequently amended on
January 21, 2000. The credit

F-16

---

facility consists of a $13 million term loan ("Term Loan") and up to a $7 million revolving loan ("Revolving Loan"), subject to borrowing base availability and compliance with certain
financial and other covenants and agreements. At closing, $4,527,000 of loan proceeds were disbursed to repay and close the Company's previous existing credit facility, and $10,000,000 was disbursed
to repay the promissory note issued in connection with the acquisition of the assets of Inholtra Naturals, Ltd. (see Note 5).

The
loans under the facility are secured by substantially all the assets of the Company. Borrowings under the Term Loan bear interest at an annual rate of either prime plus
2.25 percent or LIBOR plus 3.75 percent and are paid quarterly. Borrowings under the Revolving Loan currently bear interest at an annual rate of either prime plus 1.75 percent or
LIBOR plus 3.0 percent, and are paid quarterly. The rates are subject to decrease based upon the Company satisfying certain operating performance levels. The credit facility agreement contains
certain financial and other covenants or restrictions, including the maintenance of certain financial ratios, limitations on capital expenditures, restrictions on acquisitions, limitations on the
incurrence of indebtedness and restrictions on dividends paid by the Company. As of December 31, 1999, the Company was in violation of several covenants, including maintenance of certain
financial ratios. The Company obtained a waiver from the lender for these covenants.

The
Revolving Loan commitment, as revised in connection with the waiver from the lender, expires on April 30 2001, when the loan is payable in full. As of December 31,
1999, the maximum additional credit available under the borrowing limitations was $564,000.

Selected
information regarding borrowings under line of credit agreements for 1999 and 1998 follows:

1999

1998Average amount outstanding

$
3,967,000

$
620,000Maximum amount outstanding

$
6,436,000

$
1,500,000Weighted average interest rate during the period


9.1
%

8.4
%


The
$13,000,000 Term Loan is payable in quarterly installments of $583,333 that began October 15, 1999, and which will increase to $750,000 on October 15, 2002, until
the Loan is paid in full on April 15, 2004. In addition, the Company shall make a payment of principal on the Term Loan in addition to the quarterly payments in an amount equal to 50% of
"Excess Cash Flow" (as defined) for each fiscal year. Each Excess Cash Flow Payment shall be applied to reduce the remaining regularly scheduled principal installments of the Term Loan in inverse
order of their maturity. Additionally, upon receipt by Borrower of any unapplied insurance or condemnation proceeds, the proceeds of key-man life insurance which has been assigned to an
Agent, asset sale proceeds or debt sale proceeds, the Company shall make a mandatory prepayment of the Term Loan in the amount thereof. Furthermore, upon receipt by Borrower of any equity sale
proceeds, Borrower shall make a mandatory prepayment of (i) the Revolving Loan to the limited extent necessary to fully prepay the Revolving Loan or, if less, in such amount so that borrowing
availability after giving effect thereto equals $3,000,000 and (ii) to the extent of any balance of any equity sale proceeds after the application to the Revolving Loan to the extent provided
in the preceding clause, the Term Loan; provided, however, if at the time of receipt of such equity sale proceeds, no event of default has occurred and is continuing and the debt to EBITDA ratio meets
certain defined levels, then the amount of such mandatory prepayment on the Term Loan shall be 50% of the amount of such equity sale proceeds remaining after application to the Revolving Loan pursuant
to the preceding clause, and, further, provided, however, if such ratio is less than a defined amount, then no such prepayment on the Term Loan from equity sale proceeds need be made.

F-17

---

As a condition of the waiver, the Term Loan and Revolving Loan agreements will be amended to change the expiration dates of both facilities to April 30, 2001. Further, under
the proposed amendment the lender will require the Company to meet certain revised financial ratios.

Future
annual payments under the Term Loan, as revised, are as follows as of December 31:

Year ended December 31,2000

$
2,332,0002001


10,085,00012,417,000Lesscurrent portion


(2,332,000
)$
10,085,000


10.  NOTES PAYABLE

Notes payable consists of the following at December 31:

1999

1998Note payable to a bank assumed by the buyer of the Boulder Building (see Note 7)

$


$
1,300,000Notes payable to three individuals, unsecured, bearing interest at an annual rate of 6.0 percent, payable in monthly installments of principal and interest of approximately $26,000, due June 2000


155,000


451,000Capital lease obligation (see Note 13)


123,000


278,000


1,751,000Less current portion


(176,000
)

(328,000
)$
102,000

$
1,423,000


Future
annual payments under the notes payable and capital lease obligations are as follows as of December 31, 1999:

Year ended December 31,2000

$
176,0002001


23,0002002


26,0002003


30,0002004


23,000$
278,000


11.  WRITE-OFF OF INTANGIBLES

The Company acquired ID Technology in connection with a 1996 merger. ID Technology is used in angioplasty procedures. In the third quarter of 1999, the Company
determined that the value of such technology was impaired and, therefore, wrote-off the remaining unamortized balance of $390,000. In addition, the Company wrote-off $250,000
of inventories related to this technology. Total charges in connection with this impairment were $640,000.

F-18

---

12.  INCOME TAXES

From January 1, 1997 through June 30, 1998, Irwin Naturals had elected treatment as an S corporation under provisions of the Internal
Revenue Code. Effective June 30, 1998, Irwin Naturals terminated its S corporation election and became a C corporation. As such, the actual taxes due by Irwin Naturals for the period from
January 1, 1997 to June 30, 1998 are based on S corporation tax rates, which are substantially less than C corporation tax rates. As a result of the "pooling of interests" between Irwin
Naturals and 4Health, Inc., the accompanying statements of operations for 1998 and 1997 reflect historical tax provisions which are a combination of both C corporation and S corporation tax
rates. Because of the Irwin Natural's change in tax status, historical results of operations, including income taxes and earnings (loss) per share information may not, in all cases, be comparable to
or indicative of current and future results. Therefore, the statements of operations for 1998 and 1997 also include unaudited pro forma provisions for income taxes and resulting unaudited pro forma
net income (loss) and unaudited pro forma earnings (loss) per share information as if Irwin Naturals had been a C corporation during the period from January 1, 1997 to June 30,
1998.

The
Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred income tax assets
or liabilities are computed based on the temporary difference between the financial statement and income tax bases of assets and liabilities using the current marginal income tax rate. Deferred income
tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period.

Deferred
tax assets may be recognized for temporary differences that will result in deductible amounts in future periods and for loss carryforwards. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 1999 and 1998,
the Company had recorded valuation allowances.

The
components of the deferred income tax assets (liabilities) as of December 31, 1999 and 1998 are as follows:

1999

1998Allowance for doubtful accounts

$
1,384,000

$
369,000Inventory tax adjustment


484,000


83,000Inventory reserve


216,000


186,000Warrants


373,000


52,000Accrued liabilities


588,000


33,000NOL carryforwards


4,618,000


2,817,000Other





288,0007,663,000


3,828,000Valuation allowance


(7,663,000
)

(3,828,000
)$


$



At
December 31, 1999, the Company has federal net operating loss carryforwards of approximately $11,599,000 expiring at various dates through 2019. Future use of these net
operating loss carryforwards may be limited subject to certain provisions of the Internal Revenue Code.

F-19

---

The components of the provision (benefit) for income taxes for the periods ended December 31, 1999, 1998 and 1997 are as follows:

1999

1998

1997Current:Federal

$
(274,800
)
$
287,000

$
(17,000
)State


800


131,000


(1,000
)(274,000
)

418,000


(18,000
)Deferred





182,000


18,000Provision (benefit) for income taxes

$
(274,000
)
$
600,000

$



Differences
between the provision for income taxes and income taxes at the statutory federal income tax rate are as follows:

|                                                      |  | December 31, 1999 |            | December 31, 1998 |       | December 31, 1997 |  
|----------------------------------------------------- |  | ----------------- | ---------- | ----------------- | ----- | ----------------- | -
|Income tax at statutory federal rate                  |  | $                 | (3,852,000 | )                 | (34.0 | )%                | $
|State income taxes                                    |  |                   | (657,000   | )                 | (5.8  | )                 |  
|S corporation income not taxed at C corporation rates |  |                   |           |                   |      |                   |  
|Permanent differences                                 |  |                   | 407,000    |                   | 3.6   |                   |  
|Use of net operating loss carryforwards               |  |                   |           |                   |      |                   |  
|Change in valuation allowance                         |  |                   | 3,835,000  |                   | 33.8  |                   |  
|Current losses not benefited                          |  |                   | 690,000    |                   | 6.1   |                   |  
|Reversal of 1998 excess provision                     |  |                   | (274,000   | )                 | (2.4  | )                 |  
|Other items, net                                      |  |                   | (423,000   | )                 | (3.7  | )                 |  
|                                                      |  |                   |            |                   |       |                   |  
|                                                      |  | $                 | (274,000   | )                 | (2.4  | )%                | $
|                                                      |  |                   |            |                   |       |                   |  

The components of the unaudited pro forma provision for income taxes for 1998 and 1997 are as follows:

December 31, 1998

December 31, 1997Federal

$
890,000

$
633,000State


271,000


114,0001,161,000


747,000Deferred


184,000


18,000Pro forma provision for income taxes

$
1,345,000

$
765,000


F-20

---

Differences
between the unaudited pro forma provision for income taxes and income taxes at the statutory federal income tax rate are as follows:

|                                        |  | December 31, 1998 |           | December 31, 1997 |      
|--------------------------------------- |  | ----------------- | --------- | ----------------- | -----
|Income tax at statutory federal rate    |  | $                 | 550,000   |                   | 34.0 
|State income taxes                      |  |                   | 271,000   |                   | 16.8 
|Permanent differences                   |  |                   | 372,000   |                   | 22.9 
|Use of net operating loss carryforwards |  |                   | (332,000  | )                 | (20.5
|Change in valuation allowance           |  |                   | 484,000   |                   | 29.9 
|Other, net                              |  |                   |          |                   |     
|                                        |  |                   |           |                   |      
|                                        |  | $                 | 1,345,000 |                   | 83.1 
|                                        |  |                   |           |                   |      

13.  COMMITMENTS AND CONTINGENCIES

Capital and Operating Lease Obligations Payable

The Company leases its facility and certain property and equipment under long-term operating leases expiring at various dates through 2004. The
Company also leases property and equipment under a capital lease. Included in property and equipment is $132,000, at cost, related to capital leases.

The
future minimum lease payments at December 31, 1999 under capital and operating leases are as follows:

Capital
Leases

Operating
Leases

Total2000

$
35,000

$
672,000

$
707,0002001


35,000


667,000


702,0002002


35,000


656,000


691,0002003


35,000


647,000


682,0002004


23,000


292,000


315,000Total future minimum lease payments


163,000

$
2,934,000

$
3,097,000Lessamount representing interest at 12%


(40,000
)Present value of minimum capital lease payments


123,000Lesscurrent portion


(21,000
)$
102,000


Total
rental expense for the years ended December 31, 1999, 1998 and 1997 was approximately $588,000, $557,000 and $390,000, respectively.

Employment Contracts

Upon the consummation of the Merger, both Mr. R. Lindsey Duncan and Mr. Klee Irwin entered into substantially similar three-year
employment agreements with the Company. Mr. Duncan was employed as Chairman of the Board and as a member of the Executive Committee with all duties and responsibilities normally associated with
this position. Mr. Irwin was employed as the Chief Executive Officer and as a member of the Executive Committee with all duties and responsibilities normally associated with this position until
April 20, 1999. On that date, Mr. Irwin resigned, as Chief Executive Officer of Omni Nutraceuticals and his employment agreement was terminated effective April 20, 1999.

F-21

---

In connection with his resignation the Board of Directors appointed him as Chief Executive Officer of HealthZone.com, the Company's wholly owned subsidiary. In October of 1998 (as revised in
June 1999), the Company entered into an agreement to hire Mr. Louis Mancini as President and Chief Operating Officer and, subsequently, Chief Executive Officer.

These
employment agreements provided for: (i) annual salaries of $225,000, and $300,000 for Messrs. Duncan and Mancini, respectively; (ii) the right for
Mr. Duncan and Mr. Mancini to receive an annual bonus based on certain performance incentives.

On
March 12, 2000, Mr. Duncan agreed to resign from the Board of Directors of the Company and agreed to terminate his employment agreement. Also on March 12,
2000, the Board of Directors terminated Mr. Mancini's employment. Klee Irwin replaced Mr. Mancini as President and Chief Executive Officer.

As
a result of the March 12, 2000 employment realignments, the Company has the following obligations to the above individuals:

| |  |  | Lindsay Duncan: |  | extension of exercise and expiration dates for 1,003,029 stock options to March 2007
| | - |  | --------------- |  | ------------------------------------------------------------------------------------
| |  |  | Louis Mancini:  |  | payout accrued vacation, forgiveness of $175,000 note receivable (see Note 8)       
| |  |  | Klee Irwin:     |  | none                                                                                

Legal

On December 23, 1999, a lawsuit was filed against the Company, the Company's former President and Chief Executive Officer, Klee Irwin, and the Company's
then current President, Louis Mancini, entitledDavid Mandel, Jeffrey D. Segal and Gordon D. Barker v. Omni Nutraceuticals, Inc., Klee Irwin, Louis Mancini and Does 1
through 50(Superior Court of the State of California, County of Los AngelesCentral District, Case No. BC222263). The lawsuit includes various causes of action,
including fraud, negligent misrepresentation, misappropriation of trade secrets, unjust enrichment, unfair business practices and violations of the Racketeer Influenced and Corrupt Organizations Act
(RICO) (under which triple damages have been claimed). The lawsuit is based on various alleged claims, including that the plaintiffs, the sole shareholders of Health & Vitamin Express ("HVE"),
were fraudulently induced to enter into a merger agreement pursuant to which HVE became a wholly-owned subsidiary of the Company based on false representations of the defendants. The lawsuit does not
specify the amount of damages claimed. Although the Company believes that the claims made in the lawsuit are without merit, the Company is currently in settlement negotiations with the plaintiffs in
the lawsuit. The proposed terms of the settlement provide that the Company will issue an additional 363,636 shares of common stock to the former shareholders of HVE. Management believes that the
claims will be settled in accordance with the proposed settlement agreement. As such, the Company has estimated and recorded a charge of $1,200,000 in the accompanying statement of operations as of
December 31, 1999 in connection with this claim.

The
Company has been named as defendant in various other claims arising out of the normal course of business. In the opinion of management, the outcome of these claims will not have a
material effect on the Company's financial position or results of operations.

F-22

---

14.  SHAREHOLDERS' EQUITY

Preferred Stock

The Company has authorized 5,000,000 shares of Preferred Stock. Under the terms of the Article of Incorporation, the Board of Directors may issue Preferred
Stock for any proper corporate purpose. In approving any issuance, the Board has broad authority to determine the rights, privileges, and preferences of the Preferred Stock, which may be issued as one
or more classes or series. The rights, privileges and preferences may include voting, dividend, conversion, redemption, participation and liquidation rights. As of December 31, 1999 and 1998,
no Preferred Stock is issued or outstanding. Subsequent to December 31, 1999, the Company amended its Articles of Incorporation to allow for the issuance of a new series of Convertible
Preferred Stock (see Note 17).

Common Stock

In February 1999, the Company issued 363,636 shares of common stock in connection with the acquisition of HVE (see note 5).

In
August 1999, the Company entered into a three-year agreement with an individual to be the spokesperson for its Inholtra product line. The Company issued 15,000
shares of common stock and recorded compensation of $36,000 in connection with the issuance of these shares. In addition, the Company granted this individual an option to purchase 75,000 shares of
common stock. The Company recorded compensation expense of $29,000 in 1999 in connection with the grant of these options to this non-employee.

In
October 1999, the Company issued 13,000 shares of common stock to its previous facility landlord in lieu of cash for one month's rent due. The Company recorded expense of
$19,000 in connection with the issuance of these shares.

In
October 1999, the former Chief Executive Officer and shareholder returned 941,436 shares to the Company as a contribution to capital. The Company retired these returned
shares.

During
1999, the Company issued 25,000 shares of common stock to a consultant in exchange for services performed during the same period. The Company recorded compensation of $120,000
in connection with the issuance of these shares.

In
September 1997, pursuant to a clause in a July 1996 merger agreement, 500,000 additional shares common stock were issued to "pre-1996 merger" shareholders
to realign the equity interests.

Warrants

In 1997, the Company entered into a three year consulting agreement with an investment-banking firm. In consideration for the consulting services, the Company
issued the investment-banking firm warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $6.00 per share and additional warrants to purchase 250,000 shares of
common stock at an exercise price of $4.00 per share. The warrants are exercisable for five years from the date of issuance. The Company recorded professional services expense of $388,000, $388,000
and $275,000 in 1999, 1998 and 1997, respectively, in connection with the fair value of these warrants based upon the Black Scholes pricing model. As of December 31, 1999, all warrants were
still outstanding.

During
the year ended December 31, 1999, the Company entered into a consulting agreement with an advisor. In consideration of the consulting services, the Company issued to the
advisor warrants to purchase 62,500 shares of the Company's common stock at an exercise price of $4.75 per share. The Company recorded professional services expense of $415,000 in 1999 in connection
with the fair value of these warrants based upon the Black Scholes pricing model. These warrants were exercised subsequent to year-end.

F-23

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Subsequent to year-end, the Company issued 775,000 warrants to acquire shares of common stock at $2.25 per share in connection with the issuance of a new series of
Convertible Preferred Stock (see Note 17).

Stock Options

In 1996, the Company adopted the Long-Term Stock Incentive Plan (LTSIP). This plan was amended on December 22, 1999. Under the terms of the
LTSIP, the Company is authorized to issue incentive and non-qualified stock options to its directors, officers, key employees and consultants totaling up to 4,500,000 shares of common
stock. At December 31, 1999, 553,402 shares are available for future grant under this plan. Options are generally granted at exercise prices not less than the fair market value on the date of
grant and expire from two to seven years after the date of grant. Options granted under this plan vest over varying terms ranging from immediate vesting to seven years.

In
November 1998, the Company's Board of Directors approved a stock option pool authorizing management of the Company to make discretionary grants up to 500,000 shares.

In
1996, the Company adopted SFAS 123. Therefore, the following information is presented in accordance with the provisions of SFAS 123.

A
summary of the Company's outstanding options and activity follows:

|                           |           |           |            |   |      | Exercisable
|-------------------------- | --------- | --------- | ---------- | - | ---- | -----------
|
|Balance, January 1, 1997   |           | 866,103   |            | $ | 4.35 |            
|                           | Granted   |           | 192,500    |   |      | 5.92       
|                           | Exercised |           | (186,396   | ) |      | 4.01       
|                           | Cancelled |           | (129,564   | ) |      | 6.00       
|                           |           |           |            |   |      |            
|Balance, December 31, 1997 |           | 742,643   |            |   | 4.57 |            
|                           |           |           |            |   |      |            
|                           | Granted   |           | 1,853,860  |   |      | 5.22       
|                           | Exercised |           | (38,341    | ) |      | 4.51       
|                           | Cancelled |           | (111,991   | ) |      | 5.46       
|                           |           |           |            |   |      |            
|Balance, December 31, 1998 |           | 2,446,171 |            |   | 5.01 |            
|                           |           |           |            |   |      |            
|                           | Granted   |           | 3,267,500  |   |      | 2.27       
|                           | Exercised |           | (19,670    | ) |      | 4.33       
|                           | Cancelled |           | (1,747,403 | ) |      | 5.03       
|                           |           |           |            |   |      |            
|Balance, December 31, 1999 |           | 3,946,598 |            | $ | 3.58 |            
|                           |           |           |            |   |      |            

Weighted
average fair value of all options granted during years ended December 31 1999, 1998 and 1997 were $1.23, $1.99 and $1.62, respectively.

F-24

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The following table summarizes information about the options outstanding at December 31, 1999:

|Range of
Exercise Prices |  | Number
outstanding at
December 31, 1999 |  | Weighted
Average
Exercise
Price |      | Weighted
Average
Remaining
Life |           | Exercisable at
December 31, 1999 |           | Weighted
Average
Exercise
Price
|------------------------ |  | --------------------------------------- |  | ------------------------------- | ---- | ------------------------------- | --------- | -------------------------------- | --------- | -------------------------------
|$2.00$2.99              |  | 1,137,500                               |  | $                               | 2.23 |                                 | 9.7 years |                                  | 975,000   |                                
|$3.00$3.99              |  | 1,818,955                               |  |                                 | 3.20 |                                 | 8.8 years |                                  | 593,871   |                                
|$4.00$6.00              |  | 970,729                                 |  |                                 | 5.79 |                                 | 9.0 years |                                  | 413,229   |                                
|$6.01$8.75              |  | 19,414                                  |  |                                 | 7.40 |                                 | 7.5 years |                                  | 9,804     |                                
|                         |  |                                         |  |                                 |      |                                 |           |                                  |           |                                
|                         |  | 3,946,598                               |  | $                               | 3.58 |                                 |           |                                  | 1,991,904 |                                
|                         |  |                                         |  |                                 |      |                                 |           |                                  |           |                                

The
Company has elected to continue to measure compensation costs associated with its stock option plan under APB No. 25, "Accounting for Stock Issued to Employees" and comply
with the pro forma disclosure requirements of SFAS No. 123. Had the Company applied the fair value based method of accounting, which is not required, to all grants of stock options,
under SFAS No. 123, the Company would have recorded additional compensation expense and computed pro forma net income (loss) and pro forma earnings (loss) per share amounts as follows for 1999,
1998 and 1997 as follows:

|                                     |         | 1999 |             | 1998  |   | 1997    |     
|------------------------------------ | ------- | ---- | ----------- | ----- | - | ------- | ----
|Additional compensation expense      |         | $    | 3,128,000   |       | $ | 672,000 |     
|Pro forma net income (loss)          |         |      | (14,183,000 | )     |   | 346,000 |     
|Pro forma earnings (loss) per share: |         |      |             |       |   |         |     
|                                     | Basic   |      | $           | (0.50 | ) | $       | 0.01
|                                     | Diluted |      | $           | (0.50 | ) | $       | 0.01

These
pro forma amounts were determined by computing the fair vale of each option on its grant date using the Black-Scholes option-pricing model with the following assumptions:

|                        |  | 1999    |   | 1998         |   | 1997      |  
|----------------------- |  | ------- | - | ------------ | - | --------- | -
|Risk free interest rate |  | 6.03    | % | 4.34%5.55   | % | 5.97%     |  
|Expected life           |  | 4 years |   | 2 to 7 years |   | 2.2 years |  
|Volatility              |  | 90.00   | % | 60.00        | % | 60.68     | %
|Expected dividend yield |  | None    |   | None         |   | None      |  

15.  RELATED PARTY TRANSACTIONS

From January 1, 1997 through June 30, 1998, the Company made distributions totaling $1,682,000 ($579,000 in 1997 and $1,103,000 in 1998) to the S
corporation shareholders of Irwin Naturals. These distributions were for tax liabilities to be paid by the S corporation shareholders attributable to their respective S corporation income.

During
the year ended December 31, 1999, a bonus of $50,000 was paid to Mr. Lindsey Duncan, Chairman of the Board.

On
October 8, 1999, the Company and Mr. Klee Irwin entered into a settlement agreement (the "Settlement Agreement') in order to resolve certain mutual claims that had
arisen between the
Company and Mr. Irwin. Subsequent to year-end, the Settlement Agreement and all ancillary agreements thereto, including the voting agreement between Mr. Duncan and
Mr. Irwin were terminated.

On
or about October 8, 1999, Mr. Irwin made a capital contribution of $305,000, and returned 941,436 shares of Omni Nutraceutical common stock to the Company.

F-25

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16. SEGMENT INFORMATION

In 1997 and 1998, the Company operated as one reportable business segment. Since February 15, 1999, concurrent with the acquisition of the Company's
e-commerce operations by its subsidiary HealthZone.com (see Note 5), the Company's businesses have been organized, managed and internally reported as two segments: wholesale and
retail product distribution, and e-commerce. These segments are based on differences in products, customer type and sales and distribution methods. The distribution segment consists
primarily of the sales of the Company's products directly to retailers, wholesalers, mass merchants and distributors who stock and manage inventory within health stores. The Company's
e-commerce business, HealthZone.com, enables customers to choose from the Company's brand-name products and also gives customers the opportunity to buy products from other
vendors.

|                                   |  | Distribution |             | E-Commerce |   | Total    |  
|---------------------------------- |  | ------------ | ----------- | ---------- | - | -------- | -
|1999                               |  |              |             |            |   |          |  
|Net sales                          |  | $            | 30,922,000  |            | $ | 295,000  |  
|Cost of sales                      |  |              | 15,988,000  |            |   | 212,000  |  
|Gross profit                       |  |              | 14,934,000  |            |   | 83,000   |  
|Costs and expenses                 |  |              | 24,800,000  |            |   | 717,000  |  
|Loss from operations               |  |              | (9,866,000  | )          |   | (634,000 | )
|Interest income                    |  |              | 32,000      |            |   |         |  
|Interest expense                   |  |              | (1,326,000  | )          |   | (13,000  | )
|Other income (expense)             |  |              | 479,000     |            |   | (1,000   | )
|Benefit for income taxes           |  |              | (274,000    | )          |   |         |  
|Net loss                           |  |              | (10,407,000 | )          |   | (648,000 | )
|Depreciation and amortization      |  |              | 1,875,000   |            |   | 17,000   |  
|Assets                             |  |              | 29,475,000  |            |   | 58,000   |  
|Expenditures for long-lived assets |  |              | 15,154,000  |            |   |         |  

17. SUBSEQUENT EVENTS

FinancingsOn January 24, 2000, the Company completed an equity transaction with American
Equities, LLC and Corporate Financial Enterprises, Inc. that will provide up to $5,000,000 of capital to the Company and its wholly owned subsidiary HealthZone.com.

Under
the terms of the transaction, the Company will issue up to 4,500,000 shares of its newly created 5% Convertible Preferred Stock, Series A ("Preferred Shares") and seven
year warrants to purchase up to an aggregate of 775,000 shares of common stock at an exercise price of $2.25 per share, subject to adjustment. The aggregate purchase price for the Preferred Shares and
warrants is $4,000,000 payable in two installments, the first in the amount of $2,000,000 that was funded on January 21, 2000, and subject to the satisfaction of certain performance targets,
the second in the amount of $2,000,000. Concurrently with the first installment payment, HealthZone.com issued 222,222 shares of its common stock (representing approximately 10% of HealthZone.com's
issued and outstanding shares of common stock) and a seven year warrant to purchase up to 37,000 shares of its common stock at an exercise price, subject to adjustment, equal to the lesser of $1.00 or
70% of the lowest price received by HealthZone.com on future sales of its capital stock, for a purchase price of $1,000,000. The Company has also agreed to lend HealthZone.com $1,000,000 out of second
installment proceeds. The Company will use the proceeds from the sale of its securities to reduce indebtedness and for working capital purposes. The Preferred Shares are convertible into an aggregate
of 3,000,000 shares of Company common stock (assuming issuance of the full amount of Preferred Shares), subject to adjustment. The Preferred Shares are not redeemable but may be subject to mandatory
conversion under certain circumstances. The Preferred Shares will vote together with the common stockholders on an as converted basis and will have separate class voting rights to elect one director
and in connection with

F-26

---

certain corporate changes. The Preferred Shares will carry a liquidation preference of $0.60 per share and an annual dividend rate of $0.05 per share, payable semi-annually. The Company
may elect to pay the dividend in additional Preferred Shares at a rate of .05 shares per share. The investor was also provided certain registration rights in connection with this transaction. In
connection with the above transaction, the Company has (i) amended its Articles of Incorporation to provide for the Preferred
Shares, (ii) amended the Settlement Agreement between the Company and Klee Irwin as it related to certain funding provisions of HealthZone.com, and (iii) entered into two separate
consulting agreements, one of which requires the Company to issue 560,000 shares of its Common Stock. Further, in connection with the above transaction, the Chairman and the former Chief Executive
Officer, both significant shareholders, each sold 220,000 (totaling 440,000) shares of their personally held Company common stock to the investing parties for $250,000 (totaling $500,000).

On
March 27, 1999, the Company completed a private sale of its securities whereby 700,000 shares of common stock of the Company were sold for an aggregate purchase price of
$2,100,000. The investor was also provided certain registration rights in connection with this transaction.

The
pro forma effect of these transactions as if they had occurred at December 31, 1999 is as follows, before giving effect to any application of the proceeds:

|                                           |  | Balance
December 31, 1999 |            | Pro forma
Adjustments |   | Pro forma
December 31, 1999
|------------------------------------------ |  | ------------------------- | ---------- | --------------------- | - | ---------------------------
|Assets                                     |  |                           |            |                       |   |                            
|Current assets                             |  | $                         | 11,104,000 |                       | $ | 5,100,000                  
|Other assets                               |  |                           | 18,429,000 |                       |   |                           
|                                           |  |                           |            |                       |   |                            
|Total assets                               |  | $                         | 29,533,000 |                       | $ | 5,100,000                  
|                                           |  |                           |            |                       |   |                            
|Liabilities and stockholders' equity       |  |                           |            |                       |   |                            
|Line of credit                             |  | $                         | 6,436,000  |                       | $ |                           
|Other current liabilities                  |  |                           | 13,226,000 |                       |   |                           
|Debt, net of current portion               |  |                           | 10,187,000 |                       |   |                           
|Stockholders' equity                       |  |                           | (316,000   | )                     |   | 5,100,000                  
|                                           |  |                           |            |                       |   |                            
|Total liabilities and stockholders' equity |  | $                         | 29,533,000 |                       | $ | 5,100,000                  
|                                           |  |                           |            |                       |   |                            

OtherIn January 2000, the Company issued 75,000 shares of common stock to its three then current
outside board of directors as compensation for services.

In
January 2000, the Company granted 100,000 options at an exercise price of $2.25 per share to the President of its internet operations.

Effective
January 24, 2000, the Company entered into a two year consulting agreement with an advisor that required the issuance of 1,200,000 shares of the Company's common
stock. 400,000 of these shares may be returned to the Company if at any time during the second year of the consulting agreement the Company gives the consultant a properly noticed Early Termination
Notice.

In
March 2000, the Company formed a joint venture for the purpose of distributing its products throughout the European Union. The Company contributed $5,000 for a
50 percent ownership in the venture.

In
March and April 2000, the Company signed term sheets constituting their intent to acquire two separate companies. Under the currently proposed terms, if the acquisitions are
consummated, the Company will issue 240,000 shares of common stock as purchase consideration (120,000 shares for each acquisition).

F-27

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18.  EVENTS SUBSEQUENT TO ORIGINAL ISSUANCE OF 1999 FINANCIAL STATEMENTS
       ON APRIL 12, 2000 (unaudited)

Pursuant to a Settlement, Termination and Mutual Release Agreement dated April 13, 2000, 363,636 additional shares were issued in settlement of a
lawsuit filed on December 23, 1999 by the former owners of HVE. In connection with the settlement, all other rights and obligations that existed under the February 15, 1999 Merger
Agreement were terminated. The fair value of these additional shares ($1,200,000 based on the fair value at the time of the shares issued) has been recorded as an expense in the accompanying statement
of operations for the year ended December 31, 1999.

On
May 8, 2000, the Company's term loan and revolving loan agreements with its principal lender were amended. As a condition of the waiver of certain financial ratios, the
amendment changed the expiration dates of both facilities to April 30, 2001. Further, the term loan amortization and interest payments will be made monthly. Under that amendment, the lender
will require the Company to meet certain revised financial ratios.

On
May 22, 2000, the Company executed an asset purchase agreement to purchase selected assets of HealthShop.com for a purchase price of $3,500,000 of the Company's common stock
(838,951 shares) with up to 400,000 additional shares depending on the market price of the Company's common stock through February 2001, and an additional 250,000 shares contingent on meeting
certain performance measures during the one year period from the closing date.

In
connection with this acquisition, the Company entered into a consulting agreement with the former shareholders and executives of Healthshop.com for 250,000 shares of the Company's
common stock. HealthShop.com was an Internet business that sold nutritional supplements and health related products.

On
May 25, 2000, the Company executed an agreement and plan of reorganization with Smart Basics, Inc., dba SmartBasics.com, an Internet and mail order business that
sells nutritional supplements and health related products. Under the terms of the agreement, the Company paid 170,000 shares of Omni Nutraceuticals, Inc. common stock for all of the equity of
SmartBasics.com.

On
June 28, 2000 the Company entered into a consulting agreement with an investment banking firm to perform certain financial consulting services. The agreement called for the
issuance of 300,000 options to purchase the Company's common stock at $4.00 per share and covered a term of six months. The options were valued at $747,000 and are being amortized into consulting
expense over the term of the agreement.

On
September 18, 2000, the Company was served with a lawsuit.Veromax International, LLC (Plaintiff) v. Omni Nutraceuticals, Inc.
(Defendant), currently pending in the Circuit Court of Maryland for Baltimore County, Case No. 03-C-00-009605. The litigation
concerns a Distribution Agreement between Veromax and Omni, dated September 10, 1999, wherein Omni was appointed the exclusive distributor for the product Veromax. In the litigation, Veromax
International seeks to terminate the Distribution Agreement and seeks damages for breach of contract, including the Company's failure to meet minimum purchase commitments. The Company contends that it
is not in breach of the agreement between parties, the distributorship is still valid, and it should continue to sell the product. The Company anticipates filing a cross-complaint against the
plaintiff for the plaintiff's breach of contract and seeking substantial damages. The parties are currently working to resolve the dispute without further litigation. Management intends to vigorously
defend this claim, as necessary. While it is far too early to predict an outcome, if this matter is ultimately found in favor of the plaintiff, it could have a material adverse affect on the Company's
financial position.

In
September and October 2000, agreements were reached with five public relations firms to perform certain services for the Company. The nature of the services is similar, although
each employs

F-28

---

a different venue. The terms of the agreements vary. An aggregate of 205,500 shares will be issued in connection with these agreements.

On
October 23, 2000, the Company entered into Waiver and Amendment No. 4 ("Waiver") to Secured Credit Agreement, amending the Secured Credit Agreement ("Agreement")
dated June 10, 1999 between the Company and First Source Financial, LLP, its secured lender.

The
amendments covered by the Waiver include the following:

| | a. |  | Waiver of the events of default existing as of the date of the Waiver.                                                                                                                                                
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. |  | Revision of the definition of "Borrowing Base" in the Agreement to effectively permit the Company to borrow up to the maximum credit of $7 million extended under the revolving portion of the total credit line.     
| | c. |  | Extension of the term of the Agreement from April 30, 2001 to July 30, 2002.                                                                                                                                          
| | d. |  | Deferral of monthly principal payments called for under the Agreement, as amended, between October 2000 and May 2001, with the total amount so deferred becoming payable on June 15, 2001 in the amount of $1,750,000.
| | e. |  | Granting the Company complete use of the proceeds of the equity offering completed on October 27, 2000 for working capital purposes.                                                                                  
| | f. |  | Charging the Company a fee for the restructuring of the indebtedness of approximately $131,000, payable in six equal monthly installments beginning April 15, 2001.                                                   

On
October 27, 2000, the Company announced it had completed a $3 million private equity financing. This private placement consisted of the sale of 3,000 shares of
Series A Convertible Preferred Stock ("Series A") and warrants to acquire an aggregate of 600,000 shares of the Company's common stock to ten investors ("Holders") for $3,000,000. The Company
used the net proceeds of the offering in the amount of approximately $2,720,000, after certain fees and expenses, for working capital purposes. In connection with this equity financing, the Company
issued warrants for 50,000 shares of the Company's common stock to its investment banker. The warrants are exercisable on the same basis as for the Holders.

The
Series A is convertible into common stock at the lesser of:

| | (i)  |  | 115% of the market price, defined as the average of the two lowest closing bid prices on the principal market for the Company's common stock over the ten trading days preceding the closing, or
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) |  | 80% of the market price, defined as the average of the two lowest closing bid prices over the five trading days preceding conversion, subject to adjustment.                                    

Each
warrant permits the Holder thereof to acquire one share of common stock at any time within five years of the closing for 120% of the Company's common stock's market value,
defined as the average of the two lowest quoted closing bid prices over the five trading days preceding the closing.

F-29

---

The Series A may be redeemed by the Company at any time after closing at a price per share equal to the greater of:

| | (i)  |  | $1,400, plus an Additional Amount per Share, defined as 6% of the face amount of the Series A being redeemed, multiplied by the number of days since the closing, divided by 365 (the "Optional Redemption Price") or,
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) |  | the market price of the Common Stock into which the Series A being redeemed could be converted as of the date of the notice of optional redemption.                                                                   

On
the fourth anniversary of the Issue date, any existing shares of Series A, together with the Additional Amount, must either be converted into Common Stock pursuant to the
conversion formula or redeemed for cash at the Optional Redemption Price.

In
the event any conversion of Series A would result in the issuance of more than 19.9% of the number of shares of common stock outstanding on the date of the closing, the
Series A representing such excess must be redeemed in cash for $1,400.00 per share, plus the Additional Amount.

A
registration statement is required to be filed within 30 days of the closing to cover the common stock underlying the conversion of the Series A ("Conversion Shares")
and the exercise of the warrants, and such indeterminate number of shares of common stock issuable pursuant to the anti-dilution adjustment provisions of the Series A and warrants.
For registration purposes only, the number of Conversion Shares to be registered is calculated based upon an assumed conversion price per share of $.75.

In
the event that the market price for the common stock for any five consecutive trading days is less than $1.00, the Company is obligated to register additional Conversion Shares
assuming a conversion price per share of $.50. The Company is liable for certain delay damages in the event it fails to file the registration statement prior to November 26, 2000; or the
registration statement is not declared effective by the Securities and Exchange Commission prior to January 25, 2001, or the Company fails to issue timely shares of common stock upon conversion
of the Series A or exercise of the warrants.

In
separate agreements, two of the Company's trade creditors agreed to convert a portion of their debt in exchange for common stock of the Company and to accept a substantially
reduced cash payment and/or note for the balance of the obligation of the company. On September 7, 2000, approximately $985,000 of debt had been converted in exchange for approximately 328,300
shares of common stock, or approximately $3.00 per share. Both agreements contain provisions that may require future adjustments to the cash amounts they receive, contingent on their realization upon
disposition of the common stock they received pursuant to their respective agreements.

On
November 7, 2000, the NASDAQ/NMS halted trading in the Company's stock. NASDAQ delisted the Common Stock from trading on November 17, 2000. The Company's common Stock
is currently quoted in the "Pink Sheets," which are published by the National Quotation Bureau.

Some
of the reasons given by NASDAQ include:

| |  |  | the company's delinquency in filing it's Amended Form 10-K for 1999;                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | technical non-conformity with a certain NASDAQ rule related to certain provisions of documents from a private placements recently completed by the Company;
| |  |  | and failure to meet the minimum listing requirements.                                                                                                      

In
March 2000, the Company announced the proposed acquisition of Vitamin Discount Connection, an Internet "e-tailer" and mail order retailer of nutritional and
health-related products.

F-30

---

The Company issued 190,000 shares of Common Stock in exchange for certain assets and the assumption of the seller's liabilities of $115,000. This acquisition was completed on November 16, 2000.

During
the fourth quarter of 2000, the Company entered into four agreements with vendors to convert a portion of the debt due them to common stock of the Company. In total,
approximately 271,500 shares were issued in exchange for approximately $496,000 in debt. The shares were issued to these suppliers at or above the quoted market price on the date of each agreement.

During
the fourth quarter of 2000, approximately 155,500 shares of common stock were issued to five holders for services totaling approximately $211,000.

On
January 19, 2001 a lawsuit was filed in Los Angeles County Superior Court: Unified Western Grocers, Inc. (Plaintiff) v. Omni Nutraceuticals, Inc., Case No. 01 000066. The
complaint seeks recovery of approximately $20,000, including legal fees for amounts which the plaintiff claims are owed for an open account. The Company denies that the amount is due to the plaintiff.
A responsive pleading was filed by the Company on February 14, 2001. At present, Management does not believe that the outcome of this litigation is likely to materially impact the Company.

On
January 23, 2001, the Labor Commissioner of the State of California entered a judgment against the Company in the amount of approximately $42,000 in the action: Richard F.
Lynch v. Omni Nutraceuticals, Inc. Labor Commissioner, State of California, State Case No. 05-19487 ICC. The Company denies any amounts are due Lynch. The Company has filed an appeal,
which required posting a bond in the amount of the judgment, seeking a new trail in the Superior Court. The final outcome of this case is uncertain, but appears unlikely that it will have a material
impact on the Company.

A
judgment was recently entered against the Company for approximately $117,000, plus an undetermined amount for attorney's fees, interest and costs, in a matter entitled: Pacific
Foods of Oregon, Inc. v. Omni Nutraceuticals, Inc., United States District Court, District of Oregon, Case No. CV 00-1014 JO. This case involves the Company's open account with
the plaintiff. The Company has not yet received a copy of either the complaint of the judgment, but recently received a Notice of
Deposition with respect to a Judgment Debtor Examination. It is currently too early to assess the outcome of this matter.

On
February 2, 2001, the Company entered into and simultaneously closed a Purchase Agreement with Vitacost.com, Inc. ("Vitacost"), an on-line marketer of
vitamins and nutritional products, whereby Vitacost acquired substantially all of the operating assets of the Company's combined Internet operations in exchange for 6,800,000 shares of Vitacost common
stock. The agreement contains an optional repurchase right giving the Company, at any time after four years from the closing, the right to demand Vitacost repurchase the stock the Company acquired for
$3,400,000 in cash or, at their option, a 60 month note requiring equal monthly payments of $56,667. The agreement also contains an optional redemption right, giving Vitacost the right to
redeem the stock the Company acquired, at any time up to four years from the closing. If this option is exercised between the closing and the first anniversary thereof, the price is $7,000,000, which
compounds at the rate of 10% for each year up to $9,317,000 on the fourth anniversary of the closing. The stock the Company received represents approximately 19.9% of the total Vitacost common stock
outstanding and, accordingly, the Company will record this investment on the cost basis. As long as the Company continues to hold at least a 10% interest, the Company will have one of the five
available seats on the Vitacost Board of Directors. Additionally, the Company has certain anti-dilution rights in the event Vitacost raises additional equity. The net loss from these
discontinued operations, including amortization of acquisition costs, was approximately $1,133,000 for the year ended December 31, 1999 and is estimated to be approximately $1,085,000
(unaudited) for the nine months ended September 30, 2000, respectively. The estimated loss for the fourth quarter of 2000, up to the measurement date of December 1, 2000, approximates
$307,000. It is currently estimated that there will be a gain on Discontinued Operations, representing

F-31

---

the difference between the appraised value of the Vitacost.com common stock received and the net assets remaining on the Company's books, including intangibles, and approximates $69,000, including
approximately two months of operating losses estimated at $277,000. The Internet operations will be presented as discontinued operations in the December 31, 2000 Form 10-K
and retroactively reflected in the Company's financial statements of the prior periods in the Company's future reporting.

On
February 21, 2001, the Company was advised of a lawsuit:Media Networks, Inc. v. Omni Nutraceuticals, Inc., Los Angeles Superior Court Case No. BC
241503, for amounts due on open account pursuant to an agreement filed December 8, 2000. The complaint seeks a total of approximately $480,000, including interest, attorneys
and collection fees, for which plaintiff has filed a Request for Entry of Default and Judgment. Efforts are in process to have the plaintiff agree to set aside the default if already entered, and to
file a motion to set aside the default if it has been entered. Based on the information currently available, the Company is unable to evaluate the likelihood of an unfavorable outcome.

On
February 21, 2001, the Company received a demand letter from counsel representing the majority of the former owners of Smart Basics, Inc. (dba SmartBasics.com), an Internet
retailer acquired by the Company on May 25, 2000, claiming, among other things, misrepresentations in connection with the transaction in which these individuals exchanged their ownership
interests in Smart Basics, Inc. for common stock of the Company. The demand letter seeks unspecified relief or, in the alternative, rescission of the original transaction. Smart Basics, Inc., together
with the Companies other Internet properties, was sold to Vitacost.com on February 2, 2001.

The
demand letter threatens that a legal action will commence on February 28, 2001, unless substantial progress is made towards resolving this claim. Based on the information
currently available, the Company is unable to determine the likelihood of an unfavorable outcome to this matter.

F-32

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SIGNATURES

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

|Dated: February 22, 2001 |  | OMNI NUTRACEUTICALS, INC.
|------------------------ |  | -------------------------
|                         |  | By:                      

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

|Signature                                 |  | Title                   |  | Date             
|----------------------------------------- |  | ----------------------- |  | -----------------
|                                          |  |                         |  |                  
|/s/KLEE IRWINKlee Irwin                   |  | President & CEO         |  | February 22, 2001
|/s/ANDREW VOLLERO, JR.Andrew Vollero, Jr. |  | Chairman of the Board   |  | February 22, 2001
|/s/TOM AARTSTom Aarts                     |  | Director                |  | February 22, 2001
|/s/REBECCA PEARMANRebecca Pearman         |  | Director                |  | February 22, 2001
|/s/HERM ROSENMANHerm Rosenman             |  | Chief Financial Officer |  | February 22, 2001

F-33

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