Vital Living Inc · 10KSB/A · For 12/31/04

Filed On 6/22/05 1:38pm ET   ·   SEC File 0-33211   ·   Accession Number 1144204-5-19606

Amendment to Annual Report -- Small Business   ·   Form 10-KSB
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 1: 10KSB/A     Amendment to Annual Report -- Small Business          65    405K 
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10KSB/A   ·   Amendment to Annual Report -- Small Business
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

 Amendment No. 2
FORM 10-KSBA
ANNUAL REPORT PURCHASE TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934

 For the Fiscal Year Ended December 31, 2004

Commission file number 000-33211

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

VITAL LIVING, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

          Nevada                         3652                 88-0485596
---------------------------------  ---------------------------- ----------------
(State or Other Jurisdiction Of    (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)  

5080 North 40th Street, Suite 105, Phoenix, Arizona            85018-2147     
------------------------------------------------------------------------------  
(Address of Principal Executive Offices)                       (Zip Code)       

  (602) 389-8600
  ----------------------------------------------------
  (Registrant's telephone number, including area code)

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

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

  Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12   
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90  
days. Yes |X|  No |_|                                                           

    Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be      
contained, to the best of registrant's knowledge, in definitive proxy or        
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes |X| No |_|                            

State issuer's revenue for the most recent fiscal year: $4,161,000. 

As of March 17, 2005, the aggregate market value of the voting and  
non-voting common stock held by non-affiliates of the issuer (based on the      
closing sales price as reported by the OTC Bulletin Board) was $10,552,000      
assuming all officers and directors are deemed affiliates for this purpose).    

 As of March 17, 2005, the issuer had 101,068,713 shares of its common
stock, $0.001 par value, outstanding.                                           

     Transitional Small Business Disclosure Format (check one): Yes |X| No |_|

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VITAL LIVING, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2004
 TABLE OF CONTENTS
PART I

ITEM 1.  DESCRIPTION OF BUSINESS.............................................. 3
ITEM 2.  DESCRIPTION OF PROPERTY..............................................16
ITEM 3.  LEGAL PROCEEDINGS....................................................16
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................16

   PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS                  
             AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.........16
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...........17
ITEM 7.  FINANCIAL STATEMENTS.................................................24
ITEM 8A. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING            
             AND FINANCIAL DISCLOSURE.........................................24
ITEM 8B. OTHER INFORMATION....................................................24

  PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................25
ITEM 10. EXECUTIVE COMPENSATION...............................................25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                    
             MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................25
         SIGNATURES...........................................................25
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES                                
         INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...........................32

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

Statement Regarding Forward-Looking Statements

The statements contained in this report on Form 10-KSB that are not purely      
historical are forward-looking statements within the meaning of applicable      
securities laws. Forward-looking statements include statements regarding our    
"expectations," "anticipation," "intentions," "beliefs," or "strategies"        
regarding the future. Forward-looking statements also include statements        
regarding revenue, margins, expenses, and earnings analysis for fiscal 2005 and 
thereafter; future products or product development; our product development     
strategies; potential acquisitions or strategic alliances; the success of       
particular product or marketing programs; the amounts of revenue generated as a 
result of sales to significant customers; and liquidity and anticipated cash    
needs and availability. All forward-looking statements included in this report  
are based on information available to us as of the filing date of this report,  
and we assume no obligation to update any such forward-looking statements. Our  
actual results could differ materially from the forward-looking statements.     
Among the factors that could cause actual results to differ materially are the  
factors discussed in Item 1, "Business - Risk Factors."                         

Note: Amendment No. 2 is being filed to amend the financial statements included 
in this report as well as the related material in the risk factor titled "We    
have substantial indebtedness and interest obligations that we must satisfy when
due" and both the net loss from continuing operations section and the second    
paragraph of the Liquidity and Capital Resources section of the Management      
Discussion and Analysis.                                                        

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 PART I.

Item 1. Description of Business                                                 

Overview

Our Company                                                                     

      We develop and market nutritional fruit and vegetable supplements, protein
supplements, and nutraceuticals products. Through a licensing agreement, we also
have certain rights for the use of a pharmaceutical delivery system known as    
"GEOMATRIX." Our principal products currently are Greensfirst(R), Dream         
Protein(R), and Complete Essentials(R). We distribute our products primarily in 
the following three distribution channels:                                      

o     healthcare practitioners, including physicians, condition     
           specialists, chiropractors, nutritionists, and trainers who promote
or prescribe our products;                              

o     regional nutritional distributors that market our proprietary 
  products and patient selling system directly to healthcare
          practitioners who utilize our proprietary selling system to market
our products directly to consumers; and                 

o     directly to consumers through call centers and websites.      

     The following table sets forth our current target conditions,
products, and distribution channels:                                            

------------------------------------------------------------------------------  
Target Conditions        Products Offered             Distribution Channels     
------------------------------------------------------------------------------  
                       GreensFIRST(R)               Healthcare practitioners
General Health           Dream Protein(R)             Regional distributors     
              Complete Essentials(R)       Consumer direct
------------------------------------------------------------------------------  
Cardiovascular Health    Essentum(R)                  Consumer Direct           
------------------------------------------------------------------------------  

     Nutritional supplements represent a convenient and cost-effective way for
an individual to obtain the nutritional benefits of whole foods. Nutritional    
supplements are formulated from whole foods and are intended to provide for     
improved health, reduced risk of diseases, and the delay onset of age related   
indicators while resulting in little added caloric and fat intake. Nutritional  
supplements come in powder, capsule, cracker, and other forms.                  

     Nutraceuticals, consisting of vitamins, minerals, herbs, and supplements,
are products that are isolated or purified from foods and generally sold in     
medicinal forms not usually associated with foods, including tablets, capsules, 
and drops. Nutraceuticals are intended to have physiological benefits or have   
the ability to reduce the risk of chronic disease beyond basic nutritional      
products. We develop and test our nutraceuticals in collaboration with leading  
medical experts in the nutraceuticals field. We have designed our products to be
incorporated by healthcare practitioners into standard patient routines in which
healthcare practitioners recommend and sell our nutritional supplements and     
nutraceuticals products to their patients. Use of vitamins, minerals, herbs, and
nutritional supplements continues to rise as consumers seek nutritional products
to improve general health, increase longevity, and enhance the overall quality  
of life.                                                                        

     We were incorporated in the state of Nevada on January 22, 2001 under the
name Nutritional Systems, Inc. We acquired substantially all of the assets of   
Vital Living, Inc. effective as of May 7, 2001 and changed our name to Vital    
Living, Inc. on May 20, 2001. On August 16, 2001, we merged with VCM Technology 
Limited, a company reporting under the Securities and Exchange Act of 1934.     
Following the merger, we continued as the surviving corporation and commenced   
reporting under the Securities and Exchange Act of 1934.                        

   Our executive offices are located at 5080 North 40th Street, Suite 105,
Phoenix, Arizona 85018, and our telephone number is (602) 952-9909. Our website 
is located at www.vitalliving.com.                                              

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Strategy                                                                        

   Our goal is to become a major participant in the nutritional supplement
and nutraceutical markets. Key elements of our strategy to achieve this goal    
include the following:                                                          

o     capitalize on the growing consumer interest in the use of     
            nutritional supplements and nutraceuticals to complement traditional
health care routines,                                   

o     develop products that appeal to health care professionals and 
consumers,                                              

 o     enhance our distribution channels and the participants in those
channels, and                                           

    o     pursue strategic acquisitions in the highly fragmented nutritional
   supplement and nutraceuticals markets to expand our product
offerings, distribution channels, and geographic reach. 

Business

Products                                                                        

Our current principal products are GreensFirst(R), Dream Protein(R),
Complete Essentials(R) and Essentum(R).                                         

GreensFIRST(R) is a highly concentrated formulation of fruits and   
vegetables with natural, organic, whole foods and extracts, produced in a powder
for mixing with a variety of liquids. GreensFirst(R) supplies natural vitamins, 
minerals, plant enzymes, antioxidants, phytonutrients, and symbiotic intestinal 
flora designed to provide for more optimal energy metabolism, fat burning,      
digestion, detoxification, immunity, repair, recovery, rejuvenation, and vital  
longevity. GreensFIRST(R) is currently distributed through more than 2,500      
healthcare practitioners throughout the United States.                          

      Dream Protein(R) is a whey protein highly concentrated formula, consisting
of proprietary hormone free, ultra-lowtemp(TM) whey protein isolate. We start   
with hormone free whey from New Zealand cows, which are "meadow fed" and not    
given any rBGH or BST Hormones. Dream Protein is also made with an Ultra-Low    
Temp(TM) process in which the protein is not denatured (damaged) from an        
extensive heat treatment.                                                       

    Complete Essentials(R) is a ultra pure omega 369 dietary supplement that
contains essential fatty acids derived from organic flaxseed oil, borage seed   
oil, and deep sea cold water fish oil. Because the human body cannot manufacture
essential fatty acids on its own, our unique dietary supplement is a blend of   
healthy oils designed to satisfy an individual's need for essential fatty acids.

Essentum(R) and EssentumNP(R) (collectively "Essentum") are our     
proprietary, patent-pending supplements designed by cardiologists to meet       
specific nutritional needs for cardiovascular health. Cardiovascular disease    
affects nearly 60 million Americans and is one of the leading causes of death in
the United States. The American Heart Association estimates that 100 million    
Americans could benefit from improved dietary and exercise regimens to reduce   
their risk of heart attack. The nutrients in Essentum are designed to support   
healthy levels of cholesterol, triglycerides, and homocysteine, as well as to   
provide necessary vitamins and minerals. Because physicians formulated it,      
Essentum will not interact with, or reduce the effectiveness of, typical        
cardio-related prescription medications.                                        

Sales and Marketing                                                             

We market our products through the following distribution channels: 

o     healthcare practitioners, which includes physicians, condition
            specialists, chiropractors, nutritionists, and trainers, who promote
or prescribe our products.                              

o     regional nutritional distributors that market our proprietary 
  products and patient selling system directly to healthcare
          practitioners who utilize our proprietary selling system to market
directly to consumers.                                  

o     directly to consumers through call centers and websites.      

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     We distribute a majority of our products, including Greensfirst(R), Dream
Protein(R), and Complete Essentials(R), primarily through healthcare            
practitioners. We currently sell our Essentum(R) product directly to consumers  
through call centers and other means. During 2004 and 2003, our Greensfirst(R)  
product was primarily responsible for a significant portion of our revenue.     
During 2004 and 2003, Essentum(R) represented an immaterial portion of our      
revenue.                                                                        

      During the third quarter of 2004, we entered a joint venture with Wellness
Watchers Systems providing for the development and marketing of the Healthy     
Living Kit. The Healthy Living Kit creates a Wellness Smoothie, which is a meal 
replacement designed for all types of metabolisms and blood types. It consists  
of one scoop of GreensFirst(R) and one scoop of Dream Protein(R) in six ounces  
of water along with one Complete Essential(R) Ultra Pure Omega 3-6-9 capsule.   
Each Healthy Living Kit Wellness Smoothie meal replacement is a balanced,       
low-calorie, low-glycemic, hypoallergenic, high-antioxidant, nutrient-dense food
source. It is created from a combination of potent organic, hormone and         
pesticide free all-natural foods. The Health Living Kit along with the lifestyle
program were created to assist healthcare practitioners in dealing with chronic 
diseases, such as cancer, heart disease, and diabetes.                          

 We continue to explore other possibilities to distribute our products
nationally and internationally. We may evaluate the regulatory and distribution 
structures in Europe, Asia, and other international markets to determine the    
best way to distribute our products in those markets.                           

Research and Development                                                        

  Our research and development efforts focus on developing, testing, and
substantiating the efficacy of new products in response to what we perceive is a
need in the healthcare practitioner distribution channel to complement existing 
product lines currently available to our customers. Additionally, we continually
reformulate existing products in response to literature and market demand.      

   We believe that flexibility and innovation with respect to new products
are crucial factors in remaining competitive in the nutritional supplements and 
nutraceuticals markets and being able to produce the most effective products,   
which healthcare practitioners will be willing to prescribe for their patients  
for specific conditions. By monitoring market trends and avoiding short-lived   
"fad" products, we attempt to anticipate healthcare practitioners demand for    
certain product categories. Maintaining flexibility is a key to enabling us to  
capitalize on emerging sciences relative to nutritional products as well as     
shifts in consumer needs.                                                       

     Research and development costs amounted to approximately $1.1 million and
$400,000 for 2004 and 2003, respectively. Research and development costs        
incurred from our formation until December 31, 2004 were $2.1 million.          

Manufacturing                                                                   

We utilize independent contract manufacturers to produce all of our 
products. Competitors that manufacture their own products may have an advantage 
over us with respect to pricing, availability of products, and other areas      
through their control of manufacturing processes. During the first quarter of   
2005, we entered into a one-year contractual arrangement with one of our primary
manufacturers. The potential loss of our relationships with our manufacturers or
their inability to conduct their manufacturing services for us as anticipated in
terms of cost, quality and product delivery could adversely affect our ability  
to provide cost-effective, high-quality, and timely product delivery to our     
customers. We depend to a great extent on our manufacturers for the safety,     
purity, and potency of our products.                                            

Raw Materials and Quality Control                                               

  The principal raw materials used in the manufacture of our nutritional
supplements and nutraceuticals are natural ingredients purchased from           
manufacturers and other suppliers in the United States, with certain materials  
imported from other countries. We purchase these raw materials directly or      
through our manufactures and other suppliers. Therefore, with our suppliers and 
manufacturers, we maintain the responsibility for documenting all certificates  
of analysis for the materials in accordance with good manufacturing practices   
("GMP") and guidelines. All raw materials are sent directly to our manufacturers
for milling and other fabrication. We do not have contracts with suppliers of   
raw materials used in the production of our products. Historically, we have not 
experienced difficulties obtaining raw ingredients for our products on customary
terms. We believe that the materials used in our products are readily available 
from numerous sources and that the loss of any of our current suppliers would   
not adversely affect our operations. There is no assurance, however, that       
suppliers will continue to provide the raw materials needed by us in the        
quantities required or on favorable terms. Because we do not control the source 
of these raw materials, we also are subject to delays caused by interruptions in
production of materials based on conditions outside our control. Any significant
delay in, or disruption of, the supply of raw materials could have any of the   
following results:                                                              

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    If supply shortages were to occur and we were unable to meet the demands
of our customers, even if for only a short time, the result could be a long-term
decrease in the anticipated sales of our products. We cannot assure you that, on
a long-term basis, an adequate supply of ingredients will be available to us on 
commercially reasonable terms in order for us to meet the supply obligations to 
our customers.                                                                  

Finished products are produced by our manufacturers, which maintain 
quality control laboratories and testing facilities. Our manufactured products  
are packaged by and protected by a tamper-resistant outer safety seal. All of   
this is done by our manufacturers according to current GMPGovernment Regulation 

Acquisitions and Strategic Initiatives                                          

      During 2004 and 2003, we completed the acquisition of three companies with
complimentary business or products ranging from start-ups to businesses with    
revenue up to $2.5 million per year. These acquisitions were intended to shift  
our business toward established, higher margin products or to expand into new   
product lines. These acquisitions also increased our geographic presence with   
locations through various portions of the United States. During 2004, we        
discontinued the operations of both MAF BioNutritional, LLC, which was acquired 
during 2002, and Christophers's Original Formulas, Inc, which was acquired      
during 2003. See Note 9 of the Audited Financial Statements for further         
discussion related to discontinued operations. The following information        
provides a summary of our acquisitions:                                         

   E-Nutraceuticals, Inc. ("ENI"). On August 20, 2003, we acquired ENI for
net consideration of $41.3 million, consisting of 30.5 million shares of common 
stock. ENI had developed safe and effective alternatives to prescription        
medications for non-life threatening chronic ailments, such as obesity and      
depression. In addition, through a collaborative partnership with SkyePharma,   
PLC, or Skye, a UK pharmaceuticals company and a major shareholder of our       
company, we acquired certain rights to a licensed FDA-approved, proprietary     
delivery systems. Under an amended Development and License Agreement, we        
acquired exclusive rights to Skye's drug delivery technology, GEOMATRIX(R), and 
marketing and royalty rights to pharmaceutical sales using GEOMATRIX(R) in the  
Peoples Republic of China, Taiwan, and Hong Kong. ENI did not generate any      
material revenue during both 2004 and 2003.                                     

     Doctors For Nutrition, Inc. ("DFN"). On October 14, 2003, we acquired DFN
for consideration of $2.7 million, consisting of 3.1 million shares of common   
stock. DFN's product line includes GreensFIRST(R), a highly concentrated        
formulation of fruits and vegetables. One serving of the product has the        
antioxidant power of over 10 servings of fruits and vegetables. Mixed with      
water, GreensFIRST(R) contains certified organic fruits, vegetables, and barley 
grass, which are first juiced and then spray-dried at low temperature, leaving  
all the important nutrients and live enzymes intact. Benefits of usage include  
increased energy, improved digestion, and enhanced immune response. DFN         
currently distributes GreensFIRST(R) through more than 2,500 practitioner       
offices throughout the United States. DFN generated annualized pro forma        
revenues of approximately $3.8 million and $1.6 million during the years ended  
December 31, 2004 and 2003, respectively.                                       

      Wellness Watchers Systems, LLC. On August 17, 2004, we consummated a joint
venture with Wellness Watchers International, Inc., or WWI, and together formed 
Wellness Watchers Systems, LLC, or WWS. We paid WWI $805,000 for its 50%        
interest in WWS. The purchase price consisted of 3.0 million shares of our      
common stock along with a $25,000 cash payment. We and WWI originally owned 50% 
of WWS. The operating agreement gave us overall operating responsibility. WWS   
manufactures a proprietary brand of dietary protein powder called Dream         
Protein(R), which is directly marketed to the health practitioners together with
our GreensFIRST(R) product. WWS plans to introduce complementary products that  
will be marketed as part of WWS' Healthy Living Program(R). Part of WWI's       
contribution to WWS was the exclusive licensing of certain products, client     
lists and marketing                                                             

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strategies, which included Dream Protein(R). WWS has developed a unique         
marketing strategy that channels products directly to health practitioners.     
Prior to forming WWS, WWI had no prior operating history. During 2004, WWS had  
total revenue of $.4 million During February 2005, we acquired 100% interest in 
WWS by issuing an additional 1.0 million shares of our stock. In conjunction    
with our acquisition of the remainder of WWS and certain other marketing and    
operation strategic productivity decisions, during the first quarter of 2005, we
have consolidated the operations of WWS into DFN.                               

      We plan to continue our acquisition strategy in the future. In particular,
we intend to focus on candidates that have strong relationships with key vendors
or have established complimentary distribution channels or customers. We believe
that a number of factors will facilitate our acquisition strategy, including the
following:                                                                      

     o     the highly fragmented composition of the nutritional supplement and
nutraceuticals markets;                                 

o     our status as a public corporation;                           

     o     a decentralized management strategy, which facilitates the acquired
         company's management remaining involved in operations should they
desire to do so; and                                    

      o     the ability of our management to identify acquisition opportunities.

Trademarks and Patents                                                          

    We own numerous trademarks registered with the U.S. Patent and Trademark
Office and with agencies in certain other major jurisdictions of the world. Our 
trademarks include Vital Living(R), Vital Living - The Physician Nutraceutical  
Company(R) (plus a logo), Essentum(R), Essentum For Cardiovascular Health(R)    
(plus a logo), GreensFirst(R), Dream Protein(R), and Complete Essentials(R).    

     Federally registered trademarks have a perpetual life as long as they are
renewed on a timely basis and used properly as trademarks, subject to the rights
of third parties to seek cancellation of the marks. We believe that our         
registered and unregistered trademarks, patents, and other proprietary rights   
are valuable assets and that they have significant value in the marketing of our
products. Accordingly, we intend to vigorously protect our intellectual property
against infringement.                                                           

Competition                                                                     

  Our competitors vary by the nature of the distribution channel. In the
healthcare practitioner and regional nutritional distributor channel, we compete
with a number of companies selling whole foods and nutritional supplements,     
including Douglas Labs, Integration Therapeutics, Phyto Pharmacia, Metagenics   
Standard Process, Allergy Research, and Enzymatic Therapy.                      

Many of our competitors are substantially larger than us and have   
significantly greater financial, technical, marketing, and other resources. We  
compete primarily based on our ability to be first to market, and our           
distribution channels through healthcare practitioners who desire to have a     
nutritional line of products to supplement their practices.                     

Governmental Regulation                                                         

The formulation, manufacturing, packaging, labeling, advertising,   
distribution, and sale (hereafter, collectively "sale" or "sold") of dietary and
nutritional supplements, such as those sold by us, are subject to regulation by 
one or more federal agencies, principally the Food and Drug Administration, or  
FDA, the Federal Trade Commission, or FTC, and to a lesser extent the Consumer  
Product Safety Commission and United States Department of Agriculture. Our      
activities are also regulated by various governmental agencies for the states   
and localities in which our products are sold, as well as by governmental       
agencies in certain countries outside the United States. Among other matters,   
regulation by the FDA and FTC covers product safety and claims made with respect
to a product's ability to provide health-related benefits.                      

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     Federal agencies, primarily the FDA and FTC, have a variety of procedures
and enforcement remedies available to them, including the following:            

o     initiating investigations,                                    

o     issuing warning letters and cease and desist orders,          

o     requiring corrective labeling or advertising,                 

    o     requiring consumer redress, such as requiring that a company offer
to repurchase products previously sold to consumers,    

o     seeking injunctive relief or product seizures,                

o     imposing civil penalties, or                                  

o     commencing civil action and/or criminal prosecution.          

     In addition, certain state agencies have similar authority. These federal
and state agencies have in the past used these remedies in regulating           
participants in the dietary supplements industry, including the imposition by   
federal agencies of civil penalties in the millions of dollars against industry 
participants. We cannot assure you that the regulatory environment in which we  
operate will not change or that such regulatory environment, or any specific    
action taken against us, will not result in a material adverse effect on our    
operations. In addition, increased sales of, and publicity about, dietary       
supplements may result in increased regulatory scrutiny of the dietary          
supplements industry.                                                           

     The Dietary Supplement Health and Education Act, or DSHEA, was enacted in
1994, amending the Federal Food, Drug, and Cosmetic Act (FFD&CA). We believe the
DSHEA is generally favorable to consumers and to the dietary supplement         
industry. DSHEA establishes a statutory class of "dietary supplements," which   
includes vitamins, minerals, herbs, amino acids, and other dietary ingredients  
for human use to supplement the diet. Dietary ingredients on the market as of   
October 15, 1994 do not require the submission by the manufacturer or           
distributor to the FDA of evidence of a history of use or other evidence of     
safety establishing that the ingredient will reasonably be expected to be safe, 
but a dietary ingredient which was not on the market as of October 15, 1994 may 
need to be the subject of such a submission to FDA at least 75 days before      
marketing. Among other things, the DSHEA prevents the FDA from regulating       
dietary ingredients in dietary supplements as "food additives" and allows the   
use of statements of nutritional support on product labels. The FDA has issued  
proposed and final regulations in this area and indicates that further guidance 
and regulations are forthcoming. We cannot assure you that the FDA will accept  
the evidence of safety for any new dietary ingredient that we may decide to use 
and the FDA's refusal to accept such evidence could result in regulation of such
dietary ingredients as food additives, requiring FDA pre-approval based on newly
conducted, costly safety testing. In addition, while the DSHEA authorizes the   
use of statements of nutritional support or "structure/function claims in the   
labels and labeling of dietary supplements, the FDA is required to be notified  
of such statements. We cannot assure you that the FDA will not consider         
particular labeling statements used by us to be drug claims rather than         
acceptable statements of nutritional support, thereby necessitating approval of 
a costly new drug application, or re-labeling to delete such statements. We do  
believe, however, that we substantially comply with the regulations promulgated 
under DSHEA with regard to labels and labeling of our dietary supplements.      

In November 1998, the FTC announced new advertising guidelines      
specifically for the dietary supplement industry, entitled "Dietary Supplements:
An Advertising Guide for Industry." These guidelines reiterate many of the      
policies the FTC has previously announced over the years, including requirements
for substantiation of claims made in advertising about dietary supplements. We  
make every effort to ensure we are in compliance with FTC advertising standards.

The FFD&CA also authorizes the FDA to promulgate good manufacturing 
practices (GMP) standards for dietary supplements, which require special quality
controls for the manufacture, packaging, storage, and distribution of           
supplements. The final version of FDA's GMP regulation has not been published.  
We believe however, that we will be in substantial compliance with the          
regulations once they are issued. We contractually require that any independent 
third party manufacturers doing business with us comply with all existing, or to
be promulgated, regulations. The FFD&CA further authorizes the FDA to promulgate
regulations governing the labeling of dietary supplements, including claims for 
supplements pursuant to recommendations made by the Presidential Commission on  
Dietary Supplement Labels. These rules, which were issued on or after September 
23, 1997, entail specific requirements relative to the labeling of our dietary  
supplements. The rules also require additional record keeping and claim         
substantiation, reformulation, or discontinuance of certain products, which     
would be a material expense to us.                                              

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The sale of our products in countries outside the United States is  
regulated by the governments of those countries. We are not currently marketing 
our products outside of the United States except in Canada, China, Mexico, and  
the United Kingdom. Our plans to commence or and sales in those countries may be
prevented or delayed by such regulation. While compliance with such regulation  
will generally be undertaken by international distributors, we may assist with  
such compliance and in certain cases may be liable if a distributor fails to    
comply.                                                                         

We cannot predict the nature of any future laws, regulations,       
interpretations, or applications, nor can we determine what effect such         
additional regulation, when and if it occurs, would have on our business in the 
future. Such additional regulation could require, however, any or all of the    
actions listed below, which could have a material adverse effect on our         
operations:                                                                     

o     the reformulation of certain products to meet new standards,  

o     the recall or discontinuance of certain products,             

o     additional record keeping,                                    

o     expanded documentation of the properties of certain products, 

o     revised, expanded or different labeling, or                   

o     additional scientific substantiation.                         

Employees                                                                       

As of March 16, 2005, we had eight full-time employees. Of these    
employees, two were engaged in sales and marketing, one was engaged in          
production or operational activities, and five were engaged in finance,         
administration, or management functions. None of our employees is subject to any
collective bargaining agreements with us, and we believe our relationship with  
our employees is satisfactory. Our future success depends, in part, on our      
ability to attract, retain, and motivate highly qualified personnel.            

Risk Factors

You should consider carefully the following risk factors and all other          
information contained herein in evaluating our company and our business. Our    
common stock involves a high degree of risk. If any of the following risks      
actually occur, our business, financial condition or operating results will     
suffer. Moreover, the price of our common stock could decline and you could lose
all of your investment.                                                         

Our significant losses and negative cash flow raise questions about our ability 
to continue as a going concern.                                                 

      We have only a limited operating history. Our prospects must be considered
in light of the risks, expenses, and difficulties frequently encountered in     
establishing a business in the nutraceuticals industry, which is characterized  
by a large number of market participants, intense competition, and a high       
failure rate. We incurred net losses of approximately $28.6 million and $30.2   
million for the years ended December 31, 2004 and 2003, respectively. We cannot 
assure you that we will be able to achieve or sustain revenue growth,           
profitability, or positive cash flow on either a quarterly or annual basis or   
that profitability, if achieved, will be sustained. If we are unable to achieve 
or sustain profitability, we may not be financially viable in the future and may
have to curtail, suspend, or cease operations. Because of our recurring         
operating losses and negative cash flow, the report of our independent auditor  
on our financial statements for the fiscal years ended December 31, 2004 and    
2003 contain an explanatory paragraph stating that the independent auditor has  
substantial doubt about our ability to continue as a going concern.             

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If we are unable to generate cash from operations, we may need to raise         
additional funds in the near future.                                            

 We had working capital deficits of $2.8 million at December 31, 2004.
Historically, we have been dependent on equity or debt financings to fund our   
operations and working capital needs. We completed offerings of $4.6 million    
aggregate principal in Senior Secured Convertible Notes, which includes the     
conversion of $1.6 million in Bridge Note principal and accrued interest, during
the fourth quarter of 2003; an offering of 510,000 shares of our common stock   
raising gross proceeds of $510,000 in the first quarter of 2004; an offering of 
3.9 million shares of our common stock and 15.6 million warrants, which resulted
in gross proceeds of $975,000 in June and July of 2004; and a special warrant   
offering, which began in November 2004 and concluded in January 2005, that      
resulting in the issuance of 7.1 million shares of our common stock and issuance
of 6.4 million new warrants that generated $717,000 in gross proceeds. Our      
average net cash expenditures (cash generated from continuing operations less   
expenses paid) during 2004 was approximately $260,000 per month and we expect to
reduce our net cash expenditures to approximately $110,000 per month in the     
first quarter of 2005. However, net cash expenditures may vary greatly on a     
monthly basis and this average is not necessarily indicative of future amounts. 
We may need to raise additional capital in the very near future to fund our     
operations and are currently examining various sources of additional financings.
However, because our Senior Secured Convertible Notes are secured by            
substantially all of our assets, we may have difficulty securing additional debt
financing on terms favorable to us or at all. Any equity financing that we      
obtain may be highly dilutive to existing stockholders. Our inability to        
generate cash flow from operations or to find sources of funding would have an  
adverse impact on our ability to maintain our operations.                       

We have substantial indebtedness and interest obligations that we must satisfy  
when due.                                                                       

  We have substantial indebtedness and interest obligations that we must
satisfy in accordance with their terms. In connection with the MAF acquisition  
completed during 2002, we have a potential of approximately $401,000 of debt,   
which is included in our current liabilities. During the third quarter of 2004, 
we entered into an agreement to sell all property, rights, and assets related to
our Boulder Bar product line. The purchaser agreed to assume the debt. However, 
the purchaser has not complied with the terms of the agreement, and we are      
currently seeking legal remedies. In addition, we have outstanding $4.2 million 
aggregate principal amount of Senior Secured Convertible Notes, which are       
secured by substantially all of our assets. In October 2004, we obtained        
majority consent of the holders of the notes to pay the 12% annual interest     
requirement in either cash or shares of our common stock. We cannot assure you  
that our operations will generate funds sufficient to repay these debt          
obligations as they come due. Our failure to repay any of our indebtedness and  
make required interest payments as required by these debt obligations could     
result in an event of default. In this event, the holders of our debt could     
force us to sell our assets in order to repay obligations owing to them.        

We may record future losses because continuing adverse market conditions may    
require us to record an impairment of goodwill and other intangibles.           

     We had approximately $3.2 million of goodwill as of December 31, 2004 and
approximately $20.8 million of net intangible assets at December 31, 2004       
cumulatively accounting for approximately 92% of our total assets at December   
31, 2004. We adopted Statement of Financial Accounting Standards No. 142,       
"Goodwill and Other Intangible Assets," and are required to analyze our goodwill
and other intangible assets for impairment issues on an annual basis or when    
events occur that would indicate that an intangible asset impairment had        
occurred. The value of our goodwill and other intangible assets is exposed to   
future adverse changes if we experience declines in operating results or        
experience significant negative industry or economic trends or if future        
performance is below historical trends. We periodically review goodwill and     
intangible assets for impairment using the guidance of applicable accounting    
literature. We are subject to financial statement risk to the extent that the   
goodwill and other intangible assets become impaired, and any impairment losses 
related to goodwill and other intangible assets may result in a non-cash charge 
to earnings.                                                                    

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We may lose our exclusive licensing rights to the GEOMATRIX technology if       
SkyePharma terminates the Development and License Agreement which we are a party
to.                                                                             

   We are party to a Development and License Agreement with SkyePharma PLC
under which we have certain exclusive licensing rights to the GEOMATRIX         
technology. We are in dispute with SkyePharma over the terms of the agreement   
and have failed to make payments, which total $750,000 called for under the     
agreement. On April 6, 2004, we received a demand letter from SkyePharma related
to the past due payments under the agreement, which triggered a 30-day          
negotiation period under the agreement. This 30-day period is required before   
initiating formal collection proceedings. We are currently in discussions to    
modify both the terms and payment schedules under the agreement. We cannot      
assure you that these negotiations will be successful and that we will reach a  
satisfactory resolution of this matter. In the event a satisfactory resolution  
cannot be reached and SkyePharma exercises its rights of termination under the  
agreement, we may lose substantial and possibly all rights gained under this and
related contracts with SkyePharma.                                              

Any acquisitions that we undertake could be difficult to integrate, disrupt our 
business, dilute stockholder value, and harm our operating results.             

    We plan to continue to review opportunities to buy other businesses that
would expand our product offerings, enhance our product distribution, expand the
geographical breadth of our markets, or otherwise offer other growth            
opportunities. In the past two years, we have acquired three businesses, and we 
may acquire additional businesses in the future. If we make any future          
acquisitions, we may issue stock that would dilute existing stockholders'       
percentage ownership, incur substantial debt, or assume contingent liabilities. 
Our recent acquisitions, as well as potential future potential acquisitions,    
involve numerous risks, including the following:                                

     o     problems integrating the purchased products, operations, personnel,
distribution channels, and systems with our own;        

    o     unanticipated costs or undisclosed liabilities associated with the
acquisition;                                            

   o     diversion of management's attention from our existing businesses;

    o     potential compliance issues with regard to acquired companies that
did not have adequate internal controls;                

   o     adverse effects on existing business relationships with suppliers
distributors, and customers;                            

o     risks associated with entering markets in which we have no or 
limited prior experience; and                           

o     potential loss of key employees and customers of purchased    
organizations.                                          

For example, certain of our acquired companies have continued to incur losses   
from operations or have required significant cost outlays and caused increases  
in our selling, general, and administrative expenses.                           

   Our acquisition strategy entails reviewing and potentially reorganizing
acquired business operations, corporate infrastructure and systems, and         
financial controls. Unforeseen expenses, difficulties, and delays frequently    
encountered in connection with expansion through acquisitions could inhibit our 
growth and negatively impact our profitability. We may be unable to identify    
suitable acquisition candidates or to complete the acquisitions of candidates   
that we identify. Increased competition for acquisition candidates may increase 
purchase prices for acquisitions to levels beyond our financial capability or to
levels that would not result in the returns required by our acquisition         
criteria. In addition, we may encounter difficulties in integrating the         
operations of acquired businesses with our own operations or managing acquired  
businesses profitably without substantial costs, delays, or other operational or
financial problems.                                                             

     We may issue common or preferred stock and incur substantial indebtedness
in making future acquisitions. The size, timing, and integration of any future  
acquisitions may cause substantial fluctuations in operating results from       
quarter to quarter. Consequently, operating results for any quarter may not be  
indicative of the results that may be achieved for any subsequent quarter or for
a full fiscal year. These fluctuations could adversely affect the market price  
of our common stock.                                                            

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      Our ability to grow through acquisitions will depend upon various factors,
including the following:                                                        

   o     the availability of suitable acquisition candidates at attractive
purchase prices,                                        

o     the ability to compete effectively for available acquisition  
opportunities, and                                      

    o     the availability of funds or common stock with a sufficient market
price to complete the acquisitions.                     

      As a part of our acquisition strategy, we frequently engage in discussions
with various companies regarding their potential acquisition by us. In          
connection with these discussions, we and each potential acquisition candidate  
exchange confidential operational and financial information, conduct due        
diligence inquiries, and consider the structure, terms, and conditions of the   
potential acquisition. In certain cases, the prospective acquisition candidate  
agrees not to discuss a potential acquisition with any other party for a        
specific period of time, grants us an option to purchase the prospective        
business for a designated price during a specific time, and agrees to take other
actions designed to enhance the possibility of the acquisition, such as         
preparing audited financial information. Potential acquisition discussions      
frequently take place over a long period of time and involve difficult business 
integration and other issues, including in some cases, management succession and
related matters. As a result of these and other factors, a number of potential  
acquisitions that from time to time appear likely to occur do not result in     
binding legal agreements and are not consummated.                               

We rely on others for our production, and any interruptions of these            
arrangements could disrupt our ability to fill our customers' orders.           

 We outsource through contract manufacturers for all of our production
requirements. Competitors that manufacture their own products may have an       
advantage over us with respect to pricing, availability of products, and other  
areas through their control of the manufacturing processes. Any increase in     
labor, equipment, or other manufacturing costs could adversely affect our cost  
of sales. Qualifying new manufacturers is time-consuming and might result in    
unforeseen manufacturing and operations problems. The loss of our relationships 
with our manufacturers or their inability to conduct their manufacturing        
services for us as anticipated in terms of cost, quality, and timeliness could  
adversely affect our ability to fill customer orders in accordance with required
delivery, quality, and performance requirements. If this were to occur, the     
resulting decline in revenue would harm our business.                           

We depend on third parties to maintain satisfactory manufacturing and delivery  
schedules, and their inability to do so could increase our costs, disrupt our   
supply chain, and result in our inability to deliver our products, which would  
adversely affect our results of operations.                                     

      We depend on our manufacturers to maintain high levels of productivity and
satisfactory delivery schedules. Although we a have long-term contract with one 
of our manufacturers that does not guarantee adequate production capacity,      
prices, lead times, or delivery schedules. Our manufacturers serve many other   
customers, a number of which have greater production requirements than we do. As
a result, our manufacturers could determine to prioritize production capacity   
for other customers or reduce or eliminate deliveries to us on short notice. At 
times, we have experienced lower than anticipated manufacturing turnarounds and 
lengthening of delivery schedules. We may encounter manufacturing delays and    
longer delivery schedules in commencing volume production of our new products.  
Any of these problems could result in our inability to deliver our products in a
timely manner and adversely affect our operating results. We depend to a great  
extent on our manufacturers for the safety, purity, and potency of our products.

We depend on a limited number of wholesale distributors to sell a significant   
portion of our products.                                                        

We currently market our products on a wholesale basis through our   
distributors operating in the United States. We depend on these distributors to 
sell our products to retailers throughout the United States. If a significant   
distributor discontinues selling our products, performs poorly, does not pay for
purchased products, reorganizes, or liquidates and is unable to continue selling
our products, our business, financial condition, and operating results could be 
adversely affected. Our failure or inability to replace poorly performing       
distributors could have a material adverse effect on our business.              

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Any material increase in the cost of the raw materials used to manufacture our  
products could have a material adverse effect on our cost of sales.             

   We do not have contracts with all of our suppliers of the raw materials
used in the production of our products. Historically, we have not experienced   
any difficulties obtaining the raw ingredients for our products on customary    
terms. We are, however, subject to variations in the prices of the raw materials
used in the manufacture of our products. We may not be able to pass along any   
cost increases to our customers. As a result, any material increase in the cost 
of raw materials used in the manufacture of our products could have a material  
adverse effect on our cost of sales.                                            

If we are unable to compete effectively with existing or new competitors, our   
existing business will decline and our anticipated business plan will not be    
successfully implemented.                                                       

We believe the market for nutritional supplements and nutraceuticals
products is continually evolving and is highly dependent upon changes in the    
demographic and social trends. We compete with numerous competitors, many of    
which have significantly greater financial, technical, marketing, and other     
resources than we do. In making decisions regarding the development of new      
products and the enhancement and extension of our current products, we encounter
competition in attempting to anticipate the needs and preferences of healthcare 
practitioners, consumers, and nutritionists. Consumer preferences, particularly 
in the nutritional supplements and nutraceuticals market, are continuously      
changing and are difficult to predict. We believe we can compete effectively by 
reacting quickly to expected and perceived customer requirements and desires by 
maintaining relationships with our existing strategic partners, and identifying 
and reaching agreements with new partners. However, we cannot assure you that   
our assessment of the market place is correct, or that our products will be     
accepted now or in the future.                                                  

Our failure to comply with current or future governmental regulations could     
adversely affect our business.                                                  

The formulation, manufacturing, packaging, labeling, advertising,   
distribution, and sale of dietary supplements, such as those sold by us, are    
subject to regulation by a number of federal, state and local agencies,         
principally, the FDA, and the FTC, as well as foreign agencies in areas where we
may operate. Among other matters, this regulation is concerned with product     
safety and claims made with respect to a product's ability to provide           
health-related benefits. These agencies have a variety of procedures and        
enforcement remedies available to them, including the following:                

o     initiating investigations;                                    

o     issuing warning letters and cease and desist orders;          

o     requiring corrective labeling or advertising;                 

    o     requiring consumer redress, such as requiring that a company offer
to repurchase products previously sold to consumers;    

o     seeking injunctive relief or product seizures; and            

o     imposing civil penalties or commencing criminal prosecution.  

Federal and state agencies have in the past used these remedies in  
regulating participants in the dietary supplements industry, including the      
imposition by federal agencies of civil penalties in the millions of dollars    
against a few industry participants. In addition, publicity related to dietary  
supplements may result in increased regulatory scrutiny of the nutritional      
supplements industry.                                                           

 Our failure to comply with applicable laws could subject us to severe
legal sanctions, which could have a material adverse effect on our business and 
results of operations. We cannot assure you that the regulatory environment in  
which we operate will not change or that such regulatory environment, or any    
specific action taken against us, will not result in a material adverse effect  
on our business and operations. We cannot assure you that a state will not      
interpret claims presumptively valid under federal law as illegal under that    
state's regulations, or that future FDA regulations or FTC decisions will not   
restrict the permissible scope of such claims. Additionally, we cannot assure   
you that such proceedings or investigations or any future proceedings or        
investigations will not have a material adverse effect on our business or       
operations.                                                                     

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If we are deemed to be subject to the federal Medicare Anti-Kickback statutes or
similar state statutes, it could have a material adverse effect on our business 
and operations.                                                                 

The healthcare industry is subject to extensive federal and state   
regulation relating to licensure, conduct of operations, ownership of           
facilities, addition of facilities and services, and payment for services. As   
Essentum(R) is not subject to Medicare or Medicaid reimbursement, we do not     
believe that our activities are subject to regulation under the federal         
Anti-Kickback statutes. The Anti-Kickback statutes generally prohibit persons   
from knowingly and willfully soliciting, receiving, offering or providing       
remuneration, directly or indirectly, to induce either the referral of an       
individual, or the furnishing, recommending, or arranging for a good or service,
for which payment may be made under a federal healthcare program such as the    
Medicare and Medicaid programs. However, the statute was drafted broadly and it 
has resulted in many arrangements and practices that are lawful in businesses   
outside of the healthcare industry to be deemed unlawful. As a result, there has
been a lack of uniform interpretation of the Anti-Kickback statutes, which make 
compliance even more difficult. The penalties for violating these statutes can  
be severe and include criminal penalties and civil sanctions, fines,            
imprisonment and possible exclusion from the Medicare and Medicaid programs.    
Many states have adopted laws similar to the federal Anti-Kickback statutes.    
Some of these state prohibitions apply to referral of patients for healthcare   
services reimbursed by any source, not only the Medicare and Medicaid programs. 
Although we believe that we comply with both federal and state anti-kickback    
laws, any finding of a violation of these laws could subject us to criminal and 
civil penalties or possible exclusion from federal or state healthcare programs.
Such penalties would adversely affect our financial performance and our ability 
to operate our business.                                                        

Our insurance may be inadequate to cover us against product liability claims    
that may be brought against us.                                                 

We maintain liability insurance with policy limits generally of $1.0
million per occurrence and $2.0 million in the aggregate. Our insurance coverage
includes property, casualty, comprehensive general liability, and products      
liability insurance. We believe that our insurance coverage is adequate. The    
testing, marketing, and sale of health care products, however, entail an        
inherent risk of product liability. We cannot assure you that product liability 
claims relating to dietary supplement products will not be asserted against us, 
our licensees, or third parties with whom we operate. Many claims related to    
dietary supplements have already been brought against businesses in our         
industry. Further, we cannot assure you that such insurance will provide        
adequate coverage against any potential claims. A product liability claim or    
product recall could have a material adverse effect on our business, financial  
condition, or results of operations.                                            

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We depend on key employees and the loss of either of their services could harm  
our business.                                                                   

   We are heavily dependent upon Stuart A. Benson, our President and Chief
Executive Officer, and Gregg Linn, our Chief Financial Officer. We have entered 
into employment agreements with both Mr. Benson and Mr. Linn that provide for   
them to be employed by us through December 2007. The agreements, however, cannot
assure us of their continued service. The loss of either Mr. Benson or Mr. Linn 
could have a material adverse effect on us. Under the terms of Mr. Benson's     
employment agreement, we are permitted to apply to obtain, and have made        
application with respect thereto, for a "key-man" insurance policy for Mr.      
Benson in the amount of $500,000. We will be the beneficiary of this policy when
and if the insurance is obtained.                                               

Our existing stockholders will experience dilution if we issue additional       
securities.                                                                     

 As of March 17, 2005, we had 101,068,713 outstanding shares of common
stock, 1,500,000 shares of preferred stock currently convertible into 1,500,000 
shares of common stock, options to purchase 5,471,390 shares of common stock,   
which are subject to stockholder approval, warrants to purchase 30,459,713      
shares of common stock, and Senior Secured Convertible Notes convertible into   
17,860,192 shares of common stock. If we issue additional shares, or if our     
existing stockholders exercise or convert their outstanding options, warrants,  
or notes, our other stockholders may find their holdings drastically diluted,   
which if it occurs, means that they will own a smaller percentage of our        
company. Further, any issuance of additional securities to various persons or   
entities in lieu of cash payments will lead to further dilution. If all         
convertible instruments were converted and all outstanding warrants and options 
were exercised, we would have 153,747,341 shares of common stock outstanding.   

We are party to a voting agreement pursuant to which certain officers, directors
and stockholders can elect a majority of our Board of Directors.                

   We are party to a voting agreement with Stuart A. Benson, our President
and Chief Executive Officer, Donald C. Hannah, chairman of our Board of         
Directors, and SkyePharma, PLC and Fifth Avenue Capital, Inc., both significant 
stockholders. As a result of voting together under the terms of the agreement,  
the parties have the ability to elect a majority of our Board of Directors and  
to approve most, if not all, of any corporate actions requiring shareholder     
approval without the vote of any other shareholders.                            

The market price of our common stock is highly volatile and subject to wide     
fluctuations as a result of many factors.                                       

      Our common stock has been traded on the OTC Bulletin Board since March 28,
2002. The market price of our common stock has been highly volatile and may     
continue to be volatile in the future. Many factors could affect the trading    
price of our common stock, including the following:                             

 o     the low price, thin trading volume, and relatively small public
float of our common stock;                              

o     variations in our quarterly operating results;                

   o     introduction of new products and customer acceptance of products;

 o     general trends in the nutritional supplement and nutraceuticals
markets;                                                

o     the number of holders of our common stock; and                

    o     the interest of securities dealers in maintaining a market for our
common stock.                                           

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

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Because our common stock is subject to the SEC's penny stock rules,             
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.                   

     Because we currently have less than $5,000,000 of net tangible assets and
the market price of our common stock is less than $5.00 per share, transactions 
in our common stock are subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. These rules require broker-dealers that        
recommend our securities to persons other than institutional accredited         
investors to do each of the following:                                          

     o     make a special written suitability determination for the purchaser;

     o     receive the purchaser's written agreement to a transaction prior to
sale;                                                   

     o     provide the purchaser with risk disclosure documents which identify
           certain risks associated with investing in "penny stocks" and which
 describe the market for these "penny stocks" as well as a
purchaser's legal remedies; and                         

o     obtain a signed and dated acknowledgment from the purchaser   
           demonstrating that the purchaser has actually received the required
            risk disclosure document before a transaction in a "penny stock" can
be completed.                                           

    As a result, broker-dealers may find it difficult to effectuate customer
transactions and trading activity in our securities may be adversely affected.  
Therefore, the market price of our securities may be depressed, and you may find
it more difficult to sell our securities.                                       

We have never paid any cash dividends on our common stock.                      

    We have never paid any cash dividends on our common stock, and we do not
expect to pay cash dividends on our common stock in the foreseeable future. In  
addition, the terms of our outstanding preferred stock and Senior Secured       
Convertible Notes restrict our ability to pay cash dividends.                   

Item 2. Description of Property                                                 

     We lease our corporate offices under a three-year lease, which expires in
2007.                                                                           

Item 3. Legal Proceedings                                                       

      We are involved in various legal proceedings arising out of our operations
in the ordinary course of business. We do not believe that any such proceedings 
will have a material adverse effect on our business, operating results, or      
financial condition.                                                            

Item 4. Submission of Matters to a Vote of Security Holders                     

Not applicable.                                                     

PART II.

Item 5. Market for Common Equity, Related Stockholder Matters, and small        
Business Issuer Purchases of Equity Securities                  

Our common stock has been traded in the OTC Bulletin Board under the
symbol VTLV.OB since March 28, 2002. The following table sets forth the high    
and low sales prices of our common stock for each calendar quarter indicated.   

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Year ended December 31, 2002:                            High              Low  
                                                       ----              ---

        Second quarter.............................    $3.40             $2.45
        Third quarter..............................    $1.56             $0.91
        Fourth quarter.............................    $1.34             $0.64

Year ended December 31, 2003:                                                   

        First quarter .............................    $0.95             $0.74
        Second quarter.............................    $1.25             $0.70
        Third quarter..............................    $1.52             $1.12
        Fourth quarter.............................    $1.34             $1.13

Year ended December 31, 2004:                                                   

        First quarter .............................    $0.92             $0.77
        Second quarter.............................    $0.57             $0.30
        Third quarter..............................    $0.24             $0.17
        Fourth quarter.............................    $0.20             $0.14

      On March 17, 2005, the closing price of our stock was $0.12 and we had 458
record holders of our common stock.                                             

Item 6. Management's Discussion and Analysis or Plan of Operation               

Overview                                                                        

      We develop and market fruit and vegetable supplements, protein supplements
and nutraceutical products which are marketed for distribution through          
physicians, medical groups, chiropractic offices, and retail outlets.           
Additionally, through a licensing agreement, we have certain rights for a       
pharmaceutical delivery systems (our GEOMATRIX technology). Nutraceuticals are  
products that are isolated or purified from foods and generally sold in         
medicinal forms not usually associated with foods, including tablets, capsules, 
or drops. These nutraceuticals may have physiological benefits or have the      
ability to reduce the risk of chronic disease beyond basic nutritional products.
We develop and test our nutraceuticals in collaboration with leading medical    
experts in the nutraceuticals field. We have designed them to be incorporated by
healthcare practitioners into a standard patient system where healthcare        
practitioners recommend and sell our whole food and nutraceuticals products to  
their patients. Our focus has been with our Greensfirst(R), Dream Protein(R) and
Complete Essentials(R) products. Additionally, we have targeted cardiovascular  
health.                                                                         

   Our business strategy is to capitalize on the growing complimentary and
alternative medicine market by creating condition-specific formulations that    
offer a broad range of benefits. Our products focus on general health by        
utilizing nutraceuticals and whole foods as a means to gain the healthcare      
practitioner confidence and support. We plan to focus on certain target         
conditions, providing the market with high quality, relevant products through   
our healthcare practitioner distribution channels.                              

Results of Operations                                                           

      The following sets forth selected financial data and its percentage of net
sales for the years ended December 31:                                          

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                                                     2004                  2003                      
                                                                                           Increase  
                                            Amount          %     Amount           %      (Decrease) 
                                            ------         ---    ------          ---      ----------
                                                                                                     
Revenue                                      $4,161,000   -100%       $498,000    -12%   $ 3,663,000 
Cost of goods sold                            2,801,000    -67%        237,000    -6%      2,564,000 
                                          -------------           ------------                       
     Gross profit                             1,360,000    -33%        261,000    -6%      1,099,000 
     Administrative expenses                                                                         
     Salaries and benefits                      992,000    -24%     11,449,000   -275%   (10,457,000)
     Professional and consulting fees         1,676,000    -40%      3,203,000    -77%    (1,527,000)
     Selling, general and administrative      1,937,000    -47%      1,275,000    -31%       662,000 
     Research and development                 1,180,000    -28%        411,000    -10%       769,000 
     Depreciation and amortization            4,560,000   -110%      1,811,000    -44%     2,749,000 
     Impairment of goodwill                  14,976,000   -360%      6,777,000   -163%     8,199,000 
                                          -------------          -------------                       
Total                                        25,321,000   -609%     24,926,000   -599%       395,000 
                                          -------------          -------------                       

Net loss from continuing operations         (23,961,000)   576%    (24,665,000)   593%       704,000 
Other income (expense)                                                                               
     Other expense                              (76,000)    2%         (43,000)    1%        (33,000)
     Interest income                              2,000     0%           5,000     0%         (3,000)
     Interest expense                        (1,962,000)   47%      (2,503,000)   60%        541,000 
                                          -------------          -------------                       
Net loss from continuing operations       $ (25,997,000)   625%  $ (27,206,000)   654%  $ (1,209,000)

Year Ended December 31, 2004 Compared With Year Ended December 31, 2003         

Revenue                                                             

Total revenue for the year ended December 31, 2004 was $4.2 million 
compared with $498,000 for the year ended December 31, 2003, an increase of $3.7
million. This increase was primarily attributable to the growth in our          
Greensfirst(R) product line, which was acquired as part of the DFN acquisitions 
in the fourth quarter of 2003                                                   

Cost of Goods Sold and Gross Profit                                 

    Cost of goods sold for the year ended December 31, 2004 was $2.8 million
compared with $237,000 for the year ended December 31, 2003, an increase of $2.6
million. This increase reflected the increase in revenues in our DFN subsidiary 
along with a $728,000 inventory reserve for our X-Fat(R) inventory. The gross   
profit percentage for the year ended December 31, 2004 was 50%, excluding the   
X-Fat(R) inventory reserve compared with 52% for the year ended December 31,    
2003. The small decline in the gross margin reflects the change in our marketing
strategy in 2004 where a greater portion of our products are sold to            
distributors at wholesale pricing as compared with 2003, where a greater portion
were sold directly to healthcare practitioners.                                 

Administrative Expenses                                                         

Salary and Benefit Costs                                            

      Salary and benefit costs for the year ended December 31, 2004 was $992,000
compared with $11.4 million for the year ended December 31, 2003, a 
decrease of $10.5 million. The decrease was substantially due to a  
    non-cash repricing adjustments required in accordance with FIN No. 44(1)
related to warrants issued to one of our officers during 2003.      

(1)   In accordance with Financial Interpretation No. ("FIN") 44,   
           "Accounting for Certain Transactions Involving Stock Compensation,"
          a non-cash charge to compensation expense is required if the price
            of our common stock on the last trading day of a reporting period is
    greater than the exercise price of certain stock options and
            warrants issued to officers or employees. The requirements of FIN 44
         may also result in a credit to compensation expense to the extent
            that the trading price declines from the trading price as of the end
          of previous reporting period, except that a credit is not recorded
         to the extent our common stock trades below the exercise price of
     the options or warrants. In accordance with FIN 44, we adjust
           compensation expense upward or downward on a monthly basis based on
the trading price at the end of each period.            

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Professional and consulting fees                                    

    Professional and consulting fees were $1.7 million during the year ended
December 31, 2004 compared with $3.2 million for the year ended December 31,    
2003, a decrease of $1.5 million. This decrease was primarily comprised of      
repricing adjustments in accordance with FIN 44 related to options previously   
issued in our agreement with the Arizona Heart Institute, our distribution      
partner for Essentum(R), and amortization of common stock, options or warrants  
issued under various consulting or other service contracts, as most of these    
contracts during 2003.                                                          

Selling, general, and administrative expenses                       

     Selling, general, and administrative expenses for the year ended December
31, 2004 was $1.9 million compared with $1.3 million for the year ended December
31, 2003, an increase of $663,000. The increase related primarily to additional 
expenditures during 2004 in our DFN subsidiary.                                 

Research and development costs                                      

    Research and development costs are expensed as incurred and totaled $1.2
million for the year ended December 31, 2004 compared with $411,000 for the year
ended December 31, 2003, an increase of $769,000. This increase was primarily   
related to outstanding obligations in 2004 to Skye related to the development of
our rights in the Geomatrix(R) technology.                                      

Depreciation and amortization expenses                              

      Depreciation and amortization expense for the year ended December 31, 2004
was $4.6 million compared with $1.8 million for the year ended December 31,     
2003, an increase of $2.8 million. The increase was primarily attributable to   
amortization of intangibles acquired or recorded as part of acquisitions, as    
well as increased depreciation related to acquired tangible assets.             

Impairment of Goodwill and Other Intangible Assets:                             

     Goodwill and other intangibles created by our acquisitions are tested for
impairment at least annually, or upon occurrence of such events that may        
indicate impairment exists, in accordance with SFAS No. 142. As a result of     
lower than expected operating results net cash flows, we revised our            
expectations and, as a result, recorded a goodwill impairment loss of $15.0     
million and $6.8 million during 2004 and 2003, respectively. The change in fair 
value of each component of goodwill and other intangibles were estimated using  
certain operational results and assumptions, as described below.                

    MAF. The gross value of goodwill related to the MAF acquisition was $5.0
million. On September 30, 2004, we entered into an agreement to sell all        
property, rights, and assets related to our Boulder Bar product line. The       
purchaser agreed to assume the debt of approximately $400,000. However, the     
purchaser has not complied with the terms of the agreement, and we are currently
seeking legal remedies. As a result of this transaction and MAF's inability to  
generate positive cash flow from operations, we have discontinued its operations
and recorded impairment charges of $104,000 and $38,000 related to intangible   
assets and other MAF assets deemed to be of no remaining value, respectively.   
During 2003, we determined that as a result of marketplace competition and      
various other factors, a portion of the goodwill related to the MAF Acquisition 
was impaired and accordingly, we recorded a $4.4 million impairment charge to   
goodwill.                                                                       

    NSI. The gross value of goodwill related to the COF acquisition was $3.9
million. In order to resolve certain disputes between a former employee of the  
COF subsidiary, on July 9, 2004, we settled all matters via an execution of a   
Settlement and Release Agreement calling for the settlement of all claims and   
the sale of certain assets and liabilities back to the previous owners of COF.  
As part of the agreement, we agreed to pay the previous owners of COF $150,000  
in six equal monthly installments beginning July 2004 in exchange for the return
of 2,600,000 shares of our common stock originally paid as part of the          
acquisition price. In addition, we will assign certain assets and the previous  
owners and COF will assume certain liabilities of NSI as of the effective date, 
the previous owners of COF will sublease our leased facilities located in       
Spanish Fork, Utah for a period of one year from the effective date, and        

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executive employment agreements with two former employees, which was executed as
part of the COF acquisition, become null and void. Should either party fail to  
perform its obligations under the agreement, certain rights and options exist   
allowing the parties to terminate the agreement. During 2004, we paid $50,000 of
$150,000 required payments under the Agreement. The remaining $100,000 balance  
was paid directly to the Internal Revenue Service as a result of being served   
with a final demand notice from the IRS related to obligations from the previous
owners of COF. These amounts were the obligation of the previous owners of COF, 
which was ratified in the agreement. However, in order to avoid any further     
claims related to this matter, in November 2004, we entered into a settlement   
agreement with the IRS related to this matter and paid the remaining $100,000   
obligation under the agreement directly to the IRS. The IRS has agreed not      
pursue us related to this matter.                                               

  As of December 31, 2004, we had not received the 2.6 million shares of
common stock back from the previous owners of COF. Accordingly, we are currently
seeking specific remedies.                                                      

  During the period ended December 31, 2003, we experienced an operating
loss of approximately $533,000, prior to depreciation, amortization, and        
interest charges, and the business was not able to generate positive cash flow  
from operations to date. As a result, we determined the goodwill recorded       
because of the COF acquisition was impaired by $2.4 million, which has been     
recorded as goodwill impairment expense during 2003.                            

DFN. The gross value of goodwill related to the DFN Acquisition was 
$2,113,000. During 2004, we generated operating income of approximately         
$751,000, before depreciation, amortization, and interest charges. We expect    
increasing net cash flows from operations, as we increase the national          
distribution of GreensFIRST(R) along with our Dream Protein(R) and Complete     
Essentials(R) product lines by cross-selling into distribution channels         
currently and expanding sales of GreensFIRST(R) into net markets. We also       
anticipate launching additional products currently under development. Based on  
our analysis, we do not believe the goodwill amount at December 31, 2004 is     
impaired and have not recorded an adjustment to the carrying value.             

WWS. The gross value of goodwill related to the WWS acquisition was 
$805,000. WWS was acquired in the second quarter of 2004 and, to date, has been 
well received by our existing distribution channels and has played a major role 
in increasing the number of health practitioners to which we market our         
products. Accordingly, we do not believe the goodwill amount at December 31,    
2004 is impaired and have not received an adjustment to the carrying value.     

   ENI. Our primary intangibles, outside of goodwill discussed above, were
obtained in the ENI acquisition and consist of several licensing and marketing  
agreements. The GEOMATRIX(R) system, with an associated gross intangible value  
of $20.8 million at December 31, 2004, is our licensed technology. We are in    
dispute with SkyePharma over the terms of the Development and Licensing         
Agreement and failed to make payments of $750,000 called for under the licensing
agreement during 2004. On April 6, 2004, we received a demand letter from       
SkyePharma related to the past due payments under the Development and License   
Agreement, which triggered the 30-day negotiation period under the agreement.   
This 30-day period is required before initiating formal collection proceedings. 
We are currently in discussions to modify both the terms and payment schedules  
under the licensing agreement. Although we believe we will reach a settlement of
the terms and conditions of the agreement with SkyePharma, we cannot assure you 
that these negotiations will be successful and that we will reach a satisfactory
resolution of this matter. In the event a satisfactory resolution can not be    
reached and SkyePharma exercises their rights of termination under the          
agreement, we may lose substantial and possibly all rights gained under this and
related contracts with SkyePharma. Accordingly, amounts recorded as intangible  
assets associated with this agreement, which represent substantially all of our 
intangible assets, would be impaired. During 2004, certain events occurred that 
caused us to modify the business model underlying the original valuation of     
these intangibles, including the anticipated timing of future cash flows and the
sources from which revenue will be derived. As a result, we determined that the 
net book value of the intangible assets associated with the GEOMATRIX(R) license
and marketing agreements was impaired by $9,545,000 and $1,727,000,             
respectively; therefore, $11,272,000 was recorded as impairment expense during  
2004.                                                                           

     X-Fat(R), with a related gross intangible value of $4,093,000 at December
31, 2003, is our licensed dietary supplement aimed at weight loss and was       
launched in test markets throughout the United States in early March 2004.      
During 2004, certain events occurred that caused us to modify the business model
underlying the original valuation of this intangible, including the anticipated 
timing of future cash flows and the sources from which revenue will be derived. 
As a result, we determined that the net book value of the intangible assets     
associated with X-Fat(R) license agreements was impaired by $3.7 million and was
recorded as impairment expense during 2004.                                     

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Other Income (Expense):                                             

  Interest Expense for the year ended December 31, 2004 was $2.0 million
compared with $2.5 million for the year ended December 31, 2003, a decrease of  
$541,000. The decrease relates primarily to the expensing debt issuance cost of 
$542,000 in 2003 that did not occur in 2004                                     

Net loss from continuing operations                                 

    Our net loss from continuing operations for the years ended December 31,
2004 was $25.9 million compared with $27.2 million for the year ended December  
31, 2003, a decrease of $1.3 million. Of these losses, approximately $21.2      
million and $22.7 million during 2004 and 2003, respectively, related to        
non-cash charges described herein and as follows and included only those items  
that would not have been required to be settled in cash or other assets by their
original terms.                                                                 

                                                        · Enlarge/Download Table

                                                              2004           2003     
                                                          ------------   ------------ 
                                                                                      
Net Loss From Continuing Operations                       $(25,997,000)  $(27,206,000)

Non-cash charges                                                                      
    Officer compensation for common stock,                                            
    options, warrants, and warrant amendments                  581,000     10,362,000 
    Common stock, options, warrants, issued                                           
    for services, including amortization of such              (664,000)     1,696,000 
    Impairment loss                                         14,976,000      6,777,000 
    Interest and other charges related to debt financing     1,772,000      2,050,000 
    Depreciation and amortization                            4,560,000      1,827,000 
                                                          ------------   ------------ 

Total non-cash charges                                      21,225,000     22,712,000 
                                                          ------------   ------------ 

Net loss excluding non-cash charges                       $ (4,772,000)  $ (4,494,000)
                                                          ------------   ------------ 

Liquidity and Capital Resources                                     

   At December 31, 2004, we had $466,000 in cash, primarily as a result of
our warrant offering that began in November 2004 and concluded in December 2004,
which resulted in approximately $700,000 in gross proceeds.                     

   Cash flows used in operating activities of approximately $3,550,000 and
$4,737,000 in 2004 and 2003, respectively, have decreased over prior year as a  
result of our decision during 2004 to both discontinue the operations of MAF and
COF and the consolidation of our entire operations in Phoenix. We anticipate    
that during 2005 the effects of the consolidation in Phoenix as well as certain 
expense containment and efficiency initiatives that began in 2004 and continued 
into 2005 along with continued growth in our core revenues will result in       
improved cash flow from operations. Cash flows from financing activities was    
$2,294,000 and $5,560,000 in 2004 and 2003, respectively, reflecting the        
financings (as outlined below), partially offset by servicing of indebtedness.  

     To date, we have funded our operations and acquisition activity primarily
from cash generated from private placements and with funds from borrowings under
various debt instruments, as summarized in the table below, generating an       
aggregate in net cash proceeds of $7.9 million during 2004 and 2003.            

      The following summarizes private placement offerings completed during 2004
and 2003:                                                                       

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                                         Shares or    Price    Net Cash       Options &       Exercise
       Date           Description        Principal  Per Share  Proceeds        Warrants         Price 
       ----           -----------        ---------  ---------  --------        --------         ----- 
                                                                                                      
April, 2003        Series B Preferred    1,000,000   $1.00       $875,000  1,000,000 Series E    $1.60
                                                                             500,000 Series D    $1.30
July, 2003         Series C Preferred      500,000   $1.00       $438,000    500,000 Series E    $1.60
August, 2003       Series D Preferred    1,000,000   $1.00       $815,000                 N/A     N/A 
October -                                                                  3,060,000 No Series   $1.00
December, 2003     Bridge Notes          1,530,000   $1.00     $1,316,000  1,530,000 No Series   $1.50
December, 2003     Senior Secured Notes  4,587,738   $1.00     $2,502,000  4,587,738 No Series   $1.00
March-April, 2004  Common Stock            510,000   $1.00       $469,000                 N/A     N/A 

June-July, 2004    Common Stock          3,900,000   $0.25       $897,000  11,700,000 Series G   $0.25
                                                                           3,900,000 Series H    $0.25
Nov 2004-Dec 2004  Warrant Offering      7,056,706   $0.10       $631,000  6,560,000 No Series   $0.10
                                                               ----------                             
                                                               $7,943,000                             
                                                               ----------                             

     In addition to the above offerings, during the fourth quarter of 2003, we
used short-term notes payable to various shareholders and related parties,      
borrowing an aggregate principal amount of $396,672. The notes generally matured
in 60 days and bore interest at stated rates ranging between 10% and 28%, with  
12 months of interest earned and payable immediately. The notes, including      
interest earned of $58,672, were paid in full prior to December 31, 2003.       

Going concern                                                                   

 The accompanying consolidated financial statements have been prepared
assuming we will continue on a going concern basis, which contemplates the      
realization of assets and the satisfaction of liabilities in the normal course  
of business. We have suffered recurring losses from operations, have a working  
capital deficit, and are dependent on funding from sources other than           
operations. Since inception, we have been required to raise additional capital  
by the issuance of both equity and debt instruments. There are no commitments   
from prior funding sources should cash flows be insufficient to fund ongoing    
operations and other cash commitments as they come due. These factors raise     
substantial doubt about our ability to continue as a going concern. We will be  
required to raise additional capital in the near term through offerings of      
securities to fund operations and will attempt to continue raising capital      
resources if we do not begin to generate revenue sufficient to maintain our     
company as a viable entity. No assurance can be given that such financing will  
be available or, if available, that it will be on commercially favorable terms. 
Moreover, available financing may be dilutive to current investors.             

     We are in the process of improving, acquiring, or developing products for
sale that would generate revenue to sustain our operations, as well as          
consolidating our operations in order to gain cost synergies and efficiencies.  
If successful, these actions will serve to mitigate the factors that have raised
doubt about our ability to continue as a going concern and increase the         
availability of resources for funding of our current operations and future      
market development. In addition, in March and April 2004, we entered into       
purchase agreements with investors and sold 510,000 shares of common stock at   
$1.00 per share with rights to receive a portion of net revenues, as defined    
therein, from the sale of X-Fat(R). The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of    
recorded assets or liabilities that might be necessary should we be unable to   
continue as a going concern.                                                    

Critical Accounting Policies                                                    

Acquisitions                                                                    

 We account for acquisitions in accordance with Statement of Financial
Accounting Standards, ("SFAS") No. 141 "Business Combinations" and accordingly  
apply the purchase method of accounting for all business combinations initiated 
after June 30, 2001 and separately identify recognized intangible assets that   
meet the criteria and amortizes these assets over their determinable useful     
lives.                                                                          

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Goodwill                                                                        

     Goodwill represents the excess of the aggregate price paid by us over the
value of the net equity acquired in an acquisition. In accordance with SFAS No. 
142, "Goodwill and Other Intangible Assets," we are no longer required to       
amortize goodwill, but are required to review goodwill for impairment at least  
annually whenever events indicate that the carrying amount of the asset may not 
be recoverable in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." As of December 31, 2004, events had occurred    
that would indicate goodwill had been impaired and, accordingly, an impairment  
loss was recorded.                                                              

Intangible assets                                                               

  Our other intangible assets include trademarks, patents, formulations,
customer lists, and various marketing and license agreements. Intangible assets 
are amortized on a straight-line basis over the lesser of the correlating       
agreements or estimated useful lives ranging from two to 14 years.              

Impairment of Long-lived assets                                                 

     Long-lived assets and identifiable other intangible assets to be held and
used are reviewed for impairment at least annually whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Goodwill
and other intangible assets arising from various acquisitions are evaluated for 
impairment on at least an annual basis or when events occur that would indicate 
that impairment had occurred. Impairment is measured by comparing the carrying  
value of the long-lived asset to the estimated undiscounted future cash flows   
expected to result from use of the assets and their eventual disposition.       

   Assumptions used include estimates of (1) market share penetration, (2)
timing of product rollouts for new products, (3) licensing royalty percentages, 
(4) manufacturing costs, (5) selling prices, (6) volumes sold and (7) discount  
rates. Any changes in assumptions applied in the cash flow model used to        
evaluate goodwill and other intangibles for impairment may effect the outcome of
the analysis. Unfavorable changes in assumptions may result in further          
impairments of goodwill and other intangibles.                                  

     As of December 31, 2004, events had occurred that would indicate goodwill
had been impaired; accordingly, an impairment loss was recorded.                

Stock based compensation                                                        

      We account for our stock option plans in accordance with the provisions of
SFAS No. 123, "Accounting for Stock Based Compensation," as amended by SFAS No. 
148 "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS   
No. 123 permits entities to recognize as expense over the vesting period the    
fair value of all stock-based awards on the date of grant. Alternatively, SFAS  
No. 123 also allows entities to apply the provisions of Accounting Principles   
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and   
related interpretations and provide pro forma net income or loss and pro forma  
earnings per share disclosures for employee stock option grants as if the       
fair-value-based method defined in SFAS No. 123 had been applied.               

     We are subject to reporting requirements of FASB Financial Interpretation
No. ("FIN") 44, "Accounting for Certain Transactions Involving Stock            
Compensation," which requires a non-cash charge to deferred compensation expense
if the price of our common stock on the last trading day of each reporting      
period is greater than the exercise price of certain stock options. After the   
first such adjustment is made, each subsequent period is adjusted upward or     
downward to the extent that the trading price exceeds the exercise price of the 
options.                                                                        

We account for our stock option plans under the recognition and     
measurement principles of Accounting Principles Board ("APB") Opinion No. 25,   
"Accounting for Stock issued to Employees," and related Interpretations. No     
stock-based employee compensation (except that related to repriced warrants in  
accordance with FIN No. 44) is reflected in net loss, as all options and        
warrants granted had an exercise price equal to or below the market value of the
underlying common stock at the date of grant.                                   

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Recent accounting pronouncements                                                

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain  
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150  
clarifies the accounting for certain financial instruments with characteristics 
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those   
financial instruments were classified as equity. SFAS No. 150 is effective for  
financial instruments entered into or modified after May 31, 2003 and otherwise 
is effective at the beginning of the first interim period beginning after       
September 15, 2003. The adoption of SFAS No. 150 did not have a material effect 
on our company.                                                                 

    In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and  
clarifies financial accounting and reporting for derivative instruments,        
including certain derivative instruments embedded in other contracts            
(collectively referred to as derivatives) and for hedging activities under SFAS 
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This   
statement is effective for contracts entered into or modified after September   
30, 2003. The adoption of SFAS No. 149 did not have a material effect on our    
Company.                                                                        

In January 2003, the FASB issued FIN 46, "Consolidation of Variable 
Interest Entities." In general, a variable interest entity is a corporation,    
partnership, trust, or any other legal entity used for business purposes that   
either (a) does not have equity investors with voting rights or (b) has equity  
investors that do not provide sufficient financial resources for the entity to  
support its activities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors in the   
entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities     
without additional subordinated financial support from other parties. The       
consolidation requirements of FIN 46 apply immediately to variable interest     
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after       
September 15, 2003. Certain of the disclosure requirements apply to all         
financial statements issued after January 31, 2003, regardless of when the      
variable interest entity was established.                                       

   In December 2003, the FASB issued a revised Interpretation No. 46 ("FIN
46R"), "Consolidation of Variable Interest Entities." FIN 46R requires companies
to consider whether entities, in which they have financial interests, lack      
sufficient equity at risk to permit that entity to finance its activities       
without additional subordinated financial support and to consolidate those      
entities where the company would absorb the majority of any losses. The         
consolidation requirements are effective for interim and annual periods ending  
after March 15, 2004. The adoption of FIN 46 and FIN 46R did not have a material
effect on our Company.                                                          

 In December 2004 the FASB issued a revised Statement 123 (SFAS 123R),
"Accounting for Stock-Based Compensation" requiring public entities to measure  
the cost of employee services received in exchange for an award of equity       
instruments based on grant date fair value. The cost will be recognized over the
period during which an employee is required to provide service in exchange for  
the award -- usually the vesting period. The effective date for this statement  
is as of the first interim period that begins after June 15, 2005. The Company  
is evaluating the impact of this new pronouncement and has not yet estimated the
effect of implementation on the Company's financial statements.                 

Item 7. Financial Statements                                                    

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

Item 8A. Changes and Disagreements with Accountants on Accounting and Financial 
Disclosure                                                                      

Not applicable.                                                     

Item 8B. Other Information                                                      

Not applicable.                                                     

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PART III

Item 9. Directors and Executive Officers of the Registrant                      

      The information required by this Item relating to directors of our company
is incorporated herein by reference to the definitive Proxy Statement to be     
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 for our 
2005 Annual Meeting of Stockholders.                                            

Item 10. Executive Compensation                                                 

     The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the 
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.    

Item 11. Security Ownership of Certain Beneficial Owners and Management and     
Related Stockholder Matters                                                     

     The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the 
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.    

Item 12. Certain Relationships and Related Transactions                         

     The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the 
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.    

Item 13. Exhibits and Reports on Form 8-K.                                      

(a)   The following documents are filed as part of this Report:     

(1)   Financial statements filed as part of this Report:

               Report of Epstein, Webber & Conover, P.C..................... F-1
               Consolidated Balance Sheets as of December 31, 2004.......... F-2
Consolidated Statements of Operations             
                 Years Ended December 31, 2004 and 2003..................... F-3
       Consolidated Statements of Stockholders' Equity (Deficit)
                 Years Ended December 31, 2004 and 2003..................... F-6
Consolidated Statements of Cash Flows             
                 Years Ended December 31, 2004 and 2003..................... F-4
               Notes to Consolidated Financial Statements................... F-7

(2)   Exhibits filed as part of this Report:            

                                                        · Enlarge/Download Table

Exhibit No.                                                  Description                                                
-----------                                                  -----------                                                
                                                                                                                        
    2.1      Acquisition  Agreement and Plan of Merger,  dated as of August 16, 2001, between Vital Living, Inc. and VCM
             Technology Limited (1)                                                                                     

    2.2      Certificate of Merger of Vital Living, Inc. and VCM Technology Limited (1)                                 

    3.1      Amended and Restated Articles of Incorporation for Vital Living, Inc. (1)                                  

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Exhibit No.                                                  Description                                                
-----------                                                  -----------                                                
                                                                                                                        
    3.2      Amended and Restated Bylaws for Vital Living, Inc. (1)                                                     

    4.1      Form of Series A Warrant (2)                                                                               

    4.2      Form of Series B Warrant (3)                                                                               

    4.3      Form of Series C Warrant (3)                                                                               

    4.4      Form of Series D Warrant (4)                                                                               

    4.5      Form of Series E Warrant (5)                                                                               

    4.6      Form of Series F Warrant (2)                                                                               

    4.7      Certificate of Designation of Preferences, Rights and Limitations of 10% Series A Preferred Stock (20)     

    4.8      Certificate of Designation,  Preferences and Relative,  Participating,  Optional or Other Special Rights of
             Series B Convertible Preferred Stock (20)                                                                  

    4.9      Certificate of Designation,  Preferences and Relative,  Participating,  Optional or Other Special Rights of
             Series C Convertible Preferred Stock (20)                                                                  

   4.10      Certificate of Designation,  Preferences and Relative,  Participating,  Optional or Other Special Rights of
             Series D Convertible Preferred Stock (5)                                                                   

   4.11      Stock Purchase Agreement, dated as of October 23, 2002, by and                                             
             among Vital Living, Inc., MAF BioNutritionals, LLC, William A.                                             
             Coppel (personally and as a representative of Kenneth Martin),                                             
             Phillip B.                                                                                                 
             Maffetone, Leslie C. Quick, III, Thomas C. Quick and Kenneth Glah (6)                                      

   4.12      Subscription Agreement for November 2002 private placement of units (3)                                    

   4.13      Form of Subscription Agreement for Series B Convertible Preferred Stock (4)                                

   4.14      Form of Subscription Agreement for Series C Convertible Preferred Stock (7)                                

   4.15      Form of Subscription Agreement for Series D Convertible Preferred Stock (5)                                

   4.16      Registration Rights Agreement,  dated as of November 20, 2002, between Vital Living, Inc. and those persons
             listed on Exhibit A attached thereto (3)                                                                   

   4.17      Stockholders'  Agreement,  dated,  by and among Vital  Living,  Inc.,  Bradley D. Edson,  Stuart A. Benson,
             Martin Gerst,  Donald Hannah,  William Coppel,  Kenneth Martin,  Phil Maffetone,  Leslie C. Quick, III, and
             Thomas C. Quick (3)                                                                                        

   4.18      Stockholders'  Agreement,  dated August 20, 2003,  by and between  Vital  Living,  Inc.,  Bradley D. Edson,
             Stuart A. Benson, Donald Hannah, SkyePharma PLC, Fifth Avenue Capital, Inc. and Stephen Morris (5)         

   4.19      Registration  Rights  Agreement,  dated as of August 20,  2003,  by and  between  Vital  Living,  Inc.  and
             SkyePharma PLC (5)                                                                                         

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Exhibit No.                                                  Description                                                
-----------                                                  -----------                                                
                                                                                                                        
   4.20      Lock Up  Agreement,  dated as of May 21, 2001,  among  Bradley D. Edson  Martin  Gerst,  Donald  Hannah and
             Kenneth Lind (8)                                                                                           

   4.21      Amendment  No. 1 to Lock Up  Agreement,  dated as of May 21, 2001,  among  Bradley D. Edson  Martin  Gerst,
             Donald Hannah and Kenneth Lind (8)                                                                         

   4.22      Form of Securities Purchase Agreement for December 2003 private offering (9)                               

   4.23      Form of Senior Secured Convertible Note issued in December 2003 private offering (9)                       

   4.24      Form of Warrant issued in December 2003 private offering (9)                                               

   4.25      Form of Warrant issued in 2003 offering of senior convertible promissory notes (9)                         

   4.26      Form of Security Agreement for December 2003 private offering (9)                                          

   4.27      Form of Registration Rights Agreement for December 2003 private offering (9)                               

   4.28      Form of Escrow Agreement for December 2003 private offering (9)                                            

   4.29      Form Purchase Agreement for March 2004 private offering (21)                                               

   4.30      Form of Securities Purchase Agreement for June 2004 private offering (21)                                  

   4.31      Form of Series G Warrant (21)                                                                              

   4.32      Form of Series H Warrant (21)                                                                              

   4.33      Form of Registration Rights Agreement for June 2004 private offering (21)                                  

   4.34      Asset Purchase Agreement,  dated September 30, 2004, among Vital Living, Inc., MAF BioNutritional,  LLC and
             Radha Krishna Heartly Blessings, Inc.(22)                                                                  

   10.1      2001 Stock Option Plan (1)                                                                                 

   10.2      Agreement, dated August 21, 2001, between Vital Living, Inc. and Arizona Heart Institute, Inc. (8)         

   10.3      Addendum,  dated April 4, 2002, to Agreement between Vital Living,  Inc. and Arizona Heart Institute,  Inc.
             (10)                                                                                                       

   10.4      Amendment No. 1, dated July 15, 2003, to Agreement  Vital Living,  Inc. and Arizona Heart  Institute,  Inc.
             (11)                                                                                                       

   10.5      Distribution Agreement,  dated August 21, 2001, between Vital Living, Inc. and Advanced Medical China, Ltd.
             (8)                                                                                                        

   10.6      Amendment  No. 1 to  Distribution  Agreement,  dated  February 26, 2002,  between  Vital  Living,  Inc. and
             Advanced Medical China, Ltd. and AHI Management Hong Kong Ltd. (12)                                        

   10.7      Employment agreement, dated October 1, 2001, between Vital Living, Inc. and Bradley D. Edson (8)           

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Exhibit No.                                                  Description                                                
-----------                                                  -----------                                                
                                                                                                                        
   10.8      Amendment No. 1, dated October 1, 2002, to Employment  Agreement between Vital Living,  Inc. and Bradley D.
             Edson (3)                                                                                                  

   10.9      Consultant Agreement, dated October 1, 2001, between Vital Living, Inc. and Howard Wernick (8)             

   10.10     Consulting Agreement, dated March 20, 2002, between Vital Living, Inc. and Leslie D. Michelson (13)        

   10.11     Consulting Agreement, dated March 20, 2002, between Vital Living, Inc. and Brian C. Smith (13)             

   10.12     Consulting Agreement, dated March 20, 2002, between Vital Living, Inc. and Michael H. Davidson, M.D. (13)  

   10.13     Form of Clinical Trial Agreement, between Vital Living, Inc. and the City of Phoenix Fire Department (14)  

   10.14     Executive  Services  Agreement,  dated as of November 20, 2002,  between Vital  Living,  Inc. and Stuart A.
             Benson (3)                                                                                                 

   10.15     Amendment No. 1 to Employment Agreement between Vital Living, Inc. and Stuart A. Benson (20)               

   10.16     Amendment No. 2 to Employment Agreement between Vital Living, Inc. and Stuart A. Benson (20)               

   10.17     Warrant Agreement, dated November 20, 2002, between Vital Living, Inc. and Stuart A. Benson (10)           

   10.18     Amendment No. 1 to Warrant Agreement between Vital Living, Inc. and Stuart A. Benson (4)                   

   10.19     Amendment No. 2 to Warrant Agreement between Vital Living, Inc. and Stuart A. Benson (20)                  

   10.20     Financial  Advisor  Services  Agreement,  dated July 29,  2002,  between  Vital  Living,  Inc. and Peck and
             Grossman, LLC (14)                                                                                         

   10.21     Agreement, dated February 3, 2003, between Vital Living, Inc. and CHG Allied Inc. (14)                     

   10.22     Agreement,  dated  September 30, 2002,  between  Vital Living,  Inc. and Medical  Resource,  LLC,  National
             Provider Network (14)                                                                                      

   10.23     Consulting Agreement, dated as of October 8, 2002, between Vital Living, Inc. and  Martin Wallace (14)     

   10.24     Management  Agreement,  dated as of April 17, 2003, between Vital Living,  Inc. and Christopher's  Original
             Formulas, Inc. (4)                                                                                         

   10.25     Consulting Agreement, dated May 19, 2002, between Vital Living, Inc. and Stephen Songsheng Chen (4)        

   10.26     Warrant Agreement, dated April 16, 2003, between Vital Living, Inc. and Stephen Songsheng Chen (4)         

   10.27     Scientific  Advisory  Board  Agreement,  dated May 15, 2002,  between  Vital  Living,  Inc. and Dr.  Dennis
             Sprecher (15)                                                                                              

   10.28     Scientific Advisory Board Agreement,  dated May 30, 2002, between Vital Living, Inc. and John A. Sutherland
             (16)                                                                                                       

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Exhibit No.                                                  Description                                                
-----------                                                  -----------                                                
                                                                                                                        
   10.29     Scientific Advisory Board Agreement,  dated May 16, 2002, among Vital Living,  Inc., Thomas Allison and the
             Mayo Foundation for Medical Education and Research (15)                                                    

   10.30     Scientific  Advisory Board Agreement,  dated June 17, 2002, between Vital Living, Inc. and Ronald M. Krauss
             (17)                                                                                                       

   10.31     Scientific Advisory Board Agreement, dated May 7, 2002, between Vital Living, Inc. and  Dr. David Maron (4)

   10.32     Settlement and Release Agreement, dated June 25, 2003, between Vital Living, Inc. and William Coppel (18)  

   10.33     Asset Purchase  Agreement,  dated as of June 20, 2003, among Vital Living,  Inc.,  Nature's Systems,  Inc.,
             Christopher's Original Formulas, Inc., Robert C. Scott and James R. Jeppson (18)                           

   10.34     Form of Escrow  Agreement,  dated August 20, 2003,  between Vital  Living,  Inc.,  E-Nutraceuticals,  Inc.,
             Stephen Morris and Mercantile National Bank - California, as escrow agent (5)                              

   10.35     Development  and License  Agreement,  dated as of December 28,  2001,  between  E-Nutraceuticals,  Inc. and
             SkyePharma PLC (5)                                                                                         

   10.36     Amendment  No. 1, dated as of August 20,  2003,  to  Development  and License  Agreement by and among Vital
             Living, Inc., E-Nutraceuticals, Inc., Jagotec AG and SkyePharma PLC (5)                                    

   10.37     Stock Purchase  Agreement,  dated as of October 14, 2003, among Vital Living, Inc. and the shareholders set
             forth on the signature page attached thereto (19)                                                          

   10.38     Escrow Agreement,  dated as of October 14, 2003, among Vital Living,  Inc., the shareholders of Doctors For
             Nutrition, Inc. and Mercantile National Bank - California (19)                                             

   10.39     Executive Services Agreement,  dated as of October 14, 2003, between Doctors For Nutrition,  Inc. and Bruce
             Howe (19)                                                                                                  

   10.40     Strategic Advisor Agreement, dated October 14, 2003, between Vital Living, Inc. and Dr. Roger Howe (19)    

   10.41     Strategic Advisor Agreement, dated October 14, 2003, between Vital Living, Inc. and Dr. Maynard Howe (19)  

   10.42     Form of  Indemnification  Agreement  between the Company  and each of Bradley D. Edson,  Stuart A.  Benson,
             Donald C. Hannah,  Carson E. Beadle,  Leslie C. Quick, Robert J. Eide, David Allen,  Marcus Feder,  Mitchel
             Feinglas and Michael Ashton (2)                                                                            

  10.42.1    Schedule of Indemnification Agreements in the form of Exhibit  10.42, including material detail in which   
             such documents differ from Exhibit 10.42 (2)                                                               

   10.43     Amendment No. 1, dated as of January 13, 2004,  to  Stockholders'  Agreement,  dated as of August 14, 2003,
             between each of the Company,  Bradley D. Edson, Stuart Benson,  Donald Hannah,  Stephen Morris,  SkyePharma
             PLC and Fifth Avenue Capital, Inc. (20)                                                                    

   10.44     Stock Option Agreement, dated as of April 19, 2004, between the Company and Nest Ventures, LLC (23)        

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Exhibit No.                                                  Description                                                
-----------                                                  -----------                                                
                                                                                                                        
   10.45     Settlement and Release Agreement,  dated 9, 2004, between the Company,  Natures System, Inc., Christopher's
             Original Formulas,  Inc., Christopher  Enterprises,  Inc., Robert Scott, James Jeppson, Norman Barala, Ruth
             Christopher and Stuart Benson (21)                                                                         

   10.46     Employment  Agreement between Vital Living,  Inc. and Stuart Benson,  dated January 1, 2005 effective as of
             February 15, 2005 (24)                                                                                     

   10.47     Employment  Agreement  between Vital  Living,  Inc. and Gregg Linn,  dated January 1, 2005  effective as of
             February 15, 2005 (24)                                                                                     

   31.1      Certification of Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley  Act of 2002 (Filed
             Herewith)                                                                                                  

   31.2      Certification of Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley  Act of 2002 (Filed
             Herewith)                                                                                                  

   32.1      Certification  of Chief  Executive  Officer  and Chief  Financial  Officer  pursuant  to Section 906 of the
             Sarbanes-Oxley Act of 2002 (Filed Herewith)                                                                

   32.2      Certification  of Chief  Executive  Officer  and Chief  Financial  Officer  pursuant  to Section 906 of the
             Sarbanes-Oxley Act of 2002 (Filed Herewith)                                                                

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

      (1)   Incorporated by reference to current Report on Form 8-K dated August
17, 2001 and filed with the SEC on October 1, 2001      

  (2)   Incorporated by reference to Registration Statement on Form SB-2
(333-111921) filed with the SEC on January 14, 2004     

 (3)   Incorporated by reference to current Report on Form 8-K/A dated
    November 20, 2002 and filed with the SEC on December 5, 2002

(4)   Incorporated by reference to Amendment No. 2 to Registration  
   Statement on Form SB-2 (333-102106) filed on April 28, 2003

      (5)   Incorporated by reference to current Report on Form 8-K dated August
21, 2003 and filed with the SEC on September 8, 2003    

(6)   Incorporated by reference to current Report on Form 8-K dated 
   October 23, 2002 and filed with the SEC on November 4, 2002

(7)   Incorporated by reference to Amendment No. 3 to Registration  
  Statement on Form SB-2 (333-102106) filed on June 18, 2003

      (8)   Incorporated by reference to current Report on Form 8-K dated August
17, 2001 and filed with the SEC on November 20, 2001    

(9)   Incorporated by reference to current Report on Form 8-K dated 
     December 15, 2003 and filed with the SEC on December 19, 2003

     (10)  Incorporated by reference to current Report on Form 8-K dated April
1, 2002 and filed with the SEC on April 16, 2002        

(11)  Incorporated by reference to Amendment No. 4 to Registration  
  Statement on Form SB-2 (333-102106) filed on July 23, 2003

(12)  Incorporated by reference to current Report on Form 8-K dated 
     February 27, 2002 and filed with the SEC on February 28, 2002

   (13)  Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001                     

(14)  Incorporated by reference to Amendment No. 1 to Registration  
  Statement on Form SB-2 (333-102106) filed on March 7, 2003

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   (15)  Incorporated by reference to current Report on Form 8-K dated May
15, 2002 and filed with the SEC on May 31, 2002         

   (16)  Incorporated by reference to current Report on Form 8-K dated May
30, 2002 and filed with the SEC on June 13, 2002        

    (17)  Incorporated by reference to current Report on Form 8-K dated June
17, 2002 and filed with the SEC on July 2, 2002         

    (18)  Incorporated by reference to current Report on Form 8-K dated July
2, 2003 and filed with the SEC on July 16, 2003         

 (19)  Incorporated by reference to current Report on Form 8-K/A dated
   October 14, 2003 and filed with the SEC on December 5, 2003

   (20)  Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003                     

  (21)  Incorporated by reference to Registration Statement on Form SB-2
(333-102106) filed on August 3, 2004                    

(22)  Incorporated by reference to current Report on Form 8-K dated 
     September 30, 2004 and filed with the SEC on October 20, 2004

     (23)  Amendment No. 1 to Registration Statement on Form SB-2 filed on May
12, 2004                                                

(24)  Incorporated by reference to current Report on Form 8-K dated 
     February 15, 2005 and filed with the SEC on February 18, 2005

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(b)   We filed the following reports on Form 8-K during the quarter ended       
December 31, 2004.                                                  

 (1)   A Report on Form 8-K was filed with the Securities and Exchange
  Commission on October 20, 2004 relating to a change in the
           conversion and exercise price of the Secured Notes iin exchange for
       allowing us to pay interest either cash or shares of our common
stock .                                                 

 (2)   A Report on Form 8-K was filed with the Securities and Exchange
       Commission on November 4, 2004 relating to the dismissal of our
independent accountants.                                

   (3)   A Report on Form 8-K/A was filed with the Securities and Exchange
           Commission on November 11, 2004 amending a Report on Form 8-K filed
     November 4, 2004 relating to the dismissal of our independent
accountants..                                           

 (4)   A Report on Form 8-K was filed with the Securities and Exchange
   Commission on November 22, 2004 relating to a press release
       discussing our financial results for the third quarter of 2004.

Item 14. Principal Accountants Fees and Services Index to Consolidated Financial
Statements                                                                      

    The information required by this Item 14 is incorporated by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the    
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.    

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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 on
its behalf by the undersigned, thereunto duly authorized.                       

                  VITAL LIVING, INC.

                    /s/ STUART A. BENSON
                                        ----------------------------------------
                Stuart A. Benson
                                     President and Chief Executive Officer

Date: June 21, 2005                                                             

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 VITAL LIVING, INC

 Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheet of Vital Living,    
Inc. and subsidiaries as of December 31, 2004 and the related statements of     
operations, stockholders' equity, and cash flows for the two years in the period
then ended. These financial statements are the responsibility of the Company's  
management. Our responsibility is to express an opinion on these financial      
statements based on our audits.                                                 

We conducted our audits in accordance with the standards of the Public Company  
Accounting Oversight Board (United States). Those standards require that we plan
and perform the 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 Vital Living, Inc. and         
subsidiaries as of December 31, 2004 and the results of their operations and    
their cash flows for the two years in the period then ended in conformity with  
accounting principles generally accepted in the United States of America.       

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. As discussed in Note 2 to the         
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit, and is dependent on funding sources from other   
than operations. Since inception, the Company has been required to raise        
additional capital by the issuance of both equity and debt instruments. There   
are no commitments from funding sources, debt or equity, in the event that cash 
flows are not sufficient to fund ongoing operations or other cash commitments   
when they come due. These factors raise substantial doubt about the Company's   
ability to continue as a going concern. Management's plans regarding these      
matters are also described in Note 2. The financial statements do not include   
any adjustments that might result from the outcome of this uncertainty.         

/s/ Epstein Weber & Conover PLC                                                 

Scottsdale, Arizona                                                             
April 8, 2005                                                                   

F-1 

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VITAL LIVING, INC.
 Consolidated Balance Sheets
                                                                  December 31,
                                                                  2004
                                                                  ------------
Assets                                                                          
Current assets:                                                                 
Cash and cash equivalents                                          $    466,000 
Accounts receivable, trade; net of allowance                                    
 for doubtful accounts of $37,000                                      446,000
Inventory, net of reserve of $379,000                                   141,000 
Marketable securities                                                   173,000 
Prepaid expenses and other current assets                                71,000 
                                                                  ------------
  Total current assets                                               1,297,000
                                                                  ------------

Other assets                                                                    
Deferred debt issuance costs, net of accumulated                                
 amortization of $450,000                                              766,000
Property and equipment, net                                              70,000 
Goodwill                                                              3,226,000 
License agreement - GEOMATRIX(R), net                                20,784,000 
Other intangible assets, net                                             15,000 
Other non-current assets                                                 13,000 
                                                                  ------------
   Total other assets                                               24,874,000
                                                                  ------------

Total assets                                                       $ 26,171,000 
                                                                  ============

Liabilities and Stockholders' Equity                                            
Current liabilities:                                                            
Accounts payable, trade                                            $  1,981,000 
Accrued and other current liabilities                                 1,728,000 
Current portion of long-term debt                                       401,000 
                                                                  ------------
  Total current liabilities                                          4,110,000
                                                                  ------------

Long-term debt, net of unamortized debt discount                                
 of $2,140,000                                                       2,146,000
                                                                  ------------
   Total liabilities                                                 6,256,000
                                                                  ------------

Commitments and contingencies                                                -- 
Stockholders' equity                                                            
Preferred stock, $0.001 par value, 50,000,000                                   
shares authorized:                                                          
Preferred stock - Series C, $0.001 par value,                                   
3,000,000 shares authorized; 500,000 shares                                 
 issued and outstanding                                                     --
Preferred stock - Series D, $0.001 par value,                                   
1,000,000 shares authorized; 1,000,000 and                                  
1,000,000 shares issued and outstanding,                                    
 respectively                                                            1,000
Additional paid-in capital - preferred                                  304,000 
Common stock, $0.001 par value, 150,000,000                                     
shares authorized; 99,016,000 shares issued,                                
 98,592,000 outstanding                                                 99,000
Additional paid-in capital - common                                  86,733,000 
Stock, options, and warrants - unamortized                             (214,000)
Treasury stock, 424,000 shares at cost                                  (72,000)
Accumulated other comprehensive income                                 (946,000)
Accumulated deficit                                                 (65,990,000)
                                                                  ------------
   Total stockholders' equity                                       19,915,000
                                                                  ------------

Total liabilities and stockholders' equity                         $ 26,171,000 
                                                                  ============

See accompanying notes to consolidated financial statements.                    

F-2 

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VITAL LIVING, INC.
 Consolidated Statements of Operations

                                                     Year Ended December 31,
                                                  ----------------------------
                                                  2004            2003
                                                  ------------    ------------

Revenue                                            $  4,161,000    $    498,000 
Cost of goods sold                                    2,801,000         237,000 
                                                  ------------    ------------
    Gross profit                                     1,360,000         261,000
                                                  ------------    ------------

Administrative expenses                                                         
   Salaries and benefits                               992,000      11,449,000
   Professional and consulting fees                  1,676,000       3,203,000
   Selling, general and administrative               1,937,000       1,275,000
   Research and development                          1,180,000         411,000
   Depreciation and amortization                     4,560,000       1,811,000
   Impairment of goodwill and intangibles           14,976,000       6,777,000
                                                  ------------    ------------
       Total administrative expenses                25,321,000      24,926,000
                                                  ------------    ------------
Net loss from operations                            (23,961,000)    (24,665,000)
Other income (expense)                                                          
    Other expense                                    (2,036,000)     (2,541,000)
                                                  ------------    ------------
Net loss before discontinued operations             (25,997,000)    (27,206,000)
                                                  ------------    ------------
Discontinued operations                                                         
    Loss from operations                             (2,772,000)       (729,000)
Gain (loss) on disposal                             597,000             
                                                  ------------    ------------
Loss from discontinued operations                    (2,175,000)       (729,000)
                                                  ------------    ------------
Net loss                                            (28,172,000)    (27,935,000)
                                                  ------------    ------------

Deemed dividend associated with beneficial                                      
  conversion of preferred stock                        (126,000)     (1,643,000)
Preferred stock dividend                               (300,000)       (585,000)
                                                  ------------    ------------
Net loss available to common stockholders          $(28,598,000)   $(30,163,000)
                                                  ============    ============

Basic and diluted loss per share before                                         
  discontinued operations                          ($      0.40)   ($      0.85)
Gain (loss) from discontinued operations           ($      0.03)   ($      0.02)
Preferred stock dividend                           ($      0.01)   ($      0.07)
                                                  ------------    ------------
Basic and diluted loss per share available to                                   
  common stockholders                              ($      0.44)   ($      0.94)
                                                  ============    ============
Weighted average basic and diluted common stock                                 
 outstanding                                        64,878,000      31,992,000
                                                  ============    ============

See accompanying notes to consolidated financial statements.                    

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VITAL LIVING, INC.
 Consolidated Statements of Cash Flows

                                                        · Enlarge/Download Table

                                                             Year Ended December 31,   
                                                              2004            2003     
                                                          ------------    ------------ 
                                                                                       
Cash flows from operating activities:                                                  
    Net loss                                              $(28,172,000)   $(27,935,000)
    Adjustments to reconcile net loss to net cash                                      
      used in operating activities:                                                    
        Depreciation and amortization                        4,560,000       1,827,000 
        Impairment of goodwill                              14,976,000       6,777,000 
        Warrants issued, beneficial conversion, and                                    
          amortization of costs associated with senior                                 
          convertible notes                                    765,000       2,050,000 
        Issuance of common stock for services                  754,000         693,000 
        Issuance of common stock for shareholder penalty                               
          interest                                             287,000         156,000 
        Issuance of common stock for compensation              581,000       1,781,000 
        Issuance of warrants for services                           --          33,000 
        Issuance of warrants for compensation                       --       6,800,000 
        Repricing of and modifications to warrants          (1,624,000)      1,781,000 
        Amortization of restricted common stock, options                               
          and warrants issued for services                     941,000         970,000 
        Loss on discontinued operations                      2,772,000         728,000 
        Gain on disposal of discontiunued operations          (597,000)             -- 
        Allowance for bad debt                                   5,000         (54,000)
        Inventory reserve                                      360,000        (172,000)
        Loss on disposal of assets                                  --          44,000 
    Change in operating assets and liabilities:                                        
        Accounts receivable                                   (197,000)         50,000 
        Inventory                                             (454,000)        183,000 
        Prepaid expenses and other current assets            1,113,000        (851,000)
        Accounts payable                                       446,000          (3,000)
        Accrued and other current liabilities                  697,000       1,169,000 
                                                          ------------    ------------ 
            Cash used in continuing activities              (2,787,000)     (3,973,000)
            Cash used by discontinued operations              (763,000)       (764,000)
                                                          ------------    ------------ 
    Net cash used in operating activities:                  (3,550,000)     (4,737,000)
                                                          ------------    ------------ 

Cash flows from investing activities:                                                  
    Purchases of property, equipment and intangibles           (51,000)        (51,000)
    Proceeds from sale of discontinued operations               50,000              -- 
    Cost of acquisitions, net of cash acquired of                                      
      $291,000 and $78,000, respectively                            --        (416,000)
                                                          ------------    ------------ 
            Cash used in investing activities                   (1,000)       (467,000)
                                                          ------------    ------------ 

Cash flows from financing activities:                                                  
    Payment on notes and payables to related                                           
      parties, net                                             (31,000)        (57,000)
    Conversion of senior secured convertible to                                        
      common stock                                             393,000              -- 
    Borrowings on long term debt, net                               --       4,287,000 
    Debt issuance costs                                             --        (751,000)
    Purchase of treasury stock                                      --         (72,000)
    Proceeds from sale of common stock, options, and                                   
      warrants,  net of offering costs                       1,932,000          26,000 
    Proceeds from sale of preferred stock,                                             
      net of offering costs                                         --       2,127,000 
                                                          ------------    ------------ 
            Cash provided by financing activities            2,294,000       5,560,000 
                                                          ------------    ------------ 

Effect of foreign exchange rates on cash                        (6,000)        (43,000)

Net (decrease) increase in cash                             (1,263,000)        313,000 
                                                          ------------    ------------ 
Cash at beginning of period                                  1,729,000       1,416,000 
                                                          ------------    ------------ 
Cash at end of period                                     $    466,000    $  1,729,000 
                                                          ============    ============ 

See accompanying notes to consolidated financial statements.                    

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VITAL LIVING, INC.
 Consolidated Statements of Cash Flows
 (continued)

                                                        · Enlarge/Download Table

                                                                                      Year Ended December 31,      
                                                                              -----------------   -----------------
                                                                                     2004                2003      
                                                                              -----------------   -----------------
                                                                                                                   
Supplemental cash flow information                                                                                 
    Interest paid                                                             $         190,000   $         115,000
                                                                              =================   =================

Non cash investing activities                                                                                      
    Common stock issued for acquisitions and acquisition costs                $              --   $      47,748,000
                                                                              =================   =================

Non cash financing activites                                                                                       
    Issuance of common stock for services, settlements and interest           $         766,000   $       1,716,000
                                                                              =================   =================
    Issuance of common stock for compensation                                 $         581,000   $       1,781,000
                                                                              =================   =================
    Common stock for Series C Preferre stock offering costs                   $              --   $          74,000
                                                                              =================   =================
    Preferred stock for preferred stock dividend                              $              --   $         380,000
                                                                              =================   =================
    Issuance of common stock for marketable securities                        $       1,070,000   $              --
                                                                              =================   =================
    Issuance of common stock for intangibles                                  $       1,642,000   $              --
                                                                              =================   =================
    Issuance of common stock for common stock offering costs                  $          80,000   $              --
                                                                              =================   =================
    Issuance of warrants and options for services                             $         745,000   $         460,000
                                                                              =================   =================
    Issuance of warrants for common stock offering                            $         625,000   $              --
                                                                              =================   =================
    Issuance of warrants for compensation                                     $              --   $       6,800,000
                                                                              =================   =================
    Warrants for preferred stock offerings                                    $              --   $         229,000
                                                                              =================   =================
    Warrants for preferred stock offering costs                               $              --   $         105,000
                                                                              =================   =================
    Warrants for convertible debt offering                                    $              --   $       2,072,000
                                                                              =================   =================
    Repricing of  and amendments to options and warrants                      $       1,624,000   $       1,781,000
                                                                              =================   =================
    Issuance of Series A preferred stock dividend                             $         250,000   $              --
                                                                              =================   =================
    Issuance of preferred stock for preferred stock dividend in arrears       $         204,000   $              --
                                                                              =================   =================
    Conversion of preferred to common                                         $              --   $       1,304,000
                                                                              =================   =================
    Conversion of Series A preferred stock to common stock                    $       4,516,000   $              --
                                                                              =================   =================
    Conversion of Series B preferred stock to common stock                    $       1,250,000   $              --
                                                                              =================   =================
    Conversion of senior notes and accrued interest                           $              --   $       1,548,000
                                                                              =================   =================
    Beneficial conversion of convertible debt                                 $              --   $       2,190,000
                                                                              =================   =================
    Deemed dividend associated with beneficial conversion of preferred stock  $         127,000   $         623,000
                                                                              =================   =================

See accompanying notes to consolidated financial statements                     

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VITAL LIVING, INC.
 Consolidated Statements of Stockholders' Equity

                                                        · Enlarge/Download Table

                                  ------------------Preferred Stock---------------------   --------------Common Stock-------------- 

                                                              Additional                                                Additional  
                                                                Paid-In                                                   Paid-In   
                                    Shares       Par Value      Capital       Discount        Shares      Par Value       Capital   
                                  ----------   ------------   -----------   ------------   -----------   -----------   ------------ 
                                                                                                                                    
Balance December 31, 2002          3,712,000   $      4,000   $ 6,972,000   ($ 1,147,000)   17,843,000   $    18,000   $   8,021,00 
                                  ----------   ------------   -----------   ------------   -----------   -----------   ------------ 
Series A Preferred stock                                                                                                            
  conversion                        (682,000)  ($     1,000)  ($1,303,000)  $         --       682,000   $     1,000   $  1,303,000 

Series A Preferred stock                                                                                                            
  dividend,                          380,000             --       380,000             --            --            --             -- 
Series B Preferred stock issued                                                                                                     
  for cash,                        1,000,000          1,000       803,000             --            --            --         70,000 
Series C Preferred stock issued                                                                                                     
  for cash                           500,000             --       100,000             --        62,000            --        337,000 
Series C Preferred stock                                                                                                            
  beneficial conversion feature           --          1,000       253,000       (253,000)           --            --             -- 
Series D Preferred stock issued                                                                                                     
  for cash                         1,000,000          1,000       814,000             --            --            --             -- 
Series D Preferred stock                                                                                                            
  beneficial conversion feature           --             --       370,000       (370,000)           --            --             -- 
Amortization of preferred stock                                                                                                     
  beneficial conversion features          --             --            --      1,643,000            --            --             -- 
Common stock issued for services                                                                                                    
  and settlements                         --             --            --             --     1,425,000         1,000      1,715,000 
Common stock issued for                                                                                                             
  compensation                            --             --            --             --     1,300,000         1,000      1,780,000 
Common stock issued for                                                                                                             
  acquisition of COF                      --             --            --             --     2,754,000         3,000      2,972,000 
Common stock issued for                                                                                                             
  acquisition of ENI                      --             --            --             --    32,398,000        32,000     42,340,000 
Common stock issued for                                                                                                             
  acquisition of DFN                      --             --            --             --     1,700,000         2,000      2,400,000 
Convertible debt beneficial                                                                                                         
  conversion feature                      --             --            --             --            --            --      2,190,000 
Convertible debt detachable                                                                                                         
  warrants issued                         --             --            --             --            --            --      2,072,000 
Options and warrants exercised            --             --            --             --       105,000            --         27,000 
Options and warrants issued for                                                                                                     
  services                                --             --            --             --            --            --        460,000 
Options and warrants issued for                                                                                                     
  compensation                            --             --            --             --            --            --      6,800,000 
Warrants repriced for an                                                                                                            
  employee                                --             --            --             --            --            --      1,526,000 
Warrant modification for a                                                                                                          
  consultant                              --             --            --             --            --            --        255,000 
Amortization of restricted                                                                                                          
  common stock, options, and                                                                                                        
  warrants issued for services            --             --            --             --            --            --             -- 
Treasury stock purchase,                                                                                                            
  424,000 shares at cost                  --             --            --             --            --            --             -- 
Comprehensive income:                     --             --            --             --            --            --             -- 
Change in cumulative                                                                                                                
  translation adjustment                  --             --            --             --            --            --             -- 
Net loss                                  --             --            --             --            --            --             -- 

Comprehensive Income                      --             --            --             --            --            --             -- 
                                  ----------   ------------   -----------   ------------   -----------   -----------   ------------ 
Balance December 31, 2003          5,910,000   $      6,000   $ 8,389,000   ($   127,000)   58,269,000   $    58,000   $ 74,268,000 
                                  ----------   ------------   -----------   ------------   -----------   -----------   ------------ 
Preferred stock conversion        (4,615,000)        (5,000)   (8,289,000)            --     5,068,000         5,000      8,289,000 

Beneficial conversion of                                                                                                            
  dividend payable                   205,000             --       204,000             --            --            --             -- 
Amortization of preferred stock                                                                                                     
  beneficial conversion features          --             --            --        127,000            --            --             -- 
Common stock issued for services                                                                                                    
  and settlements                         --             --            --             --       653,000         2,000        752,000 

Common stock issued for penalty                                                                                                     
  shares                                  --             --            --             --       357,000            --        287,000 

Commons stock issued for                                                                                                            
  marketable securities                   --             --            --             --     5,000,000         5,000      1,065,000 
Common stock issued for                                                                                                             
  acquisitions of intangibles             --             --            --             --     5,451,000         5,000      1,637,000 

Common stock issued for                                                                                                             
  compensation                            --             --            --             --       700,000         1,000        580,000 
Common stock returned pursuant                                                                                                      
  to holdback agreement on                                                                                                          
  purchase of ENI                         --             --            --             --      (791,000)       (1,000)    (1,033,000)
Recovery of shares related to                                                                                                       
  COF acquisition                         --             --            --             --    (1,850,000)       (2,000)      (553,000)
Common stock issued as dividend                                                                                                     
  on Series C Preferred                   --             --            --             --       250,000            --         50,000 
Common stock issued as dividend                                                                                                     
  on Series B preferred                   --             --            --             --       250,000            --        250,000 
Common stock issued in exchange                                                                                                     
  for Senior Secured Convertible                                                                                                    
  Notes                                   --             --            --             --     1,205,000         1,000        300,000 

Sale of common stock                      --             --            --             --     4,095,000         4,000        893,000 
Options and warrants exercised            --             --            --             --    19,753,000        20,000      1,015,000 

Options and warrants issued for                                                                                                     
  services                                --             --            --             --            --            --        245,000 

Common stock issued for                                                                                                             
  amortiazble services                    --             --            --             --       606,000         1,000        302,000 
Amortization of restricted                                                                                                          
  common stock, options, and                                                                                                        
  warrants issued for services            --             --            --             --            --            --        154,000 
Re-pricing of options                     --             --            --             --            --            --     (1,768,000)
Net loss                                  --                                                                                        
Comprehensive income:                     --             --            --             --            --            --             -- 
Loss on marketable securities             --             --            --             --            --            --             -- 
Change in cumulative translation                                                                                                    
  adjustment                              --             --            --             --            --            --             -- 

Other comprehensive gain/(loss)           --             --            --             --            --            --             -- 

Total Comprehensive income:               --             --            --             --            --            --             -- 

                                  ----------   ------------   -----------   ------------   -----------   -----------   ------------ 
Balance December 31, 2004          1,500,000   $      1,000   $   304,000   $          0    99,016,000   $    99,000   $ 86,733,000 
                                  ==========   ============   ===========   ============   ===========   ===========   ============ 

VITAL LIVING, INC.
 Consolidated Statements of Stockholders' Equity
(continued) 

                                                        · Enlarge/Download Table

                                     Stock,                 Accumulated                                              
                                  Options and                 Other                                                  
                                    Warrants    Treasury   Comprehensive    Retained     Comprehensive  Stockholders'
                                  Unamortized    Stock     Income (Loss)    Deficit         Income         Equity    
                                  -----------   --------   ------------   ------------   ------------   ------------ 
                                                                                                                     
Balance December 31, 2002         ($  982,000)  $      0   $         --   ($ 7,228,000)            --   $  5,658,000 
                                  -----------   --------   ------------   ------------   ------------   ------------ 
Series A Preferred stock                                                                                             
  conversion                      $        --   $     --   $         --   $         --             --   $          0 
Series A Preferred stock                                                                                             
  dividend,                                --         --             --       (585,000)            --   ($   205,000)
Series B Preferred stock issued                                                                                      
  for cash,                                --         --             --             --             --        874,000 
Series C Preferred stock issued                                                                                      
  for cash                                 --         --             --             --             --        437,000 
Series C Preferred stock                                                                                             
  beneficial conversion feature            --         --             --             --             --          1,000 
Series D Preferred stock issued                                                                                      
  for cash                                 --         --             --             --             --        815,000 
Series D Preferred stock                                                                                             
  beneficial conversion feature            --         --             --             --             --             -- 
Amortization of preferred stock                                                                                      
  beneficial conversion features           --         --             --     (1,643,000)            --             -- 
Common stock issued for services                                                                                     
  and settlements                    (569,000)        --             --             --             --      1,147,000 
Common stock issued for                                                                                              
  compensation                             --         --             --             --             --      1,781,000 
Common stock issued for                                                                                              
  acquisition of COF                       --         --             --             --             --      2,975,000 
Common stock issued for                                                                                              
  acquisition of ENI                       --         --             --             --             --     42,372,000 
Common stock issued for                                                                                              
  acquisition of DFN                       --         --             --             --             --      2,402,000 
Convertible debt beneficial                                                                                          
  conversion feature                       --         --             --             --             --      2,190,000 
Convertible debt detachable                                                                                          
  warrants issued                          --         --             --             --             --      2,072,000 
Options and warrants exercised             --         --             --             --             --         27,000 
Options and warrants issued for                                                                                      
  services                            (16,000)        --             --             --             --        444,000 
Options and warrants issued for                                                                                      
  compensation                             --         --             --             --             --      6,800,000 
Warrants repriced for an                                                                                             
  employee                                 --         --             --             --             --      1,526,000 
Warrant modification for a                                                                                           
  consultant                               --         --             --             --             --        255,000 
Amortization of restricted                                                                                           
  common stock, options, and                                                                                         
  warrants issued for services        970,000         --             --             --             --        970,000 
Treasury stock purchase,                                                                                             
  424,000 shares at cost                   --    (72,000)            --             --             --        (72,000)
Comprehensive income:                      --         --             --             --             --             -- 
Change in cumulative                                                                                                 
  translation adjustment                   --         --        (43,000)            --             --        (43,000)
Net loss                                   --         --             --    (27,935,000)            --    (27,935,000)
                                                                                                        ------------ 
Comprehensive Income                       --         --             --             --             --    (27,978,000)
                                  -----------   --------   ------------   ------------   ------------   ------------ 
Balance December 31, 2003         ($  597,000)  ($72,000)  ($    43,000)  ($37,391,000)            --   $ 44,491,000 
                                  -----------   --------   ------------   ------------   ------------   ------------ 
Preferred stock conversion                 --         --             --             --             --             -- 

Beneficial conversion of                                                                                             
  dividend payable                         --         --             --             --             --        204,000 
Amortization of preferred stock                                                                                      
  beneficial conversion features           --         --             --       (127,000)            --             -- 
Common stock issued for services                                                                                     
  and settlements                          --         --             --             --             --        754,000 

Common stock issued for penalty                                                                                      
  shares                                   --         --             --             --             --        287,000 

Commons stock issued for                                                                                             
  marketable securities                    --         --             --             --             --      1,070,000 
Common stock issued for                                                                                              
  acquisitions of intangibles              --         --             --             --             --      1,642,000 

Common stock issued for                                                                                              
  compensation                             --         --             --             --             --        581,000 
Common stock returned pursuant                                                                                       
  to holdback agreement on                                                                                           
  purchase of ENI                          --         --             --             --             --     (1,034,000)
Recovery of shares related to                                                                                        
  COF acquisition                          --         --             --             --             --       (555,000)
Common stock issued as dividend                                                                                      
  on Series C Preferred                    --         --             --        (50,000)            --             -- 
Common stock issued as dividend                                                                                      
  on Series B preferred                    --         --             --       (250,000)            --             -- 
Common stock issued in exchange                                                                                      
  for Senior Secured Convertible                                                                                     
  Notes                                    --         --             --             --             --        301,000 

Sale of common stock                       --         --             --             --             --        897,000 
Options and warrants exercised             --         --             --             --             --      1,035,000 

Options and warrants issued for                                                                                      
  services                           (245,000)        --             --             --             --             -- 

Common stock issued for                                                                                              
  amortiazble services               (303,000)        --             --             --             --             -- 
Amortization of restricted                                                                                           
  common stock, options, and                                                                                         
  warrants issued for services        787,000         --             --             --             --        941,000 
Re-pricing of options                 144,000         --             --             --             --     (1,624,000)
Net loss                                   --         --             --     (28,172,000)           --    (28,172,000)
Comprehensive income:                      --         --             --             --             --             -- 
Loss on marketable securities              --         --       (897,000)            --             --             -- 
Change in cumulative translation                                                                                     
  adjustment                               --         --         (6,000)            --             --             -- 
                                                           ------------                                              
Other comprehensive gain/(loss)            --         --       (903,000)      (903,000)            --       (903,000)
                                                                          ------------                               
Total Comprehensive income:                --         --             --    (29,075,000)            --    (29,075,000)
                                  -----------   --------   ------------   ------------   ------------   ------------ 
Balance December 31, 2004         ($  214,000)  ($72,000)  ($   946,000)  ($65,990,000)            --   $ 19,915,000 
                                  ===========   ========   ============   ============   ============   ============ 

See accompanying notes to consolidated financial statements.                    

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 VITAL LIVING, INC
Notes to Consolidated Financial Statements

Note 1 - Organization and Description of Business                               

     We were incorporated in the State of Nevada on January 22, 2001 under the
      name Nutritional Systems, Inc. We acquired substantially all of the assets
     of Vital Living, Inc. effective May 7, 2001 and changed our name to Vital
     Living, Inc. on May 20, 2001. We then merged with VCM Technology Limited,
    a company reporting under the Securities Exchange Act of 1934, on August
    16, 2001. As set forth in the terms of the merger agreement, we acquired
all of the outstanding shares of common stock of VCM from its sole  
stockholder in exchange for 5,062 shares of restricted common stock.
Following the merger, we continued as the surviving corporation and 
commenced reporting under the Securities and Exchange Act of 1934 by
   assuming the reporting of 1934 by assuming the reporting status of VCM,
   which in turn provided us with the ability to file for quotation on the
Over-the- Counter Bulleting Board under the symbol "VTLV".          

   Through a series of various acquisition and divestiture activities that
     occurred during 2004 and 2003, as described further below, we develop and
market nutritional supplements, and nutraceuticals products for     
distribution primarily through healthcare practitioners. Through a  
licensing agreement, we also have certain rights for the use of a   
pharmaceutical delivery system known as "GEOMATRIX." Our principal  
 products currently are Greensfirst(R), Dream Protein(R), and Complete
Essentials(R).                                                      

     Nutritional supplements represent a convenient and cost-effective way for
an individual to obtain the nutritional benefits of whole foods.    
    Nutritional supplements are formulated from whole foods and are intended
   to provide for improved health, reduced risk of diseases, and the delay
   onset of age related indicators while resulting in little added caloric
     and fat intake. Nutritional supplements come in powder, capsule, cracker,
     and other forms. Nutraceuticals, consisting of vitamins, minerals, herbs,
      and supplements, are products that are isolated or purified from foods and
generally sold in medicinal forms not usually associated with foods,
  including tablets, capsules, and drops. Nutraceuticals are intended to
 have physiological benefits or have the ability to reduce the risk of
chronic disease beyond basic nutritional products.                  

We develop and test our nutraceuticals in collaboration with leading
      medical experts in the nutraceuticals field. We have designed our products
to be incorporated by healthcare practitioners into standard patient
routines in which healthcare practitioners recommend and sell our   
      nutritional supplements and nutraceuticals products to their patients. Use
  of vitamins, minerals, herbs, and nutritional supplements continues to
  rise as consumers seek nutritional products to improve general health,
increase longevity, and enhance the overall quality of life.        

In November 2002, we acquired MAF BioNutritionals, LLC ("MAF"). MAF 
formulates, markets, and distributes natural and organic food-based,
    preventative nutraceuticals and therapeutic and functional food products
    designed to support proactive human cell maintenance and rehabilitation,
    essential in the prevention and treatment of disease, as well as overall
 optimal body performance and metabolic function. As further described
    below, we sold the primary assets of MAF and discontinued its operations
in September 2004.                                                  

      In July 2003, we completed the acquisition of the assets and assumption of
 certain liabilities of Christopher's Original Formulas, Inc. ("COF").
     Through this acquisition, we gained the exclusive licensing and marketing
    rights to Christopher's products, a line of over 300 herbal formulas and
    products, consisting primarily of naturally occurring organic substances
sold to professionals and at retail locations throughout the United 
      States. As further described below, we sold certain assets and liabilities
      of COF back to the previous owners and discontinued its operations in July
2004.                                                               

  In August 2003, we completed the acquisition of E-Nutraceuticals, Inc.
      ("ENI"). In addition, through a collaborative partnership with SkyePharma,
  PLC, ("Skye"), a UK pharmaceuticals company and a major shareholder of
ours, we are in the process of enhancing existing nutraceuticals via
FDA-approved, proprietary delivery systems. Pursuant to an amended  
Development and License Agreement between the parties, we acquired  
   exclusive rights to Skye's drug delivery technology, GEOMATRIX(TM), and
    marketing and royalty rights to pharmaceutical sales using GEOMATRIX(TM)
in the Peoples Republic of China, Taiwan, and Hong Kong.            

   In October 2003, we completed the acquisition of Doctors For Nutrition,
Inc. ("DFN"). DFN's product line includes GreensFIRST(R), a highly  
 concentrated formulation of fruits and vegetables. One serving of the
product has the antioxidant power of over 10 servings of fruits and 
vegetables. We currently distribute GreensFIRST(R) through health   
practitioner offices throughout the United States.                  

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 VITAL LIVING, INC
Notes to Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies                             

    The consolidated financial statements include Vital Living, Inc. and its
     wholly owned domestic and foreign subsidiaries (collectively, "We","Vital
      Living" or the "Company"). Consolidated financial statements are financial
   statements of a parent company and its subsidiaries presented as if the
   entities were a single economic unit. Although the assets, liabilities,
   revenues, and expenses of all entities are combined to provide a single
 set of financial statements, certain eliminations and adjustments are
   made. These eliminations are necessary to ensure that only arm's-length
      transactions between independent parties are reflected in the consolidated
statements; transactions between related parties are eliminated.    

Going concern                                                       

 The accompanying consolidated financial statements have been prepared
      assuming we will continue on a going concern basis, which contemplates the
   realization of assets and the satisfaction of liabilities in the normal
  course of business. We have suffered recurring losses from operations,
    have a working capital deficit, and depend on funding from sources other
than operations. Since inception, we have been required to raise    
  additional capital by the issuance of both equity and debt securities.
 There are no commitments from funding sources, debt or equity, in the
  event that cash flows are not sufficient to fund ongoing operations or
    other cash commitments as they come due. These factors raise substantial
doubt about our ability to continue as a going concern. We will be  
      required to raise additional capital in the near term through offerings of
  securities to fund our operations and will attempt to continue raising
  capital resources if we do not begin to generate revenue sufficient to
      maintain ourselves as a viable entity. No assurance can be given that such
      financing will be available or, if available, that it will be available on
commercially favorable terms. Moreover, available financing may be  
dilutive to current investors.                                      

     We are in the process of improving, acquiring, or developing products for
  sale that would generate revenue to sustain our operations, as well as
consolidating our operations in order to gain cost synergies and    
 efficiencies. If successful, these actions will serve to mitigate the
   factors that have raised doubt about our ability to continue as a going
 concern and increase the availability of resources for funding of our
   current operations and future market development. In addition, in March
      2004, we entered into a purchase agreement with investors and sold 250,000
  shares of our common stock at $1.00 per share with rights to receive a
   portion of net revenues, as defined therein, from the sale of X-Fat(R).
The consolidated financial statements do not include any adjustments
   relating to the recoverability and classification of recorded assets or
    liabilities that might be necessary should we be unable to continue as a
going concern.                                                      

Financial instruments                                               

 Our financial instruments consist of cash, receivables, payables, and
  long-term debt. The carrying amount of cash, receivables, and payables
    approximates fair value because of the short-term nature of these items.
      The carrying amount of long-term debt as of December 31, 2004 approximates
  fair value because interest rates and debt discounts are reflective of
market rates.                                                       

Concentrations of credit risk                                       

  Financial instruments that potentially subject us to concentrations of
      credit risk consist principally of cash. At various times during the year,
our cash balances may be in excess of federally insured limits. We  
maintain our cash, which consists primarily of demand deposits, with
   high-quality financial institutions, which we believe limits this risk.

Acquisitions                                                        

 We account for acquisitions in accordance with Statement of Financial
Accounting Standards, ("SFAS") No. 141 "Business Combinations" and  
accordingly apply the purchase method of accounting for all business
combinations initiated after June 30, 2001 and separately identify  
  recognized intangible assets that meet the criteria and amortize these
assets over their determinable useful lives.                        

Cash and cash equivalents                                           

   Our cash equivalents consist primarily of any financial instrument with
     maturities of three months or less and cash investments with high-quality
     financial institutions. Our investment policy limits the amount of credit
exposure to any one financial institution.                          

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Notes to Consolidated Financial Statements

Investments in marketable securities                                

Investments in marketable securities consist of corporate equity    
securities which are stated at market value. The Company currently  
  classifies all investment securities as available-for-sale. Unrealized
      gains and losses on such securities, net of the related income tax effect,
are excluded from earnings and report as a separate component of    
      stockolders' equity until realized. Realized gains and losses are included
    in earnings and are derived using the specific identification method for
determining the cost of the securities sold.                        

Investments in marketable securities consisted of the following at  
December 31, 2004:                                                  

                                                            Fair
                  Cost          Gains         Losses         Value
                      ----------------------------------------------------------
Equity securities     $ 1,070,000     $   --      $ (897,000)      $173,000     

   During the year ended December 31, 2004, the Company invested in common
     stock of Langely Park, an entity traded on the London stock exchange. The
   Company acquired these shares by issuing 5,000,000 shares of its common
    stock valued at eh $0.21 per share trading value on the date the Company
made the investment. On the basis of the trading value of Langely at
December 31, 2004 the Company has written down its investment to the
   estimated fair value and the unrealized loss of $897,000 is recorded in
other comprehensive income.                                         

Accounts Receivable                                                 

 The Company determines any required allowance by considering numerous
   factors including the length of time trade accounts receivable are past
   due and the Company's previous loss history. Receivables are considered
   past due when they are unpaid greater than 90 days. The Company records
   and allowance for accounts when they become uncollectible, and payments
  subsequently received on such accounts are reflected as a reduction of
that allowance. The allowance for doubtful accounts was $437,000 at 
December 31, 2004.                                                  

Inventories                                                         

    Inventories are stated at the lower of cost (first-in, first-out method)
     or market and consist of products available for sale or raw materials. At
      December 31, 2004 inventories for resale were $141,000 net of a reserve of
      $379,000. During the year ended December 31, 2004, the Company provided an
  allowance of $325,000 for inventory related to its X-Fat product line.

Property and equipment                                              

Property and equipment consists of office furniture, fixtures, and  
     equipment, including computer hardware and software and various leasehold
  improvements. We record Property and equipment at cost. We provide for
      Depreciation on a straight-line basis over the lesser of correlating lease
terms or estimated useful lives ranging from three to ten years.    

Goodwill                                                            

     Goodwill represents the excess of the aggregate price paid by us over the
  value of the net equity acquired in an acquisition. In accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets," we no longer  
  required to amortize goodwill, but are required to review goodwill for
   impairment at least annually whenever events indicate that the carrying
      amount of the asset may not be recoverable in accordance with SFAS No. 144
   "Accounting for the Impairment or Disposal of Long-Lived Assets." As of
   December 31, 2004, events had occurred that would indicate goodwill had
     been impaired and, accordingly, an impairment loss was recorded (see Note
5).                                                                 

Intangible assets                                                   

  Our other intangible assets include trademarks, patents, formulations,
     customer lists, and various marketing and license agreements. We amortize
intangible assets on a straight-line basis over the lesser of the   
   correlating agreements or estimated useful lives ranging from two to 14
years.                                                              

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Notes to Consolidated Financial Statements

Long-lived assets                                                   

      We review long-lived assets and identifiable other intangible assets to be
held and used for impairment at least annually or whenever events or
 changes in circumstances indicate that the carrying amount may not be
      recoverable. We evaluate goodwill and other intangible assets arising from
   various acquisitions for impairment on at least an annual basis or when
     events occur that would indicate that impairment had occurred. We measure
      impairment by comparing the carrying value of the long-lived assets to the
   estimated undiscounted future cash flows expected to result from use of
      the assets and their eventual disposition. As of December 31, 2004, events
    had occurred that would indicate goodwill and other intangibles had been
impaired; accordingly, an impairment loss was recorded (see Note 5).

Deferred charges                                                    

    We capitalize costs associated with the issuance of debt instruments. We
     amortize these costs are amortized on a straight-line basis over the term
   of the debt instruments. Amortization expense was $765,000 and $231,000
for the years ended for the year ended December 31, 2004 and 2003   
respectively. These amounts are recorded as a component of interest 
expense.                                                            

Accounting estimates                                                

The preparation of financial statements in conformity with generally
      accepted accounting principles in the United States of America requires us
 to make estimates and assumptions that affect the reported amounts of
  assets and liabilities at the date of the financial statements and the
  reported amounts of revenues and expenses during the reporting period.
     Some of the more significant estimates required to be made us include the
     valuation of inventory, intangible assets, and equity based transactions.
Actual results could differ from such estimates.                    

Income taxes                                                        

    We account for income taxes in accordance with SFAS No. 109, "Accounting
  for Income Taxes." Under the asset and liability approach specified by
      SFAS No. 109, a deferred tax asset or liability is determined based on the
  difference between the financial statement and tax basis of assets and
    liabilities as measured by the enacted rates that will be in effect when
these differences reverse. Deferred tax assets are recorded at their
likely realizable amounts.                                          

Revenue recognition                                                 

   We recognize revenue when products are shipped to customers. Our return
      policy provides for an unconditional guarantee to our customers for a full
 refund of any unused product, including product that has exceeded its
 expiration date. All returns are subject to quality assurance reviews
      before acceptance. We have determined that product returns are immaterial.
   However, we provide an allowance for returned product as a reduction of
revenue based on estimates and historical experience with individual
    customers. We offer, from time to time, volume and promotional discounts
on the products we sell. We record these discounts as a reduction of
revenue.                                                            

Comprehensive income                                                

     SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components
   within the financial statements. Other comprehensive income consists of
charges to stockholders' equity, other than contributions from or   
 distributions to stockholders, excluded from the determination of net
   income. Our other comprehensive income consists of unrealized gains and
      losses on available for sale securities and foreign currency translations.
   We do not provide for U.S. income taxes on foreign currency translation
adjustments since we do not provide for such taxes on undistributed 
earnings of foreign subsidiaries.                                   

Foreign currency translation                                        

 Financial statements of our foreign subsidiary are prepared using the
   local currency as the functional currency. Translation of these foreign
 operations to U.S. dollars occurs using the current exchange rate for
      balance sheet accounts and a weighted average exchange rate for results of
foreign operations. Translation gains or losses are recognized in   
"accumulated other comprehensive income (loss)" as a component of   
 stockholders' equity in the accompanying consolidated balance sheets.

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Notes to Consolidated Financial Statements

Research and development                                            

  We expense research and development costs relating to both present and
     future products when incurred. Research and development costs amounted to
   $1,180,000 and $411,000 for the years ended December 31, 2004 and 2003,
respectively.                                                       

Net loss per share                                                  

      We account for earnings per share ("EPS") in accordance with SFAS No. 128,
   "Earnings Per Share," which establishes the requirements for presenting
    EPS. SFAS No. 128 requires the presentation of "basic" and "diluted" EPS
     on the face of the income statement. Basic earnings per share begins with
   income (loss) applicable to common stockholders (net income (loss) less
     preferred stock dividends) and is based on the weighted average number of
common shares outstanding during each period presented. Diluted EPS 
  assumes the exercise of all stock options and warrants having exercise
   prices less than the average market price of the common stock using the
 treasury stock method. For the purpose of diluted earnings per common
    share, and only if such calculation results in dilution, preferred stock
    dividends will not reduce earnings; however, the weighted average common
      shares outstanding would increase representing the amount of common shares
      into which such preferred stock is currently convertible. During the years
     ended December 31, 2004 and 2003, we reported a net loss from operations;
 thus the effects of dilutive securities were anti-dilutive, rendering
   basic and diluted loss per share the same. Convertible preferred stock,
 warrants, and options to purchase common stock are included as common
 stock equivalents only when dilutive. Potentially dilutive securities
    excluded from the loss per share calculation for the year ended December
31, 2004 are as follows:                                            

Convertible preferred stock                    619,000  
Convertible debt                            19,283,000  
Warrants                                       815,000  
Employee options                               401,000  
                                          ----------
                                          21,118,000
                                          ==========

Stock based compensation                                            

      We account for our stock option plans in accordance with the provisions of
  SFAS No. 123, "Accounting for Stock Based Compensation," as amended by
SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and
   Disclosure." SFAS No. 123 permits entities to recognize as expense over
      the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25,   
   "Accounting for Stock Issued to Employees," and related interpretations
     and provide pro forma net income or loss and pro forma earnings per share
   disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied.                    

     We are subject to reporting requirements of FASB Financial Interpretation
No. ("FIN") 44, "Accounting for Certain Transactions Involving Stock
    Compensation," which requires a non-cash charge to deferred compensation
    expense if the price of our common stock on the last trading day of each
reporting period is greater than the exercise price of certain stock
    options. After the first such adjustment is made, each subsequent period
is adjusted upward or downward to the extent that the trading price 
exceeds the exercise price of the options.                          

    We account for our incentive plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25,   
    "Accounting for Stock issued to Employees," and related Interpretations.
  No stock-based employee compensation (except that related to re-priced
    warrants in accordance with FIN No. 44) is reflected in net loss, as all
    options and warrants granted had an exercise price equal to or below the
market value of the underlying common stock at the date of grant.   

     The fair value of our stock-based awards to employees was estimated using
the Black-Scholes option-pricing model. The Black-Scholes model was 
      developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, the
    Black-Scholes model requires the input of highly subjective assumptions,
  including the expected stock price volatility. Because our stock-based
    awards have characteristics significantly different from those of traded
     options and because changes in the subjective input can materially affect
the fair value estimate, in our opinion, the existing models do not 
  necessarily provide a reliable single measure of the fair value of our
     stock-based awards to employees. The fair value of our stock-based awards
    (including re-priced warrants discussed above) was estimated assuming no
     expected dividends and the following weighted average assumptions for the
years ended December 31:                                            

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 VITAL LIVING, INC
Notes to Consolidated Financial Statements

                                                      2004                2003
                                                      ----                ----
Expected life in years                                 3.00                4.00 
Expected stock price volatility                         37%                 33% 
Risk-free interest rate                                3.72%               3.14%
Average fair value per option/warrant                  $0.59               $0.68

      For pro forma purposes, the estimated fair value of our stock-based awards
to employees is amortized over the respective vesting periods.      

   The following table illustrates the effect on net loss and net loss per
      share if we had applied the fair value recognition provisions of Statement
 of Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
 Compensation," to our stock-based employee compensation for the years
ended December 31:                                                  

                                                        · Enlarge/Download Table

                                                                 2004           2003     
                                                             ------------   ------------ 
                                                                                         
Net loss - as reported                                       $(28,172,000)  $(27,935,000)
Add:                                                                                     
        Stock based compensation included                                                
          in determination of net loss                            170,180      1,526,000 
Deduct:                                                                                  

        Stock based employee compensation                                                
          determined under fair value based                                              
          method for all awards, net of related                                          
          tax effects                                             (54,083)    (1,356,000)
                                                             ------------   ------------ 

Net loss - pro forma                                          (28,055,903)   (27,765,000)
Deemed dividend associated with beneficial                                               
  conversion of preferred stock                                  (126,000)    (1,643,000)
Series A Preferred stock dividend                                (300,000)      (585,000)
                                                             ------------   ------------ 
Net loss available to common stockholders                                                
  - pro forma                                                $(28,481,903)  $(29,993,000)
                                                             ------------   ------------ 

Basic and diluted loss per share - as reported                                           
Basic and diluted loss per share - as reported               $      (0.43)  $      (0.87)
Basic and diluted loss per share available to                                            
  common stockholders - as reported                          $      (0.44)  $      (0.94)
Basic and diluted loss per share - pro forma                 $      (0.44)  $      (0.87)
Basic and diluted loss per share available to                                            
  common stockholders - pro forma                            $      (0.44)  $      (0.94)

Weighted average basic and diluted common stock outstanding    64,878,000     31,992,000 
                                                             ============   ============ 

The Company granted warrants to its CEO in 2003. These warrants were
    subsequently re-priced. As a result of this re-pricing, the award is now
   accounted as a variable award. Due to a decline in the trading price of
   the Company's common stock, there was a reduction in personnel costs of
$1,468,000 for the adjustments of the variable award.               

Recent accounting pronouncements-                                   

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain  
      Instruments with Characteristics of Both Liabilities and Equity." SFAS No.
150 clarifies the accounting for certain financial instruments with 
  characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial 
     position. Previously, many of those financial instruments were classified
  as equity. SFAS No. 150 is effective for financial instruments entered
 into or modified after May 31, 2003 and otherwise is effective at the
     beginning of the first interim period beginning after September 15, 2003.
The adoption of SFAS No. 150 did not have a material effect on our  
company.                                                            

    In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
      133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative     
   instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging 
     activities under SFAS No. 133, "Accounting for Derivative Instruments and
  Hedging Activities." This statement is effective for contracts entered
   into or modified after September 30, 2003. The adoption of SFAS No. 149
did not have a material effect on our Company.                      

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Notes to Consolidated Financial Statements

In January 2003, the FASB issued FIN 46, "Consolidation of Variable 
Interest Entities." In general, a variable interest entity is a     
corporation, partnership, trust, or any other legal entity used for 
 business purposes that either (a) does not have equity investors with
    voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46
 requires certain variable interest entities to be consolidated by the
   primary beneficiary of the entity if the investors in the entity do not
  have the characteristics of a controlling financial interest or do not
   have sufficient equity at risk for the entity to finance its activities
     without additional subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to variable  
interest entities created after January 31, 2003. The consolidation 
    requirements apply to older entities in the first fiscal year or interim
period beginning after September 15, 2003. Certain of the disclosure
   requirements apply to all financial statements issued after January 31,
  2003, regardless of when the variable interest entity was established.

   In December 2003, the FASB issued a revised Interpretation No. 46 ("FIN
  46R"), "Consolidation of Variable Interest Entities." FIN 46R requires
companies to consider whether entities, in which they have financial
      interests, lack sufficient equity at risk to permit that entity to finance
   its activities without additional subordinated financial support and to
     consolidate those entities where the company would absorb the majority of
    any losses. The consolidation requirements are effective for interim and
      annual periods ending after March 15, 2004. The adoption of FIN 46 and FIN
46R did not have a material effect on our Company.                  

 In December 2004 the FASB issued a revised Statement 123 (SFAS 123R),
  "Accounting for Stock-Based Compensation" requiring public entities to
      measure the cost of employee services received in exchange for an award of
equity instruments based on grant date fair value. The cost will be 
      recognized over the period during which an employee is required to provide
service in exchange for the award -- usually the vesting period. The
    effective date for this statement is as of the first interim period that
    begins after June 15, 2005. The Company is evaluating the impact of this
    new pronouncement and has not yet estimated the effect of implementation
on the Company's financial statements.                              

Note 3 - Mergers and Acquisitions                                               

   During 2004 and 2003, we acquired three companies. In each transaction,
 common stock was used as consideration and the excess of the purchase
      consideration over the net assets or obligations assumed, after allocation
     to respective identifiable intangible assets, was recorded as goodwill as
 summarized below. A description of each business combination follows.

                                                        · Enlarge/Download Table

                                                   ENI            DFN             WWS    
                                               ------------   ------------   ------------
                                                                                         
Purchase price paid                            $ 40,877,000   $  2,651,000   $    805,000
Less:                                                                                    
    Working capital (assets) liabilities, net       405,000       (314,000)             0
    Property and equipment, net                      (1,000)        (7,000)             0
    Intangibles, net                            (43,059,000)             0              0
Plus:                                                                                    
    Debt obligations assumed                        150,000              0              0
    Acquisition costs                             1,628,000         91,000              0
                                               ------------   ------------   ------------
Goodwill at purchase date                                 0      2,421,000        805,000
    Less: Impairment at December 31, 2004                 0                              
                                               ------------   ------------   ------------
Goodwill at December 31, 2004                  $         --   $  2,421,000   $    805,000
                                               ------------   ------------   ------------

E-Nutraceuticals, Inc.                                              

   On August 20, 2003, we acquired 100% of the outstanding common stock of
    ENI, a privately held Delaware corporation. The acquisition net purchase
      price of $41.3 million consisted of 31,500,000 shares of our common stock.
    Included in the purchase price was the cost of 251,000 options issued in
  exchange for existing ENI options, which were estimated to have a fair
  value of $254,000. Other acquisition costs include 1,150,000 shares of
    common stock valued at $1.30 per share or $1,495,000 issued to financial
advisors and $133,000 of legal and other related costs paid to      
professional advisors.                                              

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Notes to Consolidated Financial Statements

The total number of shares issued in this transaction, including the
 issuance of the Series D Preferred Stock (see Note 8), was 40% of the
total number of shares outstanding on a fully diluted basis, which  
     contemplates that all warrants, options, and various classes of preferred
stock are converted to common stock.                                

    The original recording of the ENI acquisition was based on a third-party
     business valuation and purchase price allocation provided by a reputable,
independent, full-service investment bank. The primary assets of ENI
     included the intangible value associated with the worldwide patent rights
      to X-Fat(R), a dietary supplement used in weight loss; licensing rights to
 GEOMATRIX(R), a time-released drug delivery technology; and marketing
     rights to pharmaceutical sales using GEOMATRIX(R) in the Peoples Republic
      of China, Taiwan, and Hong Kong. The purchase price allocation resulted in
  $43,059,000 being assigned to the value of these three agreements. The
   amortization period for these agreements was approximately 14 years for
  the GEOMATRIX and X-fat agreements and approximately two years for the
marketing agreement.                                                

   During 2004, based our continually monitoring of the fair value of both
the goodwill and intangible assets recorded as a result of the ENI  
acquisition, certain intangible asset impairment determinations were
concluded and during 2004, $15.0 million was deemed impaired.       

Doctors For Nutrition, Inc.                                         

    On October 14, 2003, we acquired 100% of the outstanding common stock of
  DFN, a privately held California corporation. The acquisition purchase
    price of $2.7 million consisted of 3,100,000 shares of our common stock.
Included in the acquisition costs were 50,000 shares of common stock
      issued to financial advisors. Goodwill recorded in this transaction is not
 deductible for federal income tax purposes. During 2004 an additional
    1,400,000 shares of our common stock were granted to the previous owners
of Doctors for Nutrition with a value of $308,000. This amount was  
recorded as an addition to Goodwill.                                

Wellness Watchers Systems, LLC.                                     

     On August 17, 2004, we consummated a joint venture with Wellness Watchers
International, Inc., or WWI, and together formed Wellness Watchers  
      Systems, LLC, or WWS. As of December 31, 2004, WWS was owned equally by us
      and WWI. The operating agreement gave us overall operating responsibility.
 WWS is consolidated within the financial statements of the Company at
      December 31, 2004. WWS manufactures a proprietary brand of dietary protein
    powder called Dream Protein(R), which is directly marketed to the health
practitioners together with our GreensFIRST(R) product. WWS plans to
  introduce complementary products that will be marketed as part of WWS'
Healthy Living Program(R). Part of WWI's contribution to WWS was the
exclusive licensing of certain products, client lists, and marketing
   strategies, which included Dream Protein(R). WWS has developed a unique
marketing strategy that channels products directly to health        
practitioners. We paid WWI $805,000 for its 50% interest in WWS. The
  purchase price consisted of 3,000,000 shares of our common stock along
with a $25,000 cash payment. Prior to forming WWS, WWI had no prior 
operating history. During 2004, WWS had total revenue of $400,000.  
Pursuant to the WWS operating agreement, we are responsible for all 
   operating loss incurred. Accordingly, we have not reported any minority
    interest during 2004. During February 2005, we acquired 100% interest in
WWS by issuing an additional 1,000,000 shares of common stock. In   
    conjunction with the 100% acquisition of WWS and certain other marketing
    and operation strategic productivity decisions, we have consolidated the
operations of WWS into DFN during the first quarter of 2005.        

Acquisition pro formas                                              

    The unaudited pro forma consolidated results of operations for the years
ended December 31, 2004 and 2003 have been prepared assuming the    
acquisitions of ENI, WWS and DFN and the corresponding issuance of  
    37,999,000 of common stock issued as consideration in these acquisitions
   as if they, had occurred as of January 1, 2002. Thus, the unaudited pro
     forma consolidated results of operations include the following periods of
operation:                                                          

    o     Vital Living, Inc. for the years ended December 31, 2004 and 2003.

     o     ENI for the period from April 1, 2003 through August 20, 2003 (date
of acquisition) and the year ended March 31, 2003.      

  o     DFN for the period from January 1, 2003 through October 14, 2003
   (date of acquisition) and the year ended December 31, 2002.

Presented below are the unaudited pro forma consolidated results of 
operations for the years ended:                                     

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Notes to Consolidated Financial Statements

                                                    December 31,
                                                  ----------------------------
                                                   2004             2003
                                                  ------------    ------------
Revenue                                            $  4,162,000    $  1,679,000 
Cost of goods sold                                    2,802,000         931,000 
                                                  ------------    ------------

Gross Profit                                          1,360,000         748,000 

Operating expenses and other                         27,357,000      28,247,000 
                                                  ------------    ------------

Net loss                                            (25,997,000)    (27,499,000)

Basic and diluted loss per share available to             (0.40)          (0.85)
common stockholders                                                             

NOTE 4 - PROPERTY AND EQUIPMENT-                                                

Property and equipment consists of the following at December 31:    

        2004
       ---------
Computer hardware and software   $ 132,000                          
Office Furniture and fixtures       39,000                          
Machinery and equipment             32,000                          
Leasehold improvements                   0                          
       ---------
Gross property and equipment       203,000                          
Less accumulated depreciation     (133,000)                         
       ---------
Net property and equipment       $  70,000                          
       ---------

Depreciation expense was $37,000 for 2004.                          

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Notes to Consolidated Financial Statements

NOTE 5 - INTANGIBLE ASSETS-                                                     

Intangible assets consisted of the following at December 31:        

                                    2004
                                     -----------------------------------------
                Gross Carrying
                                         Amount            Accumulated
                                  (net of impairment)       Amortization
                                     -------------------   -------------------

License agreement - Geomatrix         $        24,082,000   $        (3,298,000)
Marketing agreement                             2,577,000            (2,577,000)
Trademarks and patents                             20,000                (5,000)
                                     -------------------   -------------------
Total amortizable intangible assets   $        26,679,000   $        (5,880,000)
                                     -------------------   -------------------
Unamortizable intangible assets                                                 
Goodwill                    $         3,226,000             

                                       Estimated           Accumulated
                                       Amortization         Amortization
                                      Expense              Expense
                                       -------------------   -------------------

For the year ended December 31, 2005   $         2,429,000   $         8,309,000
For the year ended December 31, 2006             2,429,000            10,738,000
For the year ended December 31, 2007             2,429,000            13,167,000
For the year ended December 31, 2008             2,429,000            15,596,000
For the year ended December 31, 2009             2,429,000            18,025,000
For the year ended December 31, 2010             2,429,000            20,454,000
For the year ended December 31, 2011             2,429,000            22,883,000
For the year ended December 31, 2012             2,429,000            25,312,000
For the year ended December 31, 2013             1,367,000            26,679,000
                                       -------------------   -------------------
Totals                                 $        20,799,000   $        26,679,000
                                       -------------------   -------------------

Impairment Analysis                                                 

As required by SFAS No. 142, we continually test goodwill or other  
    intangibles created by each acquisition for impairment. These assets are
      tested for impairment at least annually, or upon occurrence of such events
     that may indicate impairment exists. We revised the earnings forecast for
the next five years and evaluated the change in fair value of each  
 component of goodwill using the expected present value of future cash
flows. Impairment was due to a combination of factors, including    
acquisition price, increased market competition, and operating      
   performance. As result of this process, during 2004, we determined that
 certain intangible assets were impaired. Accordingly, during 2004, we
    recorded impairment charges totaling $14,976,000 in 2004. The individual
charges of $9,545,000, $1,727,000 and $3,704,000 are related to the 
    Geomatrix licensing agreement, the ENI China marketing agreement and the
X-Fat marketing agreement, respectively.                            

     As a result of our review, the remaining goodwill was deemed to be fairly
      stated at December 31, 2004. The goodwill of $3,226,000 is attributable to
previous acquisitions as follows:                                   

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Notes to Consolidated Financial Statements

DFN     $2,421,000
WWS        805,000
        ----------

Total   $3,226,000
        ==========

      Our primary intangibles, other than goodwill discussed above, with a gross
   inttangible value of $26,679,000 at December 31, 2004, were obtained in
    the 2003 acquisition of ENI and consist of a licensing agreement for the
    licensing of the GEOMATRIX(R) technology and certain marketing rights to
     pharmaceutical sales using GEOMATRIX(R) in the Peoples Republic of China,
Taiwan, and Hong Kong.                                              

      In order to test for impairment of these long-lived assets, fair value was
   determined based on a valuation study performed by an independent third
  party that considered primarily the discounted cash flow and guideline
    company method. As a result of this review, none of the remaining assets
are deemed to be impaired.                                          

NOTE 6 - LONG-TERM DEBT                                                         

 Between October and December 2003, we borrowed an aggregate principal
amount of $1.5 million in the form of Senior Convertible Notes (the 
   "Bridge Notes"), due April 28, 2004, in a private placement, subject to
  certain registration rights, generating cash proceeds of approximately
$1,300,000, net of cash debt issue costs of $213,600. Principal and 
     interest at a rate of 10% per annum is payable in a single installment on
      the maturity date in cash or shares of common stock, at our discretion, at
      a price equal to $1.00 per share. As part of the transactions, Bridge Note
    holders received 3,060,000 and 1,530,000 warrants to purchase our common
    stock at exercise prices of $1.00 and $1.50 per share, respectively. The
fair value of these warrants of $988,000 has been recorded by us and
     charged immediately to interest expense as the warrants were fully vested
and the related notes fully convertible at the date of issuance. In 
     accordance with the terms of these Bridge Notes, because we consummated a
   debt financing before the maturity date, the entire principal amount of
  the notes plus accrued interest totaling $1,548,000 has been converted
into the debt securities offered in the December 2003 Secured Notes.

    Debt issue costs related to this transaction of $655,000, including cash
  fees of $214,000, common stock issued valued at $298,000, and the fair
     value associated with warrants issued of $144,000 as discussed in Note 9,
   was recorded in deferred debt issuance costs, net of amounts charged to
      interest expense during the year ended December 31, 2004 totaling $766,000
     before refinancing. The market value of our common stock on the dates the
Bridge Notes were issued ranged from $1.28 - $1.52 per share. In    
accordance with EITF 98-5, as amended by EITF 00-27, because the    
     convertible debt was sold at a price less than market value, a beneficial
conversion to holders of the Bridge Notes occurred. Accordingly, a  
beneficial conversion amount of $542,000 was recorded to additional 
      paid-in-capital and a corresponding amount recorded as a debt discount and
 subsequently recorded as interest expense when converted as described
above.                                                              

In December 2003, we borrowed an aggregate principal amount of      
 approximately $4.58 million in the form of Senior Secured Convertible
Notes (the "Secured Notes"), due December 17, 2008, in a private    
     placement, subject to certain registration rights, thereby converting the
      Bridge Notes as described above, generating cash proceeds of $2.5 million,
     net of cash debt issue costs of $538,000. At time of issuance the Secured
  Notes bore interest at a rate of 12% per annum, 8% of which is payable
     semi-annually in cash each June and December, while 4% per annum could be
    paid, at our discretion, in cash or our common stock at a price equal to
    the ten-day average trading price of our common stock five business days
   prior to the relevant interest payment date. A total of $550,000, or an
   amount equal to the first two semi-annual interest payments at 12%, was
     placed in an interest bearing escrow account at December 31, 2003 and was
      recorded in Prepaid Expenses and Other Current Assets. In October 2004, we
   agreed with the holders of the Secured Notes and warrants to reduce the
conversion price and exercise price of those securities to $0.25 per
 share. Two noteholders converted their notes as of December 31, 2004.
     There was no expense recorded relative to the reduction in the conversion
      price. The reduction of the conversion price is permanent and there was no
time limit placed on the reduced conversion price, therefore it was 
      determined not to be a an inducement to convert as that term is defined in
     Statement of Financial Accounting Standards No. 84 Induced Conversions of
Convertible Debt . In exchange for this reduction:                  

   We agreed to include the additional shares of common stock that are now
    issuable upon conversion of the outstanding Secured Notes as a result of
    the reduction in the conversion price in the next registration statement
  we file with the Securities and Exchange Commission ("New Registration
    Statement"). The shares of common stock originally convertible under the
    Secured Notes are registered for resale under our Registration Statement
    on Form SB-2 (SEC File No. 333-111921) ("Registration Statement"), which
     was declared effective by the SEC on August 13, 2004; We are now entitled
     to pay all 12% interest due on the Secured Notes in either cash or shares
 of our common stock, at our sole option, commencing with the interest
    payment due in December 2004. We were originally required to pay the 12%
     interest on the senior convertible promissory notes at the rate of 8% per
      annum in cash and had the option to pay the remaining interest at the rate
   of 4% per annum in cash or shares of common stock. The shares of common
 stock representing the 4% interest payments are registered for resale
      under the Registration Statement. We have agreed to include the additional
   shares of common stock representing the 8% interest payments in the New
Registration Statement; and                                         

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Notes to Consolidated Financial Statements

o     All penalties that we were required to pay as a result of our 
        failure to have the Registration Statement declared effective by
       April 15, 2004 will be payable by our in shares of common stock
         ("Penalty Stock") at a price equal to $0.258. Such shares will be
included on the New Registration Statement.             

      We may redeem the Secured Notes commencing December 15, 2004, provided the
     ten-day average trading price of our common stock prior to the redemption
    is at least $3.00 per share. The Secured Notes are collateralized by our
    assets, have priority in right of payment over all our indebtedness, and
    include certain provisions related to change in control, reorganization,
      recapitalization, and other adjustments. In addition, Secured Note holders
received 4,588,000 warrants to purchase shares of common stock at an
  exercise price of $1.00 per share. The fair value of these warrants of
  $1,084,000 was recorded and previously charged immediately to interest
 expense as the warrants were fully vested and the related notes fully
convertible at the date of issuance. As discussed in Note 2, we have
   restated our financial results as of December 31, 2003 to record a debt
discount of $1,066,000, net of accumulated accretion of $18,000 of  
 interest expense, in accordance with EITF 00-27 and will amortize the
remaining discount over the life of the Secured Notes.              

     Debt issue costs related to the Secured Notes of $741,000, including cash
      fees of $330,000 and the value associated with warrants issued of $167,000
as discussed in Note 9, is recorded in deferred debt issuance costs.
  Amounts charged to interest expense during the year ended December 31,
    2004 totals $255,000 and includes $244,000 of cash and the fair value of
   warrants issued in conjunction with the refinancing of the Bridge Notes
     charged to expense in the period incurred. The market value of our common
     stock on the date the Secured Notes were issued ranged from $1.15 - $1.23
      per share. In accordance with EITF 98-5, as amended by EITF 00-27, because
the convertible debt was sold at a price less than market value, a  
beneficial conversion to holders of the Secured Notes occurred.     
      Accordingly, a beneficial conversion amount of $1,648,000 was recorded and
additional paid-in-capital and a corresponding amount was previously
      recorded by us to interest expense, as the debt is immediately convertible
      at the option of the debt holder. As discussed in Note 2, we have restated
      our financial results as of December 31, 2003 to record a debt discount of
    $1,620,000, net of accumulated accretion of interest expense of $27,000,
  in accordance with EITF 00-27 and will amortize the remaining discount
over the life of the Secured Notes.                                 

   In connection with our acquisitions, we assumed certain of the acquired
companies' long-term debt , the terms of which are described further
below. Long-term debt consists of the following at December 31:     

Secured Notes                                                       

$4,286,000 Secured Notes; maturity December 2008;                   
interest at 12% per annum (may be paid in cash or                   
      common stock); principal due at December 17, 2008               $4,286,000

Small Business Administration Loan                                  

$650,000 note payable to bank; maturity December 14,                
2008; variable interest at prime plus 1.5% (6.75% at                
December 31, 2004); monthly principal and interest                  
      payments of $10,000; secured by assets of the company              401,000
                                                                      ----------
      Total                                                            4,687,000

      Less current portion                                               401,000
      Less unamortized debt discount                                   2,140,000
                                                                      ----------

      Net long-term debt                                              $2,146,000
                                                                      ----------

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Notes to Consolidated Financial Statements

Aggregate maturities of long-term debt for the subsequent five years
ending December 31 are as follows:                                  

 2005   $  401,000
 2006           --
 2007           --
 2008    4,286,000
        ----------
Total   $4,687,000
        ----------

NOTE 7 - COMMITMENTS AND CONTINGENCIES                                          

     From time to time, we are party to a variety of legal proceedings arising
      out of the normal course of business, including cases in which damages may
      be sought. We believe we have a valid defense and are vigorously defending
any pending litigation. While the results of litigation cannot be   
 predicted with certainty, we do not believe that the outcome of these
proceedings will have a material adverse effect on our consolidated 
financial position, results of operations, or cash flows.           

    We lease office space under non-cancellable operating leases that expire
through 2007. Future minimum lease payments under non-cancellable   
 operating leases for the subsequent five years ending December 31 are
approximately as follows:                                           

             2005     $ 82,000
             2006       82,000
             2007       27,000
2008
2009
                      --------
                      --------
Total                  $191,000 
                      ========

     Total rent expense was $126,000 and $161,000 for the years ended December
31, 2004 and 2003, respectively.                                    

    In connection with the ENI Acquisition, we became party to a Development
  and License Agreement and subsequent Amendment (collectively, the "ENI
      Agreements") with SkyePharma, PLC ("Skye"). The ENI Agreements provide for
certain product identification and license exclusivity rights on    
nutraceutical products utilizing Skye's patented drug-delivery      
technologies, GEOMATRIX(R), in exchange for various commitments as  
follows:                                                            

 o     In consideration for the ENI Agreement and development services
          through 2004 and contingent on additional debt or equity financing
          of $3.0 million, we are obligated to pay Skye $1.0 million in four
          equal installments beginning January 1, 2004 and each first day of
each calendar quarter thereafter.                       

o     We may retain our right to identify new product candidates and
          license them exclusively through the later of December 31, 2017 or
         the expiration of Skye's corresponding patents, provided at least
            four such product candidates are identified us and approved by Skye,
      or Skye receives $1.0 million in product development fees, per
calendar year beginning January 1, 2005.                

  o     We are obligated to pay Skye royalties equal to 10% of net sales
      generated from the products, as defined, quarterly in arrears.

Should we fail to meet the above commitments, product selection and 
  license exclusivity rights will terminate at the end of the respective
 calendar year without effect on rights attained in prior years. As of
December 31, 2004, we had failed to make payments to Skye totaling  
     $750,000 related to the ENI Agreement. We are in process of renegotiating
    the related terms and payments in order to maintain our rights under the
     ENI Agreements despite the default. These amounts are included in accrued
and other liabilities.                                              

      The ENI Agreements also appointed us as Skye's exclusive marketing partner
    to pharmaceutical companies for licensing of all of Skye's technology in
      the Chinese Territories, as defined therein. We are eligible to receive 5%
of all gross revenues resulting directly from our marketing efforts.
Receipt of such royalties is contingent, however, on such revenues  
reaching or exceeding $1.0 million, or in aggregate $2.0 million, by
 August 2004 and 2005, respectively. Should these revenue goals not be
     achieved, our exclusive marketing rights and Skye's royalty obligation on
      newly established sales will terminate, except, that royalties on on-going
     gross revenues resulting directly from our marketing efforts prior to the
loss of such rights will continue to be due and payable.            

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Notes to Consolidated Financial Statements

  In connection with the ENI Acquisition, we became party to a Licensing
Agreement, granting us an exclusive, worldwide, perpetual license to
dietary supplements containing chitosan, gor X-Fat(R) (the "X-Fat   
     License"). The X-Fat License requires us to pay royalties equal to 10% of
  the first $1.0 million of net product sales and 5% of such net product
      sales in excess of $1.0 million, up to a maximum royalty of $1,250,000 per
 fiscal year. We are required to pay advanced royalties of $15,000 per
   quarter to be credited against future royalty payments. At December 31,
2004, we prepaid royalties of $307,000.                             

NOTE 8 - CAPITAL STOCK                                                          

   In December 2003, the board of directors and a majority of stockholders
  approved an amendment to our Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 to     
  150,000,000, par value $.001 per share. We are currently authorized to
 issue up to 50,000,000 shares of preferred stock, par value $.001 per
      share. At December 31, 2004, our capital stock consisted of the following:

                                                                      Issued &
        Capital Stock                 Par Value     Authorized       Outstanding
        -------------                 ---------     ----------       -----------

Common Stock                          $    0.001   150,000,000        99,016,000
Preferred Stock                       $    0.001     3,000,000         1,500,000

Common Stock                                                        

    Each holder of common stock is entitled to one vote per share of held on
      all matters submitted to a vote of our stockholders. Holders of our common
      stock have no preemptive rights and have no rights to convert their common
stock into any other securities. In the event of dissolution or     
     liquidation or the winding-up of our company, holders of our common stock
      will be entitled to share ratably in all assets remaining after payment of
   all liabilities, subject to any preferential payments to the holders of
   any Secured Notes and preferred stock then outstanding. Although we are
restricted from paying cash dividends under the terms of the Secured
Notes, holders of common stock are entitled to receive ratably such 
dividends as may be declared by our board of directors out of funds 
 legally available therefore. All of our outstanding common shares are
fully paid and non-assessable.                                      

     During 2004, 791,000 shares were retuned to us as required by the term of
the ENI acquisition agreement. Additionally, the Company received   
     1,850,000 shares valued at $555,000 that were returned in connection with
the agreement to unwind the COF acquisition.                        

Common Stock Issued to an Employee                                  

     During the 2004 and 2003 we issued 700,000 and 1,300,000 shares of common
   stock to a former employee valued at $581,000 and $6,000,000 million as
     consideration for early termination of an employment contract during 2004
  and compensation related to the closing for various 2003 acquisitions,
respectively.                                                       

Common Stock Issued for Services and Settlements                    

      In order to fund operating activities, we, from time to time, issue common
stock in lieu of cash in exchange for goods or services.            

    During the years ended December 31, 2004 and 2003, we issued 653,000 and
    1,425,000 shares of restricted common stock with a value of $754,000 and
$1,716,000 respectively, in consideration for consulting, investment
   banking, or other services rendered, compensation, release of debt, and
various other claims that parties may have had against the Company. 

   Additionally, during 2004, we issued 357,000 shares of our common stock
valued at 287,000 related to penalties for not having an effective  
registration statement as required for the December 2003 private    
placement.                                                          

  During the years ended December 31, 2004 and 2003, 160,000 and 395,000
      shares of common stock with a value of $47,000 and $514,000, respectively,
     were issued to directors for director services and to various consultants
 for various consultations and advisory services to be provided over a
      period ranging from 12 months to three years. These shares were originally
  capitalized as a component of equity and amortized to expense over the
     vesting periods. For the years ended December 31, 2004 and 2003, $587,000
and $428,000 was amortized to expense, respectively. The value of   
      unamortized restricted common stock issued for services as of December 31,
2004 and 2003 was $93,000 and $390,000, respectively.               

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Notes to Consolidated Financial Statements

During the 2003, a total of 1,400,000 shares of common stock with an
aggregate value of $1.7 million were issued for financial advisory  
services related to our various acquisitions. During 2003, 1,150,000
     shares of common stock with a market value of $1.5 million were issued to
     financial advisors in the ENI Acquisition, 154,000 shares of common stock
    with a market value of $166,000 were issued to financial advisors in the
     COF Acquisition, and 50,000 shares of common stock with a market value of
$59,000 were issued to a financial advisor in the DFN Acquisition.  

   During the year ended December 31, 2003, 266,000 shares of common stock
 with a value of $372,000 were issued for investment banking and other
      services related to private placements of both senior convertible debt and
     the Series C Preferred stock. The value of the shares were capitalized as
     a component of equity if associated with Series C Preferred stock private
    placement ($74,000), or as deferred loan costs if associated with Senior
Convertible Debt private placements ($298,000).                     

  Pursuant to a registration rights agreement related to a November 2002
      private placement of 1,368,000 shares of common stock, we were required to
     file and have declared effective a registration statement to register the
shares of common stock issued and shares that might be issued upon  
    exercise of the Series B Warrants and Series C Warrants from the private
 placement prior to March 20, 2003. We failed to have the registration
  statement declared effective by the deadline; as a result, we owed the
    investors liquidated damages equal to 2% per month of the purchase price
    of these securities, calculated on a pro rata basis to the date on which
      the registration statement was ultimately declared effective. During 2003,
     we reached an agreement with some of the investors to pay such damages in
 328,000 shares of our common stock, valued at approximately $367,000.
      During 2004 we issued an additional 357,000 shares valued at approximately
$287,000.                                                           

Treasury Stock                                                      

  As part of a resignation agreement executed in July 2003, in which all
      severance payments under a prior employment agreement were waived, 280,000
  shares of restricted common stock were returned at no cost and 144,000
 shares were repurchased by us at $0.50 per share from William Coppel,
     former President, for total payments of $72,000 during 2003. These shares
   have been returned to and recorded as treasury stock as of December 31,
2003. The 280,000 shares of common stock returned by Mr. Coppel were
recorded at par value, or $280, with a corresponding adjustment to  
additional paid-in capital.                                         

Preferred Stock                                                     

   Preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by our board of directors,
 without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters),    
      preferences as to dividends and liquidation, conversion rights, redemption
   rights and sinking fund provisions. The issuance of shares of preferred
      stock could adversely affect the rights of the holders of common stock and
therefore, reduce the value of the common stock.                    

Series A Preferred Stock                                            

    Between February and June 2002, we sold 3,712,000 shares of 10% Series A
Preferred Stock at $1.00 per share, generating cash proceeds of     
approximately $3.6 million, net of cash offering costs of $118,000. 
      Holders may convert their shares into a like amount of common stock at any
 time after the first anniversary date of issuance and the shares will
      convert by their terms after 18 months. Upon conversion, holders of Series
  A Preferred Stock will receive one Series A Warrant per five preferred
 shares converted to purchase one share of common stock at an exercise
     price of $2.00 per share, exercisable one year from the date of issuance.
     If all Series A Preferred Stock were to convert, it would require that we
issue 742,000 Series A Warrants, excluding those to be issued upon  
conversion of Series A Preferred Stock issued as dividends.         

Holders of Series A Preferred Stock have no voting rights, but are  
     entitled to various rights, preferences, and restrictions that include, a
      10% cumulative dividend payable in additional shares of Series A Preferred
      Stock at $1.00 per share; a preference upon a liquidation, dissolution, or
      winding up of our company; and privileges upon redemption during the first
twelve months from the date of issuance equal to $1.50 per share.   

      The market value of our common stock on the dates Series A Preferred Stock
      was sold ranged between $1.25 - $3.40 per common share. In accordance with
     EITF 98-5, as amended by EITF 00-27, because the Series A Preferred Stock
      was sold at a price less than market value of the underlying components of
      the security, a beneficial conversion to holders of the Series A Preferred
    Stock occurred. Accordingly, during 2002, we recorded a discount of $3.4
million within stockholders' equity and a corresponding amount to   
    preferred stock additional paid-in-capital. The Series A Preferred Stock
    is convertible into common stock at the option of the holder at any time
 after the first anniversary date of its issuance, thus the beneficial
      conversion is amortized over a one-year period. A total of $1.1 million of
the Series A Preferred Stock discount was amortized during 2003. At 
   December 31, 2003, the entire amount of the Series A Preferred discount
had been amortized.                                                 

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Notes to Consolidated Financial Statements

During 2003, holders of 682,000 shares of Series A Preferred Stock  
     converted such shares into 682,000 shares of common stock. As a condition
      to conversion, we granted 136,000 warrants with an exercise price of $2.00
   per share. The value of the converted Series A Preferred Stock was $1.3
     million and the value of the warrants was $55,000 using the Black-Scholes
   option-pricing model. Dividends are cumulative and are to be paid every
 six months from the date of issuance for a total of 18 months with no
obligation to pay dividends thereafter. During June 2003, 380,000   
 additional shares of Series A Preferred Stock valued at $380,000 were
     issued in satisfaction of dividends owed to holders of Series A Preferred
     Stock and at December 31, 2003, declared and unpaid dividends of $204,000
     were accrued and will be paid by the issuance of Series A Preferred Stock
  for a total dividend of $585,000 (or $0.02 per share). At December 31,
   2003, 3,400,000 shares of Series A Preferred Stock remained outstanding
pending the issuance of a like amount of common stock.              

    During 2004, the holders of the 3.4 million shares of Series A Preferred
     Stock converted such shares into a like amount of shares of common stock.
      As a condition of conversion, we granted 859,000 series A warrants with an
  exercise price of $2.00 per share. The value of the converted Series A
Preferred Stock was $6.5 million and the value of the warrants was  
   $385,000 using the Black-Scholes option-pricing model. Dividends on the
    Series A Preferred Stock issued in September 2002 are cumulative and are
   to be paid every six months from the date of issuance for a total of 18
  months with no obligation to pay dividends thereafter. During February
 2004, 205,000 additional shares of Series A Preferred Stock valued at
    $205,000 were issued in satisfaction of all dividends owed to holders of
Series A Preferred Stock for a cumulative dividend of $585,000.     

   The market value our common stock on the dates Series A Preferred Stock
    was sold ranged between $1.25 - $3.40 per share. In accordance with EITF
    98-5, as amended by EITF 00-27, because the Series A Preferred Stock was
      sold at a price less than market value of the underlying components of the
  security, a beneficial conversion to holders of the Series A Preferred
    Stock occurred. Accordingly, during 2002, we recorded a discount of $3.4
million within stockholders' equity and a corresponding amount to   
    preferred stock additional paid-in-capital. The Series A Preferred Stock
     was convertible into common stock at the option of the holder at any time
  after the first anniversary date of its issuance, thus, the beneficial
  conversion was amortized over a one-year period and fully amortized by
 December 31, 2003. In conjunction with the conversion of the Series A
Preferred shares during 2004, $2.2 million of previously amortized  
  beneficial conversion was reclassified from preferred stock additional
paid-in-capital to common stock additional paid-in capital.         

Series B Preferred Stock                                            

   On April 16, 2003, we sold to one investor 10 units, each consisting of
     100,000 shares of non-voting 25% Series B Preferred Stock, 100,000 Series
 D Warrants, and 100,000 Series E Warrants, convertible into 1,000,000
     shares of Series B Preferred Stock at $1.00 per share, 1,000,000 Series D
    Warrants at an exercise price of $1.30 per share, and 1,000,000 Series E
      Warrants at an exercise price of $1.60 per share, generating cash proceeds
  of $875,000, net of cash offering costs of $125,000. The combined fair
      value at the date of grant of the Series D and Series E Warrants using the
Black-Scholes option-pricing model was $62,000.                     

  The holder of the Series B Preferred Stock is entitled to a one-time a
   dividend at a rate of 25% per annum, payable in cash or common stock on
   the one-year anniversary of the issuance date with no obligation to pay
    dividends thereafter. Unpaid and/or undeclared dividends are cumulative.
The total amount of dividends not declared at December 31, 2003 was 
      $177,000 (or $0.01 per common share) and would total $250,000 on an annual
     basis (or $0.01 per common share). Each share of Series B Preferred Stock
     is convertible into one share of common stock at the option of the holder
at any time after the first anniversary of the date of issuance. In 
     connection with this offering, 200,000 Series D Warrants with an exercise
 price of $1.30 per share (fair value of $8,086) and a cash commission
     equal to 12.5% of the proceeds (or $125,000) were paid to the stockholder
      to facilitate the transaction, thus increasing the total offering costs to
    $133,086. The Series B Preferred Stock has no voting rights, liquidation
preferences, or protective provisions.                              

In April 2004, 250,000 additional shares of Series B Preferred Stock
   valued at $250,000 were issued in satisfaction of dividends owed to the
 holder of the Series B Preferred Stock. Simultaneously, all 1,250,000
      shares of Series B Preferred Stock were converted into 1,250,000 shares of
common stock.                                                       

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Notes to Consolidated Financial Statements

Series C Preferred Stock                                            

   On July 9, 2003, we sold to one investor five units, each consisting of
     100,000 shares of non-voting 50% Series C Preferred Stock, 100,000 Series
    D Warrants, and 100,000 Series E Warrants, aggregating 500,000 shares of
     Series C Preferred Stock at $1.00 per share, 500,000 Series D Warrants at
     an exercise price of $1.30 per share, and 500,000 Series E Warrants at an
    exercise price of $1.60 per share, generating cash proceeds of $438,000,
     net of cash offering cost of $63,000. The combined fair value at the date
  of grant of the Series D and Series E Warrants using the Black-Scholes
option-pricing model was $242,000.                                  

The holder of the Series C Preferred Stock is entitled to a two-time
     dividend at the rate of 50% per annum, payable in cash or common stock on
    the first and second anniversary of the issuance date with no obligation
to pay dividends thereafter. Unpaid and/or undeclared dividends are 
  cumulative. The total amount of dividends not declared at December 31,
      2004 was $370,000... Each share of Series C Preferred Stock is convertible
  into one share of common stock at the option of the holder at any time
after the first anniversary of the date of issuance.                

In connection with this offering, 250,000 Series D Warrants with an 
exercise price of $1.30 per share (fair value of $72,000), a cash   
    commission equal to 12.5% of the proceeds (or $63,000), 63,000 shares of
      common stock (fair value of $74,000, or $1.18 per share), and an option to
      acquire 63,000 shares of common stock exercisable at $1.00 per share (fair
value of $26,000) were granted, paid, or issued to a stockholder to 
   facilitate the transaction, thus increasing the total offering costs to
    $234,000. The Series C Preferred Stock has no voting rights, liquidation
preferences, or protective provisions.                              

   The market value of our common stock on the date the Series C Preferred
Stock was sold was $1.18 per share. In accordance with EITF 98-5, as
     amended by EITF 00-27, because the Series C Preferred Stock was sold at a
      price less than market value of the underlying components of the security,
a beneficial conversion to holders of the Series C Preferred Stock  
  occurred. Accordingly, during 2003, we recorded a discount of $253,000
     within stockholders' equity and a corresponding amount to preferred stock
   additional paid-in-capital. The Series C Preferred Stock is convertible
     into common stock at the option of the holder at any time after the first
anniversary date of its issuance, thus the beneficial conversion is 
amortized over a one-year period. The entire $253,000 balance was   
amortized during 2004 and 2003.                                     

Series D Preferred Stock                                            

 On August 20, 2003, concurrent with the ENI Acquisition, we sold to a
     single investor 1,000,000 shares of Series D Preferred Stock at $1.00 per
      share, generating cash proceeds of $815,000, net of cash offering costs of
    $185,000. Each share of Series D Preferred Stock is convertible into one
share of common stock at the option of the holder at any time.      

   The market value of our common stock on the date the Series D Preferred
    Stock was sold was $1.37 per common share. In accordance with EITF 98-5,
      as amended by EITF 00-27, because the Series D Preferred Stock was sold at
a price less than market value of the underlying components of the  
  security, a beneficial conversion to holders of the Series D Preferred
Stock occurred. Accordingly, during 2003 we recorded a discount of  
$370,000 within stockholders' equity and a corresponding amount to  
    preferred stock additional paid-in-capital. The Series D Preferred Stock
     is convertible into common stock at the option of the holder at any time,
    thus the beneficial conversion was recorded as a dividend upon issuance.

     The holder of the Series D Preferred Stock is entitled to various rights,
preferences, and restrictions that include, but are not limited to: 

     1.    Voting. The Series D Preferred Stock votes on an as-converted basis
with the common stock.                                  

     2.    Dividends. The holders of the Series D Preferred Stock are entitled
            to a like dividend or distribution, pro rata, should there be a cash
            or property dividend or distribution to any class of common stock or
           preferred stock other than the Series A Preferred Stock, determined
          on an as converted basis. This does not include any dividends paid
            in shares of common stock to the holders of Series B Preferred Stock
            and Series C Preferred Stock outstanding as of the date of issuance.

   3.    Liquidation Preference. The Series D Preferred Stock is senior to
         the Series B Preferred Stock and Series C Preferred Stock and the
           common stock upon liquidation and is entitled to an amount equal to
      the original $1.00 per share issue price plus any declared and
        unpaid dividends (as adjusted for stock dividends, combinations,
            splits, recapitalization, and the like with respect to such shares).

4.    Redemption. We have no rights to redeem the Series D Preferred
Stock.                                                  

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    5.    Conversion. The holders of Series D Preferred Stock have the right
         to convert into common stock, at any time. Each share of Series D
     Preferred Stock is convertible into one share of common stock
      subject to adjustment for declared and unpaid dividends, stock
            dividends, combinations, splits, recapitalization, and the like with
        respect to such shares. The conversion price is initially set at
            $1.00. The conversion price may be decreased at the end of two years
            if the common stock is trading at a price below the conversion price
         then in effect. The floor for such adjustment is $0.25 per share.
        The conversion price of the Series D Preferred Stock may also be
     reduced in certain situations if we issue additional options,
         warrants, or rights to purchase common stock at a price below the
            conversion price of the Series D Preferred Stock. In such event, the
        conversion price will be decreased by multiplying the conversion
          price then in effect by a fraction of which (i) the numerator will
          be the number of outstanding shares of common stock on the date of
        issuance of the rights plus the number of shares of common stock
      which could be purchased at the then conversion price from the
            aggregate offering price of the rights and (ii) the denominator will
            be the shares of common stock outstanding on the date of issuance of
           the rights plus the number of shares of common stock so offered for
subscription or purchase pursuant to such rights.       

    6.    Protective Provisions. So long as any shares of Series D Preferred
        Stock are outstanding, we may not, without the prior affirmative
    consent or vote of the holders of at least two thirds of the
outstanding shares of the Series D Preferred Stock:     

         a.    authorize, create, designate, establish or issue shares of,
                any class or series of capital stock ranking senior to or on
              parity with the Series D Preferred Stock or reclassify any
               shares of common stock into shares having any preference or
           priority as to dividends or assets superior to any such
          preference or priority of Series D Preferred Stock; or

         b.    amend, alter or repeal, whether by merger, consolidation or
                 otherwise, our amended and restated articles of incorporation
                or bylaws or the resolutions contained in the certificate of
               designation of the Series D Preferred Stock and the powers,
                  preferences, privileges, relative, participating, optional and
            other special rights and qualifications, limitations and
                 restrictions thereof, which would adversely affect any right,
         preference, privilege or voting power of the Series D
          Preferred Stock, or which would increase the amount of
               authorized shares of the Series D Preferred Stock or of any
                  other series of preferred stock ranking senior to the Series D
             Preferred Stock, with respect to the payment of dividends
                (whether or not such series of preferred stock is cumulative
                 or non-cumulative as to payment of dividends) or liquidation.

NOTE 9 - DISCONTINUED OPERATIONS                                                

  In order to resolve certain disputes with a former employee of the COF
     subsidiary, on July 9, 2004, we settled all matters via an execution of a
Settlement and Release Agreement (the "Agreement") calling for the  
   settlement of all claims and the sale of certain assets and liabilities
     back to the previous owners of COF. As part of the Agreement, we will pay
 the previous owners of COF $150,000 in six equal monthly installments
     beginning July 2004 in exchange for the return of 2,600,000 shares of our
common stock originally paid as part of the acquisition price. In   
  addition, we will assign certain assets and the previous owners of COF
will assume certain liabilities of NSI as of the effective date, the
    previous owners of COF will sublease the Company's facilities located in
    Spanish Fork, Utah for a period of one year from the effective date, and
executive employment agreements with Robert Scott and James Jeppson 
executed as part of the COF Acquisition become null and void. Should
     either party fail to perform its obligations under the Agreement, certain
     rights and options exist allowing the parties to terminate the Agreement.
    During 2004, we paid $50,000 of the $150,000 required payments under the
   Agreement. As of November 15, 2004, we has not received the 2.6 million
    shares of common stock back from the previous owners of COF, accordingly
      we are seeking specific remedies. In September 2004, we were served with a
    final demand notice from the Internal Revenue Service ("IRS") related to
obligations from the previous owners of COF. These amounts were the 
obligation of the previous owners of COF which was ratified in the  
     Agreement. However, in order for us to avoid any future claims related to
      this matter, in November 2004, we entered into a settlement agreement with
     the IRS related to this matter and paid the remaining $100,000 obligation
     under the Agreement directly to the IRS. The IRS has agreed not pursue us
related to this matter.                                             

On September 30, 2004, MAF entered into an agreement to sell all    
properties, rights and assets used or useful in connection with its 
      product line, Boulder Bar. This was the primary asset in MAF. MAF received
   a $50,000 cash payment, a $50,000 promissory note and the purchaser has
     agreed to continue serving the debt obligation of approximately $435,000,
which is secured by the aforementioned asset. As a result of this   
transaction, during 2004, the Company recorded an impairment charge 
     related to the remaining $104,000 of intangible assets related to the MAF
     acquisition and a charge of $38,000 related to other MAF assets deemed to
be of no remaining value.                                           

    As of December 31, 2004, COF and MAF total net asset were ($916,000) and
$189,000, respectively. For 2004 total revenues for COF and MAF were
      $1,060,000 and $543,000 respectively. For 2003, COF and MAF total revenues
were $987,000 and $1,370,000, respectively.                         

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Notes to Consolidated Financial Statements

NOTE 10 - STOCK OPTIONS AND WARRANTS                                            

Series A Warrants                                                   

   Series A Warrants were issued in connection with the June 2002 Series A
      Preferred Stock private placement. Upon conversion of every five shares of
  Series A Preferred Stock into common stock, we will grant one Series A
    Warrant to purchase one share of our common stock, exercisable after one
   year from the date of grant at an exercise price of $2.00 per share and
 expiring on the second anniversary of the date of grant. The exercise
price of the warrants is subject to adjustment for stock splits,    
dividends, reclassifications, and other adjustments.                

   Upon conversion of the 3,712,000 shares of Series A Preferred Stock and
    corresponding stock dividends, we will ultimately issue 859,420 Series A
   Warrants. During 2004, pursuant to the warrant offering in November and
December 2004, one holder of the Series A warrants exercised 278,000
      warrants at $0.10 per warrant resulting in gross proceeds of approximately
  $28,000. As of December 31, 2004, there were 582,000 Series A Warrants
outstanding.                                                        

Series B and Series C Warrants                                      

      Series B and Series C Warrants were issued in connection with the November
     2002 common stock private placement, concurrent with the MAF Acquisition.
The Series B and Series C Warrants have exercise prices of $1.65 and
    $2.14, respectively, and may be exercised at the option of the holder at
any time for a period of five years from the date of issuance. The  
  exercise prices are subject to adjustment for stock splits, dividends,
reclassifications, and other typical corporate actions. If we issue 
   additional shares of common stock at a price less than $1.00 per share,
the exercise prices of the warrants upon each such issuance will be 
  adjusted and reset to such issuance price; however, this reset feature
does not apply to the following:                                    

     1.    any stock splits, dividends, reclassifications, or similar actions,
or                                                      

   2.    any issuance of shares of common stock (or shares of common stock
           issuable upon the exercise of securities convertible into shares of
           common stock with an exercise price or a conversion price less than
        $1.00) if such securities were issued to consultants, employees,
       service providers, or to a third party to satisfy amounts owed;
          provided that we may not issue to such individuals, in any rolling
          12-month period, more than 1,600,000 shares of common stock or 10%
 of the actual number of shares of common stock issued and
      outstanding (assuming the conversion of the Series A Preferred
        Stock) and may not issue to any one individual more than 500,000
shares of common stock.                                 

  As long as a registration statement covering the shares underlying the
   warrants is effective, we may redeem any or all of the warrants, at any
time, at $0.05 per warrant if:                                      

      1.    the closing price for our common stock on any 20 trading days within
         a period of 30 consecutive trading days ending on the date of the
           notice of the call has been in excess of 150% of the then effective
exercise price, and                                     

      2.    no less than four of such 20 days occur during the last five trading
days ending on the date of the notice of the redemption.

As of December 31, 2004, there were 1,368,000 Series B Warrants and 
1,368,000 Series C Warrants outstanding.                            

Series D and Series E Warrants                                      

   Series D and Series E Warrants were issued in connection with the April
2003 Series B Preferred Stock and July 2003 Series C Preferred Stock
private placements. The Series D and Series E Warrants have exercise
prices of $1.30 and $1.60, respectively, and may be exercised at the
     option of the holder at any time for a period of five years from the date
of issuance. The exercise prices are subject to adjustment for stock
      splits, dividends, reclassifications, and other typical corporate actions.
As of December 31, 2004, there were 1,950,000 Series D Warrants and 
1,500,000 Series E Warrants outstanding.                            

Series F Warrants                                                   

    Series F Warrants were issued in connection with the July 2003 amendment
     of one of our strategic consulting agreements. The Series F Warrants have
      an exercise price of $1.00 per share and may be exercised at the option of
the holder at any time for a period of five years from the date of  
   issuance. The exercise price is subject to adjustment for stock splits,
    dividends, reclassifications, and other typical corporate actions. As of
December 31, 2004, there were 125,000 Series F Warrants outstanding.

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Notes to Consolidated Financial Statements

Series G and H Warrants                                             

  Series G and H Warrants were issued in connection with the sale of our
      common stock in June and July 2004. We sold units, each unit consisting of
one share of common stock, three Series G Warrants, and one Series H
     Warrant, aggregating 3,900,000 shares of common stock at $0.25 per share,
     11,700,000 Series G Warrants at an exercise price of $0.25 per share, and
3,900,000 Series H Warrants at an exercise price of $0.25 per share,
generating cash proceeds of $772,000, net of cash offering costs of 
$125,000. In addition, 265,000 shares of common stock and 1,950,000 
  warrants, with a combined fair market value at the date of issuance of
     $549,000 were issued to financial advisors to facilitate the transaction,
thus increasing the total offering costs to $599,000.               

    In December 2004, the holders of the G warrants exercised their right to
convert the warrant in 5.8 million shares of our common stock. As of
December 31, 2004, no G warrants and 3.9 million H warrants were    
outstanding. We received no consideration related to the G warrant  
conversion into our common stock.                                   

Other Warrants                                                      

     In connection with the Bridge Notes and Senior Secured Notes (see Note 6)
      during 2003, we granted note holders an aggregate of 9,706,000 warrants at
   original exercise prices that ranged from $1.00 to $1.50 per share. The
     warrants may be exercised immediately, expire on the fifth anniversary of
     the date of issuance, and the exercise price is subject to adjustment for
   stock splits, dividends, reclassifications, and other typical corporate
actions.                                                            

      Additionally, we granted 174,000 warrants to financial advisors associated
     with the issuance of the Bridge Notes. Financial advisors associated with
the Secured Notes were granted 558,000 warrants.                    

   In conjunction with warrant exercises in November and December of 2004,
      6,560,000 of these warrants were exercised at $0.10 per warrant generating
  gross cash proceeds of $660,000. The holders of each exercised warrant
      will receive a new warrant with an exercise price of $0.10. In conjunction
    with this offering, we paid to financial advisors to help facilitate the
transaction $64,000 in cash consideration and will issue 656,000 new
 warrants with an exercise price of $0.10. Effectively, we sold common
stock for $0.10 per share and extend the terms of the warrants.     

 In aggregate, as of December 31, 2004, there were 11,210,000 of these
warrants outstanding.                                               

Stock Option Plans                                                  

   On August 1, 2001, the Board of Directors adopted our 2001 Stock Option
 Plan pursuant to which incentive stock options or non-statutory stock
     options to purchase up to 2,500,000 shares of common stock can be granted
to employees, officers, directors, consultants, and independent     
contractors and other service providers.                            

     On May 3, 2002, the Board of Directors adopted our 2002 Stock Option Plan
    pursuant to which incentive stock options or non-statutory stock options
to purchase up to 2,000,000 shares of common stock can be granted to
     employees, officers, directors, consultants, independent contractors, and
other service providers.                                            

On a combined basis, the plans had 437,000 and 3,831,000 options    
  outstanding at December 31, 2004 and 2003, respectively, with exercise
   prices ranging from $0.65 to $1.00. At December 31, 2003, there were an
   aggregate of 3,600,000,517 options available under the plans for future
grant.                                                              

Options and Warrants Issued for Services                            

In order to fund operating activities, we, from time to time, grant 
options or warrants to purchase common stock in lieu of cash in     
consideration for consulting, investment banking, or other services 
  rendered, compensation, release of debt, and various other claims that
    parties may have against us. We granted options and warrants to purchase
common stock during the years ended December 31, as follows:        

               2004                               2003
              ---------------------------------   ----------------------------
              Number       Fair      Exercise     Number      Fair    Exercise
             Granted      Value       Price      Granted     Value     Price
             -------     -------   -----------   -------    -------    -----
Options        150,000    $ 88,500   $      0.65    40,000   $ 16,000    $1.40  
Warrants       300,000     181,000   $0.25-$1.30   743,000    444,000    $1.00  
             -------------------   -----------   -------    -------    -----
    450,000    $269,500                 783,000   $460,000
    -------------------                 ------------------

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Notes to Consolidated Financial Statements

The fair value of certain of these options and warrants are being   
     amortized over their respective vesting periods, which range from zero to
   36 months. For the years ended December 31, 2004 and 2003, $185,000 and
$708,000 was amortized to expense, respectively. The fair value of  
     unamortized options and warrants issued for services at December 31, 2004
and 2003 was $122.000 and $207,000, respectively.                   

      During June and July 2004 in connection with the common stock offering, we
 granted an aggregate of 2,000,000 warrants to acquire common stock to
investment advisors with an exercise price of $1.25 per share.      
   Additionally, during 2004, we issued 300,000 warrants to acquire common
   stock with exercise prices that ranged from $0.89 to $1.30 per share to
various advisors.                                                   

      In 2004, we granted 150,000 options to an advisor to purchase common stock
at an exercise price of $0.65 per share.                            

Per FIN No. 44, "Accounting for Certain Transactions Involving Stock
   Compensation," a non-cash charge to expense is required if the price of
     our common stock on the last trading day of a reporting period is greater
     than the exercise price of certain stock options and warrants issued. The
    requirements of FIN No. 44 may also result in a credit to expense to the
   extent that the trading price declines from the trading price as of the
   end of the previous reporting period, provided however that a credit is
 not recorded to the extent our common stock trades below the exercise
      price of the options or warrants. In accordance with FIN No. 44, we adjust
    expense upward or downward on a monthly basis based on the trading price
   at the end of each period. As a result, we recorded expense of $255,000
    during the year ended December 31, 2003, which represents the fair value
of the effective re-pricing of the options using the Black-Scholes  
   option-pricing model at the date of the amendments. Due to a decline in
     the trading price of the Company's common stock, there was a reduction in
      personnel costs of $1,755,000 for the adjustments of the variable award in
the year ended December 31, 2004.                                   

Options and Warrants Issued to Employees                            

   During 2004, we granted 80,000 warrants with an exercise price of $0.54
per share to several employees                                      

    In accordance with FIN No. 44, we adjust expense upward or downward on a
    monthly basis based on the trading price at the end of each period. As a
     result, we recorded a net credit to compensation expense of approximately
$1,755,000 during the year ended December 31, 2004.                 

    During August 2003, concurrent with the ENI Acquisition and the Series D
    Preferred Stock private placement, we executed a second amendment to the
      Officer Warrants that provided for the granting of an additional 5,000,000
 warrants with an exercise price of $0.01 per share and eliminated the
   full-ratchet dilution provision, as defined. The new warrants were 100%
   vested on the date of grant and had a fair value of $6.8 million, which
  was charged to compensation expense during the year ended December 31,
2003.                                                               

   In July 2002, we granted 30,000 options to an employee with an exercise
 price of $2.40, vesting quarterly over a three-year period commencing
October 17, 2002. The options were cancelled in 2002.               

    In January 2002, we issued 125,000 options to an employee under our 2001
     Stock Option Plan. The options have an exercise price of $1.00 per share,
      expire in four years, and vest quarterly, 40,000 in the first year, 45,000
   in the second year, and 40,000 in the third year. The fair value of the
     options using the Black-Scholes option-pricing model was determined to be
zero.                                                               

Summary of Options and Warrants                                     

    A summary of stock option activity for the years ended December 31 is as
follows:                                                            

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Notes to Consolidated Financial Statements

                                                                · Download Table

                                              2004                     2003         
                                     ----------------------   ----------------------
                                                   Weighted                 Weighted
                                                    Average                  Average
                                                   Exercise                 Exercise
                                       Shares        Price     Shares         Price 
                                     ---------     --------   ---------     --------
                                                                                    
Outstanding at beginning of period   3,039,000     $   0.93   3,385,000     $   0.87
Granted                                375,000     $   0.59     654,000     $   1.21
Cancelled                           (2,750,000)    $   0.91          --           --
Exercised                             (263,000)    $   0.10  (1,000,000)    $   0.35
                                     ---------     --------   ---------     --------
Outstanding at end of period           401,000     $   0.87   3,039,000     $   0.93
                                     ---------     --------   ---------     --------
Exercisable at end of period           339,000     $   0.77   1,764,000     $   1.10
                                     =========     ========  ==========     ========

  Information about stock options outstanding at December 31, 2004 is as
follows:                                                            

                                                        · Enlarge/Download Table

                               Options Outstanding                 Options Exercisable    
                    -----------------------------------------  ---------------------------
                                    Weighted                                              
                                     Average        Weighted                     Weighted 
                                    Remaining       Average                      Average  
 Range of Exercise    Shares        Contractual     Exercise     Shares          Exercise 
      Prices        Outstanding       Life           Price     Exercisable        Price   
-------------     -----------     -----------     -----------  -----------     -----------
                                                                                          
$0.35 - $1.00         401,000             3.9     $      0.87      339,000     $      0.91
$1.40 - $1.50              --              --              --           --              --
$2.00 - $3.00              --              --              --           --              --
                  -----------     -----------     -----------  -----------     -----------
                      401,000                                      339,000                
                  -----------                                  -----------                

A summary of warrant activity for the years ended December 31 is as follows:    

                                                        · Enlarge/Download Table

                                               2004                           2003            
                                    ----------------------------  ----------------------------
                                                      Weighted                      Weighted  
                                                       Average                      Average   
                                                      Exercise                      Exercise  
                                      Shares            Price        Shares           Price   
                                    -----------      -----------  -----------      -----------
                                                                                              
Outstanding at beginning of period   26,475,000      $      0.91    7,775,000      $      1.32
Granted                              25,196,000      $      0.22   18,730,000      $      0.87
Cancelled                                    --               --           --               --
Exercised                           (19,856,000)     $      0.10      (30,000)     $      0.01
                                    -----------                   -----------                 
Outstanding at end of period         31,815,000      $      0.46   26,475,000      $      0.91
                                    -----------                   -----------                 

Exercisable at end of period         31,815,000      $      0.46   25,538,000      $      0.91
                                    -----------                   -----------                 

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Notes to Consolidated Financial Statements

Information about warrants outstanding at December 31, 2004 is as follows:      

Warrants Outstanding & Exercisable
----------------------------------
Weighted                                Weighted                    
Average                                  Average            Weighted
Range of                                Remaining            Average
Exercise             Shares            Contractual          Exercise
Prices            Outstanding             Life               Price
 -------------      --------------      --------------      --------------
 $0.01 - $0.35          26,218,000                4.10      $         0.13
 $0.54 - $1.00           1,015,000                2.98      $         0.95
 $1.30 - $1.65           4,000,000                3.52      $         1.43
 $        2.00             582,000                2.42      $         1.43
--------------                    
                        31,815,000                4.00      $         0.35

NOTE 11 - INCOME TAXES                                                          

    Components of the deferred tax asset (liabilities) as of December 31 are
as follows:                                                         

                                             2004               2003
                                              ------------        ------------
Net operating loss carryforwards               $ 10,140,000        $  6,362,000 
Deferred compensation                             3,297,000           3,108,000 
Prepaids                                            161,000                   0 
Inventories                                         130,000                   0 
Amortizable intangibles                           8,024,000           1,079,000 
Other temporary differences                          58,000              61,000 
                                              ------------        ------------
                                                21,810,000          10,610,000
Less valuation allowance                        (21,810,000)        (10,610,000)
                                              ------------        ------------
                                              $         --        $         --
                                              ============        ============

    Net operating loss carry forwards are available to reduce future taxable
    income. However, a change in ownership, as defined by federal income tax
      regulations, could significantly limit our ability to utilize our U.S. net
 operating loss carry forwards. Additionally, because federal tax laws
    limit the time during which the net operating loss carry forwards may be
     applied against future taxes, if we fail to generate taxable income prior
to the expiration dates, we may not be able to fully utilize the net
operating loss carry forwards to reduce future income taxes.        

As we have had cumulative losses and there is no assurance of future
   taxable income, valuation allowances have been recorded to fully offset
 the deferred tax asset at December 31, 2004 and 2003. During the year
   ended December 31, 2004, a current income tax benefit of $3,778,000 was
     offset by an equal deferred income tax provision primarily related to the
  increase in the valuation allowance. The valuation allowance increased
   $11,200,000 during 2004 due to our current period net loss. Due to this
increase in the valuation allowance, the effective tax rate has been
reduced to 0% for the years ended December 31, 2004 and 2003. As of 
   December 31, 2004, we had net operating loss carry forwards for federal
   income tax reporting purposes of approximately $28,158,000 which expire
  through 2024. The utilization of such operating losses may be limited.

     A reconciliation of statutory to effective income tax rates is as follows
for years ended December 31:                                        

                           2004                       2003
                          ----------------------     -----------------------
Federal statutory rates     -34%      $ (9,578,000)       -34%     $ (9,498,000)
State                        -6%        (1,690,000)        -6%       (1,676,000)
Valuation allowance          40%            67,000         40%       11,174,000 
Other                        --         11,201,000         --                   
                          ----------------------     -----------------------
 Effective rate             0%      $         --          0%     $        --
                          ======================     =======================

F-29

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 VITAL LIVING, INC
Notes to Consolidated Financial Statements

NOTE 12 - RELATED PARTY TRANSACTIONS                                            

      From time to time, we engage our directors, shareholders, or other related
  parties for consulting services related to investment, acquisition, or
     other activities in the normal course of business. We believe that all of
      these transactions are conducted at an "arms-length." Fair market value of
  securities issued in these transactions, including stock, options, and
warrants, is listed below where applicable and calculated using the 
Black-Scholes Pricing Model as of the date of issuance or grant.    

Officers and Directors                                              

 During 2004, we issued 165,000 and 75,000 shares of restricted common
     stock to Michael Cardamone and D. Clay Coffeen, respectively, in exchange
for director services for a combined fair market value of $47,000.  

      During 2004, $35,000 was either paid directly or amounts paid on behalf of
    Mr. Hannah, our Chairman. These amounts were paid for services requested
     by management that were deemed outside the scope of his role as Chairman.

In connection with the departure of the former Chairman and Chief   
     Executive Officer in January 2004, we executed a severance agreement that
     provides for cash payments of $244,000 ($119,000 due within eight days of
   execution, $20,000 due on each first day of July, August, and September
      2004, and $22,000 due on each first day of October, November, and December
2004) and 600,000 shares of the Company's common stock, valued at   
   $498,000, due within eleven days of execution and included in a pending
    Registration Statement initially filed January 14, 2004. In addition, we
    agreed to continue to pay Mr. Edson's medical benefits until the earlier
    of (i) July 31, 2005, or (ii) the date he becomes eligible to be covered
  under another program. However, due to certain differences between the
   parties, in August 2004, the parties agreed that we would issue 100,000
 shares of our common stock in exchange for complete settlement of the
severance agreement. As of September 30, 2004, we had no further    
obligations to Mr. Edson.                                           

   In March and April 2004, we transacted a common stock private placement
     (see Note 6) for which finder's fees of 8% in cash and 8% in common stock
     were authorized to various parties to facilitate the transaction. We paid
$21,000 in cash and issued 20,800 shares of common stock, valued at 
$17,000, to a company whose principal is our former Chief Executive 
Officer and Chairman for such services. In addition, 110,000 of the 
510,000 common shares issued to investors in this private placement,
 valued at $110,000, were family members of our former Chief Executive
Officer and Chairman.                                               

Shareholders                                                        

We are party to two voting agreements as follows:                   

MAF Voting Agreement. In connection with our November 2002 MAF      
 Acquisition, we entered into a stockholders' agreement with Stuart A.
     Benson, Donald C. Hannah, Bradley D. Edson, Martin Gerst, William Coppel,
     Phil Maffetone, Kenneth Martin, Leslie C. Quick, III, and Thomas C. Quick
(the "MAF Voting Agreement"). Pursuant to the MAF Voting Agreement: 

     o     for so long as Messrs. Edson, Benson, Hannah and Gerst beneficially
           own an aggregate of at least 65% of the shares of common stock held
      by them on the date of the agreement, they will be entitled to
            nominate and have elected four directors acceptable to them in their
sole discretion; and                                    

o     for so long as Messrs. Coppel, Maffetone, Quick and Quick     
      beneficially own an aggregate of at least 65% of the shares of
            common stock held by them on the date of the agreement, they will be
entitled to nominate and have elected three Directors.  

  Each of the parties to the MAF Voting Agreement has agreed to vote the
shares of common stock beneficially owned by them on the date of the
      agreement in favor of the other group's nominees. Each of the parties have
     further agreed that they will vote in favor of the other parties' nominee
      or nominees, and will not take any action, or cause us to take any action,
to remove, with or without cause, a Director nominated by any of the
     parties. Because Messrs. Coppel, Maffetone, Quick, and Quick do not still
beneficially own the required 65%, they no longer have the right to 
nominate and have elected any Directors.                            

     ENI Voting Agreement. In connection with our August 2003 ENI Acquisition,
      we entered into a stockholders' agreement with Stuart A. Benson, Donald C.
  Hannah, SkyePharma PLC, Stephen Morris, and Fifth Avenue Capital, Inc.
  (the "ENI Voting Agreement"). Pursuant to the ENI Voting Agreement, as
amended:                                                            

F-30

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 VITAL LIVING, INC
Notes to Consolidated Financial Statements

o     for so long as Messrs. Benson and Hannah (the "Founders")     
      beneficially own an aggregate of at least 65% of the shares of
          common stock owned by them on the date of the agreement, they will
be entitled to nominate three directors;                

     o     for so long as Stephen Morris and Fifth Avenue Capital beneficially
            own an aggregate of at least 65% of the shares of common stock owned
      by them on the date of the agreement, they will be entitled to
nominate one director; and                              

      o     for so long as SkyePharma beneficially owns an aggregate of at least
        65% of the shares of common stock owned by it on the date of the
agreement, it is entitled to nominate one director.     

  Each of the parties to the ENI Voting Agreement has agreed to vote the
shares of common stock beneficially owned by them on the date of the
      agreement in favor of the other group's nominees. Each of the parties have
     further agreed that they will vote in favor of the other parties' nominee
      or nominees, and will not take any action, or cause us to take any action,
to remove, with or without cause, a Director nominated by any of the
parties.                                                            

  We have a consulting arrangement with Stephen Chen, Chairman and Chief
    Executive Officer of Strong International, Inc., the sole shareholder of
     the outstanding Series C Preferred Stock, to assist in creating strategic
     alliances in China. During 2004, we paid Mr. Chen $19,000 related to such
   matters. In 2004, 250,000 additional shares of Series B Preferred Stock
   valued at $250,000 were issued in satisfaction of dividends owed to the
 holder of the Series B Preferred Stock. Simultaneously, all 1,250,000
 shares of Series B Preferred Stock converted into 1,250,000 shares of
 common stock. Additionally, Mr. Chen participated in the November and
    December warrant offering and exercised 612,000 warrants to purchase our
common stock at an exercise price of $0.10 per warrant.             

     We have several agreements with HCFP/Brenner Securities, LLC ("Brenner"),
    a stockholder, to provide consulting, investment, or financial services.
   During 2004, the following amounts were paid to Brenner in exchange for
such services:                                                      

                                                        · Enlarge/Download Table

                                                           Options & Warrants                        
                                                     -------------------------------                 
                                                                                        Fair Market  
                                                                                          Value of   
Matter                   Cash            Stock           Number       Exercise Price     Securities  
-------------------  --------------  --------------  --------------   --------------   --------------
                                                                                                     
Consulting Services  $           --         300,000             --              N/A   $      135,000 
Investment Services  $       19,000              --      2,141,000    $0.10 - $0.25   $      266,000 

    We have several agreements with Atlas Capital Services, LLC ("Atlas") to
provide consulting, investment, or financial services, including the
valuation related to the ENI Acquisition.                           

      We have several agreements with Sloan Securities Corp ("Sloan") to provide
     consulting, investment, or financial services. During 2004, the following
amounts were paid to Sloan (or its designees) in exchange for such  
services:                                                           

                                  Options & Warrants
                                   ---------------------
                                                                     Fair Market
                                                          Exercise    Value of
Matter                   Cash        Stock       Number     Price     Securities
--------------------   ---------   ---------   ---------   ---------   ---------
Investment Services    $  45,338          --     453,000   $    0.10   $  59,000

NOTE 13 - SUBSEQUENT EVENTS                                                     

Executive Management                                                

    On February 15, 2005, Vital Living, Inc. (the "Company") entered into an
employment agreement dated as of January 1, 2005 with Stuart Benson 
     providing for the employment of Mr. Benson as the Company's President and
      Chief Executive Officer. On February 15, 2005, the Company entered into an
employment agreement dated as of January 1, 2005 with Gregg A. Linn 
     providing for the employment of Mr. Linn as the Company's Chief Financial
      Officer. The employment agreements have initial terms of three years each,
      and are both subject to automatic renewal for successive one-year periods.

F-31

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 VITAL LIVING, INC
Notes to Consolidated Financial Statements

   Mr. Benson's employment agreement provides for Mr. Benson to receive an
    annual base salary of $220,000 from January 1, 2005 through December 31,
2005; $250,000 from January 1, 2006 through December 31, 2006; and  
   $280,000 commencing on January 1, 2007. Mr. Linn's employment agreement
   provides for Mr. Linn to receive an annual base salary of $160,000 from
    January 1, 2005 through December 31, 2005; $180,000 from January 1, 2006
  through December 31, 2006; and $200,000 commencing on January 1, 2007.
    Both executives will also be eligible to receive annual bonuses pursuant
    to the employment agreements in amounts to be determined by the Board of
Directors of the Company.                                           

     As part of their compensation packages, the Company granted to Mr. Benson
      and Mr. Linn, subject to the approval of the Company's stockholders at its
     2005 Annual Meeting of Stockholders, options to purchase 3,000,000 shares
   and 2,000,000 shares, respectively, of the Company's common stock at an
      exercise price equal to the closing price of the Company's common stock on
  the date of execution of the agreements. The options vest one third on
     each of the first three annual anniversaries following the date of grant.

F-32

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10KSB/A Filing		Date		First		Last			Other Filings
		10/15/94		8
		9/23/97		8
		1/22/01		3		40
		5/7/01		3		40
		5/20/01		3		40
		5/21/01		27
		6/30/01		22		41
		8/1/01		59
		8/16/01		3		40
		8/17/01		30					8-K12G3, 8-K12G3/A
		8/21/01		27
		10/1/01		27		30			8-K12G3
		11/20/01		30					8-K12G3/A
		12/28/01		29
		12/31/01		30					10KSB
		1/1/02		47
		2/26/02		27
		2/27/02		30					8-K
		2/28/02		30					8-K
		3/20/02		28
		3/28/02		15		16
		4/1/02		30					10KSB, 8-K
		4/4/02		27
		4/16/02		30					8-K
		5/3/02		59
		5/7/02		29
		5/15/02		28		31			10QSB, 8-K
		5/16/02		29
		5/19/02		28
		5/30/02		28		31			8-K
		5/31/02		31					8-K
		6/13/02		31					8-K
		6/17/02		29		31			8-K
		7/2/02		31					8-K
		7/29/02		28
		9/30/02		28					10QSB, 10QSB/A, 8-K, 8-K/A
		10/1/02		28
		10/8/02		28
		10/17/02		60
		10/23/02		26		30			8-K
		11/4/02		30					8-K
		11/20/02		26		30			8-K/A
		12/5/02		30					8-K/A
		12/31/02		17		47			10KSB, 10KSB/A
		1/1/03		47
		1/31/03		24		46
		2/3/03		28
		3/7/03		30					SB-2/A
		3/20/03		54
		3/31/03		47					10KSB, 10QSB, 10QSB/A
		4/1/03		47
		4/16/03		28		55
		4/17/03		28
		4/28/03		30					SB-2/A
		5/31/03		24		45
		6/18/03		30					SB-2/A
		6/20/03		29
		6/25/03		29					8-K
		7/2/03		31					8-K
		7/9/03		56
		7/15/03		27
		7/16/03		31					8-K
		7/23/03		30					4, SB-2/A
		8/14/03		29					10KSB/A, 10QSB, 10QSB/A
		8/20/03		6		56			3
		8/21/03		30					8-K, 8-K/A
		9/8/03		30					8-K
		9/15/03		24		46
		9/30/03		24		45			10QSB, 10QSB/A, NT 10-Q
		10/14/03		6		47			4, 8-K, 8-K/A
		12/5/03		31					8-K/A
		12/15/03		30					8-K
		12/19/03		30					4, 8-K, SC 13D/A
		12/31/03		6		62			10KSB, 10KSB/A
		1/1/04		52
		1/13/04		29
		1/14/04		30		63			SB-2
		3/15/04		24		46
		4/6/04		11		20
		4/15/04		51
		4/19/04		29
		4/28/04		50
		5/12/04		31					SB-2/A
		7/9/04		19		57
		8/3/04		31					SB-2/A
		8/13/04		50					8-K/A
		8/17/04		6		47
		9/30/04		19		63			10QSB, 10QSB/A, 424B3, 8-K, 8-K/A, NT 10-Q
		10/20/04		31		32
		11/4/04		32
		11/11/04		32
		11/15/04		57
		11/22/04		32					10QSB, 8-K
		12/15/04		51
For The Period Ended		12/31/04		1		62			10KSB, 10KSB/A, NT 10-K
		1/1/05		30		65
		2/15/05		30		64			8-K
		2/18/05		31					8-K
		3/16/05		9
		3/17/05		1		17
		4/8/05		34
		6/15/05		24		46			4
		6/21/05		33
Filed On / Filed As Of		6/22/05
		7/31/05		63
		12/31/05		49		65
		1/1/06		65
		12/31/06		65
		1/1/07		65
		12/14/08		51
		12/17/08		50		51
		12/31/17		52
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