NOTE 1 - ORGANIZATION

Health Sciences Group, Inc. (the "Company") was incorporated in the state of Colorado on June 13, 1996 as Centurion Properties Development Corporation. The Company remained dormant until October 16, 2000 when its name was changed to iGoHealthy.com, Inc. On September 10, 2001, the Company changed its name to Health Sciences Group, Inc. The Company acquires and integrates into a collaborative network, companies operating in the fields of pharmaceuticals, nutraceuticals and cosmeceuticals.

Effective December 14, 2001, the Company acquired 100% of the outstanding stock of XCEL Healthcare, Inc., a California corporation, and the outstanding shares of BioSelect Innovations, Inc., a Nevada corporation, for approximately $4.4 million pursuant to a Stock Purchase and Sale Agreement.

On February 24, 2003, effective January 1, 2003, the Company completed its acquisition of Quality Botanical Ingredients, Inc. pursuant to an Asset Purchase Agreement for approximately $1.5 million (Note 3). Quality Botanical Ingredients is a leading manufacturer and contract processor of bulk botanical materials and nutritional ingredients supplied to buyers in various industries including pharmaceutical, nutraceutical and cosmetics.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Quality Botanical Ingredients, Inc. ("QBI"), XCEL Healthcare, Inc. ("XCEL") and BioSelect Innovations, Inc. ("BioSelect"). All material inter-company accounts have been eliminated in consolidation.

Classes of Stock

The Company's Articles of Incorporation, as amended, authorized the issuance of up to 55,000,000 shares of stock, consisting of 5,000,000 shares of Convertible Preferred Non-voting Equity stock and 50,000,000 shares of common stock, which have a par value of $0.001.

Convertible Preferred Stock

Convertible Preferred Non-voting Equity stock will have par terms, preferences and conversion features as determined by the Board of Directors at the time of the issuance of any such shares. In July 2003, the Board of Directors executed and filed a Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock with the State of Colorado, which authorized the issuance of 2,352,948 shares of Series A convertible preferred stock (Note 14). There were no convertible preferred shares issued as of December 31, 2002.

Basis of Presentation

As reflected in the accompanying consolidated financial statements, the Company has losses, negative cash flows from operations and negative working capital. These matters raise substantial doubt about the Company's ability to continue as a going concern.

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company's ability to continue to raise capital and generate positive cash flows from operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of Presentation, Continued

Management plans to take, or has taken, the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence.

o Through February 2004, the Company has raised approximately $300,000 from the sale of equity funds (Note 18) and anticipates raising additional equity funds of up to $2,000,000 that will be used to fund any capital shortfalls.

o Management is decreasing expenses by using internal resources to perform due diligence and other acquisition related duties on future acquisitions.

o Management has streamlined its operation and is developing new products, which are anticipated to have increased gross profit margins.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company's significant estimates include the contractual allowance on accounts receivable and life and estimated value of intangible assets for recoverability. Actual results could differ from those estimates.

Fair Value of Financial Instruments

For certain of the Company's financial instruments, including accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities. The amounts owed on its lines of credit, notes payable and capital leases also approximate fair value because current interest rates and terms offered to the Company are at current market rates.

Cash and Cash Equivalents

Equivalents

Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased.

Concentration

The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses in such account.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable arising from the Company's normal business activities. QBI routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. Sales are comprised of approximately 390 customers for the year ended December 31, 2003. Included in accounts receivable are amounts due from 185 customers at December 31, 2003. QBI had no customers that represent sales greater than 10% of total sales for the year ended December 31, 2003.

XCEL obtains payments from various insurance payors. Prior to shipment, XCEL obtains documentation and authorization from the appropriate sources to ensure payment will be received. If the claim is denied by the insurance payor as a non-covered item, the patient is responsible for the charge. Substantially all of XCEL's accounts receivable are due from two governmental agencies. Included in accounts receivable is approximately $327,000 and $400,000 due from these two agencies at December 31, 2003 and 2002, respectively.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventory

Inventory consists of herbs and nutritional supplements in the raw material, blended and processed stages. Herbs and nutritional supplement inventory is reviewed at least annually for obsolescence or permanent markdowns and adjustments, if any, are included in cost of goods sold. Inventory also includes pharmaceutical and over-the-counter medications. Inventory is stated at the lower of cost or market. Costs for pharmaceutical and over-the-counter products generally being determined on a first in, first out basis while the cost for herbs and nutritional supplements are determined on an average cost basis. Pharmaceutical and over-the-counter medications, which have expired, are returned for credit or refund at amounts that approximate the purchase price. As a result, the Company has no obsolete inventory related to its pharmaceutical and over-the-counter medications.

                                        Estimated useful
                                         life (in years)
                                         ---------------
Building leasehold improvements              10
Machinery and equipment                    5 - 10
Furniture and fixtures                     5 - 10
Computer software and systems              3 - 5
Vehicles                                     5

Leasehold improvements are amortized on the straight-line method over the term of the lease or estimated useful life, whichever is shorter. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized.

Loan Fees

Loan fees are capitalized and are amortized using the effective interest rate method over the life of the loans (1 - 3 years). Accumulated amortization totaled approximately $273,000 and $6,000 at December 31, 2003 and 2002, respectively. Amortization expense totaled approximately $267,000 and $6,000 for the years ended December 31, 2003 and 2002, respectively.

Excess of Cost Over Fair Value of Net Assets Acquired

Excess of cost over fair value of net tangible assets acquired arising from the acquisition of XCEL and BioSelect was first attributed to patents, formulas, agreements not-to-compete and website development based upon their estimated fair value at the date of acquisition. These intangible assets are being amortized over their estimated useful lives, which range from 3-19 years. Excess of cost over fair value of net assets acquired will be reviewed for impairment pursuant to the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142.

The Company accounts for its intangible assets under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". In accordance with SFAS No. 142, intangible assets with a definite life are accounted for impairment under SFAS No. 144 and intangible assets with indefinite life are accounted for impairment under SFAS No. 142. In accordance with SFAS No. 142, goodwill, or the excess of cost over fair value of net assets acquired, is no longer amortized but is tested for impairment using a fair value approach at the "reporting unit" level. A reporting unit is the operating segment, or a business one level below that operating segment (referred to as a component) if discrete financial information is prepared and regularly reviewed by management at the component level. The Company recognizes an impairment charge for any amount by which the carrying amount of a reporting unit's goodwill exceeds its fair value. The Company uses discounted cash flows to establish fair values. When available and as appropriate, comparative market multiples to corroborate discounted cash flow results is used. When a business within a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value methodology.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible and Long-Lived Assets

In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provision of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. This statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be impaired. SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also establishes a "primary-asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. This statement is effective for fiscal years beginning after December 15, 2001. The Company's adoption did not have a material impact to the Company's financial position or results of operations.

Revenue Recognition

Net sales are recorded when products are delivered to the customer. QBI processes raw materials based on customer specifications. QBI determines the sales price of the products and assesses the credit worthiness of the customer prior to shipment. The revenue recognition criteria are completed prior to shipment.

XCEL's net sales are recorded at its established rates on an accrual basis, net of the provision for contractual allowances when pharmaceutical products are shipped. A valid prescription and authorization for payment must be received by XCEL for the customer prior to shipment, representing the contract between the customer's insurance company and XCEL. On the date the product is shipped, the insurance payor is billed for the sale as the service has been provided to the customer and, at which point, collectibility is assured. Contractual allowances include differences between established billing rates and amounts estimated by management as reimbursable from third-party payors and others for products shipped.

Research and Development Costs

Research and development costs consist of expenditures for the research and development of patents and new products, which cannot be capitalized.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs totaled approximately $16,000 and $2,800 for the years ended December 31, 2003 and 2002, respectively.

Shipping and Handling Costs

The Company expenses shipping and handling costs as incurred and includes the expense in cost of goods sold for its Nutraceutical subsidiary and in selling, general and administrative expenses for its Pharmaceutical subsidiary. Shipping and handling costs totaled approximately $433,000 and $58,000 for the years ended December 31, 2003 and 2002, respectively.

Income Taxes

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the differences between the financial statement bases and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded to reduce a deferred tax asset to that portion that is expected to more likely than not be realized.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net Loss Per Share

The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic and diluted loss per share. Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. At December 31, 2003 and 2002, the outstanding number of potentially dilutive common shares totaled approximately 1,256,000 and 1,606,000 shares, respectively. However, as the Company has net losses, their effect is anti-dilutive and has not been included in the diluted weighted average earnings per share as shown on the Consolidated Statements of Operations.

Pro Forma Information for Stock Options Issued to Employees

SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of grant and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current intrinsic value accounting method specified in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock-based compensation. The Company has elected to use the intrinsic value based method and has disclosed the pro forma effect of using the fair value based method to account for its stock-based compensation. The Company uses the fair value method for options granted to non-employees. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under the Stock Option Plan consistent with the methodology prescribed by SFAS No. 123, the Company' net loss and loss per share would be reduced to the pro forma amounts indicated below for the years ended December 31, 2003 and 2002:

                                                 December 31, 2003    December 31, 2002
                                                 -----------------    -----------------
Net loss attributable to common
  shareholders, as reported                         $(8,447,276)        $(4,283,936)
Stock compensation calculated under SFAS 123           (478,867)           (340,295)
                                                    -----------         -----------
Pro forma net loss attributable to
  common shareholders                               $(8,926,143)        $(4,624,231)
                                                    ===========         ===========

Net loss per share available to common
  shareholders - basic and diluted
     As reported                                    $     (0.76)        $     (0.73)
                                                    ===========         ===========
     Pro forma                                      $     (0.80)        $     (0.79)
                                                    ===========         ===========

Pro forma information using the Black-Scholes method at the date of grant based on the following assumptions: average risk free interest rate of 2.10% for 2003 and 2.70% for 2002; dividend yield of 0% for each of the years 2003 and 2002; average volatility factor of the expected market price of the Company's common stock of 133.6% for 2003 and 121.7% for 2002; and an expected life of the options of 3 years for each of the 2003 and 2002.

This option valuation model requires input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value of estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of fair value of its employee stock options.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

In November 2002, FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Among other things, the Interpretation requires guarantors to recognize, at fair value, their obligations to stand ready to perform under certain guarantees. FIN 45 is effective for guarantees issued or modified on or after January 1, 2003. The Company does not expect the adoption of this pronouncement to have a material impact to the Company's financial position or results of operations.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") No. 51." This interpretation clarifies the application of ARB No. 51, "Consolidated Financial Statements", to certain entities in which equity investors 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. In December 2003, the FASB revised FASB Interpretation No. 46 ("FIN 46R"), which allowed companies with certain types of variable interest entities to defer implementation until March 31, 2004. The Company does not expect the adoption of this pronouncement to have a material impact to the Company's financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have a material impact on its consolidated financial position, results of operations or stockholders' equity.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 clarifies the accounting treatment 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. 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 June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material impact on its consolidated financial position, results of operations or stockholders' equity.

In December 2003, the FASB issued Summary of Statement No. 132 (revised 2003), "Employer's Disclosures about Pensions and Other Post Retirement Benefits - an amendment to FASB Statements No. 87, 88, and 106." This statement revises employers' disclosures about pension plans and other postretirement benefit plans. However, it does not change the measurement or recognition of those plans as required by FASB Statements No. 87, "Employers' Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost. This statement also calls for certain information to be disclosed in financial statements for interim period. The disclosures required by this statement are effective for fiscal year ending after December 15, 2003. The Company does not expect the adoption of this pronouncement to have a material impact on its consolidated financial position or results of operations.

In January 2004, the FASB issued FASB Staff Position No. FAS 106-1 ("FSP 106-1"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernation Act of 2003," (the "Act"). FSP 106-1 addresses the accounting impact of the Act, which was signed into law on December 8, 2003. Among other features, the Act introduces a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Companies sponsoring affected postretirement benefit plans may elect to defer recognition of the impact of the Act until (1) final FASB guidance on accounting for the federal subsidy provision of the Act is issued, or (2) a significant event calling for remeasurement of a plan's assets and obligations occurs. FSP 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The adoption of this accounting interpretation is not expected to have a material impact on the Company's consolidated financial statements.

NOTE 3 - BUSINESS ACQUISITION

On February 25, 2003, effective January 1, 2003, the Company formed a new subsidiary, Quality Botanical Ingredients, Inc., a Delaware corporation that purchased substantially all assets and assumed certain liabilities of Quality Botanical Ingredients, Inc., a New Jersey corporation (now known as AAA Health Products, Inc.) ("AAA") pursuant to an Asset Purchase Agreement (the "Agreement") for approximately $1.5 million. Included in the purchase price was the issuance of 1,200,000 shares of the Company's common stock, which includes 433,333 shares placed in an escrow account and 200,000 shares issued to consultants for services provided to the Company relating to the acquisition as well as approximately $394,000 paid to attorneys and a business acquisition firm for due diligence services related to the acquisition of QBI. Pursuant to the Agreement, the Company contributed $200,000 to AAA, which was used as payment to AAA's creditors. The value of the 1,200,000 shares totaled $972,000 and was determined based on the average closing market price of the Company's common stock over the two-day period before and after the terms of the acquisition were agreed to and announced. Shares placed in escrow totaling 333,333 are subject to set-off of any accounts receivable remaining after 150 days from the closing date. The remaining 100,000 shares, valued at approximately $81,000, are subject to settlement of any indemnity claims. Additional shares, not to exceed 1,250,000, of the Company's common stock will be issued to the seller should the closing price of the Company's common stock not achieve certain levels after 1 year from the closing date. In January 2004, the Company and AAA entered into an Amendment Agreement to limit the maximum amount of additional shares to 750,000, a decrease of 500,000 shares. An additional 200,000 shares shall be issued to the seller upon reaching certain levels of gross revenues and gross operating margins as compared to its 2001 financial results. The Company also contributed $400,000 to AAA, of which, $350,000 was used to pay down AAA's line of credit and the remaining $50,000 was paid as a loan fee.

In February 2003, the newly formed subsidiary entered into a loan agreement with a financial institution for a maximum line of credit totaling $4 million, pursuant to the purchase agreement (Note 9). The funds were used to payoff AAA's line of credit with the same institution. Additionally, the newly formed subsidiary assumed notes payable of $387,481 and $63,194 with a financial institution (Note 10).

In keeping with the Company's focus to be an integrated provider of innovative products and services to the nutraceutical, pharmaceutical, and cosmeceutical industries, the assets and business purchased from QBI allows the Company to process domestic and imported botanical and nutraceutical raw materials into nutritional supplement components which are sold to manufactures throughout the world. The acquisition has been accounted for as a purchase transaction pursuant to SFAS 141 and accordingly, the acquired assets and liabilities assumed being recorded at their estimated fair values at the date of acquisition. The net book value of the acquired assets and liabilities assumed approximated the fair value at the date of purchase. Therefore, there was no excess of cost over net book value recorded.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

                                        At January 31, 2003
                                        -------------------
Current assets                            $ 6,484,289
Machinery, furniture and equipment          1,504,748
Other long-term assets                        113,071
                                          -----------
     Total assets acquired                  8,102,108
                                          -----------

Current liabilities                        (6,155,387)
Long-term debt                               (461,646)
                                          -----------
     Total liabilities assumed             (6,617,033)
                                          -----------

     Net assets acquired                  $ 1,485,075
                                          ===========

                                               For the year ended  For the year ended
                                                December 31, 2003   December 31, 2002
                                                -----------------   -----------------
                                                    (audited)          (unaudited)
Net sales                                            $ 17,771         $ 19,856
Gross profit                                            2,277            4,967
Net loss attributable to common shareholders           (8,447)          (4,187)
Net loss per available to common shareholders           (0.76)           (0.72)

NOTE 4 - STOCK OPTIONS ISSUED TO EMPLOYEES

The Company has adopted the 2001 Employee Stock Option Plan (the "Plan"). The Plan authorizes the issuance of up to 2,000,000 shares of the Company's common stock pursuant to the exercise of options granted there under. The Board of Directors administers the Plan, selects recipients to whom options are granted and determines the number of shares to be awarded. Options granted under the Plan are exercisable at a price determined by the Board of Directors at the time of grant, but in no event less than fair market value.

Pro forma information regarding the effects on operations as required by SFAS No. 123 and SFAS No. 148, has been determined as if the Company had accounted for its employee stock options under the fair value method of those statements. As allowed under the guidance of SFAS No. 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations in accounting for its employee stock options. Employee stock option compensation expense totaled approximately $60,000 for the year ended December 31, 2002. The amount was calculated by taking the difference between the fair market value of the options and the exercise price at the date of grant. There was no employee stock option compensation expense required to be recognized under APB 25 for the year ended December 31, 2002 because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant.

The number and weighted average exercise prices of options granted are as follows:

                                               December 31, 2003                    December 31, 2002
                                           ---------------------------         ---------------------------
                                                              Average                           Average
                                                              Exercise                          Exercise
                                             Number            Price            Number           Price
                                             ------            -----            ------           -----
Outstanding at beginning of the year          751,000        $    0.68          500,000        $    0.25
Granted during the year                     1,905,000             1.73          766,000             0.69
Exercised during the year                          --               --          500,000             0.25
Terminated during the year                    950,000             0.90           15,000             1.40
Exercisable at end of the year              1,336,000             1.54          731,000             0.61
Outstanding at end of the year              1,706,000             0.98          751,000             0.68

                                           Weighted-                 Weighted-            Weighted-           Weighted
Range of           Remaining                Average                   Average              Average             Average
Exercise            Number                Contractual                  Fair                Number             Exercise
 Prices           Outstanding            Life (Years)                  Value             Exercisable            Price
--------------------------------------------------------------------------------------------------------------------------
$0 to $1            750,000                   2.0                $     0.58                  700,000       $    0.55
 1 to 2             926,000                   2.8                      1.24                  616,000            1.30
 2 to 3                   -                     -                         -                        -               -
 3 to 4              30,000                   1.2                      3.10                   20,000            3.10

A summary of the options by ranges at December 31, 2003 are as follows:

                                           Weighted-                 Weighted-            Weighted-           Weighted
Range of           Remaining                Average                   Average              Average             Average
Exercise            Number                Contractual                  Fair                Number             Exercise
 Prices           Outstanding            Life (Years)                  Value             Exercisable            Price
---------------------------------------------------------------------------------------------------------------------------
$0 to $1            700,000                   3.0                $     0.47                  700,000       $    0.55
 1 to 2             21,000                    9.7                      1.14                   21,000            1.33
 2 to 3                -                       -                         -                         -              -
 3 to 4             30,000                    2.3                      2.67                   10,000            3.10

                                         December 31, 2003   December 31, 2002
                                         -----------------   -----------------
Accounts receivable                          $2,160,402        $  650,477
Less allowances for doubtful
  accounts and contractual allowances           306,063            83,430
                                             ----------        ----------

                                             $1,854,339        $  567,047
                                             ==========        ==========

Bad debt expense charged to operations totaled approximately $252,000 for the year ended December 31, 2003. The Company had no bad debt expense for the year ended December 31, 2002.

                                                       December 31,     December 31,
                                                          2003              2002
                                                       ------------     ------------
Raw materials                                          $1,525,421        $       --
Work in process                                            18,525                --
Finished goods                                            949,738                --
Pharmaceutical and over-the-counter medications           142,432           156,953
                                                       ----------        ----------

                                                        2,636,116           156,953
Less reserves                                              49,377                --
                                                       ----------        ----------

                                                       $2,586,739        $  156,953
                                                       ==========        ==========

Included in cost of goods sold for the year ended December 31, 2003 is approximately $500,000 of permanent markdowns and obsolete inventory related to its purchased raw materials and finished goods. The Company had no markdowns or obsolete inventory for the year ended December 31, 2002.

                                                          December 31,     December 31
                                                             2003              2002
                                                          ------------     -----------
Machinery and equipment                                   $  655,243        $       --
Machinery and vehicles held under capital leases             248,023            50,000
Furniture and office equipment                               159,069            48,612
Computer software and equipment                              130,478            47,095
Leasehold improvements                                       582,239            79,505
                                                          ----------        ----------

                                                           1,775,052           225,212

Less accumulated depreciation, including
  approximately $139,000 and $18,000 for
  equipment and vehicles held under capital leases           358,825            93,416
                                                          ----------        ----------

                                                          $1,416,227        $  131,796
                                                          ==========        ==========

Depreciation expense charged to operations totaled approximately $268,000 and $85,000, including approximately $121,000 and $17,000 for equipment and vehicles held under capital lease obligations, for the years ended December 31, 2003 and 2002, respectively.

                                     December 31,     December 31,
                                        2003              2002
                                     ----------        ----------
Patents                              $3,300,000        $3,300,000
Formulas                                680,000           680,000
Agreements not-to-compete               390,000           390,000
Website development                      77,288            77,288
                                     ----------        ----------

                                      4,447,288         4,447,288
Less accumulated amortization           451,575           227,384
                                     ----------        ----------
                                     $3,995,713        $4,219,904
                                     ==========        ==========

Amortization expense totaled approximately $224,000 and $198,000 for the years ended December 31, 2003 and 2002, respectively. Amortization expense for the years ending December 31, 2004 and 2005 is estimated to be approximately $228,000 and $157,000, respectively, $179,000 for each of the subsequent years ending through December 31, 2016 and approximately $133,000 thereafter.

Patents

Patents consist of the assigned fair market value at the date of acquisition arising from the purchase of BioSelect. Patent costs are amortized on a straight-line basis over their economic lives of approximately 19 years and are reviewed for impairment whenever the facts and circumstances indicate that the carrying amount may not be recoverable.

Formulas

Formulas consist of the assigned fair market value at the date of acquisition arising from the purchase of XCEL. Formulas are amortized on a straight-line basis over their estimated economic lives of 15 years and are reviewed for impairment whenever the facts and circumstances indicate that the carrying amount may not be recoverable.

NOTE 8 - INTANGIBLE ASSETS (CONTINUED)

Agreements Not-to-Compete

Certain stockholders and former employees of the Company entered into non-competition agreements. The agreements have been recorded at their fair market value at the date of purchase of XCEL. The agreements are amortized on a straight-line basis over their estimated economic lives of 3 years.

Website Development

The Company capitalizes certain software development costs, which are amortized using the straight-line method over the estimated useful lives of the software, not to exceed three years.

NOTE 9 - LINES OF CREDIT

In February 2003, QBI entered into an Amended and Restated Loan and Security Agreement (the "Loan Agreement") with a finance institution for a maximum line of credit totaling $4,000,000. Interest is due monthly on the outstanding balance at a rate of 1.50% above the prime rate as published in the Wall Street Journal. At December 31, 2003, the interest rate was 5.5%. The Loan Agreement expires in October 2004 and is secured by substantially all assets of QBI. The financial institution will make advances on the loan agreement up to 80% of QBI's accounts receivable to a maximum of $4 million and 55% of QBI's inventory to a maximum $1.8 million. The borrowings are guaranteed by the Company and personally guaranteed by the majority shareholders of the Company. The credit line is limited as to use by QBI. At December 31, 2003, the balance of the credit line totaled approximately $2,791,000.

QBI must maintain the following financial ratios:

o Net income > $500,000 *

o Net worth > $1,700,000 *

* QBI is in default of these covenants at December 31, 2003 and has entered into a forbearance agreement (Note 18).

In February 2003, XCEL entered into a Loan and Security Agreement (the "Loan Agreement") with a finance company for a maximum line of credit totaling $750,000. Interest is due monthly on the outstanding balance at a rate of 3.75% above XCEL's reference rate. At December 31, 2003, the interest rate was 7.85%. The Loan Agreement expires in February 2006 and is secured by substantially all assets of XCEL. The finance company will make advances on the loan agreement up to 75% of XCEL's eligible accounts receivable. The borrowings are guaranteed by the Company and personally guaranteed by the majority shareholders of the Company. The credit line is limited as to use by XCEL. At December 31, 2003, the balance of the credit line totaled approximately $135,000.

XCEL must maintain the following financial ratio and covenant:

o Minimum working capital ratio .75 to 1

o XCEL must be profitable*

* XCEL is in default of this covenant at December 31, 2003.

Additionally, the Company paid $37,500 and issued 30,000 stock purchase warrants to a consultant for services relating to the line of credit. Each warrant entitles the holder to purchase one share of the Company's common stock at an exercise price of $0.95. The warrants expire February 2008. The estimated value of the warrants totaled approximately $24,000 at the date of issuance and is included in loan fees. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.75%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 142%; and a term of 5 years.

NOTE 9 - LINES OF CREDIT (CONTINUED)

In additional to the loan agreement with the finance company, XCEL may borrow up to $75,000 under a revolving line of credit agreement with a financial institution, which has an automatic annual renewal, expiring in March 2005. The line can be withdrawn at the financial institutions option. Interest is payable at 2.5% above the prime interest rate. At December 31, 2003, the interest rate was 6.5%. Certain stockholders of the Company guarantee the agreement. At December 31, 2003 and 2002, the balance was $73,150.

Interest expense on the lines of credit totaled approximately $201,000 and $5,000 for the years ended December 31, 2003 and 2002, respectively.

                                                                    December 31,     December 31,
                                                                       2003             2002
                                                                    ------------     ------------
Note payable, financial institution, secured by substantially
  all assets of QBI, monthly payments of $22,793 plus interest
  at the prime rate plus 2.5% per annum, 6.5% at December 31,
  2003, through July 2004 (Notes 3 and 18)                            $159,551        $     --
Note payable, individual, interest at 11% per annum,
  unsecured, subordinated to a $750,000 line of credit
  agreement (Note 9)                                                   116,146         116,146
Note payable, consulting firm, interest at 10% per
  annum, unsecured, due in monthly installments of
  $12,000 through February 2004                                         23,178         126,000
Note payable, financial institution, secured by
  substantially all assets of QBI, monthly payments of $4,861
  plus interest at the prime rate plus 3% per annum, 7.0%, at
  December 31, 2003, through March 2004 (Note 3)                        14,583              --
Note payable, individual, interest at 10% per annum,
  unsecured, subordinated to a $750,000 line of credit
  agreement (Note 9)                                                     7,755           9,915
Note payable, individual, interest at 13% per annum,
  unsecured, due May 2002                                                   --          55,000
Note payable with stock purchase warrants (Note 14),
  less discount of $20,500, individual, stated interest at 12%
  per annum, unsecured, due February 2003, guaranteed by the
  officers and major stockholders of the Company                            --          44,750
Note payable with stock purchase warrants (Note 14),
  less discount of $8,200, individual, stated interest at 12%
  per annum, unsecured, due March 2003, guaranteed by the
  officers and major stockholders of the Company                            --          16,533
Note payable, individual, interest at 12% per annum,
  unsecured, due September 2003                                             --          15,000
                                                                      --------        --------

                                                                       321,213         383,344
Less current maturities                                                197,313         217,572
                                                                      --------        --------

                                                                      $123,900        $165,772
                                                                      ========        ========

Years ending
December 31
-----------
     2004                                   $ 197,313
     2005                                     123,900
                                            ---------

                                            $ 321,213
                                            =========

Interest expense on notes payable totaled approximately $63,000 and $51,000 including amortization of discounts on notes payable totaling approximately $16,000 and $13,000 for the years ended December 31, 2003 and 2002, respectively.

    Total minimum lease payments through December 31, 2004     $113,545
    Less amount representing interest                             7,959
                                                               --------

Present value of net minimum lease payments                     105,586
    Less current maturities                                     105,586
                                                               --------
                                                               $      -
                                                               ========

Interest  expense totaled  approximately  $34,000 and $4,000 for the years
ended December 31, 2003 and 2002, respectively.

NOTE 12 - CONVERTIBLE DEBENTURES

12% Convertible Debenture, Principal Amount $300,000

In February 2003, the Company sold $300,000 of convertible debentures pursuant to a Securities Purchase Agreement. Additionally, the Company issued 571,428 of common stock purchase warrants to the debenture holders. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.60. The warrants expire in February 2008. The debentures accrue interest at 12% per annum. The unpaid principal and accrued interest was due on February 24, 2004. In January 2004, the Company and debenture holder entered into an amendment agreement to extend the due date of the convertible debentures to February 24, 2005. The notes are collateralized by a second position in substantially all assets of the Company and shares owned by the officers and major shareholders of the Company. Commencing July 24, 2003, the debentures can be converted at $0.525 per share. The proceeds were allocated first to the warrants based on their relative fair value, which totaled approximately $174,000 using Black-Scholes option pricing model. The remainder of approximately $126,000 was allocated to the beneficial conversion feature.

The discount attributable to the value of the warrants as calculated using the Black-Scholes pricing model and the value of the equity conversion features exceeded the face value of the convertible notes. As a result, the notes were fully discounted and the discount was recorded as additional paid-in capital. The discount will be amortized using the effective interest rate method over one year resulting in an effective interest rate in excess of 100%. Upon conversion of the debt, any unamortized debt issue costs will be charged to expense.

NOTE 12 - CONVERTIBLE DEBENTURES (CONTINUED)

12% Convertible Debenture, Principal Amount $300,000, Continued

Additionally, the Company granted 85,712 stock purchase warrants to two consultants for services relating to these convertible debentures sold by the Company. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.60. The warrants expire in February 2008. The estimated value of the warrants totaled approximately $71,000 at the date of issuance and is included in loan fees. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.82%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 142%; and a term of 5 years.

In November 2003, the Company issued 19,636 shares of its common stock to the debenture holder for penalties due. The value of the shares totaled approximately $30,000 and is included in selling, general and administrative expenses. The penalty payment was due as the Company did not obtain an effective registration statement in the time frame required in the agreement. The registration statement became effective in October 2003.

In November 2003, one of the consultants exercised stock purchase warrants resulting in the issuance of 14,286 of the Company's common stock in exchange for a subscription receivable. Net proceeds totaled approximately $9,000 and was received in 2004.

In November 2003, the debenture holder converted $27,500 of the note payable into 50,000 shares of the Company's common stock. As a result, approximately $7,000 of unamortized discount relating to the portion of the note converted was expensed at the date of conversion and is included in interest expense.

12% Convertible Debenture, Principal Amount $500,000

In May 2003, the Company sold $500,000 of convertible debentures pursuant to a Securities Purchase Agreement. Additionally, the Company issued 588,235 of common stock purchase warrants to the debenture holders. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $1.25. The warrants expire in May 2008. The debentures accrue interest at 12% per annum. The unpaid principal and accrued interest was due on May 21, 2004. In January 2004, the Company and debenture holder entered into an amendment agreement to extend the due date of the convertible debentures to May 21, 2005. The notes are collateralized by substantially all assets of the Company, subject to all prior liens and security interests. Commencing October 18, 2004, the debentures can be converted at the daily volume weighted average price of the Company's common stock for the 5 days prior to the conversion date but not lower than $0.85 per share. The proceeds were allocated first to the warrants based on their relative fair value, which totaled approximately $229,000 using Black-Scholes option pricing model. The remainder of approximately $271,000 was allocated to the beneficial conversion feature.

The discount attributable to the value of the warrants as calculated using the Black-Scholes pricing model and the value of the equity conversion features exceeded the face value of the convertible notes. As a result, the notes were fully discounted and the discount was recorded as additional paid-in capital. The discount will be amortized using the effective interest rate method over one year resulting in an effective interest rate in excess of 100%. Upon conversion of the debt, any unamortized debt issue costs will be charged to expense.

Additionally, the Company granted 88,235 stock purchase warrants to a consultant for services relating to these convertible debentures sold by the Company. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $1.25. The warrants expire in May 2008. The estimated value of the warrants totaled approximately $72,000 at the date of issuance and is included in loan fees. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.58%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 134%; and a term of 5 years.

NOTE 12 - CONVERTIBLE DEBENTURES (CONTINUED)

12% Convertible Debenture, Principal Amount $500,000, Continued

The warrants issued to all debenture holders and consultants require the Company to settle the contracts by the delivery of registered shares. At the date of issuance, the Company did not have an effective registration statement related to the shares that could be issued should the warrant holders exercise the warrants. As the contracts must be settled by the delivery of registered shares and the delivery of the registered shares are not controlled by the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the relative net value of the warrants at the date of issuance was recorded as a warrant liability on the balance sheet and the change in fair value from the date of issuance to the date the registration statement became effective, which was October 2003, is included in other (expense) income. The value of the warrants on the date the registration statement became effective totaled approximately $651,000 and was reclassified from warrant liability to additional paid-in capital as required by the EITF. The change in fair value of the warrants from the date of issuance to October 2003 increased by approximately $114,000.

In November 2003, the debenture holder converted $42,500 of the note payable into 50,000 shares of the Company's common stock. As a result, approximately $21,000 of unamortized discount relating to the portion converted was expensed at the date of conversion and is included in interest expense.

Interest expense on the convertible debentures totaled approximately $649,000, including amortization of discounts on convertible debentures payable totaling approximately $582,000 for the year ended December 31, 2003. The Company had no interest expense relating to the convertible debentures for the year ended December 31, 2002.

NOTE 13 - EMPLOYEE BENEFIT PLAN

XCEL sponsors an employee benefit plan, pursuant to Section 401(k) of the Internal Revenue Code, whereby participants may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. The plan allows the Company to make matching contribution totaling 3% of the participants' contribution and an additional percentage at the discretion of the Board of Directors. Matching contributions totaled approximately $1,000 and $25,300 for the year ended December 31, 2003 and 2002, respectively.

NOTE 14 - STOCKHOLDERS' EQUITY

Convertible Preferred Stock

Private Placement - Series A Convertible Preferred Stock

In July 2003, the Company commenced a Private Placement to accredited investors, which closed in September 2003, for the sale 2,352,948 units of the Company's Series A Convertible Preferred Stock ("Series A Preferred") and one warrant to purchase one share of common stock at a purchase price of $0.85. As a result, the Company issued 2,352,948 shares of its 5,000,000 authorized shares of preferred stock, which has a par value of $0.001. The Series A Preferred stock shall convert into shares of the Company's common stock at the purchase price per unit on the earlier of 1) the request of the Holder; 2) three years from the closing date; or 3) if, after two years from the closing date, the Company's common stock trades at a closing bid price greater than $4.00 for 20 consecutive days. The Holders of the Series A Preferred stock shall be entitled to receive dividends at 8% per annum at the end of each calendar quarter and three years from the date of closing payable in cash or, at the Company's sole discretion, in registered shares of the Company's common stock. Each warrant entitles the holder to purchase one share of the Company's common stock at an exercise price of $1.10 per share. The warrants expire three years from the date of closing. This Private Placement was fully subscribed and the Company issued approximately 2,352,948 units, which generated net proceeds totaling approximately $1,663,000.

The proceeds were first allocated to the warrants based on their relative fair value, which totaled approximately $991,000 using the Black-Scholes option pricing model. The remainder of approximately $1,009,000 was allocated to the beneficial conversion feature.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Convertible Preferred Stock, Continued

Private Placement - Series A Convertible Preferred Stock, Continued

The discount attributable to the value of the warrants as calculated using the Black-Scholes pricing model and the value of the beneficial conversion feature exceeded the sales price of the shares. As a result, the preferred shares were fully discounted. The shares are convertible at the option of the holder at issuance and, pursuant to EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversation Features or Contingently Adjustable Conversion Ratios", the discount attributable to the beneficial conversation feature of approximately $1,009,000 was immediately expensed in a manner similar to a dividend at the date of issuance and is included in preferred dividends on the face of the statement of operations. The remaining discount, attributable to the warrants, will be amortized using the effective interest rate method over 3 years. The amortization of discounts on the issuance of the convertible preferred stock totaled approximately $122,000 at December 31, 2003 and is included in interest expense.

Further, the preferred shares are convertible into registered shares of the Company's common stock. Pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", approximately $794,000, the net value of the shares at December 31, 2003, has been recorded as a long term liability until the Company has obtained an effective registration statement relating to these shares. Upon the completion of the registration statement, the net value of the shares shall be recorded as additional paid-in capital.

The Company granted 941,177 stock purchase warrants to a consultant for services relating to the sale of the preferred stock. Each warrant entitles the holder to purchase one share of common stock at an average exercise price of $1.03. The warrants expire in August 2008. The estimated value of the warrants totaled approximately $845,000 at the date of issuance. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.17%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 133%; and a term of 5 years.

The warrants issued to all preferred shareholders and consultants require the Company to settle the contracts by the delivery of registered shares. A registration statement was filed with the SEC in January 2004 and is currently being reviewed. However, from the date of issuance, the Company did not have an effective registration statement related to the shares that could be issued should the warrant holders exercise the warrants. As the contracts must be settled by the delivery of registered shares and the delivery of the registered shares are not controlled by the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the net value of the warrants at the date of issuance was recorded as a warrant liability on the balance sheet and the change in fair value from the date of issuance to December 31, 2003 has been included in other (expense) income. The change in fair value of the warrants increased by approximately $564,000 for the year ended December 31, 2003.

Dividends earned through December 31, 2003 totaled approximately $59,000. In December 2003, the Company issued 29,683 shares of its common stock to preferred shareholders for dividends due. The value of the shares totaled $40,000 and was based on the Company's closing market price at the date of issuance.

Additionally in December 2003, the Company issued 95,987 shares of its common stock to preferred shareholders for penalties due. The value of the shares totaled approximately $130,000, was based on the Company's closing market price at the date of issuance and is included in selling, general and administrative expenses. The penalty payment was due as the Company did not obtain an effective registration statement in the time frame required in the agreement with the shareholders.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock

Return of Common Stock for Investment in Equity Securities

In September 2001 and October 2001, the Company purchased 8,753,797 shares (approximately 24.34%) of common stock of Biofarm S.A. ("Biofarm"), a listed pharmaceutical company on the Romanian Stock Exchange, from International Pharmaceutical Group, LLC ("IPG") in exchange for 1,700,000 shares of the Company's common stock. Subsequently, Biofarm issued new shares by incorporating revaluation reserves, which were calculated in accordance with Romanian accounting law. As a result, the total number of shares owned by the Company increased from 8,753,797 shares to 14,432,064 shares.

The purchase of the stock was accomplished by an exchange of common stock between the Company and its major shareholder. Therefore, the value of the transaction was recorded at the historical cost of the major shareholder pursuant to APB No. 29.

On January 1, 2002, the Company and IPG agreed to rescind the Stock Purchase Agreement previously executed on September 7, 2001. Pursuant to the Rescission Agreement, the Company and IPG determined that Mr. Harry S. Branch, the Managing Member of IPG, either individually or through an affiliate, could not facilitate the acquisition of the remaining outstanding shares of Biofarm by the Company. Also, with respect to the deployment of the Company's new strategic direction, Branch was unable to provide operational or advisory services. On April 26, 2002, IPG returned the 1,700,000 shares of its common stock valued at approximately $845,000 to the Company who retired the shares as part of the Stock Purchase Agreement. In accordance with APB No. 29, paragraph 23, the rescission was accounted for as a nonreciprocal transfer and the value of the transaction was determined using the net book value of the investment being returned, which included the original value of the Company's common shares issued valued at approximately $698,000 plus additional cash and income earned from the investment totaling approximately $147,000. As this is a non-monetary transaction between related parties, no gain or loss was recorded.

Securities Sold

In June 2002, the Company entered into a Securities Purchase Agreement providing for the sale of 100,000 units, comprised of 100,000 shares of the Company's common stock and 100,000 common stock purchase warrants at $1.75 per unit. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $3.00. The warrants expire on June 9, 2004. Proceeds from the sale of shares and warrants totaled $175,000. The purchase agreement calls for additional issuances of shares if at any time through December 2002 the Company issues additional shares of common stock in a capital raising transaction at a price less than $1.75 per unit. Consequently, an additional 94,444 shares of common stock was issued. The value of the additional shares was determined based on the Company's closing market price on the date of the transaction, which totaled approximately $93,000 and is included in interest expense.

In September 2002, the Company commenced a Private Placement of 100,000 units of the Company's common stock and warrants at a purchase price of $0.90 per unit. The Private Placement is exempt from the registration provisions of the Securities Act of 1933 and is being offered and sold only to accredited investors. To date, the Company issued 111,111 units, which generated net proceeds totaling $100,000. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $1.30. The warrants expire three years from the date of grant.

In December 2002, the Company issued 181,818 shares of its common stock and warrants at a purchase price of $0.55 per share. The issuance is exempt from the registration provisions of the Securities Act of 1933 and is being offered and sold only to accredited investors. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The sale generated net proceeds of $100,000. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $1.00. The warrants expire three years from the date of grant.

In February and March 2003, the Company entered into Securities Purchase Agreements providing for the sale of 224,546 units, comprised of 224,546 shares of the Company's common stock and 224,546 common stock purchase warrants at $0.55 per unit. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $1.00. The warrants expire three years from the date of grant. Proceeds from the sale of shares and warrants totaled $123,500.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock, Continued

Securities Sold, Continued

During the second quarter of 2003, the Company entered into Security Purchase Agreements providing for the sale of 194,551 units comprised of 194,551 shares of the Company's common stock and 194,551 common stock purchase warrants at an average price of $1.06 per unit. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. Each warrant entitles the holder to purchase one share of common stock at an average exercise price of $1.23. The warrants expire three years from the date of grant. Net proceeds from the sale of shares and warrants totaled $158,800.

In July 2003, the Company entered into Security Purchase Agreements providing for the sale of 58,823 units comprised of 58,823 shares of the Company's common stock and 58,823 common stock purchase warrants at $0.85 per unit. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. Each warrants entitles the holder to purchase one share of common stock at an exercise price of $1.25. The warrants expire three years from the date of grant. Net proceeds from the sale of shares and warrants totaled $50,000.

Stock Retirement

In December 2003, the Company repurchased and retired 5,507 shares of its common stock for approximately $5,000.

Stock Issuances to Professionals

In February and March 2002, the Company issued 101,500 shares of common stock to a business development firm in exchange for business development, acquisition and administrative services valued at $369,500. Of this amount, $234,500 was expensed in the current year, $101,000 is assigned to the acquisition costs of QBI and $34,000 is assigned to the acquisition costs of XCEL and BSI as they represents payments to a consultants for the valuation of the three subsidiaries. The shares have been recorded based on the Company's closing market price on the date of issuance.

In April and May 2002, the Company issued 406,000 shares of common stock to a business development firm in exchange for business development, acquisition and investor relation services valued at approximately $1,280,000. Of this amount, approximately $1,190,000 has been expensed in the year ended December 31, 2002 and approximately $90,000 has been assigned to the acquisition of QBI. The shares were recorded based on the Company's closing market price on the date of issuance.

In November 2002, the Company issued 125,000 shares of common stock to a public and financial relations firm for services. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $88,000 and was determined based on the Company's fair market value on the date of issuance.

In December 2002, the Company issued 38,418 shares of its common stock to two consultants for legal and consulting services. The shares were valued at approximately $32,000 based on the Company's closing market price on the date of issuance.

In February 2003, the Company issued 8,761 shares of common stock to a business development firm for services. The value of the shares totaled approximately $5,300 at the date of issuance and was determined based on the fair market value of the Company's common stock at the date of issuance.

In February 2003, the Company issued 162,201 shares of common stock to an attorney for services, of which 153,632 shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $91,000, determined based on the fair market value of the Company's common stock at the date of issuance. Of this amount, approximately $56,000 is capitalized as loan costs and the remainder of approximately $35,000 has been expensed.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock, Continued

Stock Issuances to Professionals, Continued

In March 2003, the Company entered into an agreement with an investor relations firm to provide services through September 11, 2003. The Company issued 90,000 shares of the restricted common stock to the consultant as consideration for the services to be provided. The value of the shares issued totaled approximately $66,000 at the date of issuance and was determined based on the fair market value of the Company's common stock at the date of issuance. The value of the shares is included in selling, general and administrative expenses.

In June 2003, the Company issued 12,041 shares of common stock to two business development firms for services. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $7,000 at the date of issuance, was determined based on the fair market value of the Company's common stock at the date of issuance and is included in selling, general and administrative expenses.

In July 2003, the Company issued 10,000 shares of common stock to a business development firm for services. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $11,000 at the date of issuance and was determined based on the fair market value of the Company's common stock at the date of issuance.

In September 2003, the Company issued 501,200 shares of common stock to an attorney and a business development and financing firm for services. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $451,000 at the date of issuance and was determined based on the fair market value of the Company's common stock at the date of issuance. Of this amount, approximately $95,000 was expensed for the year ended December 31, 2003 and approximately $356,000 is included in prepaid compensation expense as this relates to business development and financing services to be provided through August 2006.

In October 2003, the Company issued 58,822 shares of its common stock to two law firms for services provided to the Company. Restricted shares totaled 29,411 pursuant to Rule 144 of the Securities Act of 1933. The remainder of 29,411 was issued as free trading shares. The value of the shares totaled approximately $68,000 at the date of issuance and was determined based on the fair market value of the Company's common stock at the date of issuance.

In October 2003, the Company issued 12,000 shares of its common stock to a business development firm for services. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $12,000 and was determined based on the closing price of the Company's common stock at the date of issuance.

In November 2003, the Company issued 15,000 shares of its common stock to a business development consultant for services. The value of the shares totaled approximately $23,000 and was determined based on the closing price of the Company's common stock at the date of issuance. Of this amount, approximately $8,000 was expensed in the year ended December 31, 2003 and approximately $15,000 is included in prepaid compensation expense as this relates to business development services to be provided in 2004.

In December 2003, the Company issued 750 shares of its common stock to Company office support staff for services. The value of the shares totaled approximately $1,100 at the date of issuance and was determined based on the closing price of the Company's common stock at the date of issuance.

In December 2003, the Company issued 50,000 shares of its common stock to a law corporation for legal services provided to the Company. The value of the shares totaled approximately $69,000 on the date of issuance and was determined based on the fair value of the company's common stock at the date of issuance.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock, Continued

Conversion of Notes Payable

In December 31, 2002, the Company entered into an agreement to issue 193,066 shares of common stock in exchange for a note payable totaling $164,106. The value of the shares was determined based on the closing price of the Company's common stock on the date of issuance.

In March 2003, the Company issued 40,000 shares of common stock in exchange for a note payable due an individual totaling $25,200 including interest expense totaling $3,000. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares was determined based on the fair market value of the Company's common stock at the date of issuance.

Settlement Agreement

In October 2002, the Company issued 500,000 shares of common stock to a former consultant for public and financial relations pursuant to a Settlement and Release Agreement entered into in September 2002. Pursuant to the agreement, the former consultant is entitled to receive up to 200,000 additional shares of the Company's common stock based on 8% of shares issued subsequent to the date of the agreement. As a result, an additional 148,295 shares of common stock was issued to the consultant in 2002 and the remaining 51,705 shares of common stock were issued in June 2003. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. Moreover, the settlement agreement limits the number of shares that the consultant may sell in any calendar month to 0.33% of the outstanding shares of the Company at the date of sale. The value of the shares issued in 2002 and 2003 totaled approximately $401,000 and $32,000, respectively, and was estimated based on the Company's closing market price on the date the shares were due the consultant.

Stock Issuances to Officers

In May 2002, Messrs. Tannous and Glaser, officer/shareholders of the Company, exercised 100,000 options to purchase common stock. The options were exercised on a "cashless" basis and as a result, the Company issued 91,962 shares of its common stock.

In November 2002, Messrs. Tannous and Glaser exercised 400,000 options to purchase common stock at an exercise price of $0.25 in exchange for a reduction of obligation due the officer/shareholders totaling $100,000.

In December 2002, the Company issued 707,229 shares of its common stock to Messrs. Tannous and Glaser in exchange for notes payable due the officer/shareholders totaling $338,000 plus interest expense totaling approximately $51,000. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares was determined based on the price of the most recent private placement for similar instruments issued by the Company to non-employees, which approximates the closing price of the Company's common stock on the date of issuance, less a discount for the restrictive nature of the common stock.

In December 2002, the Company issued 744,056 shares of its common stock to Messrs. Tannous and Glaser in lieu of cash as compensation and benefits earned, which totaled approximately $409,000 at December 31, 2002. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares was determined based on the price of the most recent private placement for similar instruments issued by the Company to non-employees, which approximates the closing price of the Company's common stock on the date of issuance, less a discount for the restrictive nature of the stock.

In October 2003, the Company issued 300,000 shares of its common stock to Messrs. Tannous and Glaser as compensation and benefits earned. The value of the shares totaled $300,000 based on the Company's fair value at the date of issuance. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock, Continued

Stock Issuances to Employees

In July 2002, the Company issued 5,000 shares of its common stock to an employee for services rendered. The shares were valued at $6,500 based on the Company's closing market price on the date of issuance.

In November 2002, the Company issued 2,600 shares of its common stock to employees for services rendered. The shares were valued at approximately $2,000 based on the Company's closing market price on the date of issuance.

In January 2003, the Company issued 19,250 shares of its common stock to two employees as compensation. Of the total amount of shares issued, 6,250 shares are restricted pursuant to Rule 144 of the Securities Act of 1933. The value of the shares totaled approximately $14,000 and was determined based on the fair market value of the Company's common stock at the date of issuance.

In February 2003, an employee exercised options and the Company issued 132,507 shares of its common stock to the employee for services performed in 2003. The value of shares totaled approximately $113,000 and was determined based on the fair market value of the Company's stock at the date of issuance. In September 2003, the employee returned 50,000 shares of common stock to the Company. The shares, which were valued at $52,500, are placed in treasury. The treasury shares were valued based on the fair market value of the Company's common stock at the date of the return. The remainder, of approximately $60,500, is included in selling, general and administrative expenses for the year ended December 31, 2003.

In October 2003, the Company issued 131,852 shares of its common stock to two employees for services provided. The value of the shares totaled approximately $129,000, which was determined based on the fair value of the Company's common stock at the date of issuance. The shares are restricted pursuant to Rule 144 of the Securities Act of 1933.

In December 2003, the Company issued 35,000 shares of its common stock to an employee for services. The value of the shares totaled $49,000, which was the determined based on the fair value of the Company's common stock at the date of issuance.

Warrants Issued to Note holders

In December 2002, the Company issued 70,000 stock purchase warrants to two note holders (Note 10). The warrants entitle the holders to purchase 70,000 shares of the Company's common stock at an exercise price of $1.00. The warrants are exercisable immediately and expire in December 2005. The estimated value of the warrants totaled approximately $49,000 at the date of issuance and is included in additional paid-in capital. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.39%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 167%; and a term of 3 years. The value of the warrants was allocated to the notes based on the relative fair value of the proceeds received, which totaled $28,700. This amount is recorded as a discount on notes payable and is being amortized over the period the obligation is outstanding, using a method that approximates the effective interest method. Amortization of notes payable discount totaled approximately $16,000 and $13,000 for the years ended December 31, 2003 and 2002, respectively, and is included in interest expense.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock, Continued

Options and Warrants Issued to Professionals

On April 9, 2002, the Company granted three business development and operations consultants each an option to purchase 25,000 shares of its common stock at an exercise price of $1.25 per share in consideration of services provided to the Company through April 8, 2003. The estimated value of the options totaled approximately $120,000 at the date of grant. Of this amount, approximately $90,000 was expensed in 2002 and approximately $30,000 was expensed in 2003. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest of 2.55%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 116%; and a term of 1 month. The options were exercised in April 2002, which generated net proceeds to the Company totaling $93,750.

In July 2002, the Company granted a financial communications firm and attorney options to purchase a total of 255,000 shares of its common stock at exercise prices ranging between $0.83 and $6.17, in consideration of services provided to the Company through April 2003. The estimated value of the options totaled approximately $429,000 at the date of grant. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.06%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 143%; and a term of 2 years. Approximately $185,000 and $244,000 were expensed in the years ended December 31, 2003 and 2002, respectively. In December 2002, the Company terminated the agreement with the financial communications firm. As a result, 100,000 options, originally valued at approximately $185,000, were cancelled. In July 2002, a consultant exercised options in exchange for 30,000 shares of the Company's common stock, which generated net proceeds totaling $25,000.

In August 2002, the Company granted a general advisory consultant options to purchase 66,666 shares of its common stock at an exercise price of $0.96, in consideration of services provided to the Company. The estimated value of the options totaled approximately $59,000 at the date of grant. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest of 2.19%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 143%; and a term of 2 years.

In September 2002, the Company granted an investor relations firm options to purchase 500,000 shares of its common stock at an exercise price of $1.00, in consideration of services provided to the Company through February 2004. The estimated value of the options totaled approximately $424,000 at the date of grant. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest of 2.14%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 143%; and a term of 5 years. In December 2002, the Company terminated the agreement. As a result, 300,000 options, valued at approximately $233,000, were cancelled. Approximately $191,000 was expensed in the year ended December 31, 2002, which represents 200,000 options that remain outstanding.

In January 2003, the Company entered into an agreement with a financial relations firm to provide services through July 2003. The agreement grants the consultant options to purchase 125,000 shares of the Company's common stock at an exercise price of $0.55 per share. The options vest equally over a six month period and expire three years from the date of grant. The estimated value of the options totaled approximately $54,000 and is included in selling, general and administrative expenses. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.00%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 140%; and a term of 3 years.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock, Continued

Options and Warrants Issued to Professionals, Continued

In February 2003, the Company issued 30,000 stock purchase warrants to a consultant for services relating to XCEL's line of credit (Note 9). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.95. The warrants expire February 2008. The estimated value of the warrants totaled approximately $24,000 at the date of issuance. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.75%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 142%; and a term of 5 years.

In May 2003, the Company entered into an agreement with a business development firm to provide services through May 2004. The Company issued options to purchase 25,000 shares of the Company's common stock at an exercise price of $1.25 per share. The options vested on the date of issuance and expire three years from the date of grant. The estimated value of the options total approximately $22,000. Of this amount, approximately $14,000 was expensed in the year ended December 31, 2003 and approximately $8,000 is included in prepaid compensation expense as this relates to services to be provided in 2004. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 1.93%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 136%; and a term of 3 years.

In May 2003, the Company entered into an agreement with a financial advisory and investment banking firm to provide services through May 2004. Pursuant to the agreement, the Company issued stock purchase warrants to purchase 125,000 shares of the Company's common stock at an exercise price of $0.001 per share. The warrants vested in May 2003 and expire five years from the date of grant. The estimated value of the warrants total approximately $122,000. Further, the Company issued additional stock purchase warrants to purchase 58,400 shares of the Company's common stock at an exercise price of $0.001 per share. The value of the warrants totaled approximately $59,000. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 2.58%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 160%; and a term of 5 years. In December 2003, the Company terminated its agreement with the firm.

In June 2003, the Company entered into an agreement with a business development firm to provide services through August 2003. Pursuant to the agreement, the Company issued stock purchase warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $1.00 per share. The warrants vest equally over a three month period and expire three years from the date of grant. The estimated value of the warrants total approximately $30,000 and is included in selling, general and administrative expenses for the year ended December 31, 2003. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 1.58%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 135%; and a term of 3 years.

In October 2003, the Company issued stock purchase warrants to an attorney for legal services to purchase 150,000 shares of its common stock at an exercise price of $1.21 per share in consideration of services provided to the Company. The estimated value of the options totaled approximately $176,000 at the date of grant and is included in selling, general and administrative expenses for the year ended December 31, 2003. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest of 3.17%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 131%; and a term of 10 years. In December 2003, a portion of the warrants were exercised and, as a result, the Company issued 112,000 shares of its common stock, which generated net proceeds to the Company totaling approximately $136,000.

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock (Continued)

Options and Warrants Issued to Consultants (Continued)

In October 2003, the Company issued stock purchase warrants to a business development, acquisition and strategic planning consultant to purchase 500,000 shares of the its common stock at an exercise price of $1.25 in consideration for services provided to the Company. The estimated value of the options totaled approximately $471,000 at the date of grant and is included in selling, general and administrative expenses for the year ended December 31, 2003. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions:
risk-free interest of 2.36%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 131%; and a term of 3 years.

In November 2003, the Company issued stock purchase warrants to a financial public relations firm to purchase 144,000 shares of the its common stock at an exercise price of $1.00 in consideration for services provided to the Company through October 31, 2004. The estimated value of the options totaled approximately $153,000 at the date of grant. Of this amount, approximately $17,000 was expensed in the year ended December 31, 2003 and approximately $136,000 is included in prepaid compensation expense as this relates to services to be provided in 2004. The value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest of 1.35%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 131%; and a term of 3 years.

The number and weighted average exercise prices of the options and warrants issued to consultants are as follows:

                                                 December 31, 2003                  December 31, 2002
                                             --------------------------       ----------------------------
                                                               Average                           Average
                                                              Exercise                          Exercise
                                              Number           Price            Number           Price
                                              ------           -----            ------           -----
Outstanding at beginning of the year          854,596        $    1.66               --        $      --
Granted during the year                     6,317,492             1.01        1,492,929             1.71
Exercised during the year                     126,286             1.14          105,000             1.13
Terminated during the year                    183,400               --          533,333             1.89
Exercisable at end of the year              6,862,402             1.08          854,596             1.66
Outstanding at end of the year              6,862,402             1.07          854,596             1.66

The following table summarizes information on stock options and warrants outstanding and exercisable issued to consultants at December 31, 2003:

                                                         Weighted-                  Weighted-               Weighted-
 Range of                   Remaining                     Average                    Average                 Average
 Exercise                    Number                     Contractual                   Fair                  Exercise
  Prices                   Outstanding                 Life (Years)                   Value                   Price
------------------------------------------------------------------------------------------------------------------------
 $0 to $1                  2,507,402                         3.1                 $      .82                $      .89
  1 to 2                   4,255,000                         3.2                       1.15                      1.23
  2 to 3                           -                           -                          -                         -
  3 to 4                      50,000                          .3                       3.86                      3.86
  4 to 5                      50,000                          .3                       4.63                      4.63

                            Weighted-                    Weighted-                  Weighted-                   Weighted-
 Range of                   Remaining                     Average                    Average                     Average
 Exercise                    Number                     Contractual                   Fair                      Exercise
  Prices                   Outstanding                 Life (Years)                   Value                       Price
--------------------------------------------------------------------------------------------------------------------------
 $0 to $1                     66,667                          .7                 $     0.67                $       0.96
  1 to 2                     587,929                         3.5                       0.52                        0.86
  2 to 3                           -                           -                          -                            -
  3 to 4                     150,000                         1.5                       1.19                        3.29
  4 to 5                      50,000                         1.6                       1.97                        4.63

NOTE 15 - INCOME TAXES

For federal income tax return purposes, the Company has available net operating loss carryforwards of approximately $7,899,000, which expire through 2023 and are available to offset future income tax liabilities.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 2003 are as follows:

Deferred tax asset -
  net operating loss carry forwards                   $ 3,159,600
Deferred tax liabilities -
  intangible assets                                    (1,523,000)
                                                      -----------

Net deferred assets before valuation allowance          1,636,600
Valuation allowance                                    (1,636,600)
                                                      -----------

 Net deferred tax asset                               $        --
                                                      ===========

The reconciliation of the effective income tax rate to the Federal statutory rate is as follows:

                                                               December 31,     December 31,
                                                                  2003              2002
                                                               ------------     ------------
Federal and state income tax rate                                 (34.0%)         (34.0%)
State income taxes, net federal benefit                            (6.0%)          (6.0%)
                                                               ------------     ------------

Total expected provision                                          (40.0%)         (40.0%)

Permanent differences (discounts associated with warrants
  and beneficial conversion feature amortization and
  change in fair value of  warrant liability)                       9.6%            1.9%
Loss for which no benefit is available                             30.4%           38.1%
                                                               ------------     ------------

Effective income tax rate                                          0.0 %           0.0 %
                                                               ============     ============

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its office and warehouse facilities under various lease agreements expiring through April 2022. Only one of these agreements extend greater than one year. This agreement calls for minimum monthly rental payments of approximately $21,000 with escalation clauses based on the Consumer Price Index effective during certain milestone dates of the lease agreement. Rental expense under Company's rental the operating leases totaled $368,000 and $56,000 for the years ended December 31, 2003 and 2002, respectively.

The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2003:

Year ending December 31,
    2004                                    $   233,000
    2005                                        233,000
    2006                                        233,000
    2007                                        233,000
    2008                                        233,000
    Thereafter                                2,814,000
                                            -----------

                                            $ 3,979,000
                                            ===========

Employment Agreements

In December 2001, XCEL and BSI entered into employment agreements with 3 stockholders of the Company to pay an annual base salary of $125,000, $125,000 and $85,000 through December 2004. The agreements include provisions for salary increases and stock options based on earnings growth the XCEL and BSI may achieve. The agreements were terminated during 2003. Under these agreements, salary expense totaled approximately $370,000 and $392,000 for the years ended December 31, 2003 and 2002, respectively.

Effective January 1, 2002, the Company entered into employment agreements with its corporate officers/stockholders of the Company to pay an annual base salary of $190,000 plus a bonus based on key milestone's the Company may achieve. The agreements expire December 31, 2005. In 2003, under the agreements, salary expense for the officers/stockholders totaled approximately $684,000, including 300,000 shares of the Company's common stock valued at $300,000. The officers/stockholders converted the amount due at December 31, 2002 to 744,056 shares of common stock, which was valued at approximately $409,000 (Note 14).

In February 2003, QBI entered into an employment agreement with an officer of QBI to pay an annual base salary of $150,000 plus a bonus based on the performance of QBI through February 2006. The agreement also included provisions for salary increases and stock options based on earnings growth the Company may achieve. Under this agreement, salary expense totaled approximately $221,000, which includes the issuance of stock options valued at approximately $60,000 for the year ended December 31, 2003. In February 2004, this agreement was terminated.

In August 2003, the Company entered into an employment agreement with an individual to pay an annual base salary of $150,000 through December 2005 plus a bonus of 2% based on the earnings of QBI before the computation of income taxes and based on the performance of the employee. The agreement also includes provisions for salary increases and stock options based on earnings growth the Company may achieve. Under this agreement, salary expense totaled approximately $151,000, including 100,000 shares of the Company's common stock valued at $101,000 for the year ended December 31, 2003 (Note 14).

NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

Legal Proceedings

On March 24, 2003, First Mirage, Inc. filed an action against the Company, Bill Glaser and Transfer Online, Inc., in the United States District Court, District of Oregon (CV 03 382 KI). The complaint contains claims for declaratory judgment, breach of state statutory obligations, conversion, intentional interference with economic relations, breach of fiduciary duty, and negligence. The complaint alleges that the defendants wrongfully prevented First Mirage from completing its sale of 66,337 shares of the Company's Common Stock on the open market by refusing to reissue the stock certificate representing those shares without a restrictive legend. The complaint seeks damages in an amount subject to proof at trial, but not less than $90,000. The complaint also seeks pre and post-judgment interest, punitive damages, and injunctive relief.

The Company believes that because the shares at issue had been sold to First Mirage by an affiliate of the Company, they were subject to the one-year holding period set forth in Rule 144 (promulgated under the Securities Act of 1933), which had not expired at the time of the proposed sale. The Company thus believes that the complaint is without merit and intends to defend the lawsuit vigorously. The Company, moreover, has agreed to provide a defense for Mr. Glaser and Transfer Online, Inc.

This litigation is in its early stages and discovery has not commenced. Therefore, the Company is unable to opine as to the probable outcome of this matter at this time nor has any amount been accrued for possible loss.

QBI is a defendant in a suit seeking $400,000 in damages brought by Fortress Systems, Inc., ("FSI") Bankruptcy Trustee. The suit which is pending in the U.S. Bankruptcy Court in Omaha, Nebraska alleges that certain products sold by QBI did not meet specifications of FSI. While the outcome of the litigation cannot be predicted at this time, the Company is seeking through negotiations with the Sellers of the QBI assets to offset the $400,000 claim against 400,000 shares of its common stock which were issued to the Sellers of the QBI assets as part of the consideration for the purchase of the QBI assets by the Company under the QBI Asset Purchase Agreement of November 30, 2003 (Note 3).

NOTE 17 - SEGMENT INFORMATION

The Company has four business units that have separate management and reporting infrastructures that offer different products and services. The business units have been aggregated into four reportable segments:
Corporate, Nutraceutical, Pharmaceutical, and Research and Development. The Corporate group is the holding company and oversees the operations of the other business units. The Corporate group also arranges financing and strategic guidance for the entire organization. The Nutraceutical group processes domestic and imported botanical raw materials into nutritional supplement components, which are sold to manufacturers primarily in the United States. The Pharmaceutical group provides in-home pharmaceutical products, primarily in Southern California. The Research and Development group develops future and present products in the fields of drug delivery, vitamins and minerals, and cosmetic pharmaceuticals.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 2). The Company had no intersegment sales for the years ended December 31, 2003 and 2002. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Company evaluates the performance of its operating segments based on income from operations, before income taxes, accounting changes, non-recurring items and interest income and expense.