10-K 1 celltech1231_10k.txt ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NO. 0-21015 CELL TECH INTERNATIONAL INCORPORATED (Exact Name of Registrant as Specified in its Charter) Delaware 22-3345046 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) dentification No.) 565 Century Court KLAMATH FALLS, OREGON 97601 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including area code: (541) 882-5406 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 per Share (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the 800,000 shares of registrant's voting stock held by non-affiliates of the registrant as of June 30, 2003 (the last day of the registrant's most recently completed second fiscal quarter) was approximately $128,000 based on the closing price of the registrant's common stock on the National Quotation Bureau's Pink Sheets or $0.16 per share. The number of shares outstanding of the registrant's sole class of common stock, par value $0.01 per share, as of March 25, 2004, the latest practicable date, was 13,974,087. DOCUMENTS INCORPORATED BY REFERENCE None. CELL TECH INTERNATIONAL INCORPORATED FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 TABLE OF CONTENTS

~~--------------------------------------------------------------------------------------------------------------------------~~PART ~~Daily~~I...................................................................................................1 ~~Health~~ITEM ~~Digestive~~1. ~~Defensive~~BUSINESS....................................................................................1 ~~Powered~~ITEM ~~Drinks~~3. ~~Animal~~LEGAL ~~and~~PROCEEDINGS..........................................................................14 ~~Maintenance~~ITEM ~~Health~~4. ~~Health~~SUBMISSION ~~and~~OF ~~Snacks~~MATTERS ~~Plant~~TO ~~Food~~A ~~--------------------------------------------------------------------------------------------------------------------------~~VOTE ~~Super~~OF ~~Blue~~SECURITIES ~~Green(R)~~HOLDERS......................................15 ~~Alpha~~PART ~~Sun(R)~~II.................................................................................................16 ~~Energy~~ITEM ~~for~~5. ~~the~~MARKET XFOR ~~Entire~~REGISTRANT'S ~~Body~~COMMON ~~--------------------------------------------------------------------------------------------------------------------------~~EQUITY ~~Super~~AND ~~Blue~~RELATED ~~Green(R)~~STOCKHOLDER ~~Omega~~MATTERS....................................................................................16 ~~Sun(R)~~ITEM ~~Energy~~6. ~~for~~SELECTED ~~the~~FINANCIAL XDATA....................................................................19 ~~Mind~~ITEM ~~--------------------------------------------------------------------------------------------------------------------------~~7. ~~Acidolphilus~~MANAGEMENT'S XDISCUSSION ~~--------------------------------------------------------------------------------------------------------------------------~~AND ~~Bifudus~~ANALYSIS XOF ~~--------------------------------------------------------------------------------------------------------------------------~~FINANCIAL ~~Spectrabiotic(R)~~CONDITION XAND ~~--------------------------------------------------------------------------------------------------------------------------~~RESULTS ~~Internal~~OF ~~Cleansing~~OPERATION.......................................................................19 ~~System~~ITEM X7A. ~~--------------------------------------------------------------------------------------------------------------------------~~QUANTITATIVE ~~Super~~AND ~~Blue~~QUALITATIVE ~~Green(R)~~DISCLOSURES ~~Enzyme~~ABOUT XMARKET ~~--------------------------------------------------------------------------------------------------------------------------~~RISK............................. ~~Super~~...31 ~~Sprouts~~ITEM &8. ~~Algae~~FINANCIAL XSTATEMENTS ~~--------------------------------------------------------------------------------------------------------------------------~~AND ~~Super~~SUPPLEMENTARY ~~Q10~~DATA................................................31 XITEM ~~--------------------------------------------------------------------------------------------------------------------------~~9. ~~Alpha~~CHANGES ~~Gold~~IN ~~Promoting~~AND ~~Physical~~DISAGREEMENTS ~~Well-being~~WITH XACCOUNTANTS ~~--------------------------------------------------------------------------------------------------------------------------~~ON ~~Omega~~ACCOUNTING ~~Gold~~AND ~~Enhancing~~FINANCIAL ~~Mental~~DISCLOSURE.......................................................................31 ~~Well-being~~ITEM X9A. ~~--------------------------------------------------------------------------------------------------------------------------~~CONTROLS ~~Super~~AND ~~Sun~~PROCEDURES....................................................................31 ~~Smoothies~~PART XIII................................................................................................32 ~~--------------------------------------------------------------------------------------------------------------------------~~ITEM ~~Mazama~~10. ~~Mix~~DIRECTORS XAND ~~--------------------------------------------------------------------------------------------------------------------------~~EXECUTIVE ~~Cell~~OFFICERS ~~Tech~~OF ~~Essentials~~THE XREGISTRANT.........................................32 XITEM X11. ~~--------------------------------------------------------------------------------------------------------------------------~~EXECUTIVE ~~Super~~COMPENSATION.....................................................................34 ~~Blue~~ITEM ~~Green(R)Animal~~12. ~~Food~~SECURITY XOWNERSHIP ~~--------------------------------------------------------------------------------------------------------------------------~~OF ~~PLANeT~~CERTAIN ~~Food(R)~~BENEFICIAL XOWNERS AND MANAGEMENT.............................40 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................41 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.....................................................42 PART IV.................................................................................................42 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-~~-------------------------------------------------------------------------------------------------------------------------~~K.........................42 SIGNATURES..............................................................................................46

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of our statements under "Business," "Properties," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures about Market Risk," the Notes to Consolidated Financial Statements and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to certain events, risks and uncertainties that may be outside our control. Some of these forward-looking statements include statements of: o management's plans, objectives and budgets for its future operations and future economic performance; o capital budget and future capital requirements; o meeting future capital needs; o realization of any deferred tax assets; o the level of future expenditures; o impact of recent accounting pronouncements; o the outcome of regulatory and litigation matters; and o the assumptions described in this report underlying such forward-looking statements. o Actual results and developments may materially differ from those expressed in or implied by such statements due to a number of factors, including: o those described in the context of such forward-looking statements; o future product development and manufacturing costs; o changes in our incentive plans; o timely development and acceptance of new products; o the markets of our domestic and international operations; o the impact of competitive products and pricing; o the political, social and economic climate in which we conduct operations; and o the risk factors described in other documents and reports filed with the Securities and Exchange Commission. In some cases, forward-looking statements are identified by terminology such as "may," "will," "should," "could," "would," "expects," "plans," "intends," "anticipates," "believes," "estimates," "approximates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of such statements and is under no duty to update any of the forward-looking statements after the date of this report. PART I ITEM 1. BUSINESS OVERVIEW We are a natural and nutritional products company. We develop and distribute a wide range of products made with APHANIZOMENON FLOS-AQUAE (trade name Super Blue Green(R)) Algae ("SBGA") and other nutrients and ingredients through a network of independent Business Associates ("Business Associates"). We currently offer over sixty products that are intended to appeal to health-conscious consumers. We divide our products into three major product lines including nutritional supplements and foods, skin and hair care products, and animal and plant care. We harvest SBGA and manufacture several of our products at our modern production facilities in Klamath Falls, Oregon. We market our products through independent Business Associates located in all fifty states, the District of Columbia, Guam, Puerto Rico, American Samoa, the Virgin Islands, Federated States of Micronesia, Marshall Islands, Northern Mariana Islands, Palau and Canada. We encourage our Business Associates to recruit interested people as new Business Associates for our products. We place these recruits beneath the recruiting Business Associates in the "network" and we refer to them as the associates' "downlines" or "networks." Business Associates earn commissions on sales by their organizations as well as on the sales they generate directly. We assist Business Associates in establishing their own businesses and provide support programs such as a comprehensive, information-packed website (www.celltech.com), audio and videotapes for training, a national Training tour, Regional Sales Meetings, seminars and an annual convention called the August Celebration. HISTORY AND ORGANIZATION Unless otherwise specifically stated, references to "we" and "us" in this Form 10-K (the "Report") refer: (a) for periods prior to our reorganization, to the historical operations of HumaScan and (b) for periods following our reorganization, to the operations of Cell Tech International Incorporated, including its wholly owned subsidiaries The New Earth Company, Inc. ("NEC") and The New Algae Company, Inc. ("NAC"). NEC is now an inactive corporation. We were formed under the name "HumaScan Inc." in 1994 to manufacture and market in the United States and Canada a device called the BreastAlert(TM) Differential Temperature Sensor, a non-invasive, easy to use, adjunctive test for use as part of a breast disease monitoring program (the "BreastAlert Device"). We commenced shipments of the BreastAlert(TM) Device in December 1997. In November 1998, we announced that we were in the process of evaluating various strategic alternatives, as we did not have adequate resources for the completion of clinical trials and marketing of the BreastAlert Device. Before the end of 1998, because of the lack of adequate financing, we terminated all employees and suspended all operations, focusing substantially all of our efforts on obtaining new financing and/or restructuring the business. The Board of Directors then entered into consulting agreements with three former key employees to negotiate settlement agreements with Scantek Medical, Inc. ("Scantek") to terminate the license agreement and negotiate settlements with other creditors, and explore the possibilities for restructuring and/or reorganizing the business. In March 1999, we concluded a settlement agreement with Scantek that terminated the license for the technology used in the BreastAlert Device. We transferred certain assets related to the licensed business to Scantek and we issued additional shares of common stock to Scantek and an affiliated company as consideration for release of all obligations concerning the license agreement and equipment supply agreements. We also received a cash payment from Scantek, which we applied to some of our other outstanding obligations. On July 16, 1999, we entered into an Agreement and Plan of Reorganization with Daryl J. Kollman and Marta C. Carpenter (formerly known as Marta C. Kollman). The agreement provided for the exchange of all the outstanding shares of NEC and NAC for shares of our common stock and preferred stock that together represented, on August 6, 1999, approximately 92% of our outstanding common stock (including the common stock issuable upon conversion of the preferred stock). We completed the reorganization on August 6, 1999. On August 10, 1999, we changed our name to Cell Tech International Incorporated. 1 Marta C. Carpenter and Daryl J. Kollman formed Cell Tech, Inc. and NEC in 1982 and 1988, respectively, to develop and distribute products made from a unique natural strain of blue green algae growing in massive quantities in Upper Klamath Lake in southern Oregon - the algae we now call SBGA. In 1990, Ms. Carpenter and Mr. Kollman formed NAC, acquired the assets of Cell Tech, Inc. and began doing business under the trade name Cell Tech. Through 1999, NAC housed the sales organization, and provided the research and development and administrative functions of our business, while NEC handled the harvesting and manufacturing of our products. Beginning in 2000, NAC took over these functions and NEC became inactive. EXECUTIVE OFFICES Our principal executive offices are located at 565 Century Court, Klamath Falls, Oregon 97601, and our telephone number at that address is (541) 882-5406. Our internet address is WWW.CELLTECH.COM; however, the information on our website does not constitute part of this Annual Report on Form 10-K and is not incorporated herein unless otherwise indicated in this report. You may obtain, free of charge, our annual, quarterly and current reports, and any amendments thereto on the Securities and Exchange Commission's website at WWW.SEC.GOV. INDUSTRY OVERVIEW With the significant expansion of our product line, in the last two quarters of 2003, we are addressing two large markets. The first is the market for nutritional supplements, particularly those to which industry analysts refer as "herbal supplements", though, in fact, we have very few actual herbs in our product lines. The second market is natural personal care and, in particular, natural skin care. Though these markets are related by their emphases on natural ingredients and by generally similar market demographics, they are very different markets, with very different growth prospects. Simply, the market for herbal supplements is growing, if at all, much slower than the market for natural personal care. This is why our strategy is to maintain and revitalize our traditional supplement business, while we establish ourselves as a significant and distinctive player in the market for natural personal care. Scott Van Winkle, CFA, is a principal at the Boston-based investment bank of Adams, Harkness & Hill, who researches the natural & organic food, specialty food and nutrition industries. In a recent article in Natural Products Industry Insider, he said, "Given the return to positive growth in the mass market and our ongoing confidence in growth in the direct, natural food, and specialty segments; we are forecasting that the category has broadly recovered from the herbal-led decline, and we forecast low, single-digit growth in the United States going forward... We forecast 2-percent to 5-percent growth in the nutritional category over the next several years driven by the constant aging of the demographic, combined with .5-percent population growth, recovering consumer confidence, and the occasional new product class adding to the category. "We believe that the category has already bottomed and the future outlook is brighter. Some supply and industry structure-related issues still persist, but demand is the single most important aspect of any consumer product category, and it has improved." We agree with his assessment, and with his further assertion that, "The direct channel of the nutritional supplement industry, specifically network marketing, could be aided by the rising unemployment and lack of income growth in the United States. The theory forwarded by most in this industry is that the strong economy and high employment rate pared back the potential market for network marketing distributors in the late '90s. With unemployment on the rise over the last 12 to 24 months, and a constant flow of layoffs coming daily, the network marketing channel could, and probably should, see growth of new distributors." 2 So, we have faith in the future of this market, and we will continue to position ourselves, with new products and new presentations, to benefit from its inevitable resurgence. On the other hand, we are aggressively establishing a position in the natural personal care industry, which has experienced double-digit growth for the last few years, and which has robust opportunity going forward. According to THE U.S. MARKET FOR NATURAL PERSONAL CARE PRODUCTS, "The boom in natural grooming products is a phenomenon that mainstream Health and Beauty Care marketers must heed: natural/organic skincare, hair care and cosmetic items are breaking the $3.9 billion mark at retail in 2003, and shall rocket to a $5.8 billion by 2008," The Nutrition Business Journal states that, "Analysis of Nutrition Business Journal's survey of natural personal care manufacturers, and other data sources indicate that natural personal care products grew $4.1 billion in consumer sales in 2002, or 11% of the $37.3 billion U.S. health & beauty care market. Growth in natural personal care was 10% over 2001, as manufacturers reaped the benefits of growing consumer interest, gains in mass-market distribution, successful new products, revamped packaging and savvier marketing. "In 2002, the aggregate growth rate of the top 10 core natural personal care companies listed in Nutrition Business Journal's annual ranking was 14%, six points higher than just one year before. "The natural personal care category is enjoying healthy growth, fueled by consumer demand that is attracting attention not only from core natural product manufacturers but from mainstream cosmetic companies as well. While the mainstream cosmetic and personal care product market is growing at a sluggish, low single-digit pace, the natural personal care market has become a beacon of light in a foggy nutrition industry." Cell Tech is particularly well suited to benefit from this market growth, because our network marketing system enables us to add new products quickly and incrementally, and because our existing supplement products and expertise are directly relevant to product development in the natural personal care arena. GROWTH STRATEGY In the last several years, widely publicized reports and medical research findings, indicating a correlation between the consumption of nutrients and the reduced incidence of certain diseases, have heightened the public awareness of the positive effects of nutritional supplements on health. The United States government and universities generally have increased sponsorship of research relating to nutritional supplements. For example, Congress has established an Office of Alternative Medicine and an Office of Dietary Supplements within the National Institutes of Health to foster research into alternative medical treatment modalities and the role of dietary supplements in maintaining health and preventing disease, respectively. However, questions about the efficacy and safety of nutritional supplements may have and may continue to affect sales of such supplements. The recent controversies over the efficacy of St. John's Wort and Kava, and the recent concerns about the safety of Ephedra illustrate this point. However, we believe that the aging of the United States population, together with a corresponding increased focus on preventative health care measures, will continue to result in increased demand for certain nutritional supplement products despite negative publicity of the type described above. The United States Bureau of the Census projects the 35-and-older age group of consumers, which represents a large majority of the regular users of vitamin and mineral supplements, to grow significantly faster than the general United States population through 2010. Further, the $1.6 billion market for Natural Personal Care products, including skin and hair care, is growing at double-digit rates, according to the Nutrition Business Journal. We are particularly well suited to participate in this market because one of the key drivers of growth in this market is consumer interest in personal care products which include ingredients like blue-green algae, enzymes, coenzyme Q10, grape seed and grape seed extracts and beta glucan, among others. 3 All of these ingredients, and more, are already available in our nutritional supplements, and our consumer base is already attuned to their effectiveness as internal and external supplements. Our growth strategy is to capitalize on the increased interest in nutritional supplements and natural personal care described above by dramatically expanding our product lines, increasing product sales through existing distribution channels in the U.S. and Canada and by expanding into new markets. In particular, we believe that we may realize our growth by achieving the following: o We will introduce new products complementary to our current product lines. Our product development strategy is to develop new product lines to complement our current products. We more than doubled our entire product line in the second half of 2003. Most of these new products were skin care and hair care products, which complement and leverage our existing supplement lines. We have introduced five new product lines (Essential Matrix, Grape Synergy, CoQskin, Golden Lily and a new line of supplements in packets, which we call Essentials) and we are actively working on introducing additional products. o We have introduced a revised compensation plan and other promotion and recognition programs to provide additional incentives to our Business Associates. Our ability to increase sales is significantly dependent on our ability to attract, motivate and retain Business Associates. We utilize an innovative marketing program that we believe is competitive with programs offered by many other network marketing companies. This program provides financial incentives, including several forms of commission (bonus), optional Business Associate training and support, no sign-up costs, inventory requirements, and low monthly purchase requirements. We intend to reach potential new Business Associates through increased advertising, teleconferencing and regional sales and training meetings. Successful management of Business Associates supports the marketing of products as well as the recruitment of new Business Associates. o We believe that growth potential exists in international markets. We intend to tackle international markets by entering into marketing distribution agreements for Europe and Asia. o We intend to engage government relations personnel to assist our international expansion. We will engage government relations personnel who will take a systematic, proactive approach to working with government and licensing agencies in new markets to ensure that our products and distribution model comply with all local laws and regulations. We will utilize outside market consultants and work with private organizations throughout the world to prepare for introducing our products in diverse markets. o We intend to seek to enter into agreements and joint ventures with strategic partners. We believe that opportunities exist with various strategic partners that may improve our ability to market and distribute our products, enter into new markets and provide our Business Associates with new products that complement our existing product lines. PRODUCT OVERVIEW Our product line consists primarily of consumable products that we target to consumers interested in natural alternatives for health, nutrition, and personal care. In developing our product line, we have emphasized natural ingredients and processing, quality, purity, potency, and safety. We offer a line of over sixty products that we divide into three categories: Nutritional Supplements and Foods, Skin and Hair Care, and Animal and Plant Foods. NUTRITIONAL SUPPLEMENTS AND FOODS Our nutritional supplements and foods include a naturally harvested and processed form of Aphanizomenon flos-aqua, which we call Super Blue Green(R) Algae (SBGA). We also offer a wide range of other nutritional supplements, including digestive enzymes, probiotics, and nutrients like Coenzyme Q10, WGP(TM) Beta Glucan, and Grape Seed and Grape Skin extracts. 4 We also provide a range of nutritional drinks, including liquid versions of SBGA, two of which are fortified with Lutein, for vision support, or WGP(TM) Beta Glucan, for immune system support. We also market a nutritional food bar, called the BG Bar. SKIN AND HAIR CARE Since June of 2003, we added over thirty new products in this category. They are primarily skin care products, ranging from basic bath and body care (Essential Matrix, Grape Synergy and CoQskin) to spa and salon quality, premium skin care (Professional Formulas, Golden Lily). These products are uniquely natural and high-performance, with ingredients that include a number of our dietary supplements, like Super Blue Green(R) Algae and WGP(TM) Beta Glucan, which have significant benefits for the skin when applied topically or when ingested. We have also introduced a new package of supplements that contain each of the key performance ingredients in our skin and hair care lines. These are Super Blue Green(R) Algae, Grape Synergy(TM) grape seed and grape skin extracts, ImmuSun(TM) WGP(TM) Beta Glucan and Coenzyme Q10. We call them Natural Beauty Essentials. ANIMAL AND PLANT FOODS In addition to our soil amendment, which we call PLANeT Food, we have a series of animal supplements, for cats, dogs, horses, and other small animals. BUSINESS ASSOCIATES AND OUR NETWORK MARKETING SYSTEM We distribute our products through a network marketing system of Business Associates. Business Associates are independent contractors who purchase products directly from us for resale to retail consumers. Business Associates may elect to work on a full-time or a part-time basis. We believe that our network marketing system is well suited to marketing our nutritional supplements and other products because ongoing personal contact between retail consumers and Business Associates, most of whom use our products, strengthen sales of such products. Currently, we have Business Associates in all fifty states, the District of Columbia, Guam, Puerto Rico, American Samoa, Virgin Islands and Canada. Each Business Associate has the opportunity to sponsor additional Business Associates, which can enhance the original Business Associate's income, as described below. Each new sponsored Business Associate, as well as his or her own "downline" groups, becomes a member of the Business Associate's network or "downline." COMMISSION SYSTEM We currently offer two categories of membership. We call the first category "Business Associate" and the other "Preferred Customer." Business Associates are interested in receiving commissions for their own purchases as well as for purchases made by members enrolled in their "downline." A Preferred Customer is a customer who is interested in consuming our products, but is not interested in the business opportunity we offer to our Business Associates. Many Preferred Customers eventually become Business Associates. Both categories of membership purchase our products at wholesale prices. We compensate our Business Associates through a Business Associate commission system that encourages both retail selling and sales organization management. Business Associates may derive income from several sources. First, Business Associates may receive revenues by purchasing our products at wholesale prices and selling them to customers at retail prices. Second, Business Associates earn the right to receive bonuses (commissions) based upon purchases by members of their "downline" or sales marketing organization. Each new Business Associate that a Business Associate sponsors becomes a member of his selling organization or "downline." We refer to the Business Associates that a Business Associate directly sponsors as his "first generation" or "first level." 5 In June 2002, we revised our commission system to better suit our long-term growth objectives of attracting new Business Associates and appropriately rewarding the Business Associates that work to increase their business with us. Our goal was to redistribute our commission expense to those Business Associates who demonstrate to us that they are actively contributing to our growth. We believe we have designed a commission system that is suited to achieve these goals as is demonstrated by the decrease in commission expense from 47.8% of revenue in 2001 to 43.7% of revenue in 2002 and 42.5% of revenue in 2003. The changes to our system that took effect in June 2002, are as follows: o We reduced the personal volume percentage paid to Members to 5% from 10%. This change did not affect titles above Member. Once a Member reaches the title of Representative, the commission on personal volume is 15% and 5% on any volume of Members in the Representative's network. o We reduced generation 4, 5, and 6 payout percentages to 3%, 2%, and 1% from 4%, 3%, and 2%, respectively. We did not affect the titles of Amethyst, Ruby and Sapphire by this change. The first level is "Member" and the highest level is "Executive." Business Associates may attain "Member" status by purchasing any product from us. There are two intermediary levels between Member and Executive: Representative and Leader. A Business Associate achieves higher levels in the bonus structure primarily through increased purchases by Business Associates sponsored directly by them (their first level) and in their personal group. The requirements for a Business Associate to reach the first "Executive" level are monthly personal purchases of at least $100 and monthly group volume of $500. For each "Executive" level attained thereafter, the Business Associate must maintain monthly personal purchases of at least $100 and monthly group volume of at least $500. The program is such that each month a Business Associate must qualify at that level for us to pay at that level. The advantage to this is that the Business Associates must remain active in purchasing and sponsoring to retain their bonuses, but if they do not qualify in a certain month, we only reduce their income that one month. The Business Associate commission system includes three kinds of bonuses, as described below: o STANDARD BONUS. The standard bonus is available to any Business Associate who has an "active" status with us. Business Associates may attain the title of "Assistant Leader" by purchasing a minimum of $50 of products in a month. We base the percentages used to determine the bonus and the number of levels in the organization the Business Associate receives bonuses upon on the individual's title with us. The standard bonus grants rebates to the Business Associate as he consumes and sells our products to others. o EXECUTIVE GENERATION BONUS. A second form of bonus is available to those who have Executives in their downline. Based on the number of "Executives" they have at each level, and assuming certain minimum personal purchases each month, Business Associates receive a percentage of such Executives' standard bonus as an additional bonus. o BLUE-GREEN DIAMOND BONUS. Finally, those Executives attaining the highest levels in our structure are eligible to receive an additional bonus called the "Blue-Green Diamond Bonus" which is a percentage of the gross commissionable sales volume for the year. We believe that the opportunity of Business Associates to earn bonuses contributes significantly to our ability to retain our productive Business Associates. The Business Associate commission system encourages promotion to higher commission levels by enabling Business Associates to earn commissions on a deeper sales base (i.e., more levels of their organization). We believe this will encourage sponsoring growth (depth) in an organization and not just acquiring customers personally. To become a Business Associate, a person must simply sign an agreement to comply with our policies and procedures. No investment is necessary to become a Business Associate. We consider, as of February 29, 2004, approximately 32,000 of our Business Associates to be "active," that is, an individual Business Associate who has ordered at least $50 of our products during the preceding six-month period. 6 TRAINING We support opportunity meetings in various key cities and participate in motivational and training events in various market areas, designed to inform prospective and existing Business Associates about our product line and selling techniques. Business Associates give presentations relating to their experiences with our products and the methods by which they have developed their own organization of Business Associates. We offer motivation to participants in the form of recognition, promotions, excursions and tours, which we intend to foster an atmosphere of excitement throughout the Business Associate organization. Prospective Business Associates are educated about the structure, dynamics and benefits of our network marketing system. We continually develop marketing strategies and programs to motivate Business Associates. We design these programs to increase Business Associates' monthly product sales and the recruiting of new Business Associates. BUSINESS ASSOCIATE SUPPORT As part of our program to maintain constant communication with our Business Associate network, we offer the following support programs to our Business Associates: o ASSOCIATIONS/TEAMS/ADVISORY BOARD. Several associations and teams support Business Associates' efforts, including the Leadership Alliance, an association of those Business Associates having reached the top levels of our Marketing Plan, which was formed in order to allow interaction among the Network's "top level" group for discussion of business issues, development of solutions and methods to improve the sales success and growth of downlines and the Network as a whole. In addition, the Field Advisory Board is an advisory team representing the entire field organization and brings issues, recommendations, and other ideas to us for discussion. The Field Advisory Board participates in bi-monthly teleconferences with our marketing and operations executives. o AUGUST CELEBRATION. For the past sixteen years, we have sponsored and held the August Celebration, which is our annual convention. o ORDERING SUPPORT. We offer a variety of methods to order product and support materials, including toll-free telephone operator access, "Order Express" (a toll-free automated telephone system that Business Associates can call 24 hours a day to place orders or to access their records), and our website at http://www.celltech.com. o INFORMATION SUPPORT. Business Associates may learn more about our products, our history, Business Associate organization building, management techniques and related matters through our website, www.celltech.com. In addition, we produce color catalogues and brochures for our Business Associates and produce a monthly publication called "Networker's Edge" focused on business building. We also maintain our ATG Technologies Voice Mail System, which includes options for broadcasting messages to our Business Associates via temporary, permanent and super groups. A direct access telephone line allows Business Associates to access our most recent announcements sent through the ATG Technologies System to our Network. Finally, a 24-hour toll-free "Fax-on-Demand" system provides Business Associates with news bulletins, product literature and articles of interest via facsimile. RESEARCH AND DEVELOPMENT We spent $197,266 on research and development in 2003, $193,310 in 2002 and $190,884 in 2001. We continually seek to identify, develop and introduce innovative, effective and safe products. We have introduced approximately forty new products since 1997. Management believes that our ability to introduce new products increases our Business Associates' product visibility and competitiveness in the marketplace. We also continuously evaluate "existing" products for viability and it is our policy to discontinue products that are not selling satisfactorily. We derive new product ideas from a number of sources, including trade publications, scientific and health journals, management, and independent consultants. We maintain our own quality assurance/quality control staff, consisting of two full time employees, but rely upon independent research, consultants and others for ingredient research, development and formulation services. When we identify a new product concept or when we must reformulate an 7 existing product for introduction into a new or existing market, we generally submit the new product concept or reformulation to our suppliers for technological development and implementation. In addition, prior to introducing products into our markets, our scientific consultants, legal counsel and other representatives investigate product formulation matters as they relate to regulatory compliance and other issues. In 2003, we began formulating and testing various new products, including skin and hair care products, which are designed to compliment our existing product lines. We are currently developing additional products, including new skin and hair care products, antioxidants, weight management, and energy products. In addition to the introduction of single products, we are also focusing on promoting groups of products to be taken in conjunction with each other to address the specific needs an individual may have (such as weight loss, stress or daily wellness). PRODUCT WARRANTIES AND RETURNS Our product warranties and policy regarding returns of products are similar to those of other companies in our industry. Any consumer, who is not satisfied with any of our products, may return it to the Business Associate from whom they purchased it from within 90 days of their purchase. The Business Associate is required to refund the purchase price to the consumer. The Business Associate may then return the unused portion of the product to us for an exchange of equal value. If a Business Associate requests a refund in lieu of an exchange, we will issue a check or credit the appropriate amount to the Business Associate's credit card. We warrant all of our products against defect. Our experience has been that returns are 1/2 of 1 percent of sales. We have a reserve of $14,600 for sales returns at December 31, 2003. RAW MATERIALS AND SUPPLIERS Our primary raw material is APHANIZOMENON FLOS-AQUAE, which we harvest from Upper Klamath Lake using modern technology. Upper Klamath Lake produces approximately 200 million pounds of SBGA each year. When we need to harvest, we typically harvest algae once or twice a year, timing our harvests to coincide with the greatest density of algae. In 2001, for the first time ever, we began harvesting on Upper Klamath Lake by the use of a unique (patent pending) on-lake harvester. Because of this method of harvesting, we can gather APHANIZOMENON FLOS-AQUAE directly from the lake. This development of our harvesting techniques made harvesting possible in a drought year when the availability of water in the canals was nonexistent or questionable, because of the nationally reported water crisis in the Klamath Basin. We believe that harvesting directly from Upper Klamath Lake is both cost-effective and provides us with excellent yields, utilizing the new harvester that we conceived, designed and built. We have applied for a design patent on our harvester, as we believe that the technology utilized with this new harvest system is effective, special and unique. Processing of SBGA is a complex process including the following: o SCREENING. We filter fresh algae out of the water with fine mesh screens. o PRIMARY SEPARATION. Primary separators remove everything suspended in the lake water, which concentrates the algae by removing virtually all extracellular water. o FREEZING. We quickly freeze the algae, converting it into slabs at a temperature of -30(Degree) Fahrenheit. o DRYING. We gently remove all cellular water in a low temperature environment, converting the algae into a dry, stable medium that retains vital nutrients. o POWDERING AND BOTTLING. We sift and grind the algae to a fine powder, which we can encapsulate or tabletize and seal to retain freshness and viability. 8 In years when there has been no harvest, we rely on our inventory of frozen and freeze-dried SBGA. As of December 31, 2003, we had 900,157 pounds of frozen algae inventory for use in capsules and tablets and 1,660,511 pounds of frozen algae for use with vendor products. We had not harvested algae since 1998 due to excess inventory in relation to sales; however, in July 2001, we commenced harvesting SBGA and in 2002, we expanded our harvesting capacity ten-fold. We believe that our present rate of inventory consumption only partially reflects the demand that we anticipate as we implement our growth strategy. Although the availability of new algae that we may harvest from Upper Klamath Lake may change from year to year, we believe that our existing inventory is adequate for several years. From time to time, a toxic species of algae called MICROCYSTIS AERUGINOSA blooms in Upper Klamath Lake and can contaminate a portion of our harvest of SBGA with microcystin, a toxin. We have worked with state and federal agencies to establish prudent safety precautions, and test each batch of algae we harvest for microcystin levels before releasing it for production. Our experience indicates that our harvest method helps us to minimize the amount of MICROCYSTIS AERUGINOSA in the harvested material, thus increasing the total amount of algae that we can release for production. We encapsulate and bottle algae in-house. We also purchase vitamins, nutritional supplements and other products and ingredients from parties that manufacture such products to our specifications and standards. During 2003, 2002, and 2001, one vendor supplied approximately 42%, 45% and 55%, respectively, of the products that we purchased. This vendor was our source of enzymes and probiotics. We place significant emphasis on quality control with all of our products. All nutritional supplements, raw materials and finished products are subject to sample testing, weight testing and purity testing by independent laboratories. In the event of loss of any of our sources of supply, we believe that suitable replacement sources of similar products and product ingredients exist and are available to us. TRADEMARKS AND SERVICE MARKS We package most products under our "private label." At December 31, 2003, we have six trademarks registered with the United States Patent and Trademark Office and one trademark application pending, and three trademarks registered and one application pending with the Canadian Intellectual Property Office of Trade Marks. In addition, we have registered trademarks in eleven foreign countries (and one application pending in a twelfth) for the mark "PLANeT Food." While we believe customer identification with our name and brand is important, we feel that our primary competitive edge arises from our Business Associate network and our strategic location, which allows us to process algae immediately after its harvest, and not from any proprietary technology. We do not have a registered trademark for the name "Cell Tech." As of the date of this Annual Report on Form 10-K/A, no other person has claimed infringement based on our use of the name "Cell Tech," but there can be no assurance that it would not make such a claim in the future. A British company in a different business than ours has a United States trademark registration for the name "Cell Tech" and it has not objected to our use of the name. COMPETITION The nutritional supplements industry is large and intensely competitive. We compete with other companies that manufacture and market retail nutritional products to health-conscious consumers, including General Nutrition Companies, Inc., Solgar Vitamin and Herb Company, Inc., Twinlab Corporation and Weider Nutrition International, Inc. Many of our competitors in this market have longer operating histories, greater name recognition and financial resources than us. In addition, consumers can purchase nutritional supplements in a wide variety of distribution channels. While we believe that many consumers appreciate the convenience of ordering products from home through a sales person, the buying habits of many consumers accustomed to purchasing products through traditional retail channels are difficult to change. We offered our products, on a limited test basis, via infomercials in May 2001 and suspended them in July 2001 due to a lack of financial resources. We intend to resume airing infomercials when we have adequate financial resources. Our product offerings in each product category are also relatively small compared to the wide variety of products offered by many other nutritional product companies. 9 Several companies harvest algae from the Upper Klamath Lake. However, we are the largest harvester and the supply of algae is substantially more than the total amount harvested by all companies. We also have access to Upper Klamath Lake that is in close proximity to our freezer facility. We also compete in the nutritional supplements market and for new Business Associates with other retail, multi-level marketing and direct selling companies in the nutritional supplements industry by emphasizing the proprietary nature, value, and the quality of our products and the convenience of our distribution system. We also compete with other direct selling organizations, many of which have longer operating histories and greater name recognition and financial resources than us. They include Amway Corporation, Nu Skin Enterprises, Inc., Body Wise International, Inc., Herbalife International, Inc., Mannatech Incorporated, Rexall Showcase International, and Forever Living Products, Inc. We compete for new Business Associates based on our compensation plan and our proprietary and quality products. We believe that many more direct selling organizations will enter the market place as this channel of distribution expands over the next several years. We also compete for the commitment of our Business Associates. Given that the pool of individuals interested in direct selling tends to be limited in each market, the potential pool of Business Associates for our products is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. GOVERNMENT REGULATION GENERAL We are subject to laws, governmental regulations, administrative determinations, and court decisions on the federal, state, and local levels. These regulations pertain to a variety of issues related to us. First, they pertain to the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products and taxation of our Business Associates, which in some instances may impose an obligation on us to collect the taxes and maintain appropriate records. Second, the regulations pertain to product claims and advertising, both by us and by our Business Associates, for whom we are responsible. Finally, certain regulations pertain to our network marketing system. PRODUCT REGULATION Several governmental agencies regulate certain aspects of our products, including formulation, manufacturing, packaging, storing, labeling, advertising, distribution, and sales. These agencies include the Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer Products Safety Commission, the Department of Agriculture, the Environmental Protection Agency, and the Postal Service. In addition, various state and local agencies can regulate us in areas where we manufacture, distribute and sell our products. The FDA regulates the formulation, manufacture, packaging, storage, labeling, promotion, distribution, and sale of foods, dietary supplements, and over-the-counter drugs, including those we distribute. With respect to the preparation, packaging and storage of our supplements, FDA regulations require that our suppliers and we meet relevant good manufacturing practice regulations. The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised certain provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA") concerning the composition and labeling of dietary supplements. We believe that DSHEA is generally favorable to the dietary supplement industry. The legislation creates a new statutory class of "dietary supplements," which includes vitamins, minerals, herbs, and amino acids. DSHEA applies with certain limitations to dietary ingredients that were on the market before October 15, 1994. With respect to dietary supplements that contain dietary ingredients not on the market before October 15, 1994, DSHEA requires further evidence. This evidence must show that the supplement contains only those ingredients that have been in the food supply or other evidence of use or safety. Manufacturers of dietary supplements must make a "statement of nutritional support," which is a statement describing certain types of product performance characteristics. In making such a statement, we must have substantiation that the statement is truthful and not misleading and must make a disclaimer within the statement. Finally, we must notify the FDA of the statement no later than 30 days after we make it. 10 In January 2000, the FDA published a final rule that defines the types of statements companies can make concerning the effect of a dietary supplement on the structure or function of the body pursuant to the DSHEA. Under the DSHEA, dietary supplement labeling may bear "structure/function" claims, which are claims that the products affect the structure or function of the body, without prior FDA review. Without prior FDA review, a product may not bear a claim that it can prevent, treat, cure, mitigate or diagnose disease (a disease claim). The new final rule describes how the FDA will distinguish disease claims from structure/function claims. In February 2001, the FDA issued a notice requesting comments on the types of information that should be included in guidance on applying the regulations on statements made for dietary supplements concerning the effect of a dietary supplement on the structure or function of the body. To date, the FDA has not issued a guidance document, and we have continued our ongoing efforts to ensure that our dietary supplement product labeling complies with the requirements of the "Structure/Function" final rule, which became effective in February of 2000. FFDCA classifies the majority of our products as "dietary supplements." The FDA issued regulations governing the labeling and marketing of dietary supplement products in September 1997. These regulations covered several issues. First, they covered the identification of dietary supplements, as well as their nutrition and ingredient labeling. Second, they covered the use of terminology for nutrient content claims, health content claims, and statements of nutritional support. Third, they covered the labeling requirements for dietary supplements that claim to be "high potency" and "antioxidant." Fourth, they covered notification procedures for statements on dietary supplements. Finally, the regulations covered the pre-market notification procedures for new dietary ingredients in dietary supplements. The notification procedures became effective in October 1997. The labeling requirements became effective in March 1999 and we revised our product labels to reflect the new requirements. We continue to secure substantiation of our product performance claims and to notify the FDA of certain types of performance claims made for our products. Our substantiation program involves compiling and reviewing scientific literature, including our own university research that is pertinent to the ingredients contained in our products. Dietary supplements are subject to the Nutrition, Labeling and Education Act ("NLEA"), as well as the associated regulations. These regulate health claims, ingredient labeling, and nutrient content claims, which characterize the level of a nutrient in the product. NLEA prohibits the use of any health claim for dietary supplements unless significant scientific agreement supports the claim and the FDA pre-approves it. STATE REGULATION As a result of certain conditions, a toxic strain of algae called MICROCYSTIS AERUGINOSA occasionally blooms in Klamath Lake and can contaminate a portion of our harvest of blue-green algae with microcystin, a toxin. In 1994, we began to test the algae harvested at this facility for possible contamination. We have regularly measured, at various levels, the existence of MICROCYSTIS AERUGINOSA. In the absence of established regulatory criteria for determining an acceptable level of microcystin (the actual toxin), we sponsored an assessment of risk and set our own standards for determining whether a particular batch of algae is acceptable for human consumption. Algae that does not meet our standards and that we cannot use in alternative non-human consumable products is isolated and not used in production. On October 23, 1997, the Oregon Department of Agriculture issued an Administrative Rule on the sale of blue-green algae, which stated, "the agency has decided to adopt the 1 microgram per gram (1 ppm) level of microcystin in blue-green algae." This ruling may have an impact on our ability to process and distribute the raw algae harvested and finished goods produced. Such ruling may also decrease the amount of salable inventory and therefore, may have an adverse impact on our ability to realize the carrying value of our inventories. We have recognized that an impairment of our inventory exists and therefore have recorded our best estimate of the effect by establishing a reserve for $4,000,000 at December 31, 2002. During 2003 we destroyed certain inventory that was least sellable thus reducing the inventory reserve to $2,565,000 by year end. The Oregon Department of Agriculture has taken no regulatory actions against our products under this Rule to date. 11 FOREIGN MARKETS In Canada, both national and provincial law regulates our network marketing system. Under Canada's Federal Competition Act, we must make sure that any representations relating to Business Associate compensation made to prospective Business Associates constitute fair, reasonable and timely disclosure and that it meets other legal requirements of the Federal Competition Act. After a review of our revised compensation plan, we will submit it to the appropriate Canadian authorities. All Canadian provinces and territories, other than Ontario have legislation requiring that we register, or become licensed as a direct seller, within that province. They design the licensing to maintain the standards of the direct selling industry and to protect the consumer. Some provinces require licenses for both our Business Associates and us. We are in the process of obtaining all of the required provincial or territorial direct sellers' licenses. In 1999, Health Canada issued a warning about the safety of blue green algae products due to concerns about microcystin. While we believe our products are safe and comply with Canadian rules, the adverse publicity from the Health Canada warning adversely affected our sales in Canada. Such warning may occur in the future and could have an adverse affect on our business. REGULATION OF ADVERTISING We are unable to make any claim that any of our nutritional supplements will diagnose, cure, mitigate, treat, or prevent disease. DSHEA, however, permits substantiated, truthful, and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or a function of the body. The FDA recently issued a proposed rule concerning these issues. The FTC similarly requires the substantiation of any claims. The FTC exercises jurisdiction over the marketing practices and advertising of all our products. In years past, the FTC has instituted enforcement actions against several dietary supplement companies for false and misleading marketing practices. This has resulted in consent decrees and monetary payments by the companies involved. We have not been the subject of FTC enforcement action with respect to our advertising. However, there is no assurance that the FTC will not subject us to inquiry in the future. Through our manuals, seminars and other training materials and programs, we attempt to educate our Business Associates as to the scope of permissible and impermissible activities in each market. We also investigate allegations of Business Associate misconduct. However, our Business Associates generally are independent contractors, and we are unable to monitor directly all of their activities. Consequently, we cannot be sure that our Business Associates comply with applicable regulations. Misconduct by Business Associates could have a material adverse effect on us in a particular market or in general. We are unable to predict the nature of any future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. However, they could require: (1) the reformulation of some products we may not able to reformulate; (2) imposition of additional record keeping requirements; (3) expanded documentation of the properties of some products; (4) expanded or different labeling; and (5) additional scientific substantiation regarding product ingredients, safety or usefulness. 12 NETWORK MARKETING SYSTEM REGULATION Our Business Associate commission system constitutes a network marketing system. A number of federal and state statutes and regulations apply to this system, including those administered by the FTC. The legal requirements that apply to network marketing organizations ensure the ultimate sale of products to consumers. Further, they ensure that advancement within the organizations be based on the sales of products, rather than from the recruitment of additional Business Associates, investment in the organization, or non-retail sale criteria. Where required by law, we must obtain regulatory approval of our network marketing system. If such approval is not required, the favorable opinion of local counsel will suffice. Finally, in addition to these regulations, the FTC regulates trade practices related to network marketing systems. EMPLOYEES At February 28, 2004, we employed approximately 75 persons, of which 3 were part-time. These numbers do not include our Business Associates, who are generally independent contractors rather than our employees. None of our employees are represented by a labor union and we have never experienced any business interruption as a result of any labor disputes. We believe that our relationship with our employees is good. INDUSTRY SEGMENTS AND EXPORT SALES We have no assets outside of the United States. Our business consists of one industry segment and we group it into two geographic areas: United States and Canada. The following table (dollars in thousands), summarizes the product sales revenues from customers in each of the two geographic regions:

(~~Dollars~~DOLLARS inIN ~~Thousands~~THOUSANDS) ~~2000~~2003 ~~1999~~2002 ~~1998~~2001 ~~1997~~ ---- ------------- ----------------- ----------------- United States ....................... $3619,~~796~~935 9493.49% $5126,~~385~~696 94.3% $6928,~~397~~310 9394.73% ~~$116,891~~Canada 93.7%............................. ~~Canada~~ $ 21,~~181~~286 5.6.1% $ 31,~~103~~498 5.7% $ 41,~~674~~702 65.~~3% $~~ 7~~,896 6.3~~% ------- ----- ------- ----- ------- ----- ~~--------~~Total ~~----- TOTAL $38,977 100~~.0%.............................. $5421,~~488~~221 100.0% $7426,~~071~~194 100.0% $~~124~~30,~~787~~012 100.0% ======= ===== ======= ===== ======= ===== ~~======== =====~~

We believe that our profit margin on export sales is not significantly different from that realized on sales in the United States. We consummate all foreign product sales transactions in U.S. dollars. Item 2. Properties. Currently, our headquarters and all of our operating facilities are located in Klamath Falls, Oregon. We leased approximately 100,000 square feet of office, processing, freezer and storage space directly from two of our principal stockholders during 2003. Most of these leases are year-to-year or month-to-month with the exception of one lease that will expire in 2005. We believe that we lease the space from our shareholders and their affiliate at or below fair market rates. We have made a decision to vacate approximately 33,000 square feet of office and warehouse space during the first half of 2004 that we have been leasing from those principal stockholders. We have other owned and leased properties that are adequate for our continuing operational needs. Vacating those properties will save the company approximately $11,480 per month in rent expense. It will also lead to the early expensing of leasehold improvements in the approximate amount of $540,000 during the first two quarters of 2004. We also lease an additional 21 acres from an independent third party, on which we have built an alga processing and storage facility that is currently standing idle and being held for sale. Our lease with the independent third party will terminate in 2020, at which time we have the option to renew for an additional 25 years. At the termination of such lease, ownership of the facility will revert to the lessor. We believe that the above-described properties will provide sufficient space to meet our currently planned future needs and that comparable space is readily available to meet any unforeseen circumstances. 13 ITEM 3. LEGAL PROCEEDINGS. On February 6, 1998, Oregon Freeze Dry, Inc., a vendor, filed a complaint against us alleging that we wrongfully terminated a contract with Oregon Freeze Dry, Inc. On December 20, 2002, the parties signed a settlement agreement and they dismissed the lawsuit. The parties agreed that we will pay $1,885,917 to Oregon Freeze Dry, Inc. Payments are to be $50,000 per month. No interest will accrue to this note as long as we are timely in the note payments. $1,019,920 is included in notes payable in the accompanying balance sheet at December 31, 2003. As of December 31, 2003, we are current on the payment obligations to them. Additionally, we are obligated to use them for all of our freeze-drying needs. If we choose to use a bulk drying method other than freeze-drying, then we will pay a fee of 25 cents per pound to them for a period of up to 10 years, but not to exceed $2,500,000, for algae dried using such alternative method. On January 16, 2001, we filed an action against Glenn Foods in the Circuit Court of Klamath County alleging, among other things, that Glenn Foods breached an agreement with us for the manufacture of our SBG Square Meal Bars and BG Bites by failing to produce our products according to our specifications, refusing to turn over our formula, and failing to refund our money. We were seeking monetary damages of approximately $226,345 for all causes specified in our complaint. The matter was settled in February 2004 resulting in the defendant agreeing to pay $80,000 to us for damages. In October of 2001, Teachers for Truth in Advertising filed an action in the Superior Court of Tulare County, California alleging that we, erroneously sued as Cell Tech Products, Inc., engaged in unfair business practices and misleading advertising. In January 2003, the Superior Court of Tulare County issued a tentative decision stating that Teachers for Truth in Advertising was entitled to an injunction prohibiting us from making deceptive representations in its advertising or literature disseminated in California and ordering us to refund the purchase price paid by California customers for our algae products from the date four years prior to the filing of the action through the trial date in November of 2002. In response to the tentative decision, our counsel filed a Request for Statement of Decision on January 23, 2003. On February 20, 2003, the Superior Court issued its Final Decision, which essentially affirms the tentative decision, which judgment was entered in April 2003. Plaintiff has submitted a proposed judgment to the court consistent with the Tentative and Final Decisions. The parties mediated this matter on May 9, 2003 before a retired Orange County, California Superior Court judge and agreed to submit a proposed confidential settlement to the Superior Court within 60 days, which they have done. The confidential settlement provides for making partial refunds to certain of our California customers. The Superior Court approved the confidential settlement and vacated the judgment on August 25, 2003. We do not believe that the proposed refund to California customers will be in an amount that would have a material adverse impact on our business and financial position. On February 19, 2002, Daryl Kollman, one of our principal shareholders, filed two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta Carpenter and others, in the Circuit Court of the State of Oregon, Klamath County, Oregon. Mr. Kollman alleges, among other things, that we owe him approximately $705,693 in past due rent. Mr. Kollman also claims that we owe Klamath Cold Storage, Inc. ("KCS"), a company owned by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due rent. Mr. Kollman asserts that we are not entitled to remove our personal property from the real property owned by him, Marta Carpenter and KCS and seeks to subject our to foreclosure proceedings. We intend to vigorously defend against these liens. We cannot predict the amount of loss, if any, that could result from these liens, but do not believe that an unfavorable outcome would have a material adverse impact upon our financial condition, cash flow, or results of operations. On or about May 31, 2002, Daryl Kollman filed an action in the Circuit Court of Klamath County (Case No. 02-01956CV) seeking to evict us from certain real property owned by him and Marta Carpenter. Mr. Kollman later added a claim for allegedly unpaid rent exceeding $558,000. On or about October 31, 2002, the Court dismissed Mr. Kollman's eviction claim. Mr. Kollman's claim for unpaid rent is currently pending. We cannot predict the amount of loss, if any, that could result from this lawsuit but an unfavorable outcome could have a material adverse effect on our financial condition. 14 On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit Court for the State of Oregon for Klamath County (Case No. 02-02040CV) to evict us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we have not paid approximately $1,050,000 in rent. We have voluntarily vacated all of the KCS property we do not need to support our current operations. We contend that we have paid all rents owing and intend to vigorously defend this lawsuit. We cannot predict the amount of loss, if any, that could result from this lawsuit but an unfavorable outcome could have a material adverse effect on our financial condition. On October 7, 2002, Daryl Kollman, one of our principal shareholders, filed a lawsuit against us, certain of our officers, directors and counsel in the Circuit Court for the State of Oregon for Klamath County (Case No. 02-03774CV). The complaint makes a number of individual and derivative claims. Mr. Kollman makes two claims against us. First, Mr. Kollman alleges that we breached an agreement to register our stock for public sale and seeks damages of an amount he must prove at trial, but not less than $9,282,000. Second, Mr. Kollman claims that we conspired with Marta C. Carpenter (formerly known as Marta C. Kollman), a principal stockholder and our President, Chief Executive Officer and one of our directors; Donald P. Hateley, our Chairman of the Board of Directors; and others to prevent the registration of Mr. Kollman's stock and to cause other financial injury to him. As a result, Mr. Kollman seeks no less than $32,931,976 against the defendants. Mr. Kollman also seeks millions of dollars in damages on his own behalf and on behalf of us against Marta Carpenter, Mr. Hateley and others based on a variety of legal theories. We intend to vigorously defend the direct claims asserted in this lawsuit, and we have filed a motion to disqualify Mr. Kollman as a proper plaintiff for the derivative claims, which motion is currently pending. We cannot predict the amount of loss, if any, which could result from this lawsuit and an unfavorable outcome could have a material adverse impact upon our financial condition, cash flow, or results of operations. On March 27, 2002, the Nature Conservancy filed an action against us in the Circuit Court for the State of Oregon for Klamath County, alleging, among other things, that our wholly owned subsidiary, The New Earth Company, was in default on a promissory note and a trust deed. The Nature Conservancy was seeking $375,000, the principal amount due under the promissory note, plus interest and certain leasehold rights. We had previously recorded the net present value of the promissory note, which had a balance of $313,790 and had been included in the current portion of long-term debt in the December 31, 2002 consolidated balance sheet. The parties signed a settlement agreement and the court action was dismissed in January 2003. The net effect of this is an increase to net income during the first quarter of 2003 of $161,956. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK On August 14, 1996, HumaScan completed its initial public offering and our common stock began trading on the NASDAQ Small Cap Market under the symbol "HMSC." Prior to the IPO there was no established public trading market for our common stock. On March 4, 1999, the NASDAQ Small Cap Market delisted our common stock and it commenced trading on the OTC Bulletin Board. On August 10, 1999, as part of our reorganization, we executed a 1 for 10.8520933 reverse stock split and changed our name to Cell Tech International Incorporated, trading symbol "EFLI." On July 24, 2000, the NASD suspended trading in our common stock on the OTC Bulletin Board because our 1934 Act filings were past due and the National Quotation Bureau's Pink Sheets subsequently quoted our common stock. The following table lists the bid prices at the end of each period obtained from the National Quotation Bureau's Pink Sheet service and is adjusted for subsequent stock dividends and stock splits. Prices do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions. Trading in our common stock is limited and sporadic and you should not deem such quotations to constitute an established public trading market. HIGH BID PRICE LOW BID PRICE FOR PERIOD ($) FOR PERIOD ($) -------------- -------------- 2003 First Quarter....................... .25 .16 Second Quarter...................... .25 .15 Third Quarter ...................... .25 .12 Fourth Quarter...................... .20 .20 2002 First Quarter....................... .40 .20 Second Quarter...................... .45 .20 Third Quarter ...................... .52 .17 Fourth Quarter...................... .50 .20 At February 29, 2004, 13,974,087 shares of our common stock were issued and outstanding and approximately 141 stockholders of record held our stock. DIVIDENDS In 1999, before our reorganization, we distributed certain real estate valued at $1,050,000 to Marta C. Carpenter and Daryl J. Kollman, and paid previously declared dividends of $7.6 million to Ms. Carpenter and Mr. Kollman. We do not plan to pay dividends on our common stock in the foreseeable future. The payment of dividends in the future will depend on the evaluation by our Board of Directors of such factors, as it deems relevant at the time and restrictions imposed by the terms of our debt obligations, if any. Currently, the Board of Directors believes that we should retain all of our earnings, if any, for the development of our business. 16 RECENT SALES OF UNREGISTERED SECURITIES On October 19, 1999, we sold 1,157,895 shares of our common stock and warrants to purchase 1,157,895 shares of our common stock in a private placement to Zubair Kazi for $1,515,625, net of fundraising costs of $134,375. In connection with this transaction, we also issued warrants to purchase 150,000 and 100,000 shares of our common stock to Pacific Basin Capital and Richard Wade, respectively. Each warrant has a 5-year term and an exercise price of $1.425 per share. We also issued 50,000 shares of our common stock, at fair market value that amounted to $134,375, to Pacific Basin Capital for its services. The transaction above involved an investment by one person who is an accredited investor, as defined by Regulation D of the Securities Act of 1933, as amended, and did not involve a general solicitation. We effected the above transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended. We are obligated to issue to Mr. Kazi additional Purchased Securities, as penalties and interest, for any delay in filing our next registration statement beyond 120 days after October 19, 1999. As of March 31, 2003, we had not filed a registration statement and consequently, Mr. Kazi was entitled to an additional 3,333,192 penalty shares of common stock and warrants. During the second quarter of 2003, we issued to Mr. Kazi 3,333,192 shares of common stock and we converted the accrued liability of $624,860 to equity. Warrants to purchase an additional 3,333,192 shares of common stock were also due to Mr. Kazi at that time and have not yet been issued. During the last three quarters of 2003, additional liability was recognized under the agreement in the amount of $82,537, based on the fair value of the securities at the respective measurement dates. We have accrued and will continue to accrue additional penalties until the shares are registered. The total expense accrued for the year ended December 31, 2003, was $139,037 and 453,863 shares and 3,787,055 warrants are issuable to Mr. Kazi. We are obligated, upon the effective date of our next registration statement (First reset date), to issue additional securities to Mr. Kazi in accordance with the following reset rights: o If the ratio of $1.425 per share divided by the average closing bid price for the last twenty trading days prior to the first reset date (the first reset ratio) is greater than the ratio of $1.425 divided by the average closing bid price for the last twenty days prior to the execution of the Term Sheet, or September 13, 1999 (the Initial Ratio), on the first reset date, then we shall issue to Mr. Kazi additional securities so that the initial ratio and the first reset ratio are equal and pursuant to the following formula: - Amount of additional purchased securities = ((First Reset Ratio)/(Initial Ratio)-1) times 1,157,895. In addition, if Kazi holds any purchased warrants for the period covered by the last three reset dates, the exercise price of these purchased warrants shall be reduced by the following formula: o Exercise price of purchased warrants = ((Initial Ratio)/(First Reset Ratio)) times $1.425. Kazi is entitled to five additional reset dates that will occur as follows: o The next three reset dates will occur each three months after the first reset date. o The next two subsequent reset dates will occur each six-month period thereafter. Since we have not yet filed our first registration statement, the first reset date has not yet occurred. 17 EQUITY COMPENSATION PLANS Below represents information concerning our equity compensation plans as of December 31, 2003 (note 9):

~~Years~~(A) ~~ended~~(B) ~~December~~(C) ~~31, 2000 1999 1998 1997 1996~~ ------- ------- ----------- ---------------------- ------------------------ ($NUMBER inOF ~~thousands,~~SECURITIES ~~except~~AVAILABLE ~~per~~FOR ~~share~~FUTURE ~~data)~~NUMBER ~~RESULTS~~ OF ~~OPERATIONS~~SECURITIES ~~Revenue~~TO ~~$38,977~~WEIGHTED-AVERAGE ~~$54,488~~ISSUANCE ~~$74,071~~UNDER ~~$124,788~~EQUITY ~~$212,612~~BE ~~Gross~~ISSUED ~~Profit~~UPON ~~27,488~~EXERCISE ~~39,739~~EXERCISE ~~54,851~~PRICE ~~102,591~~OF ~~173,908~~COMPENSATION ~~Selling~~PLANS ~~Profit~~OF ~~9,855~~OUTSTANDING 15OPTIONS,~~306~~ ~~21,026~~OUTSTANDING 42OPTIONS,~~314~~ ~~69,791~~(EXCLUDING ~~Operating~~SECURITIES ~~Income/(Loss)~~WARRANTS ~~from~~AND ~~operations~~RIGHTS ~~(2,436)~~WARRANTS AND RIGHTS REFLECTED IN COLUMN (~~4,439~~A)) ~~1,670~~------------------------- 15---------------------- ------------------------ Equity Compensation Plans Approved by Shareholders ........... 25,~~837~~802 31$3.05 - $142.49 38,~~201~~702 ~~Net~~Equity ~~Income/(Loss)~~Compensation ~~before~~Plans ~~taxes~~Not ~~(2,784)~~Approved (4by Shareholders ........... 180,~~141)~~000 2$0.15 - $0.50 520,~~296~~000 17------- -------- Total ................................. 205,~~253~~802 34558,~~100~~702 ======= =======

18 ITEM 6. SELECTED FINANCIAL DATA. We have derived the selected financial data as of and for the five years ended December 31, 2002 from our audited consolidated financial statements and related notes. You should read the selected financial and operating data in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the consolidated financial statements and related notes.

~~Year~~Years ~~Ended~~ended December 31, ------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- ($ in thousands, except per share data) ~~First~~RESULTS ~~Second~~OF ~~Third~~OPERATIONS ~~Fourth~~Revenue ~~Quarter~~$ ~~Quarter~~22,286 ~~Quarter~~$ ~~Quarter~~26,194 $ 30,012 $ 38,977 $ 54,488 Gross Profit 15,138 16,731 20,488 27,488 39,739 Gross Profit after Commissions 5,670 5,271 6,146 9,855 15,306 Operating Income (Loss) (5,322) (3,516) (4,985) (2,436) (4,439) Net Income (Loss) (5,651) (3,497) (5,015) (2,784) (4,141) Net Income (Loss) per common share Basic and Diluted $ (0.40) $ (0.27) $ (0.47) $ (0.26) $ (0.45) Weighted Average Shares Outstanding Basic and Diluted 14,049,055 12,864,643 10,640,895 10,640,895 9,280,431 Cash dividend per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.82 (1) SELECTED BALANCE SHEET DATA Cash & Cash Equivalents $ -- $ --~~---~~ $ --~~-----~~ $ --~~-----~~ $ --~~-----~~ ~~Revenue~~Current 11Assets 2,~~136~~750 3,259 2,788 3,881 5,505 Total Assets 9,~~971~~184 15,814 19,975 27,250 41,099 Current Liabilities 6,450 7,542 9,~~166~~225 11,223 8,~~704~~577 ~~Operating~~Total ~~Loss~~Liabilities ~~(287)~~6,958 ~~(832)~~8,561 ~~(487)~~9,225 ~~(830)~~11,485 14,266 Shareholders' Equity 2,226 7,252 10,750 15,765 18,549

---------- (1) In 1999, before our reorganization, we paid a previously declared dividend of $7.6 million to Marta C. Carpenter and Daryl J. Kollman. See "Dividends." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. From time to time, our representatives or we have made or may make forward-looking statements, orally or in writing, including in this Report. Such forward-looking statements may be included in, without limitation, press releases, oral statements made with the approval of one of our authorized executive officers and filings with the Securities and Exchange Commission. The words or phrases "anticipates," "believes," "expects," "intends," "will continue," "estimates," "plans," "projects," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to vary materially from anticipated results, including, without limitation, market acceptance of our marketing and merchandising concepts, changes in political and general market conditions, demand for and market acceptance of new and existing products, availability and development of new products, increased competition, our failure to attain satisfactory outside financing and adverse weather conditions at Upper Klamath Lake. We discuss these factors in 19 further detail below under "Risks and Uncertainties." Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those discussed herein as expected, believed, estimated, intended or anticipated. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. GOING CONCERN We have experienced recurring net losses and have negative working capital at December 31, 2003 and March 15, 2004. In September 2002, La Jolla Loans purchased and took an assignment of our financing facility with Coast Business Credit. At the same time, we entered into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms of the forbearance agreement, La Jolla Loans would not declare a default until June 30, 2003, when the entire principal is due. The forbearance period was extended to June 30, 2004 with our payment of a $75,000 renewal fee. We have tentatively agreed with the lender to extend the loan until June 30, 2005. However, there can be no assurance that additional financing will be available when the extension period ends in June of 2004. We are also experiencing some difficulty in generating sufficient cash flows to meet our obligations on a month-to-month basis. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis. We are continuing our efforts to raise both debt and equity financing. However, there can be no assurance that we will be able to service additional financing or that if such financing is available, whether the terms or conditions would be acceptable to us. OFF-BALANCE SHEET ARRANGEMENTS None. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K/A, beginning on page F-8. Note that our preparation of this Annual Report on Form 10-K/A requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. - REVENUE RECOGNITION The Company recognizes revenue from the sale of its products upon shipment, at which time title passes. The Company estimates an allowance for sales returns based on historical experience with product returns. - IMPAIRMENTS OF LONG-LIVED ASSETS We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows we estimate to generate by those assets are less than the carrying amount of those items. We base our cash flow estimates on historical results adjusted to reflect our best estimate of future market and operating conditions. We reduce the net carrying value of assets not recoverable to fair 20 value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. During 2003 we recorded impairment expenses for various assets designated as held for sale. The former harvest building is no longer being used and after the auction we held in September of 2003 we determined that the building would not be suitable for its original purposes and reviewed its net book value. After reviewing estimated replacement costs and listings of comparable properties in the area we determined the impairment to be $2.2 million. This was reported in our 3rd quarter report. Additionally, there are still several pieces of equipment being held for sale that were not disposed of at auction. Additional impairment of $64,646 was recorded on those assets to recognize them at auction value per a certified appraisal taken in December of 2002 (note 5). - INVENTORY We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the future. During the last quarter of 2003 we determined that a certain portion of our inventory is excess or obsolete, and accordingly, we expensed its carrying value in the amount of $544,233. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. We have experienced, and may continue to experience, significant fluctuations in sales and operating - results from quarter to quarter. - COMMISSIONS In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products," which addresses the accounting for consideration given by a vendor to a customer or a reseller of the vendor's products. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which provides guidance on the income statement classification of consideration from a vendor to a reseller in connection with the reseller's purchase of the vendor's products or to promote sales of the vendor's products. We pay commissions to our distributors as compensation for sales and marketing activities and based on their personal sales volumes and the sales of distributors they have recruited into our network. Accordingly, we classify these expenses as a cost and not a reduction of revenue. - CONTINGENCIES We determine whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable and where reasonable estimates can be made of the amount of potential loss, of the materiality of the loss contingency, in accordance with Statement of Financial Accounting Standards No. 5 ("SFAS 5"), "Accounting for Contingencies." We develop our assessment in consultation with outside advisors and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and frequently involve matters that are in litigation, which by its nature is unpredictable. We believe that our loss contingency assumptions are sound, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assumptions may prove to be incorrect, which could materially impact our consolidated financial statements in future periods. 21 GENERAL We are a network marketing company and we develop and distribute a wide range of products made with APHANIZOMENON FLOS-AQUAE (trade name Super Blue Green(R) Algae) and other nutrients and ingredients through a network of independent distributors ("Distributors"). We currently offer twenty-two different products intended to appeal to health-conscious consumers. We divide our products into five product lines including Daily Health Maintenance, Digestive Health, Defensive Health, Powdered Drinks and Snacks, and Animal and Plant Food. RESULTS OF OPERATIONS Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods, which depend upon numerous factors including our ability to attract and retain new Distributors, enter new markets and to introduce additional and new products into our markets. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Net sales for the year ended December 31, 2003 were $22,285,975, a decrease of 15% from net sales of $26,193,747 for the year ended December 31, 2002. We directly relate the decrease in sales to a decrease in the number of Business Associates and orders for the same period partially offset by an increase in the average order size to $125 from $123 over the same period. The increase in average order size was likely due to a price increase that was implemented on some of our products during the spring of 2003. The number of Business Associates in 2003 decreased to an average of 37,563, which was 14% lower than the average of 43,761 Business Associates in 2002. We make sales of our food supplement and personal care products through a multi-level marketing network of Business Associates, so we positively link sales with the number of business associates. Gross profit represents net sales less the cost of goods sold, which includes the cost of harvesting blue-green algae from Klamath Lake, the cost of other materials, direct labor expenses, an allocation of overhead costs, amortization, and depreciation. Gross profit increased to 67.9% from 63.2% of net sales for the years ended December 31, 2003 and 2002, respectively. The increase in the gross profit margin is due primarily to price increases and a reduction in the amount of inventory charged off as unsaleable in 2003. In 2002, $3.1 million was charged against income for potentially unsaleable inventory and in 2003, $544,000 was charged off as potentially unsaleable. Gross profit after commissions represents gross profit less commission expense. Commission expense for 2003 and 2002 was 42.5% and 44.6% of net sales, respectively. We are a multi-level marketing organization. Business Associates make up our sales force. Business Associates buy algae products for their own consumption plus they actively recruit other Business Associates into our network. Business Associates are paid commissions based upon their personal sales volumes and the sales of Business Associates beneath them in their network. Commission expense as a percentage of sales decreased in 2003 due to changes in the commission plan. Operating expenses include shipping and handling expenses, selling expenses, research and development expenses, general and administrative expenses and asset write-down expense. In total, operating expenses increased $2,830,272, or 34%, to $11,198,391 for the year ended December 31, 2003 from $8,368,119 for the year ended December 31, 2002. We discuss the components of operating expenses below. o Shipping and handling expenses includes purchasing, receiving, and materials management. Shipping and handling expenses decreased $66,505, or 4%, to $1,448,853 in 2003, from $1,515,358 in 2002. The decrease was due primarily to a decrease in freight expense in 2003 due to the overall decrease in sales volumes. Shipping and handling expenses, as a percent of net sales, were 6.5% for the year ended December 31, 2003 and 5.8% for the year ended December 31, 2002. o Selling expenses includes order operator and distributor services expenses, marketing and promotion expenses, and the expenses of the Office of the President and CEO. Selling expenses decreased $19,868 between 2003 and 2002 to $4,001,866 from $4,021,734. This decrease was primarily due to decreases in transaction costs associated with credit card processing of $104,000, reduced depreciation expense of $104,000 and other miscellaneous expense reductions. These reductions were offset by increases in insurance expense of $59,000 and advertising costs of $134,000. Selling expenses were 22 18.0% of sales for the year ended December 31, 2003 and 15.4% for the year ended December 31, 2002. o Research and development expenses increased 2% to $197,266 in 2003 from $193,310 in 2002, which constituted 0.8% and 0.7% of net sales, respectively. o General and administrative expenses increased by $1,521,571 or 86% between 2003 and 2002 to $3,285,760 from $1,764,189. General and administrative expenses averaged 14.7% and 6.7% of sales for the years ended December 31, 2003 and December 31, 2002, respectively. The increase between 2003 and 2002 is attributable primarily to an increase in loss on sale of assets of $805,000 and in legal fees of $444,000. o Asset write-downs increased by $1,391,118 or 159% from $873,528 for the year ended December 31, 2002 to $2,264,646 for the year ended December 31, 2003. An additional reserve was recorded during the year ended December 31, 2003 to adequately reserve for the impaired value of fixed assets identified as being held for sale and not continuing to be used for production (note 5). Other income decreased to $274,266 for the year ended December 31, 2003 from $283,834 for the year ended December 31, 2002, principally due to a decrease in sundry income collected from Business Associates and to a decrease in management fees charged to Klamath Cold Storage. Interest expense increased to $397,183 in 2003 from $265,047 in 2002. This increase was due primarily to the note payable to Oregon Freeze Dry, Inc. that resulted from our settlement with them in December of 2002. Net loss for 2003 increased 62% to $5,651,029 from $3,497,387 reported in the prior year or a loss of $0.40 per share for 2003 compared to a loss of $0.27 per share for 2002. The increase was primarily due to an increase in asset impairment charges in 2003, as well as other causes detailed above. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Net sales for the year ended December 31, 2002 were $26,193,747, a decrease of 12.7% from net sales of $30,012,076 for the year ended December 31, 2001. We directly relate the decrease in sales to a decrease in the number of Business Associates and orders for the same period partially offset by an increase in the average order size to $123 from $116 over the same period. The number of Business Associates in 2002 decreased to an average of 43,761, which was 17% lower than the average of 52,761 Business Associates in 2001. We make sales of our food supplement products through a multi-level marketing network of Business Associates, so we positively link sales with the number of Business Associates. Gross profit represents net sales less the cost of goods sold, which includes the cost of harvesting blue-green algae from Klamath Lake, the cost of other materials, direct labor expenses, an allocation of overhead costs, amortization, and depreciation. Gross profit decreased to 63.2% from 67.5% of net sales between the years ended December 31, 2002 and 2001, respectively. The decrease in the gross profit margin is due primarily to the recording of an additional reserve of $3.1 million for potentially unsaleable inventories. We determined that the sales of our plant food and agricultural products was less than previously anticipated and recorded this reserve against the carrying value of our inventory designated for plant food and agricultural uses. The decrease in the gross profit margin as a result of recording the additional reserve for potentially unsaleable inventory was offset by a decrease in depreciation expense previously recorded on the harvest site fixed assets. We suspended this depreciation expense when management made the decision to cease harvesting of algae on the A-Canal and classifying certain of the fixed assets as "held for sale". The related depreciation expense that we did not record in 2002 was $1,144,370. In addition, because of our harvesting algae in 2002, we have capitalized certain harvest costs in ending inventory whereas in prior years when no harvesting of algae took place, we expensed such costs. Costs capitalized in ending inventory in 2002 were approximately $585,450. Gross profit after commissions represents gross profit less commission expense. Commission expense for 2002 and 2001 was 44.6% and 47.8% of net sales, respectively. We are a multi-level marketing organization. Business Associates make up our sales force. Business Associates buy algae products for their own consumption plus they actively recruit other Business Associates into our network. Business Associates are paid commissions based upon 23 their personal sales volumes and the sales of other Business Associates beneath them in their network. During the year ended December 31, 2001, we implemented a new commission structure in an attempt to attract and retain new Business Associates and to decrease commission expense. Operating expenses include shipping and handling expenses, selling expenses, research and development expenses and general and administrative expenses. In total, operating expenses decreased $2,544,873 or 23.3% to $8,368,119 for the twelve months ended December 31, 2002 from $10,912,992 for the twelve months ended December 31, 2001. We discuss the components of operating expenses below. o Shipping and handling expenses includes purchasing, receiving, and materials management. Shipping and handling expenses decreased $131,267 or 8%, to $1,515,358 in 2002 from $1,646,625 in 2001. The decrease was due to a decrease in freight expenses and supplies in 2002 due to the overall decrease in sales volumes, partially offset by an increase in postal rates. Shipping and handling expenses as a percent of net sales increased to 5.8% for the year ended December 31, 2002 from 5.5% for the year ended December 31, 2001. o Selling expenses includes order operator and distributor services expenses, marketing and promotion expenses, and the expenses of the Office of the President and CEO. Selling expenses decreased $38,248 or 0.9% between 2002 and 2001 to $4,021,734 from $4,059,982. This decrease was primarily due to a decrease in leased equipment costs, consulting expenses, merchant expense, utilities and depreciation costs of $324,518 partially offset by an increase in insurance expense of $79,852 and promotional expense of $231,000. Selling expenses were 15.4% of sales for the year ended December 31, 2002 and 13.5% of sales for the year ended December 31, 2001. o Research and development expenses increased 1% to $193,310 in 2002 from $190,884 in 2001, which constituted 0.7% and 0.6% of net sales, respectively. o General and administrative expenses decreased by $661,372 or 27% between 2002 and 2001 to $1,764,189 from $2,425,561. General and administrative expenses averaged 6.7% and 8.1% of sales for the years ended December 31, 2002 and December 31, 2001, respectively. The decrease between 2002 and 2001 is attributable to a decrease of $830,000 in costs associated with licenses, insurance, consulting fees and depreciation expense partially offset by an increase in legal fees of $62,000. o Asset write-downs decreased by $1,716,412 or 66% from $2,589,940 for the year ended December 31, 2001 to $873,528 for the year ended December 31, 2002. An additional reserve was recorded during the year ended December 31, 2002 to adequately reserve for the deteriorating value of fixed assets identified as being held for sale, and was ascertained by having an independent appraisal done of that equipment. Other income decreased to $283,834 for the year ended December 31, 2002 from $591,787 for the year ended December 31, 2001 principally due to a decrease in sundry income collected from Business Associates and by the additional recording of fair value cost of penalty shares and warrants we owe to an investor of $243,120. Interest expense decreased to $265,047 in 2002 from $622,235 in 2001. This decrease was due to the assignment of our previous financing facility to La Jolla Loans during the third quarter ended September 30, 2002, resulting in the elimination of previously required minimum interest payments. Net loss for 2002 decreased 30% to $3,497,387 from $5,015,350 reported in the prior year or a loss of $0.27 per share for 2002 compared to a loss of $0.43 per share for 2001. The decrease was primarily due to reduced commission expense because of the changes to the commission structure implemented during 2001, reduced operating expenses because of the cost-cutting efforts of management in 2002, and the reduced asset write-down expense of approximately $1.7 million during 2002. We offset the decrease in these expenses by the increase in cost of sales as previously described. 24 LIQUIDITY AND CAPITAL RESOURCES We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash provided by operating activities. CASH FLOWS Net cash flows provided by operating activities for the year ended December 31, 2003 amounted to $113,102 compared to cash flows provided by operations of $1,277,926 for the year ended December 31, 2002. The decrease in cash flows provided by operations is primarily due to sales revenue decreasing at a faster rate than the associated expenses and working capital requirements to sustain those revenues. Cash flows provided by investing activities for the year ended December 31, 2003 was $550,621, net of $665,705 of proceeds from sales of equipment. This is an increase of $1,127,922 from net cash used for investing activities of $577,301 for the year ended December 31, 2002, due to a decrease in equipment purchases related to the construction of the on-lake harvester during the fiscal year ended December 31, 2002 and to the auction of unused equipment during 2003. Net cash flows used for financing activities was $663,723 for the year ended December 31, 2003 versus net cash used for financing activities of $700,625 during 2002. This change is principally due to payments on long-term debt offset by increases in related party debt during 2003. We do not plan to pay dividends on our common stock in the foreseeable future. The payment of dividends in the future will depend on the evaluation by our Board of Directors of such factors, as it deems relevant at the time and restrictions imposed by the terms of our debt obligations, if any. We are currently restricted from paying dividends pursuant to a Loan and Security Agreement with La Jolla Loans, Inc. ("La Jolla Loans"). Currently, the Board of Directors believes that we should retain all of our earnings, if any, for the development of our business. Working capital deficit at December 31, 2003 amounted to $3,699,942, a decrease of $582,956 from a working capital deficit of $4,282,898 as of December 31, 2002. At December 31, 2003, we had a bank overdraft of $481,496 versus a bank overdraft of $468,008 as of December 31, 2002. LINE OF CREDIT In June 1999, we entered into a $15 million Line of Credit Agreement with a financial institution. The agreement has four parts: Receivable Loans, Advances and Inventory Loans, Term Loans, and Equipment Acquisition Loans. The Receivable Loans and the Advances and Inventory Loans incurred interest at a rate equal to the prime rate plus 2.5% per annum, effectively 7.5% at December 31, 2001, and expired June 30, 2002. The Term Loans and Equipment Acquisition Loans incurred interest at a rate equal to the prime rate plus 2.75% at December 31, 2002, and were repayable in 60 monthly installments by July 1, 2004. In September 2002, La Jolla Loans purchased and took an assignment of our financing facility with Coast Business Credit. In connection with this transaction, Coast Business Credit assigned its security interest in real and personal property and assigned all associated security and loan documents to La Jolla Loans. At the same time, we entered into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms of the forbearance agreement, La Jolla Loans would not declare a default until June 30, 2003, when the entire principal was due. We extended the loan to June 30, 2004 under the terms of the loan agreement by paying an extension fee of $75,000. The extension fee of $75,000 was recorded a prepaid asset and is being expensed over the twelve months of the loan extension period. Interest of $18,225 at an effective rate of 14% is payable monthly along with additional monthly impound payments of approximately $19,000 to be used to pay insurance, property taxes and lease payments on collateralized property during the forbearance period. La Jolla Loans has also agreed to defer, during the forbearance period, the difference between the minimum interest payment of $45,000 under the agreement with Coast Business Credit and the $24,500 minimum interest payments under the forbearance agreement. If we fully perform under the terms and conditions of the forbearance agreement and no default occurs during the forbearance period, La Jolla Loans will release us from any obligation to pay minimum monthly interest payments in excess of $24,500. The outstanding principal balance at December 31, 2003 is $1,562,164. 25 We are in compliance with all loan covenants as of March 31, 2004. We have classified all outstanding debt to the lender as a current liability. La Jolla Loan has agreed in principle to further extend the loan at June 30, 2004 upon payment of approximately $100,000 in fees and associated expenses. CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS The following table aggregates the Company's expected minimum contractual obligations and commitments subsequent to December 31, 2003

~~Year~~CONTRACTUAL ~~Ended~~OBLIGATIONS ~~December~~LESS ~~31,~~THAN ~~1999~~TOTALS ($1 inYEAR ~~thousands,~~1-2 ~~except~~YEARS ~~per~~3-5 ~~share~~YEARS ~~data) First Second Third Fourth Quarter Quarter Quarter Quarter~~ ---------- ---------- ---------- ---------- ~~Revenue~~Long ~~14,860~~term ~~13,819~~debt 13$1,~~127 12~~019,~~682~~920 ~~Operating~~$ ~~Loss~~512,064 ~~(175)~~$ (1507,~~854)~~856 ~~(1,003)~~$ ~~(1,407)~~-- ~~Net~~Short ~~Loss~~term ~~(39)~~borrowings (1,~~172) (1~~562,~~086)~~164 (1,~~844)~~562,164 ~~Basic~~-- ~~Net~~-- ~~Loss~~Capital ~~per~~lease ~~share~~commitments ~~(0.00)~~-- ~~(0.13)~~-- ~~(0.12)~~-- ~~(0.17)~~-- ~~Diluted~~Operating ~~Net~~lease ~~Loss~~commitments ~~per~~412,843 ~~Share~~168,203 ~~(0.00)~~201,506 ~~(0.13)~~43,134 ~~(0.12)~~---------- ~~(0.17)~~---------- ~~Weighted~~---------- ~~Average~~---------- ~~Number~~Total ofcontractual ~~Shares~~cash ~~Outstanding~~commitments ~~Basic 8~~$2,~~683~~994,~~000~~927 8$2,~~683~~242,~~000~~431 ~~9,183,000~~$ 10709,~~572,725~~362 ~~Diluted~~$ 843,~~683,000~~134 ~~8,683,000~~========== ~~9,183,000~~========== ~~10,572,725~~========== ==========

Not included in the table above are normal recurring accounts payable or accrued expenses that are presented on the accompanying consolidated financial statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or Disposal Activities," effective for activities that we initiate after December 31, 2002, with early application encouraged. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." We adopted SFAS No. 146 in January 2003 and it did not have a material effect on our financial position or results of operations. In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our annual financial statements for the year ended December 31, 2002 and must also provide the disclosures in our quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003. The adoption of SFAS No. 148 did not have a material effect on our financial position or results of operations. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150, ACCOUNTING FOR CERTAIN INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("FAS 150"), which establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. FAS 150 requires an issuer to classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies. We adopted this Statement as of July 1, 2003 and it had no material impact on our financial statements. 26 In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS No. 149"). FAS No. 149 amends and clarifies the accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. We do not have any contracts that are derivatives or that contain embedded derivatives. In January 2003, the FASB issued FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, an interpretation of Accounting Research Bulletins ("ARB") No. 51, CONSOLIDATED FINANCIAL STATEMENTS ("FIN 46"). FIN 46 clarifies the application of ARB No. 51 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. We do not believe the adoption of FIN 46 will have a material impact on our financial position and results of operations. RISKS AND UNCERTAINTIES VARIABILITY OF RESULTS Our annual sales were in excess of $200 million in 1996. Subsequent to 1996, sales have decreased substantially each year. There can be no assurance that we will return to generating profits on either a quarterly or annual basis. We have experienced a continual downward trend in sales although the rate of decline is less than in previous years. Many factors accounted for the past decrease in sales, including low productivity of independent business associates, loss of services of certain existing distributors, and competition. Our inability to adjust our operating expenses to compensate fully for the decrease in sales contributes to our negative profit margins. Consequently, we have experienced a significant decrease in working capital since the end of 1998. We are facing difficulties generating sufficient cash flow to timely satisfy our financial obligations. EFFECTS OF CLINICAL STUDIES, SCIENTIFIC REVIEW, AND PUBLICITY We believe that the national media attention to recent scientific research that highlights potential health benefits of consuming certain vitamins and nutritional supplements drives the increasing interest generally in vitamins, nutritional supplements and similar products. While we have concluded from extensive independent research that SBGA, the principal ingredient in our products, has nutritional value, consumer demands for nutritional supplements are generally dependent on publicized scientific findings. Consumer perception of the values of vitamins and nutritional supplements would be altered should future studies report that nutritional and alternative medicine is in any way either harmful or not beneficial to health. Moreover, any future publicity relating to illnesses or other adverse effects resulting from consumers' use of certain nutritional products, which existing and potential customers might associate with our products, could have an adverse effect on our business. CONSUMER DEMAND FOR NEW & INDIVIDUAL PRODUCTS Our ability to introduce safe, new and innovative products contributed to the growth of our business in the nutritional supplement market. We have expended and will expend a significant amount of resources on the research and development of such products. However, different factors, including consumers' acceptance of innovative products and our compliance with governmental regulatory laws, condition the success of these products. We cannot be certain that sales of new products that we introduce into the markets will achieve success in the future, as there is no assurance that consumers will continue to accept such products or that we can obtain regulatory approvals for them. 27 SUPPLY OF RAW MATERIALS; CONDITIONS AFFECTING HARVEST We harvest our own SBGA in Upper Klamath Lake, the only place in the world where SBGA grows in the massive quantities sufficient for harvesting. Although we may not depend on third-party suppliers for sources, we determine our reserve of SBGA by the growth of APHANIZOMENON FLOS-AQUAE in the lake. APHANIZOMENON FLOS-AQUAE has flourished in Upper Klamath Lake because of Upper Klamath Lake's protected environment, abundance of minerals, natural nitrogen, clean water and regular sunshine. Despite a water shortage in 2000 and 2001, which precluded a harvest from the "A" canal, we began harvesting directly from Upper Klamath Lake in July 2001 with a uniquely designed harvester. In 2002, we added additional harvest capacity to increase our ability to harvest directly from Upper Klamath Lake. We cannot assure the absence of future adverse weather conditions disturbing the growth of APHANIZOMENON FLOS-AQUAE. As a result of certain conditions MICROCYSTIS, a toxic algae, occasionally blooms in Klamath Lake at the same time blue-green algae is harvested. We regularly test the algae we harvest for possible contamination. Algae that does not meet our standards is not used in products for human or animal consumption. In 1997, the Oregon Department of Agriculture issued an administrative rule that created a standard of 1 microgram per gram (1 ppm) of MICROCYSTIS in products for human consumption that contain blue-green algae. The Oregon Department of Agriculture has raised no questions about our products under this rule. In some years, the presence of MICROCYSTIS may reduce the quantity of algae that we can harvest. We constructed a modern SBGA processing system that is continually improved and updated. Potential unexpected system failures may, however, interrupt production and reduce sales revenue. System failures may result from events beyond our control, including natural disasters such as fires and unexpected weather changes, intentional acts of break-ins and sabotage, and similar misconduct. COMPETITION--PRODUCTS, PRICING, AND MARKETING; INTELLECTUAL PROPERTY PROTECTION The market for nutritional supplements and personal care products is highly competitive at all stages of distribution. Most of our competitors in the business of development, manufacture, and marketing of vitamins and other nutritional supplements, including large pharmaceutical companies, have greater product offerings, longer operating histories in the markets and superior financial capabilities than us. We face intense competition with numerous companies in traditional retail channels, such as drug store chains, independent drug stores, supermarkets, and health and natural food stores. Although the practice of ordering products from home is becoming increasingly popular, consumers are more accustomed to purchasing products through these traditional sales channels. Although we now have trademark protection for a number of our product labels in the United States and in some foreign countries, and are currently pursuing registration of other trademarks, we do not have trademark registration for the name "Cell Tech." Moreover, we do not have patent protection for our products. Any unlawful or lawful use of our trade names or the ingredient Super Blue Green(R) Algae to manufacture similar products by competitors could have a material adverse effect on our business. RETENTION AND PRODUCTIVITY OF BUSINESS ASSOCIATES We rely almost exclusively on a network marketing system of independent Business Associates to sell our products. The success of our operations depends on our ability to attract new Business Associates and maintain business relationships with existing Business Associates. We compete with other network marketing companies for Business Associates and can experience high turnover among our Business Associates. Because some of these companies may have a longer history of operations and superior resources, their ability to appeal to a large base of Business Associates is greater. There can be no assurance that existing Business Associates will not terminate their services to us or that the number of Business Associates for our products will remain steady or increase. Moreover, our revenue is dependent on the ability of the Business Associates to attract and retain customers. A decrease in the productivity of existing Business Associates would adversely affect our financial conditions. We cannot 28 assure you that the Business Associates will maintain or increase their productivity. We also cannot accurately predict the future productivity of the Business Associates since their operations depend on their ability to sponsor, train, and motivate new Business Associates. REGULATION OF BUSINESS ASSOCIATES AND NETWORK MARKETING SYSTEM Since the Business Associates in the network marketing system are not our employees, they are not subject to the same degree of supervision and management as our employees. While certain contractual rules of conduct govern the services of the Business Associates to our business, it is difficult to monitor or control the conduct of the sales associates of our Business Associates marketing our products. Violations of our policies and rules by sales associates in dealing with customers could reflect negatively on our products and operations, and harm our business reputation. Furthermore, extensive federal, state, and local laws that regulate direct selling activities govern our network marketing system. We believe that our marketing practices have been and are consistent with such laws. However, we cannot provide assurance that any future changes to laws and regulations of any particular jurisdiction will not affect our operations. A court could also hold us civilly or criminally accountable based on vicarious liability because of the actions of independent Distributors. We are not aware of any such actions of independent distributors. DEPARTURE OF BUSINESS ASSOCIATES Certain Business Associates have severed their ties with us and are now competing against us. This will adversely affect us in that these Business Associates will no longer be generating revenues for us and furthermore, we can expect the departing Business Associates to divert business to our competitors. ALTERNATIVE CHANNELS OF DISTRIBUTION On May 18, 2001, we commenced, on a limited test basis, sales through infomercials and discontinued them on July 1, 2001 due to our limited financial resources. We designed this alternative distribution strategy to provide a complementary marketing method for our Business Associates. While we believe the infomercials will complement the sales efforts of our Business Associates, there can be no assurance that it will have its intended effect with our Business Associates and could create conflicts with our Business Associates that could result in the loss of many of our Business Associates, which in turn would mean a decline in our sales volume and would be detrimental to our business and result in losses from our operations. However, our tests results, and the responses that we have received from Business Associates, indicate that there are no conflicts with our present distribution methods. Moreover, such a program requires an investment in producing the infomercial videos. We have discontinued airing such infomercials until we have sufficient funds to continue broadcasting. MANAGEMENT OF OPERATIONS Limitations on our ability to attract additional key management personnel as we grow could be materially adverse to our business and financial conditions. Our location in Klamath Falls, Oregon is a limiting factor on our ability to attract key management personnel when we need it, particularly in the areas of marketing and information systems. For similar reasons, we may face difficulty in recruiting a permanent Chief Financial Officer. Our limited ability to attract such personnel could be materially adverse to our business and financial conditions. In addition, since we will need additional managers who have key strategic skills, new personnel challenges could confront us as our business expands. The future success of our business and financial conditions will depend significantly on our ability to add key management personnel in a timely and cost effective manner. LIEN ON CARPENTER'S AND KOLLMAN'S STOCK Our common stock owned by majority shareholders Daryl J. Kollman and Marta C. Carpenter is the subject of a tax lien filed by the Internal Revenue Service for income taxes due from them arising from taxable income attributed from NEC and NAC prior to our reorganization. The Internal Revenue Service has subordinated the lien in favor of the lender for the Term Loan. 29 DISPUTE BETWEEN PRINCIPAL SHAREHOLDERS Daryl J. Kollman and Marta C. Carpenter, shareholders who together own approximately 62% of our outstanding shares of common stock, divorced in 2002. Mr. Kollman and Ms. Carpenter jointly are lessors of substantially all of our facilities, including office space, processing and freezer storage space. Although one lease is in effect until 2005, we lease the rest of these facilities on a month-to-month or year-to-year basis. The disposition of these properties pursuant to the divorce could have an adverse or disruptive effect on our operations. Mr. Kollman is no longer actively involved in management and has been unwilling to execute personal guarantees on our behalf, as he has done in the past. On May 14, 2001, Ms. Carpenter petitioned the Circuit Court for the State of Oregon with a motion seeking, among other court orders, to enjoin Mr. Kollman from interfering with any future loan applications of Ms. Carpenter or us and a self executing judgment provision whereby the court would sign a loan application on behalf of Mr. Kollman. The court held that Mr. Kollman is to cease and desist from any such endeavors of interfering with our loan applications during the pendency of the dissolution proceedings and the order prohibits him from writing letters or communicating orally with any lending institutions unless requested to do so by the institution. The court also held that Mr. Kollman, if presented with loan documents to sign and if he objects to those documents in form or content, he must first raise it with the court. On January 29, 2002, the Court issued its written Order after the court heard the matter at trial on December 10, 11, and 12, 2001. The Court ruled that Marta Carpenter and Daryl Kollman were each entitled to an equal division of their respective stock ownership in our common stock, thus resulting in no change in our current ownership. The Court also ruled Mr. Kollman and Ms. Carpenter will equally divide their joint ownership in certain real property assets leased by us from them in each property and that they must sell the properties and improvements to pay the indebtedness to the Internal Revenue Service. They will equally share any remaining proceeds after the payment of Federal and State taxes applicable to the sale. We do not believe the Court Order issued on January 29, 2002, will have a material impact on our business since we believe that we can maintain our favorable leases in the event of the sale of the properties or provide for an adequate transition to other properties for the orderly continuation of our business. IMPACT OF GOVERNMENT REGULATION The formulation, manufacture, labeling, and advertising of our products are subject to extensive federal, state, and local governmental regulation. From time to time, we have received formal and informal inquiries from governmental regulators about our business and compliance with existing laws. On occasions, we have altered our product formulas and revised our labeling and promotion practices to comply with such laws. To enforce statutes and regulations, governmental agencies may initiate investigations, issue warning letters and cease and desist orders, impose corrective measures, seek injunctive relief or product seizure, impose civil penalties, or pursue criminal prosecution. Therefore, any future repeal, amendment, or narrow interpretations of current statutes or regulations that render our current practices noncompliant could substantially hinder our ability to maintain or increase our stream of distribution, or to introduce new products into the markets. We cannot predict the nature of any of such future laws, regulations, or interpretations, or what kind of impact they might have on our business. Future laws and regulations requiring the reformulation, discontinuance, or re-labeling of any of our products to comply with new standards could interrupt our product distribution and potentially harm our business. Even if future governmental actions or investigations in our business do not halt the manufacture of any of our products, they could create negative publicity, thereby harming our business. UNCERTAINTIES IN THE INTERNATIONAL MARKETS Our operations growth strategy involves expanding product sales into the international markets in Europe and Asia. We believe that there is a potential for growth internationally, but various factors, which include varying domestic regulations, responsiveness of government authorities, cultural differences and political uncertainties may limit our ability to enter effectively these markets. We cannot provide assurance that consumers in any of our potential new international markets will be receptive to our nutritional supplement and personal care products. We also cannot assure you that we will be able to reformulate our products or adjust our labeling and promotion practices to comply with foreign laws and regulations. 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material. Our primary market risks include fluctuations in interest rates. Our management believes that fluctuation in interest rates in the near term would not materially affect our consolidated operating results, financial position or cash flows as we have limited risks related to interest rate fluctuations. Marta C. Carpenter and Daryl J. Kollman have sole voting and investment power with respect to their shares. The Internal Revenue Service has a security interest in all of their shares pursuant to a Notice of Determination dated June 18, 1999, under the terms of which a trust holds the shares and the Internal Revenue Service will release them upon the payment of Ms. Carpenter and Mr. Kollman's federal income tax liabilities for various specified years. Ms. Carpenter and Mr. Kollman will sell their shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. Ms. Carpenter and Mr. Kollman retain all voting rights incident to their shares while the trust holds the shares. The Internal Revenue Service may seize Marta C. Carpenter and Daryl J. Kollman's shares from trust if Ms. Carpenter and Mr. Kollman fail to timely cure a default upon their commitments to the Internal Revenue Service under the Notice of Determination. The Internal Revenue Service would thereafter proceed to sell or judicially foreclose some or all of the shares for payment of Ms. Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our Consolidated Financial Statements together with the Report thereon of BDO Seidman, LLP, independent certified public accountants, and the Supplementary Data required by this Item 8, are included elsewhere in Item 15. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of our management, including our chief executive officer and chief accounting officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within the 90 day period prior to the filing date of this report. Based on this evaluation, our chief executive officer and chief accounting officer concluded that our disclosure controls and procedures were effective as of that date. (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers are as follows: NAME AGE POSITION Marta C. Carpenter 58 Chief Executive Officer, President, Chief Accounting Officer and Director Justin Straus 33 Chief Operating Officer and Director Victor M. Bond 52 Vice President, Marketing and Strategy Donald P. Hateley (1)(2) 46 Chairman of the Board Christopher J. Blaxland (1)(2) 62 Director Donald M. Anderson (1)(2) 55 Director ---------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. MARTA C. CARPENTER has served as our Chief Executive Officer, President and as a director since August 1999. She co-founded NEC in 1988 and NAC in 1990 and has served as their President and as a director of both companies since that time. Prior to joining us, Ms. Carpenter also researched, harvested and marketed algae to consumers. Ms. Carpenter has been a member of the Board of Directors of the Dan O'Brien Foundation since 1995 and has served as its Secretary since 1997. JUSTIN STRAUS has served as a director since August 1999 and has served as our Chief Operating Officer from August 2000 to the present. From January 1998 to August 2000, he served as our Vice President and Director of Sales and from October 1999 to August 2000, he served as our Vice President of Customer Fulfillment and fulfilled the function of Chief Operating Officer until his appointment to that position. He joined NAC in 1984 as a harvest site employee where he participated in the design, construction and preparation of the NAC harvest site. After holding a variety of positions in NAC, he served as the Vice President/Director of Sales from December 1994 to January 1998. Mr. Straus is the son of Ms. Carpenter. VICTOR M. BOND has served as our Vice President of Marketing and Strategy since January 2001. From October 1999 to December 2000, he was a consultant to us that performed the functions of the Office of Vice President, Marketing and Strategy. From 1991 to 1999, he was President of ChangeNet, which developed and implemented change management services and communications programs for corporations and his clients included Xerox, Otis Elevator, and Dura Pharmaceuticals. Prior to ChangeNet, he worked with and held executive positions with International Business Machines Corporation including Director of Marketing and Director of Strategy. DONALD P. HATELEY has served as our Chairman of the Board since August 1999. From 1994 to the present, he has been the Managing Director of InterCap Partners, a boutique investment banking firm located in Los Angeles, California that specializes in corporate finance, mergers and acquisitions and financial advisory matters. From 1996 to the present, he has been an attorney with Hateley & Hampton, a Los Angeles-based law firm that specializes in corporate, tax, real estate and securities law. Mr. Hateley is also a California licensed certified public accountant and real estate broker. 32 DR. CHRISTOPHER J. BLAXLAND has served as a director since September 1998. He was Chief Executive Officer and a director of HumaScan from September 1 to December 22, 1998; from December 22, 1998 to August 6, 1999, he was Chief Executive Officer and director in a consultant capacity of HumaScan until the Reorganization. Dr. Blaxland has worked in the biopharmaceutical industry for over 30 years and since 2002 has been one of the Principals of Hunter Partners LLC, a consultancy advising early stage biopharmaceutical and device companies. DR. DONALD M. ANDERSON has served as a director since August 1999. He has served as a consultant to NAC on scientific matters since 1993, and became a director of NAC in July 1999. He is a Senior Scientist at the Woods Hole Oceanographic Institution in Massachusetts, has served in that capacity since 1991 and has been on the scientific staff since 1978, after receiving his Ph.D. from the Massachusetts Institute of Technology. Dr. Anderson is a recognized expert on toxic and harmful algal blooms and has been the director of the U.S. National Office on Marine Biotoxins and Harmful Algal Blooms since 1993. BOARD OF DIRECTORS MEETINGS AND COMMITTEES Our Board of Directors held nine meetings in 2003, ten meetings in 2002 and four meetings in the year 2001. We maintain a standing Audit Committee and Compensation Committee, but do not maintain a standing nominating committee. Donald Hateley, Chris Blaxland and Donald Anderson serve on the Audit Committee and on the Compensation Committee. There are no family relationships among our directors or executive officers, except that Ms. Carpenter is the mother of Mr. Straus. Our Audit Committee conducted six meetings during 2003, four meetings in 2002, and no meetings in 2001. The committee reviews the scope of the independent annual audit, the independent certified public accountants' letter to the Board of Directors concerning the effectiveness of our internal financial and accounting controls and the Board of Directors' response to that letter, if deemed necessary. Our Compensation Committee oversees our executive compensation program and makes recommendations to our full Board of Directors regarding changes in compensation. It also administers our stock option plans. The committee held three meetings in 2003 and one meeting during 2001. It did not hold any compensation committee meetings in 2002. AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that at least one person serving on the audit committee is an "audit committee financial expert" as defined under Item 401(h) of Regulation S-K. Don Hateley satisfies the "audit committee financial expert" criteria established by the SEC and is independent as defined under Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE To our knowledge, based solely on a review of Section 16(a) forms furnished to us, we believe that our directors, executive officers and ten percent beneficial owners complied with all Section 16(a) reporting requirements during 2003 except for Daryl Kollman who has not filed his initial Form 3. CODE OF ETHICS We have adopted a code of business conduct and ethics within the meaning of Item 406(b) of Regulation S-K. This code of ethics applies to our directors, executive officers and employees, including our CEO and Controller. A copy of our code of ethics is available to the public free of charge by sending a written request to: Corporate Controller, Cell Tech International, 565 Century Court, Klamath Falls, Oregon 97601. 33 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth, for the year ended December 31, 2003, compensation paid by us to (a) each person serving as our Chief Executive Officer during 2003 and (b) each of our other most highly compensated executive officers (the "named executive officers") during 2003 who was serving as an executive officer on December 31, 2003.

~~Securities~~SUMMARY ~~Other~~COMPENSATION ~~Annual~~TABLE ~~Underlying~~LONG ~~Name~~TERM ~~and~~COMPENSATION ~~Principal Location Year Salary ($) Bonus ($) Compensation ($) Options (#)~~ --------------------------- ---- ---------- ------~~---~~ ~~----------------~~ANNUAL ~~-----------~~COMPENSATION ~~Marta~~AWARDS ~~Carpenter~~PAYOUTS ~~Kollman 2000 290,000 0 3,000 0 President and Chief Executive Officer 1999 350,000 0 3,000 (2) 0 (Beginning August 1999) 1998 NA NA N/A N/A 1997 N/A N/A N/A N/A~~ --------------------------------------------------------------------------------------~~--------------------~~ ~~Christopher~~(A) J.(B) ~~Blaxland~~(C) ~~2000~~(D) 0(E) 0(F) 0(G) 0(H) ~~President~~(I) ~~and~~OTHER ~~Chief~~NAME ~~Executive~~ANNUAL ~~Officer~~RESTRICTED ~~1999~~SECURITIES 0ALL 0OTHER 0AND 0COMPEN- ~~(September~~STOCK ~~1998~~UNDERLYING ~~through~~LTIP ~~July~~COMPEN- ~~1999~~PRINCIPAL SATION AWARD(S) ~~1998~~OPTIONS/ ~~137,019~~PAYOUTS ~~6,000~~SATION POSITION YEAR SALARY (3$) ~~13,822~~BONUS ~~1997~~($) ~~N/A~~($) ~~N/A~~($) ~~N/A~~SARS ~~N/A~~(#) ($) ($) ---------------------------------------------------------------------------------------------------------- ~~Elizabeth E. Tallett 2000 0 0 0 0 President and Chief Executive Officer 1999 0 0 0 0 (May 1998 through August 1998) 1998 35,769 18,000 (3) 5,989~~ -------------------------~~---------------------------------------------------------------------------------~~ ~~Donald~~Marta BC. ~~Brounstein~~Carpenter ~~2000~~2003 0290,000 0 0 0 ~~President and Chief Executive Officer 1999~~ 0 0 0 0CHIEF ~~(Through~~EXECUTIVE ~~May~~2002 ~~1998) 1998 91~~290,~~915~~000 0 (3~~) 0 1997 152~~,~~574 14,980~~ 000(31) 0 ~~---------------------------------------------------------------------------------------------------------- Kenneth S. Hollander 2000~~ 0 0 0 0oFFICER ~~Chief~~& ~~Financial~~PRESIDENT ~~Officer~~2001 ~~1999~~290,000 0 ~~0 0 0 (June 1996 through December 1999) 1998 144~~3,~~577 18,375~~ 000(31) ~~921~~0 ~~1997~~0 ~~94,414~~0 ~~17,325 (3)~~ 0 ~~----------------------------------------------------------------------------------------------------------~~ Victor M. Bond ~~2000~~2003 180,000 0 0 0 ~~Vice~~0 ~~President,~~0 ~~Marketing~~0 &VICE ~~Strategy~~PRESIDENT ~~1999~~OF 452002 180,000 0 0 0 ~~(Beginning~~0 ~~October~~0 ~~1999)~~0 ~~1998~~MARKETING ~~N/A~~& ~~N/A~~STRATEGY ~~N/A~~2001 ~~N/A~~180,000 ~~1997~~0 ~~N/A~~0 ~~N/A~~0 ~~N/A~~0 ~~N/A~~0 ~~----------------------------------------------------------------------------------------------------------~~0 Justin Straus ~~2000~~2003 ~~110~~114,~~000~~529 0 0 0 ~~Vice~~0 ~~President,~~0 ~~Customer~~0 ~~Fulfillment~~CHIEF ~~1999~~OPERATING ~~110~~2002 100,000 0 0 0 ~~1998 110,000~~ 0 0 0 ~~1997~~OFFICER 852001 100,000 0 0 0 0 0 0

---------------- (1) Estimated dollar value of pickup truck owned by us and used by Ms. Carpenter. 34 The following table summarizes the number of shares and the terms of stock options we granted to the named executive officers in our 2003 fiscal year.

~~Individual Grants ---------------------------------- Potential Realizable Number of % of Total Value at Assumed Securities Options~~OPTIONS/~~SARs~~SARS ~~Annual~~GRANTS ~~Rates~~DURING ofYEAR ~~Stock~~ENDED ~~Underlying~~DECEMBER ~~Granted~~31, to2003 ~~Exercise~~POTENTIAL orREALIZABLE ~~Price~~VALUE ~~Appreciation~~AT ~~Options/SARs~~ASSUMED ~~Employees~~ANNUAL inRATES ~~Base~~OF ~~Price~~STOCK ~~for~~PRICE ~~Option~~APPRECIATION ~~Term~~INDIVIDUAL ~~Name~~GRANTS ~~Year~~FOR ~~Granted~~OPTION TERM(#4) ~~Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)~~ ---- ---- ------------ ------------ ----------- --------- ------ ------ ---------- ~~Marta~~NUMBER ~~Carpenter~~OF ~~Kollman~~% ~~2000~~OF 0SECURITIES 0TOTAL ~~N/A~~UNDERLYING NOPTIONS/A NOPTIONS/A ~~N/A~~SARS ~~1999~~EXERCISE 0SARS 0GRANTED ~~N/A~~TO ~~N/A~~OR ~~N/A~~BASE ~~N/A~~GRANTED ~~1998~~EMPLOYEES 0PRICE 0EXPIRATION ~~N/A~~NAME ~~N/A~~(#)(1)(2) ~~N/A~~IN NFISCALYEAR ($/ASH)(3) ~~1997~~DATE 05% 0($) 010% ~~N/A~~($) ~~N/A N/A~~ ------------------------------------------ --------------- -------------- ----------- -------------- ------- --------~~--------------~~ ~~Christopher~~Marta JC. ~~Blaxland 2000 15,000 33~~Carpenter.~~3 2~~.~~50 2/14/10 23,583 59,765 1999 2,764 6~~.~~6 0~~.~~87 3/3/04 664 1,468 1998 13,822 44~~.~~3 9~~.~~83 (2) N/A N/A 1997 0 0 0 0 0 0 ----------------------------------------------------------------------------------------------------------------------------- Elizabeth E~~. ~~Tallett 2000 0 0 N/A N/A N/A N/A 1999 9,215 22~~.~~0 0~~.~~87 3/3/04 2,215 4,894 1998 1,382 4~~.~~0 98~~.~~68 3/13/08 85,750 217,307 4,607 13~~.~~3 35~~.~~59 5/19/08 103,139 261,374 1997 0 0 0 N/A N/A N/A ----------------------------------------------------------------------------------------------------------------------------- Donald B~~............ ~~Brounstein 2000~~ 0 0 N/A N/A N/A N/A ~~1999~~Justin 0 0 N/A N/A N/A N/A 1998 0 0 N/A N/A N/A N/A 1997 0 0 0 N/A N/A N/A ----------------------------------------------------------------------------------------------------------------------------- Kenneth SStraus.............................. ~~Hollander 2000~~ 0 0 N/A N/A N/A N/A ~~1999~~Victor ~~2,764 6~~Bond.~~6 0~~.~~81 3/3/04 664 1,467 1998 921 3~~.~~0 4~~.~~77 (2) N/A N/A 1997 0 0 0 N/A N/A N/A ----------------------------------------------------------------------------------------------------------------------------- Victor M~~............................ ~~Bond 2000~~ 0 0 N/A N/A N/A N/A 1999 0 0 0 N/A N/A N/A 1998 0 0 0 N/A N/A N/A 1997 0 0 0 N/A N/A N/A ----------------------------------------------------------------------------------------------------------------------------- Justin Straus 2000 0 0 0 N/A N/A N/A 1999 0 0 0 N/A N/A N/A

35 The following table sets forth information concerning the number and value of unexercised options held by each of the named executive officers as of December 31, 2003. None of the named executive officers exercised options in 2003. AGGREGATE YEAR END OPTION VALUES (DECEMBER 31, 2003)

~~Number~~NUMBER ofOF ~~securities~~SECURITIES ~~underlying~~VALUE ~~Value~~OF ofUNEXERCISED ~~unexercised~~UNDERLYING inUNEXERCISED IN-~~the~~THE-~~money~~MONEY ~~unexercised~~OPTIONS ~~options~~AT atOPTIONS ~~fiscal~~AT ~~year-end~~12/31/03 ~~(#)~~12/31/02 ~~options-at-fiscal year-end~~ ($) (1) -------------------------------------~~-----~~ ---------------------------------~~---~~ ~~Name~~SHARES ~~Year~~ACQUIRED ~~Exercisable~~ON ~~Unexercisable~~EXERCISE ~~Exercisable~~VALUE ~~Unexercisable~~NAME ---- ---- ----------- ------------- ----------- ------------- Marta Carpenter Kollman 2000 0 0 0 0 1999 0 0 N/A N/A 1998 0 0 N/A N/A 1997 0 0 N/A N/A ------------------------------------------------------------------------------------------------------------------ Christopher J. Blaxland 2000 17,764 0 0 0 1999 2,764 0 0 0 1998 5,528 (2#) ~~11,057~~REALIZED ~~(3)~~UNEXERCISABLE 0EXERCISABLE 0UNEXERCISABLE ~~1997~~EXERCISABLE ~~0 0 N/A N/A~~ ---- ------------ -------- ------------- ----------- ------------- -----------~~------------------------------------------~~ ~~Elizabeth~~Marta EC. ~~Tallett 2000 9,215 0 0 0 1999 9,215 0 0 0 1998 5,989 0 0 0 1997 0 0 N/A N/A ------------------------------------------------------------------------------------------------------------------ Donald B~~Carpenter............... ~~Brounstein 2000 3,455~~ 0 0 0 ~~1999 3,455~~ 0 0 0 ~~1998~~Justin ~~3,455 0 0 0 1997 3,409 0 $118,875 N/A ------------------------------------------------------------------------------------------------------------------ Kenneth S~~Straus.................... ~~Hollander 2000 3,801~~ 0 0 0 ~~1999 3,801~~ 0 0 0 ~~1998 4,860 (4) 1,244 0 0 1997 2,511 2,672 $75,663 $72,500 ------------------------------------------------------------------------------------------------------------------~~ Victor MBond...................... ~~Bond 2000~~ 0 0 0 0 ~~1999~~ 0 0 N/A N/A 1998 0 0 N/A N/A 1997 0 0 N/A N/A ------------------------------------------------------------------------------------------------------------------ Justin Straus 2000 0 0 0 0 1999 0 0 N/A N/A 1998 0 0 N/A N/A 1997 0 0 N/A N/A

(1) Represents the difference between the aggregate market value at December 31, 2003 and 2002, as applicable, of our common stock (based on a last sale price of $0.20 and $0.20 on each such date, respectively) and the options' aggregrate exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Donald P. Hateley, Chairman of the Board of Directors, Chris Blaxland, a director and Dr. Donald M. Anderson, a director, served on the Compensation Committee in 2003 and 2002. Marta C. Carpenter, our Chief Executive Officer, President and a director, Chris Blaxland, a director and Dr. Donald M. Anderson, a director, served on the Compensation Committee in 2001. None of the compensation committee members who served during 2003 were serving as officers of the company during that time. The only member of the compensation committee that has previously served as an officer is Chris Blaxland. He served as an officer previous to August 6, 1999. INTRODUCTION TO REPORT OF COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors (the "Committee") is composed of Messrs. Blaxland, Anderson and Hateley. The Committee is responsible for the establishment and oversight of our executive compensation programs. The following report of the Committee discusses generally our executive compensation objectives and policies and their relationship to our performance in 2003. EXECUTIVE COMPENSATION PHILOSOPHY AND OBJECTIVES We designed our executive compensation program to attract, retain and motivate highly effective executives and to reward sustained corporate and individual performance with an appropriate base annual salary and incentive compensation. We seek to increase management ownership of our common stock and to link executive compensation with stockholder value, achievement of business objectives and corporate profitability. Our compensation philosophy is to compensate our executive officers at market-competitive levels for achieving planned performance. Market comparisons include general industry norms, nutritional supplements manufacturers 36 companies, and a selected group of direct selling companies that are approximately the same size as us. We place more emphasis on general industry rather than the nutritional supplement industry norms. COMPENSATION PROGRAM COMPONENTS Consistent with our executive compensation objectives, our compensation for our senior management, including the Chief Executive Officer, consists of three components: an annual base salary, annual cash incentive awards and long-term incentive awards. During the year ended December 31, 2003, our compensation of our senior executives consisted of annual base salary. We did not pay any cash incentive awards in 2003. ANNUAL BASE SALARY. Base salaries for executive officers are determined with reference to a salary range for each position. We determine salary ranges by evaluating a particular employee's position and comparing it with what were believe to be representative prevailing norms for similar positions in similarly sized companies. Within this salary range, an executive's initial salary level is determined largely through Committee judgment, based on the experience of our members. Salaries were set at a level to attract, retain and motivate superior executives. LONG-TERM INCENTIVE AWARDS. We will provide Long-term incentive compensation by the grant of options to purchase shares of our common stock under the 2000 Plan, if amended, or a successor or additional stock option plan that our Board of Directors will approve. In considering the awards, the Committee takes into account such factors as prevailing norms for the ratio of options outstanding to total shares outstanding, the effect on maximizing long-term stockholder value, and vesting and expiration dates of each executive's outstanding options. THE COMPENSATION COMMITTEE Donald P. Hateley Chris J.M. Blaxland Donald M. Anderson COMPENSATION OF DIRECTORS We do not separately compensate members of our Board of Directors who are our officers for serving on the Board of Directors. We pay directors who are not our employees an annual retainer of $40,000 ($30,000 if the director does not attend at least 3/4 of the Board meetings held), an additional $10,000 to the Chairman of the Board, $5,000 for each Board committee on which the director serves, a meeting fee of $1,500 ($500 if attendance is by telephone), and reimbursement of reasonable expenses. In addition, in February 2000, we adopted the 2000 Stock Incentive Plan that provides that each non-employee director will receive on the date of each annual meeting of our stockholders options to purchase 10,000 shares of our common stock under terms more fully described below. Upon the Board's adoption of our 2000 Stock Incentive Plan, again in 2002 for our fiscal year ended December 31, 2001, and under its terms, we granted to each of Donald Hateley, Christopher Blaxland and Donald Anderson a 10-year option to purchase 15,000 shares of our common stock, in each of 2000, 2001, 2002 and 2003, at an exercise price as provided by our Board of Directors which is equal to the fair market value of our common stock on the date on which the options are granted. These options are fully exercisable as of the date of their grant. 37 STOCK OPTIONS 2000 STOCK INCENTIVE PLAN. The Board of Directors adopted our 2000 Stock Incentive Plan in February 2000 for the purpose of securing for us and our shareholders the benefits arising from the ownership of restricted shares of our common stock, stock appreciation rights, and stock options by directors who are not employees (Donald Hateley, Christopher Blaxland and Donald Anderson are our current non-employee directors), officers, other key employees and consultants to us and our subsidiaries who are expected to contribute to our future growth and success. We have not granted restricted shares or stock appreciation rights under the plan. As stated above, we have granted options under the plan for an aggregate of 180,000 shares to our eligible non-employee directors. We may not grant awards under the plan after February 2010. The plan is subject to shareholders approval. The plan provides for the issuance of up to 700,000 shares of our common stock. Under the plan, we may grant awards to key employees and will annually grant an option to purchase 10,000 shares of our common stock to our eligible non-employee directors, as described below. The Board of Directors administers the plan, which, subject to the terms of the plan, determines the key employees who will receive awards and the terms of the awards granted. Under the plan, provided that a sufficient number of shares remain available for grant, non-employee directors serving on the Board of Directors immediately following each annual meeting of shareholders (including those elected at the meeting), are automatically granted a 10-year option to purchase 10,000 shares of our common stock at an exercise price equal to the fair market of the common stock on the annual meeting date. These options become exercisable with respect to 1/3 of the shares underlying the option on the date of grant, 2/3 of such shares one year later and all of such shares two years later, in each case assuming the recipient's continuous service as a director during that time. 1996 STOCK INCENTIVE PLAN. HumaScan adopted a 1996 Stock Incentive Plan in June 1996. The provisions of the 1996 plan were substantially similar to the provisions of our 2000 Stock Incentive Plan except that the 1996 plan provides for the issuance of up to 64,504 shares of our common stock. We will make no further awards under the 1996 plan, but options to purchase 25,802 shares remain outstanding and exercisable under the plan at exercise prices varying between $3.05 and $142.49 per share. OTHER OPTIONS. We have issued options outside of our stock option plans to certain officers, directors, employees and consultants. We granted options to purchase (a) 13,131 shares in February 1996 with a five-year term and an exercise price of $57.84 per share, (b) 1,382 shares in March 1998 with a ten-year term and an exercise price of $98.69 per share, and (c) 4,607 shares to a consultant with a 5-year term and an exercise price of $14.98. The options for 4,607 shares issued to a consultant expired unexercised during 2003. Options for 4,216 shares that we granted in prior years have been exercised. All of these options, except for the options exercised, remain outstanding and are fully exercisable. In September 1996, we also granted options to purchase an aggregate of 691 shares with a 10-year term and an exercise price of $65.11 to five former non-employee directors. These options are outstanding and exercisable. PERFORMANCE MEASUREMENT COMPARISON* The rules and regulations of the SEC require the presentation of a line graph since the common stock has been registered under Section 12 of the Exchange Act comparing the yearly percentage change in our cumulative stockholder return to (i) the cumulative total return of a broad market equity index and (ii) the cumulative return of either a published industry index or a self-constructed group of peer issuers that we believe is relevant to a comparative understanding of its performance. We have used the NASDAQ Market (U.S.) and a peer group. The publicly traded companies in our peer group are Mannatech, Inc., Market America, Inc., Usana Health Sciences, Inc., Nature's Sunshine Products, Inc., Reliv International, Inc. and Nu Skin Enterprises Inc. 38 [COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN GRAPH APPEARS HERE] * The material in this graph is not "solicitation material," is not deemed filed with the SEC, and is not incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing. Research Data Group, Inc. has provided the information in the graph.

~~Cumulative~~12/31/98 ~~Total~~12/31/99 ~~Return~~12/31/00 12/31/01 12/31/02 12/31/03 -------- -------- -------- -------- -------- --------~~--------------~~ ~~8/12/1996~~Cell ~~12/96~~Tech ~~12/97~~International ~~12/98~~Incorporated.... ~~12/99 12/00 CELL TECH INTERNATIONAL INCORPORATED~~ 100.00 93202.7571 ~~141~~33.6717 151.0560 2233.9217 2529.2648 NASDAQ ~~STOCK~~Stock ~~MARKET~~Market (U.S.) ............. 100.00 ~~113~~190.1462 ~~138~~127.5767 ~~195~~70.3742 ~~363~~64.0884 ~~218~~91.3716 ~~PEER~~Peer ~~GROUP~~Group ............................. 100.00 7645.0413 7425.7919 6142.2178 3257.3269 18123.2827

---------- 39 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding ownership of our capital stock as of February 29, 2004, by (i) each person known to us to beneficially own more than 5% of the shares of our outstanding common stock, (ii) each of our directors, (iii) each of the named executive officers, and (iv) all of our directors and executive officers as a group.

~~Number~~PERCENT ofOF ~~Shares~~NUNBER ~~Percent~~SHARES ofOF ~~Beneficially~~BENEFICIALLY ~~Shares~~SHARES ~~Name~~NAME ~~and~~AND ~~Address~~ADDRESS ofOF ~~Beneficial~~BENEFICIAL ~~Owner~~OWNER ~~Owned~~ OWNED(1) ~~Outstanding~~OUTSTANDING ------------------------------------ --------- ----------- Marta C. Carpenter ~~Kollman~~23.3% 4,341,498(2) 565 Century Court Klamath Falls, Oregon 97601 ~~4,341,498(2) 40.8~~ Daryl J. Kollman ~~5248~~23.3% ~~Timber~~4,341,498(3) ~~Branch~~5534 ~~Way~~South ~~San~~Sixth ~~Diego~~Street, CAPMB ~~92130~~#225 4Klamath Falls,~~341,498(3)~~ ~~40.8~~Oregon 97603 Victor M. Bond * 0 565 Century Court Klamath Falls, Oregon 97601 0 * Donald P. Hateley 1.9% 360,000(4) 1800 Century Park East Los Angeles, California 90067 ~~315,000(4) 2.8~~ Dr. Christopher J. Blaxland * 62,764(5) 509 County Line Road Radnor, Pennsylvania 19087 ~~17,764(5)~~Dr. * Donald M. Anderson ~~Biology~~* ~~Department Mail Stop 32~~62,949(6) ~~Redfield~~6 ~~332~~Arrowhead ~~Woods~~Lane ~~Hole~~Marion, Massachusetts ~~02543-1049~~02738 17,949(6) * Justin Straus * 0 565 Century Court Klamath Falls, Oregon 97601 0 * Zubair Kazi ~~3671~~48.3% ~~Sunswept Drive 4~~8,~~837~~982,~~691~~174(7) ~~33.8~~3671 Sunswept Drive Studio City, California 91604 All executive officers and directors as a group (6 persons) 25.9% 4,~~018~~827,~~524~~211(8) ~~84.4~~

----------------------- * Less than one percent. (1) A person is considered to "beneficially own" any shares (a) over which such person exercises sole or shared voting or investment power, or (b) of which such person has the right to acquire ownership at any time within 60 days (e.g., through exercise of stock options). Except as otherwise indicated, voting and investment power relating to the shares referenced in the table above is exercised solely by the beneficial owner. 40 (2) The Internal Revenue Service has a security interest in all of Marta C. Carpenter's shares pursuant to a Notice of Determination dated June 18, 1999 under the terms of which the shares are held in trust and will be released upon the payment of Ms. Carpenter and Daryl J. Kollman's federal income tax liabilities for various specified years. Ms. Carpenter will sell her shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. While the trust holds the shares Ms. Carpenter retains all voting rights incident to her shares. The Internal Revenue Service may seize Ms. Carpenter's shares from trust if Ms. Carpenter and Daryl J. Kollman fail to timely cure a default upon their commitments to the Internal Revenue Service under the Notice of Determination. The Internal Revenue Service would thereafter proceed to sell or judicially foreclose some or all of the shares for payment of Ms. Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law. (3) The Internal Revenue Service has a security interest in all of Daryl J. Kollman's shares pursuant to a Notice of Determination dated June 18, 1999 under the terms of which the trust holds the shares and, upon Marta C. Carpenter and Mr. Kollman's payment of their federal income tax liabilities for various specified years, will be released. Mr. Kollman will sell his shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. Mr. Kollman retains all voting rights incident to his shares while the trust holds the shares. The Internal Revenue Service may seize Mr. Kollman's shares from trust if Ms. Carpenter and Mr. Kollman fail to timely cure a default upon their commitments to the Internal Revenue Service under the Notice of Determination. The Internal Revenue Service would thereafter proceed to sell or judicially foreclose some or all of the shares for payment of Ms. Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law. (4) Represents warrants to purchase 300,000 shares of common stock held by Hateley & Hampton, a Professional Law Corporation of which Donald P. Hateley is a President, co-founder and a shareholder and 60,000 shares Mr. Hateley has the right to acquire pursuant to options exercisable within 60 days of February 24, 2004. (5) Represents 62,764 shares Dr. Blaxland has the right to acquire pursuant to options exercisable within 60 days of February 24, 2004. (6) Includes 60,000 shares Mr. Anderson has the right to acquire pursuant to options exercisable within 60 days of February 24, 2004. (7) Includes 4,491,087 shares already issued to Kazi and and 4,491,087 issuable to Mr. Kazi upon the exercise of his warrants. (8) Includes 360,000 shares issuable upon the exercise of warrants and 62,764 shares issuable upon the exercise of options within 60 days of February 24, 2004. See footnotes 4 through 6 above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. We lease approximately 100,000 square feet of office, processing, freezer and storage space directly from Marta C. Carpenter and Daryl Kollman, two of our principal shareholders. Most of these leases are year-to-year, although we do rent some space on a month-to-month basis and one lease will expire in 2005. We believe that the space we lease from Ms. Carpenter and Mr. Kollman and the rent we pay to them is at or below fair market values. Rental expense accrued for rent to Ms. Carpenter and Mr. Kollman in 2003 was $627,280. We owe Ms. Carpenter and Mr. Kollman $746,747 in accrued rental payments reflected on our balance sheet as a related party payable as of December 31, 2003. In 2003, we also received $68,617 in management fees and other income from Klamath Cold Storage, Inc., a corporation owned jointly by Ms. Carpenter and Mr. Kollman. 41 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table sets forth fees for services BDO Seidman, LLP provided during fiscal years 2003 and 2002: 2003 2002 ------------- ------------- Audit Fees(1) 121,458 141,920 Audit-related fees(2) - - Tax fees(3) - - All other fees(4) - - ------------- ------------- Total $ 121,458 $ 141,920 ============= ============= ---------------- (1) Represents fees for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements. (2) During 2003 and 2002, we did not incur fees for assurance services related to the audit of our financial statements and for services in connection with audits of our benefit plans, which services would be reported in this category. (3) Represents fees for services and advice provided in connection with preparation of our federal and state tax returns. (4) During 2003 and 2002, we did not incur any other fees related to other services provided. Our Audit Committee has determined that the provision of non-audit services by BDO Seidman, LLP is compatible with maintaining BDO Seidman, LLP's independence, and none of such services were pre-approved pursuant to the DE MINIMIS exception provided in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934. Generally, the Audit Committee approves in advance audit and non-audit services to be provided by BDO Seidman, LLP. In other cases, in accordance with Rule 2-01(c)(7) of Securities and Exchange Commission Regulation S-X, the Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee for matters which arise or otherwise require approval between regularly scheduled meetings of the Audit Committee, provided that the Chairman report such approvals to the Audit Committee at the next regularly scheduled meeting of the Audit Committee. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K (a)(1) and (2) Financial Statements. We have listed the Financial Statements and Schedules in the Index to Financial Statements on page F-1 of this Form 10-K. (a)(3) Exhibits: EXHIBIT NUMBER DESCRIPTION (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession (2.1) Agreement and Plan of Reorganization, dated July 16, 1999, among the Company, Daryl J. Kollman and Marta C. Kollman (filed as Exhibit 2.1 without schedules and exhibits to the Current Report on Form 8-K on August 2, 1999 and incorporated by reference) 42 (3) Articles of Incorporation and Bylaws (3.1) Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (3.2) Certificate of Amendment of Certificate of Incorporation (filed as Exhibit 3.1(a) to the Current Report on Form 8-K on November 19, 1999 and incorporated by reference) (3.3) Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (filed as Exhibit 3.1 to the Current Report on Form 8-K on August 2, 1999 and incorporated by reference) (3.4) Amended and Restated Bylaws (filed as Exhibit 3.2 to the Registration Form for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (4) Instruments Defining the Rights of Security Holders (4.1) Loan and Security Agreement, dated June 21, 1999, by and among The New Earth Company, The New Algae Company and Coast Business Credit (filed as Exhibit 4.1 to the Current Report on Form 8-K on November 19, 1999 and incorporated by reference) (4.2) Continuing Guaranty, dated August 6, 1999 (filed as Exhibit 4.2 to the Current Report on Form 8-K on November 19, 1999 and incorporated by reference) (4.3) Form of Common Stock Certificate (filed as Exhibit 4.1 to the Amendment to Registration Statement for Small Business on Form SB-2/A on July 26, 1996 and incorporated by reference) (4.4) Form of Series A Preferred Stock Certificate (filed as Exhibit 4.2 to the Amendment to Registration Statement for Small Business on Form SB-2/A on July 26, 1996 and incorporated by reference) (4.5) Form of Warrant to Purchase Shares of Common Stock to be issued to Andromeda Enterprises, Inc. or its designees, Hateley & Hampton or its designees and Wharton Capital Partners, Ltd. (filed as Exhibit 4.1 to the Current Report on Form 8-K on August 2, 1999 and incorporated by reference) (4.6) Nonqualified Stock Option Agreement between the Company and Physicians World Communications Group (filed as Exhibit 4.9 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (4.7) Warrant to Purchase Shares of Common Stock issued to Scantek Medical, Inc. as of May 15, 1998 (filed as Exhibit 4.7 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (4.8) Warrant to Purchase Shares of Common Stock issued to Zigmed, Inc. as of May 15, 1998 (filed as Exhibit 4.8 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (4.9) Representative's Warrant Agreement between the Company and Keane Securities Co., including Form of Warrant Certificate (filed as Exhibit 4.3 to the Amendment to Registration Statement for Small Business on Form SB-2/A on July 26, 1996 and incorporated by reference) (4.10) Form of Warrant Certificate for March Bridge Warrants (filed as Exhibit 4.4 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) 43 (4.11) Nonqualified Stock Option Agreements with Certain Officers (Donald Brounstein, James Whidden, Whidden & Associates, Inc., Amy Lewis, and Everett Lautin) (filed as Exhibit 4.5 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (4.12) Form of Private Warrants issued in connection with May Private Placement (filed as Exhibit 4.6 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (10) Material Contracts (10.1) General Release, dated January 25, 2000 between the Company and Donald Brounstein (filed as Exhibit 10.1 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.2) Settlement Agreement, dated May 15, 1998, between the Company and Scantek Medical, Inc. (filed as Exhibit 10.16 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 and incorporated by reference) (10.3) Settlement Agreement, dated May 15, 1998, between the Company and Zigmed, Inc. (filed as Exhibit 10.17 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 and incorporated by reference) (10.4) Employment Agreement between the Company and Dr. Chris J. M. Blaxland, dated as of September 1, 1998 (filed as Exhibit 10.18 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (10.5) Employment Agreement between the Company and Donald Brounstein, dated January 1, 1996 (filed as Exhibit 10.8 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (10.6) Employment Agreement between the Company and James J. Whidden (filed as Exhibit 10.9 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (10.7) Employment Agreement between the Company and Kenneth S. Hollander, dated June 3, 1996 (filed as Exhibit 10.10 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (10.8) Consulting Agreement, dated March 1, 1996, between the Company and Don Anderson (filed as Exhibit 10.8 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.9) Exclusive Supply and Distribution Agreement between the Company and Physician Sales & Services, Inc., as amended (filed as Exhibit 10.1 to the Amendment to Registration Statement for Small Business on Form SB-2/A on July 26, 1996 and incorporated by reference) (10.10) License Agreement, dated October 20, 1995, between the Company and Scantek Medical, Inc., as amended (filed as Exhibit 10.2 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (10.11) Construction Contract between the Company and Zigmed, Inc. (filed as Exhibit 10.3 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) 44 (10.12) Lease, dated June 11, 1996, between the Company and the Moen Organization, Inc. (filed as Exhibit 10.14 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (10.13) Lease Termination Agreement, dated February 2, 1999, between the Company and the Moen Organization, Inc. (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.14) Intentionally omitted (10.15) Commercial Lease Agreement, dated July 1, 1995, between and among The New Earth Company, Daryl Kollman and Marta Kollman (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.16) Commercial Lease Agreement, dated August 15, 1995, between and among The New Algae Company, Daryl Kollman and Marta Kollman (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.17) Ground Lease Agreement, dated December 9, 1995, between and among The New Earth Company, Emil Nobel and Mary Ann Nobel (filed as Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.18) Commercial Lease Agreement, dated May 1, 1996, between and among The New Algae Company, Daryl Kollman and Marta Kollman (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.19) Commercial Lease Agreement, dated September 1, 1996, between Klamath Cold Storage, Inc. and The New Earth Company, including Sublease between The New Earth Company and The New Algae Company (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (10.20) Voting and Stockholders' Rights Agreement, dated May 15, 1996 (filed as Exhibit 10.4 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.21) Agreement to Issue Warrants, dated March 19, 1996, between the Company and Udi Toledano (filed as Exhibit 10.5 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.22) Agreement to Issue Warrants, dated March 19, 1996, between the Company and Herbert V. Turk (filed as Exhibit 10.6 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.23) Non-Negotiable Warrant Certificate between the Company and Physician Sales & Service, Inc. (filed as Exhibit 10.7 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.24) HumaScan, Inc. Non-Employee Director Stock Option Plan (filed as Exhibit 10.12 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.25) Form of Indemnification Agreement between the Company and its Executive Officers and Directors (filed as Exhibit 10.15 to the Annual Report for Small Business on Form 10KSB40 for the fiscal year ended December 31, 1997 and by this reference incorporated herein) 45 (10.26) The Company's 2000 Stock Incentive Plan (filed as Exhibit 10.26 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (16) Letter from KPMG, dated November 2, 1999, agreeing with the statements contained in the Company's Form 8-K, dated November 2, 1999 (filed as Exhibit 16 to the Current Report on Form 8-K on November 22, 1999 and by this reference incorporated herein) (21) List of the Company's Subsidiaries (filed as Exhibit 21 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (31) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.1) Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Cell Tech International Incorporated* (31.2) Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Accounting Officer of Cell Tech International Incorporated* (32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.1) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Cell Tech International Incorporated* (32.2) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Accounting Officer of Cell Tech International Incorporated* (99) Additional Exhibits (99.1) Internal Revenue Service Notice of Determination, dated July 18, 1999 (filed as Exhibit 99.1 to the Current Report on Form 8-K on November 19, 1999 and by this reference incorporated herein) (99.2) Pledge and Escrow Agreement between and among Daryl Kollman and Marta Kollman, the Internal Revenue Service and West Coast Trust Co., Inc. (filed as Exhibit 99.2 to the Current Report on Form 8-K on November 19, 1999 and by this reference incorporated herein) (b) Reports on Form 8-K. None. * Filed herewith. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Klamath Falls, State of Oregon on April 13, 2004. CELL TECH INTERNATIONAL INCORPORATED By: /S/ MARTA C. CARPENTER -------------------------------- Marta C. Carpenter, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities indicated have signed this report below: SIGNATURE TITLE DATE By:/S/ MARTA C. CARPENTER President and Chief Executive March 30, 2004 ----------------------- Officer and Director Marta C. Killman (principal executive officer and principal accounting officer) By: /S/ DONALD P. HATELEY Chairman of the Board March 30, 2004 --------------------- Donald P. Hateley By: /S/ JUSTIN STRAUS Chief Operating Officer March 30, 2004 ----------------- Justin Straus By: /S/ CHRIS J.M. BLAXLAND Director March 30, 2004 ----------------------- Chris J.M. Blaxland By: /S/ DONALD M. ANDERSON Director March 30, 2004 ---------------------- Donald M. Anderson 47 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statement of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 Report of Independent Certified Public Accountants To the Shareholders of Cell Tech International Incorporated and Subsidiaries Klamath Falls, Oregon We have audited the accompanying consolidated balance sheets of Cell Tech International Incorporated and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates, made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cell Tech International Incorporated and Subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced recurring losses, has negative working capital at December 31, 2003, is experiencing difficulty in generating sufficient cash flows to meet its obligations and faces potential significant adverse litigation. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 2. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Los Angeles, California March 26, 2004 F-2 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

~~Signature~~December ~~Title~~31, ~~Date~~ --------------------------- 2003 2002 ----------- ----------- ~~By:~~ASSETS ~~/s/~~(Note ~~Marta~~7) C.CURRENT ~~Kollman~~ASSETS ~~President~~Receivables ~~and~~(Note ~~Chief~~3) ~~Executive~~$ ~~October~~284,648 22$ 372,011 ~~2001~~Current portion of inventories (Note 4) 1,900,000 2,300,000 Prepaid expenses 565,450 586,662 ----------- ----------- Total current assets 2,750,098 3,258,673 INVENTORIES, net of current portion (Note 4) 2,816,471 3,824,298 PROPERTY AND EQUIPMENT, net of accumulated depreciation (Note 5) 2,460,237 6,801,389 IDLE PROPERTY AND EQUIPMENT HELD FOR SALE, net (Note 5) 916,355 1,382,570 OTHER ASSETS (Note 6) 240,851 546,846 ----------- ~~Officer~~----------- ~~and~~Total ~~Director~~assets ~~Marta~~$ C.9,184,012 ~~Kollman~~$15,813,776 ~~(principal~~=========== ~~executive~~=========== ~~officer~~LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft $ 481,496 ~~principal~~$ ~~financial~~468,008 ~~officer~~Accounts payable 685,146 594,329 Commissions payable 878,258 970,315 Sales taxes payable 67,588 69,797 Accrued payroll and ~~principal~~related ~~accounting~~liabilities ~~officer)~~296,506 ~~By:~~291,140 ~~/s/~~Other ~~Donald~~accrued P.expenses ~~Hateley~~1,220,071 ~~Chairman~~1,848,070 Current portion of ~~the~~long-term ~~Board~~debt ~~October~~(Note 227) 2,074,229 ~~2001~~2,872,145 Related party payable (Note 12) 746,747 427,767 ----------- ----------- Total current liabilities 6,450,040 7,541,571 ----------- ~~Donald~~----------- P.LONG-TERM ~~Hateley~~LIABILITIES ~~By:~~Long-term ~~/s/~~debt, ~~Justin~~net ~~Straus~~of ~~Vice~~current ~~President~~portion of(Note ~~Customer~~7) ~~October~~507,855 221,019,920 ~~2001~~----------- ----------- Total liabilities 6,957,895 8,561,491 ----------- ----------- ~~Fulfillment~~COMMITMENTS AND CONTINGENCIES (Notes 9 and ~~Director~~10) ~~Justin~~SHAREHOLDERS' ~~Straus~~EQUITY ~~Director~~Series ~~By:~~A ~~/s/~~convertible ~~Chris~~preferred ~~J.M.~~stock ~~Blaxland~~- ~~October~~no 22par value; 4,175,000 ~~2001~~shares authorized; none issued and outstanding -- -- Series B convertible preferred stock - no par value; 800,000 shares authorized; none issued and outstanding -- -- Undesignated preferred stock - no par value; 1,825,000 shares authorized; none issued and outstanding -- --~~-------------------~~ ~~Chris~~Common Jstock - $.M.01 ~~Blaxland~~par ~~By:~~value; ~~/s/~~50,000,000 ~~Donald~~shares M.authorized, ~~Anderson~~13,974,087 ~~Director~~shares ~~October~~issued 22and outstanding (Notes 9 and 10) 139,741 ~~2001~~106,409 Additional paid-in capital 2,891,224 2,299,696 Retained earnings (deficit) (804,849) 4,846,180 ----------- ----------- Total shareholders' equity 2,226,116 7,252,285 ----------- ~~Donald~~----------- M.Total ~~Anderson~~liabilities and shareholders' equity $ 9,184,012 $15,813,776 =========== =========== See accompanying notes to consolidated financial statements.

F-3 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, -------------------------------------------- ~~2000~~2003 ~~1999~~2002 ~~1998~~2001 ~~===========~~------------ ~~=========== =========== Assets (Note 8) Current assets Cash and cash equivalents $~~ ------------ $ ------------ SALES $ 122,~~502~~285,~~110~~975 ~~Receivables~~$ ~~(Note~~26,193,747 3)$ ~~535~~30,~~145 489~~012,~~651~~076 ~~412,366~~COST ~~Current~~OF ~~portion~~SALES ~~of inventories (Note 4) 2~~7,~~500~~148,~~000~~303 39,~~500~~651,~~000~~050 29,~~650~~742,~~000~~051 ~~Prepaid expenses 845,855 733,650 940,952~~ ------------ ------------ ------------ ~~Total~~GROSS ~~current~~PROFIT ~~assets~~15,137,672 316,~~881~~542,~~000~~697 420,~~723~~270,~~301~~025 5COMMISSIONS 9,~~505~~467,~~428~~392 11,690,752 14,341,935 ------------ ------------ ------------ ~~Property~~GROSS ~~and~~PROFIT ~~equipment~~AFTER COMMISSIONS 5,670,280 ~~net~~4,851,945 of5,928,090 ~~accumulated~~SHIPPING ~~depreciation~~AND ~~(Note~~HANDLING 5)EXPENSES 131,~~560~~448,~~986~~853 161,~~075~~515,~~851~~358 191,~~666~~646,~~350~~625 ~~Long-term~~SELLING ~~inventories~~EXPENSES 4,001,866 ~~net~~4,021,734 of4,059,982 ~~current~~RESEARCH ~~portion~~AND DEVELOPMENT 197,266 193,310 190,884 GENERAL AND ADMINISTRATIVE 3,285,760 1,764,189 2,425,561 IMPAIRMENT OF LONG-LIVED ASSETS (~~Note~~NOTES 45 AND 6) 82,~~675~~264,~~999~~646 10873,~~031~~528 2,~~387~~589,940 13------------ ------------ ------------ OPERATING LOSS (5,~~918~~528,~~241~~111) ~~Other~~(3,516,174) ~~assets~~(4,984,902) OTHER INCOME (~~Note~~NOTE 613) 1274,~~131~~266 283,~~661~~834 1591,~~983~~787 INTEREST EXPENSE (397,~~982~~183) 2(265,~~009~~047) (622,~~347~~235) ------------ ------------ ------------ ~~Total~~NET ~~assets~~LOSS $27 (5,~~249~~651,~~646~~029) $32 (3,~~814~~497,~~521~~38) $41 (5,~~099~~015,~~366~~350) ============ =========== ============ ~~Liabilities~~BASIC ~~and~~AND ~~Shareholders'~~DILUTED ~~Equity~~LOSS ~~Current~~PER ~~liabilities~~SHARE ~~Bank overdraft~~ $ ~~1,310,551~~(0.40) $ ~~247,584~~(0.27) $ --(.43) ~~Accounts~~============ ~~payable~~=========== ~~2,897,684~~============ ~~4,203,000~~WEIGHTED ~~2,012,070~~AVERAGE ~~Commissions~~NUMBER ~~payable~~OF ~~1,869,135~~COMMON ~~4,396,375~~SHARES ~~4,169,804~~OUTSTANDING ~~Sales~~USED ~~taxes~~TO ~~payable~~CALCULATE ~~112,988~~BASIC ~~174,515~~AND ~~277,691~~DILUTED ~~Accrued~~LOSS ~~payroll~~PER ~~and~~SHARE ~~related liabilities 255~~14,~~132 380~~049,~~267~~055 ~~352~~12,~~050 Other accrued expenses 1~~864,~~173,321~~643 ~~640~~11,~~450 1~~755,~~074,988~~888 ~~Current~~============ ~~portion~~=========== ~~of long-term debt (Notes 7 and 8) 2,862,683 3,895,579 690,093~~============

See accompanying notes to consolidated financial statements. F-4 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

~~Years~~Common ~~ended~~Stock ~~December~~Additional ~~31,~~Retained ---------------------- Paid-In Earnings Shareholders' Shares Amount Capital (Deficit) Equity --------- ---------- ------------ ------------- ~~2000~~------------ ~~1999~~BALANCES, ~~1998~~December ~~1997~~31, ~~=============~~2000 ~~=============~~10,640,895 ~~============= ============= Revenue~~ $ 38106,~~976,663~~409 $ 542,~~487~~299,~~939~~696 $ 7413,~~071~~358,~~275~~917 $ ~~124~~15,~~787~~765,~~758~~022 ~~Cost~~Net ofloss ~~sales~~-- ~~11,488,802~~-- ~~14,748,570~~-- 19(5,~~219~~015,~~922~~350) 22(5,~~196~~015,~~792~~350) ---------- --------- ------------- ------------- ------------- ~~Gross~~BALANCES, ~~profit~~December 2731,~~487,861~~ ~~39,739,369~~2001 5410,~~851~~640,~~353~~895 ~~102~~106,~~590,966~~409 ~~Commissions 17~~2,~~632~~299,~~344~~696 248,~~433~~343,~~049~~567 3310,~~825~~749,~~537~~672 ~~60,277,004~~ ----------~~---~~ ---------~~----~~ ------------- ------------- Selling profit 9,855,517 15,306,320 21,025,816 42,313,962 Shipping and handling expenses 2,097,369 3,899,361 4,773,524 7,625,954 Selling expenses 5,338,194 7,974,259 9,234,333 13,033,762 Research and development 456,098 1,453,371 1,023,909 593,012 General and administrative 4,400,348 6,418,788 4,323,765 5,224,057 ------------- Net loss --~~-----------~~ --~~-----------~~ --~~-----------~~ ~~Operating income~~ (~~loss) (2~~3,~~436~~497,~~492~~387) (43,~~439~~497,~~459~~387) 1BALANCES,~~670,285~~ 15December 31,~~837,177~~ ~~Other~~2002 ~~income (Note 16) 421~~10,~~045 1~~640,~~012,660~~895 ~~882~~106,~~985~~409 12,~~914~~299,~~784~~696 ~~Interest expense (768~~4,~~492) (714~~846,~~025)~~180 ~~(256~~7,~~985) (498~~252,~~703)~~285 ~~-------------~~Net loss --~~-----------~~ --~~-----------~~ --~~-----------~~ ~~Net income~~ (~~loss) before taxes (2~~5,~~783~~651,~~939~~029) (45,~~140~~651,~~824~~029) ~~2,296,285~~Conversion ~~17,253,258~~of ~~Income~~debt ~~tax~~to ~~benefit~~equity ~~(Note~~3,333,192 9)33,332 591,528 -- 624,860 -- -- -- ---- --------- ------------- ------------- ------------- ~~Net~~BALANCES, ~~income~~December ~~(loss)~~31, $2003 (213,~~783~~974,~~939)~~087 $ (4139,~~140,824)~~741 $ 2,~~296~~299,~~285~~696 $ ~~17,253,258 ============= ============= ============= ============= Basic and diluted income~~ (~~loss~~804,849) ~~per share~~ $ ~~(0.26)~~2,226,116 ~~$ (0.45) $ 0.26 $ 1.99~~ ==========~~===~~ =========~~====~~ ============= ============= ~~Weighted average number of common shares outstanding used to calculate basic and diluted income (loss) per share 10,640,895 9,280,431 8,683,000 8,683,000~~ ============~~= ============= ============= =============~~

See accompanying notes to consolidated financial statements. F-5 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Common~~Years ~~Stock~~ended ~~(Note~~December ~~12)~~31, ~~Additional~~ ------------------------------------------- ~~Paid~~2003 2002 2001 -In---------- ~~Retained~~----------- ~~Shareholders'~~------------ ~~Shares~~CASH ~~Amount~~FLOWS ~~Capital~~FROM ~~Earnings~~OPERATING ~~Equity~~ACTIVITIES ~~============~~Net ~~============~~loss ~~============~~$(5,651,029) ~~============~~$(3,497,387) ~~=============~~$ ~~Balances~~(5,015,350) ~~January~~Adjustments to reconcile net loss to cash provided by (used for) operating activities: Depreciation and amortization 1,126,929 ~~1997~~1,162,726 82,~~683~~607,668 (Gain) loss on sale of fixed assets 806,734 (1,827) (15,175 Reserve for potentially unsaleable inventories 544,233 3,100,000 $-- 86Impairment of fixed assets and intangibles 2,~~830~~264,646 $873,528 ~~192~~2,~~213~~589,940 $Changes in assets and liabilities: Receivables 87,363 (44,928) 208,062 Inventories 863,594 80,480 1,871,221 Prepaid expenses 21,~~969~~212 (125,~~476~~802) $290,165 22Other assets 305,~~248~~995 (305,~~519~~851) ~~Distributions~~(70,374) toAccounts ~~shareholders~~payable --90,817 --(454,474) --(370,606) Commissions payable (792,~~285~~057) (248,~~000~~821) (7649,~~285~~999) Sales tax payable (2,~~000~~209) ~~Net~~(12,546) ~~income~~(30,645) --Accrued --payroll --and 17payroll related liabilities 5,~~253~~366 38,~~258~~196 17(39,~~253~~883) Other accrued expenses (3,~~258~~139) 714,632 (2,188) ------------ ------------ ------------ Net cash provided by operating activities 368,455 1,277,926 1,372,836 ----------- ----------- ------------ ~~Balances,~~CASH ~~January~~FLOWS 1,FROM ~~1998~~INVESTING ~~8,683,000~~ACTIVITIES ~~86,830~~Purchase ~~192~~of property and equipment (115,~~213~~084) 31(584,~~937,734~~551) 32(253,~~216,777~~662 ~~Distributions~~Proceeds tofrom ~~shareholders~~sale --of --equipment --724,142 (27,~~790,000)~~250 (247,~~790,~~000) ~~Net income~~ -- -- -- ~~2,296,285 2,296,285~~ ----- ----------- ------------ Net cash provided by (used for) investing activities 609,058 (577,301) (206,662 ------------ ------------ ------------ ~~Balances,~~CASH ~~December~~FLOWS ~~31,~~FROM ~~1998~~FINANCING ~~8,683,000~~ACTIVITIES ~~86,830~~Bank ~~192,213~~overdraft 3113,~~444,019~~488 31(295,~~723,062~~097) ~~Reorganization~~(547,446 ~~recapitalization~~Payments ~~and~~on ~~reverse~~long-term ~~stock~~debt ~~split~~ (~~Note~~ 1~~) 750~~,~~000 7~~309,~~500~~981) 69(1,~~562 -- 77~~847,~~062~~196) ~~Issuance of common stock and warrants for cash~~ (~~Note~~963,357 ~~10)~~Proceeds ~~1,157,895~~from ~~11,579~~debt ~~1,504,046~~financing -- 12,~~515~~100,~~625~~000 ~~Common~~-- ~~stock~~Net ~~issued~~proceeds ~~for services~~ (~~Note 10~~repayments) ~~50,000~~from ~~500~~related ~~133,875~~party --debt ~~134~~318,~~375~~980 ~~Warrants issued for services~~ (~~Note 10~~658,332) ~~-- -- 400~~344,~~000~~629 -- ~~400,000 Distributions to shareholders~~ -- -- -- ~~(11,160,339) (11,160,339) Net loss~~ -- -- -- ~~(4,140,824) (4,140,824)~~ ---------~~---~~ ------------ Net cash used for financing activities (977,513) (700,625) (1,166,174 ------------ ------------ ------------ ~~Balances,~~NET ~~December~~INCREASE ~~31,~~(DECREASE) ~~1999~~IN ~~10,640,895~~CASH ~~106,409~~AND ~~2,299,696~~CASH ~~16,142,856~~EQUIVALENTS ~~18,548,961 Net loss~~ -- -- -- ~~(2,783,939)~~CASH (2AND CASH EQUIVALENTS,~~783,939)~~ beginning of year -- --~~--------~~ --~~----------~~ ------------ ------------ ------------ ~~Balances,~~CASH ~~December~~AND ~~31,~~CASH ~~2000 10~~EQUIVALENTS,~~640,895~~ $end ~~106,409~~of year $ ~~2,299,696~~-- $ ~~13,358,917~~-- $ ~~15,765,022~~-- ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for Interest $ 397,183 $ 250,190 $ 602,570 NON-CASH TRANSACTIONS Accrued liability for penalty shares was settled during the quarter ended June 30,2003 by issuing 3,333,192 shares of common stock valued at $624,860 $ 624,860 -- -- =========== =========== ============

See accompanying notes to consolidated financial statements. F-6 NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Certain items reported in the prior year have been reclassified to follow the company's current reporting practices. BUSINESS Cell Tech International Incorporated, The New Algae Company (NAC), and The New Earth Company (NEC), collectively the "Company," are engaged in the production and marketing of food supplement and personal care products made with blue-green algae harvested from Klamath Lake, Oregon. The Company uses a multi-level distributor network throughout the United States and Canada to distribute its products. The Company commenced operations as NAC in 1982 and subsequently formed NEC to further its operations. In 1990, NAC purchased the assets of Cell Tech, Inc. and then began doing business under the trade name "Cell Tech." BASIS OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the accounts of the parent company, Cell Tech International Incorporated, and its subsidiaries NAC and NEC. Intercompany transactions and balances have been eliminated on consolidation. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. CASH AND CASH EQUIVALENTS The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. INVENTORIES Work in progress, finished goods and sales aids inventories are stated at the lower of cost or market. The Company uses a weighted average method to determine cost for work in progress and finished goods based upon normal harvesting volumes (see Note 4). Costs of work in progress and finished goods includes direct labor and an allocation of overhead costs. Sales aids consist of video tapes, audio tapes, brochures and other promotional items sold by the Company to its distributors. Inventory that is not anticipated to be sold within the subsequent year is classified as a non-current asset. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of 40 years for buildings and 3 to 10 years for machinery and equipment as well as furniture and fixtures. Additions, renewals and improvements are capitalized. Expenditures for maintenance, repairs and minor renewals and improvements are charged to expense. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is recorded in operations. F-7 The Company evaluates impairment of its property and equipment on an individual asset basis or by logical groupings of assets whenever circumstances indicate that the carrying value may not be recoverable. Assets deemed to be impaired are written down to their fair value using discounted future cash flows and, if available, comparable market values. During 2003, certain assets were determined to be impaired in value and the associated net book value was reduced accordingly (see Note 5). Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are reclassified as assets held for sale. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but will be reviewed annually, or more frequently if impairment indicators arise, for impairment. Other intangible assets with finite lives, consisting of trademarks with a carrying value of $57,302 at January 1, 2002, will continue to be amortized over their estimated useful lives of 10 years. As of the date of the adoption of the new accounting standards, there was no remaining goodwill. FINANCIAL INSTRUMENTS The Company estimates the fair value of its monetary assets and liabilities based upon the existing interest rates related to such assets and liabilities compared to the current market rates of interest for instruments of a similar nature and degree of risk. The fair value of debt is estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's debt at December 31, 2003 and 2002 approximates carrying value. REVENUE RECOGNITION The Company recognizes revenue from the sale of its products upon shipment, at which time title passes. The Company estimates an allowance for sales returns based on historical experience with product returns. SHIPPING AND HANDLING FEES AND COSTS The Company bills customers for shipping and handling costs. The amounts billed are included in sales and totaled $1,065,158, $1,263,622 and $1,443,692 in 2003, 2002 and 2001, respectively. The related costs for shipping and handling goods shipped by the Company to customers are included in a separate caption, shipping and handling expenses, in the statements of operations. SALES INCENTIVES In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products," which addresses the accounting for consideration given by a vendor to a customer or a reseller of the vendor's products. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which provides guidance on the income statement classification of consideration from a vendor to a reseller in connection with the reseller's purchase of the vendor's products or to promote sales of the vendor's products. The Company pays commissions to its distributors as compensation for sales and marketing activities and based on their personal sales volumes and the sales of distributors they have recruited into the Company's network. Accordingly, the Company classifies these expenses as a cost and not a reduction of revenue. There was no effect on the consolidated financial position, results of operations or cash flows as a result of implementation of this pronouncement. F-8 INCOME TAXES The Company accounts for income taxes using the liability method whereby the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for the impairment of long-lived assets to be held and used, when indications of impairment are present, by evaluating the carrying value in relation to the operating performance and future undiscounted cash flows of the underlying business. Long-lived assets held for disposal are reported at the lower of their carrying value or fair value less costs to sell (see Notes 5 and 6). STOCK OPTION PLAN Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees" (APB No. 25), and related Interpretations. Accordingly, for employee options, the Company records expense in an amount equal to the quoted market price on the grant date over the option price. The Company provides pro forma disclosures of net earning and earnings per share, as if the fair value based method of accounting had been applied. Stock based compensation paid to non-employees is recorded at fair value using the Black Scholes options pricing model (see Note 9). F-9 We have adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", as amended by Statement No. 148. If compensation expense for the stock options had been determined using "fair value" at the grant date for awards in 2003, 2002 and 2001, consistent with the provisions of Statement of Financial Accounting Standards No. 123, our net loss and loss per share would have been reduced to the pro forma amounts indicated below.

Years ended December 31, --------------------------------------------------- 2003 2002 2001 --------- 2000 1999 1998 1997 ============ ============ ============ ============ Cash flows from operating activities Net income (loss) $ (2,783,939) $ (4,140,824) $ 2,296,285 $ 17,253,258 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization 3,347,670 2,621,377 2,898,649 3,090,365 Loss on sale of fixed assets 60,693 530,095 309,705 179,538 Impairment of fixed assets and intangibles 136,381 -- ~~861,865~~ --- ~~Warrants issued for services~~ -- ~~400,000~~ ---------- ------------- ~~Changes~~NET ~~in assets and liabilities: Receivables~~ (~~45,494~~LOSS) ~~(77,285)~~AS ~~(119,639)~~REPORTED ~~250,707~~$ ~~Inventories 2,355,388 3,036,854 2,179,525~~ (5,~~133~~651,~~164~~029) ~~Prepaid~~$ ~~expenses~~ (~~112~~3,~~205) 207~~497,~~302 (20,787~~387) ~~(216,897)~~$ ~~Other assets~~ (365,~~159) 25~~015,~~365 1,569,395 (425,034~~350) ~~Accounts~~ADD: ~~payable~~STOCK-BASED ~~(1,305,316)~~EMPLOYEE ~~2,190,930~~COMPENSATION ~~815,457~~EXPENSE ~~(466,780)~~INCLUDED ~~Commissions~~IN ~~payable~~REPORTED ~~(2,527,240)~~INCOME ~~226,571~~- ~~(1,798,107)~~- ~~(4,414,202)~~- ~~Sales~~DEDUCT: ~~tax~~TOTAL ~~payable~~STOCK-BASED ~~(61,527)~~EMPLOYEE ~~(103,176)~~COMPENSATION ~~(2,491,831)~~EXPENSE ~~(6,545,939)~~DETERMINED ~~Accrued~~UNDER ~~payroll~~FAIR ~~and~~VALUE ~~payroll~~BASED ~~related~~METHODS ~~liabilities~~FOR ~~(125,135)~~ALL ~~28,217~~AWARDS 125,~~910~~261 ~~(321~~8,~~787)~~998 ~~Other accrued expenses 532~~9,~~871~~000 ~~(434,538) 52,552 354,998~~ ------------ --~~----------~~ ------------ ------------- ~~Net~~NET ~~cash provided by~~ (~~used for~~LOSS) ~~operating~~PRO ~~activities~~FORMA $ (~~564~~5,~~012~~656,290) ~~4,510,888~~$ 6(3,~~565~~506,~~979~~385) 3$ (5,~~605~~024,~~063~~350) ------------ --~~----------~~ ------------ ------------- LOSS PER DILUTED SHARE AS REPORTED $ (0.40) $ (0.27) $ (.43) LOSS PER DILUTED SHARE PRO FORMA $ (0.40) $ (0.27) $ (.43)

The proforma calculations above are for informational purposes only. Future calculations of the pro forma effects of stock options may vary significantly due to changes in the assumptions described above as well as future grants, and for forfeitures of stock options. SEGMENT REPORTING The Company operates in one segment, which is the production and sale of food supplement and personal care products made from blue green algae. Approximately 6 percent of our sales are from International sources outside of the United States, primarily Canada. EARNINGS PER SHARE The computations of the weighted-average common shares used in the computation of basic and diluted net income (loss) per share is based on 14,049,055, 12,864,643 and 11,755,888 shares for the years ended December 31, 2003, 2002 and 2001. Potential dilutive securities were not included in the EPS calculation since their effect would be antidilutive. In accordance with SFAS No. 128, "Earnings Per Share," the Company has included in weighted average common shares for the years ended December 31, 2001, 2002 and 2003, shares earned by Mr. Zubair Kazi but not yet issued (see Note 10). Potential dilutive securities consisted of outstanding stock options and convertible preferred stock and common stock purchase warrants. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. F-10 RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or Disposal Activities," effective for activities that we initiate after December 31, 2002, with early application encouraged. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." We adopted SFAS No. 146 in January 2003 and it did not have a material effect on our financial position or results of operations. In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our annual financial statements for the year ended December 31, 2002 and must also provide the disclosures in our quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003. The adoption of SFAS No. 148 did not have a material effect on our financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affect leasing transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need to be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. The Company has determined that there has been no impact due to the application of FIN No. 45 on our financial position and results of operations. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150, ACCOUNTING FOR CERTAIN INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("FAS 150"), which establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. FAS 150 requires an issuer to classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies. We adopted this Statement as of July 1, 2003 and it had no material impact on our financial statements. In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS No. 149"). FAS No. 149 amends and clarifies the accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. We do not have any contracts that are derivatives or that contain embedded derivatives. F-11 In January 2003, the FASB issued FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, an interpretation of Accounting Research Bulletins ("ARB") No. 51, CONSOLIDATED FINANCIAL STATEMENTS ("FIN 46"). FIN 46 clarifies the application of ARB No. 51 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. We do not believe the adoption of FIN 46 will have a material impact on our financial position and results of operations. NOTE 2--GOING CONCERN During 2002, the Company was able to obtain new financing that allowed it to repay the borrowings under the former line of credit. As of December 31, 2003, the Company is in compliance with the loan covenants under the new loan agreement. Additionally, management has introduced several new products and advertising campaigns in order to increase revenues and reverse the trend of net losses in 2003 and prior years. Although management believes that progress was made during 2003 on issues affecting the Company's ability to continue as a going concern, the Company has experienced recurring net losses, has negative working capital at December 31, 2003 and faces potential significantly adverse litigation (Note 10). These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely basis. The Company is continuing its efforts to raise both debt and equity financing. However, there can be no assurance that the Company will be able to obtain or service additional financing, or that if such financing were available, whether the terms or conditions would be acceptable to the Company. NOTE 3 -- RECEIVABLES As revenues are generally paid with credit cards and thereby collected at the time of shipment, the Company does not record trade accounts receivable. Receivables consist of the following: December 31, ------------------------------- 2003 2002 ---------- ---------- Credit card deposits in transit $ 136,154 $ 303,746 Miscellaneous receivables 148,494 68,265 ---------- ---------- $ 284,648 $ 372,011 =========== ========== F-12 NOTE 4 -- INVENTORIES

Inventories consist of the following: December 31, -------------------------------------- 2003 2002 -------------- ~~2000~~--------------- ~~1999~~Work ~~1998~~in ~~===========~~progress ~~=========== =========== Intangibles (Note 13): Lease rights, net of accumulated amortization of~~ $~~682,972,~~ ~~$530~~6,~~178 and $377~~857,~~384~~108 $ ~~844~~9,~~955 $ 997~~520,~~749~~527 $Finished ~~1,150,543~~goods ~~Excess of purchase price over fair value of tangible assets acquired, net of accumulated amortization of $1,690,056, $1,564,609 and $1,~~418,~~455~~999 ~~136~~588,~~917~~586 ~~262,364~~Sales ~~428,518~~aids ~~Loan fees~~5,904 ~~net of accumulated amortization of $864~~15,~~505~~185 ~~and $254,266~~ -- ~~610,239~~ -- ~~Deposits 87,774 52,255 453,338 Other 156,845 156,205 71,780~~ ----------- ----------- ----~~-------~~ 17,~~226~~282,~~491~~011 210,~~078~~124,~~812~~298 ~~2,104,179~~ Less ~~current~~reserve ~~portion~~for ofpotentially ~~lease~~unsaleable ~~rights~~inventories ~~included in prepaid expenses~~ (~~94,830~~Note 12) (942,~~830~~565,540) (944,~~832~~000,000) ----------- --- -------- -------~~----~~ $4,716,471 16,~~131~~124,~~661~~298 $Less current portion (1,~~983~~900,~~982~~000) (2,300,000) $ 2,~~009~~816,~~347~~471 ~~===========~~$ ~~===========~~3,824,298 ~~===========~~-------------- ---------------

Certain of the Company's inventory is marketable only to the agricultural market. Sales in this market have been less than anticipated and management has recognized that an impairment of inventory may exist. The Company has established reserves of $2,565,540 and $4,000,000 at December 31, 2003 and 2002, respectively. During 2003, additional inventory of $544,233 was recognized as impaired and the reserve was increased accordingly and $1,978,693 of inventory that had been previously reserved for was destroyed in order to reduce costs associated with maintaining frozen inventory. Inventories that are in excess of the following year's estimated sales have been classified as long-term inventories. NOTE 5 -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following: December 31, --------------------------------------~~---~~ ~~2000~~2003 1999 1998 =========== =========== =========== Receivable loans, advances and inventory loans, secured by substantially all of the assets of the Company, interest at the prime rate plus 2.5% per annum (12% at December 31, 2000), expiring June 30, 2002 ~~(Note~~-------------- ~~7) $ 1,105,012 $ 1,631,710 $~~ --------------- ~~Term~~Land ~~loans~~ and ~~equipment~~improvements ~~acquisition~~$ ~~loans~~17,817 ~~secured~~$ ~~by substantially all of the assets of the Company~~17,817 ~~interest~~Buildings ~~at prime rate plus 2.75% (12.25% at December 31, 2000)~~ and ~~repayable~~improvements ~~in 60 monthly installments by July~~ 1, ~~2004 (Note 7) 1~~709,~~691,541~~931 26,~~169~~254,~~739~~180 --Furniture ~~Note payable to former owner of Cell Tech, Inc. secured by all of the assets~~ and ~~all~~fixtures ~~of the issued and outstanding stock of NAC~~692,743 ~~with monthly payments of $65~~741,~~942~~754 ~~including~~Machinery ~~interest at 19%, repaid during the year ended December 31, 1999 (Note 13) -- -- 1,074,717 Note payable to a nonprofit organization, secured by rights of property~~ and ~~leasehold~~equipment ~~improvements, with annual payments of $75,000 including interest at~~ 6~~.25%~~, ~~maturing July 19~~627,226 ~~2005 313~~8,~~790 365~~894,~~920~~246 ~~414,984 Note payable to a university with monthly installments of $3,500 per month to be paid in full by April 2001. The note does not bear interest and is not secured 14,000 56,000~~ -- ------------ ----------- ----~~-------~~ 39,~~124~~047,~~343~~717 415,~~223~~907,~~369~~997 ~~1,489,701~~ Less ~~current~~accumulated ~~portion~~depreciation (~~Note 7) (2~~6,~~862~~587,~~683~~480) (39,~~895~~106,~~579~~608) ~~(690,093)~~ ----------- --- -------- -------~~----~~ $ ~~261~~2,~~660 $ 327~~460,~~790~~237 $ ~~799~~6,~~608~~801,389 =========== ===== ====== ===========

Depreciation expense aggregated $1,121,217, $1,111,629 and $2,386,418, for 2003, 2002 and 2001, respectively. During the fourth quarter of 2003 it was determined that two buildings that were being leased from shareholders were not required for continuing operations and accordingly it was determined to terminate those leases. Both leases are on month-to-month terms. Due to the shorter life of the leases than originally expected, it is anticipated that the associated leasehold improvements of $640,000 will be written off during a seven-month period beginning in December of 2003. Accordingly there was an approximate $100,000 increase in depreciation expense or a loss of $0.01 per share during 2003 and it is anticipated that there will be an additional $540,000 of depreciation expense or a loss of $0.04 per share in 2004 due to these lease terminations. There are no other costs, continuing or otherwise, associated with these lease terminations. Idle property and equipment consists of buildings, machinery and equipment with a carrying value of $916,355 and $1,382,570, a cost of $5,077,923 and $9,981,028, and accumulated depreciation and valuation reserve of $4,161,568 and $8,598,458 at December 31, 2003 and 2002, respectively. The Company is actively attempting to sell these F-13 assets and as a result, the assets have been written down to their fair value and no depreciation has been recorded on these assets since the date they were identified as being held for sale. We utilize significant amounts of equipment in our operations to harvest and process blue-green algae from Klamath Lake. During 2001, we developed an alternative method of harvesting algae directly from Klamath Lake that increased our likelihood of being able to harvest on a low water year in comparison to our previous harvest method at the A Canal site. As a result, during 2001, we have taken out of service certain equipment previously used to harvest algae from the canal site. We have written-off equipment taken out of service that we cannot remove from the canal site and has no other use. We had an auction in September 2003 at which most of the remaining idle equipment was sold. For the equipment that remained after the auction sale, we recognized $64,646 in impairment loss to reduce its book value to appraised auction value. Due to the nature of auction sales, we anticipated the potential decrease in value by writing off an additional $528,632 in equipment values during the second quarter of 2003. The impairment charge recorded in the second quarter was reclassified to loss on sale of assets prior to year end to more accurately reflect the equipment sold at auction during the year. After the equipment auction we determined that a building that had been used for harvest processing would no longer be utilized to the extent previously determined. We have determined that the asset is impaired and, accordingly, we have recorded an impairment charge of $2.2 million in the third quarter 2003 and have written the asset down to its estimated fair value. The fair market value was determined based on estimated replacement construction costs and per square foot market values of similar properties being advertised for sale in the surrounding area. We continue to review our property and equipment offered for sale and if we cannot realize any portion of the carrying value, we make adjustments to reduce the carrying value to its fair value. We also regularly review property and equipment used in our operations and test for impairment if conditions indicate we may not recover the carrying value of the property and equipment. If we determine that we will not recover the carrying value and that assets are impaired, we adjust the carrying value through a valuation allowance. The decision to write down a portion of the carrying value of property and equipment used in our operations or offered for sale could have a significant adverse effect on our operating results. The financial statements for the years ended December 31, 2003, 2002, and 2001 include adjustments due to the impairment of fixed assets of $2,264,646, $873,529, and $2,589,940 respectively. NOTE 6 -- OTHER ASSETS

~~December~~Other ~~31,~~assets ~~===================================~~consist ~~2000~~of ~~1999~~the ~~1998~~following: ~~1997~~December ~~======~~31, ~~======~~---------------------------------- ~~=====~~2003 ~~======~~2002 ~~Tax at U.S. federal statutory rate (34.0) (34.0)% 34.0% 34.0% Income not subject to corporate taxes~~ ----------- ------------ ~~(34.0)% (34.0)% State and local income taxes~~Trademarks, net of ~~federal~~accumulated ~~benefit~~amortization ~~(4.4)~~of ~~(4.4)~~$44,690 ~~-- -- Merger~~ and ~~acquisition~~$38,978 ~~costs~~$ --53,477 ~~(6.5~~$ --57,196 --Deposits ~~Other~~46,927 ~~5.9~~55,441 ~~(6.8~~Restricted --cash --62,031 ~~Valuation~~198,963 ~~allowance~~Loan ~~against~~Fees ~~deferred~~78,416 ~~tax~~235,246 ~~assets 32.5 51.7~~ -- -- ------ -~~-----~~ ----- ------ --% ~~--%~~$ ~~--%~~40,851 ~~--%~~$ 546,846 ====== ====== ===== =======

Amortization expense aggregated $5,712, $51,097 and $221,250 for 2003, 2002 and 2001, respectively. F-14 NOTE 7 -- LONG-TERM DEBT Long-term debt consists of the following:

~~2000~~December ~~1999~~31, ~~1998~~-------------------------------- ~~1997~~2003 ~~==============~~2002 ~~==============~~----------- ~~==============~~----------- ~~==============~~Term ~~Net~~loan ~~income~~secured ~~(loss):~~by Assubstantially ~~reported~~all $of (2the assets of the Company,~~783,939)~~ effective rate of interest is 14%. Payment is due in full in June 2004 $ (41,~~140~~562,~~824)~~164 $ 2,~~296~~100,~~285~~000 $Note 17payable to a nonprofit organization,~~253~~ secured by rights of property and leasehold improvements,~~258~~ ~~Pro~~with ~~forma~~annual (2payments of $75,~~783~~000 including interest at 6.25%,~~939)~~ (4maturing July 19,~~140,824~~ 2005 (see Note 10) ~~2,051,440~~-- 17313,~~044,451~~790 ~~Net~~Note ~~income~~payable ~~(loss)~~to ~~per~~vendor ~~share:~~issued Asin ~~reported~~exchange $for ~~(0.26)~~cancellation $of (0accounts payable to vendor.~~45)~~ Note requires 37 monthly payments of $50,000 ~~0.26~~that began on October 11, 2002 and a final payment of $35,917 due on November 1, 2005, with an implied discount rate of 11.9913% ~~Pro~~1,019,920 ~~forma~~1,478,275 ----------- ----------- 2,582,084 3,892,065 Less current portion (~~0.26~~2,074,229) (~~0.45~~2,872,145) ~~0.24~~----------- ~~1.96~~----------- ~~==============~~$ ~~==============~~507,855 $ 1,019,920 ===========~~===~~ ===========~~===~~

In June 1999, the Company entered into a $15 million Line of Credit Agreement with a financial institution. The agreement had four parts: Receivable Loans, Advances and Inventory Loans, Term Loans, and Equipment Acquisition Loans. The Receivable Loans and the Advances and Inventory Loans incurred interest at a rate equal to the prime rate plus 2.5% per annum and expired June 30, 2002. The Term Loans and Equipment Acquisition Loans incurred interest at a rate equal to the prime rate plus 2.75% and were repayable in monthly installments. In September 2002, the Company's financing facility with the financial institution was purchased by and assigned to La Jolla Loans, Inc ("La Jolla Loans"). In connection with this transaction, the financial institution's security interest in real and personal property and all associated security and loan documents were assigned to La Jolla Loans. At the same time, the Company entered into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms of the forbearance agreement, La Jolla Loans would not declare a default until June 30, 2003, when the entire principal would be due. The forbearance period was extended to June 30, 2004 by the Company's payment of a $75,000 renewal fee in June 2003. Interest of $18,225 at an effective rate of 14% is payable monthly along with additional monthly impound payments of approximately $19,000 to be used to pay insurance, property taxes and lease payments on collateralized property during the forbearance period. La Jolla Loans has also agreed to defer, during the forbearance period, the difference between the minimum interest payment of $45,000 under the agreement with Coast Business Credit and the $24,500 minimum interest payments under the forbearance agreement. If the Company fully performs under the terms and conditions of the forbearance agreement and no default occurs during the forbearance period, La Jolla Loans will release the Company from any obligation to pay minimum monthly interest payments in excess of $24,500. The outstanding principal balance at December 31, 2003 is $1,562,164. The Company is in compliance with all loan covenants as of December 31, 2003. La Jolla Loan has agreed in principle to further extend the loan at June 30, 2004 upon payment of approximately $100,000 in fees and associated expenses. The Company has classified all outstanding debt to the lender as a current liability. F-15 NOTE 8 -- INCOME TAX The Company is subject to Federal income taxes subsequent to June 20, 1999. As the Company has experienced operating losses for the years 2003, 2002 and 2001, no income tax expense has been provided. At December 31, 2003, the Company had state and federal net operating loss carryforwards available to offset future taxable income of approximately $ 21.4 million that expire at various dates through 2023. The primary components of temporary differences that compose the Company's net deferred tax assets and liabilities as of December 31, 2003 and 2002 are as follows:

~~Years ended~~ December 31, ~~2000~~--------------------------------- ~~1999~~2003 ~~1998~~2002 ~~1997~~------------ ~~==========================================~~------------ ~~===========~~Deferred ~~===========~~tax ~~===========~~assets ~~===========~~(liability): ~~August~~Inventory ~~celebration~~adjustments ~~sales~~ $ 27984,~~750~~000 $ 381,~~457 $ 135~~600,~~127~~000 $Accrued ~~297,459~~expenses ~~Genealogy fee income 163~~633,~~648~~000 ~~234~~806,~~739~~000 ~~408~~Other 31,~~293~~000 ~~745~~18,~~651~~000 ~~Interest~~------------ ~~income~~------------ ~~57,507~~Current ~~87,852~~deferred ~~115,898~~tax ~~303~~assets,~~533~~ ~~Miscellaneous~~net ~~income 286~~1,~~916 683~~648,~~767~~000 ~~533~~2,~~372 747~~424,~~679~~000 ~~Management~~------------ ~~fee~~------------ ~~income~~Net ~~from~~operating alosses ~~related~~and ~~party~~credits ~~195~~8,~~917~~234,000 664,~~660~~150,000 --Property, --equipment ~~Stock~~and ~~penalties~~intangible ~~(250~~assets 1,768,000) 695,000 -- ---------- ------------ ~~Loss~~Non-current ondeferred ~~disposal~~tax of assets ~~(60~~,~~693)~~ ~~(98,815)~~net ~~(309~~10,~~705)~~002,000 ~~(179~~4,~~538)~~845,000 ------------ ------------ Net deferred tax assets 11,650,000 7,269,000 Less: valuation allowance (11,650,000) (7,269,000) ------------ ------------ $ ~~421,045~~-- $ ~~1,012,660~~-- ~~$ 882,985 $ 1,914,784~~ =========== =========== ===~~======== ===========~~

The Company annually evaluates the realization of the net deferred tax asset, taking into consideration prior earnings history, projected operating results and the reversal of temporary tax differences. At December 31, 2003 and 2002, the Company recorded a valuation allowance as a result of the uncertainty relating to the realizability of the net deferred tax asset. In addition to utilization of net operating losses being limited by future income, the net operating loss carry forward utilization could be significantly impaired by a change in ownership under IRC section 382, which may occur due to issuance of shares to or conversions of warrants by Mr. Kazi as noted in Notes 9 and 10, or if there is any change in ownership pursuant to the discussion at "lien on company stock" in Note 10. The net operating loss benefit is fully reserved via the deferred tax asset valuation allowance above. F-16 NOTE 9 -- STOCK OPTIONS AND WARRANTS WARRANTS On August 6, 1999, the Company issued warrants to purchase shares of its common stock to the following parties for their services as follows: Number of Exercise Warrants Price Term ------------- ------------- --------- Andromeda 100,000 $1.3337 5 year Hateley & Hampton 300,000 $0.0749 5 year Wharton Capital 267,000 $0.0749 5 year On October 19, 1999, the Company sold 1,157,895 shares of its common stock with warrants to purchase 1,157,895 shares of its common stock in a private placement to Mr. Zubair Kazi (see Note 12) for $1,515,625, net of fundraising costs of $134,375. In connection with this transaction, the Company also issued warrants to purchase 150,000 and 100,000 shares of its common stock to Pacific Basin and Richard Wade, respectively. Each warrant has a 5-year term and an exercise price of $1.425 per share. The Company also issued 50,000 shares of its common stock, at fair market value that amounted to $134,375, to Pacific Basin Capital for their services. Warrant activity during the years ended December 31, 2003, 2002 and 2001 is summarized as follows: Shares Price ---------------- ------------------ Outstanding at December 31, 2000 2,268,324 $ 0.075 - 84.65 Granted - - Expired - - Exercised - - ---------------- ----------------- Outstanding at December 31, 2001 2,268,324 0.075 - 84.65 Granted - - Expired (128,926) - Exercised - - ---------------- ----------------- Outstanding at December 31, 2002 2,139,398 0.075 - 84.65 Granted - - Expired (39,623) - Exercised - - ---------------- ----------------- Outstanding at December 31, 2003 2,099,775 $ 0.075 - 84.65 ================ ================= The above warrants have a weighted average remaining years at December 31, 2003. F-17 1996 STOCK INCENTIVE PLAN In June 1996, the Company adopted the 1996 Stock Incentive Plan (the 1996 Plan) pursuant to which the Company's Board of Directors may grant stock options to officers, key employees, and consultants. The 1996 Plan authorizes grants of options to purchase up to 64,504 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. The stock option activity is as follows: Shares Price --------------- ------------------- Outstanding, December 31, 2000 25,802 $ 3.05 - 142.49 Granted - - Expired - - Exercised - - --------------- ------------------- Outstanding, December 31, 2001 25,802 3.05 - 142.49 Granted - - Expired - - Exercised - - --------------- ------------------- Outstanding, December 31, 2002 25,802 3.05 - 142.49 Granted - - Expired - - Exercised - - --------------- ------------------- Outstanding, December 31, 2003 25,802 $ 3.05 - 142.49 =============== ==================- The above options have a weighted average remaining contractual life of 1.5 years as of December 31, 2003. In addition to the options provided for in the 1996 Plan, in early 1996, 13,131 options were issued to certain officers, employees and consultants at an exercise price of $57.84 per share, each with a five-year term. All the outstanding options related to these grants expired in 2001. The Company granted 691 options to certain former directors on September 25, 1996 to replace certain options, which terminated upon resignation of such directors in connection with the Company's initial public offering. These 691 options have an exercise price of $65.11 per share and a ten-year term. During 1998, 1,382 stock options were issued to a director, at an exercise price of $98.65 per share and a ten-year term. During 1998, 4,607 stock options were issued to a consultant at an exercise price of $14.98 that expired during 2003. The options for 4,607 shares issued to a consultant expired unexercised during 2003. These outstanding options at December 31, 2003 have a weighted average remaining contractual life of 2.6 years. THE 2000 STOCK INCENTIVE PLAN On February 14, 2000, the Board of Directors approved a new stock incentive plan (the 2000 Plan). The 2000 Plan is for the benefit of employees, consultants and non-employee directors of the Company and its subsidiaries. The maximum number of shares with respect to which stock options or stock appreciation rights may be granted or awarded as restricted stock under the 2000 Plan is 700,000 shares in aggregate of common stock of the Company. The 2000 Plan provides for options to purchase 15,000 shares of common stock of the Company to be automatically granted to each Non-Employee Director who was serving as a member of the Board of Directors on the date the 2000 Plan was adopted (Initial Non-Employee Director Options). The 2000 Plan also provides for 10,000 shares of common stock of the Company to be automatically granted to each Non-Employee Director, who is serving on or elected to the Board of Directors at each annual meeting of the stockholders of the Company after the date the 2000 Plan is adopted (Regular Non-Employee Director Options). The options issued are Non-Qualified Options. F-18 During December 2003, 45,000 options were granted to Non-Employee Directors under the 2000 Plan. These options have an exercise price of not less than 100% of the fair market value of the stock at the date of the grant. Shares Price --------------- --------------- Outstanding, December 31, 2000 45,000 $ .20 Granted 45,000 - Expired - - Exercised - - --------------- ------------- Outstanding, December 31, 2001 90,000 .20 Granted 45,000 - Expired - - Exercised - - --------------- ------------- Outstanding, December 31, 2002 135,000 .20 Granted 45,000 - Expired - - Exercised - - --------------- ------------- Outstanding, December 31, 2003 180,000 $ .20 ============== ============= The above options have a weighted average remaining contractual life of 8.6 years as of December 31, 2003. NOTE 10 -- COMMITMENTS AND CONTINGENCIES MICROCYSTIS As a result of certain conditions, Microcystis, a toxic algae occasionally blooms in Klamath Lake at the same time blue-green algae is harvested. The Company regularly tests the algae it harvests for possible contamination. Algae that does not meet the Company's standards is not used in products for human or animal consumption. In 1997, the Oregon Department of Agriculture issued an administrative rule that created a standard of 1 microgram per gram (1 ppm) of Microcystis in products for human consumption that contain blue-green algae. The Oregon Department of Agriculture has raised no questions about the Company's products under this rule. In some years, the presence of Microcystis may reduce the quantity of algae that the Company can harvest. LITIGATION On February 6, 1998, Oregon Freeze Dry, Inc., a vendor, filed a complaint against us alleging that we wrongfully terminated a contract with it. On December 20, 2002, the parties signed a settlement agreement and they dismissed the lawsuit. The parties agreed that we will pay $1,885,917 to it. Payments are to be $50,000 per month. No interest will accrue to this note as long as we are timely in the note payments. $1,019,920 is included in notes payable at December 31, 2003. As of December 31, 2003, we are current on the payment obligations to them. Additionally, we are obligated to use them for all of our freeze-drying needs. If we chooses to use a bulk drying method other than freeze-drying, then we will pay a fee of 25 cents per pound to them for a period of up to 10 years, but not to exceed $2,500,000 for algae dried using such alternative method. On January 16, 2001, we filed an action against Glenn Foods in the Circuit Court of Klamath County alleging, among other things, that Glenn Foods breached an agreement with us for the manufacture of our SBG Square Meal Bars and BG Bites by failing to produce our products according to our specifications, refusing to turn over our F-19 formula, and failing to refund our money. We were seeking monetary damages of approximately $226,345 for all causes specified in our complaint. The matter was settled in February 2004 resulting in the defendant agreeing to pay $80,000 to us for damages. In October of 2001, Teachers for Truth in Advertising filed an action in the Superior Court of Tulare County, California alleging that we, erroneously sued as Cell Tech Products, Inc., engaged in unfair business practices and misleading advertising. In January 2003, the Superior Court of Tulare County issued a tentative decision stating that Teachers for Truth in Advertising was entitled to an injunction prohibiting us from making deceptive representations in its advertising or literature disseminated in California and ordering us to refund the purchase price paid by California customers for our algae products from the date four years prior to the filing of the action through the trial date in November of 2002. In response to the tentative decision, our counsel filed a Request for Statement of Decision on January 23, 2003. On February 20, 2003, the Superior Court issued its Final Decision, which essentially affirms the tentative decision, which judgment was entered in April 2003. Plaintiff has submitted a proposed judgment to the court consistent with the Tentative and Final Decisions. The parties mediated this matter on May 9, 2003 before a retired Orange County, California Superior Court judge and agreed to submit a proposed confidential settlement to the Superior Court within 60 days, which they have done. The confidential settlement provides for making partial refunds to certain of our California customers. The Superior Court approved the confidential settlement and vacated the judgment on August 25, 2003. We do not believe that the proposed refund to California customers will be in an amount that would have a material adverse impact on our business and financial position. On February 19, 2002, Daryl Kollman filed two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta Carpenter and others, in Klamath County, Oregon. Mr. Kollman alleges, among other things, that we owe him approximately $705,693 in past due rent. Mr. Kollman also claims that we owe Klamath Cold Storage, Inc. ("KCS"), a company owned by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due rent. Mr. Kollman asserts that we are not entitled to remove our personal property from the real property owned by him, Marta Carpenter and KCS and seeks to subject our to foreclosure proceedings. We intend to vigorously defend against these liens. We cannot predict the amount of loss, if any, that could result from these liens, but do not believe that an unfavorable outcome would have a material adverse impact upon our financial condition, cash flow, or results of operations. On or about May 31, 2002, Daryl Kollman filed an action in the Circuit Court of Klamath County (Case No. 02-01956CV) seeking to evict us from certain real property owned by him and Marta Carpenter. Mr. Kollman later added a claim for allegedly unpaid rent exceeding $558,000. On or about October 31, 2002, the Court dismissed Mr. Kollman's eviction claim. Mr. Kollman's claim for unpaid rent is currently pending. We cannot predict the amount of loss, if any, that could result from this lawsuit but an unfavorable outcome could have a material adverse effect on our financial condition. On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit Court for the State of Oregon for Klamath County (Case No. 02-02040CV) to evict us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we have not paid approximately $1,050,000 in rent. We have voluntarily vacated all of the KCS property we do not need to support our current operations. We contend that we have paid all rents owing and intend to vigorously defend this lawsuit. We cannot predict the amount of loss, if any, that could result from this lawsuit but an unfavorable outcome could have a material adverse effect on our financial condition. On October 7, 2002, Daryl Kollman, one of our principal shareholders, filed a lawsuit against us, certain of our officers, directors and counsel in the Circuit Court for the State of Oregon for Klamath County (Case No. 02-03774CV). The complaint makes a number of individual and derivative claims. Mr. Kollman makes two claims against us. First, Mr. Kollman alleges that we breached an agreement to register our stock for public sale and seeks damages of an amount he must prove at trial, but not less than $9,282,000. Second, Mr. Kollman claims that we conspired with Marta C. Carpenter (formerly known as Marta C. Kollman), a principal stockholder and our President, Chief Executive Officer and one of our directors; Donald P. Hateley, our Chairman of the Board of Directors; and others to prevent the registration of Mr. Kollman's stock and to cause other financial injury to him. As a result, Mr. Kollman seeks no less than $32,931,976 against the defendants. Mr. Kollman also seeks millions of dollars in damages on his own behalf and on behalf of us against Marta Carpenter, Mr. Hateley and others based on a variety of legal theories. We intend to vigorously defend the direct claims asserted in this lawsuit, and we have F-20 filed a motion to disqualify Mr. Kollman as a proper plaintiff for the derivative claims, which motion is currently pending. We cannot predict the amount of loss, if any, which could result from this lawsuit and an unfavorable outcome could have a material adverse impact upon our financial condition, cash flow, or results of operations. On March 27, 2002, the Nature Conservancy filed an action against us in the Circuit Court for the State of Oregon for Klamath County, alleging, among other things, that our wholly owned subsidiary, The New Earth Company, was in default on a promissory note and a trust deed. The Nature Conservancy was seeking $375,000, the principal amount due under the promissory note, plus interest and certain leasehold rights. We had previously recorded the net present value of the promissory note, which had a balance of $313,790 and had been included in the current portion of long-term debt in the December 31, 2002 consolidated balance sheet. The parties signed a settlement agreement and the court action was dismissed in January 2003. The net effect of this was an increase to net income during 2003 of $161,956. The Company is also involved in various legal matters arising in the normal course of business. In the opinion of management, the Company's liability, if any, arising from legal proceedings related to these matters is not expected to have a material effect on the consolidated financial statements of the Company. LIEN ON COMPANY STOCK The Company stock owned by majority shareholders Daryl J. Kollman and Marta C. Carpenter is the subject of a tax lien filed by the Internal Revenue Service for income taxes due from them arising from taxable income attributed from the Company. The lien is subordinated in favor of the lender for the Term Loan (Note 7). DISPUTE BETWEEN PRINCIPAL SHAREHOLDERS Daryl Kollman and Marta C. Carpenter, shareholders who together own approximately 62% of our outstanding shares of common stock, divorced during 2002. Daryl Kollman and Marta Carpenter jointly are lessors of a substantial portion of our facilities, including office space, processing and freezer storage space. Although one lease is in effect until 2005, we lease the rest of these facilities on a month-to-month or year-to-year basis. The Court ruled Daryl Kollman and Marta Carpenter's joint ownership in these real property assets will be divided equally in each property and that they must sell the properties and improvements to pay the indebtedness to the Internal Revenue Service. The disposition of these properties pursuant to the divorce could have an adverse or disruptive effect on our operations, if the party who purchases a particular property elects to significantly increase rents or terminate any such lease arrangement at the end of the then current lease term. In addition, compliance with discovery requests may also have a disruptive effect on our business and operations, and it may be necessary for our Chief Executive Officer, Marta Carpenter, to spend a portion of her time devoted to handling matters related to the divorce decree. Moreover, Daryl Kollman is no longer actively involved in management and has been unwilling to execute personal guarantees on our behalf, as he has done in the past. On May 14, 2001, Marta Carpenter petitioned the Circuit Court for the State of Oregon with a motion seeking, among other court orders, to enjoin Daryl Kollman from interfering with any future loan applications of Marta Carpenter or us and a self executing judgment provision whereby the court would sign a loan application on behalf of Daryl Kollman. The court subsequently held that Daryl Kollman is to cease and desist from any such endeavors of interfering with our loan applications during the pendency of the dissolution proceedings and is prohibited from writing letters or communicating orally with any lending institutions unless requested to do so by the institution. The court also held that Daryl Kollman, if presented with loan documents to sign and if he objects to those documents in form or content, must first raise his objections with the court. On January 29, 2002, the Court issued its written Order after the matter was heard before the court at trial on December 10, 11, and 12, 2001. The Court ruled that Marta Carpenter and Daryl Kollman were each entitled to an equal division of their respective stock ownership in our Company, thus resulting in no change in our current ownership. Any remaining proceeds from the sale of real estate after the payment of Federal and State taxes applicable to the sale will be shared equally. The Company does not believe the Court Order issued on January 29, 2002, will have a material impact on our business since we believe that we can maintain our favorable leases in the event of the sale of the properties or provide for an adequate transition to other properties for the orderly continuation of our business. F-21 COVENANTS RELATED TO THE PRIVATE PLACEMENT TO MR. ZUBAIR KAZI In connection with the sale of 1,157,895 common shares to a private investor in 1999, the Company made certain promises to the investor. In the event that the consolidated shareholders' equity of the Company is less than $20,000,000 at December 31, 1999 and the first reset date (see below), the Company shall immediately issue to Mr. Zubair Kazi additional common stock and warrants. The amount shall equal 1,157,895 multiplied by the percentage by which the shareholders' equity is less than $20,000,000. The Company has not maintained shareholders' equity of $20,000,000. As of March 31, 2003, we had not filed a registration statement and consequently, Mr. Kazi was entitled to an additional 3,333,192 penalty shares of common stock and warrants. Subsequent to March 31, 2003, we issued to Mr. Kazi 3,333,192 shares of common stock and we converted the accrued liability of $624,860 to equity. Warrants to purchase an additional 3,333,192 shares of common stock are also due to Mr. Kazi and have not yet been issued. We have accrued and will continue to accrue additional penalties until the shares are registered. The accrued liability related for the issuance of these shares and warrants is $82,537 at December 31, 2003. Also, if within one year after October 19, 1999 the Company sells its common stock at a price less than $1.425 per share in an event other than in a registered underwriting, the Company shall immediately issue to Mr. Zubair Kazi such additional shares of common stock and warrants so that Mr. Zubair Kazi maintains his percentage shareholdings as if he had purchased shares of common stock at the reduced purchase price. The Company did not sell any common stock during the one year period ended October 19, 2000 or for the period from October 20, 2000 to December 31, 2003. The Company is obligated, upon the effective date of its next registration statement (First reset date), to issue additional purchased securities in accordance with the following reset rights: o If the ratio of $1.425 per share divided by the average closing bid price for the last twenty trading days prior to the first reset date (the first reset ratio) is greater than the ratio of $1.425 divided by the average closing bid price for the last twenty days prior to the execution of the Term Sheet, or September 13, 1999 (the Initial Ratio), on the first reset date, then the Company shall issue to the investor additional purchased securities so that the initial ratio and the first reset ratio are equal and pursuant to the following formula: o Amount of Additional Purchased Securities = ((First Reset Ratio)/(Initial Ratio)-1) times 1,157,895. o In addition, if the investor holds any Purchased Warrants for the period covered by the last three reset dates, the exercise price of these Purchased Warrants shall be reduced by the following formula: Exercise Price of Purchased Warrants = ((Initial Ratio)/(First Reset Ratio)) times $1.425. The investor is entitled to five additional reset dates which will occur as follows: o The next three reset dates will occur each three months after the first reset date. o The next two subsequent reset dates will occur each six-month period thereafter. Since the Company has not filed its first registration statement, the first reset date has not yet occurred. F-22 LEASES The Company has noncancelable operating leases (Note 12), primarily for facilities space, office equipment and phone systems, which expire at various times over the next five years and thereafter. Future minimum lease payments under operating leases are summarized as follows: Years ending December 31, AMOUNT ----------------------------- ----------- 2004 $ 98,978 2005 56,678 2006 14,378 2007 14,378 2008 14,378 Thereafter 201,292 ----------- $ 400,082 ============ Rent expense for 2003, 2002 and 2001 aggregated $629,739, $841,712 and $1,178,496, respectively. NOTE 11 -- EMPLOYEE BENEFIT PLAN Effective June 1, 1994, the Company established a 401(k) Employee Savings Plan which allows eligible employees to contribute up to 15% of their compensation annually. The plan allows for Company matching at the discretion of management. Each employee receives a pro rata allocation of the discretionary matching based on the employee's compensation in relation to the compensation of all participants entitled to profit sharing contributions. The Company matching aggregated $51,451, $47,459 and $52,614 in 2003, 2002 and 2001, respectively. NOTE 12 -- RELATED PARTY TRANSACTIONS The lease agreements described and summarized in Note 10 include certain building and equipment leases in which the lessors are shareholders of the Company. Rental payments to the shareholders for 2003, 2002 and 2001 aggregated $624,200, $766,910 and $1,127,855, respectively. The amount payable to a related party at December 31, 2003 and 2002 is due to shareholders Marta C. Carpenter and Daryl J. Kollman and relates to unpaid rent on properties owned by them. The Company also received management fees and other income of $68,617, $192,762, and $196,218 from Marta C. Carpenter, Daryl J. Kollman and Klamath Cold Storage during 2003, 2002, and 2001 respectively, which is included in other income in the consolidated statement of operations. The Company paid consulting fees to a non-employee director of $35,035, $31,873 and $32,500 during 2003, 2002 and 2001, respectively. F-23 NOTE 13 -- OTHER INCOME Other income insists of the following:

NOTE 14 -- CONCENTRATION OF CUSTOMERS AND SUPPLIERS No customers accounted for more than 10% of sales during the years ended December 31, 2003, 2002 and 2001. One vendor supplied approximately 42%, 45% and 55% of the products that the Company purchased for the years then ended. F-24 NOTE 15 -- QUARTERLY RESULTS (UNAUDITED) Quarterly results for the years ended December 31, 2003 and 2002 are reflected below:

(a) Includes third quarter adjustments. During the third quarter of 2002, we recorded an adjustment to decrease our net income by $3,100,000. The adjustment was to record an additional provision for unsaleable inventories. During the third quarter of 2003, we recorded an adjustment to decrease net income by $2,200,000. The adjustment was to record the impaired fair market value of our old harvest building. (b) Includes fourth quarter adjustments. During the fourth quarter of 2002, we recorded an adjustment that increased its net loss by $873,529. The adjustment was a charge to Write-down expense for the impairment of certain Property, Plant & Equipment. During the fourth quarter of 2003, we recorded an adjustment to decrease net income by $544,233. The adjustment was to record additional provision for unsaleable inventories. F-25

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