<PAGE>
 
                                 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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

___  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 0-26362
                                               -------

                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                    --------------------------------------
            (Exact name of Registrant as specified in its charter)

             TEXAS                                        76-0416176
             -----                                        ----------
  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
  incorporation or organization)                            

          9101 JAMEEL
        HOUSTON, TEXAS                                       77040
  ---------------------------                                -----
(Address of principal executive office)                    (Zip Code)

      Registrant's telephone number, including area code:  (713) 460-1976

          Securities Registered Pursuant to Section 12(b) of the Act:

                                                     Name of each Exchange
     Title of each Class                              on Which Registered
            NONE                                              NONE

          Securities Registered Pursuant to Section 12(g) of the Act:

                          $.01 par value common stock
                          ---------------------------
                               (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 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.  [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on December 31, 1997 was $20,707,300.

The number of shares outstanding of the Registrant's common stock on December
31, 1997 was 5,789,900.
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K is incorporated by reference to the Registrant's
definitive proxy statement which is expected to be filed within 120 days of the
end of Registrant's fiscal year ended September 30, 1997.
<PAGE>
 
                                    PART I

                               ITEM 1.  BUSINESS


BACKGROUND

The Company is a Texas corporation organized in September 1993 to be the
surviving corporation of the merger (the "Merger") of the Company and its
predecessors, Nutrition Express Corporation of Colorado, Inc. and Nutrition
Express Corporation of Utah, Inc.  The Merger was effected in June 1994.

The Company develops products that are designed for health-conscious consumers,
and sells those products to consumers through its network of independent
distributors.  The Company has developed a network of approximately 98,500
distributors.  The Company offers a product line of approximately 364 products
in nine categories, including nutritional supplements, health foods, weight
management items, skin care products, other consumer products, and services.

The Company develops products that it believes will have market appeal to its
distributors and their customers, and assists its distributors in building their
own businesses.  The advantages the Company offers to distributors is that they
can start a business without normal start-up costs and other difficulties
usually associated with new ventures.  The Company provides product development,
marketing aids, customer service, and essential record-keeping functions for its
distributors.  The Company also provides other support programs to the
distributors including international teleconferencing calls, international and
regional seminars, a proprietary "monthly" magazine, business training systems
and a site on the World Wide Web of the Internet (www.nutritionforlife.com)

Distributors actively recruit interested people to become new distributors for
the Company.  These recruits are placed beneath the recruiting distributor in
the "network" and are referred to by the Company as that distributor's
"downline".  Distributors earn commissions on sales generated by the
distributors in their downline as well as on the sales they generate directly.

The Company's marketing program is designed to provide incentive for
distributors to build an organization of recruited distributors in their
downline to maximize their earning potential.  The Company has experienced a
substantial increase in the number of distributors.  The number of distributors
increased from approximately 37,800 on September 30, 1994 to approximately
98,500 on September 30, 1997.

In 1996 the Company's marketing program became the subject of regulatory
scrutiny and the Company was named as a defendant in class action lawsuits.  The
Company believes that these matters have had a material effect on the Company's
operations and financial condition.  See "Risk Factors" below and Items 3, 7 and
8.

The Company purchases most of its products directly from manufacturers and sells
them to its independent distributors located in all 50 states, the District of
Columbia, Canada, Guam, Korea, the Republic of Philippines, Puerto Rico, the
United Kingdom, and the Republic of Ireland.  The Company hopes to expand its
efforts in these countries and in other parts of the world.  The Company has two
wholly-owned subsidiaries, Nutrition For Life International (UK) Ltd. and 
Nutrition For Life Philippines, Inc. Unless the context otherwise requires, the
term, the "Company", as used in this report includes the Company's wholly-owned
subsidiaries.

The Company intends to pursue its business strategy of increasing sales and
profitability by (1) attracting and retaining distributors to its network
marketing system; (2) increasing product sales to existing distributors; (3)
expanding its marketing activities into new international markets; and (4)
adding complimentary services.
<PAGE>
 
The Company's executive offices are located at 9101 Jameel, Houston, TX 77040.
Its telephone number is (713) 460-1976.

DISTRIBUTION AND MARKETING

The Company's products are distributed through a network marketing system
consisting of a network of approximately 98,500 distributors.  Distributors are
independent contractors who purchase products directly from the Company for
their own use and for resale to retail consumers. Distributors may elect to work
on a full-time or part-time basis.  Management believes that its network
marketing system is well suited to marketing its nutritional supplements and
other products because sales of such products are strengthened by ongoing
personal contact between retail consumers and distributors, many of whom use the
Company's products themselves.  The Company encourages its distributors to use
the Company's products.  No one distributor directly accounted for more than 5%
of the Company's sales in either of the past three fiscal years.

The Company's ability to increase sales is significantly dependent on its
ability to attract, motivate and retain distributors.  The Company utilizes an
innovative marketing program which it believes is superior to programs offered
by other network marketing companies.  The program provides financial
incentives, distributor  training and support, a low priced starter kit, no
inventory requirements, and low monthly purchase requirements.  Management
intends to reach potential new distributors through advertising, the Company's
site on the World Wide Web, teleconferencing and regional sales meetings.

Distributors' revenues are derived from several sources.  First, distributors
may receive revenues by purchasing the Company's products at wholesale prices
and selling the Company's products to customers at retail prices.  Second,
distributors earn the right to receive commissions upon attaining the level of
"executive."   Executive level distributors may earn commissions on product
purchases by other distributors in their downline organization.  The first level
of each executive may initially have no more than four executives, and, until
qualifying as a Platinum executive, commissions may be earned on the sale of
product to executives in up to the first seven levels of their downline.  The
qualification for a distributor to earn commissions is a one time requirement
and there are four ways of meeting this requirement which are as follows:

  .  Generate cumulative qualifying product volume of $1,500 over any period of
     time

  .  or generate cumulative qualifying product volume of $1,200 over any period
     of time and enroll in the optional Order Assurance Program

  .  or generate cumulative qualifying product volume of $1,000 over any period
     of time, enroll in the optional Order Assurance Program at the monthly
     level of $100 and subscribe to the $35 monthly optional Master Developer
     Series

  .  or generate cumulative qualifying product volume of $500, enroll in the
     optional Order Assurance Program at the monthly level of $100, subscribe to
     the $35 monthly optional Master Developer Series and the monthly optional
     Virtual Voice Messaging Service, and purchase selected business building
     tools for $150

"Qualifying product volume" is product the distributor and his other downline
distributors purchase at wholesale directly from the Company either for personal
use or for sale to other customers at retail.  There is no time limit to meet
these qualifications, and distributors may choose to become executives the same
day that they enroll as a distributor or over any period of time.  An executive
level distributor may attain higher levels of commission based on sales
generated by distributors 

                                       2
<PAGE>
 
within his or her organization. The only qualification to remain an executive is
to purchase $40 in product every other month, except that distributors who have
become executives by generating cumulative qualifying product value of only $500
must continue their participation in the other programs noted above for one year
from enrollment in order to maintain executive status. Management believes that
the right of executive level distributors to earn commissions contributes
significantly to the Company's ability to retain its productive distributors.
Management also believes that the timely introduction of new and topical
programs and products has assisted the Company to increase its network of
distributors.

The Company previously denominated a program as the "Instant Executive Program".
The Instant Executive Program designation merely referred to the option by which
distributors could choose to qualify immediately rather than through incremental
product purchases over time.  The Instant Executive Program, particularly as
marketed by Kevin Trudeau, a key distributor of the Company, has been the
subject of legal and regulatory scrutiny.  The Company has determined to
discontinue the use of the terminology, "Instant Executive Program".  However,
the qualification requirements for distributors to attain the level of
"executive distributor" and the commissions and bonuses which may be earned as
an executive distributor have not changed.  

In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau,
and Jules Leib, People v. Trudeau (the "Illinois Suit").  The Company was not
                -----------------                                            
named as a defendant in the Illinois Suit, but the Company's management viewed
the Illinois Suit as an opportunity to discuss the Company's marketing program
and to resolve confusion surrounding the program.  On July 16, 1996, the Company
entered into an "Assurance of Voluntary Compliance" (the "AVC") with the
Attorney General.  The AVC preserves the ability of a new distributor to become
an executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the Order Assurance Program
("OAP") and Master Developer Series.  Under the AVC, the Company may maintain
its same executive level qualifications, but to aid clarification, the Company 
will no longer use the "instant executive" terminology.

Other key features of the AVC focus on the Company's commitment to:  (a) create
an official explanation of its marketing and compensation plan and to prohibit
distributors from creating their own explanations of how the marketing and
compensation plan works; (b) make clear that there are no mandatory purchases of
product to become a distributor; (c) take further steps to stress distributor
compliance with the Company's policies and procedures; and (d) create a World
Wide Web site on the Internet to provide more information about the Company's
products and programs.  The Company also agreed to provide distributor earnings
disclosures and to make clear that executive distributors cannot earn
commissions unless they are engaged in the sale of the Company's products to
consumers at retail, including procedures to verify retail sales.  Specifically,
an executive distributor will not be entitled to receive bonuses or commissions
on downline sales unless within the preceding one month period the executive
distributor has made at least five retail sales, or within the preceding two
month period has made ten retail sales. The Company also agreed to take
additional steps to encourage distributors to redeem OAP certificates for
product and to limit the number of OAP certificates (See "Order Assurance
Program"), to monitor customer purchases, and to make a contribution to the
Illinois Consumer Education Fund.

The Company entered into similar agreements with the states of Florida, Hawaii,
Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey and Pennsylvania.  The
Company has agreed that in Florida, distributors who want to receive commissions
must state, when placing orders, that they have sold to consumers 70% of their
prior commissionable product purchase.  The Company has agreed to establish
procedures to independently verify consumer sales on a random basis and to

                                       3
<PAGE>
 
sanction distributors submitting false information.  Implementation of these
agreements by the Company could make the program less attractive to distributors
and prospective distributors.  In particular, the Company believes that the
special requirements in the Florida agreement have had a negative impact on the
Company's ability to retain and attract distributors in Florida.  These factors
could negatively impact the Company's future operating results.  See Item 7.
The Company maintains an ongoing compliance program which includes periodic
reporting to the states.

To become a distributor, a person must be sponsored by an existing distributor,
sign the official Distributor Agreement and purchase a "distributor success kit"
from the Company.  The Company revised its official Distributor Agreement in
connection with the AVC.  It is emphasized in the Distributor Agreement that in
order for a distributor to be successful in the Company's program, the
distributor must purchase and sell the Company's products at retail and sponsor
other distributors to do the same.  It is also emphasized that the distributor
must retail or use in business building 70% of the product he or she purchases
before more product may be purchased from the Company.  A distributor success
kit currently costs approximately $49 and provides sales aids, brochures, order
forms, audio and video cassette recordings and a subscription to the Company's
monthly publication, Lifestyles.
 
The following table sets forth the number of the Company's distributors on the
dates indicated:

<TABLE> 
<CAPTION> 
                                                       At September 30,
                                                       --------------- 

                                             1997      1996      1995      1994
                                             ----      ----      ----      ----
   <S>                                      <C>       <C>       <C>       <C> 
   Approximate number of distributors(1)    98,500    87,400    57,300    37,800
</TABLE> 

_________________________
 (1)  Includes "active" distributors only.  A distributor remains active by
      generating a minimum of $40 in sales volume at least once every 12 months.
      In order to maintain executive status and to be eligible for commissions
      and bonuses, an executive distributor must generate a minimum of $40 in
      sales volume every other month.

The Company seeks to expand its distributor base in each market by offering
distributors attractive compensation opportunities.  Management believes the
Company's executive level distributor compensation plan is superior to that of
other network marketing organizations because the program offers an opportunity
for the distributor to become successful without having to finance a large
inventory of products and requires only a modest amount of sales to meet the
commission requirements.

The Company participates in rallies in various key cities in North America,
Puerto Rico, the United Kingdom and Pacific Rim countries and participates in
motivational and training events in key countries, all of which are designed to
inform large numbers of prospective and existing distributors about the
Company's product line and selling techniques.  Distributors give presentations
relating to their experiences with the Company's products and the methods by
which they develop their distributor organizations.  Specific selling techniques
are explained, and emphasis is placed on the need for consistency in using such
techniques.  Participants are encouraged to ask questions regarding selling
techniques and product developments and to share information with other
distributors attending the rallies.  Distributors are also given opportunities
to interact with other distributors and to develop confidence in selling and
goal-setting techniques.  Motivation is offered to participants in the form of
recognition, gifts, excursions and tours, which are intended to foster an
atmosphere of excitement throughout the distributor organization.  Prospective
distributors are educated about the structure, dynamics and benefits of the

                                       4
<PAGE>
 
Company's network marketing system.  During the fiscal years ended September 30,
1995, 1996 and 1997, the Company expended approximately $138,000, $348,000, and
$590,000, respectively, on promotional activities related to distributors'
rallies and the annual convention.  Also, during the year ended September 30,
1997, the Company accrued $1,200,000 related to a cruise for certain
distributors scheduled for February 1998.  See Item 7.

In July 1996 the Company entered into an Administrative and Consulting Services
Agreement (the "Agreement") with Distributor Services, L.L.C. ("DS").  DS is an
affiliate of Nightingale-Conant, a major supplier of self improvement programs
to the Company.  It is provided in the Agreement that, except to the extent the
Company produces its own material in-house, DS will have the exclusive right to
produce and sell all of the Company's recruiting and training material.  Such
materials will be produced and marketed at the expense of DS and DS will be
entitled to all revenues received from the sales of such materials.  DS has also
been granted the exclusive right to produce, organize and sell, at its own
expense, admission to all Company sponsored recruiting or promotional events and
to receive all revenues received therefrom.  The Company will have the exclusive
right of approval over the content of all materials and meetings produced by DS.
Without additional compensation, DS will provide consulting services to the
Company with respect to the Company's marketing strategy and program, including
the Company's weekly teleconference, magazine and other communications with
distributors.  For a fee, DS will also produce and provide to the Company each
month at least four master cassettes for sale by the Company in the Company's
Master Developer Series.  The term of the Agreement is fifteen years and the
parties have agreed to negotiate in good faith successive fifteen year terms.
The Agreement may be earlier terminated for breaches of any material obligation.
Kevin Trudeau, a key distributor of the Company, is principally responsible for
DS's performance in connection with this Agreement.  Mr. Trudeau also produces
self improvement tapes which are sold by Nightingale-Conant to the Company and
others.

In July 1997 DS made a promissory note payable to the Company in the amount of
$632,000, which represented the balance due the Company on account.  The note
bears interest at 8% per annum.  DS supplies to the Company certain business
building materials which the Company offers for sale.  All proceeds from sale of
these products will be credited to the amount payable on the note.  Any
remaining balance on the note after application of the credits from these sales
will be due in July 1998.  At September 30, 1997, the principal balance was
$229,000.

The Company continues to develop marketing strategies and programs to motivate
distributors.  These programs are designed to increase distributors' monthly
product sales and the recruiting of new distributors.  Some of the programs that
the Company has implemented are as follows:

CAR BONUS PROGRAM.  The Company offers a car bonus program, whereby it makes car
payments up to $3,500 per month for qualifying distributors.  The Company has no
liability relating to the financing or purchasing of the automobile.  The car
bonus program was initiated in fiscal 1990.  At September 30, 1997, the Company
had 378 distributors in the program.  The requirements for a distributor to
qualify for the car bonus program are as follows:

  .  Generate $100 sales volume for nine consecutive months (or six months if
     the distributor commits to the optional Order Assurance Program at the $100
     per month level and subscribes to the optional Master Developer Series).

  .  The distributors' third level executives must generate at least $4,000 in
     sales volume for two consecutive months (that would be in either the fifth
     and sixth month, or eighth and ninth month, depending on qualifications).

                                       5
<PAGE>
 
  .  As the distributors' third level generates higher sales volume, the Company
     will make larger monthly payments up to a maximum of $3,500 per month.

ORDER ASSURANCE PROGRAM.  The Company provides a program whereby the distributor
may enroll in a minimum ordering program in order to save for big ticket items
and enhance their eligibility for commissions.  Minimum orders ranging from $41
to $300 per month are automatically placed by credit card or check.  Differing
amounts for the optional Order Assurance Program exist to allow generation of
sales volume at various levels that generally correspond to commission and bonus
qualification levels, i.e., $40 is the minimum sales volume to remain an active
executive; $80 is the minimum sales volume to qualify as a bronze or silver
executive; $100 is the minimum sales volume qualification level for the car
bonus program; $160 is the minimum sales volume to be eligible for gold
executive; and $300 is the minimum sales volume requirement to be a platinum
executive.  Therefore, this Program promotes sales for the Company and the
distributors participation in bonus programs.  The Order Assurance Program was
initiated in fiscal 1993.  The Order Assurance Program is voluntary and no
restrictions are placed upon any participant's ability to exit the Order
Assurance Program.  The Company agreed in the AVC that, effective January 1997,
a distributor would not receive additional product certificates under the
Program and would be given 30 days notice that their Program status would be
suspended if: (i) four monthly unredeemed certificates were issued consecutively
to the distributor for a maximum credit of four times the distributors
enrollment level; or (ii) the distributor had accumulated unredeemed
certificates with a total face value of six times the distributors then
designated Program amount.  However, these requirements would not be applicable
if the distributor redeems one or more of the issued certificates, or notifies
the Company that he is accumulating toward a "big ticket" item.  The Company
also agreed in the AVC to encourage distributors to redeem their certificates
for product.  It is the Company's current practice to issue packages of pre-
selected products in lieu of issuing additional certificates to distributors who
would otherwise be subject to suspension from this Program.  As of September 30,
1995, September 30, 1996 and September 30, 1997, respectively, there were
approximately 22,800, 41,700 and 34,400 distributors enrolled in the Order
Assurance Program.

PERSONAL RECRUITING AND SALES CAMPAIGNS.  These programs were developed to
assist distributors in developing their downlines and increasing product sales.
These programs provide special incentives for quicker qualification into the
executive level distributor compensation program.

As a part of the Company's commitment to maintain constant communication with
its distributor network, the Company offers the following support programs:

24 HOUR TELECONFERENCE.  The Company provides 24 hour access to a weekly
recorded teleconference call to its distributors that includes interviews with
successful distributors, current product information, announcements and product
specials offered by the Company.  The teleconference calls were initiated in
fiscal 1994.

VIRTUAL VOICE.  The Company provides a special voice messaging program which
gives distributors voice messaging capabilities to communicate more efficiently
with their downline.  This program also allows the Company to automatically
voice message all distributors on the Virtual Voice Program.

MIND AND BODY INSTITUTE.  The Company developed a series of one-day product
workshops to enhance distributor understanding and appreciation of the Company's
product line.

                                       6
<PAGE>
 
FREEDOM MAGAZINE.  The Company publishes Freedom Magazine, a multilingual
publication that provides information on the network marketing industry and the
Company.  The magazine was developed in fiscal 1994 to recruit new distributors
by answering the most commonly asked questions by potential new distributors.
Management believes it is one of the more effective marketing tools in the
industry.

MASTER DEVELOPER SERIES.  The Company provides a monthly subscriber service of
leading self development books and audio and video programs that serve as a link
between the philosophy and ideals of the Company and its distributors.

PRODUCT LITERATURE.  The Company produces for its distributors comprehensive and
attractive four color catalogues and brochures that display and describe the
Company's products.

TOLL FREE ACCESS.   The Company furnishes toll free numbers for: (1) placement
of orders, (2) customer service assistance, and (3) faxing of orders.

The Company experienced significant growth in sales in the fiscal years ended
September 30, 1995 and September 30, 1996.  Management of the Company believes
this is directly related to the increases in both the number of distributors and
the monthly sales per average number of distributors.  Management also believes
the significant part of the Company's growth is attributable to the enthusiasm
and momentum generated by executive level distributors who are able to motivate
their downline organizations through various marketing methods, including the
use of newsletters, brochures and other sales aids and the holding of meetings
and rallies at the expense of the sponsoring distributor.

Commencing with the last quarter of the fiscal year ended September 30, 1995,
one executive level distributor, Kevin Trudeau, was particularly noteworthy in
this regard, and he has made a significant contribution to the growth of the
Company.  Effective October 24, 1997, Mr. Trudeau entered into an exclusivity
agreement with the Company for a period of eight years.  Under the agreement,
Trudeau will devote substantial effort to his position as a key distributor of
the Company, which will include conducting opportunity meetings and training
seminars, producing tapes for the Company's Master Developer Series, and
consulting with Management of the Company.  Trudeau has agreed that he will not
engage in any business that markets products through a network or multilevel
marketing system other than through the Company or its affiliates. Pursuant to
the agreement, Trudeau is expected to continue to engage in other business
activities (which include sales of products similar to those offered by the
Company so long as they are not offered through a network marketing system) and
it is acknowledged that he is not an employee, director or officer of the
Company and not involved in management of the Company.  Trudeau will be entitled
to receive approximately 0.75% of the Company's sales on a monthly basis
(commencing October 1997), in addition to his regular distributor earnings.

Mr. Trudeau has sponsored radio and newspaper advertisements and radio and
television infomercials to attract new distributors.  Mr. Trudeau has
substantial prior experience in product sales through the use of infomercials.
In addition, he has served as a host of a series of infomercials entitled "A
Closer Look" and "Vantage Point".  Mr. Trudeau is the producer of the "Mega
Memory" home study course and is the author of Kevin Trudeau's Mega Memory book
                                               ----- --------- ---- ------     
which was published in 1995 by William Morrow.  He founded the American Memory
Institute, a memory training school, in 1983.  Mr. Trudeau has also been
featured as a prominent speaker at motivational seminars and other programs.

                                       7
<PAGE>
 
During the past five years, Mr. Trudeau has also been engaged in other
activities, including KT Corp., which is a distributor of the Company, the
Trudeau Marketing Group, and Distributor Services, L.L.C., which markets sales
aids, memory tapes and other products to distributors of the Company, and Mega
Systems, Inc., which markets memory and other home study courses.  Mr. Trudeau
is no longer employed by Mega Systems, Inc.  In December 1996 Mr. Trudeau
informed the Company that he is the subject of a potential complaint by the U.S.
Federal Trade Commission ("FTC"), which alleges that a number of infomercials in
which Mr. Trudeau participated in marketing products of Mega Systems, Inc.,
including "Mega Memory" tapes, were false and misleading.  Mr. Trudeau has
informed the Company that he is engaged in discussions regarding settlement of
this matter.  The pendancy and/or resolution of this matter may affect
Mr.Trudeau's ability to act effectively as a distributor of the Company.  It is
presently unknown whether this matter will affect the Company's distribution and
marketing of "Mega Memory" tapes or other products produced by Mega Systems,
Inc.  See "Risk Factors".

In 1990 Mr. Trudeau plead guilty in a Massachusetts state court to larceny
involving a bank overdraft. He was incarcerated for 21 days and received a
suspended sentence of three years.  In 1991, Mr. Trudeau plead  guilty in
federal court in Massachusetts to credit card fraud involving the use of credit
cards belonging to others for personal use and was sentenced to 24 months
incarceration and 24 months supervised release.  Mr. Trudeau has informed the
Company that he is no longer under any parole or other type of  supervised
provisions.  In addition, in 1990, Mr. Trudeau filed a Petition under Chapter 13
of the Bankruptcy Code in the United States Bankruptcy Court in Dallas, Texas.
Shortly after the filing, Mr. Trudeau withdrew the Petition and no further
action was taken.  Mr. Trudeau has been the subject of regulatory scrutiny and
certain legal proceedings.  Mr. Trudeau is a key independent distributor of the
Company, but is not an officer or director of the Company, and is not authorized
to make statements about Company policy.  See "Risk Factors".

MARKETS

The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country, and historical
sales information by country during the periods indicated.
 
                                       8
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                           Year Ended September 30,
                                                           -----------------------
                                                                 (in Thousands)
                                 Year
          Country               Entered            1997              1996            1995            1994
          -------               -------            ----              ----            ----            ---- 
          <S>                   <C>             <C>               <C>             <C>             <C>
          United States            1984         $73,000           $89,400         $25,800         $14,700

          Canada                   1993           6,800             6,400           4,200           2,400
                     
          Puerto Rico              1994             500             1,200           2,200             300
                        
          United Kingdom(1)        1996           2,500               200             ---             ---
                              
          Korea(2)                 1991             ---               100             100             100
                      
          Philippines(2)           1993             200               100             100             100
</TABLE> 
                               

          _____________________________
          (1)    The Company commenced operations in the United Kingdom in
                 September 1996. The Company commenced operations in Ireland in
                 May 1997, which results are included in the United Kingdom.

          (2)    The Company has historically sold its products to distributors
                 in Korea and the Philippines which do not use the Company's
                 network marketing system. The Company introduced its network
                 marketing system in the Philippines in July 1997.

The Company currently plans to enter additional markets outside the continental
United States.  In some instances, regulatory approvals may be required.  During
the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify certain aspects of its network marketing system as necessary to comply
with applicable regulations.

The Company may also need to undertake the steps necessary to meet the
operational requirements of new markets, including plans to satisfy the
inventory, distribution, personnel and transportation requirements of the new
market.  The Company may also need to modify its distributor manuals, cassette
recordings, videocassette and other training materials as necessary to be
suitable for the new markets.  The Company has prepared manuals in English,
French and Spanish.  Currently, the Company's products are initially distributed
to all markets from the Company's Houston, Texas distribution center.  The
Company has established an office and warehouse center in Warrington, England to
provide administrative, shipping and warehouse support for the Company's
operations in the United Kingdom and Ireland.  The Company has also established
an office in Pasig City, Philippines in addition to warehouse centers in Quezon,
Davao and Cebu, Philippines.

                                       9
<PAGE>
 
PRODUCTS

The Company markets and distributes an extensive product line of approximately
364 items in nine different categories:  (1) vitamins, minerals and
antioxidants; (2) Nutique personal care items; (3) food and weight management
items; (4) herbal formulas; (5) homeopathic and special formulas; (6) cleaning
concentrates; (7) filtration systems; (8) self-improvement programs; and (9)
services.  The line consists of primarily consumable products that are designed
to target the growing consumer interest in natural health alternatives for
nutrition and personal care.  In developing its product line, the Company has
emphasized quality, purity, potency, and safety.

VITAMINS AND MINERALS AND ANTIOXIDANTS.  The Company markets approximately 49
vitamin and mineral products that are offered in a variety of combinations
including the Company's proprietary Grand Master(R), Master-Key Plus(R), and
OraFlow Plus(R) formulations.

NUTIQUE PERSONAL CARE ITEMS.  The Company markets 29 Nutique hair and skin care
products including skin care formulas for men and women, shampoo and
conditioner, hand and body lotions, sunscreen, an alphahydroxy acid skin
rejuvenating complex, and a thigh creme.  Each of these products contains
ingredients that are formulated to promote healthier looking skin and hair.

FOOD AND WEIGHT MANAGEMENT ITEMS.  The Company markets over 70 food and weight
management products.  These include a whey beverage in five flavors, the Nutri-
Mac line of pastas, the Nutri-Blend flour and baking mixes, instant food shakes,
fiber products, the Nutri-Cookie(R), Lean Life(R), a herbal weight management
formulation, and a new line called Heartful Gourmets, which are soy-based meals
and snacks.

HERBAL FORMULAS.  The Company's 33 herb and herbal formulation products are
produced using only natural ingredients and are precisely measured and carefully
processed into a convenient tablet or capsule form.  The line consists of many
traditionally popular herbs such as alfalfa, ginkgo biloba, garlic, Cat's Claw,
and St. John's Wort, as well as special blends developed by the Company.

HOMEOPATHIC AND SPECIAL FORMULAS.  Homeopathic remedies, when prepared in minute
amounts, mimic disease symptoms and stimulate the body's defense systems.  The
Company offers 74 homeopathic remedies that have been formulated in accordance
with the Homeopathic Pharmacopoeia of the United States.  In addition, the
Company markets a variety of other special formula products including shark
cartilage liquid and capsules, pain relief formulations, cough syrup, digestive
aids, sports massaging gel, a special formula dentifrice and special
phytochemical products.

CLEANING CONCENTRATES.  The Company markets household cleaning products that are
non-volatile and biodegradable.  There are 21 products, including a liquid hand
and body soap, dishwasher concentrate, laundry concentrates, laundry softener, a
heavy duty cleaner-degreaser, a pine disinfectant, and a line of anti-microbial
and anti-viral disinfectants.

FILTRATION SYSTEMS.  The Company markets 31 products designed to test or improve
the quality of air and water, including electrostatic air filters and water
filtration systems.

SELF IMPROVEMENT PROGRAMS.   The Company markets approximately 55 motivational
and self improvement tapes and other products, including "Mega Memory" tapes.
The self improvement tapes are purchased primarily through arrangements with
Nightingale-Conant Corporation.

                                      10
<PAGE>
 
SERVICES.  The Company began a ninth marketing category in the fiscal year ended
September 30, 1997 called "Services."  Two new services are currently being
offered to distributors and customers, LIFEdial 1 Plus and Adnetic.  LIFEdial 1
Plus is a discounted long distance package.  Distributors may sign-up for the
service and sell it to customers.  Cellular and Internet access may be added to
the program in 1998 along with service to Canada.  Adnetic is a web-page design
and maintenance service.  Distributors are able to use the web sites themselves
and sell this service to others.  A third service, Body Check, is scheduled for
introduction in early 1998.  Body Check is a hair analysis which tests the level
of 21 elements normally found in the body.  The resulting report also includes
information regarding exposure to toxic substances.  The Body Check report can
then be used to make recommendations for the individual's specific nutritional
supplements.

During the last three fiscal years, no single product has accounted for 10
percent or more of the Company's revenue.  The Company continually seeks to
identify, develop and introduce innovative, effective and safe products.  During
the fiscal years ended September 30, 1995, 1996 and 1997, the approximate number
of new products and services introduced by the Company was 25, 70 and 44,
respectively.  Management believes that its ability to introduce new products
increases its distributors' visibility and competitiveness in the marketplace.

The Company maintains significant amounts of products in its inventory to meet
rapid delivery requirements of customers and to minimize product back orders,
which historically have not been significant. However, the Company experienced
significant back orders in the fiscal year ended September 30, 1997. See Item 7.
Due to the nature of the Company's business, the Company typically does not
carry a substantial backlog of orders.

NEW PRODUCT DEVELOPMENT

The Company expands its product line through the development of new products.
New product ideas are derived from a number of sources, including trade
publications, scientific and health journals, the Company's management and
consultants, and outside parties.  Prior to introducing products into the
Company's markets, counsel and other representatives retained by the Company
investigate product formulation matters as they relate to regulatory compliance
and other issues. To the extent possible, the Company's products are formulated
to suit both the regulatory and marketing requirements of the particular market.

The Company does not maintain its own product research, development and
formulation staff but relies upon independent research, vendor research
departments, research consultants and others for such services.  When the
Company, one of its consultants or another party identifies a new product
concept or when an existing product must be reformulated for introduction into a
new or existing market, the new product concept or reformulation is generally
submitted to the Company's suppliers for technological development and
implementation.  The Company owns the proprietary rights to a majority of its
product formulations.

                                      11
<PAGE>
 
CONSUMER PRODUCT WARRANTIES AND RETURNS

The Company's product warranties and policy regarding returns of products are
similar to those of other companies in the industry.  If a retail purchaser of
any of the Company's products is not satisfied with the product, he may return
it to the distributor from whom he purchased it at any time within 30 days of
his purchase.  The distributor is required to refund the purchase price to the
retail purchaser.  The distributor may then return the unused portion of the
product to the Company for an exchange of equal value.  Most products are
warranted against defect by the manufacturers of those products.  Most products
returned to the Company, however, are not found to be defective in manufacture.
As a result, most products returned to the Company are replaced by the Company
at its cost.

MANAGEMENT INFORMATION SYSTEM

The Company maintains a proprietary computerized system for processing
distributor orders and calculating distributor commission and bonus payments
which enables it to remit such payments promptly to distributors.  The Company
believes that prompt remittance of commissions and bonuses is vital to
maintaining a motivated network of distributors and that this has enhanced the
loyalty of the distributors to the Company.

The Company's computer system makes available to the Company's distributors a
detailed monthly accounting of sales and recruiting activity.  These convenient
statements eliminate the need for substantial record keeping on behalf of the
distributor. The computer system also is fully integrated with the Company's
financial reporting system that generates monthly reports, invoices and payroll.
As a precaution, duplicate copies of the Company's computer records are
transferred frequently to an off-site location for safekeeping.

The Company recently installed a White(R) automated inventory storage and
retrieval system in its warehouse/shipping facilities in Houston.  The system is
expected to improve operator productivity, reduce error rates and speed
throughput.  The Company should be able to handle substantially increased sales
volumes without material staffing increases.

The Company is currently installing SAP(R), an enterprise wide state-of-
the-market computer information system.  The system is expected to provide
improved administrative cost control, enhanced customer service and improved
multinational support.  The total cost, including implementation and training,
will be approximately $2,500,000.  The Company has entered into a lease
arrangement for a portion of this system.  See Item 7.

MANUFACTURING AND SUPPLIES

The Company currently purchases all of its vitamins, nutritional supplements and
all other products from third parties that manufacture such products to the
Company's specifications and standards.  The Company purchased products from
NION Laboratories ("NION") in the approximate amounts of $2,258,000, $5,234,000
and $4,190,000 for the fiscal years ended September 30, 1995, 1996 and `1997,
respectively.  Richard S. Kashenberg, a director of the Company, served as the
chief executive officer of NION until December 1996, and as a consultant to NION
from January to October 1997.  Until June, 1995 NION was owned by Shermfin
Corp., the Company's largest shareholder, and Mr. Kashenberg.  Since June 1995
NION has continued to be a principal supplier of product to the Company.  There
can be no assurance that NION will continue to be a significant and reliable
supplier to the Company.

                                      12
<PAGE>
 
The Company does not have long term supply agreements with NION or any other
vendor.  Although the Company believes that it could establish alternate sources
for most of its products, any delay in locating and establishing relationships
with other sources could result in product shortages and back orders for the
products, with a resulting loss of revenues to the Company.   In addition, such
delays could interrupt momentum in growth of product sales and distributor
recruitment.

The Company places significant emphasis on quality control.  All nutritional
supplements, raw materials and finished products are subject to sample testing,
weight testing and purity testing by independent laboratories.

TRADEMARKS AND SERVICE MARKS

Most products are packaged under the Company's "private label".  The Company has
registered trademarks with the United States Patent and Trademark Office for its
Master Key Plus(R), Oraflow Plus(R), LeanLife(R), Nutri-Cookie(R), Requin 3(R)
Grand Master(R), Phytonol(R), BioWater(R), E-Lemonator(R), Phytogreen(R)
and Nutrition For Life(R).  It has applied for trademark registration
for its BioGlow, BioRub, MasterPiece and PowerPlay.

COMPETITION

The Company competes with many companies marketing products similar to those
sold and marketed by the Company.   It also competes intensely with other
network marketing companies in the recruitment of distributors.

There are many network marketing companies with which the Company competes for
distributors.  Some of the largest of these are Amway, Nature's Sunshine
Products, Inc., Herbalife International, Inc., and Rexall Sundown, Inc.  Each of
these companies is substantially larger than the Company and has significantly
greater resources.  The Company competes for distributors by means of its
marketing program that includes its commission structure, training and support
services, and other benefits.  The Company's ability to remain competitive
depends, in significant part, on the Company's success in recruiting and
retaining distributors.  Since the last quarter of the fiscal year ended
September 30, 1995, one executive level distributor, Kevin Trudeau and his
marketing organization, made a significant contribution to the growth of the
Company.  See "Distribution and Marketing" above.  There can be no assurance
that the Company's programs for recruitment and retention of distributors will
be successful.

Not all competitors market all types of products marketed by the Company, and
some competitors market products and services in addition to those marketed by
the Company.  For example, some competitors are known for and are identified
with sales of herbal formulations, some are known for and are identified with
sales of household cleaning and personal care products, and others are known for
and are identified with sales of nutritional and dietary supplements.  The
Company's principal methods of competition for the sale of products are its
responsiveness to changes in consumer preferences and its commitment to quality,
purity, and safety.

GOVERNMENT REGULATIONS

Although the Company confines its activities to marketing and distribution, the
manufacturing, processing, formulation, packaging, labeling and advertising of
the Company's products are 

                                      13
<PAGE>
 
subject to regulation by federal agencies, including the United States Food and
Drug Administration (the "FDA"), the Federal Trade Commission, the Consumer
Product Safety Commission, the United States Department of Agriculture, the
United States Postal Service and the United States Environmental Protection
Agency. These activities are also subject to regulation by various agencies of
the states, localities and other countries in which the Company's products are
sold.

In November 1991, the FDA issued proposed regulations designed to, among other
things, amend its food labeling regulations.  The proposed regulations met with
substantial opposition.  In October 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted.  Section 11
of the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void.  FDA
regulations that became effective on June 1, 1994 would require standard format
nutrition labeling on dietary supplements.

The Dietary Supplement Law broadly regulates nutritional labeling requirements
for dietary supplements.  The final regulations were published September 23,
1997.  Provisions relating to notification to FDA of product label claims
considered "Statements of Nutritional Support" and provisions relating to new
dietary ingredients became effective October 23, 1997.  Regulations specifying
product label content will become effective March 23, 1999.

The Dietary Supplement Law provides for regulation of Statements of Nutritional
Support.  These Statements may be made if they are truthful and not misleading
and if `adequate" substantiation for the claims is available.  Statements can
describe claims of enhanced well-being from use of the dietary supplement or
product statements that relate to affecting a structure or function of the body.
However, Statements of Nutritional Support cannot claim to diagnose, treat,
cure, or prevent any disease, regardless of the possible existence of scientific
reports substantiating such claims.

Statements of Nutritional Support appearing in dietary supplement labeling must
be accompanied by a disclaimer stating that the FDA has not evaluated the
Statements.  Notification to the FDA of these Statements is not considered
approval of the Statements or products.  If the FDA determines in possible
future proceedings that dietary supplement Statements of Nutritional Support
fail to meet the requirements of the Dietary Supplement Law, a product may be
subject to regulation as a drug.  The FDA retains all enforcement means
available to it (i.e., seizure, civil or criminal penalties, etc.), when
investigating or enforcing labeling claims.

The Dietary Supplement Law also provided for the formation of a Presidential
Commission on Dietary Supplement Labels, requiring it to consider and comment
upon informational dietary supplement issues.  The Commission issued its non-
binding final report on November 24, 1997.  The report's findings are similar,
yet distinct from, the regulations enacted by the Dietary Supplement Law.  The
report addressed a broad range of issues, including the need for increased
consumer education of dietary supplement products and increased responsibility
on the part of manufacturers and distributors regarding the safety of dietary
supplement products.  The Company cannot determine what effect the report will
have on its business in the future, or whether the report will lead to any
additional legislative or regulatory intervention.

The FDA also regulates the formulation and manufacture of dietary supplements,
cosmetics and over-the-counter drugs distributed by the Company.  The FDA has
published proposed regulations for the manufacture of dietary supplements called
cGMP's.  Final cGMP regulations are not expected any earlier than the fourth
quarter of 1998.  The Company complies with good manufacturing practices for
foods, as currently required by the FDA.  The Company cannot 

                                      14
<PAGE>
 
predict whether this new legislation regulating manufacturing activities could
have a material adverse effect on the Company.

The Federal Trade Commission ("FTC") regulates advertising of the Company's
nutritional and dietary supplement products, cosmetics and over-the-counter
drugs.  The Federal Trade Commission Act prohibits unfair or deceptive trade
practices and false or misleading advertising.  The FTC has recently been very
active in its enforcement of advertising against manufacturers and distributors
of nutritional dietary supplements, having instituted several enforcement
actions resulting in signed agreements and payments of large fines.  Although
the Company has not been the target of a FTC investigation, there can be no
assurance that the FTC will not investigate the Company's advertising in the
future.

The Company is unable to predict the nature of any future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future.  They could, however, require the
reformulation of certain products not possible to be reformulated, imposition of
additional record keeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation regarding product ingredients, safety or usefulness.  Any or all
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.

The Company's network marketing system is subject to governmental laws and
regulations generally directed at ensuring that product sales are made to
consumers of the products and that compensation and advancement within the
marketing organization is based on sales of products rather than investment in
the organization.  These laws and FTC regulations include the federal securities
laws, matters administered by the FTC and various state anti-pyramid and
business opportunity laws.  Although the Company believes that it is in
compliance with all such laws and regulations, the Company remains subject to
the risk that, in one or more of its present or future markets, its marketing
system or the conduct of certain distributors could be found not to be in
compliance with applicable laws or regulations.  Failure by the Company or
significant distributors to comply with these laws and regulations could have an
adverse material effect on the Company in a particular market or in general.
See "Risk Factors" and "Distribution and Marketing" for further discussion
regarding the AVC with the Illinois Attorney General and other states, and Item
3 regarding the class action litigation against the Company which was recently
resolved.

EMPLOYEES

At September 30, 1997, the Company employed approximately 210 persons.  The
majority of the Company's employees are office, clerical and warehouse
employees.  The Company believes that its relationship with its employees is
good.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
All statements other than statements of historical fact included in this Report,
including without limitation, the statements in Items 1 and 7 regarding the
Company's financial position and liquidity, the Company's operations and
proposed operations, and other matters, may be deemed forward-looking
statements.  Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance such
expectations will prove to have been correct.

                                      15
<PAGE>
 
RISK FACTORS

Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed in this Report, including without
limitation in conjunction with the forward-looking statements included in this
Report, and the following risk factors:

RECENT LOSSES.  Although the Company experienced rapid growth in sales and
income during its fiscal years ended September 30, 1995 and 1996, it incurred a
substantial loss in the fiscal year ended September 30, 1997.  This loss was
attributable primarily to accrual of expenses related to the settlement of class
action lawsuits against the Company.  However, the Company also experienced a
decline in net sales as compared to the year ended September 30, 1996.  In
addition, the Company experienced significant increases in both cost of sales
and marketing, distribution and administrative expenses as a percentage of net
sales.  See Item 7.  The Company has increased its infrastructure during its
growth phase.  Particularly in view of the Company's increased level of
expenditures, the Company's future operating results will be negatively impacted
if the Company is not successful in regaining its growth in sales.

DISTRIBUTOR NETWORK.  The Company's products are distributed through an
extensive network marketing system of distributors.  Distributors are
independent contractors who purchase products directly from the Company for
resale and/or for their own use.  Distributors typically work on a part-time
basis for the Company, and may engage in other business activities, including
the sale of products offered by competitors of the Company.  The Company has a
large number of distributors, and a relatively small corporate staff to
implement its marketing programs and provide motivational support.  The
Company's continued growth depends to a significant degree on its ability to
retain and motivate its existing distributors and to attract new distributors by
continuing to offer new products and new marketing programs.

REGULATORY SCRUTINY AND LEGAL PROCEEDINGS.  The Company's network marketing
system is subject to governmental laws and regulations generally directed at
ensuring that product sales are made to consumers of the products and that
compensation and advancement within the marketing organization is based on sales
of products rather than investment in the organization.  These laws and
regulations include the federal securities laws, matters administered by the
Federal Trade Commission and various state anti-pyramid and business opportunity
laws.  Although the Company believes that it is in compliance with all such laws
and regulations, the Company remains subject to the risk that, in one or more of
its present or future markets, its marketing system or the conduct of certain
distributors could be found not to be in compliance with applicable laws or
regulations.  Failure by the Company or significant distributors to comply with
these laws and regulations could have an adverse material effect on the Company
in a particular market or in general.

To become a distributor of the Company, a person must be sponsored by an
existing distributor, sign the official Distributor Agreement, and purchase a
"distributor success kit" from the Company, which is currently priced at $49.
The Company's distributors earn the right to receive commissions upon obtaining
the level of "executive."  Executive level distributors may earn commissions on
sales generated by other distributors in their downline organization.  There are
three ways for a distributor to meet the requirement to become an executive,
which can be met the same day he or she enrolls as a distributor or over an
extended period of time at the election of the distributor.  The Company
previously used the terminology of "Instant Executive Program" to reference the
qualifications for becoming an executive distributor on an accelerated basis.
The Instant Executive Program, particularly as marketed by Kevin Trudeau, a key
independent distributor, and his marketing organization, was the subject of
legal and regulatory scrutiny.

                                      16
<PAGE>
 
In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau
and Jules Leib, People v. Trudeau (the "Illinois Suit") alleging violations of
                -----------------                                             
the Illinois Consumer Fraud and Deceptive Practices Act and the Illinois
Business Opportunities Sales Law of 1995 by, among other things, operating a
"pyramid sales scheme."  Mr. Leib works with Mr. Trudeau.  In addition, the
Secretary of State of the State of Illinois issued to Mr. Trudeau and the
Trudeau Marketing Group a Summary Order to Cease and Desist prohibiting them
from offering or selling "business opportunities" in the State of Illinois.
Generally, a "business opportunity" is an agreement involving sales of products
or services enabling the purchaser to start a business when the purchaser is
required to pay more than $500.  Many other states have "business opportunity"
statutes.  See "Distribution and Marketing" above for further information
regarding Mr. Trudeau.

The Company was not named as a defendant in the Illinois Suit, but the Company's
management viewed the Illinois Suit as an opportunity to discuss the Company's
marketing program and to resolve confusion surrounding the program.  On July 16,
1996, the Company entered into an "Assurance of Voluntary Compliance" (the
"AVC") with the Illinois Attorney General.  The AVC preserves the ability of a
new distributor to become an executive distributor the day that he or she
enrolls by purchasing at least $1,000 in qualifying products and by joining the
Order Assurance Program and Master Developer Series.  Under the AVC, the Company
may maintain its same executive level qualifications, but to aid clarification,
it will no longer use the "Instant Executive" designation.  The Company entered
into similar agreements with the States of Florida, Hawaii, Idaho, Kansas,
Kentucky, Michigan, Missouri, New Jersey and Pennsylvania.  The effect of the
implementation of the measures in the AVC, including the requirement that
executive distributors must make at least five retail sales in a month, and of
any agreements the Company may make with other states, is uncertain.
Implementation of these agreements may be expensive and could make the program
less attractive to distributors.  These factors could impact the Company's
future operating results.  Moreover, because the Company does not have
substantial experience operating under these agreements, there may be other
consequences which are not presently ascertainable and which could adversely
affect the Company.

The Company has been informed that in July 1996, Mr. Trudeau signed a consent
decree resolving the lawsuit with the Illinois Attorney General and entered into
a settlement agreement with the Illinois Secretary of State resolving the Cease
and Desist Order.  Among other things, Mr. Trudeau has agreed to abide by all
applicable provisions of the AVC entered into between the Company and the
Illinois Attorney General.  The Company has also been informed that Mr. Leib
entered an Assurance of Voluntary Compliance with the Illinois Attorney General.

In April 1996, the Company received notice from the Securities and Exchange
Commission of a formal order of private investigation into possible violations
by the Company of the federal securities laws.  In December 1996 the Company
received a letter from the Securities and Exchange Commission notifying the
Company that the staff inquiry had been terminated and that no enforcement
action had been recommended at that time to the Commission.

In 1996 class action lawsuits were commenced against the Company alleging, among
other things, that the Company's distributor compensation program constituted an
illegal "pyramid scheme."  In 1997, the Company entered into settlement
agreements.  The pendancy and settlement of these actions had a material adverse
effect upon the Company's operations and financial condition.  See Items 3, 7
and 8.

                                      17
<PAGE>
 
The Company does not believe that the manner in which it markets its products
constitutes a "pyramid scheme" or a "security."  The only financial requirement
to become a distributor is to purchase a "distributor success kit" which is
currently priced at a nominal charge of $49.  The Company does not pay a fee or
other compensation to distributors as direct remuneration for enrolling
distributors in their "downline" and the Company encourages all distributors to
retail their products to consumers who are not Company executives.  In addition,
the Company does not pay a fee or other compensation to distributors for sales
of product to their downline, thus, all product purchases are to be consumed by
the distributor or sold to the ultimate consumer.  The Company believes that the
efforts it has undertaken with the Illinois Attorney General and regulatory
authorities in other states, which culminated in the AVC in Illinois and
elsewhere, will assist the Company in complying with government laws and
regulations in the future.  Nonetheless, there can be no assurance that the
appropriate authorities in any states will not initiate court proceedings
against the Company for violation of applicable laws.  Furthermore, there can be
no assurances that the Company will not be subject to other lawsuits from other
governmental authorities or private parties in state or federal court.  Any such
actions could have a material adverse effect upon the Company.

NEGATIVE MEDIA AND OTHER REPORTS.  The Company's ability to continue its growth
is dependent upon the Company's success in retaining and motivating its existing
distributors and in attracting new distributors.  A significant part of the
Company's recent growth is attributable to the efforts of Kevin Trudeau and his
marketing organization (collectively referred to as "Trudeau").  Effective
October 24, 1997, the Company entered into an agreement with Mr. Trudeau
providing for the exclusive use of Mr. Trudeau's service in the network
marketing industry.

Mr. Trudeau has twice been convicted of criminal charges during the past 10
years.  See "Distribution and Marketing" above for biographical information
concerning Mr. Trudeau and the exclusive services agreement with Mr. Trudeau.
Mr. Trudeau's criminal past was highlighted in an article which appeared in The
                                                                            ---
Wall Street Journal on January 19, 1996.  The author of the article also
---- ------ -------                                                     
questioned the legality of Trudeau's marketing practices and, in particular, the
recruitment of executive level distributors.  Similar negative reports were
published on the same day by Bloomberg, a news wire service, and by cable
television station CNBC.  Other negative media reports occurred subsequently.

The Company believes that the negative reports in the financial media had a
negative impact on its retention and recruitment of distributors.  It is
presently unknown whether there will be negative reports or adverse legal
developments in the future, but if that occurred, distributor recruitment and/or
retention could suffer and there could be an adverse effect on the Company's
future sales. Moreover, even if the Company's operating results were unaffected,
the negative media coverage could adversely impact the price of the Common
Stock.

In addition, an individual who several years ago was associated with, and a
major shareholder of a predecessor of the Company, has embarked on a campaign to
discredit and harm the Company and Mr. Trudeau.  He has published negative
statements on the Internet and elsewhere regarding the Company and Mr. Trudeau
and has contacted various regulatory agencies to complain about the Company and
Mr. Trudeau.  In separate actions, the Company and Mr. Trudeau brought
defamation lawsuits against this individual. The Company was awarded a default
judgment and Mr. Trudeau was awarded damages of $10 million.  This individual
subsequently filed for bankruptcy.  The court also ordered that the defendant be
enjoined from publishing the statements alleged to be defamatory in Mr.
Trudeau's complaint against him.  Nonetheless, there is a risk that this
individual and/or others may engage in actions which would damage the reputation
of the Company and adversely affect the Company's operations.

                                      18
<PAGE>
 
STATEMENTS AND OTHER ACTIONS BY DISTRIBUTORS.  The Company's distributors are
required to sign the Company's official Distributor Agreement which requires
them to abide by the Company's policies.  Nonetheless, in certain instances
distributors have created promotional material which does not accurately
describe the Company's marketing program or may have made statements regarding
potential earnings or other matters not in accordance with the Company's
policies.  Although the Company was not sued by regulatory authorities, such
actions lead to increased regulatory scrutiny as described above.  In order to
assure itself that its policies and practices and those of its independent
distributors conform to law and fairly protect the interests of consumers, the
Company entered into an AVC with the State of Illinois and similar agreements
with several other states.  Among other things, the Company agreed in the AVC to
more carefully monitor against misdescriptions by distributors of the Company's
executive compensation plan.  The Company has approximately 98,500 distributors.
Although the Company has increased its efforts to monitor its distributors'
statements and activities, there can be no assurance that the Company will not
be subject to additional regulatory scrutiny and potential claims.  In addition,
distributors, including key distributors such as Kevin Trudeau, could make
predictive statements about the Company's operations or other unauthorized
remarks regarding the Company which the Company may be unable to control.  Mr.
Trudeau and other distributors are not authorized to make such statements on
behalf of the Company.  Nonetheless, statements or actions by Mr. Trudeau or
other distributors could also adversely affect the Company.

PRODUCT COMPETITION; COMPETITION FOR DISTRIBUTORS. The business of distributing
and marketing vitamins and minerals, personal care items, weight management
items, and other products offered by the Company is highly competitive. Numerous
manufacturers, distributors and retailers compete actively for consumers. Many
of the Company's competitors are substantially larger than the Company and have
greater financial resources. The market is highly sensitive to the introduction
of new products or weight management plans that may rapidly capture a
significant share of the market. As a result, the Company's ability to remain
competitive depends in part upon the successful introduction of new products.

The Company is subject to significant competition from other marketing
organizations for the recruitment of distributors.  The Company's ability to
remain competitive depends, in significant part, on the Company's success in
recruiting and retaining distributors.  Since the last quarter of the fiscal
year ended September 30, 1995, one executive level distributor, Kevin Trudeau
and his marketing organization, made a significant contribution to the growth of
the Company.  See "Distribution and Marketing" above.  There can be no assurance
that the Company's programs for recruitment and retention of distributors will
be successful.

DEPENDENCE ON KEY PERSONNEL.  The Company's future success depends on the
continued availability of certain key management personnel, including David P.
Bertrand and Jana Mitcham, founders, officers and directors of the Company.  The
Company has obtained "key man" insurance on the lives of Mr. Bertrand and Ms.
Mitcham with benefit amounts to the Company of $1,060,000 and $660,000,
respectively.  The Company's continued growth and profitability also depends on
its ability to attract and retain other management personnel.

FAMILY RELATIONSHIPS.  At September 30, 1997, the Company employed approximately
210 persons.  Of these 210 persons, 12 persons have a family relationship,
through birth or marriage, with either David P. Bertrand or Jana Mitcham,
executive officers of the Company.  The Company's management believes that all
of the Company's employees have been employed by the Company on the basis of
their qualifications, and that their retention by, and advancement within, the
Company has been, and will continue to be, determined by their individual
performances as an employee of the Company, and not due to any family
relationship.  

                                       19
<PAGE>
 
Nonetheless, due to the large number of family relationships, the potential for
conflicts of interest could be significant.

GOVERNMENT REGULATIONS.  Although the Company confines its activities to
marketing and distribution, the manufacturing, processing, formulation,
packaging, labeling and advertising of the Company's products are subject to
regulation by federal agencies, including the United States Food and Drug
Administration (the "FDA"), the Federal Trade Commission, the Consumer Product
Safety Commission, the United States Department of Agriculture, the United
States Postal Service and the United States Environmental Protection Agency.
These activities are also subject to regulation by various agencies of the
states, localities and other countries in which the Company's products are sold.

In November 1991, the FDA issued proposed regulations designed to, among other
things, amend its food labeling regulations.  The proposed regulations met with
substantial opposition.  In October 1994 the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law') was enacted.  The Dietary
Supplement Law broadly regulates nutritional labeling requirements for dietary
supplements.  Final regulations were published September 23, 1997.  Provisions
relating to FDA notification of product label claims considered "Statements of
Nutritional Support" and provisions relating to new dietary ingredients became
effective October 23, 1997.  Regulations specifying product label content will
become effective March 23, 1999.  The Company cannot determine what effect FDA
regulations will have on its business in the future.  Such regulations may,
among other things, require expanded or different labeling, additional record
keeping and expanded documentation of the properties of certain products and
scientific substantiation.  In addition, negative publicity associated with a
regulatory inquiry regarding products sold by the Company may adversely affect
the Company.  The Company cannot predict whether new legislation regulating its
activities will be enacted, which new legislation could have a material adverse
effect on the Company.  See "Government Regulations" above.

EXPANSION INTO FOREIGN MARKETS.  Although the Company intends to continue to
expand into foreign markets, there can be no assurance that the Company can open
markets on a timely basis or that such new markets will prove to be profitable. 
See Item 7 for a discussion of recent start-up expenditures and increased 
operating costs associated with expansion into the United Kingdom and the 
Republic of Philippines.  Significant regulation and legal barriers must be
overcome before marketing can begin in any foreign market.  Also, before
marketing has commenced, it is difficult to assess the extent to which the
Company's products and sales techniques will be successful in any given country.
In addition to significant regulatory barriers, the Company may also expect
problems related to entering new markets with different cultural bases and legal
systems from those encountered in the past.  See "Markets" above.  Moreover,
expansion of the Company's operations into new markets entails substantial
working capital and capital requirements associated with regulatory compliance.

EFFECT OF EXCHANGE RATE FLUCTUATIONS.   The Company has commenced efforts to
expand its marketing organization in foreign countries.  As a result, exchange
rate fluctuations may have a significant effect on its sales and the Company's
gross margins.  Further, if exchange rates fluctuate dramatically, it may become
uneconomical for the Company to establish or continue activities in certain
countries.

NO FIRM CONTRACTS WITH SUPPLIERS OR MANUFACTURERS.  The Company does not have
any written contracts with any of its suppliers or manufacturers or commitments
from any of its suppliers or manufacturers to continue to sell products to the
Company.  A substantial portion of the products purchased by the Company have
been supplied by NION Laboratories ("NION").  Richard S. Kashenberg, a director
of the Company, served as the chief executive officer of NION until December
1996, and as a consultant to NION from January to October 1997. Until June 1995

                                       20
<PAGE>
 
NION was owned by Shermfin Corp., the Company's largest shareholder, and Mr.
Kashenberg.  Since June 1995, NION has been owned by a corporation with no
affiliation with the Company other than Mr. Kashenberg's continuation as the
chief executive officer of, and then as a consultant to, NION.  Since June 1995
NION has continued to be a principal supplier of product to the Company.  There
can be no assurance that NION will continue to be a significant and reliable
supplier to the Company.  The Company does not have long term supply agreements
with NION or any other vendor.  Accordingly, there is a risk that any of the
Company's suppliers or manufacturers could discontinue selling their products to
the Company for any reason.  Although the Company believes that it could
establish alternate sources for most of its products, any delay in locating and
establishing relationships with other sources could result in product shortages
and back orders for the products, with a resulting loss of revenues to the
Company.

PRODUCT LIABILITIES. Although the Company does not engage in the manufacture of
any of the products it markets and distributes, the Company could be exposed to
product liability claims. The Company has not had any such claims to date.
Although the Company maintains product liability insurance which it believes to
be adequate for its needs, there can be no assurance that the Company will not
be subject to claims in the future or that its insurance coverage will be
adequate.

DIVIDENDS. The Company declared an initial cash dividend of $.02 per share of
Common Stock in September 1996, and has since paid dividends quarterly. Although
it is the Company's present intent to declare dividends on a quarterly basis,
the determination of whether to pay dividends will be made by the Board of
Directors and will depend on many factors. See Item 5.


                              ITEM 2.  PROPERTIES


PROPERTIES

The Company owns no real property. The Company's offices and warehouse
facilities in Houston, Texas are leased from non-affiliates. The Company's
office building consists of approximately 37,184 square feet and the current
monthly rental is $18,700 which escalates over the 3 year term remaining on the
lease. Additionally, the Company's warehouse consists of approximately 52,047
square feet and the current monthly rental is $16,500 which escalates over the 4
year term remaining on the lease. See Item 8. The Company also leases an office
and warehouse center in Warrington, England from a non-affiliate consisting of
approximately 16,000 square feet. The current monthly rental is $10,500 which
escalates over the nine year term remaining on the lease. The Company also
leases warehouse facilities in the Philippines aggregating 3,900 square feet for
an aggregate monthly rental of $6,200.



                          ITEM 3.  LEGAL PROCEEDINGS


As more fully discussed in Items 1, 7 and 8, the Company entered into an
"Assurance of Voluntary Compliance" with the Illinois Attorney General and
similar agreements with other states.  In the future, inquiries may continue
from various state agencies concerning the marketing of the Company's programs.

A formal investigation was commenced during the fiscal year ended September 30,
1996 by the Securities and Exchange Commission regarding possible violations by
the Company of the federal securities laws.  In December 1996 the Company
received a letter from the Securities and Exchange Commission notifying the
Company that the staff inquiry had been terminated and that no enforcement
action had been recommended at that time to the Commission.

                                       21
<PAGE>
 
In August 1996, a suit was filed against the Company in the United States
District Court for the Southern District of Texas, Houston Division (the
"Federal Action").  Also named as defendants were Kevin Trudeau, a key
distributor of the Company, the Trudeau Marketing Group, Inc., Bernard Sherman,
the largest beneficial owner of the Company's Common Stock, certain officers of
the Company, and Cohig & Associates, Inc. and Neidiger/Tucker/Bruner, Inc., the
investment banking firms which previously served as underwriters of the July
1995 public offering of the Company's securities.  The Federal Action was
brought as a class action on behalf of persons who became "instant" executive
distributors of the Company and on behalf of persons who purchased the Company's
Common Stock and Warrants between July 11, 1995 and July 16, 1996.

The principal allegations of the complaint in the Federal Action were that
certain aspects of the executive distributor compensation program constituted an
illegal pyramid scheme and the sale of an unregistered security and that the
Company failed to disclose the alleged illegality of the program and Mr.
Trudeau's past.

In August 1996, a suit was also filed against the Company and the same
defendants in the Federal Action in the District Court of Harris County, Texas
(the "State Action").  The State Action was brought as a class action on behalf
of persons who purchased Common Stock and Warrants of the Company during the
period from July 11, 1995 through July 16, 1996.

The principal allegations of the complaint in the State Action were
substantially similar to the Federal Action, i.e., that certain aspects of the
executive distributor compensation program constituted an illegal pyramid scheme
and that the Company failed to disclose that its outstanding financial results
were directly attributable to the questioned aspects of its marketing practices
and failed to adequately disclose Mr. Trudeau's past.

In January 1997, the Company reached two preliminary settlement agreements which
resolved the class actions lawsuits in the Federal Action.  The settlement
agreements in these class actions lawsuits are discussed in Item 8.  In August,
1997, the federal court approved as fair, reasonable and adequate the settlement
agreement involving the Company's distributors, and in September, 1997, the
settlement agreement involving purchasers of the Company's securities was
approved by the federal court as fair, reasonable and adequate.  The State
Action was dismissed in November 1997.


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


No matter was submitted during the fourth quarter of the fiscal year covered by
this Report to a vote of security holders.

                                       22
<PAGE>
 
                                  PART II


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

The Company's Common Stock is traded on the National Market System of The Nasdaq
Stock Market under the symbol "NFLI".  The quotations have been adjusted to give
effect to a two-for-one split of the Common Stock effected on December 8, 1995.

In connection with a public offering in July 1995 the Company issued warrants to
purchase Common Stock (the "Warrants").  The holder of one Warrant is entitled
to purchase one share of Common Stock at $3.75 per share until July 10, 1998,
unless earlier redeemed by the Company.


<TABLE>
<CAPTION>
                                              Common Stock                   Warrants
                                          -------------------         ------------------     
Quarter Ended                             High            Low         High           Low
-------------                             ----            ---         ----           ---
<S>                                       <C>             <C>         <C>            <C>
Fiscal 1996
-----------
December 31, 1995..................       $24.00          $8.63       $20.13         $5.00
March 31, 1996.....................        35.00          16.75        31.50         13.00
June 30, 1996......................        23.00           8.50        19.25          5.00
September 30, 1996.................        17.75           9.50        14.25          6.50
Fiscal 1997
-----------
December 31, 1996..................        17.50          11.00        14.00          8.25
March 31, 1997.....................        13.25           7.00         9.38          4.00
June 30, 1997......................        10.50           7.50         6.63          3.75
September 30, 1997.................        10.75           6.00         6.88          2.00
</TABLE>


As of December 31, 1997, there were 1,433 record holders of Common Stock.

The Company declared its first cash dividend on its Common Stock in September
1996, which dividend of $.02 per share was paid in October 1996.  The Company
has since continued to pay quarterly dividends of $.02 per share of Common
Stock.  The Company currently intends to continue to declare dividends in this
amount on a quarterly basis.  However, the determination of the payment of
dividends in the future will be within the discretion of the Company's Board of
Directors and will depend on the earnings, capital requirements and operating
and financial condition of the Company, among other factors.  See Items 1 and 7.


                       ITEM 6.  SELECTED FINANCIAL DATA


The selected financial data presented below for each year in the five-year
period ended September 30, 1997 have been derived from the audited financial
statements of the Company.  The data presented below should be read in
conjunction with the Company's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7.

                                       23
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                      YEARS ENDED SEPTEMBER 30,
                                         (In thousands, except Per Share and Operating Data)
                                         ---------------------------------------------------

                                          1997        1996       1995        1994         1993 
                                          ----        ----       ----        ----         ----  
<S>                                     <C>        <C>        <C>         <C>          <C> 
Statements of operations:
  Net sales.........................   $83,045     $97,404    $32,290     $17,583      $13,838
  Gross profit......................    22,767      29,577      8,774       4,801        3,686
  Operating income (loss)...........    (3,276)     13,347      2,921         442          136
  Net income (loss).................    (1,981)      8,705      2,244         250(4)        85
Earnings (loss) per share:
  Primary...........................      (.32)       1.36        .65        0.09         0.03
  Fully diluted.....................      (.32)       1.36        .51        0.08         0.03
Weighted average number of shares
 outstanding(1):
  Primary...........................     6,278       6,405      3,437       2,824        2,824
  Fully diluted.....................     6,278       6,405      4,444       3,792        3,792
Operating data:
  Number of Distributors(2).........    98,500      87,400     57,300      37,800       29,500
  Average monthly
  sales per Distributor(3)..........        74         112         58          44           38
  Total products offered............       364         320        270         258          236
Balance Sheet Data:
  Working capital...................     9,570      14,617      6,082         546          181
  Total assets......................    29,347      27,689     12,566       2,633        1,986
  Total liabilities.................    13,489      10,087      5,407       1,985        1,769
  Stockholders' equity..............    15,858      17,602      7,159         648          216
</TABLE>

__________________


(1)  The weighted average number of shares of Common Stock outstanding for each
     period presented has been calculated giving effect to a three-for-five
     stock split on July 10, 1995 and a two-for-one stock split on December 8,
     1995, and after giving effect to dilutive stock options and warrants.

(2)  Includes "active" distributors only at the end of the period indicated.
     See Item 1.

(3)  Computed using a simple average for the periods indicated.

(4)  Net income is net of a $181,243 preferred stock conversion expense.

                                       24
<PAGE>
 
                   SELECTED QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                      QUARTER ENDED
                                                      -------------
                                            (In Thousands, except Per Share)
                                            --------------------------------
                        December 31      March 31     June 30     September 30     Fiscal Year
                        -----------      --------     -------     ------------     -----------
<S>                       <C>           <C>          <C>           <C>           <C> 
Fiscal 1997
Net sales.............    $19,269         $21,200     $22,600          $19,976         $83,045    
Gross profit..........      5,085           5,511       5,391            6,780          22,767    
Operating income                                                                                  
  (loss)..............     (6,921)(1)       1,078         218            2,349(2)       (3,276)   
Net income (loss).....     (4,496)            726         180            1,609          (1,981)   
Earnings (loss) per                                                                               
  share:                                                                                          
  Primary.............      (0.71)           0.12        0.03              .26           (0.32)   
  Fully diluted.......      (0.71)           0.12        0.03              .26           (0.32)   
Dividends per share...        .02             .02         .02              .02             .08    
                                                                                                  
Fiscal 1996                                                                                       
Net sales.............     21,263          30,315      26,281           19,545          97,404    
Gross profit..........      6,770           9,677       8,240            4,890          29,577    
Operating income......      3,869           5,561       3,284              633(3)       13,347    
Net income............      2,553           3,642       1,877              633           8,705    
Earnings per share:                                                                               
  Primary.............       0.40            0.55        0.30              .09            1.36    
  Fully diluted.......       0.39            0.55        0.30              .09            1.36    
Dividends per share...        ---             ---         ---              .02             .02    
                                                                                                  
Fiscal 1995                                                                                       
Net sales.............      5,235           6,012       7,943           13,100          32,290    
Gross profit..........      1,470           1,546       1,941            3,817           8,774    
Operating income......        267             308         576            1,770           2,921    
Earnings per share:                                                                               
  Primary.............        .08             .10         .19              .22             .65    
  Fully diluted.......        .06             .08         .15              .20             .51    
Net income............        238             283         551            1,172           2,244     
</TABLE>

________________


(1)  Includes a $6,425,000 charge incurred and accrued for the settlement of
     class action lawsuits.
(2)  Includes an $890,000 credit to recognize a reduction in the remaining
     estimated liability for the class action lawsuits.
(3)  Includes a $782,000 charge for resolution of the state regulatory issues.

                                       25
<PAGE>
 
                 FINANCIAL INFORMATION RELATING TO FOREIGN AND
                      DOMESTIC OPERATIONS AND EXPORT SALES

<TABLE>
<CAPTION>
                                                                 YEARS ENDED SEPTEMBER 30,
                                                                 -------------------------
                                                                       (In thousands)
                                                                       --------------
                                                          1997             1996            1995(4)
                                                          ----             ----            -------
<S>                                                     <C>              <C>               <C> 
Sales to unaffiliated customers:
     North America(1)...........................        $80,325          $97,248           $32,290
     United Kingdom(2)..........................          2,549              156               ---
     Philippines(3).............................            171              ---               ---
Sales or transfers between geographic areas:
     North America..............................            ---              ---               ---
     United Kingdom.............................            682               82               ---
     Philippines................................            269              ---               ---
Operating profit (loss):
     North America..............................         (2,342)          13,382             2,921
     United Kingdom.............................           (906)             (35)              ---
     Philippines................................            (28)             ---               ---
Identifiable assets:
     North America..............................         29,827           27,524            12,566
     United Kingdom.............................          1,355              871               ---
     Philippines................................            708              ---               ---
</TABLE> 
________________________

(1)  Includes the United States, Canada and Puerto Rico
(2)  First began operations in fiscal 1996
(3)  First began operations in fiscal 1997
(4)  No operations outside of North America conducted in fiscal 1995

                                       26
<PAGE>
 
                 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

The Company develops products that are designed for health conscious consumers,
and sells those products through its network of approximately 98,500 independent
distributors.  The Company offers a line of approximately 364 products in nine
categories, including nutritional supplements, health foods, weight management
items, skin care products, other consumer products and services.

After two fiscal years of rapid growth in both net sales and income, the Company
experienced a decline in net sales and incurred a net loss in fiscal 1997.  The
primary reason for the net loss was expenses incurred in the settlement of class
action lawsuits filed against the Company in 1996.  Management believes that the
regulatory scrutiny and legal proceedings filed against the Company in fiscal
1996 and concluded during fiscal 1997 as well as negative media reports were
significant factors affecting distributor recruitment and retention and sales
efforts by distributors during fiscal 1997.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentages which
selected items in the Consolidated Statement of Operations bear to net sales:


<TABLE>
<CAPTION>
                                                            Year Ended September 30,
                                                            -----------------------
                                                           1997      1996      1995
                                                           ----      ----      ----
     <S>                                                   <C>       <C>       <C>
     Net sales                                             100.0%    100.0%    100.0%
     Cost of sales                                          72.6      69.6      72.8
                                                            ----      ----      ----
     Gross profit                                           27.4      30.4      27.2
     Operating expenses                                     31.3      16.7      18.1
                                                            ----      ----      ----
     Income (loss) from operations                          (3.9)     13.7       9.1
     Other income (expense), net                             1.0       0.6       0.3
                                                            ----       ---       ---
     Income (loss) before income tax expense (benefit)      (2.9)     14.3       9.4
     Income tax expense (benefit)                           (0.5)      5.4       2.4
                                                            ----       ---       ---
     Net income (loss)                                      (2.4)      8.9       7.0
                                                            ====       ===       ===
</TABLE> 

YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996

Net sales for the year ended September 30, 1997 decreased by $14,359,000 or
14.7% to $83,045,000 from $97,404,000 for the year ended September 30, 1996.  At
September 30, 1997, the Company had approximately 98,500 distributors compared
to approximately 87,400 at September 30, 1996.  Although there was a net
addition of approximately 11,100 distributors during fiscal 1997, two additional
factors contributed to the decline in net sales (1) fewer new distributors
elected to qualify promptly as executive distributors and (2) beginning in March
1997 new distributors could qualify right away as executive distributors for
$500 rather than $1,000.  The ability of the Company to increase its number of
distributors and its sales per average number of distributors is material to the
growth of the Company.  Although the Company has resolved the regulatory
scrutiny and legal proceedings and the negative media reports have diminished,
the

                                       27
<PAGE>
 
ability of the Company to regain the rate of growth realized during fiscal 1996
cannot be predicted with certainty.  The decrease in net sales is recapped
below:
 
   Decrease in new executive initial purchases                     $(21,500,000)

   Growth in sales due to increased number of distributors           27,752,000

   Decrease in distributor average sales                            (20,611,000)
                                                                    -----------
                                                                   $(14,359,000)
                                                                    =========== 

The Company's net sales per average number of distributors per month decreased
from $112 during the year ended September 30, 1996 to $74 for the year ended
September 30, 1997.  No one distributor has directly accounted for more than 5%
of the Company's net sales in any of the past three fiscal years.

Cost of sales decreased by $7,549,000 or 11.1% to $60,278,000 for the year ended
September 30, 1997 from $67,827,000 for the year ended September 30, 1996.  Cost
of sales as a percentage of net sales increased from 69.6% in the year ended
September 30, 1996 to 72.6% in the year ended September 30, 1997.  Cost of
sales, which includes product costs, commissions and bonuses paid to
distributors, and shipping costs, is recapped below:

<TABLE>
<CAPTION>
 
                                            Year Ended
                                           September 30,
                                 -------------------------------
                                      1997            1996
                                 --------------  ---------------
       <S>                       <C>             <C>
       Product costs                  27.1%           23.6%
       Commissions and bonuses        36.2            39.2
        paid to distributors
       Shipping costs                  9.3             6.8  
                                      ----            ----
                                      72.6%           69.6%
                                      ====            ====
</TABLE>


The percentage of product costs increased 3.5% primarily as a result of vendor
price increases and the purchase by distributors of products and sales aids with
a higher cost to the Company. The decrease in the percentage of commissions and
bonuses paid of 3.0% was the result of a slower growing distributor organization
and the purchase by distributors of products with a lower rate of commission and
bonus payout. The increase of 2.5% in the percentage of shipping costs resulted
from increased shipping costs associated with the shipping of back orders
(without any associated revenues) caused initially by the success of a
promotional campaign and subsequently by production delays by a major supplier.

Gross profit decreased 23.0% or $6,810,000 from $29,577,000 for the year ended
September 30, 1996 to $22,767,000 for the year ended September 30, 1997.  Gross
profit as a percentage of sales decreased from 30.4% for the year ended
September 30, 1996 to 27.4% for the year ended September 30, 1997.

Operating expenses increased $9,813,000 or 60.5% from $16,230,000 for the year
ended September 30, 1996 to $26,043,000 for the year ended September 30, 1997.
As a percentage of net sales, marketing distribution and administrative expenses
increased to 31.3% for the year ended September 30, 1997 from 16.7% for the year
ended September 30, 1996.

                                       28
<PAGE>
 
Four factors contributed to the increase in operating expenses. First,
$5,535,000 was recorded to account for the setttlement of class action lawsuits
filed against the Company in 1996. The settlements are more fully discussed in
Items 3 and 8. Second, foreign operating costs increased approximately
$1,500,000 primarily as a result of a full twelve months of operation in the
United Kingdom. Third, the Company determined that, in connection with the
recruitment of certain distributors by Kevin Trudeau, a key distributor of the
Company, certain representations may have been made regarding entitlement to
benefits or prizes, principally cruises, as performance incentives to these
distributors. Although the Company does not believe that it is legally
responsible for any such representations, in the interest of promoting good
distributor relations, the Company offered certain distributors the right to
participate in cruises at the Company's expense. The Company estimates that its
cost will be approximately $1,200,000 for this program, which has been accrued
in the year ended September 30, 1997. Fourth, in connection with the Company's
expansion the Company experienced increases in personnel costs, postage, and
property taxes. As a result of the increase in marketing, distribution and
administrative costs incurred in connection with the Company's operations, the
Company's future operating results will be negatively impacted if the Company is
not successful in regaining its growth in sales experienced during the first two
quarters of the year ended September 30, 1996.

Income (loss) from operations for the year ended September 30, 1997 decreased
$16,623,000 or 124.5% to a loss of $3,276,000 from income of $13,347,000 for the
year ended September 30, 1996, principally as a result of the lower level of
sales, the decrease in the gross profit as a percentage of sales, and the
increase in marketing, distribution and administrative expenses. Income (loss) 
from operations as a percentage of sales decreased from 13.7% for the year ended
September 30, 1996 to a negative 3.9% for the year ended September 30, 1997.

Other income increased 31.2% to $850,000 for the year ended September 30, 1997
from $648,000 for the year ended September 30, 1996. The increase in other
income resulted primarily from $183,000 of net other income items.

An income tax benefit of $445,000 was accrued for the year ended September 30,
1997.  Of this amount, $370,000 is to recognize the benefit of the carryback of
the operating loss for the year ended September 30, 1997 and $119,000 is to
recognize a net deferred tax benefit.

Net loss was $1,981,000 for the year ended September 30, 1997, a decrease of
122.8% compared to net income of $8,705,00 for the year ended September 30,
1996, principally as a result of the lower level of net sales, the decrease in
gross profit as a percentage of sales, and the settlement of the class action
lawsuits.

YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995

Net sales for the year ended September 30, 1996 increased by $65,114,000 or
201.7% to $97,404,000 from $32,290,000 for the year ended September 30, 1995.
The increase in net sales is primarily the result of the Company increasing its
number of distributors and its sales per average number of distributors.  At
September 30, 1996, the Company had approximately 87,400 distributors compared
to approximately 57,300 at September 30, 1995.  However, the rate of growth in
the number of distributors slowed during the three months ended June 30, 1996
and September 30, 1996, respectively, to a net increase of 3,502 and 1,452
distributors.  The ability of the Company to increase its number of distributors
and its sales per average number of distributors is material to the growth of
the Company.  Management believes that the regulatory scrutiny and legal
proceedings initiated in the year ended September 30, 1996, as well as the
negative media reports, were significant factors affecting distributor
recruitment and retention and sales efforts by distributors during the last two
quarters of the year ended September 30, 1996.  The Company has resolved certain
of these issues, but the ability of the Company to regain the 

                                       29
<PAGE>
 
rate of growth realized during the first two quarters of the year ended
September 30, 1996 cannot be predicted with certainty. The increase in net sales
is recapped below:

   Increase in new executive initial purchases    $30,163,000
 
   Growth in sales due to increased number
    of distributors                                16,818,000
 
   Increase in distributor average sales           18,133,000
                                                  -----------
                                                  $65,114,000
                                                  ===========

The Company's net sales per average number of distributors per month increased
from $59 during the year ended September 30, 1995 to $112 for the year ended
September 30, 1996.  Approximately 46% of the increase in net sales was due to
new distributors electing to purchase product to qualify as an executive under
the program formerly known as the Instant Executive Program.  

The Instant Executive Program had referred to an option by which a distributor
could quickly attain the level of "executive".  Executive level distributors may
earn commissions on sales generated by other distributors in their downline
organization.  The Instant Executive Program, particularly as marketed by Kevin
Trudeau, a key distributor of the Company, has been the subject of legal and
regulatory scrutiny.

In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau,
and Jules Leib, People v. Trudeau (the "Illinois Suit").  The Company was not
                -----------------                                            
named as a defendant in the Illinois Suit, but the Company's management viewed
the Illinois Suit as an opportunity to discuss the Company's marketing program
and to resolve confusion surrounding the program.  On July 16, 1996, the Company
entered into an "Assurance of Voluntary Compliance" (the "AVC") with the
Attorney General.  The AVC preserves the ability of a new distributor to become
an executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the Order Assurance Program
("OAP") and Master Developer Series.  Under the AVC, the Company will maintain
its same executive level qualifications, but to aid clarification, it will no
longer use the "instant executive" terminology.

Other key features of the AVC focus on the Company's commitment to:  (a) create
an official explanation of its marketing and compensation plan and to prohibit
distributors from creating their own explanations of how the marketing and
compensation plan works; (b) make clear that there are no mandatory purchases of
product to become a distributor; (c) take further steps to stress distributor
compliance with the Company's policies and procedures; and (d) create a World
Wide Web site on the Internet to provide more information about the Company's
products and programs.  The Company also agreed to provide distributor earnings
disclosures, to make clear that executive distributors cannot earn commissions
unless they are engaged in the sale of the Company's products to five consumers
per month at retail, including procedures to verify retail sales, to take
additional steps to encourage distributors to redeem OAP certificates for
product, and to monitor customer purchases. The Company also agreed to make a
contribution to the Illinois Consumer Education Fund. The Company entered into
similar agreements with the states of Florida, Hawaii, Idaho, Kansas, Kentucky,
Michigan, Missouri, New Jersey, and Pennsylvania. See Item 1.

                                       30
<PAGE>
 
The Company expended significant time and resources engaging in the discussions
with the Attorney General and other state attorneys general.  Included in the
results of operations for the year ended September 30, 1996 were expenses of
approximately $782,000 related to the Company's resolution of these states'
legal issues.  These expenses included contributions to state funds, legal fees,
costs associated with revised marketing literature and other distributor
communications, and the establishment of a World Wide Web site on the Internet.
In addition, uncertainty about the possible outcome of these discussions, the
SEC investigation, the class action lawsuits and certain unfavorable media
reports appears to have affected the efforts of some of the Company's
distributors during the year ended September 30, 1996.  The future effect of the
resolution of these issues in Illinois, Florida and the other eight states, and
the implementation of, and continued compliance with, the AVC could negatively
impact the Company's future operating results.  See Item 1.

The AVC preserves the OAP, a popular option for distributors.  Under the OAP, a
distributor may elect to enroll in a minimum ordering program to maintain
eligibility for bonuses.  Minimum orders ranging from $41 to $300 per month are
automatically placed by credit card or check.  So long as distributors continue
to enroll in the OAP the Company is assured of sales and the distributor is
assured participation in bonus programs.  As noted above, the Company has agreed
in the AVC to take additional steps to encourage distributors to redeem OAP
certificates for product and to limit the number of OAP certificates which may
be issued.  The OAP is voluntary and no restrictions are placed upon any
participant's ability to exit the Program.  As of September 30, 1996 and 1995,
respectively, there were approximately 41,700 and 18,000 participants in this
Program.  On the average during the year ended September 30, 1996, the Company
issued OAP certificates for approximately 40% of the participants.  The
percentage for the comparable period in 1995 is not available.

The Company recognizes revenues on the OAP certificates when they are redeemed
for product or when they expire.  The Company recognized revenues from the
redemption of certificates of $7,647,000 and $1,090,000 for the years ended
September 30, 1996 and 1995.  The Company recognized revenues from expired
certificates of $3,025,000 and $876,000 during the years ended September 30,
1996 and 1995.  At September 30, 1996 and 1995, the Company had a liability for
unredeemed certificates of $3,893,600 and $347,800 which is included in deferred
income in the Financial Statements in Item 8.  The effect of the AVC on future
revenues from OAP certificates is uncertain, but could have a negative impact on
the Company's future operating results.

Cost of sales increased by $44,312,000 or 188.4% to $67,827,000 for the year
ended September 30, 1996 from $23,515,000 for the year ended September 30, 1995.
Also included in the cost of sales for the year ended September 30, 1996, is
approximately $58,000 of the $782,000 incurred in resolving the state legal
issues discussed above.  Cost of sales as a percentage of net sales decreased
from 72.8% in the year ended September 30, 1995 to 69.6% in the year ended
September 30, 1996.  Cost of sales, which includes product costs, commissions
and bonuses paid to distributors, and shipping costs, is recapped below:

                                       31
<PAGE>
 
<TABLE>
<CAPTION>
                                       Year Ended
                                      September 30,
                                      -------------

                                    1996         1995
                                    ----         ----
     <S>                            <C>          <C>    
     Product costs                  23.6%        24.3%  
     Commissions and bonuses        39.2         40.5   
       paid to distributors                             
     Shipping costs                  6.8          8.0   
                                    ----         ----   
                                    69.6%        72.8%  
                                    ====         ====    
</TABLE>


The percentage of product costs decreased 0.7% primarily as a result of improved
pricing with higher volume.  The decrease in the percentage of commissions and
bonuses paid of 1.3% was the result of the significant growth in new executive
initial purchases and the lower level of the associated commissions and bonuses
in relation to a slower growing organization.  The decrease of 1.2% in the
percentage of shipping costs resulted from economies of scale in shipping costs
associated with the volume of sales from new executive initial purchases.

Gross profit increased 237.1% or $20,802,000 from $8,775,000 for the year ended
September 30, 1995 to $29,577,000 for the year ended September 30, 1996.  Gross
profit as a percentage of sales increased from 27.2% for the year ended
September 30, 1995 to 30.4% for the year ended September 30, 1996.

Marketing, distribution and administrative expenses increased $10,377,000 or
177.3% from $5,853,000 for the year ended September 30, 1995 to $16,230,000 for
the year ended September 30, 1996.  As a percentage of net sales, marketing
distribution and administrative expenses decreased to 16.7% for the year ended
September 30, 1996 from 18.1% for the year ended September 30, 1995.  The dollar
increase resulted primarily from increased personnel costs, credit card fees,
postage and professional fees to support the Company's growth.  Also included in
the increase in marketing, distribution and administrative expenses is
approximately $724,000 of the $782,000 incurred in resolving the state legal
issues discussed above.  As a result of the increase in marketing, distribution
and administrative costs incurred in connection with the Company's growth and
the increased expenses related to legal issues, the Company's future operating
results will be negatively impacted if the Company is not successful in
regaining its growth in sales experienced during the first two quarters of the
year ended September 30, 1996.

Income from operations for the year ended September 30, 1996 increased
$10,426,000 or 356.9% to $13,347,000 from $2,921,000 for the year ended
September 30, 1995, principally as a result of the higher level of sales, the
increase in income recognized from expired OAP certificates, and the increase in
the gross profit as a percentage of sales.  Income from operations as a
percentage of sales increased from 9.1% for the year ended September 30, 1995 to
13.7% for the year ended September 30, 1996.

Other income increased to $648,000 for the year ended September 30, 1996 from
$88,000 for the year ended September 30, 1995.  The increase was primarily a
result of interest income earned.

Income tax expense increased $4,525,000 to $5,290,000 for the year ended
September 30, 1996 from $765,000 for the year ended September 30, 1995.  The
dollar increase resulted from higher taxable income, an increased base tax rate,
and a reduced effect of the utilization of approximately $150,000 of net
operating loss carryforward compared to approximately $423,000 in the prior
fiscal year.

                                       32
<PAGE>
 
Net income was $8,705,000 for the year ended September 30, 1996, an increase of
287.9% compared to $2,244,000 for the year ended September 30, 1995, principally
as a result of higher level of sales and the increase in gross profit as a
percentage of sales.



LIQUIDITY AND CAPITAL RESOURCES


The Company has financed its recent growth primarily from funds obtained from
operations.  The Company had cash and cash equivalents of $8,904,000 at
September 30, 1997 compared to $15,589,000 at September 30, 1996.  For the year
ended September 30, 1997, the net cash used in operations was $2,693,000,
$4,076,000 was used for acquisition of property and equipment and $52,000 for
start-up expenditures in the Republic of Philippines. Of the property and
equipment additions approximately $2,200,000 was for the cost of a SAP(R)
enterprisewide computer information system and approximately $1,050,000 was for
the cost of a White(R) automated inventory storage and retrieval system. The
Company also received $690,000 from exercise of Warrants issued in the public
offering completed in July, 1995 and the exercise of stock options. In addition,
the Company used $450,000 and $74,000 respectively, for the payment of dividends
and the purchase of treasury stock. The Company had cash and cash equivalents of
$15,589,000 at September 30, 1996 compared to $8,960,000 at September 30, 1995.
For the year ended September 30, 1996, the net cash provided by operations was
$7,165,000 and $2,174,000 was used for the acquisition of property and equipment
and $211,660 for start-up expenditures in the United Kingdom. The Company also
received $1,854,000 from the exercise of Warrants issued in the public offering
completed in July, 1995 and the exercise of stock options.

The Company had working capital of $9,570,000 at September 30, 1997 compared to
$14,617,000 at September 30, 1996. Approximately 95% of all sales are paid in
advance before shipment; therefore, accounts receivable as a percentage of sales
averages less than 5% of monthly sales. Included in receivables at September 30,
1997, is a Canadian tax refund claim of $968,000 and advances to a supplier of
$229,000.

The Company does not expect any material price increases by its suppliers and
inflation is not expected to have a material impact on the Company's business
during the next twelve months.

The Company has approximately $130,000 of net operating loss available to carry
forward subject to limitations imposed by Section 382 of the Internal Revenue
Code expiring through 2008.  It is management's opinion, based on prior
operating results and expected future operating results, that it will be more
likely than not that the Company will utilize its entire net operating loss
carryforward before expiration. See Item 8.

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").  SFAS
128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15.  SFAS 128 provides for the calculation of
basic and diluted earnings per share.  Basic earnings per share includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Dilutive earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to existing fully diluted
earnings.

                                       33
<PAGE>
 
The Company is required to adopt this standard in the quarter ending December
31, 1997.  Using the principles set forth in SFAS 128, basic and diluted
earnings per share would not be materially different from that presented.

Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129") effective for periods ending after December
15, 1997, establishes standards for disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participating rights) including dividend and
liquidations preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements.  Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.

In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards.  Results of operations and financial position will be unaffected by
implementation of these new standards.

SFAS 130, "Reporting Comprehensive Income", establishes standards for reporting
and display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners.  Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.

SFAS 131, "Disclosure about Segments of a Business Enterprise" establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments to interim financial statements issued to
the public.  It also establishes standards for disclosures regarding products
and services, geographic areas and major customers.  SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the other operating
decision maker in deciding how to allocate resources and in assessing
performance.

Both of these new standards are effective for financial statements for period
beginning after December 15, 1997 and require comparative information for
earlier years to be restated.  Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.


     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The Company's market capitalization on January 28, 1997 was less than $2.5
billion, and therefore, information responsive to this Item should be included
in the Report on Form 10-K for the fiscal year ending September 30, 1998.

                                       34
<PAGE>
             ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                          PAGE            
                                                                                          ----            
<S>                                                                                       <C> 
NUTRITION FOR LIFE INTERNATIONAL, INC. FINANCIAL STATEMENTS:                                              
                                                                                                          
          Independent Certified Public Accountants' Reports                               F - 2 to F - 3  
          Consolidated Balance Sheets as of September 30, 1997 and 1996                   F - 4           
                                                                                                          
          Consolidated Statements of Operations for the Years Ended                                       
             September 30, 1997, 1996 and 1995                                            F - 5           
          Consolidated Statements of Stockholders' Equity for the                                         
             Years Ended September 30, 1997, 1996 and 1995                                F - 6           
          Consolidated Statements of Cash Flows for the Years Ended                                       
             September 30, 1997, 1996 and 1995                                            F - 7           
          Notes to Consolidated Financial Statements                                      F - 8 to F - 21  
</TABLE>

                                      F-1
<PAGE>
 
               INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
               ------------------------------------------------


To the Board of Directors
  and Shareholders of
  Nutrition for Life International, Inc.



We have audited the consolidated balance sheets of Nutrition for Life
International, Inc. as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years then ended.  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 generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Nutrition for Life International, Inc. at September 30, 1997 and 1996 and the
results of its operations and its cash flows for each of the years then ended in
conformity with generally accepted accounting principles.



                                                 BDO Seidman, LLP


Houston, Texas
December 16, 1997

                                      F-2
<PAGE>

                         Independent Auditors' Report
                         ----------------------------


The Board of Directors
Nutrition For Life International, Inc.:


We have audited the accompanying statements of operations, stockholders' equity 
and cash flows of Nutrition For Life International, Inc. for the year ended 
September 30, 1995. These financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the results of operations and the cash flows of Nutrition
For Life International, Inc. for the year ended September 30, 1995, in 
conformity with generally accepted accounting principles.



KPMG PEAT MARWICK LLP

Houston, Texas
November 2, 1995, except as to note 2,
which is as of December 8, 1995

                                      F-3
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                  1997         1996
                                                                                               ----------   -----------
<S>                                                                                            <C>          <C> 
                                                              ASSETS
                                                              ------
Current Assets:
 Cash and cash equivalents..................................................................   $ 8,903,957  $15,588,504
 Cash-restricted............................................................................       513,195            -
 Receivables................................................................................     1,547,479      368,062
 Inventories................................................................................     7,920,454    6,365,350
 Deferred tax asset, net (Note 5)...........................................................     1,888,442    1,561,000
 Refundable federal income taxes (Note 5)...................................................     1,029,277      500,000
 Prepaid expenses and other assets..........................................................       496,517      260,091
                                                                                               -----------  -----------

  Total Current Assets......................................................................    22,299,321   24,643,007

Property and equipment, net (Note 3)........................................................     6,534,042    2,493,759
Intangible assets, net......................................................................       199,047      340,063
Other assets................................................................................       315,026      212,031
                                                                                               -----------  -----------
                                                                                               $29,347,436  $27,688,860
                                                                                               ===========  ===========


                                               LIABILITIES AND STOCKHOLDERS' EQUITY
                                               ------------------------------------
Current Liabilities:
 Accounts payable...........................................................................   $ 3,707,930  $ 2,577,101
 Accrued bonuses and commissions............................................................     1,973,646    2,041,678
 Current portion of capital lease obligation (Note 4).......................................       157,739            -
 Deferred income (Note 7)...................................................................     3,130,524    3,893,570
 Accrued cruise (note 8)....................................................................     1,195,150            -
 Lawsuit settlement accrual (note 8)........................................................     1,332,314            -
 Accrued expenses and other liabilities.....................................................     1,072,883      552,424
 Federal and franchise tax payable (Note 5).................................................        43,216      850,000
 Dividends payable (Note 2).................................................................       115,798      111,371
                                                                                               -----------  -----------

   Total Current Liabilities................................................................    12,729,200   10,026,144

Deferred tax liability (Note 5).............................................................       282,000       61,000
Long-term portion of capital lease obligation (Note 4)......................................       478,220            -

Commitments and contingencies (Note 8)

Stockholders' Equity (Note 2):
 Preferred stock, $.001 par value; 1,000,000
   authorized; none issued and outstanding..................................................             -            -
 Common stock; $.01 par value; 20,000,000
   shares authorized........................................................................        57,758       55,686
 Additional paid-in capital.................................................................    10,688,951    9,939,059
 Retained earnings..........................................................................     5,176,539    7,611,580
 Cumulative foreign currency translation adjustment.........................................         8,578       (4,609)
                                                                                               -----------  -----------
                                                                                                15,931,826   17,601,716
                                                                                               -----------  -----------

 Less:  Treasury stock-9,000 shares at cost.................................................       (73,810)           -
                                                                                               -----------  -----------
   Total Stockholders' Equity...............................................................    15,858,016   17,601,716
                                                                                               -----------  -----------
                                                                                               $29,347,436  $27,688,860
                                                                                               ===========  ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                               1997         1996          1995
                                                                           -----------   -----------   -----------
<S>                                                                        <C>           <C>           <C>
Net sales (Notes 7 and 10)...............................................  $83,044,577   $97,403,757   $32,289,752
Cost of sales (Note 9)...................................................   60,277,742    67,826,803    23,515,259
                                                                           -----------   -----------   -----------
Gross profit.............................................................   22,766,835    29,576,954     8,774,493

Operating expenses:
 Marketing, distribution and administrative expenses.....................   20,508,294    16,230,023     5,853,330
 Lawsuit settlement (Note 8).............................................    5,535,000             -             -
                                                                           -----------   -----------   -----------
                                                                            26,043,294    16,230,023     5,953,330
                                                                           -----------   -----------   -----------
Income (loss) from operations............................................   (3,276,459)   13,346,931     2,921,163
                                                                           -----------   -----------   -----------
Other income (expense)
 Interest, net...........................................................      667,338       711,563       (51,499)
 Other, net..............................................................      182,600       (63,533)      139,189
                                                                           -----------   -----------   -----------
                                                                               849,938       648,030        87,690
                                                                           -----------   -----------   -----------
Income (loss) before income tax expense (benefit)........................   (2,426,521)   13,994,961     3,008,853
Income tax expense (benefit) (Note 5)....................................     (445,420)    5,289,797       764,595
                                                                           -----------   -----------   -----------

Net income (loss)........................................................  $(1,981,101)  $ 8,705,164   $ 2,244,258
                                                                           ===========   ===========   ===========
Primary earnings (loss) per common share.................................        $(.32)        $1.36          $.65
                                                                           ===========   ===========   ===========
Fully-diluted earnings (loss) per common share...........................        $(.32)        $1.36          $.51
                                                                           ===========   ===========   ===========

Weighted average common shares outstanding:
 Primary.................................................................    6,277,736     6,405,152     3,437,258
                                                                           ===========   ===========   ===========
 Fully-diluted...........................................................    6,277,736     6,405,152     4,443,532
                                                                           ===========   ===========   ===========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      F-5
                   
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                                                                  
                                                                                    CUMULATIVE                                    
                                                                                      FOREIGN                                      
                                 COMMON STOCK       ADDITIONAL     RETAINED          CURRENCY     TREASURY STOCK      TOTAL        
                                 ------------        PAID-IN       EARNINGS         TRANSLATION   --------------      STOCKHOLDERS 
                               SHARES    AMOUNT      CAPITAL       (DEFICIT)        ADJUSTMENT    SHARES  AMOUNT      EQUITY       
                               ------    ------     ----------     ---------        -----------   ------  ------      -------------
<S>                          <C>         <C>        <C>            <C>              <C>           <C>    <C>          <C>       
Balance, at
October 1, 1994              2,824,734    $28,247    $ 3,845,954    $(3,226,471)     $   --          --  $   --         $   647,730
Net income                                                            2,244,258                                           2,244,258
Conversion of debt             360,000      3,600        126,900            --           --          --      --             130,500
Public offering              1,840,000     18,400      4,089,331            --           --          --      --           4,107,731
Exercise of                                                                                                   
stock options                   30,790        308         24,067            --           --          --      --              24,375
Exercise of                                                                                                   
stock warrants                   1,000         10          3,740            --           --          --      --               3,750
                             ---------    -------    -----------   ------------     --------     ------  -------      -------------
Balance, at
September 30, 1995           5,056,524     50,565      8,089,992       (982,213)         --          --       --          7,158,344
Net income                         --         --             --       8,705,164          --          --       --          8,705,164
Cash dividends                                                                                       
(Note 2)                           --         --             --        (111,371)         --          --       --           (111,371)

Foreign currency                                                  
translation adjustment             --         --             --             --        (4,609)        --       --             (4,609)

                                                                                          
Exercise of stock options                                                                 
                                27,454        275         36,723            --           --          --       --             36,998
Exercise of stock                                                                                                  
warrants                       484,584      4,846      1,812,344            --           --          --       --           1,817,19 

                             ---------    -------    -----------   ------------  -----------     ------   --------      -----------
Balance, at
September 30, 1996           5,568,562     55,686      9,939,059      7,611,580      (4,609)         --       --         17,601,716
Net loss                           --         --             --      (1,981,101)        --           --       --         (1,981,101)

Cash dividends                                                                                                      
(Note 2)                           --         --             --        (453,940)        --           --       --          (453,940)

Issuance of common stock                                                                                            
options for services                                                                                               
(Note 6)                           --         --         105,362            --          --           --       --            105,362
                                                                                                                    
Registration expenses              --         --         (43,872)           --          --           --       --            (43,872)

Foreign currency                                                                             
translation adjustment             --         --             --             --       13,187          --       --             13,187
                                                                                             
Purchase of                                                                                  
treasury stock (Note 2)            --         --             --             --          --       (9,000) (73,810)           (73,810)

Exercise of                                                                                                        
stock options                  157,220      1,571        522,084            --          --           --      --             523,655
Exercise of stock                                                                                                  
warrants                        50,053        501        166,318            --          --           --      --             166,819
                             ---------    -------    -----------    -----------    --------   ----------   --------    ------------ 

Balance, at                                                                                                                     
September 30, 1997           5,775,835    $57,758    $10,688,951    $ 5,176,539     $ 8,578       (9,000)  $(73,810)   $ 15,858,016
                             =========    =======    ===========    ===========    ========   ===========  ========    ============
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

               INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
                                                                        1997          1996          1995               
                                                                    ------------  ------------  ------------           
<S>                                                                 <C>           <C>           <C>                    
Cash flows from operating activities:                                                                                  
     Net income (loss)...........................................   $(1,981,101)  $ 8,705,164   $ 2,244,258            
     Adjustments to reconcile net income (loss) to net cash                                                            
      provided by (used in) operating activities:                                                                      
          Depreciation and amortization..........................       801,039       400,368       211,469            
          Bad debt expense.......................................       653,458       671,198        93,744            
          Deferred tax benefit...................................      (118,636)   (1,420,858)      (79,142)           
          Stock options issued for services......................       105,362             -             -              
          Changes in assets and liabilities:                                                                             
               Cash-restricted...................................      (513,195)            -             -              
               Receivables.......................................    (1,756,875)     (866,498)     (171,025)             
               Inventories.......................................    (1,555,104)   (4,097,733)   (1,241,050)             
               Refundable federal income taxes...................      (529,277)     (500,000)            -              
               Prepaids and other assets.........................      (236,426)     (170,840)       30,795              
               Other assets......................................      (102,995)      (63,606)      (48,976)             
               Accounts payable..................................     1,130,829       187,395     1,847,497              
               Consigned inventory deposits......................             -             -       (48,881)             
               Deferred income...................................      (763,046)    3,545,776       245,023              
               Accrued expenses and other liabilities............     2,979,891       768,070     1,205,013              
               Federal and franchise tax payable.................      (806,784)        6,263       843,737              
                                                                    -----------   -----------   -----------              
Net cash provided by (used in) operating activities..............    (2,692,860)    7,164,699     5,132,462              
                                                                    -----------   -----------   -----------              
Cash flows from investing activities:                                                                                    
     Acquisition of property and equipment.......................    (4,076,384)   (2,174,214)     (407,882)             
     Purchase of intangible assets...............................       (51,769)     (211,660)            -              
                                                                    -----------   -----------   -----------              
Net cash used in investing activities............................    (4,128,153)   (2,385,874)     (407,882)             
                                                                    -----------   -----------   -----------              
Cash flows from financing activities:                                                                                    
     Exercise of stock options...................................       523,655        36,998        24,375              
     Exercise of warrants........................................       166,819     1,817,190         3,750              
     Principal repayments on long-term debt......................             -             -      (519,500)             
     Principal repayments on notes payable - bank................             -             -       (20,000)             
     Dividends paid..............................................      (449,513)            -             -              
     Net proceeds from public offering...........................             -             -     4,107,731              
     Registration fees...........................................       (43,872)            -             -              
     Purchase of treasury stock..................................       (73,810)            -             -              
                                                                    -----------   -----------   -----------              
Net cash provided by financing activities........................       123,279     1,854,188     3,596,356              
                                                                    -----------   -----------   -----------              
Net increase (decrease) in cash and cash equivalents.............    (6,697,734)    6,633,013     8,320,936              
Cash and cash equivalents, beginning of year.....................    15,588,504     8,960,100       639,164              
Cumulative foreign currency translation adjustment...............        13,187        (4,609)            -              
                                                                    -----------   -----------   -----------              
Cash and cash equivalents, end of year...........................   $ 8,903,957   $15,588,504   $ 8,960,100              
                                                                    ===========   ===========   ===========              
Supplemental disclosure of noncash financing activities:                                                                 
     Conversion of convertible long-term debt to                                                                          
      common stock...............................................   $-            $         -   $   130,500               
                                                                    ===========   ===========   ===========               
     Purchase of property and equipment under capital lease......   $   635,959   $         -   $         -               
                                                                    ===========   ===========   ===========               
                                                                                                                          
     Declaration of dividends....................................   $   115,798   $   111,371   $         -               
                                                                    ===========   ===========   ===========               
Supplemental disclosure of cash flow information:                                                                         
     Federal and state income taxes paid.........................   $   140,000   $ 7,210,000   $         -               
                                                                    ===========   ===========   ===========               
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-7
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS

     Nutrition for Life International, Inc., ("NFLI" or the "Company"), a Texas
corporation, was formed on September 15, 1993 for the purpose of being the sole
survivor of a merger between Nutrition Express Corporation of Colorado, Inc.
(NEC-Colorado) and Nutrition Express Corporation of Utah, Inc. (NEC-Utah) and
the Company.  The effect of the merger was that, instead of NEC-Colorado and
NEC-Utah conducting operations through their ownership of a general partnership,
Nutrition for Life International (the Partnership), these corporations were
merged and the business operations have been conducted through one corporation,
NFLI.  The assets and liabilities of the Partnership became the assets and
liabilities of the Company, and the business operations have continued as they
were conducted previously.

     The Company operates as a wholesale distributor through its network
marketing organization, by selling a variety of consumer products and services
through independent distributors in the United States and abroad.  The Company
develops products that are designed for health-conscious consumers, and sells
those products to consumers through its network of independent distributors.
The Company offers a product line of approximately 360 products in nine
categories, including nutritional supplements, health foods, weight management
items, skin care products, other consumer products, and services.

     The Company develops products that it believes will have market appeal to
its distributors and their customers, and assist its distributors in building
their own businesses.  The Company provides product development, marketing aids,
customer service and essential record keeping functions for its distributors.

     Distributors actively recruit interested people to become new distributors
for the Company.  These recruits are placed beneath the recruiting distributor
in the "network" and are referred to by the Company as that distributor's
"downline."  Distributors earn commissions on sales generated by the
distributors in their downline as well as on the sales they generate directly.
The Company's operations depend to a significant degree on the Company's ability
to retain and motivate its existing distributors and to attract new distributors
by continuing to offer new products and new marketing programs.

     Although the Company confines its activities to marketing and distribution,
the manufacturing, packaging, labeling and advertising of the Company's products
are subject to regulation by several federal agencies, as well as various
agencies of the states in which the Company's products are sold.  In addition,
the Company's network marketing system is subject to governmental regulations
generally directed at ensuring that product sales are made to consumers of the
products and that advancement within the marketing organization is based on
sales of products rather than investments in the organization.

     The Company has two wholly-owned subsidiaries, Nutrition For Life
International (UK) Ltd. ("UK"), and Nutrition for Life International
Philippines, Inc. ("Philippines") that were formed primarily to operate as
wholesale distributors of the Company's products throughout the United Kingdom
and the Philippines.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its two wholly-owned subsidiaries.  All significant intercompany balances
and transactions have been eliminated.

RESTRICTED CASH

     In accordance with the settlement of the Federal Class Action Lawsuit (See
Note 8), the Company was required to set up a reserve fund of $1,500,000 for
reimbursements to certain distributors.  As of September 30, 1997, the Company
made reimbursements totaling $986,805.

                                      F-8
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECEIVABLES

     Receivables at September 30, 1997, consists primarily of amounts due from
the Canadian government from overpayment of goods and services taxes and to a
company that supplies promotional goods and services to NFLI.  All amounts are
considered collectible.

INVENTORIES

     Inventories consist mainly of health and skin care products, dietary
supplements, food products and household cleaning products.  Inventories are
valued at the lower of cost or market. Cost is determined on a first-in, first-
out basis.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost.  Depreciation on property and
equipment are provided using the straight-line method over the estimated useful
lives of the assets.  Leasehold improvements are amortized over the terms of the
respective leases, not in excess of their estimated useful lives.  For income
tax purposes, depreciation on fixed assets are calculated using accelerated
methods.

     The Company reviews the carrying values of its long-lived assets for 
possible impairment whenever events or change in circumstance indicate that the
carrying amount of the assets may not be recoverable. 

CAPITAL LEASE

     The Company is the lessee of computer equipment under a capital lease
expiring August 2001.  The asset and liability under this capital lease are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset.  The asset will be amortized beginning in fiscal 1998
over the lesser of the related lease term or its estimated useful life.

INTANGIBLE ASSETS

     Intangible assets represent organizational costs and the value assigned to
nutrition and homeopathic product formulations. These assets are being amortized
over 2-10 years.

REVENUE RECOGNITION

     The Company sells its products directly to independent distributors.  Sales
are recorded when products are shipped. Net sales represent orders shipped, less
estimated returns and allowances. Provisions have been made for estimated
returns and allowances at the time of sale. Included in cost of sales are
rebates and other commissions which are paid monthly and are calculated using
specific rates based on actual sales volume.

     NFLI sells product redemption certificates to distributors who are enrolled
in the Company's order assurance program.  Revenues are recorded when these
certificates are redeemed for product.  However, if the certificates are not
redeemed for product, the Company records revenues ratably over a 150 day period
commencing with the ending of the expiration period of 120 days (see Note 7).
Such revenues are recorded as part of the Company's net sales.

INCOME TAXES

     The Company recognizes income tax expense using the liability method of
accounting for deferred income taxes. A deferred tax asset or liability is
recorded based upon the tax effect of temporary differences between the tax
basis of assets and liabilities and their carrying value for financial reporting
purposes. Deferred tax expense or benefit is the result of changes in the
deferred tax assets and liabilities during the year. The Company adjusts the
deferred tax asset valuation allowance based upon the anticipated future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.

                                      F-9
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTIONS AND WARRANTS

     The Company has elected to continue to account for stock options issued to
employees in accordance with APB No. 25.  During the year ended September 30,
1997, all options issued to officers and employees were granted at an exercise
price, which equaled or exceeded the market price per share at the date of grant
and accordingly, no compensation was recorded.

     Effective for the year ended September 30, 1997, the Company was required
to adopt the disclosure requirements of SFAS No. 123 "Accounting for Stock-based
Compensation".  This statement requires the Company to provide proforma
information regarding net income (loss) and income (loss) per share as if
compensation cost for the Company's stock options granted had been determined in
accordance with the fair value based method prescribed in SFAS No. 123.  SFAS
No. 123 requires that the Company record options issued to directors of the
Company as directors fees in accordance with the fair value based method.
Directors fees charged to operations for the year ended September 30, 1997 were
$105,362.

EARNINGS (LOSS) PER COMMON SHARE

     Earnings (loss) per common share are computed by dividing net income (loss)
applicable to common shares by the weighted average number of shares of common
stock outstanding after giving effect to dilutive stock options and warrants.
The stock options and warrants are included as share equivalents using the
treasury stock method, based on the average market price of the common shares
during the respective fiscal years.

     Fully-diluted earnings per common share for the year ended September 30,
1995 was determined on the assumption that the convertible long-term debt
outstanding as of those dates was converted as of the beginning of the year.
Net income applicable to common shares was adjusted for the interest on the
convertible long-term debt, net of its tax effect.  In addition, stock options
and warrants are included as share equivalents using the treasury stock method,
based on the market price of the common shares during the respective fiscal
years.

     As certain debt was retired with the proceeds of the Company's public
offering (see Note 2) and certain debt was converted in connection with the
offering, supplementary earnings per share information is presented herein.
Supplementary earnings per share for 1995 is $0.59.  Such amount is calculated
by increasing net income by the amount of interest expense related to the debt,
net of tax, and increasing the weighted average shares outstanding by the number
of shares issued on the conversion (278,137 weighted average shares) and the
number of shares whose proceeds from the offering would be required to retire
the debt (149,346 weighted average shares).

CASH AND CASH EQUIVALENTS

     For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and in short-term, interest bearing deposits with original
maturities of three months or less.

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments include accounts receivable, accounts
payable and capital lease obligations.  The fair market value of accounts
receivable and accounts payable approximates their carrying values because their
maturities are generally less than one year.  The carrying value of the capital
lease obligation approximates market value because the Company's incremental
borrowing rate at the inception of the lease was used.

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

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

CONCENTRATION OF CREDIT RISK

     At September 30, 1997, the Company's cash in financial institutions
exceeded the federally insured deposit limit by approximately $4,675,000.

NEW ACCOUNTING PRONOUNCEMENTS

     In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").  SFAS
128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15.  SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Dilutive earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity,

                                     F-10

<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

similar to existing fully diluted earnings per share.

     The Company is required to adopt this standard in its first quarter ending
December 31, 1997. Using the principles set forth in SFAS 128, basic and diluted
earnings per share would not be materially different from that presented.

     Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participating rights) including dividend and
liquidations preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.

     In June 1997, the Financial Accounting Standards Board issued two new
reporting and disclosure standards. Results of operations and financial position
will be unaffected by implementation of these new standards.

     SFAS 130, "Reporting Comprehensive Income" , established standards for
reporting and display of comprehensive income, its components and accumulated
balances.  Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required to
be recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.

     SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public.  It also establishes standards for disclosures regarding products
and services, geographic areas and major customers.  SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.

     Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management is unable to fully evaluate the impact, if any, they may have on
future financial statement disclosures.

RECLASSIFICATIONS

     Certain reclassifications were made to the 1996 accounts to conform to the
1997 financial statement presentation.  These reclassifications had no impact on
net income as previously recorded.

                                     F-11
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - COMMON STOCK

     On May 10, 1995, the Company's Board of Directors authorized a 
three-for-five stock split, which the Company's shareholders approved on June
30, 1995. In addition, par value was adjusted from $.001 per share to $.01 per
share. On November 6, 1995, the Company's Board of Directors authorized a 
two-for-one stock split, effected in the form of a stock dividend for
shareholders of record on December 8, 1995. Stockholders' equity has been
restated to give retroactive recognition to the stock split in prior periods by
reclassifying from additional paid-in capital to common stock the par value of
the additional shares arising from the split. In addition, all share, per share
and stock option data have been restated to reflect these splits, including the
public offering of securities discussed below.

     On July 10, 1995, the Company completed the issuance of an additional
1,840,000 shares of common stock, after giving effect to the stock splits noted
above, and 920,000 warrants (Note 6) through a public offering at prices of
$2.6875 and $0.125, respectively, resulting in net proceeds (after deducting
issuance costs) of $4,107,731.  In connection with the offering, the holder of
the convertible long-term debt converted $130,500 of debt from one of the
convertible notes into 360,000 shares of the Company's common stock. The
remaining principal balance of the notes were repaid from the proceeds of the
offering.

     On September 16, 1996 the Company's Board of Directors authorized a stock
repurchase program, whereby the Company had the discretion to purchase up to
200,000 shares of its common stock.  During the year ended September 30, 1997,
the Company purchased 9,000 shares of common stock for $73,810.  The repurchase
program terminated on June 30, 1997.

     On September 30, 1996 the Board of Directors of NFLI declared a cash
dividend of $.02 per share of common stock outstanding.  The cash dividends of
$111,371 were paid on October 15, 1996.

     On December 31, 1996, March 3, 1997, June 13, 1997 and September 30, 1997,
the board of directors of NFLI declared cash dividends, totaling $453,940, or
$.02 per share of common stock outstanding.  Of such dividends, $338,142 was
paid during the year ended September 30, 1997 and $115,798 was paid during
October 1997.

NOTE 3 - PROPERTY AND EQUIPMENT

     Property and equipment and their estimated useful lives are summarized as
follows:

<TABLE> 
<CAPTION> 
                                                                 SEPTEMBER 30,
                                                           -------------------------
                                                    LIVES     1997         1996
                                                    -----  ----------  -------------
     <S>                                            <C>    <C>         <C>
     Equipment....................................      7  $4,364,327     $2,398,666
     Computer software............................     10   1,577,004              -
     Leasehold improvements.......................      5   1,045,058        700,417
     Furniture and fixtures.......................   5-10     612,498        585,056
     Automobiles..................................      5      93,905              -
     Equipment held under capital lease (Note 4)..      4     635,959              -
                                                           ----------     ----------
                                                            8,328,751      3,684,139
     Less:  Accumulated depreciation
          and amortization........................          1,794,709      1,190,380
                                                           ----------     ----------
                                                           $6,534,042     $2,493,759
                                                           ==========     ==========
</TABLE>

                                     F-12
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - CAPITAL LEASE OBLIGATION

     Minimum future lease payments under capital leases as of September 30, 1997
for each of the next four years and in the aggregate are:

<TABLE>
<CAPTION>
     Year ended September 30:                           Amount
     -----------------------                          --------
     <S>                                              <C>
     1998                                             $181,704
     1999                                              181,704
     2000                                              181,704
     2001                                              181,704
                                                      --------
     Total minimum lease payments                      726,816
 
     Less:  Amount representing interest                90,857
                                                      --------
     Present value of net minimum lease payments      $635,959
                                                      ========
     Current portion of capital lease obligation      $157,739
     Long-term portion of capital lease obligation     478,220
                                                      --------
                                                      $635,959
                                                      ========
</TABLE>

An interest rate of 7.21% on the capital lease was imputed based on the
Company's incremental borrowing rate at the inception of the lease.

NOTE 5 - INCOME TAXES

     Deferred income taxes are determined based on the temporary differences
between the financial statement and income tax basis of assets and liabilities
as measured by the enacted tax rates which will be in effect when these
differences reverse.

     The (benefit) provision for income taxes (benefit) for the years ended
September 30, 1997, 1996 and 1995 consisted of the following:

<TABLE>
<CAPTION> 
                                                  1997         1996       1995
                                             ---------   ----------   -------- 
     <S>                                     <C>         <C>          <C>      
     Federal tax (benefit) - current         $(370,000)  $ 5,860,655  $659,015 
                                             ----------  -----------  -------- 
     Federal tax - deferred benefit, net..    (118,636)   (1,420,858)  (79,142)
     State tax............................      43,216       850,000   184,722 
                                             ---------   -----------  --------
                                             $(445,420)  $ 5,289,797  $764,595
                                             =========   ===========  ========
</TABLE>

     The following reconciles federal income taxes (benefit) computed at the
statutory rate with income taxes as reported for the years ended September 30:

<TABLE>
<CAPTION>
                                                           1997        1996         1995
                                                        ----------  -----------  -----------
     <S>                                                <C>         <C>          <C>
     Expected income tax benefit expense at 34%.......  $(825,017)  $4,758,287   $1,023,010
     Graduated tax rate effect........................          -      140,000            -
     State taxes, net of federal benefit..............     28,523      560,155      121,916
     Loss from foreign subsidiaries...................    380,000            -            -
     Nondeductible amortization of intangible assets..          -       30,694       30,694
     Utilization of loss carryforwards................          -     (150,335)    (422,701)
     Other items, net.................................    (28,926)     (49,004)      11,676
                                                        ---------   ----------   ----------
        Income tax expense (benefit)..................  $(445,420)  $5,289,797   $  764,595
                                                        =========   ==========   ==========
</TABLE>

                                     F-13
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Current deferred tax assets at September 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                                                              1997         1996
                                                                                           ----------   ----------
     <S>                                                                                   <C>          <C>
     Deferred income recognized for tax purposes.........................................  $1,023,325   $1,341,000
     Class action lawsuit accrual........................................................     463,512            -
     Additional capitalized inventory costs..............................................     348,332      162,000
     Loss carryforwards..................................................................      45,000       45,000
     Allowance for doubtful accounts.....................................................           -       13,000
     Other...............................................................................       8,273            -
                                                                                           ----------   ----------
                                                                                            1,888,442    1,561,000
     Less valuation allowance............................................................           -            -
                                                                                           ----------   ----------
        Current deferred tax assets......................................................  $1,888,442   $1,561,000
                                                                                           ==========   ==========
 
     Non-current deferred tax liability at September 30, 1997 and 1996 were as follows:
                                                                                                 1997         1996
                                                                                           ----------   ----------
        Differences between financial reporting and tax depreciation                       $ (282,000)  $  (61,000)
                                                                                           ==========   ==========
</TABLE>

     For the year ended September 30, 1997, the Company had a taxable net
operating loss of approximately $1,100,000.  This net operating loss will be
carried back to offset taxable income generated during the year ended September
30, 1996.  The Company estimates that it will receive a $370,000 income tax
refund.  In addition, the Company has recorded a federal income tax receivable
of $659,277 from an overpayment of 1996 taxes and estimated tax payments made
during 1997.

     The Company has approximately $130,000 of net operating loss available to
carryforward subject to limitations imposed by Section 382 of the Internal
Revenue Code expiring through 2008.

     It is management's opinion, based on past operating results and expected
future operating results, that it will be more likely than not that the Company
will utilize its entire net operating loss carryforward before expiration.

NOTE 6 - STOCK OPTIONS AND WARRANTS

1993 Plan

     In planning the Merger, NEC-Utah and NEC-Colorado determined that a stock
option plan to provide incentives for employees and consultants of NFLI would
provide incentives for employees and consultants of NFLI who promote the
interests of NFLI and its stockholders.  The Board of Directors of NFLI approved
the 1993 Stock Option Plan (the 1993 Plan) in connection with the approval of
the Merger.  Pursuant to the 1993 Plan, the Board of Directors of NFLI reserved
a total of 282,000 shares of its common stock for the grant of options to
purchase the Company's common stock.  Generally, one-third of the shares
underlying the options become exercisable in cumulative installments of 12
months, 24 months and 36 months after the date of grant.  Options terminate 5
years after the date of grant, except that if an employee leaves the Company,
the options will terminate 30 days thereafter.  The issuance of options is at
the discretion of the Company's Board of Directors.

1995 Discretionary

     The Board of Directors of NFLI approved the 1995 Stock Option Plan (the
1995 Plan) in March 1995.  Pursuant to the 1995 Plan, as amended in June 1996,
the Board of Directors of NFLI reserved a total of 640,000 shares of common
stock for the grant of options to purchase the Company's stock.  The terms of
the options are similar to those of the 1993 Plan.  As of September 30, 1997, no
options have been exercised.

                                     F-14
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1995 - Non-discretionary

     In November 1995, the Board of Directors of NFLI adopted the 1995 Non-
Discretionary Stock Option Plan for directors of the Company who are not
eligible to participate in the other Plans (the "Non-Discretionary Plan").  The
Non-Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's common stock to each eligible director on the date of
adoption of the Non Discretionary Plan  (November 28, 1995), to each person who
thereafter becomes a director of the Company and, as of December 1, of each year
(commencing in 1996), options to purchase an additional 5,000 shares of common
stock will be granted to each eligible director.  The exercise price of the
options is the fair value of the common stock at the date the options are
granted.  The options expire in five years and are exercisable in full at the
date of grant.

Options and warrants issued in public offering

     In connection with the Public offering (see Note 2), the Company issued
920,000 stock warrants.  Each warrant entitles the holder to purchase one share
of common stock at a price of $3.75 during a three year period ending on July
10, 1998. The Company has the right to call all of the warrants for redemption
on 30 day written notice at a redemption price of $.05 per warrant, subject to
certain defined criteria. In addition, the Company issued warrants to
underwriters to purchase 80,000 shares of the Company's common stock at $3.75
and options to purchase 160,000 of the Company's common stock at $3.23.

     The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1997, as follows:

   Assumption
   ----------

   Dividend Yield             1%
   Risk Free Interest Rate    5.7%
   Expected Life              5-10 years
   Expected Volatility        67%

                                     F-15
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Had compensation cost been determined on the basis of fair value pursuant
to SFAS No. 123 for stock options issued to employees, net income (loss) and
earnings (loss) per share for years ended September 30, 1997 and 1996 would have
been reduced as follows:

<TABLE>
<CAPTION>
                                                                       1997            1996
                                                                   ------------    -----------
          <S>                                                      <C>             <C>
          Net Income (Loss):
          ----------------
             As reported                                           $ (1,981,101)   $ 8,705,164
                                                                   ============    ===========
             Pro Forma                                             $ (2,457,533)   $ 8,657,534
                                                                   ============    ===========
 
          Primary and fully diluted earnings (loss) per share:
          ---------------------------------------------------
             As reported                                           $       (.32)   $      1.36
                                                                   ============    ===========
             Pro forma                                             $       (.39)   $      1.35
                                                                   ============    ===========
</TABLE>

The following is a summary of the status of option plans during the years ended
September 30:

Year ended September 30, 1997
-----------------------------

<TABLE>
<CAPTION>
                                                        1995                    1995                 Public Offering   
                                1993 Plan           Discretionary          Non-discretionary             Options       
                          -------------------     ------------------     --------------------      --------------------        
                                    Weighted               Weighted                Weighted                   Weighted         
                           Number   Average       Number   Average       Number    Average         Number     Average          
                             of     Exercise        of     Exercise        of      Exercise          of       Exercise         
                           Shares    Price        Shares    Price        Shares     Price          Shares      Price           
                          -------   ---------     -------  --------      ------    ----------      ---------  ---------        
<S>                       <C>       <C>           <C>      <C>           <C>       <C>             <C>        <C>              
Outstanding at                                                                                                                 
   September 30, 1996     148,800   $   1.67      177,000  $   3.96      15,000    $    19.75        160,000  $    3.23        
Granted                     5,000      10.38      246,850     12.36      15,000         12.38              -          -        
Exercised                  (7,200)      1.67            -         -           -             -       (150,020)      3.23        
                          -------   --------      -------  --------      ------    ----------      ---------  ---------        
Outstanding at                                                                                                                 
   September 30, 1997     146,600   $   1.96      423,850  $   8.85      30,000    $    16.07          9,980  $    3.23        
                          =======   ========      =======  ========      ======    ==========      =========  =========        
Options exercisable at                                                                                                         
   September 30, 1997     141,600   $   1.67      109,666  $   3.18      30,000    $    16.07          9,980  $    3.23        
                          =======   ========      =======  ========      ======    ==========      =========  =========             

Weighted average fair                                                                                                          
   value of options                                                                                                            
   granted during 1997              $   7.25                 $ 9.03                $     7.02                 $       -        
                                    ========                 ======                ==========                 =========        
</TABLE>

                                     F-16
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Year ended September 30, 1996
-----------------------------

<TABLE>
<CAPTION>
                                                                                  1995               Public Offering
                                 1993 Plan          1995 Discretionary      Non-discretionary           Options
                             -----------------      ------------------      ------------------      -----------------
                                      Weighted                Weighted                Weighted               Weighted
                             Number   Average       Number    Average       Number    Average       Number   Average
                               of     Exercise       of       Exercise        of      Exercise        of     Exercise
                             Shares    Price       Shares      Price        Shares     Price        Shares    Price
                             -------  --------     -------    --------      ------    --------      -------  --------
<S>                          <C>      <C>          <C>        <C>           <C>       <C>           <C>      <C>   
Outstanding at                                                                                            
   October 1, 1995           179,854  $   1.63     152,000    $   2.27           -     $     -     160,000   $   3.23
Granted                            -         -      25,000       14.25      15,000       19.75           -          -
Exercised                    (27,454)     1.42           -           -           -           -           -          -
Forfeited                     (3,600)     1.67           -           -           -           -           -          -
                             -------  --------     -------    --------      ------     -------     -------   -------- 
Outstanding at                                                                                          
   September 30, 1996        148,800  $   1.67     177,000    $   3.96      15,000     $ 19.75     160,000   $   3.23
                             =======  ========     =======    ========      ======     =======     =======   ========
Options and warrants                                                                  
   exercisable at                                                                   
   September 30, 1996        102,533  $   1.67      59,000    $   3.96      15,000     $ 19.75     160,000   $   3.23
                             =======  ========     =======    ========      ======     =======     =======   ========
Weighted average fair                                                           
   value of options                                                             
   granted during 1996                $      -                $   8.66                 $ 11.21               $      -
                                      ========                ========                 =======               ========
 </TABLE>                                                                       
                                                                                
The following is a summary of the status of stock warrants issued in connection
with the public offering for the years ended September 30, 1997 and 1996:   
                                                                            
<TABLE>                                                                     
<CAPTION>                                                                      
                               1997                    1996           
                        ------------------     -------------------  
                                  Weighted                Weighted       
                         Number   Average       Number    Average        
                           of     Exercise        of      Exercise       
                         Shares    Price        Shares     Price         
                        --------  --------     ---------  --------       
<S>                     <C>       <C>          <C>        <C>       
Outstanding at                                                      
   beginning of year    514,416      $3.75      999,000     $ 3.75  
Exercised               (50,053)      3.75     (484,584)      3.75  
                        -------      -----     --------     ------  
Outstanding at the                                                  
   end of year          464,363      $3.75      514,416     $ 3.75  
                        =======      =====     ========     ======  
Warrants exercisable                                                
   at end of year       464,363      $3.75            -     $    -  
                        =======      =====     ========     ======   
</TABLE>

                                     F-17
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Following is a summary of the status of the option and warrants outstanding at
September 30, 1997:

<TABLE>
<CAPTION>
                                                           Exercisable      
                             Outstanding Options             Options        
                       --------------------------------  -----------------   
                                   Weighted                                 
                                    Average    Weighted           Weighted  
                                   Remaining   Average            Average   
      Exercise                    Contractual  Exercise           Exercise  
     Price  Range       Number       Life       Price    Number    Price    
   --------------      ---------  -----------  --------  -------  --------  
   <S>                 <C>        <C>          <C>       <C>      <C>       
   $ 1.40 - $1.88        192,600      2 years    $ 1.72  175,600    $ 1.71  
   $ 2.25 - $2.69        101,000      2 years    $ 2.47   67,333    $ 2.47  
   $ 3.23 - $3.75        474,343       1 year    $ 3.74  474,343    $ 3.74  
   $        10.38         60,000     10 years    $10.38        -         -  
   $11.50 - 12.38         40,000     10 years    $12.16   30,000    $12.38  
   $        13.00        181,850     10 years    $13.00        -         -  
   $        14.25         25,000      9 years    $14.25    8,333    $14.25  
                       ---------                         -------            
                       1,074,793                         755,609            
                       =========                         =======             
</TABLE>

NOTE 7 - DEFERRED INCOME

     NFLI distributors earn monthly commissions based on their achieving a pre-
determined monthly minimum sales volume.  To assist distributors in meeting
their monthly minimum sales volume, the Company has developed an Order Assurance
Program (OAP), which allows a distributor to purchase a product redemption
certificate, subject to certain restrictions, for the difference between the
distributor's actual monthly order and the predetermined monthly minimum sales
goal.  The purchase of such a certificate by a distributor qualifies the
distributor to receive a commission in a given month even though actual product
purchases were below the required level.  The Company recognizes revenues on
these certificates when they are redeemed for product or on a ratable basis over
a 150 day period after the expiration of the certificate.  The Company
recognized revenues from the redemption of certificates of $14,400,000,
$7,647,000 and $1,090,000 for the years ended September 30, 1997, 1996 and 1995.
The Company recognized revenue from unredeemed expired certificates of
$7,028,000, $3,025,000 and $876,000 for the years ended September 30, 1997, 1996
and 1995.  At September 30, 1997 and 1996 the Company had a liability for
unredeemed certificates, net of applicable commissions, of $3,130,524 and
$3,893,570 which is included as deferred income in the accompanying consolidated
balance sheets.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Operating Leases

     The Company has noncancelable operating leases, primarily for office,
warehouse space and equipment.  Rental expense under operating leases for the
years ended September 30, 1997, 1996 and 1995 amounted to approximately
$670,000, $365,000 and $161,000, respectively.

     Future minimum rental payments required under operating leases that have
an initial or remaining noncancellable lease term in excess of one year are as
follows:

<TABLE>
<CAPTION>
         YEAR ENDED SEPTEMBER 30,     AMOUNT
         <S>                          <C>
         1998......................   $   781,845
         1999......................       737,809
         2000......................       709,163
         2001......................       517,461
         2002......................       144,299
</TABLE> 

                                     F-18
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         2003 and thereafter.......     1,101,510
                                      -----------
                                      $ 3,992,087
                                      ===========

Government Regulations

      The Company's activities are subject to regulations by various federal and
state agencies, including the Food and Drug Administration (the "FDA").  The
Company believes that they are in compliance with all federal and state
regulations.  However, the Company cannot predict whether new legislation
regulating its activities will be enacted, which could have a material adverse
effect on the Company.

Employment Agreements

      During 1995, the Company entered into employment agreements with the chief
executive officer and executive vice president of the Company which expired
September 30, 1996.  In addition to their annual salary during the year ended
September 31, 1996, both individuals were entitled to 5% of the first $2,000,000
of pre-tax income, 4% of the next $500,000 of pre-tax income and 3% of pre-tax
income over $2,500,000.  In addition, certain key individuals are to receive
bonuses in total ranging between 2% and 4% of pre-tax income over $2,000,000.
Effective October 1, 1996, the Company entered into new employment agreements
with the chief executive officer and the executive vice-president through
September 30, 1999.  Under the new agreements, both individuals will receive
their annual salary, plus 5% of pre-tax income from $3,000,000 to $5,000,000, 4%
of the next $5,000,000 of pretax income, and 3% of the next $10,000,000 of
pretax income.  The Company incurred expenses of $1,554,996 and $334,317
relating to these employment agreements for the years ended September 31, 1996
and 1995.  No bonuses were paid to these individuals for the year ended
September 31, 1997, as the Company did not achieve pretax income.

Distributor Agreement

      Effective October 24, 1997, the Company entered into an eight year
agreement with a significant distributor. The distributor is required to
exclusively market the Company's products in exchange for a percentage, as
defined in the agreement of gross revenues.

Legal Proceedings

      During April 1996, the Attorney General of the State of Illinois filed
suit against a significant distributor of NFLI concerning the distributors'
practices in the sale of products and in the recruiting of other distributors.
On July 16, 1996, NFLI entered into an "Assurance of Voluntary Compliance" (AVC)
with the state of Illinois in order to assure that NFLI and its distributors'
policies and practices conform to Illinois law and fairly protect the interests
of consumers.  In accordance with the agreement as it relates to the OAP
program, among other things, NFLI has agreed to enforce the following policies
and practices; (1) distributors may not make purchases or receive certificates
merely to earn bonuses; (2) NFLI will continue to encourage distributors to
redeem their certificates for products; (3) the Company's OAP shall remain a
wholly optional program; (4) a distributor shall not receive additional
certificates if the distributor has four unredeemed certificates or the
distributor has unredeemed certificates totalling six times the distributor's
designated OAP amount, unless the distributor is accumulating certificates for a
big ticket item; and (5) upon cancellation of a distributorship, unexpired
certificates and products purchased with certificates will be treated as any
other product for refund purposes.  The Company has implemented procedures to
ensure compliance with the policies and practices described above.  The Company
has entered into similar agreements with several other states.

      During August 1996, an action was brought against the Company in the
United States District Court (the "Federal Action") for damages relating to an
alleged illegal pyramid scheme by; (1) NFLI distributors who enrolled in the
"Instant Executive Program" or the "Instant Executive Pack" and allegedly
incurred net economic loss; and (2) all individuals who purchased common stock
and warrants during the period ended July 11, 1995 through July 16, 1996.

      In addition during August 1996, a suit was also filed against the Company
and the same defendants named in the Federal Action in the District Court of
Harris County, Texas (the "State Action").  The State Action was brought

                                     F-19
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


as a class action on behalf of persons who purchased Common Stock and Warrants
of the Company during the period from July 11, 1995 through July 16, 1996.

          The principal allegations of the complaint in the State Action are
that certain aspects of the executive distributor compensation program
constituted an illegal pyramid scheme and that the Company failed to disclose
that its outstanding financial results were directly attributable to the
questioned aspects of its marketing practices and failed to adequately disclose
a certain distributor's past. The state action was dismissed in November 1997.

          During August 1997 and September 1997, the Federal Action was settled
out of court in two separate settlement agreements for (1) the "distributor"
class for all distributors who claimed economic loss, and (2) the "stockholder"
class for all individuals who purchased common stock and warrants of the Company
from July 11, 1995 through July 16, 1996. The settlements provided the following
terms and conditions:

     (A)  As part of the distributor settlement, the Company was required to set
     aside $1,500,000 in a reserve fund to pay any individuals who became
     instant executives from April 1995 to January 1996. The Company would
     reimburse these individuals for any unused perishable product which the
     distributor returns prior to January 2, 1998 in unused condition.

     (B)  In addition, as part of the distributor settlement, the Company was
     required to ship product, with a retail value of $3,900,000 of the
     Company's choice to distributors who became instant executives during the
     period from April 1995 through April 1996 and had expired, unredeemed order
     assurance certificates. The Company estimates that the Company's cost
     associated with these products to be approximately $534,000.

     (C)  As part of the stockholders agreement, the Company agreed to pay
     $2,000,000 in cash to individuals who purchased common stock and warrants
     from July 11, 1995 through July 16, 1996.

     (D)  In addition, the Company agreed to pay the plaintiffs attorney fees up
     to $600,000 and $300,000 of the stockholder class and distributor class,
     respectively.

          The total estimated settlement, including Company legal and
administrative fees for the Federal Lawsuit was $5,535,000 which is reflected in
operating expenses in the accompanying statement of operations for the year
ended September 30, 1997. Of such amount, $1,332,314 remained unpaid as of
September 30, 1997.

          The Securities and Exchange Commission (SEC) had initiated an
investigation into possible violations by NFLI of the federal securities laws
pursuant to a formal order of investigation.  On December 4, 1996, the SEC
terminated its investigation, resulting in no enforcement action against the
Company.

          On or about March 1, 1991, a lawsuit was filed in the Superior Court
of California, Los Angeles County, by James M. Jordan, former President of NEC-
Utah, against the Partnership and its general partners. A counterclaim against
Mr. Jordan was made by the Partnership. The court found in favor of the
Partnership on all counts and awarded damages and costs of $541,291 (the
Judgment). The Judgment was affirmed October 21, 1994 by the Court of Appeal of
the State of California, Second Appellate District, Division Three.

          In 1993, the Partnership collected NEC-Utah common stock valued at
$114,458 ($.03 per share) from Mr. Jordan.  Upon combination of the entities in
the Merger, this stock was retired and the recognition of the $114,458 was
reversed as these shares were effectively treasury shares of NFLI.  In September
1995, the Company collected $160,680 from the sale of Mr. Jordan's house which
is recorded as other income in the accompanying financial

                                     F-20
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


statements. On October 4, 1995, the Bankruptcy Court for the Central District of
California declared Mr. Jordan's debt to the Company non-dischargeable. Mr.
Jordan did not file a notice of appeal. The Company has only received partial
collection on the Judgment and due to Mr. Jordan's financial circumstances, it
is presently unknown whether additional amounts will be collected and,
therefore, no additional amounts have been recorded in the accompanying
financial statements.

Cruise

      On February 11, 1997, the Board of Directors approved the rights of
certain distributors to participate in a cruise during February 1998.  In
connection with this cruise, the Company will be conducting seminars for the
education and development of its distributors. The $1.2 million estimated and 
accrued cost of the cruise is included in operating expenses. Of such amount, 
$1,195,150 remained unpaid as of September 30, 1997.

      In connection with the cruise, the Company obtained letters of credit from
a financial institution to cover the cost of the cruise, expiring February 20,
1998.  At September 30, 1997, the Company had $737,830 in letters of credit
outstanding.

Product Liability

      The Company does not engage in the manufacturing of any of the products it
markets and distributes; however, the Company could be exposed to product
liability claims. The Company has not had any such claims to date.  Although the
Company maintains product liability insurance which it believes to be adequate
for its needs, there can be no assurance that the Company will not be subject to
claims in the future or that its insurance coverage will be adequate.

NOTE 9 - RELATED PARTY TRANSACTIONS

      The Company purchases a significant portion of their inventory from one
vendor.  Until October 1997, a director of the Company was the president or
consultant of the vendor, and until June 1995, the vendor was owned by a major
stockholder of the Company.  The items purchased are readily available from
other vendors.  During the years ended September 30, 1997, 1996 and 1995, the
Company purchased $4,190,000, $5,234,000 and $2,258,000 of goods, respectively,
from this vendor.

NOTE 10 - FOREIGN SALES

      For the years ended September 30, 1997, 1996, and 1995 the Company's net
sales from foreign operations were $10,060,000, $7,982,000 and 6,482,000,
respectively, including sales to customers in Canada totaling $6,795,000,
$6,422,000 and $4,157,000, respectively. The gross profit percentages on all
foreign sales are consistent with the overall gross profit percentages, however
exchange rate fluctuations could have a future impact on the Company's gross
profit margins.

                                     F-21
<PAGE>
 
           ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE
 

On April 9, 1996 the Company received a letter from KPMG Peat Marwick LLP
informing the Company of KPMG Peat Marwick LLP's resignation as the Company's
auditors, effective that date.  KPMG Peat Marwick LLP was previously engaged as
the principal accountant to audit the Company's financial statements for the
Company's fiscal year ended September 30, 1995.

The Report of KPMG Peat Marwick LLP on the financial statements of the Company
for fiscal year ended September 30, 1995 did not contain an adverse opinion or
disclaimer of opinion nor was it modified as to uncertainty, audit scope or
accounting principles. The Company does not believe that there were any
disagreements with KPMG Peat Marwick LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
during the fiscal year ended September 30, 1995 and the subsequent interim
period through April 9, 1996 which, if not resolved to KPMG Peat Marwick LLP's
satisfaction, would have caused KPMG Peat Marwick LLP to make reference to the
subject matter of the disagreement(s) in connection with its Reports.

The Company requested KPMG Peat Marwick LLP to furnish a letter addressed to the
Commission stating whether it agreed with the statements made by the Company,
and, if not, stating the respects in which it did not agree.  A letter from KPMG
Peat Marwick LLP was included as Exhibit 16 to the Report on Form 8-K of the
Company filed with the Commission on April 15, 1996, stating its agreement with
the statements made by the Company in the Report on Form 8-K.

On April 15, 1996 the Company engaged BDO Seidman LLP as its principal
accountant to audit the Company's financial statements for the year ended
September 30, 1996.

                                       35
<PAGE>
 
                                    PART III


ITEMS 10, 11, 12 and 13 constituting Part III of this Form 10-K have been
omitted from this Annual Report pursuant to the provisions of Instruction G(3)
to Form 10-K as the Company intends to file a definitive proxy statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120
days after the close of its last fiscal year.


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



   Exhibit 2.1   Agreement and Plan of Reorganization, filed as a Exhibit to the
                 Registration Statement on Form S-4 (file no. 33-70312), which
                 Exhibit is incorporated herein by this reference.

   Exhibit 3.1   Articles of Incorporation, as amended*

   Exhibit 3.2   Bylaws, filed as an Exhibit to the Registration Statement on
                 Form S-4 (file no. 33-70312), which Exhibit is incorporated
                 herein by this reference.

   Exhibit 4.1   Specimen Certificate of Nutrition for Life International,
                 Inc.'s Common Stock*

   Exhibit 4.2   Specimen Warrant*

   Exhibit 4.3   Warrant Agreement with Corporate Stock Transfer, Inc.*

   Exhibit 10.1   1993 Stock Option Plan, filed as an Exhibit to the
                  Registration Statement on Form S-4 (file no. 33-70312), which
                  Exhibit is incorporated herein by this reference*

   Exhibit 10.2   1995 Stock Option Plan*

   Exhibit 10.3   Second Amended and Restated Convertible Debenture in the
                  principal amount of $275,000, dated June 29, 1992 made by
                  Nutrition Express Corporation of Utah, Inc. in favor of
                  Shermfin Corp., filed as an Exhibit to the Registration
                  Statement on Form S-4 (file no. 33-70312), which Exhibit is
                  incorporated herein by this reference.

   Exhibit 10.4   Agreement, dated August 12, 1991 between Nutrition Express
                  Corporation of Colorado, Inc. and Shermfin Corp., filed as an
                  Exhibit to the Registration Statement on Form S-4 (file no. 
                  33-70312), which Exhibit is incorporated herein by this
                  reference.

   Exhibit 10.5   Agreement, dated August 12, 1991 between Nutrition Express
                  Corporation of Utah, Inc. and Shermfin Corp., filed as an
                  Exhibit to the Registration Statement on Form S-4 (file no. 
                  33-70312), which Exhibit is incorporated herein by this
                  reference.

   Exhibit 10.6   Convertible Promissory Note, dated October 12, 1989, the
                  principal amount of $250,000 made by Nutrition Express
                  Corporation of Colorado, Inc. in favor of Shermfin Corp.,
                  filed as an Exhibit to the Registration Statement on Form S-4
                  (file no. 33-70312), which Exhibit is incorporated herein by
                  this reference.

                                       36
<PAGE>
 
   Exhibit 10.7    Employment Agreement dated May 10, 1995, between Nutrition
                   For Life International, Inc. and David P. Bertrand*

   Exhibit 10.8    Employment Agreement dated May 10, 1995, between Nutrition
                   For Life International, Inc. and Jana Mitcham*

   Exhibit 10.9    Consulting Agreement, dated February 22, 1995, between
                   Nutrition For Life International, Inc. and Cohig &
                   Associates, Inc.*

   Exhibit 10.10   Form of Consulting Agreement with Cohig & Associates, Inc.*

   Exhibit 10.11   Agreement, dated March 3, 1995, between Nutrition for Life
                   International, Inc. and Shermfin Corp.*

   Exhibit 10.15   Lease Agreements for office and warehouse facilities with 
                   non-affiliates, filed as an Exhibit to the Report on Form 
                   10-KSB for the fiscal year ended September 30, 1995 of the
                   Registrant, which Exhibit is incorporated herein by this
                   reference.

   Exhibit 10.16   1995 Non-Discretionary Stock Option Plan, filed as an Exhibit
                   to the Report on Form 10-KSB for the fiscal year ended
                   September 30, 1995 of the Registrant, which Exhibit is
                   incorporated herein by this reference.

   Exhibit 10.17   Assurance of Voluntary Compliance for the State of Illinois,
                   dated July 16, 1996, filed on July 31, 1996 as an Exhibit to
                   the Report on Form 8-K, which Exhibit is incorporated herein
                   by this reference.

   Exhibit 10.18   Administrative and Consulting Services Agreement, dated July
                   29, 1996, between Distributor Services, L.L.C. and Nutrition
                   For Life International, Inc.*

   Exhibit 10.19   Form of Distributor Agreement of Nutrition For Life
                   International, Inc.*

   Exhibit 10.20   Employment Agreement, effective October 1, 1996, between
                   Nutrition For Life International, Inc. and David P. Bertrand,
                   filed as an Exhibit to the Report on Form 10-KSB for the
                   fiscal year ended September 30, 1996 of the Registrant which
                   Exhibit is incorporated herein by this reference.

   Exhibit 10.21   Employment Agreement, effective October 1, 1996, between
                   Nutrition For Life International, Inc. and Jana Mitcham,
                   filed as an Exhibit to the Report on Form 10-KSB for the
                   fiscal year ended September 30, 1996 of the Registrant which
                   Exhibit is incorporated herein by this reference.

   Exhibit 10.22   Agreement, effective October 24, 1997, among K.T. Corp.,
                   Kevin Trudeau and Nutrition For Life International, Inc.

   Exhibit 21      Subsidiaries of the Company.

   Exhibit 23.1    Consent of KPMG Peat Marwick LLP.

                                       37
<PAGE>
 
   Exhibit 23.2    Consent of BDO Seidman, LLP.

___________________________________________________


   *      These exhibits were previously filed as exhibits to the Company's
          Registration Statement (File No. 33-92274), and are incorporated 
          herein by reference.

                                       38
<PAGE>
 
                                  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.

                             NUTRITION FOR LIFE INTERNATIONAL, INC.
                             (Registrant)


Date:  January 7, 1998     By: /s/ David P. Bertrand
                               --------------------------------
                               David P. Bertrand, President

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


Date:  January 7, 1998      /s/ David P. Bertrand
                            -------------------------------------------------
                            David P. Bertrand, President, Principal Executive
                            Officer, Director and Chairman of the Board of
                            Directors


Date:  January 7, 1998      /s/ Jana Mitcham
                            -------------------------------------------------
                            Jana Mitcham, Executive Vice President, Secretary,
                            and Director


Date:  January 7, 1998      /s/ Barry C. Loder
                            -------------------------------------------------
                            Barry C. Loder, Vice President and Chief Financial
                            Officer


Date:  January 7, 1998      /s/ Ronnie D. Meaux
                            -------------------------------------------------
                            Ronnie D. Meaux, Vice President, Treasurer,
                            Assistant Secretary and Principal Accounting Officer


Date:  January 12, 1998     /s/ John R. Brown, Jr.
                            -------------------------------------------------
                            John R. Brown, Jr., Vice President


Date:  January 12, 1998     /s/ F. Wayne Ballenger
                            -------------------------------------------------
                            F. Wayne Ballenger, Director


Date:  January 12, 1998     /s/ M. F. Florence
                            -------------------------------------------------
                            M. F. Florence, Director


Date:  January 12, 1998     /s/ Richard S. Kashenberg
                            -------------------------------------------------
                            Richard S. Kashenberg, Director


Date:  January 12, 1998     /s/ Gregory Pusey
                            -------------------------------------------------
                            Gregory Pusey, Director

                                       39