<PAGE>

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K

  X   Annual Report Under Section 13 or 15(d) of The Securities Exchange Act
  -   of 1934 (Fee Required) for the Fiscal Year Ended September 30, 2001

  -   Transition Report Under Section 13 or 15(d) of The Securities Exchange
      Act of 1934 (No Fee Required) for the Transition Period from ________
      to ________

                        Commission file number 0-26362

                         ADVANCED NUTRACEUTICALS, INC.
                         -----------------------------
            (Exact name of Registrant as specified in its charter)

              Texas                                   76-0642336
              -----                                   ----------
 (State or other jurisdiction of         (I.R.S. Employer Identification No.)
 incorporation or organization)

 106 South University Blvd., Unit 14
           Denver, Colorado                              80209
           ----------------                              -----
 (Address of principal executive office)               (Zip Code)

        Issuer's telephone number, including area code: (303) 722-4008


          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. [_]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on December 18, 2001 was $1,653,000.

The number of shares outstanding of the Registrant's common stock on December
26, 2001 was 2,129,975.

                      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 the Registrant's fiscal year, ended September 30, 2001.

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                DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

  The Company is including the following cautionary statement in this Annual
Report on Form 10-K to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. Actual events or results
may differ materially as a result of risks facing the Company. Such risks
include, but are not limited to, changes in business conditions, the general
economy, competition, changes in product offerings, as well as regulatory
developments that could cause actual results to vary materially from the future
anticipated results indicated, expressed or implied, in such forward-looking
statements. The Company disclaims any obligation to update any forward-looking
statement to reflect events or circumstances after the date hereof.

                                    PART I

                               ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF THE BUSINESS
-----------------------------------

  Advanced Nutraceuticals, Inc. ("ANI" or the "Company"),
www.advancednutraceuticals.com or www.anii.cc was organized in March 2000 to be
------------------------------    -----------
the holding company for Bactolac Pharmaceutical Inc. ("Bactolac") including
Bactolac's ASHCO division ("ASHCO") and Nutrition For Life International, Inc.
("NFLI"). Bactolac and ASHCO are manufacturers of nutraceutical and
pharmaceutical products. NFLI is engaged in the sale of nutritional supplements
and other consumer products through a network marketing system. The Company
adopted the holding company structure to better reflect the diversification of
its operations and to improve its organizational structure for its acquisition
program.

  On June 13, 2001, ANI completed the sale of NFLI.  As a result of the sale,
the network marketing operations of NFLI are treated as discontinued operations
in the Company's financial statements. The Company's ongoing business operations
consist of the manufacture of nutraceutical and pharmaceutical products.

  Bactolac, www.bactolac.com located in Hauppauge, New York was founded in 1995
            ----------------
and is engaged in the formulation, manufacturing, coating and packaging of
encapsulated and compressed tablets and powder blended vitamins and related
nutritional supplements. Due to the continuing sales increases experienced at
Bactolac, in the fall of 2000, its operations were moved to a state of the art
approximately 30,000 square foot GMP facility. Recent investments in high-tech
lab equipment, high speed manufacturing equipment, in-house thin film coating
equipment and flexible packaging equipment have resulted in faster turn around
times and greater control of the quality and production processes.  Bactolac
provides private label contract manufacturing services, with over 700 different
vitamins and supplements to various companies engaged in the marketing and
distribution of vitamins, mineral supplements, herbs and other health and
nutrition consumer products.

  Bactolac's growth and profitability has been driven by its reputation for
creating exciting, innovative formulas including weight loss, sport nutrition,
energy products, antioxidants, formulas designed specifically for men, women and
children, stress formulas, relaxation formulas, life extension, immune
enhancement, brain products, cleansing products, cholesterol products, liver
formulas, heart

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formulas and hundreds of herbal remedies. Additionally, Bactolac custom
formulates products in response to and in conjunction with, customer demand.
Bactolac strives to provide high quality nutritional products that promote the
health and vitality of its users.

  ASHCO, www.anipharmaceuticals.com, has operated as a division of Bactolac
         --------------------------
since it was acquired in December 1999.  The 132,000 square foot facility in
Gulfport, Mississippi owned by the Company, was previously owned and operated by
the Bayer Corporation and the same core operations management from the previous
ownership continue to follow the quality-driven procedures and principles
established by Bayer at the facility, over its more than 40 year history.  In
August 2001, the Company organized ANI Pharmaceuticals, Inc. ("ANIP"), as a
wholly owned subsidiary of the Company.  The Company expects that the operations
that have previously been conducted by the ASHCO division will be conducted by
ANIP.  For ease of reference, ANIP will include both ANI Pharmaceuticals, Inc.
and the ASHCO division unless indicated otherwise.  ANIP manufactures high
quality pharmaceutical products, including liquids, powders, tablets, ointments,
creams and lotions liquid and powder pharmaceutical products. ANIP provides
contract and private label manufacturing services to various companies, many of
which are engaged in the distribution and sale of over-the-counter liquid
antacid and powder products.

  The Company's near term strategy is to generate positive cash flow, become
profitable and strengthen its financial position. The Company believes it can
successfully implement this strategy by aggressive efforts to obtain new
customers by emphasizing its cost effective and high quality manufacturing
operations while at the same time maintaining a stringent cost containment
program.

  The Company's long-term strategy is to pursue strategic acquisition
opportunities in the manufacturing and distribution segments of the nutritional
and pharmaceutical industries. In September 2001 the Company entered into an
agreement to acquire certain assets of York Pharmaceuticals, Inc. ("York"),
including equipment and customer list.  Although the agreement has expired, the
Company is continuing its efforts to conclude the transaction.  Due to the
recent operating difficulties and limited capital resources, management of the
Company determined that for the near term, it would not be feasible to attempt
to acquire additional companies. As the sales at ANIP increase, the Company
plans to resume its program to locate and acquire companies in complementary
businesses.


FINANCIAL INFORMATION ABOUT THE COMPANY'S BUSINESS SEGMENTS
-----------------------------------------------------------

  The Company's internal competencies are divided into two distinct
manufacturing segments in separate geographic locations.  Bactolac is a private
label contract manufacturer of vitamins and supplements located in Hauppauge,
New York.  ANIP is a contract and private label manufacturer of over-the-counter
liquid and powder pharmaceutical products, primarily liquid stomach remedies,
located in Gulfport, Mississippi.  The Company is committed to providing high
quality products.  Bactolac utilizes GMP (Good Manufacturing Practices)
practices at its facility.  ANIP is a cGMP facility (under FDA guidelines) and
manufactures USP products.  Additional financial information by segment can be
found in ITEM 8, FINANCIAL STATEMENTS.


Vitamin and Supplement Segment

  Bactolac manufactures a comprehensive assortment of vitamin, mineral and
nutritional supplement products, which include a variety of vitamins, beta
carotene, magnesium, folic acid, calcium and potassium, as well as various herbs
such as Echinacea, St. John's Wort, Ginko Biloba, Saw Palmetto Ginseng, and
various multivitamin combinations, with no single product generating a sales
concentration.

The Company has the capacity to produce millions of tablets per day using
technologically advanced high-speed manufacturing equipment.  Bactolac has
increased its production capacity through additional equipment purchases as well
as vertically integrating processes that had previously been performed by
outside subcontractors.

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  Capital expenditures at Bactolac during 2001 approximated $850,000, and
resulted in significantly higher production capacity, with shorter production
turnaround times, combined with improved levels of quality control.   Bactolac
custom formulates products in response to and in conjunction with, customer
demand.  The Company also has developed a fully automated packaging line and has
recently completed an in-house thin film coating line.

  Raw materials used in Bactolac's products consist of nutrient powders,
excipients, empty gelatin capsules, and necessary components for packaging and
distribution of finished vitamin and nutritional supplement products. The
nutrient powders and the empty gelatin capsules are purchased from manufacturers
in the United States, and foreign countries. All materials procured by Bactolac
undergo quality control review to ensure conformance to product specification
prior to acceptance and release into materials inventory. To date, the Company
has not experienced any difficulty in obtaining adequate sources of supply, and
generally a number of suppliers are available for most raw materials.  Although
there can be no assurance that adequate sources will continue to be available,
Bactolac believes it should be able to secure sufficient raw materials in the
future.

  The vitamin and supplement segment generated net sales of $10,764,000 and
$9,088,000, for the years ended September 30, 2001 and 2000.  Net sales amounts
and customer information covers periods subsequent to November 17, 1999, the
date of acquisition.  The top three unrelated customers accounted for
approximately 47% and 42% of Bactolac's net sales for 2001 and 2000.  One
customer, included in the top three, had net sales percentages of 13% and 16%,
to Bactolac's net sales in 2001 and 2000, is located in Russia.    Seasonality
is generally not a major factor in Bactolac's business, other than a slight
increase in revenues during late summer and fall. Backlog at Bactolac is fairly
short term in nature due to quick production turn around, with recent backlog in
the range of $600,000 to $800,000.


Over-The-Counter Pharmaceutical Segment

  ANIP manufactures liquids, powders, and over the counter drugs. Examples of
the primary products that it produces include liquid antacids, cough and cold
syrups and elixirs, acetaminophen elixirs, baby powders, medicated powders and
anti-fungal powders.

  Raw materials used at ANIP consist of active and inactive materials for the
production of liquid antacids, liquid component additives for syrup and elixir
products and raw material powder products.  Packaging materials consisting of
bottles, caps, cardboard containers and labels are also significant stocked
items.  Substantially all materials are purchased from suppliers in the United
States. All significant vendors and materials procured by ANIP undergo quality
control review and testing, including on-site quality control audits to ensure
conformance to quality standards and product specification prior to acceptance
and release into materials inventory.  The Gulfport facility is committed to
providing high quality products; its facilities are designed to meet USP
compliance standards. In place quality management systems are detailed and
rigorous, and include analytical processes and procedures. The quality
management systems also include well-equipped and professionally staffed
analytical laboratories to assure raw material acceptance as well as in-process
and finished product evaluation for compliance to specification. The Company's
OTC pharmaceutical products are also subject to shelf life stability testing
through which the Company determines the effects of aging on its products. The
Company's product retention program allows the Company the ability to maintain
samples from each product batch shipped and, when appropriate, to analyze such
samples for product quality.

  The over-the-counter pharmaceutical segment generated net sales of $6,842,000
and  $6,980,000, for the years ended September 30, 2001 and 2000.  Net sales
amounts and customer information covers periods subsequent to November 17, 1999,
the date of acquisition.  The top unrelated customers accounted for
approximately 71% (three customers) and 66% (two customers) of ANIP's net sales
for 2001 and 2000.  One customer, included in above, was Bayer Corporation, with
percentages of 35% and 52%, to ANIP's net sales in 2001 and 2000. During the
first quarter of the fiscal year

                                       4
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ended September 30, 2001, ANIP completed the final production for Bayer
Corporation.  Bayer Corporation had previously informed the Company that it
decided to internally produce the products produced at ANIP's facility by the
Company for Bayer.  Seasonality is generally not a significant factor in ANIP's
business.  Backlog at ANIP is fairly short term in nature due to quick
production turn around, and recent backlog has generally been in the range of
$500,000 to $700,000.

Customers and Markets

  The Company manufactures a broad range of products and uses a variety of
methods to market and sell its products and services; these include experienced
sales personnel, word of mouth referrals from one customer to another, contract
sales representatives, trade show participation, trade journal advertising and
press publicity, as well as web site exposure and reliance on name recognition
and long standing reputation in the industry.

  Bactolac's customer base includes a wide range of distribution alternatives.
Customers include direct marketing companies, network-marketing companies,
retail chain distribution and customers who re-package bulk products for re-sale
to others.  During the current fiscal year, Bactolac concentrated on increasing
its customer base through expanded marketing and sales efforts, including
developing marketing materials in addition to commencing attendance at trade
shows.

  ANIP's customer base consists of distributors who re-sell the products and
major retail customers who generally have the product produced with their
private brand label on the product, to compete with national brand suppliers.
During the first quarter of the year ended September 30, 2001, ANIP completed
the final production for Bayer Corporation, which had historically accounted for
a substantial portion of the ANIP revenue. Subsequent to that time, ANIP
expanded its marketing efforts, and in addition has maintained a tight cost
containment program aimed at reducing expenses at the Gulfport facility. During
the fourth quarter of the year ended September 30, 2001, ANIP also hired a
highly qualified sales person with over 24 years of industry experience.  As a
result of these activities the Company has recently added several customers,
such as Walgreens, K-Mart, Dollar General, Winn Dixie, Kroger and Shurfine, and
is in talks with a number of large recognized retailers.

  The Company's operations are subject to the risks normally associated with
manufacturing vitamins, nutritional and pharmaceutical products, including
shortage of certain raw materials.

Research and Development

  The primary areas of the Company's research and development activities are
focused in working with customers in the development of new products and
expansion of the product line offerings for the private label market.  Such
assistance is normally in the form of product component identification and
formulation, as well as product and packaging trends. In addition, as part of
its quality control procedures the Company produces pilot or sample runs of
product formulation prototypes to ensure stability and/or efficacy and to
determine ingredient interaction. The Company has implemented quality control
procedures to verify that all products comply with established specifications
and standards in compliance with both USP and Good Manufacturing Practices
promulgated by the Food and Drug Administration (the "FDA"). Research of this
type is a part of the internal overhead operating expenses incurred by the
Company and the associated incremental outside costs of research and development
activities have not been significant to date.

Competition

  The Company's products are sold primarily in domestic as well as limited
foreign markets in competition with other private label manufacturing and
marketing companies. The vitamin, nutritional supplement and over-the-counter
pharmaceutical industries are highly competitive, and competition continues to
increase. Competition for the sale of products comes from many sources,
including companies which sell pharmaceuticals and nutraceuticals to
supermarkets, large chain discount

                                       5
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retailers, drug store chains and independent drug stores, health food stores,
pharmaceutical companies and others who sell to wholesalers, as well as mail
order vendors, eCommerce and network marketing companies. The Company does not
believe it is possible to accurately estimate the number or size of its many
competitors as the vitamin industry is largely privately held and highly
fragmented.

  The Company believes the industries it operates in continues to see
significant changes through merger and acquisition consolidations, as well as
contractions due to a general slowing of the prior growth trend.  Many industry
experts expect this trend to continue for the foreseeable future in food and
nutrition companies, multilevel marketing and direct marketing organizations and
eCommerce firms.

  Based on industry data, the botanicals and supplements industry experienced a
30% sales growth in calendar year 1998, while 1999 experienced a decelerating
growth rate of 7.8%, and preliminary estimates for 2000 and 2001 continue to
reflect this trend with negative growth. The industry, while still estimated at
over $20 billion annually, is believed to be moving into a mature stage where
greater price pressure and modest market expansion will continue to increase
competition.

  The Company believes competition among manufacturers of over-the-counter
pharmaceuticals is based, among other things, on price, timely delivery, product
quality and consistency, safety, availability, product innovation, marketing
assistance and customer service. Competition in the over-the-counter
pharmaceuticals market is highly competitive and while there are several
manufacturers in the industry, the primary competitor is Perrigo Company, which
is estimated to service the largest percentage of the market.  The competitive
position of the Company will likely depend upon continued acceptance of its
products, its ability to attract and retain qualified personnel, future
governmental regulations affecting the Company's products as well as the
publication of vitamin product safety and efficacy studies by the government and
authoritative health and medical authorities.

Employees

  At September 30, 2001, the Company employed 114 full time employees in its
operations, with Bactolac employing 46, ANIP employing 68 and 3 employed in
holding company executive management.  The employees at Bactolac and ANIP are
engaged in management and sales, quality control, production and administration.

  The Company has never experienced a work stoppage, and none of its employees
are currently represented by a union or any other form of collective bargaining
unit. The Company believes its relations with its employees are good.

Government Regulation

  The formulation, manufacturing, packaging, labeling, advertising and
distribution of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission ("FTC"), the
Consumer Product Safety Commission ("CPSC"), the United States Department of
Agriculture ("DOA") and the Environmental Protection Agency ("EPA"). These
activities are also regulated by various agencies of the states and localities
in which the Company's products are sold, including without limitation the
California Department of Health Services, Food and Drug branch. The FDA and FTC
in particular regulate the advertising, labeling and sales of vitamin and
mineral supplements and may take regulatory action concerning medical claims,
misleading or untruthful advertising, and product safety issues. These
regulations include the FDA's Good Manufacturing Practices ("GMP") for foods.

Detailed dietary supplement GMPs have been proposed but no regulations have been
adopted. Additional dietary supplement regulations were adopted by the FDA
pursuant to the implementation of the Dietary Supplement Health and Education
Act of 1994 ("DSHEA").

  The Company may be subject, from time to time, to additional laws or
regulations administered by the FDA or other Federal, State or foreign
regulatory

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authorities, or to revised interpretations of current laws or regulations. The
Company is unable to predict the nature of such 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
Company to: reformulate certain products to meet new standards; recall or
discontinue certain products not able to be reformulated; expand documentation
of the properties of certain products; expand or provide different labeling and
scientific substantiation; or, impose additional record keeping requirements.
Any or all such requirements could have a material adverse effect on the
Company's results of operations and financial position.

                         DISCONTINUED OPERATIONS- NFLI

  Effective June 13, 2001, the Company completed the sale of its NFLI subsidiary
to Everest International, L.L.C. ("Everest"). The sale provided $3.2 million in
cash at closing and a $5 million note, payable based on a ten-year amortization
with quarterly payments for three years and a final balloon payment at the end
of the third year. In addition, Bactolac entered into a product supply agreement
with NFLI and received a $650,000 note due one year and a day from closing,
relating to inter-company debt. The purchase price may also be increased up to
an additional $750,000, depending upon future operating results of NFLI's
Japanese operation.  The Company does not expect to receive any proceeds as a
result of NFLI's Japanese operations.

  Due to the completion of the sale of NFLI, the Company's consolidated
financial statements and related notes thereto have been restated to present the
operations of NFLI as discontinued operations. For further discussion see Notes
2 and 4 of the Notes to Consolidated Financial Statements in Item 8 herein.

  NFLI markets and distributes an extensive product line, including vitamins,
minerals and antioxidents, designed for health-conscious consumers, and sold
those products to consumers through its network of independent distributors.
Distributors are independent contractors who purchase products directly from
NFLI for their own use and for resale to retail consumers.

  Historically the majority of NFLI's operations have been in North America and
Europe.  Approximately 85% of revenues were generated in the United States.
During fiscal 2000 NFLI began operating in Japan.  Distributors may elect to
work on a full-time or part-time basis. Distributors' revenues are derived from
several sources. First, distributors may receive revenues by purchasing NFLI's
products at wholesale prices and selling those 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.


                                 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.

  Risks Related to the Company and its Continuing Operations

  Recent Losses. The Company has incurred losses from its continuing operations
  --------------
in each of the fiscal years ended September 30, 2001, 2000 and 1999. The losses
were incurred from the operations of ASHCO as well as NFLI, which is now
discontinued as the result of the sale of NFLI. The Company completed the
acquisitions of Bactolac and ASHCO in late 1999. Although the Bactolac operation
has been profitable since acquisition, the losses of ASHCO and the overhead and
transactional expenses of the Company have caused significant losses to be
incurred during the past two fiscal years.  Because of the brief operating
history of the acquired companies, future profitable operations cannot be
predicted with certainty.

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  Sale of NFLI. On June 13, 2001, ANI completed the sale of NFLI and NFLI's
  ------------
subsidiaries in the network marketing business to Everest. The sales price
included a $5,000,000 note payable ("Note") based upon a ten year amortization
schedule with quarterly payments for three years and a final balloon payment at
the end of the third year. ANI has agreed to subordinate the $5,000,000 Note to
a secured lender of NFLI and the Note is without recourse to Everest.  Bactolac
also received a $650,000 note due in one year from NFLI.  Collectability of the
notes will depend upon the future success of operations of NFLI, including
NFLI's ability to service any debt it may secure with a senior lender.

  Secured Lender Relationships. The Company has a senior credit facility with a
  ----------------------------
lender.  As of September 30, 2001, the balance outstanding under the facility
amounted to $2,039,454.  The lender also from time to time may, and has,
adjusted the advance rates under the revolving portion of the credit facility,
which to this point has had the effect of reducing amounts otherwise available
under the agreement. The Company has not been in compliance with certain
covenants under the credit facility and on December 26, 2001 was granted waivers
by its lender. The Company is attempting to amend its credit agreement and
believes based on its discussion with the lender, that it will be successful in
such efforts. If the Company's secured lender will not modify the agreements or
continue to work with the Company in granting waivers, until such time as the
Company may be able to modify, refinance or repay such obligations, the
financial position and liquidity of the Company could be adversely affected or
put the Company in jeopardy.

  Replacement of Principal Customer. Approximately 13% and 23% of the Company's
  ----------------------------------
total consolidated sales from continuing operations in the fiscal years ended
September 30, 2001 and 2000 were made to Bayer Corporation. During the first
quarter of the fiscal year ended September 30, 2001, the final production of
Bayer products was completed. The Company is aggressively attempting to expand
its customer base to compensate for the loss of the Bayer business and has
initiated a cost containment program. Failure to replace this substantial
customer or the inability to substantially reduce operating expenses has had and
will continue to have an adverse effect on the Company's business and financial
condition.

  Dependence on Key Personnel.  ANI's future success depends on the continued
  ---------------------------
availability of certain key management personnel, including Dr. P.M. Reddy,
founder of Bactolac and Director of ANI, and Greg Pusey, Chairman, Director and
Chief Executive Officer of ANI.  ANI has obtained "key man" insurance on the
life of Dr. Reddy with the benefit amount to ANI of $7,000,000.  ANI's growth
and profitability also depends on its ability to attract and retain other
management personnel.

  Nasdaq Listing.  The Company's common stock is currently traded under the
  --------------
symbol - ANII, on the Nasdaq Small Cap System. From time to time during 2001 the
Company's common stock failed to maintain a consistent minimum bid price of
$1.00.  Nasdaq has granted all companies listed on the Small Cap System an
exemption to the $1.00 minimum bid price requirements through July 1, 2002.
Should the Company's shares be delisted from Nasdaq, and be quoted on either the
"bulletin board," or the "pink sheet" system, it could have a negative impact on
the trading activity and price of the Company's common stock as well as the
Company's ability to raise additional equity capital and/or consummate
additional acquisitions.

  Government Regulations.  The manufacturing, processing, formulation and
  ----------------------
packaging of the Company's products are subject to regulation by federal, state
and foreign agencies, including the FDA, the FTC, the CPSC, the DOA, the United
States Postal Service and the EPA.  Such agencies have a variety of remedies and
processes available to them, including initiating investigations, issuing
warning letters and cease and desist orders, requiring corrective labels or
advertising, requiring consumer redress (for example, by requiring that a
company offer to repurchase products previously sold to consumers), seeking
injunctive relief or product seizure, imposing civil penalties, or commencing
criminal prosecution.

  There can be no assurance that the regulatory environment in which the Company
operates will not change or that such regulatory environment, or any specific
action taken against the Company will not result in a material adverse effect on
the Company's business, financial condition or results of operations. The
Company also

                                       8
<PAGE>

cannot predict whether new legislation regulating its activities will be
enacted, which new legislation could have a material adverse effect on its
operations.

  Product Liability.  The Company, like other manufacturers and distributors of
  -----------------
products that are ingested, faces an inherent risk of exposure to product
liability claims if, among other things, the use of its products results in
injury.  The Company currently has product liability insurance for its
operations in amounts the Company believes are adequate for its operations.
There can be no assurance, however, that such insurance will continue to be
available at a reasonable cost, or if available, will be adequate to cover
liabilities.

  Ability to Implement Business Strategy; Integration of Acquisitions.  The
  -------------------------------------------------------------------
Company's future results and financial condition are dependent on the successful
implementation of its business strategy.  A key component of the Company's long-
term business strategy involves strategic acquisitions.  In 1999 the Company
expanded its operations to include the manufacture of pharmaceutical products
and nutritional supplements.  Although the Company believes that its business
strategy will enable it to improve its financial results, there can be no
assurance that its strategy will be successful, that the anticipated benefits of
its strategy will be realized, that management will be able to implement the
strategy on a timely basis, that the Company will return to profitability levels
previously experienced, or that losses will not be incurred in the future.  The
Company's acquisition strategy is currently limited due to the Company's recent
operating difficulties and limited resources.

  The success of the Company will depend, in part, on the Company's ability to
integrate the operations of the acquired companies. There can be no assurance
that the Company's management team will effectively be able to oversee the
combined entity and implement the Company's business strategy. Moreover, no
assurance can be given that the Company will be able to successfully integrate
any future acquisitions without substantial cost, delays or other problems. The
cost of integration could have an adverse effect on short-term operating
results. Such costs could include severance payments, restructuring charges
associated with the acquisitions and expenses associated with the change of
control. There can be no assurance that the Company will be able to anticipate
all the changing demands the acquisitions will impose on its management
personnel, operational and management information systems and financial systems.
The integration of newly acquired companies may also lead to diversion of
management attention from other ongoing business concerns. Any or all of these
factors could have a material adverse effect on the Company's business,
financial condition or results of operations.

  Risks Related to Acquisition Financing; Leverage.  The financing for the
  ------------------------------------------------
acquisitions in 1999 was provided primarily through a new lending arrangement.
The loan facility is secured by substantially all the assets of the Company and
its subsidiaries. The loan agreement contains various covenants that require the
maintenance of certain financial ratios, as well as additional covenants and
significant restrictions on dividend payments, issuance of debt and equity,
mergers, changes in business operations and sales of assets. These restrictions
could limit the Company's ability to respond to market conditions, to provide
for unanticipated capital expenditures or to take advantage of business or
acquisition opportunities. If any covenant were breached without a waiver or
renegotiation of the terms of that covenant, the lender could have the right to
accelerate the payment of the indebtedness even if the Company has made all
principal and interest payments when due. The Company has not complied with all
of the covenants and on December 26, 2001 was granted waivers by its lender. The
Company is attempting to amend its credit agreements and believes based on its
discussions with such lenders that it will be successful in such efforts. If the
Company continues to breach these covenants, or if the Company's operating
revenues were to be insufficient to pay debt service, there would be a risk of
default and foreclosure on the Company's assets.

  Subject to future operating results and/or obtaining additional financing, the
availability of which is not assured, the Company intends to seek additional
acquisitions. The timing, size and success of the Company's acquisition efforts
and any associated capital commitments cannot be readily predicted. The Company
intends to finance future acquisitions by using shares of its stock, cash, and
borrowed funds (including the issuance of promissory notes to the sellers of the
companies to be

                                       9
<PAGE>

acquired) or a combination thereof. If the Company's stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept stock as part of the consideration for the sale of their
businesses, the Company may be required to use more of its cash resources or
more borrowed funds, in each case if available, in order to acquire additional
companies. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. There can be no assurance that the Company will be able to
obtain any additional financing that it may need for future acquisitions on the
terms that the Company deems acceptable.

  Dividends.  The Company declared an initial cash dividend of $.08 per share of
  ---------
common stock in September 1996, and paid dividends quarterly until June 1998.
The Company has not declared any dividends subsequent to June 1998. The
Company's credit facility prohibits dividend payments without the consent of the
lender.  The determination of whether to pay dividends in the future will be
made by the Board of Directors and will depend on the earnings, capital
requirements, and operating and financial condition of the Company, among other
factors. It is not anticipated that the Company will pay dividends in the fiscal
year ending September 30, 2002 or in the foreseeable future.

  Competition. The market for the Company's products is highly competitive. The
  -----------
Company competes with other dietary supplement products and over-the-counter
pharmaceutical manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's business,
operations and financial condition could be adversely affected. Many of the
Company's competitors, particularly manufacturers of nationally advertised brand
name products, are larger and have resources substantially greater than those of
the Company. There has been speculation about the potential for increased
participation in these markets by major international pharmaceutical companies.
In the future, if not already, one or more of these companies could seek to
compete more directly with the Company by manufacturing and distributing their
own or others' products, or by significantly lowering the prices of existing
national brand products. The Company sells substantially all of its supplement
products to customers who re-sell and distribute the products.



                        ITEM 2. DESCRIPTION OF PROPERTY

Properties

  ANIP manufactures pharmaceutical products at the Company owned 132,000 square
foot facility in Gulfport, Mississippi. Bactolac headquartered in Hauppauge, New
York, conducts its operations in a leased facility comprising approximately
27,500 square feet. Bactolac's current monthly rental is approximately $26,000,
of which $6,000 pertains to improvements made by a related party, that escalates
over the 5 year term remaining on the lease. The Company has two five-year
renewal options and a purchase option on the facility.  Bactolac leases is
facility from Shilpa Saketh Realty, Inc., an entity owned by Pailla M. Reddy,
President of Bactolac and a member of the Company's Board of Directors. In
addition, ANI currently rents administrative office space in Houston, TX, on a
temporary, short-term basis for approximately $600 per month.

  See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and Item 8. "Financial Statements and Supplementary Data".

                           ITEM 3. LEGAL PROCEEDINGS

  The Company is not a party to any legal proceedings, the adverse outcome of
which would, in management's opinion, have a material adverse effect on the
Company's business, financial condition and results of operations.

                                       10
<PAGE>

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

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


                                     PART II

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

     The Company's Common Stock is traded on the Small Cap Market of the Nasdaq
Stock Market under the symbol "ANII". ANI's warrants, previously traded under
the symbol "ANIIW", were delisted during 2001, and are scheduled to expire as of
December 31, 2001. A one for four (1:4) stock split of the issued and
outstanding common stock was effected in June 2001. All share references have
been retroactively restated to reflect the effect of this split.

     The holder of four Warrants is entitled to purchase one share of Common
Stock at $15 per share until December 31, 2001, unless earlier redeemed by the
Company.

                            Common Stock   Warrants
                            ------------   --------
      Quarter Ended         High    Low   High    Low
      -------------         ----    ---   ----    ---
        Fiscal 1999:
      December 31, 1998     $0.99  $0.50  $0.27  $0.10
      March 31, 1999         0.84   0.52   0.28   0.10
      June 30, 1999          0.66   0.52   0.22   0.06
      September 30, 1999     0.91   0.41   0.24   0.08

         Fiscal 2000:
      December 31, 1999      0.75   0.53   0.10   0.05
      March 31, 2000         0.61   0.41   0.19   0.05
      June 30, 2000          0.55   0.35   0.08   0.06
      September 30, 2000     0.50   0.19   0.08   0.01

         Fiscal 2001:
      December 31, 2000      1.00   0.19     *      *
      March 31, 2001          .75   0.25     *      *
      June 30, 2001          3.30   0.25     *      *
      September 30, 2001     1.75   0.77     *      *

         * Warrants were delisted in 2001.
      As of December 17, 2001, there were 1,607 record holders of common stock.

     The Company declared its first cash dividend on its common stock in
September 1996, which dividend of $.08 per share was paid in October 1996. The
Company continued to pay quarterly dividends of $.08 per share of common stock
until June 1998. No dividends have been declared by the Company subsequent to
June 1998. It is not likely that dividends will be paid in the fiscal year
ending September 30, 2002. The Company may not declare any dividends without the
consent of its senior lender, General Electric Capital Corporation. Subject to
obtaining the lender's consent 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.


ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data presented below for each year in the five-year
period ended September 30, 2001 have been derived from the audited financial
statements of the Company as restated to present the operations of NFLI as

                                       11
<PAGE>

discontinued operations. The data presented below should be read in conjunction
with Company's financial statements and notes thereto and, except for operating
data included therein, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

<TABLE>
<CAPTION>
                                                                      YEARS ENDED SEPTEMBER 30,
                                                                (In thousands, except Per Share Data)
                                                                -------------------------------------
                                                    2001          2000          1999            1998          1997
                                                    ----          ----          ----            ----          ----
<S>                                               <C>           <C>           <C>             <C>           <C>
Statements of Operations
  Net sales                                       $17,606       $ 16,068       $     --         $    --      $    --
  Gross profit                                      5,308          5,498             --              --           --
  Operating income (loss)                            (608)           770           (628)           (586)        (722)
  Income (loss) from continuing
   operations                                      (1,053)           (34)          (628)           (586)        (722)
  Income (loss) from discontinued
   operations, net of tax                           1,146         (3,970)          (220)           (281)      (1,259)
  Extraordinary item, net of tax                       73             --             --              --           --
  Net income (loss)                               $   165        $(4,004)       $  (848)        $  (867)     $(1,981)

Basic income (loss) per share:
  Continuing operations                           $  (.52)       $  (.02)       $  (.43)        $  (.40)     $  (.51)
  Discontinued operations, net of tax             $   .56        $ (2.06)       $  (.15)        $  (.19)     $  (.90)
  Extraordinary item                              $   .04             --             --              --           --
Diluted income (loss) per share:
  Continuing operations                           $  (.51)       $  (.02)       $  (.43)        $  (.40)     $  (.51)
  Discontinued operations, net of tax             $   .55        $ (2.06)       $  (.15)        $ ( .19)     $  (.90)
  Extraordinary item                              $   .04             --             --              --           --

Weighted average number of shares outstanding:
   Basic                                            2,027          1,928          1,452           1,458        1,406
   Diluted (1)                                      2,077          1,928          1,452           1,458        1,406

Balance Sheet Data:
  Working capital                                 $ 2,310        $ 1,544        $14,348         $14,443      $15,858
  Total assets                                     25,710         31,778         14,348          14,443       15,858
  Total liabilities                                 8,765         14,951             --              --           --
  Stockholders' equity                             16,945         16,827         14,348          14,443       15,858
</TABLE>

     (1) The weighted average number of shares of Common Stock outstanding for
         each period presented has been calculated giving effect to dilutive
         stock options and warrants.


                   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 2001:
     Net Sales                                                $    4,922    $   4,802       $4,702        $3,180         $  17,606
     Gross profit                                                  1,505        1,512        1,366           925             5,308
     (Loss) from continuing operations                               (90)        (186)        (250)         (527)           (1,053)
     Income (loss) from discontinued operations, net of tax          673         (238)         470           241             1,146
     Net income (loss)                                               583         (424)         220          (214)              165

       Basic income (loss) per share:
         Continuing                                           $     (.05)   $    (.09)      $ (.12)       $ (.26)        $    (.52)
         Discontinued                                         $      .33    $    (.11)      $  .22        $  .12         $     .56
         Extraordinary item, net                              $       --    $      --       $   --        $  .04         $     .04

       Diluted income (loss) per share:
         Continuing                                           $     (.04)   $    (.09)      $ (.12)       $ (.26)        $    (.51)
         Discontinued                                         $      .33    $    (.12)      $  .22        $  .12         $     .55
         Extraordinary item, net                              $       --    $      --       $   --        $  .04         $     .04

     Dividends per share                                      $       --    $      --       $   --        $   --         $      --


 Fiscal 2000:
     Net Sales                                                $    1,785    $   4,996       $4,787        $4,500         $  16,068
     Gross profit                                                    509        1,639        1,442         1,908             5,498
     Income (loss) from continuing operations                         50          225         (285)          (24)              (34)
     Loss from discontinued operations, net of tax                  (548)        (643)      (2,486)         (293)           (3,970)
     Net income (loss)                                              (498)        (418)      (2,771)         (317)           (4,004)

       Income (loss) per share:
         Continuing                                           $      .03    $     .11       $ (.15)       $ (.01)        $    (.02)
         Discontinued                                         $     (.28)   $    (.33)      $(1.29)       $ (.16)        $   (2.06)

     Dividends per share                                      $       --    $      --       $   --        $   --         $      --
</TABLE>

                                       12
<PAGE>

                 FINANCIAL INFORMATION RELATING TO FOREIGN AND
                     DOMESTIC OPERATIONS AND EXPORT SALES

  Continuing Operations:

     For the year ended September 30, 2001, sales to unaffiliated customers
totaled $17,606,000 of which $1,354,000 related to a customer located in Russia.
For the year ended September 30, 2000, sales to unaffiliated customers totaled
$16,068,000 of which $1,420,000 related to a customer located in Russia.
Approximate total gross operating margin was $5,308,000, in 2001 and $5,498,000,
in 2000. All identifiable assets for 2001 and 2000 were located in the United
States.

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

Results of Operations

     The Company's operations result from acquisitions that were consummated
during the first quarter of the fiscal year ended September 30, 2000. The
acquisition of Bactolac Pharmaceutical Inc., a contract manufacturer of
nutritional supplements, was closed on November 17, 1999, and ASHCO, a contract
manufacturer of pharmaceutical products, was acquired as a division of Bactolac,
as of December 1, 1999. The acquisitions have been accounted for under the
purchase method of accounting, whereby the results of the acquired operations
are included in the consolidated financial statements from their dates of
acquisition. In order to provide a meaningful comparison, the following table
for comparative purposes only, sets forth on a pro forma basis for the periods
indicated the amounts and percentages of selected items of revenue and expense,
as though the acquisitions of Bactolac and ASHCO had been consummated as of the
beginning of the year ended September 30, 1999.

<TABLE>
<CAPTION>
                                                           Year ended September 30,
                                          2001                       2000                       1999
                                 ----------------------     ----------------------    ----------------------
                                                                               (Pro Forma)
                                                            ------------------------------------------------
                                      Amount        %           Amount        %           Amount        %
<S>                              <C>             <C>       <C>             <C>       <C>             <C>
  Net sales                      $  17,606,000    100.0%    $ 18,762,000    100.0%    $ 19,296,000    100.0%
  Cost of sales                     12,298,000     69.9       12,932,000     68.9       16,110,000     83.5
  Gross profit                       5,308,000     30.1        5,830,000     31.1        3,186,000     16.5
</TABLE>

     Net sales for the 2001 period decreased $1,156,000 or 6.2% over the 2000
pro forma period. The decrease was primarily attributable to a net $515,000,
increase in the sales of Bactolac, through a number of customers, offset by a
$1,671,000 reduction in the sales of ASHCO. The majority of the ASHCO decrease
was attributable to a $2,610,000 decline in sales to Bayer Corporation offset by
a $939,000 increase in sales to several new and expanded customers. Bayer
Corporation has historically represented a significant portion of ASHCO's
revenue base, and effective January 1, 2001, ASHCO completed the final
production of Bayer contract production. ASHCO is aggressively attempting to
expand its customer base to compensate for the loss of the Bayer business.
Failure to replace this substantial customer, or the inability to substantially
reduce ASHCO's operating expenses, would have an adverse effect on the Company's
business and operations. Recently ASHCO has added several customers, such as
Walgreens, K-Mart, Dollar General, Winn Dixie, Kroger and Shurfine, and is in
talks with a number of large recognized retailers. The impact to net sales from
adding these customers is not expected to be felt until the second quarter of
the year ending September 30, 2002.

     Gross profit for the 2001 period decreased to $5,308,000, a $522,000
decrease over the 2000 pro forma amount. Gross profit as a percentage of net
sales decreased

                                       13
<PAGE>

to 30.1% in 2001, as compared to 31.1% in the 2000 pro forma period.
Approximately $300,000 of the decrease was due to higher levels of overhead and
labor expenses at the Bactolac operation due to the relocation into a new
facility at higher costs, while the benefits of higher sales were not achieved
until later in the fiscal year. The balance consisted of lower gross profits due
to lower sales at ASHCO.

     Total operating expenses increased to $5,916,000 in 2001, from $4,728,000,
in 2000. This represents an increase of $1,188,000, or 25.1%. The majority of
the increase relates to additional personnel costs, in addition to higher
administrative costs being incurred for insurance, professional fees and sales
and marketing expenses following the acquisitions.

     Net sales for the 2000 pro forma period decreased $534,000 or 2.8% over the
1999 pro forma period. The decrease was primarily attributable to a net
$2,612,000, increase in the sales of Bactolac, through a number of customers,
offset by a $3,146,000 reduction in the sales of ASHCO. The majority of the
ASHCO decrease was attributable to a decline in sales to Bayer Corporation.

     Gross profit for the 2000 pro forma period increased to $5,830,000, a
$2,644,000 increase over the 1999 pro forma amount. On a pro forma basis, gross
profit as a percentage of net sales increased to 31.1% in 2000, as compared to
16.5% in the 1999 pro forma period. The majority of the increase was due to
higher levels of sales at the Bactolac operation, without a corresponding level
of increase in the labor and overhead components of the cost of sales amounts.
Additionally, as Bactolac purchases materials in higher volumes and better
manages its purchasing activities, it is able to reduce, as a percentage of
sales, its material costs.

     Operating expenses in 1999 totaled $628,000, and correspond to the holding
company and public company expenses associated with the continuing operations of
the Company.

Discontinued Operations

     As of June 13, 2001, the Company completed the sale of NFLI to an unrelated
privately held entity. NFLI develops products that are designed for health-
conscious consumers, and sells those products to consumers through its network
of independent distributors.

     As a result of the sale of NFLI, the Company's consolidated financial
statements and related notes thereto have been restated to present the
operations of NFLI as discontinued operations. For further discussion see Notes
2 and 4 of the Notes to Consolidated Financial Statements in Item 8.

Liquidity and Capital Resources

     Since ANI consummated the acquisitions of Bactolac and ASHCO, it has met
its working capital and capital expenditure requirements, including funding for
debt repayments, mainly through net cash provided under the Company's revolving
line of credit provided through its secured lender as well as the net proceeds
in 2001 received from the sale of NFLI. Based upon anticipated revenue
increases, primarily from new customers of ANIP, combined with cost reductions
that have been implemented, management believes that a significant portion of
the upcoming working capital needs can be met out of cash generated from
operating activities. Management plans to continue to strive to restore
profitability and pursue additional financing during the current fiscal year to
meet currently anticipated funding requirements.

     At September 30, 2001, the Company had working capital of $2,310,000.
Borrowings under the revolving portion of the secured credit facility totaled
$2,039,000, with additional borrowings available of $599,000, at that point,
based upon accounts receivable and inventory levels.

Operating Activities

     Net cash flows from continuing operating activities generated (consumed)

                                       14
<PAGE>

approximately $300,000, $(2,289,000) and $(628,000) in 2001, 2000 and 1999. The
cash used in operations in 1999 consisted of the general and administrative
expenses of the continuing entity as an inactive holding company, as the
acquisitions of the continuing business segment were not consummated until
fiscal 2000. The net cash flow from operating activities in 2001, consisted of
approximately $1,782,000 decrease in accounts receivable, relating primarily to
reductions in Bactolac's accounts receivable as a result of implementing tighter
collection policies and follow-up procedures combined with decreases in the
average sales levels at ASHCO offset by approximately $955,000 in cash used to
reduce accounts payable and other accrued expenses. These amounts were offset in
2001 by $1,102,000 in losses from continuing operations less $1,207,000 in
depreciation and amortization expense.

     The net cash outflow from operating activities in 2000, consisted primarily
of approximately $2,138,000 in cash used to reduce accounts payable and accrued
expenses during the period following the acquisitions of Bactolac and ASHCO and
approximately $1,518,000 increase in accounts receivable, relating primarily to
higher level of sales at the Bactolac operation. These amounts were offset in
2000 by the loss generated by continuing operations net of depreciation and
amortization expense.

Investing Activities

     Investing activities from continuing activities consumed approximately
$(579,000) in 2001. Approximately $807,000 was used for additions to capital
equipment net of $228,000 in collections on notes receivable. An additional
$3,200,000 was received from the sale of the discontinued NFLI subsidiary, net
of $713,000 in expenses incurred on the sale.

     Investing activities from continuing activities consumed approximately
$77,000 in 2000. Of this amount, $205,000 was used for equipment additions net
of the cash acquired in the acquisitions of Bactolac and ASHCO. As the
acquisitions of Bactolac and ASHCO were completed in 2000, there were no
investing activities from continuing operations in 1999.

Financing Activities

     Financing activities from continuing activities consumed approximately
$(2,128,000) in 2001. This consisted of $3,253,000 in net repayments under the
Company's credit facility, plus $1,328,000 in principal payments made on long
term debt and the $1,435,000 repaid on the notes payable to related parties,
funded in part by the ASHCO mortgage refinancing of $2,415,000. Also during
2001, cash of $1,479,000 was generated by the discontinued entity for the
benefit of the Company prior to the sale.

     Financing activities from continuing activities generated approximately
$3,062,000 in 2000. This consisted of $2,323,000 in net borrowing under the
Company's credit facility, less $200,000 in principal payments made on long term
debt. Also during 2000, cash of $739,000 was generated by the discontinued
entity for the benefit of the Company.  As the acquisitions of Bactolac and
ASHCO were completed in 2000, there were no financing activities from continuing
operations in 1999.

     The Company's revolving credit facility provides for borrowings up to
$12,000,000, based upon outstanding amounts of eligible accounts receivable and
allowable inventories. Additionally, there is a term loan facility with the
secured lender that requires principal payments of $44,000, monthly over the
remaining term of the Agreement. Interest on amounts outstanding under the
Agreement is payable monthly based upon the lender's index rate plus two and
one-half percent. The credit facility is secured by substantially all of the
Company's assets. The Agreement contains a number of covenants, which include
among other items; maintenance of specified minimum net worth and fixed charge
ratio, as well as limitations on capital expenditures. At September 30, 2001,
the Company was not in compliance with several covenants under the Agreement and
on December 26, 2001, a waiver was obtained from GECC. Due to the fact that ANI
was not in compliance with the terms of the Agreement, and the waiver did not
extend beyond one year, the entire amount outstanding under the Agreement has
been classified as a current liability on the

                                       15
<PAGE>

accompanying consolidated balance sheet as of September 30, 2001. Management of
ANI plans to continue discussions with the secured lender concerning an
amendment to the credit facility which management believes based on its
discussions with such lender can be accomplished between now and the end of the
Company's second fiscal quarter of 2002, to achieve mutually acceptable
compliance conditions. If the Company is not successful in its efforts to amend
the Agreement, it could have an adverse effect on the Company's business,
financial condition and operations.

     In connection with the acquisitions of Bactolac and ASHCO, the Company
entered into purchase notes totaling $3,000,000, with certain of the selling
stockholders and assumed, through Bactolac, a $1,350,053, mortgage obligation of
the ASHCO facility. The Bactolac stock purchase note of $2,500,000 is
subordinate to the GECC facility, bears interest at 7%, and with the approval of
GECC, required a $1,000,000, payment on the first anniversary of the
acquisition. The holder of the note agreed to extend the payment of the first
installment until the closing of the NFLI sale transaction, at which time the
payment was made. In November 2001, the Company entered into a new note for
$1,543,438 (which included accrued interest) payable November 17, 2002. The
holder has the right to convert up to $1,000,000 principal, plus accrued
interest into shares of the Company's common stock at $1.00 per share. The
$500,000, ASHCO stock purchase notes were payable December 29, 2000. During 2001
the ASHCO stock purchase notes were settled for less than the face amount of the
debt and interest, resulting in a gain of $121,000, before income taxes, which
for financial reporting purposes is classified as an extraordinary gain. The
loan assumption agreement for the ASHCO mortgage obligation bore interest at
prime plus 2%, and was secured by the ASHCO land and building. The ASHCO
mortgage was refinanced during fiscal 2001 into a $2,415,000 mortgage, bearing
interest at 13% and payable monthly over a twenty-year term.

     Capital expenditures, primarily for manufacturing and laboratory equipment
for fiscal 2002 are anticipated to be approximately $200,000 to $400,000. This
is exclusive of any amounts that may be acquired under the now-expired York
Pharmaceuticals, Inc. agreement, should such agreement be re-negotiated and
finalized. It is expected that funding for the capital additions will be
provided out of working capital.

Recent Accounting Pronouncements

     The Financial Accounting Standards Board (FASB) has recently issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, SFAS No. 143,
Accounting for Asset Retirement Obligations and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.

     SFAS No. 141, Business Combinations, requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001. SFAS No. 142, Goodwill and Other Intangible Assets, addresses accounting
for the acquisition of intangible assets and accounting for goodwill and other
intangible assets after they have been initially recognized in the financial
statements, which is effective for fiscal years beginning after December 15,
2001; however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of SFAS
142.

     Major provisions of these Statements and their effective dates for the
Company are as follows:

 .   All business combinations initiated after June 30, 2001 must use the
    purchase method of accounting, with the pooling of interest method of
    accounting prohibited.

 .   Intangible assets acquired in a business combination must be recorded
    separately from goodwill if they arise from contractual or other legal
    rights or are separable from the acquired entity.

 .   Goodwill, as well as intangible assets with indefinite lives, acquired after
    June 30, 2001, will not be amortized. In the year of adoption, all
    previously recognized goodwill and intangible assets with indefinite lives
    will no longer be subject to amortization.

                                       16
<PAGE>

 .   Goodwill, tested by business segment and intangible assets with indefinite
    lives will be tested for impairment annually and whenever there is an
    impairment indicator.

     Management has not yet determined whether it will early adopt the above
standards, or the possible impact on the financial statements of the foregoing
recent accounting pronouncements.

     SFAS No. 143, Accounting for Asset Retirement Obligations, addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 will be effective for the Company for the fiscal year beginning October 1,
2002 and early adoption is encouraged. SFAS No. 143 requires that the fair value
of a liability for an asset's retirement obligation be recorded in the period in
which it is incurred and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset.  The Company estimates that the
new standard will not have a material impact on its financial statements but is
still in the process of evaluating the impact on its financial statements.

     SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, is effective for the Company for the fiscal year beginning October 1,
2002, and addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 and expands the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The Company estimates that
the new standard will not have a material impact on its financial statements but
is still in the process of evaluating the impact on its financial statements.

              ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
                               ABOUT MARKET RISK

     As a result of the completion of the NFLI sale, the Company is no longer
exposed to market risks, including changes in currency exchange rates as
measured against the U.S. dollar or the value of the U.S. dollar against the
foreign currencies.  While the Company does sell certain products
internationally, terms are settled in U.S. dollars, either through letters of
credit, cash in advance, or in limited circumstances with payment of the sale
amount following shipment, for credit worthy customers.

                                       17
<PAGE>

              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Advanced Nutraceuticals, Inc. Consolidated Financial Statement            Page
                                                                          ----
 <S>                                                                      <C>
 Report of Independent Certified Public Accountants                       F-2

 Consolidated Balance Sheets as of September 30, 2001 and 2000            F-3

 Consolidated Statements of Operations and Comprehensive Income
  (Loss) for the Years Ended September 30, 2001, 2000 and 1999            F-4

 Consolidated Statements of Stockholders' Equity for the
  Years Ended September 30, 2001, 2000 and 1999                           F-5

 Consolidated Statements of Cash Flows for the Years Ended
  September 30, 2001, 2000 and 1999                                       F-6

 Notes to Consolidated Financial Statements                               F-7
</TABLE>

                                      F-1
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Advanced Nutraceuticals, Inc. and subsidiaries


     We have audited the consolidated balance sheets of Advanced Nutraceuticals,
Inc. and Subsidiaries as of September 30, 2001 and 2000 and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Nutraceuticals, Inc. and Subsidiaries as of September 30, 2001 and 2000
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended September 30, 2001, in
conformity with accounting principles generally accepted in the United States of
America.


Grant Thornton LLP



Houston, Texas
December 26, 2001

                                      F-2
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 2001 AND 2000

<TABLE>
<CAPTION>
                                                              2001           2000
                                                              ----           ----

                        ASSETS
                        ------
 <S>                                                      <C>            <C>
 Current Assets:
   Cash and cash equivalents                              $   781,847    $   696,741
   Trade accounts receivable, net (Note 8)                  2,978,698      4,525,376
   Inventories (Notes 3 and 8)                              1,734,395      1,807,303
   Net assets of discontinued operation (Note 2)                   --      5,343,367
   Deferred tax asset (Note 5)                                181,232        520,000
   Notes receivable (Note 4)                                1,150,000             --
   Prepaid expenses and other assets                           97,228        150,425
                                                          -----------    -----------
     Total Current Assets                                   6,923,400     13,043,212

Property and equipment, net (Notes 6, 8 and 9)              9,728,865      9,456,712
Goodwill, net (Note 7)                                      8,727,553      9,228,829
Note receivable, less current portion (Note 4)                 10,201             --
Other assets                                                  319,669         49,582
                                                          -----------    -----------
                                                          $25,709,688    $31,778,335
                                                          ===========    ===========

           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------


Current Liabilities:
  Accounts payable                                        $ 1,892,884    $ 2,812,170
  Deferred income                                                  --        111,111
  Accrued expenses and other liabilities                      574,056        498,633
  Credit facility (Note 8)                                  2,039,454      5,227,078
  Current portion of long-term debt (Note 9)                  106,708      2,850,053
                                                          -----------    -----------
     Total Current Liabilities                              4,613,102     11,499,045

Deferred tax liability (Note 5)                               181,232      1,952,000
Long-term debt (Note 9)                                     3,970,596      1,500,000
                                                          -----------    -----------
     Total Liabilities                                      8,764,930     14,951,045
                                                          -----------    -----------

Commitments and contingencies (Note 11)                            --             --

Stockholders' Equity (Notes 12 and 13):
  Preferred stock, $.001 par value; 1,000,000
    shares authorized; none issued                                 --             --
  Common stock; $.01 par value; 20,000,000
    shares authorized; 2,026,975 and 2,004,967 issued          20,270         20,050
  Additional paid-in capital                               18,026,446     17,996,401
  Retained earnings (deficit)                              (1,101,958)    (1,266,831)
  Accumulated other comprehensive income (loss)                    --         77,670
                                                          -----------    -----------

     Total Stockholders' Equity                            16,944,758     16,827,290
                                                          -----------    -----------
                                                          $25,709,688    $31,778,335
                                                          ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
             FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                              2001           2000         1999
                                                                              ----           ----         ----
<S>                                                                       <C>            <C>            <C>
Net sales (Note 10)                                                        $17,606,367    $16,067,889   $       --

Cost of sales                                                               12,298,116     10,570,347           --
                                                                           -----------    -----------   ----------

Gross profit                                                                 5,308,251      5,497,542           --

General and administrative expenses                                          5,915,818      4,727,803      628,447
                                                                           -----------    -----------   ----------

Operating income (loss)                                                       (607,567)       769,739     (628,447)
                                                                           -----------    -----------   ----------

Other income (expense):
  Interest expense, net                                                       (843,329)      (546,373)          --
  Other, net                                                                    63,723          2,645           --
                                                                           -----------    -----------   ----------
                                                                              (779,606)      (543,728)          --
                                                                           -----------    -----------   ----------
Income (loss) from continuing operations
 before income tax expense and extraordinary item                           (1,387,173)       226,011     (628,447)

Income tax expense (benefit) (Note 5)                                         (333,791)       260,000           --
                                                                           -----------    -----------   ----------

Loss from continuing operations, before extraordinary item                  (1,053,382)      ( 33,989)    (628,447)

Income (Loss) from discontinued operations,
 net of tax (Note 2)                                                         1,145,540     (3,970,342)    (219,905)
                                                                           -----------    -----------   ----------
Net income (loss), before extraordinary item                                    92,158     (4,004,331)    (848,352)

Extraordinary item,
 net of income taxes (Note 9)                                                   72,715             --           --
                                                                           -----------    -----------   ----------

Net income (loss)                                                          $   164,873    $(4,004,331)  $ (848,352)
                                                                           -----------    -----------   ----------

Other comprehensive income (loss):
  Unrealized gain (loss) on investments, net of tax                                 --         45,500      ( 7,136)
  Foreign currency translation adjustment                                      (77,670)       157,919      ( 2,281)
                                                                           -----------    -----------   ----------
                                                                               (77,670)       203,419      ( 9,417)
                                                                           -----------    -----------   ----------
Total comprehensive income (loss)                                          $    87,203    $(3,800,912)  $ (857,769)
                                                                           ===========    ===========   ==========

Basic income (loss) per common share:
  Loss from continuing operations, before
    extraordinary item                                                     $      (.52)   $      (.02)  $     (.43)
  Income (Loss) from discontinued operations                                       .56          (2.06)        (.15)
  Extraordinary item                                                               .04             --           --
                                                                           -----------    -----------   ----------
  Net income (loss)                                                        $       .08    $     (2.08)  $     (.58)
                                                                           ===========    ===========   ==========
Diluted income (loss) per common share:
  Loss from continuing operations, before
    extraordinary item                                                     $      (.51)   $      (.02)  $     (.43)
  Income (Loss) from discontinued operations                                       .55          (2.06)        (.15)
  Extraordinary item                                                               .04             --           --
                                                                           -----------    -----------   ----------
  Net income (loss)                                                        $       .08    $     (2.08)  $     (.58)
                                                                           ===========    ===========   ==========
Weighted average common shares outstanding (Note 12):
  Basic                                                                      2,026,975      1,928,438    1,452,149
  Diluted                                                                    2,077,162      1,928,438    1,452,149
                                                                           ===========    ===========   ==========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                   Preferred Stock            Common Stock         Additional     Retained
                                  -----------------            ----------            Paid-In       Earnings
                               Shares       Amount       Shares        Amount       Capital      (Deficit)
                             -----------  -----------  -----------  ------------  ------------  ------------
<S>                          <C>          <C>          <C>          <C>           <C>           <C>
Balance at
 September 30, 1998                   --   $       --   1,471,899   $    14,720   $11,118,199   $ 3,958,757


Net loss                              --           --          --            --            --      (848,352)
Foreign currency
 translation adjustment               --           --          --            --            --            --
Issuance of common
 stock options and warrants           --           --          --            --       763,112            --
Unrealized loss on
 investments, net of tax              --           --          --            --            --            --
                             -----------  -----------  ----------   -----------   -----------   -----------

Balance at
 September 30, 1999                   --           --   1,471,899        14,720    11,881,311     3,110,405

Net loss                              --           --          --            --            --    (4,004,331)
Foreign currency
 translation adjustment               --           --          --            --            --            --
Unrealized gain on
 investment, net of tax               --           --          --            --            --            --
Issue preferred stock            221,127    6,280,000          --            --            --            --
Convert preferred stock         (221,127)  (6,280,000)    552,818         5,528     6,274,472            --
Cancel treasury
 stock (Note 12)                      --           --     (19,750)         (198)     (159,382)     (372,905)
                             -----------  -----------  ----------   -----------   -----------   -----------

Balance at
 September 30, 2000                   --           --   2,004,967        20,050    17,996,401    (1,266,831)

Net income                            --           --          --            --            --       164,873
Foreign currency
 Translation adjustment               --           --          --            --            --            --
Issuance of common stock
 for earn out award                   --           --      22,008           220        30,045            --
                             -----------  -----------  ----------   -----------   -----------   -----------
Balance at
 September 30, 2001                   --  $        --   2,026,975   $    20,270   $18,026,446   $(1,101,958)
                             ===========  ===========  ==========   ===========   ===========   ===========

<CAPTION>
                                  Accumulated Other
                             Comprehensive Income (Loss)
                             ---------------------------
                                            Cumulative
                               Unrealized    Foreign
                                  Loss       Currency        Treasury Stock          Total
                                   on       Translation      --------------       Stockholders'
                               Investment   Adjustment     Shares      Amount        Equity
                               -----------  -----------    ------      ------        ------
<S>                            <C>          <C>          <C>         <C>          <C>
 Balance at
 September 30, 1998             $ (38,364)   $ (77,968)    (19,750)    $(532,485) $14,442,859


Net loss                               --           --          --            --     (848,352)
Foreign currency
 translation adjustment                --       (2,281)         --            --       (2,281)
Issuance of common
 stock options and warrants            --           --          --            --      763,112
Unrealized loss on
 investments, net of tax           (7,136)          --          --            --       (7,136)
                               ----------   ----------   ---------   -----------  -----------

Balance at
 September 30, 1999               (45,500)     (80,249)    (19,750)     (532,485)  14,348,202

Net loss                               --           --          --            --   (4,004,331)
Foreign currency
 translation adjustment                --      157,919          --            --      157,919
Unrealized gain on
 investment, net of tax            45,500           --          --            --       45,500
Issue preferred stock                  --           --          --            --    6,280,000
Convert preferred stock                --           --           --          --            --
Cancel treasury
 stock (Note 12)                       --           --      19,750       532,485           --
                               ----------   ----------   ---------   -----------  -----------

Balance at
 September 30, 2000                    --       77,670          --            --   16,827,290

Net income                             --           --          --            --      164,873
Foreign currency
 Translation adjustment                --      (77,670)         --            --      (77,670)
Issuance of common stock
 for earn out award                    --           --          --            --       30,265
                               ----------   ----------   ---------   -----------  -----------
Balance at
 September 30, 2001             $      --    $      --          --    $       --  $16,944,758
                               ==========   ==========   =========   ===========  ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
            FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                            2001          2000          1999
                                                            ----          ----          ----
<S>                                                    <C>            <C>           <C>
Cash flows from operating activities:
 Net (loss) from continuing operations                  $(1,053,382)  $  ( 33,989)  $  (628,447)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
    Extraordinary item, net of taxes                         72,715            --            --
    Depreciation and amortization                         1,206,805       998,135            --
    Bad Debt Allowance                                     (235,000)      200,000            --
    Deferred tax expense (benefit)                         (374,184)      (39,259)           --
     Changes in assets and liabilities:
      Receivables                                         1,781,678    (1,517,971)           --
      Inventories                                            72,908       333,187            --
      Prepaid and other assets                             (216,889)      (90,842)           --
      Accounts payable                                     (919,286)     (742,055)           --
      Deferred income                                      (111,111)      (55,556)           --
      Accrued expenses and other liabilities                 75,423    (1,340,154)           --
                                                        -----------   -----------   -----------
   Net cash flows from continuing operations                299,677    (2,288,504)     (628,447)
   Net cash flows from discontinued operations            2,879,222       771,046    (1,201,678)
                                                        -----------   -----------   -----------

Net cash flows from operating activities                  3,178,899    (1,517,458)   (1,830,125)
                                                        -----------   -----------   -----------

Cash flows from investing activities:
 Collection on notes receivable                             228,111            --            --
 Acquisition of property and equipment                     (807,083)     (205,336)           --
 Acquired cash from acquisitions                                 --       128,472            --
                                                        -----------   -----------   -----------

   Net cash flows from continuing operations               (578,972)      (76,864)           --
   Sale of discounted subsidiary, net of expenses         2,486,529            --            --
   Net cash flows from discontinued operations           (2,650,235)   (2,265,086)    2,249,786
                                                        -----------   -----------   -----------

Net cash flows from investing activities                   (742,678)   (2,341,950)    2,249,786
                                                        -----------   -----------   -----------

Cash flows from financing activities:
 Net borrowings (payments) on credit facility            (3,252,625)    2,323,197            --
 Borrowings on long term debt                             2,415,000            --            --
 Payments of long term debt - Related Parties            (1,435,000)           --            --
 Payments of long term debt                              (1,328,082)           --            --
 Cash contribution from discontinued operations           1,478,579       738,912            --
                                                        -----------   -----------   -----------
   Net cash flows from continuing operations             (2,122,128)    3,062,109            --
   Net cash flows from discontinued operations             (228,987)    1,494,040      (419,661)
                                                        -----------   -----------   -----------

Net cash flows from financing activities                 (2,351,115)    4,556,149      (419,661)
                                                        -----------   -----------   -----------

Net decrease in cash and cash equivalents                    85,106       696,741            --

Cash and cash equivalents, beginning of year                696,741            --            --
                                                        -----------   -----------   -----------

Cash and cash equivalents, end of year                  $   781,847   $   696,741   $        --
                                                        ===========   ===========   ===========

</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Advanced Nutraceuticals, Inc. ("ANI" or the "Company"), a Texas corporation,
was formed during 2000 to become the parent company of Nutrition For Life
International, Inc. ("NFLI"), in a reorganization that was completed as of March
15, 2000. Under the terms of the reorganization, each outstanding share of
common stock of NFLI issued and outstanding immediately prior to the merger was
converted into one share of ANI's common stock. Also, each outstanding option,
and each outstanding warrant, to purchase shares of NFLI's common stock was
converted into an option or a warrant, as the case may be, to purchase, on the
same terms and conditions, an identical number of shares of ANI's common stock.
On June 13, 2001, ANI completed the sale of its network marketing subsidiary,
NFLI, to Everest Group Holding, Inc., a privately-held entity.  ANI now operates
as a contract and private label manufacturer of nutritional and pharmaceutical
products.

Principles Of Consolidation

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

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 maturities of three
months or less at the time of purchase.

Concentration of Credit Risk

  At September 30, 2001 and 2000, the Company's cash in financial institutions
exceeded the federally insured deposit limit by approximately $530,000 and
$890,000, of which $400,000, as of September 30, 2000, was included with net
assets of discontinued operations.

Fair Market Value Of Financial Instruments

  The Company's financial instruments include accounts and notes receivable,
accounts payable, and long-term debt. The fair market value of accounts
receivable and accounts payable approximate their carrying values because their
maturities are generally less than one year. Long-term notes receivable and debt
obligations are estimated to approximate their carrying values based upon their
stated interest rates.

Marketable Securities

  Unrealized holding gains and losses on available for sale securities are
reflected as a separate component of accumulated other comprehensive income
(loss) until realized, and are encompassed in the discontinued assets of the
business disposed of. For the purposes of computing realized and unrealized
gains and losses, cost is identified on a specific identification basis.

Revenue Recognition

  Revenues from the sale of products are recognized upon shipment to the
customer. Management provides an estimated allowance for uncollectable accounts
receivable based upon an assessment of amounts outstanding and evaluation of
specific customer account balances.

  The allowance for doubtful accounts at September 30, 2001 and 2000 totaled
$215,000 and $400,000, with the reduction attributable to charge-off in 2001.
The September 30, 2000 balance resulted from a $200,000 bad debt provision for
the year and a $200,000 allowance recorded in connection with the Bactolac
acquisition. No allowance was recorded at September 30, 1999.

                                      F-7
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Inventories

  Inventories are valued primarily at the lower of cost (first-in, first-out
basis) or market.

Long-lived Assets

  The Company reviews the carrying value of its long-lived assets, including
property and equipment and goodwill, whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recovered.  An
impairment loss may be recognized when estimated undiscounted future cash flows
expected to result from the use of the asset, including disposition, is less
than the carrying value of the asset.  The measurement of the impairment losses
to be recognized is based on the difference between the fair value and the
carrying amounts of the assets. In order to determine if an asset has been
impaired, assets are tested by operating segment and geographic location. During
the year ended September 30, 2000, the Company recorded an impairment of certain
of its long-lived assets held by NFLI, whose operations are now shown as
discontinued due to the sale, as disclosed in Note 2. No such losses were
recognized for the years ended September 30, 2001 or 1999.

Property And Equipment

  Property and equipment are stated at cost. Depreciation on property and
equipment is 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 is calculated using accelerated methods.

Intangible Assets

  Intangible assets consist primarily of the excess of cost over net assets
acquired, "goodwill", which is being amortized over its estimated useful life of
20 years.

Stock Options and Warrants

  The Company accounts for stock options issued to employees in accordance with
APB No.25. During the years ended September 30, 2001, 2000, and 1999, 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, based upon an intrinsic valuation, no compensation expense was
recorded relative to those grants.

  The Company has elected to adopt the disclosure requirements of SFAS No.123
"Accounting for Stock-based Compensation". This statement requires that the
 ---------------------------------------
Company 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 (see Note 12). Additionally, SFAS No. 123 generally requires that
the Company record options issued to non-employees, based on the fair value of
the options.

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
bases 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-8
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings (Loss) Per Common Share

     Basic earnings per share includes no dilution and is computed by dividing
net earnings (loss) available to stockholders by the weighted number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the Company's earnings.
Weighted average Common Shares outstanding for the year ended September 30,
2001, 2000 and 1999 were 2,026,975 (2,077,162 - Diluted), 1,928,438 and
1,452,149.

     Diluted earnings per share for the years ended September 30, 2000, and 1999
did not consider the effect of the warrants and options because they were anti-
dilutive.

Management's Estimates And Assumptions

     The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that 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.

Recent Accounting Pronouncements

     The Financial Accounting Standards Board (FASB) has recently issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, SFAS No. 143,
Accounting for Asset Retirement Obligations and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.

     SFAS No. 141, Business Combinations, requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001. SFAS No. 142, Goodwill and Other Intangible Assets, addresses accounting
for the acquisition of intangible assets and accounting for goodwill and other
intangible assets after they have been initially recognized in the financial
statements, which is effective for fiscal years beginning after December 15,
2001; however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of SFAS
142.

     Major provisions of these Statements and their effective dates for the
Company are as follows:

 .   All business combinations initiated after June 30, 2001 must use the
    purchase method of accounting, with the pooling of interest method of
    accounting prohibited.

 .   Intangible assets acquired in a business combination must be recorded
    separately from goodwill if they arise from contractual or other legal
    rights or are separable from the acquired entity.

 .   Goodwill, as well as intangible assets with indefinite lives, acquired after
    June 30, 2001, will not be amortized. In the year of adoption, all
    previously recognized goodwill and intangible assets with indefinite lives
    will no longer be subject to amortization.

 .   Goodwill, tested by business segment and intangible assets with indefinite
    lives will be tested for impairment annually and whenever there is an
    impairment indicator.

     Management has not yet determined whether it will early adopt the above
standards, or the possible impact on the financial statements of the foregoing
recent accounting pronouncements.

     SFAS No. 143, Accounting for Asset Retirement Obligations, addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 will be effective for the Company for

                                      F-9
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the fiscal year beginning October 1, 2002 and early adoption is encouraged. SFAS
No. 143 requires that the fair value of a liability for an asset's retirement
obligation be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset.  The Company estimates that the new standard will not have a
material impact on its financial statements but is still in the process of
evaluating the impact on its financial statements.

  SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
is effective for the Company for the fiscal year beginning October 1, 2002, and
addresses accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business. SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 and expands the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company estimates that the new standard
will not have a material impact on its financial statements but is still in the
process of evaluating the impact on its financial statements.

NOTE 2 -- SALE OF NUTRITION FOR LIFE INTERNATIONAL, INC. - DISCONTINUED
OPERATIONS

  On June 13, 2001, ANI completed the sale of its network marketing subsidiary,
Nutrition For Life International, Inc. ("NFLI"), to Everest International, LLC,
a privately-held entity. At closing the Company received $3.2 million in cash
and a $5 million note payable ("Note") by NFLI based on a ten-year amortization
with quarterly payments for three years and a final balloon payment in June
2004. NFLI entered into a product supply agreement with the Company's
subsidiary, Bactolac Pharmaceutical, Inc. and Bactolac received a $650,000 note
from NFLI due in June 2002. The purchase price may also be increased up to an
additional $750,000, depending upon future operating results of NFLI's
established Japanese subsidiary. As part of the terms of the transaction,
Everest paid off the balance outstanding of the Company's revolving and term
debt obligations related to NFLI. The majority of the cash received at closing
was used by the Company to reduce debt, with a portion providing working
capital.  For financial reporting purposes, management of ANI is unable to
determine that it is probable that the future cash flows from NFLI's operations
will be sufficient to fund the entire balloon payment required under the terms
of the Note. Accordingly, an allowance of approximately $4,262,000 was provided
against the face amount of the Note. ANI will account for collections on the
Note under the cost recovery method, whereby any future collections are recorded
as a reduction of the balance recorded for the Note (after the allowance).
Additional collections above that amount are recorded as income as collected.
NFLI develops products that are designed for health-conscious consumers, and
sells those products to consumers through its network of independent
distributors. As a result of the sale of NFLI, the Company's consolidated
financial statements and related notes thereto have been restated to present the
operations of NFLI as discontinued operations.

  Certain information with respect to the discontinued operations of NFLI for
the years ended September 30, 2000 and 1999, and for the period through the sale
are as follows:

                                      F-10
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                     2001 (*)         2000           1999
<S>                                                               <C>            <C>            <C>
-------------------------------------------------------------------------------------------------------------
Net sales                                                          $30,341,242    $55,440,424    $66,569,875
-------------------------------------------------------------------------------------------------------------
Cost of sales                                                       19,891,489     38,637,997     44,742,050
-------------------------------------------------------------------------------------------------------------
Gross profit                                                        10,449,753     16,802,427     21,827,825
-------------------------------------------------------------------------------------------------------------
Operating expenses                                                  10,236,064     21,170,883     21,701,467
-------------------------------------------------------------------------------------------------------------
Other income (expense)                                                 (44,436)      (498,337)       210,737
-------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes                                      169,253     (4,866,793)       337,095
-------------------------------------------------------------------------------------------------------------
Income tax expense (benefit)                                          (976,287)      (896,451)       557,000
-------------------------------------------------------------------------------------------------------------
Income (Loss) from discontinued operations                         $ 1,145,540    $(3,970,342)   $  (219,905)
-------------------------------------------------------------------------------------------------------------
(*) Period up to sale

  Net assets of NFLI as of September 30, 2000 were as follows:

-------------------------------------------------------------------------------------------------------------
Current assets, primarily inventories                                                            $ 7,482,126
-------------------------------------------------------------------------------------------------------------
Noncurrent assets, primarily equipment and software                                                5,443,561
-------------------------------------------------------------------------------------------------------------
 Total assets                                                                                     12,925,687
-------------------------------------------------------------------------------------------------------------
Current liabilities, primarily accounts payable and accruals                                       6,429,196
-------------------------------------------------------------------------------------------------------------
Noncurrent liabilities                                                                             1,153,124
-------------------------------------------------------------------------------------------------------------
 Total liabilities                                                                                 7,582,320
-------------------------------------------------------------------------------------------------------------
Net assets of NFLI                                                                                 5,343,367
-------------------------------------------------------------------------------------------------------------
</TABLE>


  During the third quarter of the year ended September 30, 2000, expense
adjustments totaling approximately $1,673,000 were recorded, of which
approximately $1,150,000 was recorded to cost of sales for non-recurring
writedowns of certain outdated literature and sales aids inventory and certain
inventory located outside the continental United States. The remainder was a
writedown in the carrying value of NFLI's audio production rights. Aggregate
year end adjustments recorded in the fourth quarter of fiscal year ended
September 30, 1999, included an inventory write down of $350,000, a write down
of assets of Nutrition For Life International Philippines, Inc. of $350,000, and
a bad debt write-off of $250,000. As a result of the discontinued operations
presentation, these amounts are included in the loss from discontinued
operations.  During 2001, NFLI received state and federal tax refunds of
approximately $825,000, arising from amending previous years' tax returns.
These refunds were recorded as tax benefits when received, and combined with the
previously unrecognized tax benefits of losses of foreign subsidiaries, caused
the 2001 tax benefit.

                                      F-11
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 -- INVENTORIES

  Inventories, at September 30, consisted of the following:

                                                        2001        2000
                                                    ----------------------
       Finished goods                               $  314,187  $  950,138
       Work in process                                  70,436     191,170
       Raw materials                                 1,349,772     665,995
                                                    ----------  ----------

       Total inventories                            $1,734,395  $1,807,303
                                                    ==========  ==========

NOTE 4 - NOTES RECEIVABLE

At closing of the NFLI sale, the Company received a $5 million note payable by
NFLI based on a ten-year amortization with quarterly payments for three years
and a final balloon payment in June 2004. NFLI also entered into a $650,000 note
payable due in June 2002 to Bactolac, representing the formalization of a
previous intercompany balance. For financial reporting purposes, management of
ANI was unable to determine that it is probable that the future cash flows from
NFLI's operations will be sufficient to fund the entire balloon payment required
under the terms of the Note. Accordingly, an allowance of approximately
$4,261,000 was provided against the face amount of the $5 million Note, computed
such that no gain or loss was recorded on the disposition of NFLI. ANI will
account for collections on the $5 million Note under the cost recovery method,
whereby future collections are recorded as a reduction of the balance recorded
for the Note (after the allowance). Additional collections above that amount
will be recorded as income as collected.

Following is a summary of the activity in the notes receivable for the year
ended September 30, 2001:


                   Note issued in NFLI sale   $ 5,000,000

                   Allowance established at
                      inception of Note        (4,261,688)

                   Collections received on
                       $5 million Note          ( 228,111)

                   Note issued to Bactolac        650,000
                                              -----------

                         Total                  1,160,201
                   Less current portion        (1,150,000)
                                              -----------

                   Note receivable, less
                       current portion        $    10,201
                                              ===========

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 are estimated to be in effect when
these differences reverse.

  The (benefit) provision for income taxes on continuing operations for the
years ended September 30, 2001, 2000 and 1999 consisted of the following:

                                      F-12
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                          2001        2000    1999
                                        ---------   --------  -----
    Federal tax (benefit) - current     $      --   $     --  $  --
    Federal tax (benefit) - deferred     (251,000)   205,000     --
    State tax (benefit) expense           (83,000)    55,000     --
                                        ---------   --------  -----
                                        $(334,000)  $260,000  $  --
                                        =========   ========  =====

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

                                                       2001       2000    1999
                                                    ---------   --------  -----

    Expected income tax (benefit) expense at 34%    $(472,000)  $ 77,000  $  --
    State taxes, net of federal benefit               (83,000)    55,000     --
    Non deductible goodwill                           213,000    125,000     --
    Other items, net                                    8,000      3,000     --
                                                    ---------   --------  -----
    Income tax expense (benefit)                    $(334,000)  $260,000  $  --
                                                    =========   ========  =====

Deferred tax assets and liabilities consisted of the following net tax effects
of operating losses and temporary differences between the carrying amounts of
assets and liabilities for financial reporting and tax purposes at September 30,
2001 and 2000:

                                                         2001         2000
                                                         ----         ----
       Assets
       ------
      Loss carryforwards                             $ 3,255,000   $  205,000
      Receivables allowance for doubtful accounts         86,000      160,000
      Inventory valuation write-offs                      74,000      155,000
      Note receivable allowance                        1,445,000           --
      Other                                               20,890           --
                                                     -----------   ----------
      Deferred tax assets                              4,880,890      520,000
      Less valuation allowance                        (2,130,430)          --
                                                     -----------   ----------
                                                     $ 2,750,460   $  520,000
                                                     ===========   ==========
      Liability
      ---------
      Fixed Assets                                   $ 2,750,460   $1,952,000
                                                     ===========   ==========

At September 30, 2001, the Company has a net operating loss carryforward of
approximately $7 million, which expires through 2020. Additionally, the Company
has obtained net operating losses of approximately $2 million, which expire
primarily in 2011 and are subject to annual usage limitations. The Company also
has capital loss carryforwards of approximately $.9 million, expiring through
2005, which may only be used to offset capital gains during the carryforward
period. As the Company is unable to determine that it is more likely than not
that the future taxable income of the Company will be sufficient to utilize the
loss carryforwards, a valuation allowance has been established against the net
asset.

                                      F-13
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 -- PROPERTY AND EQUIPMENT

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

                                              September 30,
                                              -------------
                                  Lives     2001        2000
                                  -----     ----        ----

     Land                                $1,763,567  $1,763,567
     Building and improvements       15   2,671,906   2,606,509
     Equipment                        7   6,230,323   5,572,944
     Leasehold improvements           5     257,372       8,238
     Furniture and fixtures        5-10      17,702      34,717
                                         ----------  ----------
                                         10,940,870   9,985,975

     Less: Accumulated depreciation
       and amortization                  (1,212,005)   (529,263)
                                         ----------  ----------
                                         $9,728,865  $9,456,712
                                         ==========  ==========

NOTE 7 -- ACQUISITIONS

  On November 17, 1999 the Company finalized the acquisitions of Bactolac
Pharmaceutical Inc. ("Bactolac") and Advanced Nutraceuticals, Inc., a Delaware
corporation ("Old - ANI"). Old - ANI was a holding company formed to pursue a
consolidation and integration program in the nutrition industry. Former Old -ANI
stockholders received an aggregate of 187,500 shares of the Company's common
stock. The common shares issued in the acquisitions of Old - ANI, Bactolac and
ASH were originally Series A Preferred Stock, which was converted into common
stock on a ten for one basis upon approval by the Company's stockholders at the
Company's Annual Meeting held June 6, 2000. Bactolac, headquartered in
Hauppauge, New York, manufactures nutritional supplements for private labeled
customers. The purchase price of Bactolac consisted of $2,500,000 in cash, a
subordinated promissory note in the principal amount of $2,500,000 and 242,078
shares of the Company's common stock. Additionally, 22,008 shares of common
stock were issued in February, 2001 and up to 22,008 additional shares of common
stock may be issued pursuant to an earn out agreement. Bactolac entered into an
employment agreement and covenant not to compete agreement with its former
owner. On December 1, 1999, the Company finalized the acquisition of Ash Corp.
("ASH") as a division of Bactolac. The purchase price of ASH consisted of
$750,000 in cash, a note payable in the amount of $500,000 and 123,240 shares of
the Company's common stock. Additionally, up to 264,085 shares of common stock
may be issued pursuant to an earn out agreement.  Financing for the acquisitions
was provided primarily through a financing arrangement entered into on November
17, 1999 with General Electric Capital Corporation (the "GECC"). The
acquisitions have been accounted for using the purchase method of accounting
wherein the operating results of the acquired companies are included in the
Company's consolidated financial statements from their dates of acquisition. The
purchase price for the acquisitions, including the equivalent common stock
issued which was valued at its market price of $11.36 per share, has been
allocated to the assets purchased and the liabilities assumed based upon their
fair values at the acquisition dates. The excess of the purchase price over the
net assets acquired was approximately $9,690,000 and has been recorded as
goodwill, which is being amortized on a straight-line basis over twenty years.


  The following pro forma information presents a summary of consolidated results
of operations of the Company as if the acquisitions discussed above had occurred
at the beginning of the years ended September 30, 2000 and 1999, and include
certain pro forma adjustments for amortization of the goodwill, additional
depreciation expense as a result

                                      F-14
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the step-up in the basis of fixed assets and increased interest expense on
the acquisition debt.  The pro forma financial information is not necessarily
indicative of the results of operations  which actually would have resulted had
the acquisitions been effected on the assumed dates or of future results of the
combined entities.

                                            Year Ended September 30,
                                                2000         1999
       (in 000's, except per share data)    ----------   -------------
          Net sales                           $18,762       $19,296
          Net loss                             (4,378)       (1,119)
          Net loss per share                  $  (.52)      $  (.56)

NOTE 8 - CREDIT FACILITY

     To provide financing for the acquisitions during the current year, and to
provide working capital for the entire Company, ANI entered into a three-year
Loan and Security Agreement (the "Agreement") with General Electric Capital
Corporation ("GECC") as of November 17 1999, which has subsequently been
amended.  The Agreement provides for a $12,000,000 revolving credit line based
upon eligible trade accounts receivable and allowable inventories as defined
under the terms of the Agreement.  Additionally, the agreement contains a term
loan facility, with principal payable $43,885, monthly over the remaining term
of the Agreement, at which point the remaining balance will be due.  Interest on
amounts outstanding under the Agreement is payable monthly based upon GECC's
index rate plus two and one-half percent.  The loan facility is secured by
substantially all of the assets of ANI and its subsidiaries.  As of September
30, 2001, there was $848,798 outstanding under the revolving credit line and
$1,190,656 outstanding under the term loan facility.  The Agreement contains a
number of covenants, which include among other items, maintenance of specified
minimum net worth and fixed charge ratio, as well as limitations on capital
expenditures. At September 30, 2001, the Company was not in compliance with the
covenants regarding minimum net worth and fixed charge ratio under the Agreement
and a waiver has been obtained from GECC. Due to the fact that ANI was not in
compliance with the terms of the Agreement, and GECC's waiver did not extend
beyond one year, the entire amount outstanding under the Agreement has been
classified as a current liability on the accompanying consolidated balance sheet
as of September 30, 2001. The Company is attempting to amend its credit
agreement and believes based on its discussion with such lenders that it will be
successful in such efforts.

     The Agreement was amended as of November 30, 1999, to provide for the
acquisition of ASHCO, and again as of March 9, 2000, to provide for the
reorganization of NFLI into the new holding company, ANI.  The Agreement was
further amended as of December 12, 2001, to remove NFLI from the Agreement
following the completion of the sale of NFLI and the amendment also included
adding ANI Pharmaceuticals, Inc., ("ANIP") to the Agreement, following the
incorporation of ANIP by the Company to serve as the entity which will operate
the pharmaceutical manufacturing operations in Gulfport, MS in the future.  The
Company is currently in further discussions with the lender to further amend the
Agreement to achieve mutually acceptable compliance conditions.  If the Company
is not successful in its efforts to amend the Agreement, it could impact the
Company's ability to secure working capital on a timely basis, which could have
adverse effects on the Company's ability to  business, financial condition and
operations.

NOTE 9 - LONG-TERM DEBT

     As a result of the acquisitions of Bactolac and ASHCO, during the first
quarter of the fiscal year ended September 30, 2000, the Company entered into
purchase notes with certain of the selling stockholders and assumed, through
Bactolac, a $1,456,360, mortgage obligation of the ASHCO facility.  During the
year ended September 30, 2001, the mortgage obligation of the ASHCO facility was
refinanced into a long-term mortgage.  Following is a summary of such
obligations:

                                      F-15
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                     2001      2000
                                                     ----      ----

   Note arising from purchase of Bactolac (a)    $1,500,000  $2,500,000

   Notes arising from purchase of ASHCO (b)              --     500,000

   Mortgage obligation on ASHCO facility (c)      2,404,112   1,350,053

   Other installment obligations                    173,192          --
                                                 ----------  ----------

      Total                                       4,077,304   4,350,053

   Less current portion                             106,708   2,850,053
                                                 ----------  ----------

      Long-term portion                          $3,970,596  $1,500,000
                                                 ==========  ==========

(a)  The Bactolac stock purchase note is subordinate to the GECC facility and
     bears interest at 7%, and with the approval of GECC, is payable $1,000,000,
     on the first anniversary of the acquisition, $1,000,000,on the second
     anniversary, and $500,000 on the third anniversary. The holder of the note
     agreed to extend the payment of the first installment until the closing of
     the NFLI sale transaction, at which point the $1,000,000 principal and
     accrued interest was paid.  During November 2001, a further agreement was
     entered into with the holder of the note to extend the second $1,000,000
     principal and interest payment otherwise due on November 17, 2001, for one
     year.  As part of the agreement, the Company agreed to a conversion option
     on the deferred principal and interest to allow the holder to convert such
     amounts into shares of the Company's common stock at the rate of $1.00 per
     share, during the extension period.  In connection with the conversion
     option, during the first quarter of the year ending September 30, 2002, the
     Company will determine the effects of the estimated value of the conversion
     feature.

(b)  The ASHCO stock purchase notes were subordinate to the GECC facility and
     bore interest at 7%, and subject to the approval of GECC, were payable
     December 29, 2000.  During July 2001, the Company negotiated an amendment
     to the purchase agreement that, among other items, included a settlement of
     the purchase notes.  The balance then outstanding including interest,
     totaled $556,191, which was settled in full with a payment of $435,000,
     resulting in a gain of $121,191.  For financial reporting purposes the gain
     is recorded as an extraordinary item in the accompanying statement of
     operations for the year ended September 30, 2001.  The income tax effect of
     the extraordinary item amounted to $48,476.

(c)  The assumption agreement was originally due May 15, 2000, and the holder
     had agreed to amendments that subsequently extended the due date of the
     mortgage. As of April 30, 2001, the ASHCO mortgage was refinanced with a
     $2,415,000 mortgage with a different lender under an agreement that bears
     interest at 13% and is payable monthly over a twenty year term.  The
     mortgage is secured by the ASHCO land and building.

                                      F-16
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Scheduled future maturities of long-term debt as of September 30, 2001 are as
follows:

  Year Ending September 30,
  -------------------------
           2002                          $  107,000
           2003                           1,568,000
           2004                              67,000
           2005                              62,000
           2006                              58,000
        Thereafter                        2,215,000
                                         ----------
                                         $4,077,000
                                         ==========

NOTE 10 - INDUSTRY SEGMENTS AND MAJOR CUSTOMERS

Segments

  The Company's business segments are divided into distinct manufacturing areas
in two geographic locations.  Bactolac Pharmaceutical Inc., is a private label
contract manufacturer of vitamins and supplements located in Hauppauge, New
York.  ASHCO, a division of Bactolac, is a contract and private label
manufacturer of over-the-counter liquid and powder pharmaceutical products,
primarily liquid stomach remedies, located in Gulfport, Mississippi.  In August
2001, the Company organized ANI Pharmaceuticals, Inc. ("ANIP"), as a wholly
owned subsidiary of the Company.  The Company expects that the operations that
have previously been conducted by the ASHCO division will be conducted by ANIP.
For ease of reference, ANIP will include both ANI Pharmaceuticals, Inc. and the
ASHCO division unless indicated otherwise.  The Company determines its segment
results consistent with its management reporting and consolidated accounting
policies.  Selected financial information from the Company's business segments
is as follows (ooo's):

<TABLE>
<CAPTION>
                                                Vitamins and  Pharmaceutical  Corporate\
                                                Supplements      Products      Overhead      Totals
                                                -----------      --------      --------      ------
<S>                                            <C>            <C>             <C>             <C>
 Year ended September 30,
  2001:
Net sales                                         $10,764         $ 6,842      $     --      $17,606
Gross profit                                        3,420           1,888            --        5,308
General and administrative
   expenses                                         1,778           2,968         1,170        5,916
Operating income (loss) from
   continuing operations                            1,642          (1,080)       (1,170)        (608)
Interest expense                                       70             598           175          843
Net income (loss) from
   continuing operations                            1,590          (1,585)       (1,392)      (1,387)
Extraordinary item                                     --              --            73           73
Capital expenditures                                  853              72             6          931
Depreciation and amortization                         492             605           110        1,207
Identifiable assets                                11,133          11,945         5,201       28,279

  Period ended September 30,
   2000:
Net sales                                         $ 9,088         $ 6,980      $     --      $16,068
Gross profit                                        3,484           2,014            --        5,498

General and administrative
   expenses                                         1,202           2,568           958        4,728
Operating income (loss) from
   continuing operations                            2,282            (554)         (958)         770
Net income (loss) from
   continuing operations                            2,100          (1,006)       (1,128)         (34)
Interest expense                                       89             457            --          546
Capital expenditures                                   32             173            --          205
Depreciation and amortization                         375             530            93          998
Identifiable assets                                11,726          12,876         7,176       31,778
</TABLE>

                                      F-17
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Major Customers

  Other than as detailed under export sales, the Company's revenues are
generated from customers located in the United States.  The following represents
customers comprising more than 10% of the Company's net sales from continuing
operations:

             Customer                            2001          2000
             --------                            ----          ----

                A                                14.6%          9.9%
                B                                13.4%         22.7%

Foreign Sales

  Export sales were approximately $1,610,000 and $1,890,000 for the years ended
September 30, 2001 and 2000.  The Company has no foreign assets.


NOTE 11 -- COMMITMENTS AND CONTINGENCIES

401(k) Plan

  In July 1998 the Company established the Advanced Nutraceuticals, Inc. 401(k)
Plan and Trust (formerly - Nutrition for Life 401(k) Plan and Trust) (the
"Plan") which covers all of the Company's full-time employees who are United
States citizens, at least 21 years of age and have completed one quarter of
service with the Company. Pursuant to the plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the Plan. The Plan provides for
discretionary contributions by the Company. As of September 30, 2001, the
Company has made no such discretionary contributions.

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, 2001, 2000 and 1999 amounted to approximately $400,000, $200,000,
and $-0-. The lease for the Bactolac facility is with Shilpa-Saketh Realty,
Inc., an entity owned by a member of the Company's Board of Directors.  The
lease requires monthly payments of approximately $26,000 through 2005, and also
contains renewal and purchase options on the property.

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

  Year Ending September 30,
  ------------------------
            2002                               $  313,000
            2003                                  318,000
            2004                                  323,000
            2005                                  237,000
            2006                                  237,000
                                               ----------
                                               $1,428,000
                                               ==========

Employment Agreements

The Company has employment agreements with certain of its management personnel.
The agreements contain customary provisions regarding employment terms,
confidentiality and non-solicitation provisions.  Two of the agreements provide
for commitments extending beyond one year, requiring monthly payments of
approximately $33,000 through November 2002 and thereafter decreasing to $21,000
to November 2003.



                                      F-18
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 it is 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.

NOTE 12 -- PREFERRED AND COMMON STOCK

     In connection with the acquisitions that were consummated during the first
quarter of the fiscal year ended September 30, 2000, the Board of Directors
established a Series A Preferred Stock.  The Series A  Preferred Stock is $.001
par value with 500,000 shares authorized.  Following stockholders approval for
the conversion of the Series A Preferred Stock shares into shares of common
stock, 552,818 shares of common stock were issued and no Series A preferred
shares remain outstanding.  The Series A preferred shares had a $28.40 per share
liquidation preference on any distribution over the holders of the common stock.

     The Company's Board of Directors during the fiscal year 2000 approved the
retirement of 19,750 shares of common stock previously held in treasury.

     Effective June 1, 2001, a one for four (1:4) stock split of all of the
Company's issued and outstanding common stock was effected. The effect of the
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements.


NOTE 13 -- STOCK OPTIONS AND WARRANTS

1993 Plan

     The Company's Board of Directors approved the 1993 Stock Option Plan (the
"1993 Plan") providing for a total of 70,500 shares of common stock to be
reserved 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. The maximum term of the options is 10 years, 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 Plan

     The Company's Board of Directors approved the 1995 Stock Option Plan (the
"1995 Plan") in March 1995, as amended in June 1996, April 1999, June 2000 and
May 2001 providing for a total of 771,250 shares of common stock to be reserved
for the grant of options to purchase Common Stock of the Company. The terms of
the options are similar to those of the 1993 Plan. At September 30, 2001, there
were 567,705 shares reserved for the grant of options under the 1993 and 1995
plans.

1995 Non-Discretionary Plan

     In November 1995, the Company adopted the 1995 Non-Discretionary Stock
Option Plan for non-employee 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 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

                                      F-19
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the common stock at the date of grant of the options. The options expire in
five years and are exercisable in full at the date of grant.  During the years
ended September 30, 1998 and 1997, the Company issued 15,000 options to
Directors under this plan.  The Non-Discretionary Plan was cancelled on October
6, 1999.

Options and Warrants Issued in Public Offering

     In connection with a public offering, the Company issued 920,000 stock
warrants. The holder of four warrants is entitled to purchase one share of
common stock at a price of $15.00. The Company's Board of Directors has extended
the warrant expiration date to December 31, 2001. The Company has the right to
call all of the warrants for redemption on 30 days 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 20,000 shares
of the Company's common stock at $15.00 and options to purchase 40,000 shares of
the Company's common stock at $12.92.

Other Warrants

     In April 1998, the Company retained the services of Piedmont Consulting,
Inc., ("Piedmont") a public/investor relations firm, to assist in its efforts to
gain a broader investor following. As compensation for its services Piedmont was
paid a monthly retainer and was granted a three year warrant entitling it to
purchase up to 7,500 shares of the Company's common stock at $21.00 per share
and 10,000 shares at $28.00 per share. In July 1998 the Company terminated its
relationship with Piedmont.

     In October 1998, the Company issued a warrant to Nightingale Conant to
purchase up to 72,500 shares of the Company's common stock at $22.00 per share.
The warrant is exercisable at any time until October 31, 2003, and is entitled
to the benefit of adjustment of the exercise price and number of shares
deliverable upon exercise thereof in the event of certain specified dilutive
transactions.

SFAS NO. 123 Pro Forma Computation

     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 2001, 2000 and 1999, a dividend yield of
0%, 0% and 0%; a risk-free interest rate of 5.0%, 5.5%, 5.0%; an expected life
ranging from 5-10 years; and an expected volatility of 134%, 107% and 92%,
respectively.

     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, 2001, 2000 and 1999
would have been reduced as follows:

                                   2001          2000          1999
                              ---------   -----------   -----------

       Net income (loss):
       As reported            $ 164,873   $(4,004,331)  $  (848,352)
                              =========   ===========   ===========
       Pro forma              $(358,140)  $(4,695,866)  $(1,172,062)
                              =========   ===========   ===========
       Basic income
       (loss) per share:
       As reported            $     .08   $     (2.08)  $      (.58)
                              =========   ===========   ===========
       Pro forma              $    (.18)  $     (2.44)  $      (.81)
                              =========   ===========   ===========
       Diluted income
       (loss) per share:
       As reported            $     .08   $     (2.08)  $      (.58)
                              =========   ===========   ===========
       Pro forma              $    (.17)  $     (2.44)  $      (.81)
                              =========   ===========   ===========

                                     F-20
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                 Options                        Warrants
                                                                 -------                        --------
                                                                        Weighted                        Weighted
                                                          Number         Average         Number          Average
                                                            of          Exercise           of           Exercise
                                                          Shares          Price          Shares           Price
                                                          ------          -----          ------           -----
     <S>                                                  <C>           <C>              <C>            <C>
     Outstanding as of September 30, 1998                 126,270        $29.56          130,276          $15.36

       Granted                                             51,250        $11.80           72,500          $22.00
       Exercised                                               --            --               --              --
       Forfeited                                           (1,800)       $52.00               --              --
       Canceled                                            (  750)       $52.00               --              --
                                                        ---------                      ---------
     Outstanding as of September 30, 1999                 174,970        $24.04          202,776          $18.36

       Granted                                            209,968        $10.60               --              --
       Exercised                                               --            --               --              --
       Forfeited                                         ( 26,583)       $12.36               --              --
       Canceled                                          ( 28,500)       $ 9.40               --              --
                                                        ---------                        -------
     Outstanding as of September 30, 2000                 329,855        $17.92          202,776          $18.36

       Granted                                            470,375        $ 1.21               --              --
       Exercised                                               --            --               --              --
       Forfeited                                         ( 80,551)       $10.68               --              --
       Canceled                                          (138,204)       $19.99          (17,500)          25.00
                                                         ---------                      --------
     Outstanding as of September 30, 2001                 581,475        $ 3.54          185,276          $17.74
                                                         =========                      ========
     Exercisable as of September 30,
       1999                                               110,404        $26.32          202,776          $18.36
       2000                                               114,636        $31.48          202,776          $18.36
       2001                                                50,005        $16.73          185,276          $17.74

     Weighted average fair value of grants
     during the year ended September 30,
       1999                                                              $10.36                           $ 9.68
       2000                                                              $ 9.28                           $   --
       2001                                                              $ 9.36                           $   --
                                                                         ======                           ======
</TABLE>

Following is a summary of the status of the options outstanding at September 30,
2001:

<TABLE>
<CAPTION>
                                      Options Outstanding                                     Options Exercisable
                                 --------------------------------                        ---------------------------

                                                 Weighted-Average
                                                    Remaining
           Range of                              Contractual Life    Weighted-Average                 Weighted-Average
        Exercise Prices           Number             (years)          Exercise Price     Number        Exercise Price
        ---------------           ------             -------          --------------     ------        --------------
       <S>         <C>           <C>            <C>                  <C>                 <C>          <C>
       $1.16 -     $ 7.90        470,375               9.5               $ 1.21                0            $ 0.00
        7.91 -      15.80        101,100               7.9                10.71           40,005             10.77
       15.81 -      23.70              0               0.0                 0.00                0              0.00
       23.71 -      31.60          3,750               1.2                28.00            3,750             28.00
       31.61 -      39.50              0               0.0                 0.00                0              0.00
       39.51 -      47.40          2,500               5.1                46.00            2,500             46.00
       47.41 -      55.30          3,750               0.2                49.50            3,750             49.50
       55.31 -      63.20              0               0.0                 0.00                0              0.00
       63.21 -      71.10              0               0.0                 0.00                0              0.00
       71.11 -      79.00              0               0.0                 0.00                0              0.00
                               ---------               ---               ------        ---------            ------

                                 581,475               9.2               $ 3.54           50,005            $16.73
                               =========               ===               ======        =========            ======
</TABLE>

   ANI's warrants, previously traded under the symbol "ANIIW", were delisted in
2001, and are scheduled to expire as of December 31, 2001.

                                      F-21
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                      2001             2000            1999
                                                                      ----             ----            ----
<S>                                                              <C>               <C>               <C>
Supplemental disclosure of noncash financing activities:

   Purchase of property and equipment under
       capital lease                                             $   140,000       $      --         $      --

   Issuance of common shares under earnout agreement             $    30,000       $      --         $      --

   Sale of NFLI transaction:

       Promissory Note taken in sale                             $ 5,000,000       $      --         $      --

       Establish reserve against Promissory Note                 $(4,262,000)      $      --         $      --

       Intercompany account of NFLI formalized into a
         Note receivable due to Bactolac                         $   650,000       $      --         $      --

Supplemental disclosure of cash flow information:

   Federal and state income taxes paid (refunded)                $  (825,000) *    $      --         $      --

   Interest paid                                                 $   798,000       $ 540,000         $ 128,900
</TABLE>

         * Refunds relate to the discontinued NFLI operations.

                                      F-22
<PAGE>

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

  There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices or financial
statement disclosure.

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

(a)(1) and (2)  See Item 8.

(3)             Exhibits

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 2.2     Agreement and Plan of Merger, dated as of November 5, 1999,
                among Nutrition For Life International, Inc., Advanced
                Nutraceuticals, Inc., BPI Acquisition Company, Bactolac
                Pharmaceutical Inc. and Pailla M. Reddy, filed as an Exhibit to
                the Report on Form 8-K, filed on December 2, 1999, which Exhibit
                is incorporated herein by this reference.

Exhibit 2.3     Agreement and Plan of Merger, dated as of October 20, 1999,
                among Nutrition For Life International, Inc., Advanced
                Nutraceuticals, Inc., NL Acquisition Company, Gregory Pusey and
                Barry C. Loder, filed as an Exhibit to the Report on Form 8-K,
                filed on December 2, 1999, which Exhibit is incorporated herein
                by this reference.

Exhibit 2.4     Agreement and Plan of Merger, dated as of October 25, 1999,
                among Nutrition For Life International, Inc., Advanced
                Nutraceuticals, Inc., AC Acquisition Company, Allan I. Sirkin
                and Neil Sirkin (the "Ash Merger Agreement"), filed as an
                Exhibit to the Report on Form 8-K, filed on December 15, 1999,
                which Exhibit is incorporated herein by this reference.

Exhibit 2.5     Amendment to Agreement and Plan of Merger, dated November 24,
                1999, to the Ash Merger Agreement, filed as an Exhibit to the
                Report on Form 8-K, filed on December 15, 1999, which Exhibit is
                incorporated herein by this reference.

Exhibit 2.6     Agreement and Plan of Merger dated March 13, 2000 among
                Nutrition For Life International, Inc., Advanced Nutraceuticals,
                Inc. and NFLI Merger Sub, Inc., filed as an Exhibit to the
                Report on Form 8-K, filed on March 21, 2000, which Exhibit is
                incorporated herein by reference.

Exhibit 3.1     Articles of Incorporation of Nutrition For Life International,
                Inc., as amended*

Exhibit 3.2     Bylaws of Nutrition For Life International, Inc., 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 3.3     Articles of Incorporation of Advanced Nutraceuticals, Inc.,
                filed as an Exhibit to the Report on Form 8-K, filed on March
                21, 2000, which Exhibit is incorporated herein by this reference

Exhibit 3.3 (a) Amendment to Articles of Incorporation of Advanced
                Nutraceuticals, Inc.

Exhibit 3.4     Bylaws of Advanced Nutraceuticals, Inc., filed as an Exhibit to
                the Report on Form 8-K, filed on March 21, 2000, which Exhibit
                is incorporated herein by this reference
<PAGE>

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 4.4      Statement Establishing a Series of Shares (Series A Preferred
                 Stock), filed as an Exhibit to the Report on Form 8-K, filed on
                 December 2, 1999, which Exhibit is incorporated herein by this
                 reference.

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, as amended.

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 10.24    Settlement and Release Agreement, dated October 30, 1998, among
                 the Registrant, Distributor Services, L.L.C., Tru- Vantage
                 International, L.L.C., Maximum Impact, L.L.C. and Nightingale-
                 Conant Corporation, filed as an Exhibit to the Report on Form
                 8-K filed on November 13, 1998, which Exhibit is incorporated
                 herein by this reference.

Exhibit 10.25    Agreement, dated October 30, 1998, between Distributor
                 Services, L.L.C. and the Registrant, filed as an Exhibit to the
                 Report on Form 8-K filed on November 13, 1998, which Exhibit is
                 incorporated herein by this reference.

Exhibit 10.26    Earnout Agreement, dated November 17, 1999, between Pailla M.
                 Reddy and Nutrition For Life International, Inc., filed as an
                 Exhibit to the Report on Form 8-K, filed on December 2, 1999,
                 which Exhibit is incorporated herein by this reference.

Exhibit 10.26(a) Letter of agreement dated January 10, 2000, to Earnout
                 Agreement between Pailla M. Reddy and Nutrition For Life
                 International, Inc.**

Exhibit 10.27    Earnout Agreement, dated November 30, 1999, among Nutrition For
                 Life International, Inc. and the former shareholders of Ash
                 Corp. filed as an Exhibit to the Report on Form 8-K, filed on
                 December 15, 1999, which Exhibit is incorporated herein by this
                 reference.
<PAGE>

Exhibit 10.32    Employment Agreement, dated November 17, 1999, between Bactolac
                 Pharmaceutical Inc. and Pailla Reddy.**


Exhibit 10.33    Employment Agreement, dated November 30, 1999, between Bactolac
                 Pharmaceutical Inc. and Allan I. Sirkin.**

Exhibit 10.34    Employment Agreement, dated November 30, 1999, between Bactolac
                 Pharmaceutical Inc. and Neil Sirkin. **

Exhibit 10.35    Non-Competition Agreement, dated November 17, 1999, among For
                 Life International, Inc. and NL Acquisition Company. **

Exhibit 10.36    Non-Competition Agreement, dated November 17, 1999, among Barry
                 C. Loder, Nutrition For Life International, Inc. and NL
                 Acquisition Company. **

Exhibit 10.37    Non-Competition Agreement, dated November 17, 1999, among
                 Pailla M. Reddy, Nutrition For Life International, Inc. and
                 Bactolac Pharmaceutical Inc. **

Exhibit 10.38    Non-Competition Agreement, dated November 30, 1999, between
                 Bactolac Pharmaceutical Inc. and Allan I. Sirkin. **

Exhibit 10.39    Non-Competition Agreement, dated November 30, 1999, between
                 Bactolac Pharmaceutical Inc. and Neil Sirkin. **

Exhibit 10.40    Subordinated Promissory Note, dated November 17, 1999, in the
                 principal amount of $2,500,000 made by Nutrition For Life
                 International, Inc., payable to Pailla Reddy. **

Exhibit 10.40(a) Allonge to Subordinated Promissory Note, dated November
                 17, 2000, to the $2,500,000 note payable to Pailla Reddy.

Exhibit 10.41    Subordinated Promissory Note, dated November 17, 1999, in the
                 principal amount of $650,000 made by Bactolac Pharmaceutical
                 Inc., payable to Pailla Reddy. **

Exhibit 10.42    Subordinated Promissory Note, dated December 1, 1999, in the
                 principal amount of $155,000 payable by Nutrition For Life
                 International, Inc., to Neil Sirkin. **

Exhibit 10.43    Subordinated Promissory Note, dated December 1, 1999, in the
                 principal amount of $345,000 payable by Nutrition For Life
                 International, Inc., to Allan I. Sirkin. **

Exhibit 10.44    Lock-Up Agreement, dated November 30, 1999, between Allan I.
                 Sirkin and Nutrition For Life International, Inc. **

Exhibit 10.45    Lock-Up Agreement, dated November 30, 1999, between Neil Sirkin
                 and Nutrition For Life International, Inc. **

Exhibit 10.46    Lock-Up Agreement, dated November 17, 1999, between Gregory
                 Pusey and Nutrition For Life International, Inc. **

Exhibit 10.47    Lock-Up Agreement, dated November 17, 1999, between Barry C.
                 Loder and Nutrition For Life International, Inc. **

Exhibit 10.48    Lock-Up Agreement, dated November 17, 1999, between Pailla
                 Reddy and Nutrition For Life International, Inc. **

Exhibit 10.49    Loan and Security Agreement among General Electric Capital
                 Corporation, Nutrition For Life International, Inc., Ash Corp.,
                 Bactolac Pharmaceutical Inc. and NL Acquisition Company. **
<PAGE>

Exhibit 10.50   First Amendment to Loan and Agreement among General Electric
                Capital Corporation, Nutrition For Life International, Inc.,
                Ash Corp., Bactolac Pharmaceutical Inc. and NL Acquisition
                Company. **

Exhibit 10.51   Second Amendment to Loan and Security Agreement involving
                General Electric Capital Corporation, dated March 15, 2000. ***

Exhibit 10.52   Agreement, dated September 20, 2000, among Nutrition For Life
                International, Inc., Advanced Nutraceuticals, Inc., David P.
                Bertrand, Barry C. Loder, Jeffrey G. McGonegal, Jana Mitcham and
                Gregory Pusey. ***

Exhibit 10.53   Agreement, dated July 7, 2000, between Shilpa-Saketh Realty,
                Inc. and Bactolac Pharmaceutical Inc. ***


Exhibit 10.54   Waiver under Loan and Security Agreement involving General
                Electric Capital Corporation, dated January 10, 2001. ***

Exhibit 10.55   Stock Purchase Agreement, dated December 29, 2000, among
                Advanced Nutraceuticals, Inc., Everest International, LLC and
                Nutrition For Life International, Inc. ** *

Exhibit 10.56   First Amendment to Stock Purchase Agreement, dated June 5, 2001,
                among Advanced Nutraceuticals, Inc., Everest International, LLC
                and Nutrition For Life International, Inc. filed on Form 8-K
                dated June 27, 2001, and incorporated by reference herein.

Exhibit 10.57   Subordinated Promissory Note, dated June 12, 2001, $5,000,000
                principal amount, from Nutrition For Life International, Inc.
                to Advanced Nutraceuticals, Inc.

Exhibit 10.58   Subordinated Promissory Note, dated June 12, 2001, $650,000
                principal amount, from Nutrition For Life International, Inc.
                to Bactolac Pharmaceutical Inc.

Exhibit 10.59   Release and Settlement Agreement, dated June 29, 2001, among
                Advanced Nutraceuticals, Inc., Bactolac Pharmaceutical Inc.,
                Allan I. Sirkin and Neil Sirkin

Exhibit 10.60   Amended and Restated Loan Agreement among General Electric
                Capital Corporation, Bactolac Pharmaceutical Inc., ANI
                Pharmaceuticals, Inc. and Advanced Nutraceuticals, Inc., dated
                December 12, 2001.

Exhibit 10.61   Subordinated Promissory Note dated, November 17, 2001 in the
                principal amount of $1,543,438 made by Advanced Nutraceuticals,
                Inc., payable to Pailla M. Reddy.

Exhibit 10.62   Employment Agreement dated, November 18, 2001, between Bactolac
                Pharmaceutical Inc., and Pailla M. Reddy.

Exhibit 10.63   Waiver under Loan and Security Agreement involving General
                Electric Capital Corporation, dated December 26, 2001.



Exhibit 21      Subsidiaries of the Company.

Exhibit 23.1    Consent of Grant Thornton, LLP.


*             These exhibits were previously filed as exhibits to the Company's
              Registration Statement on Form SB-2 (File No. 33-92274), and are
              incorporated herein by reference.
<PAGE>

**        These exhibits were previously filed as exhibits to the Company's
          Report on Form 10-K for the fiscal year ended September 30, 1999, and
          are incorporated herein by reference.

***       These exhibits were previously filed as exhibits to the Company's
          Report on Form 10-K/A for the fiscal year ended September 30, 2000,
          and are incorporated herein by reference.


          (b)    Reports on Form 8-K

                 None.

          (c)    Exhibits

                 (a)(3)above

          (d)    Financial Statement Schedules

                 See Item 8 above.
<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                         ADVANCED NUTRACEUTICALS, INC.
                                         (Registrant)


     Date:    December 31, 2001           By: /s/ Gregory Pusey
                                             ----------------------------------
                                             Gregory Pusey, President and Chief
                                             Executive Officer

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE>
<S>                                                          <C>
     Date:    December 31, 2001                             /s/ Gregory Pusey
              -----------------------------------------------------------------------
            Gregory Pusey, Chairman, President, Chief Executive Officer and Director

     Date:    December 31, 2001                             /s/ Jeff McGonegal
              -----------------------------------------------------------------------
                     Jeff McGonegal, Senior Vice President of Finance, Chief
                                Financial Officer and Secretary

     Date:    December 31, 2001                             /s/ John R. Brown, Jr.
              -----------------------------------------------------------------------
             John R. Brown, Jr., Vice President, Assistant Secretary and Treasurer

     Date:    December 31, 2001                             /s/ F. Wayne Ballenger
              -----------------------------------------------------------------------
                                                      F. Wayne Ballenger, Director

     Date:    December 31, 2001                             /s/ M.F. Florence
              -----------------------------------------------------------------------
                                                        M. F. Florence, Director

     Date:    December 31, 2001                             /s/ Randall D. Humphreys
              -----------------------------------------------------------------------
                                                      Randall D. Humphreys, Director

     Date:    December 31, 2001                             /s/ Pailla M. Reddy
              -----------------------------------------------------------------------
                                                        Pailla M. Reddy, Director

     Date:    December 31, 2001                             /s/ Neil Sirkin
              -----------------------------------------------------------------------
                                                        Neil Sirkin, Director
</TABLE>