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, 2002

[]   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
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(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 17, 2002 was $1,175,000.

The number of shares  outstanding of the  Registrant's  common stock on December
17, 2002 was 4,992,789.


<PAGE>
                 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 a holding  company,  organized in
March  2000,  has  two  operating  subsidiaries,  Bactolac  Pharmaceutical  Inc.
("Bactolac") and ANI Pharmaceuticals,  Inc. ("ANIP") (formerly ASHCO, a division
of  Bactolac).   Bactolac  and  ANIP  are  manufacturers  of  nutraceutical  and
pharmaceutical  products.  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.

The Company formerly owned Nutrition for Life  International,  Inc. ("NFLI"),  a
network  marketer of nutritional  and consumer  products.  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
historical  consolidated  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.  To support continuing sales increases at Bactolac, in
the fall of 2000, its operations were moved to a state of the art  approximately
32,700  square  foot  Good  Manufacturing  Practices  ("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 1000 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 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.

ANIP,  www.anipharmaceuticals.com,  formerly  operated as the ASHCO  division of
Bactolac following its acquisition in December 1999. In August 2001, the Company
organized ANI  Pharmaceuticals,  Inc. ("ANIP"),  as a wholly owned subsidiary of
the Company and the operations  that have previously been conducted by the ASHCO
division are now  conducted by ANIP.  For ease of  reference,  ANIP will include
both  ANI  Pharmaceuticals,   Inc.  and  the  ASHCO  division  unless  indicated
otherwise. 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.  ANIP  manufactures  high quality
pharmaceutical  products,  including  liquids,  powders,  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
other OTC products.

                                        2
<PAGE>


The  Company's  near term strategy is to  strengthen  its financial  position by
refinancing its current credit facility,  providing  additional  working capital
availability,   generating   positive  cash  flow,  and  becoming   consistently
profitable.  The Company believes it can successfully implement this strategy by
continuing in its aggressive efforts to obtain new customers as well as focusing
on  expanded  sales  opportunities  with  its  existing  customers  and  through
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 had entered into an
agreement to acquire  certain  assets of York  Pharmaceuticals,  Inc.  ("York"),
including  equipment and customer list. The agreement  subsequently  expired and
the  Company  abandoned  its  efforts to conclude  the  transaction.  Due to the
operating  difficulties  particularly  at ANIP over the last couple of years 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 and  operations at ANIP  continue to  turnaround  and the financial
position on a  consolidated  basis  improves,  the  Company  plans to resume its
program  to locate  and  acquire  companies  in  complementary  and  synergistic
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
pharmaceutical products, primarily liquid stomach remedies, located in Gulfport,
Mississippi.  The Company is  committed  to  providing  high  quality  products.
Bactolac  utilizes  GMP  practices  at its  facility.  ANIP  is a  Current  Good
Manufacturing   Practices   ("cGMP")   facility   (under   the   Food  and  Drug
Administration  ("FDA") guidelines) and manufactures United States Pharmacopoeia
("USP") products.  Additional  financial  information by segment can be found in
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

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.

Capital  expenditures at Bactolac  during 2002  approximated  $154,000.  Capital
expenditures  at Bactolac over the past two years  (predominately  made in 2001)
have resulted  in  significantly  higher  production   capacity,   with  shorter
production  turnaround  times,  combined with higher 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  $12,364,000  and
$10,764,000,  for the years ended  September  30,  2002 and 2001.  The top three
unrelated  customers  accounted for  approximately 50% and 47% of Bactolac's net
sales  for 2002  and  2001.  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 $800,000.

                                        3
<PAGE>


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 and associated  liquid
stomach  remedies,  baby powders,  medicated  powders,  anti-fungal  powders and
topical  liquid  products.  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   Over-the-Counter   ("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 OTC pharmaceutical segment generated net sales of $9,261,000 and $6,842,000,
for the years ended  September 30, 2002 and 2001.  The top  unrelated  customers
accounted for  approximately  47% (two  customers) and 71% (three  customers) of
ANIP's  net sales for 2002 and 2001.  One  customer  included  above,  was Bayer
Corporation  ("Bayer") that represented 35% of ANIP's net sales in 2001.  During
January 2001, ANIP completed the final  production for Bayer, who had previously
informed the Company that it decided to internally produce the products produced
at ANIP's facility for Bayer.  Seasonality is generally not a significant factor
in ANIP's  business.  Backlog at ANIP is fairly  short term in nature due to the
timing of production  turn around,  and recent backlog has generally been in the
range of $2,000,000 to $2,500,000.

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. Subsequent
to the  discontinuance  of the Bayer  production,  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  significantly  expanded its monthly sales levels by, among
other  things  adding  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 GMP  promulgated  by 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.

                                        4
<PAGE>


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 OTC pharmaceutical industries
are highly competitive,  and competition continues to increase.  Competition for
the sale of products  comes from many  sources,  including  companies  that sell
pharmaceuticals  and  nutraceuticals  to  supermarkets,   large  chain  discount
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 continue 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, with a decelerating  growth rate of 7.8%
in 1999.  Preliminary  estimates for 2000 to 2002 continue to reflect this trend
of  slowed or  contracting  growth.  The  industry,  while  still  estimated  at
approximately $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 OTC 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 OTC  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,  2002,  the Company  employed  143 full time  employees in its
operations,  with  Bactolac  employing  55, ANIP  employing 85 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"),  the  United  States  Postal  Service  ("USPS")  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 GMPs
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
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.

                                        5
<PAGE>


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  ("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.  NFLI  also  agreed to pay an
additional $750,000,  depending upon future operating results of NFLI's Japanese
operation,  which has not been successful,  therefore, those additional proceeds
will not be received.  Due to the completion of the sale of NFLI,
the Company's  consolidated  financial statements and related notes thereto were
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.

For financial  reporting  purposes,  at closing  management of ANI was unable to
determine that it is probable that the future cash flows from NFLI's  operations
would be sufficient to fund the entire balloon payment  required under the terms
of the $5.0 million Note. An allowance of approximately  $4,261,000 was provided
against the face amount of the $5 million Note. ANI accounts for  collections on
the $5 million Note under the cost  recovery  method,  whereby  collections  are
recorded  as a  reduction  of the  balance  recorded  for the  Note  (after  the
allowance).  At the June 2002, due date of the $650,000 note, the Company sent a
demand notice for payment and NFLI  responded  that there may be certain  claims
for offset.  The Company and NFLI are currently in  discussions in attempting to
resolve this matter.  During the quarter ended September 30, 2002, management of
the Company recorded an additional allowance of approximately $365,000,  against
the net balances  due under the $5.0  million Note and the $650,000  note due to
Bactolac, based upon current assessment of the probability of receiving payments
under  those  notes.  As a result of the  additional  allowance  the  Company is
carrying  these  notes on its  balance  sheet at a zero  basis.  Any  additional
collections  above  the  net  amount  carried  will be  recorded  as  income  as
collected.

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, 2002,  2001 and 2000.  The losses
were incurred  from the  operations  of ANIP  (formerly  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 ANIP in late 1999.  Although  the
Bactolac operation has been profitable since acquisition, the losses of ANIP 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.

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.  At the
June 2002  due date of the $650,000  note, the Company sent a demand notice for
payment and NFLI  responded  that there may be certain  claims for  offset.  The
Company and NFLI are  currently in  discussions  in  attempting  to resolve this
matter.  At the June 2001 closing  a reserve of $4,261,000 was provided against
the asset and during the quarter  ended  September  30, 2002,  management of the
Company recorded an additional  allowance of approximately  $365,000 against the
net  balances  due  under the $5.0  million  Note and the  $650,000  note due to
Bactolac, based upon current assessment of the probability of receiving payments
under those notes.

                                        6
<PAGE>


Secured Lender  Relationships.  The Company has a senior credit  facility with a
lender.  The lender has  notified  the  Company  that the lender is closing  the
office that services the Company and has decided, due to the smaller size of the
Company's  average  outstanding  loan balances,  not to pursue a continuing loan
arrangement  with ANI.  The  lender has  agreed to extend  the  maturity  of the
facility to January 31, 2003. As of September 30, 2002, the balance  outstanding
under  the  facility  amounted  to  $2,890,000.  The  Company  has  not  been in
compliance with certain covenants under the credit facility and while the lender
granted the Company  waivers of those defaults on December 26, 2001, ANI has not
requested  any  additional  waivers from its lender.  Due to the due date of the
loan and the existing defaults,  the entire loan amount has been classified as a
current  liability  on the  Company's  balance  sheet.  ANI is in the process of
securing an alternative  lender and has received  several  proposal letters from
prospective lenders. The Company expects that a new facility can be finalized by
the extended due date of the current agreement. If the Company is not successful
in  refinancing  this  obligation,  the financial  position and liquidity of the
Company could be adversely affected.

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,  a customer of ANIP.
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.   While  the  Company's  sales  efforts  have  recently   resulted  in
significantly  improved  revenues  at ANIP,  failure to maintain  the  increased
revenues or the inability to substantially  reduce operating expenses could 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,  Greg Pusey,  Chairman,  Director and
Chief  Executive  Officer  of ANI and Jeff  McGonegal,  CFO of the  Company  and
President of ANI  Pharmaceuticals,  Inc. 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 and 2002, the
Company's  common  stock  failed to maintain a  consistent  minimum bid price of
$1.00.   While  the  Company  is  currently  in   compliance   with  the  NASDAQ
requirements,  there can be no  assurance  that it will  continue  to meet those
requirements. 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 USPS 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 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.  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.

                                        7
<PAGE>

The success of the Company will depend,  in part,  on the  Company's  ability to
integrate the  operations of companies  acquired in the future.  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  leveraged  lending
arrangement. The loan facility is secured by substantially all the assets of the
Company and its  subsidiaries.  The lender has  notified  the  Company  that the
lender is closing the office that  services the Company and has decided,  due to
the smaller size of the Company's  average  outstanding  loan  balances,  not to
pursue a continuing loan  arrangement  with ANI. The lender has agreed to extend
the maturity of the  facility to January 31,  2003.  The Company has not been in
compliance with certain covenants under the credit facility and while the lender
granted the Company  waivers of those defaults on December 26, 2001, ANI has not
requested  any  additional  waivers from its lender.  Due to the due date of the
loan and the existing defaults,  the entire loan amount has been classified as a
current  liability  on the  Company's  balance  sheet.  ANI is in the process of
securing an alternative  lender and has received  several  proposal letters from
prospective lenders. The Company expects that a new facility can be finalized by
the extended due date of the current agreement. If the Company is not successful
in  refinancing  this  obligation,  the financial  position and liquidity of the
Company could be adversely affected.

The  existing  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. It is anticipated
that a new agreement will contain similar requirements,  although ones which the
Company  would  be in  compliance  with.  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.  If  the  Company  should  breach  these  revised
covenants,  or not be able to refinance the facility under acceptable  terms, or
if the Company's operating revenues were to be insufficient to pay debt service,
there would be a risk of default and possible foreclosure.

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 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 has not paid any  dividends  since 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, 2003 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.

                                        8
<PAGE>

                         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
32,700 square feet. Bactolac's current monthly rental is approximately  $30,000,
(of  which  $6,000  pertains  to  improvements  made by a related  party),  that
escalates  over the remaining  term on the lease,  through May 2005. The Company
has two  five-year  renewal  options  and a  purchase  option  on the  facility.
Bactolac  leases this 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.


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

The Annual Meeting of the  Shareholders of the Company was held on September 10,
2002.  All of the Directors of the Company were  re-elected  as Directors,  with
each of F. Wayne  Ballenger,  M. F. Florence and Randall D. Humphreys  receiving
1,742,  843 shares  voted for,  530 shares  withheld,  Gregory  Pusey  receiving
1,742,455  shares  voted  for and 918  shares  withheld,  and  Pailla  M.  Reddy
receiving 1,742,818 shares voted for and 555 shares withheld.

There were two other proposals  approved at the Annual  Meeting.  The 1995 Stock
Option Plan, as amended,  was approved with 1,075,324  shares voted for,  39,187
shares voted  against and 2,009 shares voted to abstain.  There  655,527  broker
non-votes on this matter.

The shareholders  also approved the right of conversion of $1,070,000 in debt to
shares of the Company's  common stock with  1,098,427  shares voted for,  16,484
shares  voted  against and 1,609  shares  voted to abstain.  There were  655,527
broker non-votes on this matter.


                                     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 expired as of December 31, 2001.
A one for four (1:4)  reverse 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.

                                    Common Stock                Warrants
                                  ---------------           ----------------
 Quarter Ended                    High        Low           High         Low
 -------------                    ----        ---           ----         ---
    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                    0.75        0.25             *           *
 June 30, 2001                     3.30        0.25             *           *
 September 30, 2001                1.75        0.77             *           *

    Fiscal 2002:
 December 31, 2001                 1.15        0.85             *           *
 March 31, 2002                    1.09        0.88             *           *
 June 30, 2002                     1.24        0.89             *           *
 September 30, 2002                0.92        0.40             *           *


     As of December 23, 2002, there were 1,642 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,  2003.  Under its  current  loan  agreement,  the Company may not
declare  any  dividends  without the  consent of its senior  lender.  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.

                                        9
<PAGE>

                         ITEM 6. SELECTED FINANCIAL DATA

The  selected  financial  data  presented  below for each year in the  five-year
period ended  September  30, 2002 have been  derived from the audited  financial
statements  of the  Company as restated  to present  the  operations  of NFLI as
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)
                                            --------------------------------------------------------
                                              2002        2001        2000        1999        1998
                                            --------    --------    --------    --------    --------
<S>                                         <C>         <C>         <C>         <C>         <C>
      Statements of Operations:
   Net sales                                $ 21,625    $ 17,606    $ 16,068    $   --      $   --
   Gross profit                                6,636       5,308       5,498        --          --
   Operating income (loss)                      (818)       (608)        770        (628)       (586)
   Loss from continuing
    operations                                (2,160)       (981)        (34)       (628)       (586)
   Income (loss) from discontinued
    operations, net of tax                      --         1,146      (3,970)       (220)       (281)

   Cumulative effect of accounting
      change                                  (1,185)       --          --          --          --
   Net income (loss)                        $ (3,344)   $    165    $ (4,004)   $   (848)   $   (867)

 Basic income (loss) per share:
   Continuing operations                    $   (.90)   $   (.48)   $   (.02)   $   (.43)   $   (.40)
   Cumulative effect of accounting change   $   (.50)   $   --      $   --      $   --      $   --
   Discontinued operations, net of tax      $   --      $    .56    $  (2.06)   $   (.15)   $   (.19)


Diluted income (loss) per share:
   Continuing operations                    $   (.90)   $   (.47)   $   (.02)   $   (.43)   $   (.40)
   Cumulative effect of accounting change   $   (.50)        $--         $--         $--         $--
   Discontinued operations, net of tax           $--    $    .55    $  (2.06)   $   (.15)   $   (.19)

 Weighted average number of shares
 outstanding:
   Basic                                       2,389       2,027       1,928       1,452       1,458
   Diluted (1)                                 2,389       2,077       1,928       1,452       1,458

 Balance Sheet Data:
   Working capital                          $  1,254    $  2,310    $  1,544    $ 14,348    $ 14,443
   Total assets                               24,535      25,710      31,778      14,348      14,443
   Total liabilities                           8,609       8,765      14,951        --          --
   Stockholders' equity                       15,926      16,945      16,827      14,348      14,443
</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.

                                       10
<PAGE>

<TABLE>
<CAPTION>
                    SELECTED QUARTERLY FINANCIAL INFORMATION

                                                                QUARTER ENDED
                                                      (In thousands, except Per Share data)
                                                  --------------------------------------------
                                                 December 31  March 31    June 30   September 30 Fiscal Year
                                                  --------    --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>         <C>
     Fiscal 2002:
         Net Sales                                $  5,147    $  5,915    $  5,118    $  5,445    $ 21,625
         Gross profit                                1,685       1,998       1,200       1,753       6,636
         (Loss) from continuing operations             (73)        (49)       (793)     (1,089)     (2,160)
         Cumulative effect of accounting change     (1,185)       --          --          --        (1,185)

         Basic income (loss) per share:
         Continuing                               $   (.04)   $   (.02)   $   (.37)   $   (.47)   $   (.90)
         Cumulative effect of accounting change   $   (.50)   $   --      $   --      $   --      $   (.50)

         Diluted income (loss) per share:
         Continuing                               $   (.04)   $   (.02)   $   (.37)   $   (.47)   $   (.90)
         Cumulative effect of accounting change   $   (.50)   $   --      $   --      $   --      $   (.50)

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


     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)       (455)       (981)
         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                           $   (.04)   $   (.39)   $   (.12)   $    .07    $   (.48)
             Discontinued                         $    .33    $    .18    $    .22    $   (.17)   $    .56

         Diluted income (loss) per share:
             Continuing                           $   (.04)   $   (.39)   $   (.12)   $    .08    $   (.47)
             Discontinued                         $    .33    $    .18    $    .22    $   (.18)   $    .55

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


                  FINANCIAL INFORMATION RELATING TO FOREIGN AND
                      DOMESTIC OPERATIONS AND EXPORT SALES
Continuing Operations:

For the year ended September 30, 2002, sales to unaffiliated  customers  totaled
$21,625,000.  Of this total $745,000,  $685,000 and $46,000 related to customers
located  in  Russia,  Algeria  and  Mexico,  respectively.  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.  Approximate  total  gross
operating  margin  was  $6,636,000,   in  2002  and  $5,308,000,  in  2001.  All
identifiable assets for 2002 and 2001 were located in the United States.

                                       11
<PAGE>


                 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 ANIP  (formerly  ASHCO,  a
division of Bactolac),  a contract manufacturer of pharmaceutical  products, was
acquired 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 ANIP had been consummated as
of the beginning of the year ended September 30, 2000.
<TABLE>
<CAPTION>

                                   Year ended September 30,
                 -------------------------------------------------------------------------
                       2002                       2001                       2000
                 ------------------       --------------------      ----------------------
                                                                          (Proforma)
                                                                    ----------------------
<S>             <C>                       <C>                       <C>
 Net sales      $21,625,000   100.0%      $17,606,000    100.0%     $  18,762,000    100.0%
 Cost of sales   14,989,000    69.3        12,298,000     69.9         12,932,000     68.9
 Gross profit     6,636,000    30.7         5,308,000     30.1          5,830,000     31.1
</TABLE>

Fiscal Year 2002 Compared to Fiscal Year 2001

Net  sales  for the 2002  period  increased  $4,019,000  or 22.8%  over the 2001
period. The increase was attributable to a net $1,600,000  increase in the sales
of Bactolac through a number of customers.  In addition,  there was a $2,419,000
increase in the sales of ANIP.  The ANIP  increase  consisted of  $2,364,000  in
sales from new  private  label  customers  such as  Walgreen's,  K-Mart,  Dollar
General, Winn Dixie and Big Lots Stores,  combined with a net expansion in sales
to continuing contract customers of $2,414,000, offset by the $2,360,000 decline
in sales to Bayer  Corporation.  Bayer  Corporation  historically  represented a
significant  portion of ANIP's  revenue base, and effective  January 2001,  ANIP
completed  the final  production  under the Bayer  contract.  During 2002,  ANIP
aggressively  expanded its customer base to compensate for the loss of the Bayer
business.

Gross profit for the 2002 period increased to $6,636,000,  a $1,328,000 increase
over the 2001 amount.  Gross profit as a  percentage  of net sales  increased to
30.7% in 2002, as compared to 30.1% in the 2001 period. Gross profit at Bactolac
improved to 33.5% from 31.7% in 2001. The majority of the  improvement  resulted
from higher sales volumes better absorbing  overhead  expenses combined with the
addition of high-speed  equipment that improved production  efficiencies.  Gross
profit  at ANIP  dropped  to  26.9%  in  2002,  as  compared  to  27.6% in 2001.
Substantially all of the change was due to changes in the product mix.

Total operating  expenses  increased to $7,454,000 in 2002, from $5,916,000,  in
2001. This represents an increase of $1,383,000,  or 23.4%.  The majority of the
increase   relates  to  additional   personnel  costs,  in  addition  to  higher
administrative  costs  being  incurred  for  insurance  and sales and  marketing
expenses incurred in connection with the private label customers at ANIP. During
2002,  ANI  wrote-off  $155,000  in net costs  incurred in  connection  with the
proposed York Pharmaceuticals acquisition that was terminated.

During  September 2002,  under  agreements  finalized with Dr. Reddy,  Cambridge
Holdings,  Ltd,.  and  Glenwood  Capital  Partners I, LP, the total  amounts and
accrued  interest due on these  convertible  obligations  (all but the remaining
$500,000 due to Dr. Reddy) were converted into 2,840,800  shares of ANI's common
stock.  The agreed upon conversion  rate was $0.55 per share,  which at the time
represented  approximately  a 20% premium  over the trading  price of the stock.
Under accounting  principles  generally accepted in the United States, since the
agreements  were  modified to adjust the  conversion  price from the  originally
established  terms,  an  inducement  expense was  required to be  recorded.  The
inducement  expense  was  computed  based upon the fair value of the  additional
shares issued,  over those that would have been issued under the original terms.
The  additional  expense was computed to be  approximately  $601,000,  which was
recorded as debt  conversion  inducement  expense on the statement of operations
for the year ended September 30, 2002, with the offsetting credit being recorded
as additional paid-in capital.

Fiscal Year 2001 Compared to Fiscal Year 2000 (Proforma)

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 ANIP. The majority of the ANIP 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 has
historically  represented a  significant  portion of ANIP's  revenue  base,  and
during  January  2001,  ANIP  completed  the  final  production  under the Bayer
contract.

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 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 ANIP.

                                       12
<PAGE>


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.

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 historical financial
statements  and related notes thereto were 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 ANIP,  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  alternative  financing  during the current fiscal year to meet currently
anticipated funding requirements

At September 30, 2002, the Company had working capital of $1,254,000. Borrowings
under the revolving  portion of the secured credit facility totaled  $2,226,000,
with  additional  borrowings  available of $323,000,  at that point,  based upon
accounts receivable and inventory levels.

The Company is currently  under-going  due  diligence by a new lender to replace
the  current  senior  lender.  Based  upon  discussions  with  the  new  lender,
management of the Company  currently  anticipates  that a new lending  agreement
will be  finalized  under  acceptable  terms,  prior to the  January  31,  2003,
extended due date of the current  agreement.  Should this new  agreement  not be
able to be  finalized  by the  extended  due date,  ANI has  received  and would
consider a sale-leaseback  proposal from another entity which ANI believes could
be closed by January 31, 2003, however the terms of the proposed  sale-leaseback
financing  would be more  expensive.  Depending  upon the status of  alternative
financing  arrangements  near the end of January  2003,  ANI would also consider
requesting a further  extension  from its current  lender,  which if such lender
agreed to an additional  extension and they are under no obligation or agreement
to do so, could require ANI to pay a substantial fee.

During the second  quarter of the fiscal  year that began  October 1, 2002,  ANI
anticipates  repaying the remaining $500,000 note to Dr. Reddy, which was due in
November 2002. Dr. Reddy has agreed verbally to this extension,  and the Company
anticipates funding this cash requirement out of a new lending relationship.

Operating Activities

Net  cash  flows  from  continuing  operating  activities  generated  (consumed)
approximately  $(1,458,000),  $300,000 and  $(2,289,000) in 2002, 2001 and 2000.
The net cash consumed in 2002 consisted  primarily of  approximately  $1,588,000
increase in accounts  receivable  and a $319,000  increase in  inventories.  The
majority of this increase  related to higher  monthly sales levels at ANIP.  The
net  loss  from   continuing   operations  in  2002  of  $3,344,000  was  offset
substantially  by the non cash  expenses  recorded  consisting  primarily of the
cumulative effect of the accounting  change relating to the goodwill  write-off,
depreciation and amortization  expenses,  the bad debt provision and the expense
recognized on the debt conversion which in total amounted to $3,375,000.

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 ANIP offset by approximately  $955,000 in cash used to reduce accounts
payable  and  other  accrued  expenses.  These  amounts  were  offset in 2001 by
$981,000 in losses from  continuing  operations  less $1,207,000 in depreciation
and amortization expense.

Investing Activities

Investing activities from continuing operations generated approximately $302,000
in 2002. This consisted of $611,000 collected on the NFLI Note receivable net of
$308,000 used for additions to equipment.

Investing  activities  from  continuing   operations   generated   approximately
$1,908,000 in 2001.  Approximately  $3,200,000 was received from the sale of the
discontinued NFLI subsidiary,  net of $713,000 in expenses incurred on the sale,
with an additional $228,000 collected on the Note from the NFLI sale.  Additions
to capital equipment consumed $807,000.

                                       13
<PAGE>

Financing Activities

Financing   activities  from  continuing   operations   consumed   approximately
$(2,044,000) 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 $1,435,000 repaid on notes payable to related parties, funded
in part by the ANIP  mortgage  refinancing  of  $2,415,000.  Also  during  2001,
$(307,000) in cash was consumed by the discontinued entity prior to the sale.

The Company's  revolving  credit facility  provides for  borrowings,  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.  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 ratios,  as well as limitations on capital  expenditures.  The lender has
notified  the Company  that the lender is closing the office that  services  the
Company and has decided, due to the smaller size of the Company's facility,  not
to pursue a  continuing  loan  arrangement  with ANI.  The  lender has agreed to
extend the  maturity of the facility to January 31,  2003.  As of September  30,
2002, the balance  outstanding  under the facility  amounted to $2,890,000.  The
Company  has not been in  compliance  with  certain  covenants  under the credit
facility and while the lender  granted the Company  waivers of those defaults on
December 26, 2001, ANI has not requested any additional waivers from its lender.
Due to the due date of the loan  and the  existing  defaults,  the  entire  loan
amount has been  classified  as a current  liability  on the  Company's  balance
sheet. ANI is in the process of securing an alternative  lender and has received
several  proposal  letters from  prospective  lenders.  The Company is currently
under-going  due diligence by a new lender to replace the current senior lender.
Based upon discussions with the new lender,  management of the Company currently
anticipates  that a new lending  agreement  will be finalized  under  acceptable
terms,  prior  to the  January  31,  2003,  extended  due  date  of the  current
agreement. Should this new agreement not be able to be finalized by the extended
due date,  ANI has received and would  consider a  sale-leaseback  proposal from
another entity which ANI believes  could be closed by January 31, 2003,  however
the terms of the  proposed  sale-leaseback  financing  would be more  expensive.
Depending upon the status of alternative financing  arrangements near the end of
January 2003,  ANI would also consider  requesting a further  extension from its
current lender,  which if such lender agreed to an additional extension and they
are under no  obligation  or  agreement  to do so,  could  require  ANI to pay a
substantial   fee.  If  the  Company  is  not  successful  in  refinancing  this
obligation,  the  financial  position  and  liquidity  of the  Company  could be
adversely affected.

In connection  with the  acquisitions  of Bactolac,  the Company  entered into a
purchase note totaling $2,500,000, with Dr, Reddy, the selling stockholder.  The
Bactolac stock purchase note in an original  amount of $2,500,000 is subordinate
to the  senior  lender's  facility,  and bears  interest  at 7%.  Dr.  Reddy had
previously  agreed to extend the  payment of the first  $1,000,000,  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, which also included
the right for the holder to convert up to  $1,000,000  principal,  plus  accrued
interest into shares of the Company's common stock at $1.00 per share.

During  January  2002,  ANI  received  a  $250,000  subordinated  7% loan from a
company,  Cambridge Holdings, Ltd., that is affiliated with ANI's chairman, Greg
Pusey.  The note  matures  in one year and is  convertible  at the option of the
holder into shares of ANI common stock at $1.00 per share,  and also  includes a
warrant  to allow the  holder to acquire  50,000  shares of ANI common  stock at
$1.00 per  share,  through  June  2004.  The  proceeds  of the loan were used as
working  capital.  The approximate  $70,700 value associated with the detachable
warrant and the conversion  feature has been recorded  separately  from the note
liability,  as a credit to additional paid-in capital. This allocation gave rise
to additional  interest cost,  above the stated face amount of interest,  as the
amount is accreted back to the total loan amount.

During July 2002, ANI borrowed  $175,000 from Glenwood Capital Partners I, LP, a
partnership managed by Randall D. Humphreys,  a director of the Company.  The 7%
note matures in one year,  and is  convertible  at the option of the holder into
shares of ANI  common  stock at $1.00 per  share.  Additionally,  a warrant  was
issued to allow  Glenwood to acquire  35,000 shares of ANI Common Stock at $1.00
per share through  January 2005. The approximate  $49,500 value  associated with
the detachable warrant and the conversion  feature has been recorded  separately
from the note  liability,  as a  credit  to  additional  paid-in  capital.  This
allocation gave rise to additional  interest cost,  above the stated face amount
of interest, as the amount is accreted back to the total loan amount.

In order to improve the Company's liquidity,  during September 2002,  agreements
were finalized with Dr. Reddy,  Cambridge  Holdings,  Ltd,. and Glenwood Capital
Partners I, LP, to convert the total  amounts and accrued  interest due on these
convertible  obligations (all but the remaining  $500,000 due to Dr. Reddy) into
2,840,800  shares of ANI's common  stock.  The agreed upon  conversion  rate was
$0.55 per share, which at the time represented  approximately a 20% premium over
the trading price of the stock.  The agreed upon  conversion  rate was $0.55 per
share,  which at the  time  represented  approximately  a 20%  premium  over the
trading price of the stock.  Under accounting  principles  generally accepted in
the United States,  since the agreements  were modified to adjust the conversion
price from the originally  established terms, an inducement expense was required
to be recorded. The inducement expense was computed based upon the fair value of
the additional  shares issued,  over those that would have been issued under the
original  terms.  The  additional  expense  was  computed  to  be  approximately
$601,000,  which was  recorded  as debt  conversion  inducement  expense  on the
statement  of  operations  for the  year  ended  September  30,  2002,  with the
offsetting credit being recorded as additional paid-in capital.

                                       14
<PAGE>

Capital expenditures, primarily for manufacturing and facility improvement costs
for  the  fiscal  year  ending   September  30,  2003,  are  anticipated  to  be
approximately  $400,000 to $600,000. It is expected that funding for the capital
additions  will be provided out of a new credit  facility with a portion  funded
out of working capital.

Recent Accounting Pronouncements

The  Financial  Accounting  Standards  Board  ("FASB")  has issued  Statement of
Financial   Accounting   Standards  ("SFAS")  No.  143,  "Accounting  for  Asset
Retirement  Obligations" ("SFAS No. 143"),  addressing  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
fiscal year  beginning  October 1, 2002 for the  Company  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 liability is accreted to its then present value
each period, and the capitalized cost is depreciated over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount,  a gain or loss is recognized.  The Company does not anticipate that the
adoption of the new standard will have a significant  effect on its consolidated
financial statements.

The FASB has issued SFAS No. 144,  "Accounting for the Impairment or Disposal of
Long-Lived  Assets" ("SFAS No. 144"), which was adopted by the Company effective
October 1, 2001,  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"  ("SFAS  No.  121") 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.  Adoption of the new standard did not have a material impact on the
Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical  Corrections"  ("SFAS No.
145").  This statement  rescinds the requirement in SFAS No. 4, "Reporting Gains
and Losses from  Extinguishment of Debt" ("SFAS No. 4"), that material gains and
losses on the  extinguishment  of debt be treated as  extraordinary  items.  The
statement also amends SFAS No. 13,  "Accounting for Leases" ("SFAS No. 134"), to
eliminate  an   inconsistency   between  the   accounting   for   sale-leaseback
transactions  and the  accounting  for  certain  lease  modifications  that have
economic effects that are similar to  sale-leaseback  transactions.  Finally the
standard  makes a number of  consequential  and other  technical  corrections to
other standards.  The provisions of the statement  relating to the rescission of
SFAS  No. 4 are  effective  for  fiscal  years  beginning  after  May 15,  2002.
Provisions  of the  statement  relating  to the  amendment  of SFAS  No.  13 are
effective for transactions occurring after May 15, 2002 and the other provisions
of the statement are effective for financial  statements  issued on or after May
15, 2002. The Company has reviewed SFAS No. 145 and its adoption is not expected
to have a material effect on its consolidated financial statements.

In July 2002,  the FASB issued SFAS No.  146,  "Accounting  for Exit or Disposal
Activities"  ("SFAS No. 146").  SFAS No. 146 applies to costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines,  terminating
employees and contracts, and relocating plant facilities or personnel.  SFAS No.
146 will require a Company to disclose  information  about its exit and disposal
activities,  the related  costs,  and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity  is  initiated  and in any  subsequent  period  until the  activity  is
completed.  SFAS  No.  146 is  effective  prospectively  for  exit  or  disposal
activities  initiated after December 31, 2002, with earlier adoption encouraged.
SFAS No. 146 supersedes  Emerging  Issues Task Force Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a  Restructuring)",  and requires
liabilities  associated  with exit and  disposal  activities  to be  expensed as
incurred and to be measured at fair value.


                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.

                                       15
<PAGE>

               ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Advanced Nutraceuticals, Inc. Consolidated Financial Statements            Page
                                                                           ----

   Report of Independent Certified Public Accountants                      F-2

   Consolidated Balance Sheets as of September 30, 2002 and 2001           F-3

   Consolidated Statements of Operations and Comprehensive Income
   (Loss) for the Years Ended September 30, 2002, 2001 and 2000            F-4

   Consolidated Statement of Stockholders' Equity for the Years
   Ended September 30, 2002, 2001 and 2000                                 F-5

   Consolidated Statements of Cash Flows for the Years Ended
   September 30, 2002, 2001 and 2000                                       F-7

   Notes to Consolidated Financial Statements                              F-8

                                       F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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

     We have audited the  accompanying  consolidated  balance sheets of Advanced
Nutraceuticals,  Inc. (a Texas corporation) and Subsidiaries as of September 30,
2002 and  2001,  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,  2002.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Advanced
Nutraceuticals, Inc. and Subsidiaries as of September 30, 2002 and 2001, and the
results of their  operations and their cash flows for each of the three years in
the period ended September 30, 2002, in conformity  with  accounting  principles
generally accepted in the United States of America.

As discussed in Note 15 to the consolidated  financial  statements,  the Company
changed its method of accounting  for goodwill and other  intangible  assets for
the year ended September 30, 2002.


Grant Thornton LLP

/s/ Grant Thornton LLP
----------------------

Houston, Texas
December 16, 2002

                                       F-2
<PAGE>

<TABLE>
                          ADVANCED NUTRACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                  SEPTEMBER 30,
<CAPTION>
                                                                              2002             2001
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
                                     ASSETS

Current Assets:
    Cash and cash equivalents                                             $    793,023    $    781,847
    Receivables (Note 8)                                                     4,099,852       2,978,698
    Inventories (Notes 3 and 8)                                              2,053,268       1,734,395
    Deferred tax asset (Note 5)                                                    --          181,232
    Notes receivable (Note 4)                                                  184,282       1,150,000
    Prepaid expenses and other assets                                          329,362          97,228
                                                                          ------------    ------------
       Total Current Assets                                                  7,459,787       6,923,400

    Property and equipment, net (Notes 6, 8 and 9)                           9,280,558       9,728,865
    Goodwill (Notes 7 and 15)                                                7,563,913       8,727,553
    Other assets                                                               230,982         329,870
                                                                          ------------    ------------
                                                                          $ 24,535,240    $ 25,709,688
                                                                          ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Accounts payable                                                      $  2,027,039    $  1,892,884
    Accrued expenses and other liabilities                                     675,714         574,056
    Note Payable - related party (Note 9)                                      500,000            --
    Credit facility (Note 8)                                                 2,889,811       2,039,454
    Current portion of long-term debt (Note 9)                                 113,384         106,708
                                                                          ------------    ------------
            Total Current Liabilities                                        6,205,948       4,613,102

Deferred tax liability (Note 5)                                                   --           181,232
Long-term debt - related party (Note 9)                                           --         1,500,000
Long-term debt (Note 9)                                                      2,403,695       2,470,596
                                                                          ------------    ------------
           Total Liabilities                                                 8,609,643       8,764,930
                                                                          ------------    ------------

Commitments and contingencies (Note 10)                                           --              --

Stockholders' Equity (Note 11 and 12):
    Preferred stock, $.001 par value; 1,000,000 authorized; none issued           --              --
    Common stock; $.01 par value; 20,000,000 shares authorized;
            4,992,789 and 2,026,975 issued and outstanding                      49,928          20,270
    Additional paid-in capital                                              20,322,048      18,026,446
    Accumulated deficit                                                     (4,446,379)     (1,101,958)
                                                                          ------------    ------------
           Total Stockholders' Equity                                       15,925,597      16,944,758
                                                                          ------------    ------------
                                                                          $ 24,535,240    $ 25,709,688
                                                                          ============    ============
</TABLE>

                     See accompanying notes to consolidated
                              financial statements.

                                       F-3
<PAGE>


<TABLE>
                          ADVANCED NUTRACEUTICALS, INC.
      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                        FOR THE YEARS ENDED SEPTEMBER 30,
<CAPTION>

                                                                      2002            2001            2000
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
Net sales                                                         $ 21,624,750    $ 17,606,367    $ 16,067,889
Cost of sales                                                       14,988,723      12,298,116      10,570,347
                                                                  ------------    ------------    ------------
Gross profit                                                         6,636,027       5,308,251       5,497,542

General and administrative expenses                                  6,933,204       5,915,818       4,727,803
Reserve for notes receivable                                           365,419               0               0
Terminated acquisition costs                                           155,126               0               0
                                                                  ------------    ------------    ------------

Operating income (loss)                                               (817,722)       (607,567)        769,739
                                                                  ------------    ------------    ------------

Other income (expense):
    Interest expense, net                                             (756,639)       (843,329)       (546,373)
    Debt conversion inducement expense                                (600,800)              0               0
    Gain on debt settlement                                                  0         121,191               0
    Other, net                                                          15,293          63,723           2,645
                                                                  ------------    ------------    ------------
                                                                    (1,342,146)       (658,415)       (543,728)
                                                                  ------------    ------------    ------------
Income (loss) from continuing operations
    before income tax expense                                       (2,159,868)     (1,265,982)        226,011

Income tax expense (benefit) (Note 5)                                        0        (285,315)        260,000
                                                                  ------------    ------------    ------------

Loss from continuing operations before cumulative
   effect of accounting change                                      (2,159,868)       (980,667)        (33,989)

Income (loss) from discontinued operations, net of tax (Note 2)              0       1,145,540      (3,970,342)
Cumulative effect of accounting change (Note 15)                    (1,184,553)              0               0
                                                                  ------------    ------------    ------------

Net income (loss)                                                   (3,344,421)        164,873      (4,004,331)
                                                                  ------------    ------------    ------------

Other comprehensive income (loss):
    Unrealized gain on investments, net of tax                               0               0          45,500
    Foreign currency translation adjustment                                  0         (77,670)        157,919
                                                                  ------------    ------------    ------------
                                                                             0         (77,670)        203,419
                                                                  ------------    ------------    ------------
Total comprehensive income (loss)                                 $ (3,344,421)   $     87,203    $ (3,800,912)
                                                                  ============    ============    ============

Basic income (loss) per common share:
    Loss from continuing operations                               $       (.90)   $       (.48)   $       (.02)
    Cumulative effect of accounting change                                (.50)           --              --
    Income (loss) from discontinued operations                            --               .56           (2.06)
                                                                  ------------    ------------    ------------
          Net income (loss)                                       $      (1.40)   $        .08    $      (2.08)
                                                                  ============    ============    ============

Diluted income (loss) per common share:
    Loss from continuing operations                               $       (.90)   $       (.47)   $       (.02)
    Cumulative effect of accounting change                                (.50)           --              --
    Income (loss) from discontinued operations                            --               .55           (2.06)
                                                                  ------------    ------------    ------------
          Net income (loss)                                       $      (1.40)   $        .08    $      (2.08)
                                                                  ============    ============    ============

Weighted average common shares outstanding (Note 12):
     Basic                                                           2,388,631       2,026,975       1,928,438
                                                                  ============    ============    ============
     Diluted                                                         2,388,631       2,077,162       1,928,438
                                                                  ============    ============    ============
</TABLE>


                     See accompanying notes to consolidated
                             financial statements.

                                       F-4
<PAGE>

<TABLE>
                          ADVANCED NUTRACEUTICALS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000

<CAPTION>

                                                                                                 Additional       Retained
                                     Preferred Stock                  Common Stock                Paid-In         Earnings
                                 Shares           Amount          Shares          Amount          Capital          Deficit
                                ------------    ------------    ------------    ------------    ------------    ------------
Balance at
<S>                             <C>             <C>             <C>             <C>             <C>             <C>
     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
     investments, 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)
Net loss                                --              --              --              --              --        (3,344,421)
Value of warrants issued with
        convertible debt                --              --              --              --           120,258            --
Issuance of common stock
     on debt conversion                 --              --         2,840,800          28,408       2,057,831            --
Common stock issued for
     bonus \ earn out awards            --              --           125,014           1,250         117,513            --
                                ------------    ------------    ------------    ------------    ------------    ------------
Balance at
     September 30, 2002                 --      $       --         4,992,789    $     49,928    $ 20,322,048    $ (4,446,379)
                                ============    ============    ============    ============    ============    ============
</TABLE>

                                       F-5
<PAGE>

<TABLE>
                          ADVANCED NUTRACEUTICALS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
<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, 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
Issued 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
Net loss                                    --              --              --              --        (3,344,421)
Value of warrants issued with
        convertible debt                    --              --              --              --           120,258
Issuance of common stock
     on debt conversion                     --              --              --              --
2,086,239 Common stock issued for
        bonus \ earn out awards             --              --              --              --           118,763
                                    ------------    ------------    ------------    ------------    ------------
Balance at
     September 30, 2002             $       --      $       --              --      $       --      $ 15,925,597
                                    ============    ============    ============    ============    ============
</TABLE>
           See accompanying notes to consolidated financial statements


                                       F-6

<PAGE>

<TABLE>

                          ADVANCED NUTRACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED SEPTEMBER 30,
<CAPTION>

                                                                2002            2001            2000
                                                             -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>
Cash flows from operating activities:
    Net loss from continuing operations before
       cumulative effect of accounting change                $(2,159,868)   $  (980,667)   $   (33,989)
    Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
           Depreciation and amortization                         756,591      1,206,805        998,135
          Bad debt provision                                     831,946       (235,000)       200,000
          Expense recognized on debt conversion inducement       600,800           --             --
          Write-off of aborted acquisition costs                 155,126           --             --
          Deferred tax expense (benefit)                            --         (374,184)       (39,259)
          Changes in assets and liabilities:
              Receivables                                     (1,587,680)     1,781,678     (1,517,971)
              Inventories                                       (318,873)        72,908        333,187
              Prepaid and other assets                          (117,340)      (216,889)       (90,842)
              Accounts payable                                   134,155       (919,286)      (742,055)
              Deferred income                                       --         (111,111)       (55,556)
              Accrued expenses and other liabilities             247,069         75,423     (1,340,154)
                                                             -----------    -----------    -----------
       Net cash flows from continuing operations              (1,458,077)       299,677     (2,288,504)
       Net cash flows from discontinued operations                  --        2,879,222        771,046
                                                             -----------    -----------    -----------

Net cash flows from operating activities                      (1,458,077)     3,178,899     (1,517,458)
                                                             -----------    -----------    -----------


Cash flows from investing activities:
       Sale of subsidiary, net of expense                           --        2,486,529           --
       Collection of notes receivable                            610,500        228,111           --
       Acquisition of property and equipment                    (308,284)      (807,083)      (205,336)
       Acquired cash from acquisitions                              --             --          128,472
                                                             -----------    -----------    -----------

       Net cash flows from continuing operations                 302,216      1,907,557        (76,864)
       Net cash flows from discontinued operations                  --       (2,650,235)    (2,265,086)
                                                             -----------    -----------    -----------

Net cash flows from investing activities                         302,216       (742,678)    (2,341,950)
                                                             -----------    -----------    -----------

Cash flows from financing activities:
       Net borrowings (payments) on credit facility              850,357     (3,252,625)     2,323,197
       Borrowings on long term debt                              425,000      2,415,000           --
       Payments of long term debt - related parties                 --       (1,435,000)          --
       Payment of long term debt                                (108,320)    (1,328,082)          --
       Cash contribution from discontinued operations               --        1,556,249        738,912
                                                             -----------    -----------    -----------
       Net cash flows from continuing operations               1,167,037     (2,044,458)     3,062,109
       Net cash flows from discontinued operations                  --         (306,657)     1,494,040
                                                             -----------    -----------    -----------

Net cash flows from financing activities                       1,167,037     (2,351,115)     4,556,149
                                                             -----------    -----------    -----------

Net increase in cash and cash equivalents                         11,176         85,106        696,741

Cash and cash equivalents, beginning of year                     781,847        696,741           --
                                                             -----------    -----------    -----------

Cash and cash equivalents, end of year                       $   793,023    $   781,847    $   696,741
                                                             ===========    ===========    ===========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-7
<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  International,  LLC ("Everest"),  a privately-held entity. ANI
now operates as a contract and private label  manufacturer  of  nutritional  and
pharmaceutical  products  through  its  two  operating  subsidiaries,   Bactolac
Pharmaceutical Inc., and ANI Pharmaceuticals, Inc.

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, 2002 and 2001,  the Company's  cash in financial  institutions
exceeded the  federally  insured  deposit  limit by  approximately  $490,000 and
$530,000.

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. The fair market value of long-term
notes  receivable  and debt  obligations  are  estimated  to  approximate  their
carrying values based upon their stated interest rates.

Revenue Recognition

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

The  allowance  for  doubtful  accounts at  September  30, 2002 and 2001 totaled
$682,000 and $215,000.

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,  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 shown as discontinued due
to the sale, as disclosed in Note 2. No such losses were recognized for the year
ended September 30, 2002 and 2001.

                                       F-8
<PAGE>


                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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".  Effective  with the  adoption of  Statement of Financial
Accounting  Standards  ("SFAS") No. 142 "Goodwill and Other  Intangible  Assets"
("SFAS No.  142"),  management of the Company  evaluates  the carrying  value of
goodwill annually or whenever a possible impairment is indicated. See Note 15.

Stock Options and Warrants

The Company  accounts for stock options  issued to employees in accordance  with
Accounting  Principles  Board  opinion No. 25,  "Accounting  for Stock Issued to
Employees" ("APB No. 25") . During the years ended September 30, 2002, 2001, and
2000,  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"  ("SFAS No. 123").  This  statement
requires  that the Company  provide  proforma  information  regarding net income
(loss) and basic and diluted  earnings (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  13).
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.

Earnings (Loss) Per Common Share

Basic earnings (loss) per share includes no dilution and is computed by dividing
net earnings (loss)  available to stockholders by the weighted average 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.

Diluted  earnings per share for the year ended  September 30, 2002 and 2000, 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 ("US
GAAP")  requires  management to make estimates and  assumptions  that affect the
reported  amounts of assets and liabilities and disclosure of contingent  assets
and  liabilities at the date of the  consolidated  financial  statements and the
reported  amounts of revenues  and expenses  during the  reporting  period.  The
actual results could differ from those estimates.

                                       F-9
<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Recent Accounting Pronouncements

 The  Financial  Accounting  Standards  Board  ("FASB") has issued SFAS No. 143,
"Accounting  for Asset  Retirement  Obligations"  ("SFAS No.  143"),  addressing
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 fiscal  year  beginning  October 1, 2002 for the
Company 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 liability is
accreted to its then present  value each  period,  and the  capitalized  cost is
depreciated  over the useful  life of the related  asset.  If the  liability  is
settled  for an  amount  other  than  the  recorded  amount,  a gain  or loss is
recognized.  The  Company  does  not  anticipate  that the  adoption  of the new
standard  will  have  a  significant   effect  on  its  consolidated   financial
statements.

The FASB has issued SFAS No. 144,  "Accounting for the Impairment or Disposal of
Long-Lived  Assets" ("SFAS No. 144"), which was adopted by the Company effective
October 1, 2001,  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"  ("SFAS  No.  121") 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.  Adoption of the new standard did not have a material impact on the
Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical  Corrections"  ("SFAS No.
145").  This statement  rescinds the requirement in SFAS No. 4, "Reporting Gains
and Losses from  Extinguishment of Debt" ("SFAS No. 4"), that material gains and
losses on the  extinguishment  of debt be treated as  extraordinary  items.  The
statement also amends SFAS No. 13,  "Accounting for Leases" ("SFAS No. 134"), to
eliminate  an   inconsistency   between  the   accounting   for   sale-leaseback
transactions  and the  accounting  for  certain  lease  modifications  that have
economic effects that are similar to  sale-leaseback  transactions.  Finally the
standard  makes a number of  consequential  and other  technical  corrections to
other standards.  The provisions of the statement  relating to the rescission of
SFAS  No. 4 are  effective  for  fiscal  years  beginning  after  May 15,  2002.
Provisions  of the  statement  relating  to the  amendment  of SFAS  No.  13 are
effective for transactions occurring after May 15, 2002 and the other provisions
of the statement are effective for financial  statements  issued on or after May
15, 2002. The Company has reviewed SFAS No. 145 and its adoption is not expected
to have a material effect on its consolidated financial statements.

In July 2002,  the FASB issued SFAS No.  146,  "Accounting  for Exit or Disposal
Activities"  ("SFAS No. 146").  SFAS No. 146 applies to costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines,  terminating
employees and contracts, and relocating plant facilities or personnel.  SFAS No.
146 will require a Company to disclose  information  about its exit and disposal
activities,  the related  costs,  and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity  is  initiated  and in any  subsequent  period  until the  activity  is
completed.  SFAS  No.  146 is  effective  prospectively  for  exit  or  disposal
activities  initiated after December 31, 2002, with earlier adoption encouraged.
SFAS No. 146 supersedes  Emerging  Issues Task Force Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a  Restructuring)",  and requires
liabilities  associated  with exit and  disposal  activities  to be  expensed as
incurred and to be measured at fair value.

Reclassifications

For  financial  reporting  purposes  certain  amounts  from  the  2001  and 2000
financial  statements have been reclassified to conform to the presentation used
for 2002.


                                      F-10
<PAGE>


                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED 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,
NFLI, to Everest.  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. ("Bactolac") 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,  which the Company considers  unlikely at the
present time and no value has been associated with this earn-out. 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 was unable to  determine  that it is probable  that the future cash flows
from NFLI's  operations  would 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 at the date of the
sale. ANI accounts 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 2001 and 2000 consolidated  financial statements and related
notes  thereto were restated to present the  operations of NFLI as  discontinued
operations.

Certain information with respect to the discontinued  operations of NFLI for the
year ended  September 30, 2000,  and for the period through the sale in 2001 are
as follows:


                                                      2001*           2000
                                                      -----           ----

Net sales                                      $  30,341,242    $   55,440,424
Cost of sales                                     19,891,489        38,637,997
                                                 -----------       -----------
Gross profit                                      10,449,753        16,802,427

Operating expenses                                10,236,064        21,170,883
Other income (expense)                               (44,436)         (498,337)
                                                 -----------       ------------

Income (loss) before income tax benefit              169,253        (4,866,793)
Income tax benefit                                  (976,287)         (896,451)
                                                 -----------          ---------
Income (loss) from discontinued operations     $   1,145,540    $   (3,970,342)
                                                   =========       ===========

(*) Period up to sale.

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.  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:
                                         2002          2001
                                         ----          ----

       Finished goods                $  319,300    $   314,187
       Work in process                  144,681         70,436
       Raw materials                  1,589,287      1,349,772
                                      ---------      ---------
       Total inventories             $2,053,268     $1,734,395
                                      =========      =========

NOTE 4 - NOTES RECEIVABLE

At the 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  ("Note").  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 would 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).  At the June 2002 due date
of the  $650,000  note,  the Company  sent a demand  notice for payment and NFLI
responded  that they  believed  that they were  entitled  to certain  claims for
offset  against  certain of the amounts owed. The Company and NFLI are currently
in  discussions  in attempting to resolve this matter.  During the quarter ended
September 30, 2002,  management of the Company recorded an additional  allowance
of approximately  $365,000,  against the net balances due under the $5.0 million
Note and the $650,000 note due to Bactolac, based upon current assessment of the
probability of receiving payments under those notes. Any additional  collections
above the net amount carried will be recorded as income as collected.

During the year ended  September 30, 2001, the Company  collected  approximately
$228,000 in total payments under the Note,  resulting in a net carrying  balance
of the $5.0 million Note and the $650,000 note,  after reserves of approximately
$1,160,000,  of which  $10,000  was long term and  included  with other  assets.
During the year ended  September 30, 2002, the Company  collected  approximately
$567,000 in total payments under the Note,  resulting in a net carrying  balance
of the $5.0  million Note and the $650,000  note,  after  reserves and other net
adjustments of  approximately  $184,000.  At September 30, 2002, the face amount
outstanding  on the $5.0 million Note was $4.5 million,  prior to the originally
established  reserve  and the  additional  reserve  recorded  for the year ended
September 30, 2002.

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, 2002, 2001 and 2000 consisted of the following:


                                          2002         2001         2000
                                        ---------    ---------    ---------
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  tax  expense
    (benefit)  computed at the statutory  rate with income taxes
    as reported for the years ended September 30:

<TABLE>
<CAPTION>
                                                  2002         2001          2000
                                                ---------    ---------    ---------
<S>                                             <C>          <C>          <C>
Expected income tax expense (benefit) at 34%    $(734,000)   $(472,000)   $  77,000
State taxes, net of federal benefit                  --        (83,000)      55,000
Non deductible goodwill                              --        213,000      125,000
Non deductible debt conversion expense            204,000         --            --
Increase in valuation allowance
      for deferred tax asset                      525,000         --            --


Other items, net                                    5,000        8,000        3,000
                                                ---------    ---------    ---------
Income tax (benefit) expense                    $    --      $(334,000)   $ 260,000
                                                =========    =========    =========
</TABLE>

                                      F-12
<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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,
2002 and 2001:

               Assets                           2002           2001
               ------                        -----------    -----------
Loss carryforwards                           $ 3,045,000    $ 3,255,000
Receivable allowance for doubtful accounts       273,000         86,000
Inventory valuation write-offs                    77,000         74,000
Note receivable allowance                      1,602,000      1,445,000
Other                                             41,856         20,890
                                             -----------    -----------
Deferred tax assets                            5,038,856      4,880,890
Less valuation allowance                      (2,401,048)    (2,130,430)
                                             -----------    -----------
                                             $ 2,637,808    $ 2,750,460
                                             ===========    ===========

       Liability
Fixed assets                                 $ 2,637,808    $ 2,750,460
                                             ===========    ===========

At September 30, 2002,  the Company has a net  operating  loss  carryforward  of
approximately  $4.4 million,  which  expires  through  2021.  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.


NOTE 6 -- PROPERTY AND EQUIPMENT

Property  and  equipment  and their  estimated  useful lives are  summarized  as
follows:
<TABLE>
<CAPTION>

                                                                               September 30,
                                                                               ------------
                                                    Lives        2002               2001
                                                    -------    ------------    ------------
<S>                                                 <C>        <C>             <C>
Land                                                           $  1,763,567    $  1,763,567
Building and improvements                                15       2,707,215       2,671,906
Equipment                                                 7       6,476,312       6,230,323
Leasehold improvements                                    5         278,357         257,372
Furniture and fixtures                                 5-10          17,702          17,702
                                                               ------------    ------------
                                                                 11,243,153      10,940,870

Less: Accumulated depreciation and amortization                  (1,962,595)     (1,212,005)
                                                               ------------    ------------
                                                               $  9,280,558    $  9,728,865
                                                               ============    ============
</TABLE>


NOTE 7 -- ACQUISITIONS

On November 17, 1999,  the Company  finalized the  acquisitions  of 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  Corp.  (now  operating  as ANI
Pharmaceuticals,  Inc.,  "ANIP") was originally Series A Preferred Stock,  which
were subsequently  converted into common stock on a ten for one basis. Bactolac,
headquartered in Hauppauge,  New York, manufactures  nutritional supplements for
private label customers.  The purchase price of Bactolac consisted of $2,500,000
in cash, a $2,500,000  subordinated  promissory  note and 242,078  shares of the
Company's common stock. Additionally,  22,008 shares of common stock were issued
in each of 2002 and 2001 under an earn-out  agreement.  On December 1, 1999, the
Company  finalized  the  acquisition  of ANIP (then a division of Bactolac,  now
operating  as a  separate  corporate  subsidiary).  The  purchase  price of ANIP
consisted of $750,000 in cash, a $500,000 note payable and 123,240 shares of the
Company's common stock. Additionally,  up to 264,085 shares of common stock were
issuable  pursuant  to  an  earn-out  agreement,  which  has  now  expired.  The
acquisitions were 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.

                                      F-13
<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 was being amortized on a straight-line basis over twenty years,
prior to the adoption of SFAS No. 142 as of October 1, 2001.

Pro forma summary of consolidated results of operations of the Company as if the
acquisitions  discussed  above had  occurred at the  beginning of the year ended
September 30, 2000,  including certain pro forma adjustments for amortization of
the goodwill,  additional depreciation expense as a result of the step-up in the
basis of fixed assets and increased  interest  expense on the acquisition  debt,
are summarized following. 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.  Had the  acquisitions  occurred as of October 1, 1999,  net
sales would have been $18,762,000, net loss would have been $(4,378,000) and the
net loss per share $(.52).

NOTE 8 - CREDIT FACILITY

To provide  financing for the  acquisitions  during 1999, 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 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. 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,  2002,  there  was
$2,225,777  outstanding under the revolving credit line and $664,034 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 ratios, as well as limitations on capital expenditures. The Company
has not been in compliance  with minimum net worth and fixed charge ratios under
the Agreement and while the lender granted the Company waivers of those defaults
on December 26, 2001,  ANI has not  requested  any  additional  waivers from its
lender.  Due to the due date of the loan and the existing  defaults,  the entire
loan amount has been classified as a current  liability on the Company's balance
sheet, as of September 30, 2002 and 2001.

GECC has notified  the Company  that it is closing the office that  services the
Company  and has  decided,  due to the  smaller  size of the  Company's  average
outstanding loan balances, not to pursue a continuing loan arrangement with ANI.
GECC agreed to extend the  maturity of the  facility  to January 31,  2003.  The
Company is currently  under-going  due  diligence by a new lender to replace the
current senior lender. Based upon discussions with the new lender, management of
the Company currently anticipates that a new lending agreement will be finalized
under acceptable terms, prior to the January 31, 2003,  extended due date of the
current agreement.  Should this new agreement not be able to be finalized by the
extended due date, ANI has received and would consider a sale-leaseback proposal
from  another  entity  which ANI  believes  could be closed by January 31, 2003,
however  the  terms  of the  proposed  sale-leaseback  financing  would  be more
expensive.  Depending upon the status of alternative financing arrangements near
the end of January 2003, ANI would also consider  requesting a further extension
from its current lender,  which if such lender agreed to an additional extension
and they are under no obligation or agreement to do so, could require ANI to pay
a  substantial  fee.  If the  Company  is not  successful  in  refinancing  this
obligation,  the  financial  position  and  liquidity  of the  Company  could be
adversely affected.

NOTE 9 - LONG-TERM DEBT AND RELATED PARTY NOTES

As a result of the  acquisitions of Bactolac and ANIP,  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
mortgage  obligation on the ANIP facility.  During the year ended  September 30,
2001,  the  mortgage  obligation  was  refinanced  into  a  long-term  mortgage.
Following is a summary of such obligations at September 30:

                                                       2002         2001
                                                     --------    ----------
    Related party Note -
      Stock purchase note arising from
      purchase of Bactolac (a)                       $500,000    $1,500,000
                                                     ========    ==========


                                      F-14
<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


             Long-term debt:
    Mortgage obligation on ANIP facility (b)     $2,375,456   $2,404,112
    Other installment obligations                   141,623      173,192
                                                 ----------   ----------
        Total                                     2,517,079    2,577,304
    Less current portion                            113,384      106,708
                                                 ----------   ----------
    Long-term portion                            $2,403,695   $2,470,596
                                                 ==========   ==========

(a)  The Bactolac  stock  purchase note is  subordinate to the GECC facility and
     bears  interest  at 7%, and subject to the  approval  of GECC,  was 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.  During September
     2002,  the  Company  reached  agreement  with the holder to convert all but
     $500,000 of the remaining loan balance into shares of the company's  common
     stock at $0.55 per share.  The Company  anticipates  repaying the remaining
     $500,000  outstanding  under the agreement during the second quarter of the
     fiscal year beginning October 1, 2002.

(b)  As of  April  30,  2001,  the  mortgage   originally  assumed  in the  ANIP
     acquisition  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 ANIP land and
     building.

During  January  2002,  ANI  received a  $250,000,  subordinated  7% loan from a
company,  Cambridge Holdings, Ltd., that is affiliated with ANI's chairman, Greg
Pusey.  The note matures in one year, is convertible at the option of the holder
into shares of ANI common stock at $1.00 per share,  and also includes a warrant
to allow the holder to acquire  50,000  shares of ANI common  stock at $1.00 per
share, through June 2004. The proceeds of the loan were used as working capital.
The approximate  $70,700 value  associated  with the detachable  warrant and the
conversion  feature has been recorded  separately from the note liability,  as a
credit to additional  paid-in  capital.  This allocation gave rise to additional
interest  cost,  above the  stated  face  amount of  interest,  as the amount is
accreted back to the total loan amount.

During July 2002, ANI borrowed  $175,000 from Glenwood Capital Partners I, LP, a
partnership managed by Randall D. Humphreys,  a director of the Company.  The 7%
note matures in one year,  and is  convertible  at the option of the holder into
shares of ANI  common  stock at $1.00 per  share.  Additionally,  a warrant  was
issued to allow  Glenwood to acquire  35,000 shares of ANI Common Stock at $1.00
per share through  January 2005. The approximate  $49,500 value  associated with
the detachable warrant and the conversion  feature has been recorded  separately
from the note  liability,  as a  credit  to  additional  paid-in  capital.  This
allocation gave rise to additional  interest cost,  above the stated face amount
of interest, as the amount is accreted back to the total loan amount.

During  September 2002,  under  agreements  finalized with Dr. Reddy,  Cambridge
Holdings,  Ltd,.  and  Glenwood  Capital  Partners I, LP, the total  amounts and
accrued interest due on the above convertible obligations (all but the remaining
$500,000 due to Dr. Reddy) were converted into 2,840,800  shares of ANI's common
stock. The agreement upon conversion rate was $0.55 per share, which at the time
represented  approximately  a 20% premium  over the trading  price of the stock.
Under US GAAP, since the agreements were modified to adjust the conversion price
from the originally  established  terms, an inducement cost of the  modification
was  required to be recorded.  The cost was computed  based upon the fair market
value on the date of the conversion of the  additional  shares issued over those
that would have been issued under the original  terms.  The additional  cost was
computed to be approximately $601,000,  which was recorded as additional expense
on the statement of operations for the year ended  September 30, 2002,  with the
offsetting credit being recorded as additional paid-in capital.

                                      F-15
<PAGE>


                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Scheduled  future  maturities  of  long-term  debt  as of  September  30,  2002,
exclusive of the  $500,000  payable to Dr.  Reddy and the credit  facility,  are
approximately as follows:

                 Year Ending September 30,
                 ------------------------
                            2003                      $   113,000
                            2004                           71,000
                            2005                           77,000
                            2006                           55,000
                            2007                           62,000
                         Thereafter                     2,139,000
                                                        ---------
                                                      $ 2,517,000

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. ANI Pharmaceuticals, Inc., 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 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)(Segment  information  for 2000 is not presented
due to the non-comparability of the short acquisition year.):
<TABLE>
<CAPTION>

                                       Vitamins and   Pharmaceutical     Corporate
                                       Supplements       Products        Overhead       Totals
                                       -----------       --------        --------       ------
Year ended September 30, 2002
-----------------------------
<S>                                     <C>              <C>             <C>           <C>
Net sales                               $ 12,364         $  9,261        $   --        $ 21,625
Gross profit                               4,141            2,495            --           6,636
General and administrative expenses        2,225            4,059           1,170         7,454
Operating income (loss) from
     continuing operations                 1,916           (1,564)         (1,170)         (818)
Interest expense                              80              519             758         1,357
Net income (loss) from
     continuing operations                 1,866           (2,083)         (1,943)       (2,160)

Cumulative accounting change                --             (1,185)           --          (1,185)
Capital expenditures                         160              148            --             308
Depreciation and amortization                212              543               2           757
Identifiable assets                       11,214           12,258           1,063        24,535

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           (1,464)         (1,392)       (1,266)
Capital expenditures                         853               72               6           931
Depreciation and amortization                492              605             110         1,207
Identifiable assets                       11,133           11,945           2,632        25,710
</TABLE>

                                      F-16
<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                 2002       2001
                        --------                 ----       ----
                           A                    16.3%       14.6%
                           B                       0%       13.4%
                           C                    13.4%        6.3%

Foreign Sales

Export sales were  approximately  $1,480,000  and $1,610,000 for the years ended
September 30, 2002 and 2001. 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,  2002,  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, 2002, 2001 and 2000 amounted to approximately $425,000,  $400,000,
and $200,000.  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  $30,000 through May 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,
      ------------------------
                             2003                     $365,000
                             2004                      370,000

                             2005                      250,000
                                                      --------
                                                      $985,000

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. One of the agreements provides
for a  commitment  extending  beyond one year,  requiring  monthly  payments  of
approximately $21,000 through November 2004.

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.

                                      F-17
<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 1,000,000 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 was  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)  reverse 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
was at the discretion of the Company's Board of Directors.  The 1993 Plan is now
expired.

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 1,021,250  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, 2002,  there
were 975,000 shares reserved for the grant of options under the 1995 plan.

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 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.

Other Options and Warrants

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.  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.  The Company's
Board of  Directors  had extended  the warrant  expiration  date to December 31,
2001, and they are now expired. 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,  and the warrant expired
in 2001. 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.

<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the Cambridge  Holdings,  Ltd., and Glenwood Capital Partners
I, LP, loan that the Company  received during the year ended September 30, 2002,
a total of 85,000  warrants  were  issued  to these  entities  to allow  them to
acquire shares of ANI Common Stock at $1.00 per share,  as further  disclosed in
Note 9.

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 2002,  2001 and 2000, a dividend yield of 0%, 0%
and 0%; a risk-free  interest  rate of 3.8%,  5.0% and 5.5%;  an  expected  life
ranging from 5-10 years;  and an expected  volatility  of 81.5%,  134% and 107%,
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, 2002,  2001
and 2000 would have been reduced as follows:

<TABLE>
<CAPTION>
                                                     2002            2001           2000
                                                 --------------   -----------    -----------
<S>                                              <C>              <C>            <C>
         Net income (loss):
     As reported                                 $   (3,344,421)  $   164,873    $(4,004,331)
                                                 ==============   ===========    ===========
     Pro forma                                   $   (3,420,678)  $  (358,140)   $(4,695,866)
                                                 ==============   ===========    ===========
Basic and diluted income (loss) per share:
     As reported                                 $        (1.40)  $       .08    $     (2.08)
                                                 ==============   ===========    ===========
     Pro forma                                   $        (1.43)  $      (.18)   $     (2.44)
                                                 ==============   ===========    ===========
</TABLE>

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, 1999               174,970        $24.04           202,776        $18.36
                                                          ---------                        --------

           Granted                                          209,968        $10.60               --            --
           Exercised                                           --             --                --            --
           Forfeited                                        (26,583)       $12.36               --            --
           Cancelled                                        (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                --            --
           Cancelled                                       (138,204)       $19.99           (17,500)        25.00
         Outstanding as of September 30, 2001               581,475         $3.54           185,276        $17.74
                                                          ---------                        --------

           Granted                                          410,000          $.48            85,000         $1.00
           Exercised                                           --              --                --            --
           Forfeited                                        (16,806)       $13.04                --            --
           Cancelled                                           --              --          (112,776)       $15,00
         Outstanding as of September 30, 2002               974,669         $2.09           157,500        $10.67
                                                          =========                        ========

         Exercisable as of September 30,
           2000                                             114,636        $31.48           202,776        $18.36
           2001                                              50,005        $16.73           185,276        $17.74
           2002                                             230,270         $5.07           157,500        $10.67

         Weighted average fair value of grants
            during the year ended September 30,
              2000                                                          $9.28                              --
              2001                                                          $9.36                            $--
              2002                                                           $.48                         $ 1.00
                                                                          =======                         ========
</TABLE>
                                      F-19
<PAGE>

                          ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<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>
$   .46 -    $   7.90         869,125            9.3               $   .87             153,055          $   1.21
   7.91 -       15.80          99,294            6.5                 10.70              70,965             10.73
  15.81 -       23.70              --             --                    --                  --                --
  23.71 -       31.60           3,750            0.2                 28.00               3,750             28.00
  31.61 -       39.50              --             --                    --                  --                --
  39.51 -       47.40           2,500            4.1                 46.00               2,500             46.00
  47.41 -       55.30              --             --                    --                  --                --
  55.31 -       63.20              --             --                    --                  --                --
  63.21 -       71.10              --             --                    --                  --                --
  71.11 -       79.00              --             --                    --                  --                --
                              -------             --                 -----              ------            ------
                              974,669            8.9               $  2.09             230,270          $   5.07
                              =======            ===                ======             =======           =======
</TABLE>

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

NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of non-cash investing and financing activities:
<TABLE>
<CAPTION>

                                                               2002                 2001                2000
                                                            -----------         -------------        ----------
<S>                                                         <C>                 <C>                  <C>
     Purchase of property and equipment under
         Capital lease                                      $        --         $     140,000        $    --

     Issuance of common stock for debt conversion           $ 1,425,000         $        --          $    --

     Issuance of common stock under earnout \
          bonus agreements                                  $   119,000         $      30,000        $    --

     Sale of NFLI transaction
         Promissory Note taken in sale                      $        --         $   5,000,000        $    --
         Establish reserve for 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)         $    (5,000)        $    (825,000)       $    --

     Interest paid                                          $   748,000         $     798,000        $  540,000
</TABLE>

o    2001 Tax refunds relate to the discontinued NFLI operations.

<PAGE>

NOTE 15 -- GOODWILL AND OTHER INTANGIBLE ASSETS

In  connection  with  the  1999  acquisitions,  goodwill  of  $8.3  million  was
originally  recorded in connection with the Bactolac segment and $1.4 million in
connection with the ANIP segment.  During 2001 and 2002,  Bactolac  goodwill was
increased  by $30,265 and  $20,913,  representing  the fair value of shares that
were  issued  under the terms of the earn out  agreement.  As  described  below,
effective October 1, 2002 a charge was recorded of approximately $1.2 million to
write-off the total amount of goodwill  associated with the ANIP segment.  As of
September  30, 2002 the $7.6 net  remaining  balance of goodwill was  associated
with the Bactolac segment.

The Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations"  ("SFAS No.  141") and No.  142,  "Goodwill  and Other  Intangible
Assets"  ("SFAS No. 142") during July 2001.  SFAS No. 141 requires that business
combinations  initiated  subsequent  to June 30, 2001 must be  accounted  for by
using the purchase method of accounting. SFAS No. 142 supersedes APB Opinion No.
17,  "Intangible  Assets,"  ("APB 17")  however;  the new  statement  will carry
forward provisions in APB 17 related to internally  developed intangible assets.
SFAS No. 142 changes the accounting for goodwill from an amortization  method to
an impairment-only  approach.  Under SFAS No. 142, goodwill and other indefinite
lived  intangible  assets  must  be  tested  annually  and  whenever  events  or
circumstances  occur  indicating  that goodwill  might be impaired.  The Company
adopted and applied  SFAS No. 142 as of October 1, 2001,  the  beginning  of the
Company's  Fiscal Year 2002.  Pursuant to the transition  provisions of SFAS No.
142, the Company had until March 31, 2002, six months from the date of adoption,
to perform a comparison  of the fair value of each of its  reporting  units with
its carrying amount, including goodwill, as of the beginning of the year. If the
fair value of a reporting  unit  exceeds its  carrying  amount,  goodwill is not
considered  impaired.  If the carrying  value exceeds the reporting  unit's fair
value, a calculation of the implied fair value of the reporting  unit's goodwill
is made and  compared to the carrying  amount of the goodwill  before the end of
the year. Upon  determination that goodwill was impaired at October 1, 2001, the
Company  recognized  the loss as a cumulative  effect of a change in  accounting
principle  in  accordance  with APB  Opinion  No. 20  (retroactive  to the first
quarter of Fiscal 2002). In accordance with SFAS No. 142, the Company determined
it had two reporting  units:  Bactolac and ANIP. The fair value of the reporting
units was  determined  using a market  approach  based on peer  group  analysis,
completed transactions and discounted cash flows. As a result of the adoption of
SFAS 142 and the  required  comparison  of implied  fair  value to the  carrying
amount of goodwill as a result of continued losses at the Gulfport operation, as
of  October  1,  2001,  the  Company  recorded  a  one-time  noncash  charge  of
approximately  $1.2  million  to  write-off  the total  amount  of its  goodwill
associated with ANIP's operations located in Gulfport,  Mississippi. The Company
has  completed  its  impairment  assessment  and the  write-down  recorded  as a
cumulative  change in  accounting  principle  is deemed  final.  Such  charge is
non-operational  and is reflected as a cumulative effect of an accounting change
in the accompanying consolidated statement of operations. It was determined that
no adjustment of the goodwill associated with the Bactolac segment was required,
and accordingly the entire remaining  goodwill is associated with Bactolac.  The
following  reconciliation  illustrates the pro forma impact that the adoption of
SFAS No. 142 would have had on the  Company's net income (loss) and earnings per
share had the adoption occurred as of October 1, 1999:
<TABLE>
<CAPTION>
                                                             Years Ended September 30,
                                                               2001           2000
                                                            -----------    -----------
<S>                                                         <C>            <C>
Net income (loss):
   Reported income (loss) from continuing operations        $  (981,000)   $   (34,000)
   Add: Goodwill amortization                                   531,000        311,000
                                                            -----------    -----------
   Adjusted income (loss) from continuing operations           (450,000)       277,000
   Income (loss) from discontinued operations, net of tax     1,146,000     (3,970,000)
                                                            -----------    -----------

   Adjusted net income (loss)                               $   695,000    $(3,693,000)
                                                            ===========    ===========

Basic income (loss) per share:
   Reported income (loss) from continuing operations        $     (0.48)   $     (0.02)
   Add: Goodwill amortization                                      0.26           0.16
                                                            -----------    -----------

   Adjusted net income (loss) from continuing operations          (0.23)          0.14
   Income from discontinued operations, net of tax                 0.57          (2.06)
                                                            -----------    -----------

   Adjusted net income (loss)                               $      0.34    $     (1.92)
                                                            ===========    ===========

Weighted average shares outstanding                           2,027,000      1,928,000
                                                            ===========    ===========
</TABLE>


NOTE 16 - TERMINATED ACQUISITION COSTS

During  September 2001 the Company  entered into an agreement to acquire certain
assets of York Pharmaceuticals,  Inc. ("York"), including equipment and customer
list.  Following  the  expiration  of the  agreement,  the Company  continued to
negotiate with the York  stockholders to attempt to conclude a transaction.  The
Company was unable to finalize an  acceptable  agreement  and during  2002,  the
parties agreed to terminate further discussions. As a result of the termination,
approximately  $155,000 in net  accumulated  acquisition  related  expenses were
written off during the quarter ended June 30, 2002.

                                      F-20
<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.

                                     PART IV

Item 14.  CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

The  management of the Company,  including the Chief  Executive  Officer and the
Chief Financial Officer, has conducted an evaluation of the effectiveness of the
Company's  disclosure  controls and procedures pursuant to Rule 13a-14 under the
Securities  Exchange Act of 1934 as of a date (the "Evaluation  Date") within 90
days prior to the filing  date of this  report.  Based on that  evaluation,  the
Chief Executive  Officer and the Chief Financial  Officer  concluded that, as of
the Evaluation  Date,  the Company's  disclosure  controls and  procedures  were
effective  in ensuring  that all  material  information  relating to the Company
required  to be filed in the  annual  report  has been  made  known to them in a
timely manner.

(b)  Changes in Internal Controls

There have been no significant  changes made in the Company's  internal controls
or in other factors that could significantly affect internal controls subsequent
to the Evaluation Date.

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

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.

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. **


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 10.64   Conversion notice of Pailla M. Reddy dated August 26, 2002.

Exhibit 10.65   Conversion notice of Cambridge Holdings, Ltd., dated August
                26, 2002.

Exhibit 10.66   Conversion notice of Glenwood Capital Partners I, L.P. dated
                August 26, 2002.

Exhibit 10.67   Agreement dated July 19, 2002, between Advanced Nutraceuticals,
                Inc. and Glenwood Capital Partners I, L.P.

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.

     **   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.

     **** These  exhibits  were  previously  filed as exhibits to the  Company's
          Report on Form 10-K for the fiscal year ended  September 30, 2001, and
          are incorporated herein by reference.

     (b)  Reports on Form 8-K On  September  13, 2002,  the Company  filed an 8K
          Report  reporting  under  Item  5  the  issuance  of a  press  release
          regarding  conversion into the Company's  common of convertible  notes
          made by the Company.

     (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 30, 2002                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.


Date:    December 30, 2002                /s/ Gregory Pusey
                                          --------------------------------------
                                          Gregory Pusey, Chairman, President,
                                          Chief Executive Officer and Director


Date:    December 30, 2002                /s/ Jeff McGonegal
                                          --------------------------------------
                                          Jeff McGonegal, Senior Vice
                                          President of Finance, Chief Financial
                                          Officer and Secretary


Date:    December 30, 2002                /s/ F. Wayne Ballenger
                                          --------------------------------------
                                          F. Wayne Ballenger, Director


Date:    December 27, 2002                /s/ Randall D. Humphries
                                          --------------------------------------
                                          Randall D. Humphries, Director


Date:    December 30, 2002                /s/ M.F. Florence
                                          --------------------------------------
                                          M. F. Florence, Director


Date:    December 30, 2002                /s/ Pailla Reddy
                                          --------------------------------------
                                          Pailla Reddy, Director



<PAGE>


Each of the undersigned certifies that:

1.   I have reviewed this annual report on Form 10-K of Advanced Nutraceuticals,
     Inc. (the "Company");

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the  statements  made,  in light of  circumstances  under  which  such
     statements  were made, not misleading with respect to the period covered by
     this annual report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the Company as of, and for, the periods presented in this annual report.

4.   The  Company's  other  certifying   officers  and  I  are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material   information   relating  to  the  Company,   including   its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the effectiveness of the Company's  disclosure  controls and
          procedures  as of a date  within 90 days prior to the  filing  date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The Company's other certifying officers and I have disclosed,  based on our
     most recent  evaluation,  to the Company's auditors and the audit committee
     of  Company's  board of directors  (or persons  performing  the  equivalent
     functions);

     a)   all  significant  deficiencies  in the design or operation of internal
          controls which could adversely affect the Company's ability to record,
          process,  summarize and report  financial data and have identified for
          the Company's  auditors any material  weaknesses in internal controls;
          and

     b)   any fraud, whether or not material,  that involves management or other
          employees  who  have a  significant  role  in the  Company's  internal
          controls; and

<PAGE>



6.   The Company's other certifying officers and I have indicated in this annual
     report whether or not there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date:    December 30, 2002                     By:  /s/ Gregory Pusey
                                                    ----------------------------
                                                    Gregory Pusey
                                                    President and Chief
                                                    Executive Officer


Date:    December 30, 2002                     By:  /s/ Jeffrey G. McGonegal
                                                    ----------------------------
                                                    Jeffrey G. McGonegal
                                                    Senior Vice President-Chief
                                                    Financial Officer