<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                  FORM 10-KSB

            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, 1996                         
               

               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
                                                -------

                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                    --------------------------------------
                (Name of Small Business Issuer in its Charter)

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

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


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

          Securities Registered Pursuant to Section 12(b) of the Act:
                                        
                                                      Name of each Exchange
        Title of each Class                            on Which Registered
               NONE                                           NONE

          Securities Registered Pursuant to Section 12(g) of the Act:
                                        
                          $.01 par value common stock
                          ---------------------------
                               (Title of Class)

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]

        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]

        Registrant's revenues for the fiscal year ended September 30, 1996:
$97,404,000

        The aggregate market value of the voting stock held by non-affiliates of
the Registrant on December 18, 1996 was $46,646,250.

        The number of shares outstanding of the Registrant's common stock on
December 18, 1996 was 5,568,562.

                      DOCUMENTS INCORPORATED BY REFERENCE

        Part III of this Form 10-KSB is incorporated by reference to the
Registrant's definitive proxy statement expected to be filed within 120 days of
the Registrant's most recent fiscal year.

        Transitional Small Business Disclosure Format (check one): 
Yes [ ] No [X]
<PAGE>
 
                                    PART I

                       ITEM 1.  DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT

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

        The Company develops products that are designed for health-conscious
consumers, and sells those products to consumers through its network of
independent distributors.  The Company has developed a network of approximately
87,400 distributors.  The Company offers a product line of approximately 320
products in eight categories, including nutritional supplements, health foods,
weight management items, skin care products, and other consumer products.

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

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

        The Company's marketing program is designed to provide incentive for
distributors to build an organization of recruited distributors in their
downline to maximize their earning potential.  The Company has experienced a
substantial increase in the number of distributors.  The number of distributors
increased from approximately 37,800 on September 30, 1994 to 57,300 on September
30, 1995.  During the fiscal year ended September 30, 1996, the number of
distributors increased to 87,400.

        In 1996 the Company's marketing program became the subject of regulatory
scrutiny and the Company was named as a defendant in class action lawsuits.  The
disposition of these matters could have a material effect on the Company's
operations and financial condition.  See "Disclosure Regarding Forward-Looking
Statements; Risk Factors" below and Items 3, 6 and 7.

        The Company purchases most of its products directly from manufacturers
and sells them to its independent distributors located in all 50 states, the
District of Columbia, Canada, Guam, Korea, the Philippines, Puerto Rico, and the
United Kingdom. The Company expects to expand its efforts in these countries and
in other parts of the world.

        The Company intends to pursue its business strategy of increasing sales
and profitability by (1) attracting and retaining distributors to its network
marketing system; (2) increasing product sales to existing distributors; and (3)
expanding its marketing activities into new international markets.  The Company
also intends to pursue potential opportunities for growth through merger and
acquisition of complimentary businesses.

        The Company's executive offices are located at 9101 Jameel, Houston, TX
77040.  Its telephone number is (713) 460-1976.

                                       2
<PAGE>
 
DISTRIBUTION AND MARKETING

        The Company's products are distributed through a network marketing
system consisting of a network of approximately 87,400 distributors.
Distributors are independent contractors who purchase products directly from the
Company for their own use and for resale to retail consumers.  Distributors may
elect to work on a full-time or part-time basis.  Management believes that its
network marketing system is well suited to marketing its nutritional supplements
and other products because sales of such products are strengthened by ongoing
personal contact between retail consumers and distributors, many of whom use the
Company's products themselves.  The Company encourages its distributors to use
the Company's products.  No one distributor directly accounted for more than 5%
of the Company's sales in either of the past two fiscal years.

        The Company's ability to increase sales is significantly dependent on
its ability to attract, motivate and retain distributors. The Company utilizes
an innovative marketing program which it believes is superior to programs
offered by other network marketing companies. The program provides financial
incentives, distributor training and support, a low priced starter kit, no
inventory requirements, and low monthly purchase requirements. Management
intends to reach potential new distributors through advertising, the Company's
site on the World Wide Web, teleconferencing and regional sales meetings. The
Company experienced a net increase in the number of distributors during the
fiscal year ended September 30, 1995 of 19,468 and during the fiscal year ended
September 30, 1996, 30,100 distributors were added.

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

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

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

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

     "Qualifying product volume" is product the distributor and his other
downline distributors purchase at wholesale directly from the Company either for
personal use or for sale to other customers at retail.  There is no time limit
to meet these qualifications, and distributors may choose to become executives
the same day that they enroll as a distributor or over any period of time.  An
executive level distributor may attain higher levels of commission based on
sales generated by distributors within his or her organization.  The only
qualification to remain an executive is to purchase $40 in product every other
month.  Management believes that the right of executive level distributors to
earn commissions contributes significantly to the Company's ability to retain
its productive distributors.  Management also believes that the timely
introduction of new and topical programs and products has assisted the Company
to increase its network of distributors.

     The Company previously marketed an Instant Executive Program.  The Instant
Executive Program merely referred to the option by which distributors could
choose to qualify immediately rather than through incremental product purchases
over time.  The Instant Executive Program, particularly as marketed by Kevin
Trudeau, a key distributor of the Company, has been the subject of legal and
regulatory scrutiny.  The Company has determined to discontinue the use of the
terminology, "Instant Executive Program".  However, the qualification
requirements for distributors to attain the level of "executive distributor" and
the commissions and bonuses which may be earned as an executive distributor have
not changed.  See Item 6.

                                       3
<PAGE>
 
     In April 1996 the Attorney General of the State of Illinois (the "Attorney
General") filed suit against the Trudeau Marketing Group, Inc., Kevin Trudeau,
and Jules Leib, People v. Trudeau (the "Illinois Suit").  The Company was not
                -----------------                                            
named as a defendant in the Illinois Suit, but the Company's management viewed
the Illinois Suit as an opportunity to discuss the Company's marketing program
and to resolve confusion surrounding the program.  On July 16, 1996, the Company
entered into an "Assurance of Voluntary Compliance" (the "AVC") with the
Attorney General.  The AVC preserves the ability of a new distributor to become
an executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the Order Assurance Program
("OAP") and Master Developer Series.  Under the AVC, the Company will maintain
its same executive level qualifications, but to aid clarification, it will no
longer use the "instant executive" terminology.

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

     The Company entered into similar agreements with the states of Florida,
Hawaii, Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey and
Pennsylvania.  The Company has agreed that in Florida, distributors who want to
receive commissions must state, when placing orders, that they have sold to
consumers 70% of their prior commissionable product purchase.  The Company has
agreed to establish procedures to independently verify consumer sales on a
random basis and to sanction distributors submitting false information.
Implementation of these agreements by the Company may be expensive and could
make the program less attractive to distributors.  These factors could
negatively impact the Company's future operating results.  See Item 6.  The
Company may enter into agreements with other states in the future.

     To become a distributor, a person must be sponsored by an existing
distributor, sign the official Distributor Agreement and purchase a "distributor
success kit" from the Company.  The Company revised its official Distributor
Agreement in connection with the AVC.  It is emphasized in the Distributor
Agreement that in order for a distributor to be successful in the Company's
program, the distributor must purchase and sell the Company's products at retail
and sponsor other distributors to do the same.  It is also emphasized that the
distributor must retail or use in business building 70% of the product he or she
purchases before more product may be purchased from the Company.  A distributor
success kit currently costs approximately $35 and provides sales aids,
brochures, order forms, audio and video cassette recordings and a subscription
to the Company's monthly publication, Lifestyles.
                                      ----------
 
     The following table sets forth the number of the Company's distributors on
the dates indicated:

                                                      At September 30,
                                                      ---------------- 
                                                  1996      1995     1994
                                                  ----      ----     ----

     Approximate number of distributors(1)       87,400    57,300   37,800
_________________________
(1)  Includes "active" distributors only. A distributor remains active by
generating a minimum of $40 in sales volume at least once every 12 months. In
order to maintain executive status and to be eligible for commissions and
bonuses, an executive distributor must generate a minimum of $40 in sales volume
every other month.

     The Company seeks to expand its distributor base in each market by offering
distributors attractive compensation opportunities.  Management believes the
Company's executive level distributor compensation plan is superior to that of
other network marketing organizations because the program offers an opportunity
for the distributor to become

                                       4
<PAGE>
 
successful without having to finance a large inventory of products and requires
only a modest amount of sales to meet the commission requirements.

     The Company participates in rallies in various key cities in North America,
Puerto Rico, the United Kingdom and Pacific Rim countries and participates in
motivational and training events in key countries, all of which are designed to
inform large numbers of prospective and existing distributors about the
Company's product line and selling techniques.  Distributors give presentations
relating to their experiences with the Company's products and the methods by
which they develop their distributor organizations.  Specific selling techniques
are explained, and emphasis is placed on the need for consistency in using such
techniques.  Participants are encouraged to ask questions regarding selling
techniques and product developments and to share information with other
distributors attending the rallies.  Distributors are also given opportunities
to interact with other distributors and to develop confidence in selling and
goal-setting techniques.  Motivation is offered to participants in the form of
recognition, gifts, excursions and tours, which are intended to foster an
atmosphere of excitement throughout the distributor organization.  Prospective
distributors are educated about the structure, dynamics and benefits of the
Company's network marketing system.  During the years ended September 30, 1995
and 1996, the Company expended approximately $138,000 and $348,000,
respectively, on promotional activities related to distributors' rallies and the
annual convention.

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

     The Company continues to develop marketing strategies and programs to
motivate distributors.  These programs are designed to increase distributors'
monthly product sales and the recruiting of new distributors.  Some of the
programs that the Company has implemented are as follows:
 
Car Bonus Program.  The Company offers a car bonus program, whereby it makes car
payments up to $3,500 per month for qualifying distributors.  The Company has no
liability relating to the financing or purchasing of the automobile.  The car
bonus program was initiated in fiscal 1990.  At September 30, 1996, the Company
had 357 distributors in the program.  The requirements for a distributor to
qualify for the car bonus program are as follows:


     .  Generate $100 sales volume for nine consecutive months (or six months if
        the distributor attends one of the Company's training programs or
        subscribes to the optional Master Developer Series).

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

     .  As the distributors' third level generates higher sales volume, the
        Company will make larger monthly payments up to a maximum of $750 per
        month.
  
                                       5
<PAGE>
 
Order Assurance Program.  The Company provides a program whereby the distributor
may enroll in a minimum ordering program in order to maintain eligibility for
bonuses.  Minimum orders ranging from $41 to $300 per month are automatically
placed by credit card or check.  Differing amounts for the optional Order
Assurance Program exist to allow generation of sales volume at levels that
correspond to commission and bonus qualification levels, i.e., $40 is the
minimum sales volume to remain an active executive; $80 is the minimum sales
volume to qualify as a bronze or silver executive; $100 is the minimum sales
volume qualification level for the car bonus program; $160 is the minimum sales
volume to be eligible for gold executive; and $300 is the minimum sales volume
requirement to be a platinum executive.  Therefore, this Program ensures sales
for the Company and the distributors participation in bonus programs.  The Order
Assurance Program was initiated in fiscal 1993.  The Order Assurance Program is
voluntary and no restrictions are placed upon any participant's ability to exit
the Order Assurance Program.  The Company has agreed in the AVC that, effective
in January 1997, a distributor will not receive additional product certificates
under the Program and will be given 30 days notice that their Program status
will be suspended if: (i) four monthly unredeemed certificates are issued
consecutively to the distributor for a maximum credit of four times the
distributors enrollment level; or (ii) the distributor has accumulated
unredeemed certificates with a total face value of six times the distributors
then designated Program amount.  However, these requirements would not be
applicable if the distributor redeems one or more of the issued certificates, or
notifies the Company that he is accumulating toward a "big ticket" item.  As of
September 30, 1995 and September 30, 1996, respectively, there were
approximately 22,800 and 41,700 distributors enrolled in the Order Assurance 
Program.

Personal Recruiting and Sales Campaigns. These programs were developed to assist
distributors in developing their downlines and increasing product sales. These
programs provide special incentives for quicker qualification into the executive
level distributor compensation program.

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

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

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

Master Developer Series.  The Company provides a monthly subscriber service of
leading self development books and audio programs that serve as a link between
the philosophy and ideals of the Company and its distributors.

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

Toll Free Access.   The Company furnishes toll free numbers for: (1) placement
of orders, (2) customer service assistance, and (3) faxing of orders and
applications.

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

                                       6
<PAGE>
 
     In the last quarter of the fiscal year ended September 30, 1995 and in the
fiscal year ended September 30, 1996, one executive level distributor, Kevin
Trudeau, was particularly noteworthy in this regard, and he has made a
significant contribution to the growth of the Company during this period.  In
addition to the marketing methods described above, Mr. Trudeau has sponsored
radio and newspaper advertisements and radio and television infomercials to
attract new distributors.  Mr. Trudeau has substantial prior experience in
product sales through the use of infomercials.  In addition, he has served as a
host of a series of infomercials entitled "A Closer Look" and "Vantage Point".

     Mr. Trudeau is the producer of the "Mega Memory" home study course and is
the author of Kevin Trudeau's Mega Memory book which was published in 1995 by
              ----- --------- ---- ------                                    
William Morrow.  He founded the American Memory Institute, a memory training
school, in 1983.  Mr. Trudeau has also been featured as a prominent speaker at
motivational seminars and other programs.

     During the past five years, Mr. Trudeau has also been engaged in other
activities, including KT Corp., which is a distributor of the Company, the
Trudeau Marketing Group, and Distributor Services, L.L.C., which markets sales
aids, memory tapes and other products to distributors of the Company, and Mega
Systems, Inc., which markets memory and other home study courses.  Mr. Trudeau
is no longer employed by Mega Systems, Inc.  In December 1996 Mr. Trudeau
informed the Company that he has received a letter from the U.S. Federal Trade
Commission ("FTC"), which raises objections to infomercials made by Mr. Trudeau
marketing products of Mega Systems, Inc., including "Mega Memory" tapes.  Mr.
Trudeau has also informed the Company that the FTC has threatened to initiate an
action against him if a settlement is not reached promptly.  Mr. Trudeau has not
informed the Company how he intends to proceed in connection with this matter.
The pendency of this matter may affect Mr.Trudeau's ability to act effectively
as a distributor of the Company.  It is presently unknown whether this matter
will affect the Company's distribution and marketing of "Mega Memory" tapes.
See "Disclosure Regarding Forward-Looking Statements; Risk Factors".

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

MARKETS

     The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country, and historical
sales information by country during the periods indicated.

                                       7
<PAGE>
 
<TABLE>
<CAPTION> 
 
                                            Year Ended September 30,
                                            ------------------------
                                                (in Thousands)
                    Year
Country            Entered           1996             1995           1994
-------            -------          -------          -------        -------
<S>               <C>               <C>            <C>               <C>
United States        1984           $89,400        $25,800            $14,700
Canada               1993             6,100          4,200              2,400
Puerto Rico          1994             1,500          2,200                300
United Kingdom(1)    1996               200             --                 --
Korea(2)             1991               100            100                100
Philippines(2)       1993               100            100                100
</TABLE>
_____________________
(1)     The Company commenced operations in the United Kingdom in September
        1996.

(2)     The Company sells its products to distributors in Korea and the
        Philippines which do not use the Company's network marketing system.

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

        The Company may also need to undertake the steps necessary to meet the
operational requirements of new markets, including plans to satisfy the
inventory, distribution, personnel and transportation requirements of the new
market.  The Company may also need to modify its distributor manuals, cassette
recordings, videocassette and other training materials as necessary to be
suitable for the new market.  The Company has prepared manuals in English,
French and Spanish. Currently, the Company's products are distributed to all
markets from the Company's Houston, Texas distribution center.

        In August 1994, to assist the Company in its entry into new markets, the
Company retained the services of Dr. David Santiago.  In December 1995, Dr.
Santiago and the Company agreed to a termination of their relationship.


PRODUCTS
                                                                               
        The Company markets and distributes an extensive product line of
approximately 320 items in eight different categories:  (1) vitamins, minerals
and antioxidants; (2) Nutique personal care items; (3) food and weight
management items; (4) herbal formulas, (5) homeopathic and special formulas; (6)
cleaning concentrates; (7) filtration systems; and (8) self-improvement
programs.  The line consists of primarily consumable products that are designed
to target the growing consumer interest in natural health alternatives for
nutrition and personal care.  In developing its product line, the Company has
emphasized quality, purity, potency, and safety.

Vitamins and minerals and antioxidants.  The Company markets approximately 44
vitamin and mineral products that are offered in a variety of combinations
including the Company's proprietary Grand Master(R), Master-Key-Plus(R), and
OraFlow Plus(R) formulations.

Nutique personal care items.  The Company markets 25 Nutique hair and skin care
products including skin care formulas for men and women, shampoo and
conditioner, hand and body lotions, sunscreen, an alphahydroxy acid skin
rejuvenating complex, and a thigh creme.  Each of these products contains
ingredients that are formulated to promote healthier looking skin and hair.

                                       8
<PAGE>
 
Food and weight management items.  The Company markets over 51 food and weight
management products.  These include a whey beverage in four flavors, the Nutri-
Mac line of pastas, the Nutri-Blend flour and baking mixes, instant food shakes,
fiber products, the Nutri-Cookie(R), and Lean Life(R), a herbal weight
management formulation.

Herbal formulas.  The Company's 31 herb and herbal formulation products are
produced using only natural ingredients and are precisely measured and carefully
processed into a convenient tablet or capsule form.  The line consists of many
traditionally popular herbs such as alfalfa, ginkgo biloba, and garlic, as well
as special blends developed by the Company.

Homeopathic and special formulas.  Homeopathic remedies, when prepared in minute
amounts, mimic disease symptoms and stimulate the body's defense systems.  The
Company offers 65 homeopathic remedies that have been formulated in accordance
with the Homeopathic Pharmacopoeia of the United States.  In addition, the
Company markets a variety of other special formula products including shark
cartilage liquid and capsules, pain relief formulations, cough syrup, digestive
aids, sports massaging gel, a special formula dentifrice and special
phytochemical products.

Cleaning concentrates.  The Company markets household cleaning products that are
non-volatile and biodegradable.  There are 18 products, including a liquid hand
and body soap, dishwasher concentrate, laundry concentrates, laundry softener, a
heavy duty cleaner-degreaser, and a pine disinfectant.

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

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

        The Company continually seeks to identify, develop and introduce
innovative, effective and safe products.  During the fiscal year ended September
30, 1995 the Company introduced approximately 25 new products or services.  From
September 30, 1995 to September 30, 1996 the Company introduced approximately 70
new products or services.  Management believes that its ability to introduce new
products increases its distributors' visibility and competitiveness in the
marketplace.


NEW PRODUCT DEVELOPMENT

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

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

                                       9
<PAGE>
 
CONSUMER PRODUCT WARRANTIES AND RETURNS

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

MANAGEMENT INFORMATION SYSTEM

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

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


MANUFACTURING AND SUPPLIES

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

        The Company does not have long term supply agreements with NION or any
other vendor.  Although the Company believes that it could establish alternate
sources for most of its products, any delay in locating and establishing
relationships with other sources could result in product shortages and back
orders for the products, with a resulting loss of revenues to the Company.

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

                                      10
<PAGE>
 
TRADEMARKS AND SERVICE MARKS

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


COMPETITION

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

        There are many network marketing companies with which the Company
competes for distributors.  Some of the largest of these are Amway, Nature's
Sunshine, Inc., Herbalife International, Inc., and Rexall Sundown, Inc.  Each of
these companies is substantially larger than the Company and has significantly
greater resources.  The Company competes for distributors by means of its
marketing program that includes its commission structure, training and support
services, and other benefits.

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


GOVERNMENT REGULATION

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

        In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations.  The proposed regulations met
with substantial opposition.  In October 1994, the "Dietary Supplement Health
and Education Act of 1994" (the "Dietary Supplement Law") was enacted.  Section
11 of the Dietary Supplement Law provided that the advance notice of proposed
rule making by the FDA concerning dietary supplements was null and void.  FDA
regulations that became effective on June 1, 1994 would require standard format
nutrition labeling on dietary supplements.  However, because the new Dietary
Supplement Law also addresses labeling of dietary supplements, the FDA has
indicated that it will not enforce its labeling regulations until January 1,
1997.  In the interim, new regulations are expected to be proposed by the FDA.
Because the FDA has not yet reconciled its existing regulations with the new
Dietary Supplement Law, the Company cannot determine to what extent any changed
or amended regulations will affect its business.

        The Dietary Supplement Law did not affect the July 1, 1994 effectiveness
of the FDA's health claims regulations.  Those regulations prohibit any express
or implied health claims for dietary supplements unless such claims are approved
in advance by the FDA through the promulgation of specific authorizing
regulations.  Such approvals are rarely provided by the FDA.  Therefore, no
claim may be made on a dietary supplement label or in printed sales literature,
"that expressly or by implication characterizes the relationship of any
substance to a disease or health-related condition".  The Company cannot
determine what effect currently proposed FDA regulations, when and if
promulgated, will have on its business in the future.  Such regulations could,
among other things, require expanded or different labeling, the recall or
discontinuance of certain products, additional record keeping and expanded
documentation of

                                      11
<PAGE>
 
the properties and certain products and scientific substantiation. In addition,
the Company cannot predict whether new legislation regulating its activities
will be enacted, which new legislation could have a material adverse effect on
the Company.

        The Company has an ongoing compliance program with assistance from
experienced FDA counsel regarding the nature and scope of food and drug legal
matters affecting the Company's business and products.  The Company is unaware
of any legal actions pending or threatened by the FDA against the Company.


EMPLOYEES

        At September 30, 1996, the Company employed approximately 200 persons.
The majority of the Company's employees are office, clerical and warehouse
employees.  The Company believes that its relationship with its employees is
good.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS; RISK FACTORS

        This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").  All statements other than statements of historical fact included in this
Report, including without limitation, the statements in Items 1 and 6 regarding
the Company's financial position and liquidity, the Company's operations and
proposed operations, and other matters, may be deemed forward-looking
statements.  Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance such
expectations will prove to have been correct.  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:

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

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

        To become a distributor of the Company, a person must be sponsored by an
existing distributor, sign the official Distributor Agreement, and purchase a
"distributor success kit" from the Company, which is currently priced at $35.
The Company's distributors earn the right to receive commissions upon obtaining
the level of "executive."  Executive level distributors may earn commissions on
sales generated by other distributors in their downline organization.  There are
three ways for a distributor to meet the requirement to become an executive,
which can be met the same day he or she enrolls as a distributor or over an
extended period of time at the election of the distributor.  The Company
previously used the terminology of "Instant Executive Program" to reference the
qualifications for becoming an executive distributor on an accelerated basis.
The Instant Executive Program, particularly as marketed by Kevin 

                                      12
<PAGE>
 
Trudeau, a key independent distributor, and his marketing organization, was the
subject of legal and regulatory scrutiny.

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

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

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

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

        The Company does not believe that the manner in which it markets its
products constitutes a "pyramid scheme" or a "security."  The only financial
requirement to become a distributor is to purchase a "distributor success kit"
which is currently priced at a nominal charge of $35. The Company does not pay a
fee or other compensation to distributors as direct remuneration for enrolling
distributors in their "downline" and the Company encourages all distributors to
retail their products to consumers who are not Company executives. In addition,
the Company does not pay a fee or other compensation to distributors for sales
of product to their downline, thus, all product purchases are to be consumed by
the distributor or sold to the ultimate consumer. The Company believes that the
efforts it has undertaken with the Illinois Attorney General and regulatory
authorities in other states, which culminated in the AVC in Illinois and
elsewhere, will assist the Company in complying with government laws and
regulations in the future. Nonetheless, there can be no assurance that the
appropriate authorities in any states will not initiate court proceedings
against the Company for violation of applicable laws.

        CLASS ACTION LITIGATION.   In August 1996, a suit was filed against the
Company in the United States District Court for the Southern District of Texas,
Houston Division (the "Federal Action").  Also named as defendants were 

                                      13
<PAGE>
 
Kevin Trudeau, a key distributor of the Company, the Trudeau Marketing Group,
Inc., Bernard Sherman, the largest beneficial owner of the Company's common
stock, certain officers of the Company, and Cohig & Associates, Inc. and
Neidiger/Tucker/Bruner, Inc., the investment banking firms which previously
served as underwriters of the July 1995 public offering of the Company's
securities. The Federal Action was brought as a class action on behalf of
persons who became "instant" executive distributors of the Company and on behalf
of persons who purchased the Company's Common Stock and Warrants between July
11, 1995 and July 16, 1996.

        The principal allegations of the complaint in the Federal Action are
that certain aspects of the executive distributor compensation program
constituted an illegal pyramid scheme and the sale of an unregistered security
and that the Company failed to disclose the alleged illegality of the program
and Mr. Trudeau's past.  The plaintiffs seek unspecified damages, costs and fees
of litigation and punitive damages.

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

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

        The Company strongly denies the allegations in both suits and intends to
vigorously defend against the charges made against it.  The pendency of these
suits, as well as a potentially unfavorable decision to the defendants, could
have a material adverse effect on the Company's financial condition and its
operations.  Due to the significant cost of, and the business disruption
associated with, this litigation, the Company may explore a reasonable
settlement of this litigation.

        NEGATIVE MEDIA AND OTHER REPORTS.  The Company's ability to continue its
growth is dependent upon the Company's success in retaining and motivating its
existing distributors and in attracting new distributors.  A significant part of
the Company's recent growth is attributable to the efforts of Kevin Trudeau and
his marketing organization (collectively referred to as "Trudeau").  Mr. Trudeau
has twice been convicted of criminal charges during the past 10 years.  See
"Distribution and Marketing" above for biographical information concerning Mr.
Trudeau.  Trudeau has been particularly successful in recruiting new
distributors who quickly attain executive level status with the Company.

        Mr. Trudeau's criminal past was highlighted in an article which appeared
in The Wall Street Journal on January 19, 1996.  The author of the article also
   --- ---- ------ -------                                                     
questioned the legality of Trudeau's marketing practices and, in particular, the
marketing of the instant executive program.  Similar negative reports were
published on the same day by Bloomberg, a news wire service, and by cable
television station CNBC.  Other negative media reports occurred subsequently.

        The Company is uncertain of the impact of the negative reports in the
financial media on its retention and recruitment of distributors.  If the
negative reports in the financial media or any legal developments cause
distributor recruitment and/or retention to suffer, there could be an adverse
effect on the Company's future sales.  Moreover, even if the Company's operating
results were unaffected, the negative media coverage could adversely impact the
price of the Common Stock.

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

                                      14
<PAGE>
 
complaint against him. Nonetheless, there is a risk that this individual and/or
others may engage in actions which would damage the reputation of the Company
and adversely affect the Company's operations.

        STATEMENTS AND OTHER ACTIONS BY DISTRIBUTORS.  The Company's
distributors are required to sign the Company's official Distributor Agreement
which requires them to abide by the Company's policies.  Nonetheless, in certain
instances distributors have created promotional material which does not
accurately describe the Company's marketing program or may have made statements
regarding potential earnings or other matters not in accordance with the
Company's policies.  Although the Company was not sued by regulatory
authorities, such actions lead to increased regulatory scrutiny as described
above.  In order to assure itself that its policies and practices and those of
its independent distributors conform to law and fairly protect the interests of
consumers, the Company entered into an AVC with the State of Illinois and
similar agreements with several other states.  Among other things, the Company
agreed in the AVC to more carefully monitor against misdescriptions by
distributors of the Company's executive compensation plan.  The Company has
approximately 87,400 distributors.  Although the Company intends to increase its
efforts to monitor its distributors' statements and activities, there can be no
assurance that the Company will be able to accomplish this objective and the
Company could be subject to additional regulatory scrutiny and potential claims.
In addition, distributors, including key distributors such as Kevin Trudeau,
could make predictive statements about the Company's operations or other
unauthorized remarks regarding the Company which the Company may be unable to
control.  Mr. Trudeau and other distributors are not authorized to make such
statements on behalf of the Company.  Nonetheless, statements or actions by Mr.
Trudeau or other distributors could also adversely affect the Company.

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

        The Company is subject to significant competition from other marketing
organizations for the recruitment of distributors.  The Company's ability to
remain competitive depends, in significant part, on the Company's success in
recruiting and retaining distributors.  In the last quarter of the fiscal year
ended September 30, 1995 and during the fiscal year ended September 30, 1996,
one executive level distributor, Kevin Trudeau and his marketing organization,
made a significant contribution to the growth of the Company.  See "Distribution
and Marketing" above.  Mr. Trudeau and the other distributors of the Company are
not obligated to continue acting as distributors of the Company.  There can be
no assurance that the Company's programs for recruitment and retention of
distributors will be successful.  See "Competition" above.

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

        FAMILY RELATIONSHIPS.  At September 30, 1996, the Company employed
approximately 200 persons.  Of these 200 persons, 15 persons have a family
relationship, through birth or marriage, with either David P. Bertrand or Jana
Mitcham, executive officers of the Company.  The Company's management believes
that all of the Company's employees have been employed by the Company on the
basis of their qualifications, and that their retention by, and advancement
within, the Company has been, and will continue to be, determined by their
individual performances as an employee of the Company, and not due to any family
relationship.  Nonetheless, due to the large number of family relationships, the
potential for conflicts of interest could be significant.

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

                                      15
<PAGE>
 
by various agencies of the states and localities in which the Company's products
are sold. In October 1994 the "Dietary Supplement Health and Education Act of
1994" was enacted. The FDA has not yet reconciled its existing regulations with
this new legislation. Therefore, the Company cannot determine to what extent any
changed or amended regulations will affect its business. The Company cannot
determine what effect currently proposed FDA regulations, when and if
promulgated, will have on its business in the future. Such regulations could,
among other things, require expanded or different labeling, the recall or
discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. In addition, negative publicity associated with a regulatory
inquiry regarding products sold by the Company may adversely affect the Company.
See "Distribution and Marketing" above. The Company cannot predict whether new
legislation regulating its activities will be enacted, which new legislation
could have a material adverse effect on the Company. See "Government Regulation"
above.

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

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

        NO FIRM CONTRACTS WITH SUPPLIERS OR MANUFACTURERS.  The Company does not
have any written contracts with any of its suppliers or manufacturers or
commitments from any of its suppliers or manufacturers to continue to sell
products to the Company.  A substantial portion of the products purchased by the
Company have been supplied by NION Laboratories ("NION").  Richard S.
Kashenberg, a director of the Company, is the chief executive officer of NION.
Until June 1995 NION was owned by Shermfin Corp., the Company's largest
shareholder, and Mr. Kashenberg.  Since June 1995, NION has been owned by a
privately held corporation with no affiliation with the Company other than Mr.
Kashenberg's continuation as the chief executive officer of NION.  Since June
1995 NION has continued to be a principal supplier of product to the Company and
the Company believes that its relationship with NION is satisfactory.  However,
there can be no assurance that NION will continue to be a significant and
reliable supplier to the Company.  The Company does not have long term supply
agreements with NION or any other vendor.  Accordingly, there is a risk that any
of the Company's suppliers or manufacturers could discontinue selling their
products to the Company for any reason.  Although the Company believes that it
could establish alternate sources for most of its products, any delay in
locating and establishing relationships with other sources could result in
product shortages and back orders for the products, with a resulting loss of
revenues to the Company.

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

        DIVIDENDS.  The Company declared an initial cash dividend of $.02 per
share of Common Stock in September 1996. Another dividend of $.02 per share of
Common Stock has been declared in December 1996 for payment in January 1997.
Although it is the Company's present intent to declare dividends on a quarterly
basis, the determination of whether to pay dividends will be made by the Board
of Directors and will depend on many factors. See Item 5.

                                      16
<PAGE>
 
                        ITEM 2.  DESCRIPTION OF PROPERTY

PROPERTIES

     The Company owns no real property.  The Company's offices and warehouse
facilities in Houston, Texas are leased from non-affiliates.  The Company's
office building consists of approximately 37,184 square feet and the current
monthly rental is $17,950 which escalates over the 4 year term remaining on the
lease.  Additionally, the Company's warehouse consists of approximately 52,047
square feet and the current monthly rental is $15,613 which escalates over the 4
year term remaining on the lease.  See Note 8 to the Financial Statements in 
Item 7.


                           ITEM 3.  LEGAL PROCEEDINGS

     As more fully discussed in Items 1 and 6 and Note 8 to the Notes to
Financial Statements in Item 7, the Company entered into an "Assurance of
Voluntary Compliance" with the Illinois Attorney General and similar agreements
with other states. The Company may enter into an agreement with two other states
as a result of pending negotiations. However, if such negotiations are
unsuccessful, litigation could result. In the future, inquiries may continue
from various state agencies concerning the marketing of the Company's programs.

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

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

     The principal allegations of the complaint in the Federal Action are that
certain aspects of the executive distributor compensation program constituted an
illegal pyramid scheme and the sale of an unregistered security and that the
Company failed to disclose the alleged illegality of the program and Mr.
Trudeau's past.  The plaintiffs seek unspecified damages, costs and fees of
litigation and punitive damages.

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

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

     The Company strongly denies the allegations in both suits and intends to
vigorously defend against the charges made against it.  The pendency of these
suits, as well as a potentially unfavorable decision to the defendants, could
have a material adverse effect on the Company's financial condition and its
operations.

                                      17
<PAGE>
 
          ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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


                                    PART II

       ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since July 1995, the Common Stock has traded on the National Market System
of The Nasdaq Stock Market under the symbol "NFLI".  From June 1994 to July
1995, the Common Stock was traded on the Electronic Bulletin Board system
operated by the National Association of Securities Dealers, Inc.  Quotations in
the table below for the periods prior to the quarters ended September 30, 1995
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily reflect actual transactions.  The quotations for the
quarters ended September 30, 1995 and thereafter represent the range of high and
low trade quotations.  For the earlier periods, the quotations reflect the high
bid and low bid prices.  The quotations have been adjusted to give effect to a
three-for-five split of the Common Stock effected on July 10, 1995 and a two-
for-one split of the Common Stock effected on December 8, 1995.

     The Warrants commenced trading in July 1995 on the National Market System
of The Nasdaq Stock Market under the symbol "NFLIW".

<TABLE>
<CAPTION>
                                                 Common Stock         Warrants
                                                --------------    --------------
Quarter Ended                                    High    Low       High    Low
-------------                                   ------  ------    ------  ------

<S>                                             <C>     <C>       <C>     <C>
Fiscal 1994
-----------
June 30, 1994 (Commencing June 27, 1994)        $ 1.25  $ 1.25
September 30, 1994......................          1.25    1.25
Fiscal 1995
-----------
December 31, 1994.......................          1.67    1.25
March 31, 1995..........................          3.54    1.67
June 30, 1995...........................          3.65    1.67
September 30, 1995......................          9.50    2.50    $ 5.63  $ 0.25
Fiscal 1996
-----------         
December 31, 1995.......................         24.00    8.63     20.13    5.00
March 31, 1996..........................         35.00   16.75     31.50   13.00
June 30, 1996...........................         23.00    8.50     19.25    5.00
September 30, 1996......................         17.75    9.50     14.25    6.50
</TABLE>

   As of September 30, 1996, there were 1,433 record holders of Common Stock.

   The Company declared its first cash dividend on its Common Stock in
September 1996.  The dividend of $.02 per share was paid in October 1996.
Another dividend of $.02 per share of Common Stock has been declared in December
1996 for payment in January 1997.  The Company currently intends to declare
dividends in this amount on a quarterly basis.  However, the determination of
the payment of dividends in the future will be within the discretion of the
Company's Board of Directors and will depend on the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.

                                      18
<PAGE>
 
                ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     The Company develops products that are designed for health conscious
consumers, and sells those products through its network of approximately 87,400
independent distributors.  The Company offers a line of approximately 320
products in eight categories, including nutritional supplements, health foods,
weight management items, skin care products and other consumer products.

     The Company has experienced rapid growth in both net sales and income
during the past three fiscal years.  Management believes that the Company's
success is attributable primarily to the Company's emphasis on continually
improving both its marketing programs and product offerings and the efforts of
its independent distributors in attracting new distributors to the Company's
network.  The Company's sales expansion has been the result of growth in both
domestic and foreign markets.  The Company intends to expand its efforts in
these areas and also expects to enter into markets in other countries outside
the United States.  The rate and extent of this expansion will depend upon many
factors, including sales momentum, the effect of government regulations and
general economic conditions.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
 
                                         Year Ended September 30, 
                                         ------------------------                   
                                           1996    1995   1994                      
                                           ----    ----   ----                      
<S>                                       <C>     <C>     <C>                       
Net sales                                 100.0%  100.0%  100.0%                    
Cost of sales                              69.6    72.8    72.7                     
                                          -----   -----   -----                     
Gross profit                               30.4    27.2    27.3                     
Marketing, distribution and                                                         
  administrative expenses                  16.7    18.1    24.8                     
                                          -----   -----   -----                     
Income from operations                     13.7     9.1     2.5                     
Other income (expense), net                 0.6     0.3    (0.1)                     
                                          -----   -----   -----                                               
Income before income tax expense           14.3     9.4     2.4                     
Income tax expense                          5.4     2.4     0.0                     
                                          -----   -----   -----                     
Net income                                  8.9     7.0     2.4                     
Preferred stock conversion                  0.0     0.0     1.0                     
                                          -----   -----   -----                     
Net income applicable to common shares      8.9%    7.0%    1.4%                    
                                          =====   =====   =====                         
</TABLE>

                                      19
<PAGE>
 
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995

        Net sales for the year ended September 30, 1996 increased by $65,114,000
or 201.7% to $97,404,000 from $32,290,000 for the year ended September 30, 1995.
The increase in net sales is primarily the result of the Company increasing its
number of distributors and its sales per average number of distributors.  At
September 30, 1996, the Company had approximately 87,400 distributors compared
to approximately 57,300 at September 30, 1995.  However, the rate of growth in
the number of distributors slowed during the three months ended June 30, 1996
and September 30, 1996, respectively, to a net increase of 3,502 and 1,452
distributors. The ability of the Company to increase its number of distributors
and its sales per average number of distributors is material to the growth of
the Company. Management believes that the regulatory scrutiny and legal
proceedings initiated in the year ended September 30, 1996, as well as the
negative media reports, were significant factors affecting distributor
recruitment and retention and sales efforts by distributors during the last two
quarters of the year ended September 30, 1996. The Company has resolved certain
of these issues, but the ability of the Company to regain the rate of growth
realized during the first two quarters of the year ended September 30, 1996
cannot be predicted with certainty. The increase in net sales is recapped below:

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

        The Company's net sales per average number of distributors per month
increased from $59 during the year ended September 30, 1995 to $112 for the year
ended September 30, 1996.  Approximately 46% of the increase in net sales was
due to new distributors electing to purchase product to qualify as an executive
under the program formerly known as the Instant Executive Program.  No one
distributor has directly accounted for more than 5% of the Company's net sales
in any of the past three fiscal years.

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

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

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

                                      20
<PAGE>
 
        The Company entered into similar agreements with the states of Florida,
Hawaii, Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey, and
Pennsylvania.  See Item 1.  The Company may enter into agreements with other
states in the future.

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

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

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

        Cost of sales increased by $44,312,000 or 188.4% to $67,827,000 for the
year ended September 30, 1996 from $23,515,000 for the year ended September 30,
1995.  Also included in the cost of sales for the year ended September 30, 1996,
is approximately $58,000 of the $782,000 incurred in resolving the state legal
issues discussed above.  Cost of sales as a percentage of net sales decreased
from 72.8% in the year ended September 30, 1995 to 69.6% in the year ended
September 30, 1996.  Cost of sales, which includes product costs, commissions
and bonuses paid to distributors, and shipping costs, is recapped below:
 
                                    Year Ended
                                   September 30,
                                   -------------
                                    1996   1995
                                    ----   ----
Product costs                       23.6%  24.3%

Commissions and bonuses             
  paid to distributors              39.2   40.5

Shipping costs                       6.8    8.0
                                    ----   ----
                                    69.6%  72.8%
                                    ====   ====

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

                                      21
<PAGE>
 
growing organization. The decrease of 1.2% in the percentage of shipping costs
resulted from economies of scale in shipping costs associated with the volume of
sales from new executive initial purchases.

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

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

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

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

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

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

YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994

          Net sales for the year ended September 30, 1995 increased by
$14,707,000 or 84% to $32,290,000 from $17,583,000 for the year ended September
30, 1994.  The increase in net sales is primarily the result of a 51.6% growth
in the number of distributors.  As of September 30, 1995, the Company had
approximately 57,300 distributors compared to approximately 37,800 at September
30, 1994.  Of the 19,500 increase in distributors, 7,700 were new distributors
utilizing the Instant Executive option.  In addition, a price increase was
enacted on June 1, 1995 on certain products to offset related increases in
product costs.  The increase in net sales is recapped below:



New executive initial purchases                           $ 7,700,000
Growth in sales due to increased number of distributors     6,067,000
Sales price increase                                          940,000
                                                          -----------
                                                          $14,707,000
                                                          ===========

          Also included in the increase in net sales was an increase in sales
outside the United States.  Net sales in Canada increased from $2,435,000 for
the year ended September 30, 1994 to $4,157,000 for the year ended September 30,
1995.  Net sales in Puerto Rico for the year ended September 30, 1995 were
$2,214,000, up from $264,000 for the year ended September 30, 1994.

                                      22

<PAGE>
 
          Cost of sales increased by $10,732,000 or 84% to $23,515,000 for the
year ended September 30, 1995 from $12,783,000 for the year ended September 30,
1994.  Cost of sales as a percentage of net sales increased only slightly in the
year ended September 30, 1995 compared to the year ended September 30, 1994.
Cost of sales, which includes product costs, commissions and bonuses paid to
distributors, and shipping costs, is recapped as a percentage of net sales in
the following table:


                                  September 30,
                                  -------------
                                   1995   1994
                                   ----   ----
Product Costs                      24.3%  24.1%
 
Commissions and bonuses paid to
 distributors                      40.5   39.7
 
Shipping costs                      8.0    8.9
                                   ----   ----
                                   72.8%  72.7%
                                   ====   ==== 

The percentage of product costs increased slightly as the Company balanced
increases in product costs with increases in sales prices as noted above.  The
increase in the percentage of commissions and bonuses paid to distributors of
0.8% was the result of maturing distributor incentives and the balancing of
selected product incentive levels.  The decrease of 0.9% in the percentage of
shipping costs resulted from economies of scale in shipping costs and a
reduction in shipping costs associated with the volume of sales of product in
the Instant Executive Program.

          Gross profit increased by 83% or $3,973,000 from $4,801,000 for the
year ended September 30, 1994 to $8,774,000 for the year ended September 30,
1995.  Gross profit as a percentage of sales decreased from 27.3% for the year
ended September 30, 1994 to 27.2% for the year ended September 30, 1995.

          Marketing, distribution and administrative expenses increased
$1,494,000 or 34.3% to $5,853,000 for the year ended September 30, 1995 from
$4,359,000 for the year ended September 30, 1994.  As a percentage of sales,
marketing, distribution and administrative expenses decreased from 24.8% for the
year ended September 30, 1994 to 18.1% for the year ended September 30, 1995.
The dollar increase resulted primarily from increased salaries, credit card
discount rate charges, postage, travel and marketing expense to provide for the
growth in sales.

          Income from operations increased $2,479,000 or 561% to $2,921,000 for
the year ended September 30, 1995 compared to $442,000 for the year ended
September 30, 1994, principally as a result of the higher level of sales. Income
from operations as a percentage of sales increased from 2.5% for the year ended
September 30, 1994 to 9.1% for the year ended September 30, 1995.

          Other income increased to $88,000 for the year ended September 30,
1995 from a deficit of $11,000 for the year ended September 30, 1994.  The
increase was primarily a result of a partial collection of a legal judgment in
favor of the Company and interest income earned.

          The Company incurred income tax expense of $765,000 for the year ended
September 30, 1995.  There was no income tax expense for the year ended
September 30, 1994 as the Company was able to utilize its loss carryforwards to
offset income.  As of September 30, 1995, the Company had approximately $553,000
of net operating loss available to carryforward subject to limitations imposed
by the Tax Reform Act of 1986.

          Net income was $2,244,000 for the year ended September 30, 1995, an
increase of 420% compared to net income of $431,000 for the year ended September
30, 1994.

LIQUIDITY AND CAPITAL RESOURCES

          The Company has financed its recent growth primarily from funds
obtained from operations.  The Company had cash and cash equivalents of
$15,589,000 at September 30, 1996 compared to $8,960,000 at September 30, 1995.
For

                                      23
<PAGE>
 
the year ended September 30, 1996, the net cash provided by operations was
$7,165,000 and $2,174,000 was used for the acquisition of property and equipment
and $211,660 for start-up expenditures in the United Kingdom.  The Company also
received $1,854,000 from the exercise of Warrants issued in the public offering
completed in July, 1995 and the exercise of stock options.  The Company received
net cash from operations for the year ended September 30, 1995 of $5,132,000
and used $408,000  for the acquisition of property and equipment.  The increase
in net cash provided by operations and cash and cash equivalents was a result of
record sales and more efficient operations.

          The Company had working capital of $14,556,000 at September 30, 1996
compared to $6,082,000 at September 30, 1995.  Approximately 95% of all sales
are paid in advance before shipment; therefore, accounts receivable as a
percentage of sales averages less than 5% of monthly sales.

          Approximately 65% of the Company's net sales are processed through
credit card transactions. The Bank which services these transactions requested
that the Company grant the Bank a security interest in the funds deposited from
credit card transactions to protect the Bank against customer returns and
"charge backs". To accomplish this the Company pledged in May, 1996, $3,000,000
in repurchase agreements purchased by the Company from the Bank to collateralize
the Bank. In July, 1996, the Bank reduced the pledged collateral to $500,000 in
repurchase agreements and a $500,000 letter of credit. Subsequent to September
30, 1996, the Bank returned the remaining $500,000 in repurchase agreements and
the $500,000 letter of credit.

          In August, 1996, the Board of Directors declared a quarterly cash
dividend of $.02 per common share payable October 15, 1996 to shareholders of
record as of September 30, 1996.  Dividends of $111,000 were paid on October 15,
1996.

          In September, 1996, the Board of Directors authorized a repurchase
program of the Company's common stock.  Under the program the Company may
purchase up to 200,000 shares in the open market or through privately negotiated
transactions. The program terminates June 30, 1997, unless extended by the Board
of Directors.

          The Company believes its existing cash resources and revenues to be
derived from operations should be sufficient to meet the Company's capital needs
and planned expansion requirements for the next 12 months. The Company currently
anticipates expanding into new foreign markets, but the extent of the expansion
has not been determined and will be dependent upon results of operations and
other factors. The Company's financial position may also be impacted by the
Company's future operating results which are uncertain particularly due to the
recent AVC, media and other reports and the pendency of the class action
lawsuits. In addition, due to the significant cost of, and the business
disruption associated with the class action lawsuits, the Company may explore a
reasonable settlement of this litigation.

          Although no assurance can be given, the Company and its independent 
legal counsel believe the Company has meritorious defenses to both of the class 
action lawsuits and the Company intends to defend itself vigorously.  While the 
ultimate results cannot be reasonably estimated, a judgment against the Company 
could have a significant negative impact on the operations and financial 
position of the Company.

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

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

          In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No.
121). SFAS No. 121 requires, among other things, that impairment losses on
assets to be held, and gains or losses from assets that are expected to be
disposed of, be included as a component of income from continuing operations.
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995.
The Company will adopt SFAS No. 121 for the year ending September 30, 1997 and
its implementation is not expected to have a material effect on the financial
statements.

          In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123).  SFAS No. 123 encourages entities to adopt
the fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other

                                      24
<PAGE>
 
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of its stock. The Company does not
anticipate adopting the fair value method encouraged by SFAS No. 123 and will
continue to account for such transactions in accordance with APB No. 25.
However, the Company will be required to provide additional disclosures
beginning in the year ending September 30, 1997 providing pro forma effects as
if the Company had elected to adopt SFAS No. 123.

                                      25
<PAGE>

                        ITEM 7.  FINANCIAL STATEMENTS 

  The financial statements of the Company are included on F-1 through F-17.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                    PAGE
                                                                    ----

NUTRITION FOR LIFE INTERNATIONAL, INC. FINANCIAL STATEMENTS:
 
        Independent Auditors' Reports.............................. F-2 to F-3
        Consolidated Balance Sheets as of September 30, 1996
         and 1995.................................................. F-4
        Consolidated Statements of Operations for the Years Ended
         September 30, 1996, 1995 and 1994......................... F-5
        Consolidated Statements of Stockholders' Equity for the
         Years Ended September 30, 1996, 1995 and 1994............. F-6
        Consolidated Statements of Cash Flows for the Years Ended
         September 30, 1996, 1995 and 1994......................... F-7
        Notes to Consolidated Financial Statements................. F-8 to F-17

                                      F-1
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------



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



We have audited the consolidated balance sheet of Nutrition for Life
International, Inc. as of September 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended.  These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

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

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



                                                            BDO Seidman, LLP


Houston, Texas
November 1, 1996, except Notes 7 and 8
  which are dated December 4, 1996.

                                      F-2
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------

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

We have audited the accompanying balance sheet of Nutrition For Life
International, Inc. as of September 30, 1995 and the related statements of 
operations, stockholders' equity and cash flows for each of the years in the 
two-year period ended September 30, 1995. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express an 
opinion on these financial statements based on our audits.

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

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

KPMG PEAT MARWICK LLP

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

                                      F-3



<PAGE>
 
                     NUTRITION FOR LIFE INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
                                                                   1996          1995
                                                                   ----          ----
                                     ASSETS
                                     ------

Current Assets:
<S>                                                             <C>          <C>
            Cash and cash equivalents.........................  $15,588,504  $ 8,960,100
            Accounts receivable, less allowance for doubtful
             accounts of $38,000 and $0.......................      368,062      172,762
            Inventories.......................................    6,365,350    2,267,617
            Deferred tax asset, net (Note 5)..................    1,500,000            -
            Refundable federal income taxes...................      500,000            -
            Prepaid expenses and other assets.................      260,091       89,251
                                                                -----------  -----------
 
              Total Current Assets............................   24,582,007   11,489,730
 
Property and Equipment, Net (Note 4)..........................    2,493,759      620,818
Deferred Tax Asset, Net (Note 5)..............................            -       79,142
Intangible Assets, Net........................................      340,063      227,498
Other Assets..................................................      212,031      148,425
                                                                -----------  -----------
                                                                $27,627,860  $12,565,613
                                                                ===========  ===========
</TABLE>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
<TABLE>
<CAPTION>
 
Current Liabilities:
<S>                                                               <C>           <C>
            Accounts payable....................................  $ 2,577,101   $ 2,389,706
            Accrued bonuses and commissions.....................    2,041,678     1,266,616
            Deferred income (Note 7)............................    3,893,570       347,795
            Accrued expenses and other liabilities..............      552,424       559,415
            Federal and franchise tax payable...................      850,000       843,737
            Dividends payable (Note 2)..........................      111,371             -
                                                                  -----------   -----------
 
              Total Current Liabilities.........................   10,026,144     5,407,269
                                                                  -----------   -----------
 
Commitments and Contingencies (Note 8)
Stockholders' Equity (Note 2):
            Preferred stock, $.001 par value; 1,000,000
              authorized; none issued and outstanding...........            -             -
            Common stock; $.01 par value; 20,000,000
              and 10,000,000 shares authorized..................       55,686        50,565
            Additional paid-in capital..........................    9,939,059     8,089,992
            Retained earnings (deficit).........................    7,611,580      (982,213)
            Cumulative foreign currency translation adjustment..       (4,609)            -
                                                                  -----------   -----------
              Total Stockholders' Equity........................   17,601,716     7,158,344
                                                                  -----------   -----------
                                                                  $27,627,860   $12,565,613
                                                                  ===========   ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-4
<PAGE>
 
                     NUTRITION FOR LIFE INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>

                                                    1996         1995          1994
                                                    ----         ----          ----
 
 
<S>                                            <C>            <C>           <C>
Net sales (Notes 7 and 10)...................   $97,403,757   $32,289,752   $17,583,195
Cost of sales (Note 9).......................    67,826,803    23,515,259    12,782,597
                                                -----------   -----------   -----------
Gross profit                                     29,576,954     8,774,493     4,800,598
Marketing, distribution and
  administrative expenses (Note 8)...........    16,230,023     5,853,330     4,358,503
                                                -----------   -----------   -----------
 
Income from operations.......................    13,346,931     2,921,163       442,095
                                                -----------   -----------   -----------
Other income (expense)
            Interest, net....................       711,563       (51,499)      (59,539)
            Other, net (Note 8)..............       (63,533)      139,189        48,747
                                                -----------   -----------   -----------
                                                    648,030        87,690       (10,792)
                                                -----------   -----------   -----------
Income before income tax expense.............    13,994,961     3,008,853       431,303
Income tax expense (Note 5)..................     5,289,797       764,595             -
                                                -----------   -----------   -----------
Net income                                        8,705,164     2,244,258       431,303
Preferred stock conversion (Note 3)..........             -             -       181,243
                                                -----------   -----------   -----------
Net income applicable to common shares.......   $ 8,705,164   $ 2,244,258   $   250,060
                                                ===========   ===========   ===========
Primary earnings per common share............         $1.36          $.65          $.09
                                                ===========   ===========   ===========
Fully-diluted earnings per common share......         $1.36          $.51          $.08
                                                ===========   ===========   ===========
 
Weighted average common shares outstanding:
            Primary..........................     6,405,152     3,437,258     2,824,734
            Fully-diluted....................     6,405,152     4,443,532     3,791,566
                                                ===========   ===========   ===========
</TABLE>

         See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>
 
                     NUTRITION FOR LIFE INTERNATIONAL, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
 
                                                                                                         
                                                                                          Cumulative
                                                                                           Foreign 
                                              Common Stock     Additional     Retained     Currency         Total                   
                                           ------------------    Paid-in      Earnings    Translation   Stockholders' 
                                            Shares    Amount     Capital     (Deficit)    Adjustment        Equity
                                           ---------  -------  -----------  ------------  -----------    -----------
<S>                                        <C>        <C>      <C>          <C>           <C>            <C>          
 
Balance, at October 1, 1993..............  2,824,734  $28,247   $3,664,711  $(3,476,531)  $         -    $   216,427
 
Net income...............................          -        -            -      431,303             -        431,303
 
Preferred stock conversion...............          -        -      181,243     (181,243)            -              -
                                           ---------  -------   ----------  -----------   -----------    -----------
 
Balance, at September 30, 1994...........  2,824,734   28,247    3,845,954   (3,226,471)            -        647,730
 
Net income...............................          -        -            -    2,244,258             -      2,244,258
 
Conversion of debt.......................    360,000    3,600      126,900            -             -        130,500
 
Public offering..........................  1,840,000   18,400    4,089,331            -             -      4,107,731
 
Exercise of stock options................     30,790      308       24,067            -             -         24,375
 
Exercise of warrants.....................      1,000       10        3,740            -             -          3,750
                                           ---------  -------   ----------  -----------   -----------    -----------
 
Balance, at September 30, 1995...........  5,056,524   50,565    8,089,992     (982,213)            -      7,158,344
 
Net income...............................          -        -            -    8,705,164             -      8,705,164
 
Cash dividends (Note 2)..................          -        -            -     (111,371)            -       (111,371)
 
Foreign currency translation adjustment..          -        -            -            -        (4,609)        (4,609)
 
Exercise of stock options................     27,454      275       36,723            -             -         36,998
 
Exercise of warrants.....................    484,584    4,846    1,812,344            -             -      1,817,190
                                           ---------  -------   ----------  -----------   -----------    -----------
 
Balance, at September 30, 1996...........  5,568,562  $55,686   $9,939,059  $ 7,611,580   $    (4,609)   $17,601,716
                                           =========  =======   ==========  ===========   ===========    ===========
</TABLE>

         See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>
 
                     NUTRITION FOR LIFE INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
 
 
                                                                1996              1995         1994
                                                            -------------     ------------  ----------
<S>                                                           <C>             <C>            <C>
Cash flows from operating activities:
        Net income........................................  $  8,705,164      $  2,244,258  $  431,303
        Adjustments to reconcile net income to net cash
          provided by operating activities:
           Depreciation and amortization..................       400,368           211,469     161,112
           Bad debt expense...............................       671,198            93,744      88,581
           Deferred tax benefit...........................    (1,420,858)          (79,142)          -
           Changes in assets and liabilities:
              Accounts receivable.........................      (866,498)         (171,025)   (100,654)
              Inventories.................................    (4,097,733)       (1,241,050)    (70,887)
              Refundable federal income taxes.............      (500,000)                -           -
              Prepaids and other assets...................      (170,840)           30,795     (89,487)
              Other assets................................       (63,606)          (48,976)    (60,094)
              Accounts payable............................       187,395         1,847,497      87,801
              Consigned inventory deposits................             -           (48,881)     24,491
              Deferred income.............................     3,545,776           245,023      10,088
              Accrued expenses and other liabilities......       768,070         1,205,013      73,322
              Federal and franchise tax payable...........         6,263           843,737           -
                                                             -----------         ---------     -------
Net cash provided by operating activities.................     7,164,699         5,132,462     555,576
                                                             -----------         ---------     -------
Cash flows from investing activities:
        Purchase of property and equipment................    (2,174,214)         (407,882)   (167,039)
        Purchase of intangible assets.....................      (211,660)                -           -
                                                             -----------         ---------     -------
Net cash used in investing activities.....................    (2,385,874)         (407,882)   (167,039)
                                                             -----------         ---------     -------
Cash flows from financing activities:
        Exercise of stock options.........................        36,998            24,375           -
        Exercise of warrants..............................     1,817,190             3,750           -
        Principal repayments on long-term debt............             -          (519,500)          -
        Proceeds from notes payable - bank................             -                 -      45,000
        Principal repayments on notes payable - bank......             -           (20,000)    (25,000)
        Net proceeds from public offering.................             -         4,107,731           -
                                                             -----------         ---------     -------
Net cash provided by financing activities.................     1,854,188         3,596,356      20,000
                                                             -----------         ---------     -------
Net increase in cash and cash equivalents.................     6,633,013         8,320,936     408,537
Cash and cash equivalents, beginning of year..............     8,960,100           639,164     230,627
Cumulative foreign currency translation adjustment........        (4,609)                -           -
                                                             -----------         ---------     -------
Cash and cash equivalents, end of year....................   $15,588,504      $  8,960,100   $ 639,164
                                                             ===========      ============   =========
Supplemental disclosure of noncash financing activities:
        Conversion of convertible long-term debt to
          common stock....................................  $          -      $    130,500   $       -
                                                            ============      ============   =========
 
        Declaration of dividends..........................   $   111,371      $          -   $       -
                                                            ============      ============   ========= 
Supplemental disclosure of cash flow information:
        Federal and state income taxes paid...............   $ 7,210,000      $          -   $       -
                                                            ============      ============   =========
</TABLE>
         See accompanying notes to consolidated financial statements.


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

 
NOTE 1 - ORGANIZATION AND BUSINESS

     Nutrition for Life International, Inc., ("NFLI" or the "Company"), a Texas
corporation, was formed on September 15, 1993 for the purpose of being the sole
survivor of a merger between Nutrition Express Corporation of Colorado, Inc.
(NEC-Colorado) and Nutrition Express Corporation of Utah, Inc. (NEC-Utah) and
the Company, as discussed in Note 3.  The effect of the merger was that, instead
of NEC-Colorado and NEC-Utah conducting operations through their ownership of a
general partnership, Nutrition for Life International (the Partnership), these
corporations were merged and the business operations have been conducted through
one corporation, NFLI.  The assets and liabilities of the Partnership became the
assets and liabilities of the Company, and the business operations have
continued as they were conducted previously.

     The Company operates as a wholesale distributor through its network
marketing organization, by selling a variety of consumer products and services
through independent distributors in the United States and abroad.  The Company
develops products that are designed for health-conscious consumers, and sells
those products to consumers through its network of independent distributors.
The Company offers a product line of approximately 320 products in eight
categories, including nutritional supplements, health foods, weight management
items, skin care products and other consumer products.

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

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

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

     The Company's wholly-owned subsidiary, Nutrition For Life International
(UK) Ltd. ("UK"), was incorporated on April 8, 1996 in the United Kingdom and
was formed primarily to operate as a wholesale distributor of the Company's
products throughout the United Kingdom.

PRINCIPLES OF CONSOLIDATION

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




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


 
INVENTORIES

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

PROPERTY AND EQUIPMENT

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

INTANGIBLE ASSETS

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

REVENUE RECOGNITION

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

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

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

EARNINGS PER COMMON SHARE

     Earnings per common share were computed by dividing net income applicable
to common shares, which has been reduced by the charge for conversion of
preferred stock for the year ended September 30, 1994 (see Note 3), and by the
weighted average number of shares of common stock outstanding after giving
effect to dilutive stock options and warrants.  The stock options and warrants
are included as share equivalents using the treasury stock method, based on the
average market price of the common shares during the year.



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


     Fully-diluted earnings per common share for the years ended September 30,
1995 and 1994 are determined on the assumption that the convertible long-term
debt outstanding as of those dates was converted as of the beginning of the
year. Net income applicable to common shares was adjusted for the interest on
the convertible long-term debt, net of its tax effect. In addition, stock
options and warrants are included as share equivalents in 1995 and 1994 using
the treasury stock method, based on the market price of the common shares as of
September 30, 1995 and 1994.

     As certain debt was retired with the proceeds of the Company's public
offering (see Note 2) and certain debt was converted in connection with the
offering, supplementary earnings per share information is presented herein.
Supplementary earnings per share for 1995 is $0.59.  Such amount is calculated
by increasing net income by the amount of interest expense related to the debt,
net of tax, and increasing the weighted average shares outstanding by the number
of shares issued on the conversion (278,137 weighted average shares) and the
number of shares whose proceeds from the offering would be required to retire
the debt (143,346 weighted average shares).

CASH AND CASH EQUIVALENTS

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

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

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

CONCENTRATION OF CREDIT RISK

     At September 30, 1996, the Company's cash in financial institutions
exceeded the federally insured deposit limit by approximately $5,665,000.

SHORT-TERM INVESTMENTS

     The carrying amount approximates fair value because of the short-term
maturity of those investments.

NEW ACCOUNTING PRONOUNCEMENTS

     In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of"  (SFAS No. 121).  SFAS No.
121 requires, among other things, that impairment losses on assets to be held,
and gains or losses from assets that are expected to be disposed of, be included
as a component of income from continuing operations.  SFAS No. 121 is effective
for fiscal years beginning after December 15, 1995.  The Company will adopt SFAS
No. 121 for the year ended September 30, 1997 and its implementation is not
expected to have a material effect on the financial statements.

     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  (SFAS No. 123).  SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to



                                     F-10
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS

 
employees in amounts based on the price of its stock. The Company does not
anticipate adopting the fair value method encouraged by SFAS No. 123 and will
continue to account for such transactions in accordance with APB No. 25.
However, the Company will be required to provide additional disclosures
beginning in the year ending September 30, 1997 providing pro forma effects as
if the Company had elected to adopt SFAS No. 123.

RECLASSIFICATIONS

     Certain reclassifications were made to the 1995 and 1994 accounts to
conform to the 1996 financial statement presentation. These reclassifications 
had no impact on net income as previously reported.

NOTE 2 - COMMON STOCK

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

     On July 10, 1995, the Company completed the issuance of an additional
1,840,000 shares of common stock, after giving effect to the stock splits noted
above, and 920,000 warrants through a public offering at prices of $2.6875 and
$0.125, respectively, resulting in net proceeds (after deducting issuance costs)
of $4,108,000.  In connection with the offering, the holder of the convertible
long-term debt converted $130,500 of debt from one of the convertible notes into
360,000 shares of the Company's common stock.  The remaining principal balance
of the notes were repaid from the proceeds of the offering.

     The terms of the warrants currently provide that one warrant entitles the
holder to purchase one share of common stock at a price of $3.75 during a three-
year period ending on July 10, 1998. The Company has the right to call all of
the warrants for redemption on 30 days' prior written notice at a redemption
price of $0.05 per warrant, subject to certain defined criteria.  For the years
ended September 30, 1996 and 1995, 484,584 and 1,000 warrants were exercised for
the issuance of 484,584 and 1,000 shares of the Company's common stock,
resulting in proceeds of $1,817,190 and $3,750.  As of September 30, 1996, there
are 434,416 warrants outstanding.

     On September 16, 1996 the Company's Board of Directors authorized a stock
repurchase program, whereby the Company shall have the discretion to purchase up
to 200,000 shares of common stock.  The repurchase program terminates on June
30, 1997, unless extended by the Board of Directors.

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

NOTE 3 - THE MERGER

     Effective June 27, 1994, the shareholders of NEC-Colorado, NEC-Utah and
NFLI approved the merger of the companies (the Merger). The former holders of
NEC-Utah common stock and NEC-Colorado Common Stock received a total of
1,383,544 and 1,441,190 shares of NFLI Common Stock, respectively, in connection
with the Merger.


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

 
     This reorganization was accounted for as a combination of entities under
common control, accounted for similar to a "pooling-of-interests".  Accordingly,
the Company's financial statements were restated for all periods prior to the
merger to reflect the financial position, results of operations, and cash flows
of the companies combined in the Merger on a historical cost basis.

     Shermfin Corporation (Shermfin) the largest shareholder of NEC-Utah Common
Stock, was the sole holder of the 500,000 shares of the NEC-Utah Series A
Preferred Stock.  Shermfin agreed to convert its Series A Preferred Stock, in
connection with the Merger, if the conversion price was reduced from the set
rate of $.0724 per share to a reduced rate of $.04 per share.  As a result,
Shermfin received 12,500,000 shares of NEC-Utah Common Stock, whereas under the
existing conversion rate, Shermfin would have been entitled to receive 6,906,077
shares.  For accounting purposes, the reduced conversion rate meets the criteria
of a "sweetened" conversion; therefore, net income applicable to  common shares
has been reduced by $181,243 (the estimated fair value of the shares in excess
of the fair value of shares which would have been issued pursuant to the
original conversion terms)  in the calculation of earnings per common share for
the year ended September 30, 1994.

NOTE 4 - PROPERTY AND EQUIPMENT

      Property and equipment and their useful lives are summarized as follows:
                                                    SEPTEMBER 30,        
                                                ----------------------         
                                         LIVES     1996        1995            
                                         -----  ----------  ----------         
      Equipment........................      7  $2,398,666  $1,219,966         
      Furniture and fixtures...........   5-10     585,056     183,241         
      Leasehold improvements...........      5     700,417     108,194         
                                                ----------  ----------         
                                                 3,684,139   1,511,401         
      Less:  Accumulated depreciation                                          
             and amortization..........          1,190,380     890,583         
                                                ----------  ----------         
                                                $2,493,759  $  620,818         
                                                ==========  ==========          

NOTE 5 - INCOME TAXES

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

          The provision for income taxes for the years ended September 30,
1996, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
                                                          1996        1995        1994
                                                      ------------  ---------  ----------
               <S>                                    <C>           <C>          <C>
               Federal tax - current................  $ 5,860,655   $659,015   $        -
               Federal tax - deferred benefit, net..   (1,420,858)   (79,142)           -
               State tax............................      850,000    184,722            -
                                                      -----------   --------    ---------
                                                      $ 5,289,797   $764,595   $        -
                                                      ===========   ========   ==========
</TABLE>



                                     F-12
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
          The following reconciles federal income taxes computed at the
statutory rate with income taxes as reported for the years ended September 30:
<TABLE>
<CAPTION>
                                                                                         1996         1995         1994
                                                                                      -----------  -----------  ---------
<S>                                                                                   <C>          <C>          <C>      
               Expected income tax expense at 34%...................................  $4,758,287   $1,023,010   $ 146,643
               Graduated tax rate effect............................................     140,000            -           -
               State taxes..........................................................     560,155      121,916           -
               Nondeductible amortization of intangible assets......................      30,694       30,694      30,694
               Nondeductible expenses associated with the Merger....................           -            -      17,250
               Utilization of loss carryforwards....................................    (150,335)    (422,701)   (197,409)
               Other items, net.....................................................     (49,004)      11,676       2,822
                                                                                      ----------   ----------   ---------
                   Income tax expense...............................................  $5,289,797   $  764,595   $       -
                                                                                      ==========   ==========   =========
 
               Deferred tax assets at September 30, 1996 and 1995 were as follows:
                                                                                                      1996         1995
                                                                                                   ----------   ---------
               Deferred income recognized for tax purposes..........................               $1,341,000   $  76,168
               Additional capitalized inventory costs...............................                  162,000           -
               Loss carryforwards...................................................                   45,000     187,956
               Allowance for doubtful accounts......................................                   13,000           -
               Differences between financial reporting and tax depreciation.........                  (61,000)      2,974
                                                                                                   ----------   ---------
                                                                                                    1,500,000     267,098
               Less valuation allowance.............................................                        -    (187,956)
                                                                                                   ----------   ---------
                   Net deferred tax assets..........................................               $1,500,000   $  79,142
                                                                                                   ==========   =========
</TABLE>

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

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

NOTE 6 - STOCK OPTION PLANS

          In planning the Merger, NEC-Utah and NEC-Colorado determined that a
stock option plan to provide incentives for employees and consultants of NFLI
would promote the interests of NFLI and its stockholders. The Board of Directors
of NFLI approved the 1993 Stock Option Plan (the 1993 Plan) in connection with
the approval of the Merger. Pursuant to the 1993 Plan, the Board of Directors of
NFLI reserved a total of 282,000 shares of its common stock for the grant of
options to purchase the Company's common stock. Options to purchase 55,844
shares have been issued in exchange for previously existing options to acquire
NEC-Utah and NEC-Colorado common stock. During 1995 the Company issued 30,790
shares to a director of NFLI from the exercise of options, resulting in proceeds
of $24,375. The remaining options to purchase 25,054 shares were exercised
during 1996, resulting in proceeds of $35,000. No other options are reserved for
issuance. The issuance of options is at the discretion of the Company's Board of
Directors.

          In October 1994, the Company granted options to key employees and
directors to purchase an aggregate of 154,800 shares of the Company's common
stock at $1.67 per share.  One-third of the shares underlying the options became
exercisable in cumulative installments of 12 months, 24 months and 36 months
after the date

                                      

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

 
of grant. Options terminate 5 years from the date of grant, except that if an
employee leaves the Company, the options will terminate 30 days thereafter.
During 1996, the Company issued 2,400 shares to an employee from the exercise of
options, resulting in proceeds of $1,998. In addition, 3,600 options were
terminated upon an employee leaving the Company.

          The Board of Directors of NFLI approved the 1995 Stock Option Plan
(the 1995 Plan) in March 1995.  Pursuant to the 1995 Plan, as amended in June
1996, the Board of Directors of NFLI reserved a total of 640,000 shares of
common stock for the grant of options to purchase the Company's stock.  In March
1995, the Company granted options to key employees and directors to purchase an
aggregate of 102,000 shares of the Company's common stock at prices ranging from
$1.88 to $2.25 per share. The terms of the options are similar to those granted
in the 1993 Plan.  In July 1995, the Company granted options to an officer of
the Company to purchase 50,000 shares of the Company's common stock at $2.69 per
share.  During the year ended September 1996, the Company granted options to two
officers of the Company to purchase an aggregate of 35,000 shares of Company's
common stock at prices ranging from $11.50 to $14.25. As of September 30, 1996,
no options were exercised.

          In November 1995, the Board of Directors of NFLI adopted the 1995 Non-
Discretionary Stock Option Plan for directors of the Company who are not
eligible to participate in the other Plans (the "Non-Discretionary Plan.")  The
Non-Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's Common Stock to each eligible director on the date of
adoption of the Non-Discretionary Plan (November 28, 1995), to each person who
thereafter becomes a director of the Company and, as of December 1 of each year
(commencing in 1996), options to purchase an additional 5,000 shares of common
stock will be granted to each eligible director.  The exercise price of the
options is the fair market value of the common stock on the date the options are
granted.  The options were exercisable in full as of the date of grant, except
that the options which have been granted were not exercisable until the
shareholders of the Company approved the Non-Discretionary Plan.  The
shareholders approved the non-discretionary plan in May 1996.  The shares
acquired upon exercise of these options cannot be sold for six months following
the later of the date of grant or shareholder approval of the Non-Discretionary
Plan.  The Company granted options to purchase 5,000 shares of common stock at a
price of $19.75 per share to three directors.  Each option granted pursuant to
the Non-Discretionary Plan will expire five years from the date of grant, except
that an option will expire, if not exercised, 30 days after the optionee ceases
to be a director of the Company.

          All options have been issued with exercise prices in excess of
the market value of the common shares at the date of grant.
<TABLE>
<CAPTION>
 
Details of stock options are as follows:
                                                           Number        Option
                                                         of Shares       Price
                                                         ---------    -------------
                    <S>                                  <C>         <C> 
                    Outstanding at September 30, 1993            -                -
                      Granted..........................     55,844   $  0.79 - 1.40
                                                         ---------
 
                    Outstanding at September 30, 1994..     55,844      0.79 - 1.40
                      Granted..........................    306,800      1.67 - 2.69
                      Exercised........................    (30,790)             .79
                                                         ---------
                    Outstanding at September 30, 1995..    331,854
                      Granted..........................     50,000    11.50 - 19.75
                      Exercised........................    (27,454)     1.40 - 1.67
                      Expired..........................     (3,600)            1.67
                                                         --------- 

                    Outstanding at September 30, 1996..    350,800
                                                         ========= 
</TABLE> 
   Under the 1993 Plan and the 1995 Plan, the Company may issue options to
   purchase up to an additional 516,556 shares of common stock.


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

 
NOTE 7 - DEFERRED INCOME

          NFLI distributors earn monthly commissions based on their achieving a
pre-determined monthly minimum sales volume. To assist distributors in meeting
their monthly minimum sales volume, the Company has developed an Order Assurance
Program (OAP), which allows a distributor to purchase a product redemption
certificate, subject to certain restrictions, for the difference between the
distributor's actual monthly order and the predetermined monthly minimum sales
goal. The purchase of such a certificate by a distributor qualifies the
distributor to receive a commission in a given month even though actual product
purchases were below the required level. The Company recognizes revenues on
these certificates when they are redeemed for product or on a ratable basis over
a 150 day period after the expiration of the certificate. The Company recognized
revenues from the redemption of certificates of $7,647,000, $1,090,000 and
$733,000 for the years ended September 30, 1996, 1995 and 1994. The Company
recognized revenue from unredeemed, expired certificates of $3,025,000, $876,000
and $430,000 for the years ended September 30, 1996, 1995 and 1994. At September
30, 1996 and 1995 the Company had a liability for unredeemed certificates, net
of applicable commissions, of $3,893,570 and $347,795 which is included in
deferred income in the accompanying consolidated balance sheets.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Operating Leases

          The Company has noncancelable operating leases, primarily for office
and warehouse space.   Rental expense under operating leases for the years ended
September 30, 1996, 1995 and 1994 amounted to approximately $365,000, $161,000
and $161,000, respectively.

          Future minimum rental payments required under operating leases that
have an initial or remaining noncancellable lease term in excess of one year are
as follows:
 
YEAR ENDED SEPTEMBER 30,                AMOUNT
                                     ----------
        1997.......................  $  682,000
        1998.......................     684,000
        1999.......................     677,000
        2000.......................     669,000
        2001.......................     496,000
2002 and thereafter................   1,185,000
                                     ----------
                                     $4,393,000
                                     ==========

Government Regulations

          The Company's activities are subject to regulations by various federal
and state agencies, including the Food and Drug Administration. 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-15
                                     
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Employment Agreements

          During 1995, the Company entered into employment agreements with the
chief executive officer and executive vice president of the Company which
expired September 30, 1996. In addition to their annual salary, both individuals
were entitled to 5% of the first $2,000,000 of pre-tax income, 4% of the next
$500,000 of pre-tax income and 3% of pre-tax income over $2,500,000. In
addition, certain key individuals are to receive bonuses in total ranging
between 2% and 4% of pre-tax income over $2,000,000. The Company intends to
enter into new employment agreements with these two individuals for the year
ending September 30, 1997. The Company incurred expenses of $1,554,996 and
$334,317 relating to these employment agreements for the years ended September
31, 1996 and 1995.

Legal Proceedings

          During April 1996, the Attorney General of the State of Illinois filed
suit against a significant distributor of NFLI concerning the distributors'
practices in the sale of products and in the recruiting of other distributors.
On July 16, 1996, NFLI entered into an "Assurance of Voluntary Compliance" (AVC)
with the state of Illinois in order to assure that NFLI and its distributors'
policies and practices conform to Illinois law and fairly protect the interests
of consumers.  In accordance with the agreement as it relates to the OAP
program, among other things, NFLI has agreed to enforce the following guidelines
and policies; (1) distributors may not make purchases or receive certificates
merely to earn bonuses; (2) NFLI will continue to encourage distributors to
redeem their certificates for products; (3) the Company's OAP shall remain a
wholly optional program; (4) a distributor shall not receive additional
certificates if the distributor has four unredeemed certificates or the
distributor has unredeemed certificates totalling six times the distributor's
designated OAP amount, unless the distributor is accumulating certificates for a
big ticket item; and (5) upon cancellation of a distributorship, unexpired
certificates and products purchased with certificates will be treated as any
other product for refund purposes.  The Company is required to implement the
above procedures prior to January 1997. The Company has entered into a similar
agreements with several other states.

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

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

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

          Although no assurances can be given, the Company and its independent
legal counsel believe the Company has meritorious defenses to both the Federal
Action and State Action and the Company intends to defend itself vigorously.
While the ultimate results cannot be reasonably estimated, a judgment against
the Company could have a significant negative impact on the operations and
financial position of the Company.

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


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

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

          In 1993, the Partnership collected NEC-Utah common stock valued at
$114,458 ($.03 per share) from Mr. Jordan, which was presented as a reduction to
administrative expenses for recovery of costs incurred to litigate this case.
Upon combination of the entities in the Merger, this stock was retired and the
recognition of the $114,458 was reversed as these shares were effectively
treasury shares of NFLI.  In September 1995, the Company collected $160,680 from
the sale of Mr. Jordan's house which is recorded as other income in the
accompanying financial statements.  On October 4, 1995, the Bankruptcy Court for
the Central District of California declared Mr. Jordan's debt to the Company
nondischargeable.  Mr. Jordan did not file a notice of appeal.  The Company has
only received partial collection on the Judgment and due to Mr. Jordan's
financial circumstances, it is presently unknown whether additional amounts will
be collected and, therefore, no additional amounts have been recorded in the
accompanying financial statements.

Product Liability

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

NOTE 9 - RELATED PARTY TRANSACTIONS

          The Company purchases a significant portion of their inventory from
one vendor.  The president of this vendor is a director of the Company, and
until June 1995, the vendor was owned by a major stockholder of the Company.
The items purchased are readily available from other vendors.  During the years
ended September 30, 1996, 1995 and 1994, the Company purchased $5,234,000,
$2,258,000 and $1,440,000 of goods, respectively, from this vendor.

NOTE 10 - FOREIGN SALES

     For the years ended September 30, 1996, 1995, and 1994 the Company's net
sales from foreign operations were $7,982,000, $6,482,000 and $2,860,000,
respectively.  During the years ended September 30, 1996 and 1995 total foreign
sales to customers in Canada totalled $6,422,000 and $4,157,000, respectively.
The gross profit percentages on all foreign sales are consistent with the
overall gross profit percentages.

                                     F-17
<PAGE>
 
           ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE


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

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

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

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

                                    PART III

     ITEMS 9, 10, 11 and 12 constituting Part III of this Form 10-KSB have been
omitted from this Annual Report pursuant to the provisions of Instruction E(3)
to Form 10-KSB as the Company intends to file a definitive proxy statement
pursuant to Regulation 14a under the Securities Exchange Act of 1934 within 120
days after the close of its last fiscal year.

                                      26
<PAGE>
 
                   ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

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

     Exhibit 3.1   Articles of Incorporation, as amended*

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

     Exhibit 4.1   Specimen Certificate of Nutrition for Life International,
                   Inc.'s Common Stock*
 
     Exhibit 4.2   Specimen Warrant*

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

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

     Exhibit 10.2  1995 Stock Option Plan*

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

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

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

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

     Exhibit 10.7  Employment Agreement dated May 10, 1995, between Nutrition
                   for Life International, Inc. and David P. Bertrand*

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

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

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

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

     Exhibit 10.13 Agreement, dated July 15, 1994 between Nutrition for Life
                   International, Inc. and Dr. David Santiago (N.F.P. Group,
                   Inc.), as amended by letter dated June 2, 1995*


                                      27
<PAGE>
 
     Exhibit 10.14  Warrant Agreement, dated October 15, 1995 with Kevin
                    Trudeau, 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 10.15  Lease Agreements for office and warehouse facilities with
                    non-affiliates, filed as an Exhibit to the Report on Form
                    10-KSB for the fiscal year ended September 30, 1995 of the
                    Registrant, which Exhibit is incorporated herein by this
                    reference.

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

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

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

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

     Exhibit 22     Subsidiaries of the Company.
___________________________________________________

     *       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.


                                      28
<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.

                                     NUTRITION FOR LIFE INTERNATIONAL, INC.
                                     (Registrant)



Date:   December 27, 1996            By: /s/ David P. Bertrand
                                        --------------------------------------
                                         David P. Bertrand, President

     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 27, 1996                /s/ David P. Bertrand
                                     --------------------------------------
                                     David P. Bertrand, President, Director
                                     and Chairman of the Board of Directors


Date:   December 27, 1996                /s/ Jana Mitcham
                                     -----------------------------------------
                                     Jana Mitcham, Executive Vice President,
                                     Secretary, and Director


Date:   December 27, 1996                /s/ Barry C. Loder
                                     -----------------------------------------
                                     Barry C. Loder, Vice President and
                                     Chief Financial Officer


Date:   December 27, 1996                /s/ Ronnie D. Meaux
                                     -----------------------------------------
                                     Ronnie D. Meaux, Vice President,
                                     Treasurer, Assistant Secretary and
                                     Principal Accounting Officer


Date:   December 27, 1996                /s/ John R. Brown, Jr.
                                     -----------------------------------------
                                     John R. Brown, Jr., Vice President


Date:   December 27, 1996                /s/ F. Wayne Ballenger
                                     -----------------------------------------
                                     F. Wayne Ballenger, Director


Date:   December 27, 1996                /s/ M.F. Florence
                                     -----------------------------------------
                                     M.F. Florence, Director


Date:   December 27, 1996                /s/ Richard S. Kashenberg
                                     -----------------------------------------
                                     Richard S. Kashenberg, Director


Date:   December 27, 1996                /s/ Gregory Pusey
                                     -----------------------------------------
                                     Gregory Pusey, Director


                                      29