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

 X  Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
    1934 (Fee Required) for the Fiscal Year Ended September 30, 1998

    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.
            (Exact name of Registrant as specified in its charter)

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

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

        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)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) , and (2) has been subject to such filing requirements for
the past 90 days. Yes [x]  No  [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on December 21, 1998 was $8,336,301.

The number of shares outstanding of the Registrant's common stock on December
21, 1998 was 5,808,595.

                      DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K is incorporated by reference to the Registrant's
definitive proxy statement which is expected to be filed within 120 days of the
end of the Registrant's fiscal year ended September 30, 1998.
<PAGE>
 
                DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

                                    PART I

                               ITEM 1. BUSINESS

Background

          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 80,000 distributors.  The Company offers a product line of 
approximately 380 products in nine categories, including nutritional 
supplements, health foods, weight management items, skin care products, and 
other consumer products and services.

          The Company develops products that it believes will have market 
appeal to its distributors and their customers, and assists its distributors 
in building their own businesses.  The advantage 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 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 directly
generate.

          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. From September 30, 1997 to 
September 30, 1998, the number of distributors decreased approximately 8,500 
from 88,500 to 80,000. See Item 1. "Business - Distribution and Marketing".

          In 1996 the Company's marketing program became the subject of 
regulatory scrutiny and the Company was named as a defendant in class action 
lawsuits.  The Company believes that these matters have had a material effect 
on the Company's operations and financial condition. See Item 1. "Business - 
Risk Factors", Item 3. "Legal Proceedings" and Item 7. "Management's 
Discussion and Analysis of Financial Condition and Results of Operations".

          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, the United Kingdom, the Republic of Ireland, the
Republic of Philippines, Guam and Puerto Rico. The Company has two wholly-owned
subsidiaries, Nutrition For Life International (UK) Ltd. and Nutrition For Life
International Philippines, Inc. Unless the context otherwise requires, the term
the "Company" as used in this Annual Report on Form 10-K includes the Company's
two wholly-owned subsidiaries.

          The Company intends to pursue its long-term business strategy of
increasing sales and profitability by (1) attracting and retaining distributors
to its network marketing system; (2) increasing product sales to existing
distributors; (3) expanding its marketing activi-

                                       2
<PAGE>
 
ties into new international markets; and (4) adding complimentary goods and
services through new product offerings and strategic acquisitions.

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

 
Distribution and Marketing

          The Company's products are distributed through a network marketing 
system consisting of approximately 80,000 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 any of the past three fiscal years.
        
          
          The Company's ability to increase sales is significantly dependent 
on its ability to attract, motivate and retain distributors.  The Company 
utilizes an innovative marketing program which it believes is superior to 
programs offered by other network marketing companies.  The program provides 
financial incentives, distributor  training and support, low priced starter 
kits, no inventory requirements, and low monthly purchase requirements.  
Management intends to reach potential new distributors through the Company's 
site on the World Wide Web, teleconferencing and regional sales meetings. 

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

          . Generate cumulative qualifying product volume of $1,000 over any
            period of time.

          . Qualify to be an Executive right away by purchasing the $199
            Executive Business Pack, enroll in the Order Assurance Program (the
            "OAP") at the monthly level of $100 or the $100 AutoShip Program and
            subscribe to the $25 monthly Business Training System.

          "Qualifying product volume" is product the distributor and his
downline distributors purchase at wholesale directly from the Company either for
personal use or for sale to other customers at retail prices. 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. For
distributors who became executives prior to March 1, 1998, the only
qualification to remain an executive is to purchase $100 in product every month,
except that distributors who have become executives by generating cumulative
qualifying product value of only $500 must continue their participation in the
other programs noted above for one year from enrollment in order to maintain
executive status. For distributors becoming executives subsequent to March 1,
1998, the qualifications to remain an executive are to purchase $100 in product
every month and to be enrolled in the Business Training System. 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 will assist in increasing its network of
distributors.

          The Company previously designated a program as the "Instant 
Executive Program".  The Instant Executive Program designation merely 
referred to the option by which distributors could choose to qualify 
immediately rather than through incremental product purchases over time. The
Instant Executive Program, particularly as marketed by Mr. Kevin Trudeau,
formerly a key distributor of the Company, was the subject of legal and
regulatory scrutiny. The Company has discontinued the use of the terminology,
"Instant Executive Program".
 
          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

                                       3
<PAGE>
 
executive distributor the day that he or she enrolls by generating at least
$1,000 in qualifying product volume and by joining the OAP and the Company's
business training program. Under the AVC, the Company was permitted to maintain
its same executive level qualifications, but to aid clarification, it no longer
uses the "instant executive" terminology.

          Other key features of the AVC focus on the Company's commitment to: 
(a) create an official explanation of its marketing and compensation plan 
and to prohibit distributors from creating their own explanations of how the 
marketing and compensation plan works; (b) make clear that there are no 
mandatory purchases of product to become a distributor; (c) take further 
steps to stress distributor compliance with the Company's policies and 
procedures; and (d) create a World Wide Web site on the Internet to provide 
more information about the Company's products and programs. The Company also
agreed to provide distributor earnings disclosures and to make clear that
executive distributors cannot earn commissions unless they are engaged in the
sale of the Company's products to consumers at retail, including procedures to
verify retail sales. Specifically, an executive distributor will not be entitled
to receive bonuses or commissions on downline sales unless within the preceding
one month period the executive distributor has made at least five retail sales,
or within the preceding two month period has made ten retail sales. The Company
also agreed to take additional steps to encourage distributors to redeem OAP
certificates for product, 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.
Compliance by the Company with these agreements may make the program less
attractive to distributors and prospective distributors. In particular, the
Company believes that the special requirements in the Florida agreement have had
a negative impact on the Company's ability to retain and attract distributors in
Florida. These factors could negatively impact the Company's future operating
results. The Company maintains an ongoing compliance program which includes
periodic reporting to the states.

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

          The following table sets forth the number of the Company's 
distributors on the dates indicated:

                                                   AT SEPTEMBER 30,      
                                          1998    1997(2) 1996    1995    1994 
                                          ----    ----    ----    ----    ----
  Approximate number of distributors(1)  80,000  88,500  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 $100 in
      sales volume every month and be enrolled in the Company's Business
      Training System.

  (2) The approximate number of 1997 active distributors was revised downward in
      March 1998 from 98,500 as previously reported, upon the discovery of a
      computer error.

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

        The Company participates in rallies in various key cities in North
America, Puerto Rico, the United Kingdom and Pacific Rim countries and
participates in motivational and training events in key countries, all of which
are designed to inform large numbers of prospective and existing distributors
about the Company's product line and selling techniques. Distributors give
presentations relating to their experiences with the Company's products and the
methods by which they develop their distributor organizations. Specific selling
techniques are explained, and emphasis is placed on the need for consistency in
using such

                                       4
<PAGE>
 
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 fiscal years ended September 30,
1998, 1997 and 1996, the Company expended approximately $679,000, $590,000, and
$348,000, respectively, on promotional activities related to distributors'
rallies and the annual convention. In February 1998 the Company sponsored a
cruise for certain distributors at an additional cost of approximately $900,000.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

        In July 1996 the Company entered into an Administrative and Consulting
Services Agreement (the "1996 Agreement") with Distributor Services, L.L.C.
("DS"). DS is an affiliate of Nightingale-Conant ("NC"), at the time a major
supplier of self improvement materials to the Company. The 1996 Agreement
provided that, except to the extent the Company produced its own material in-
house, DS had the exclusive right to produce and sell all of the Company's
recruiting and training material. Such materials were to be produced and
marketed at the expense of DS and DS was entitled to all revenues received from
the sales of such materials. DS was also 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 therefrom. The
Company had the exclusive right of approval over the content of all materials
and meetings produced by DS. Without additional compensation, DS was to 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 also produced and
provided for 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 1996
Agreement was fifteen years and the parties agreed to negotiate in good faith
successive fifteen year terms. The 1996 Agreement could be earlier terminated
for breaches of any material obligation. Kevin Trudeau, formerly a key
distributor of the Company, was principally responsible for DS's performance in
connection with this 1996 Agreement. Mr. Trudeau produces certain self
improvement tapes which are sold by NC to the Company and others. The Company
purchased product and services in the aggregate of approximately $4,387,000,
$6,494,000 and $2,273,000 from DS and NC in the years ended September 30, 1998,
1997 and 1996, respectively.

        In July 1997, DS made a promisory note payable to the Company in the 
amount of $632,000, plus interest at 8% per year, which represented the 
balance due the Company on account. The note was due and paid in July 1998.

        Associated with the termination of Kevin Trudeau's distributorship in
October 1998, the Company, DS and NC entered into a severence agreement
terminating the 1996 Agreement in which the Company agreed to pay NC and DS
$2,047,000 and to issue NC a warrant to purchase 290,000 shares of the Company's
common stock to satisfy all accounts payable and other amounts claimed by them
for materials previously delivered to the Company, as well as for the purchase
of all of DS's inventory of audio and video tapes, including all of the master
disks for such audio and video tapes, and other materials used to promote the
Company, and for cancellation of the 1996 Agreement.

        Approximately $967,000 was paid upon execution of the severence
agreement, with the balance of $1,080,000 represented by a promissory note
payable in 30 equal monthly interest free payments of $36,000 beginning November
1, 1998. The note is subordinated to working capital loans obtained by the
Company in the ordinary course of business, tax and other governmental charges,
and other obligations incurred in the ordinary course of business for obtaining
goods and services.

         The Company issued NC a warrant entitling NC to purchase up to 
290,000 shares of the Company's Common Stock at $5.50 per share at any time 
until October 31, 2003. NC also agreed that for a five year period it would 
not directly or indirectly seek to acquire a controlling interest, as defined 
under the rules and regulations promulgated by the Securities and Exchange 
Commission in the Company without the prior written consent of the Company's 
Board of Directors. Since the warrants were actually issued in October 1998 the 
Company has accrued an expense of $702,000 as of September 30, 1998 and will 
record that amount in "Additional Paid In Capital" in October 1998.

         The Company has accounted for the transactions as of September 30,
1998. The amount paid for the audio production rights was approximately
$1,400,000 and will be amortized beginning in November 1998 over an expected
recovery period of three-years. Expense relative to the warrants issued to NC
has been determined by utilizing the Black-Scholes method to be approximately
$702,000. Such expense is included in the accompanying financial statements as
"Other expense - Contract termination" and "Accrued expense - Nightingale
Conant". Since the warrants were actually issued in October 1998 the Company has
accrued an expense of $702,000 as of September 30, 1998 and will record that
amount in "Additional Paid In Capital" in October 1998. Additionally, the cash
paid upon the execution of the agreement of approximately $976,000 has also been
included in "Accrued expenses - Nightingale Conant".

        In addition to continuing to offer certain NC products through its
distributor network, the Company also agreed to utilize NC's services on an
exclusive basis for a 30-month period to reproduce audiotapes for the Business
Training System made by the Company.

          The Company is now internally providing the services previously 
performed by DS. To facilitate this the Company has hired three former 
employees of DS to assist in event organization and scheduling. The Company 
now produces, organizes and, when appropriate, sells admission to its 
recruiting and promotional events and retains all such revenue. Additionally, 
existing in-house staff, facilities and certain executive distributors are 
being utilized to produce the Company's recruiting and training materials, 
including its monthly Business Training System. The Company believes that it 
has the personnel and facilities to perform the services previously provided 
by DS.

          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

                                       5
<PAGE>
 
program was initiated in fiscal 1990. At September 30, 1998, the Company had
approximately 300 distributors in the program. The requirements for a
distributor to qualify for the car bonus program are as follows:

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

                 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 $3,500 per month.

            House Bonus Program. The Company offers a house payment bonus 
program, whereby it makes house payments up to $5,000 per month. The Company 
has no liability relating to the financing or purchasing of the house. The 
house payment bonus program was initiated in September 1998. At September 30, 
1998 the Company had 23 distributors in the program.To qualify for the house 
payment bonus program a distributor must be a fully qualified Four or 
Five-Star Platinum Executive who has 300 (Four-Star) or 400 (Five-Star) 
"unencumbered" Executives in his or her personal lines of sponsorship who are 
each purchasing $100 sales volume per month. An unencumbered executive is 
someone in a distributor's personal line of sponsorship who does not fall 
under another Four or Five-Star Platinum Executive who is also qualified to 
receive the House Payment Bonus.
          
          Order Assurance Program.  The Company provides a program whereby 
distributors  may enroll in a minimum ordering program in order to enhance 
their eligibility for commissions.  Minimum orders ranging from $41 to $301 
per month are automatically placed by credit card or check.  Differing 
amounts for the optional Order Assurance Program ("OAP") exist to allow 
generation of sales volume at various levels that generally correspond to 
commission and bonus qualification levels, i.e., $100 is the minimum sales 
volume to remain an active 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; $300 is the minimum sales volume 
requirement to be a platinum executive; and $300 is the minimum sales volume 
qualification level for the house payment program. Therefore, the OAP  
promotes sales for the Company and the distributors participating in bonus 
programs.  The OAP was initiated in fiscal 1993.  The OAP is voluntary and no 
restrictions are placed upon any participant's ability to exit the OAP.  The 
Company has agreed in the AVC that, effective in January 1997, a distributor 
would not receive additional product certificates under the OAP and would be 
given 30 days notice that their OAP status would be suspended if: (i) four 
monthly unredeemed certificates were issued consecutively to the distributor 
for a maximum credit of four times the distributors enrollment level; or (ii) 
the distributor has accumulated unredeemed certificates with a total face 
value of six times the distributors then designated OAP amount.  However, 
these requirements would not be applicable if the distributor redeems one or 
more of the issued certificates, or notifies the Company that he is 
accumulating toward a "big ticket" item.  The Company also agreed in the AVC 
to encourage distributors to redeem their certificates for product. As of 
September 30, 1998, 1997 and 1996, respectively, there were approximately 
35,100, 34,400 and 41,700 distributors enrolled in the OAP.

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

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

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

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

          Mind And Body Institute. In January 1997, the Company began a 
series of one-day product workshops designed to enhance distributor 
understanding and appreciation of the Company's product line.

          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

                                       6
<PAGE>
 
answering the most commonly asked questions by potential new distributors.
Management believes it is one of the more effective marketing tools in the
industry.

          Business Training System.  The Company provides a monthly 
subscriber service of leading self development books and audio and video 
programs that serve as a link between the philosophy and ideals of the 
Company and its distributors. Prior to September, 1998 the Company offered a s
imilar monthly subscriber service known as the "Master Developer Series".

          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.

          Management also believes that a significant part of its growth is
dependent upon the enthusiasm and momentum generated by executive level
distributors who are able to motivate their downline organizations through
various marketing methods, including the use of newsletters, brochures and other
sales aids and the holding of meetings and rallies at the expense of the
sponsoring distributor.          
 
          Commencing with the last quarter of the fiscal year ended September
30, 1995, one executive level distributor, Mr. Kevin Trudeau, was particularly
noteworthy in this regard, and he made a significant contribution to the growth
of the Company. Effective October 24, 1997, Mr. Trudeau entered into an
exclusivity agreement with the Company for a period of eight years. Under the
agreement, Mr. Trudeau was to devote substantial effort to his position as a key
distributor of the Company, which included conducting opportunity meetings and
training seminars, producing tapes for the Company's Master Developer Series,
and consulting with Management of the Company. Mr Trudeau agreed that during the
term of the exclusivity agreement and for nine months after termination, he
would not engage in any business that markets products through a network or
multilevel marketing system other than through the Company or its affiliates.
Pursuant to the agreement, Mr Trudeau was expected to continue to engage in
other business activities (which included sales of products similar to those
offered by the Company so long as they were not offered through a network
marketing system) and it was acknowledged that he was not an employee, director
or officer of the Company and was not involved in management of the Company. Mr
Trudeau was entitled to receive approximately 0.75% of the Company's sales on a
monthly basis (which commenced in October 1997), in addition to his regular
distributor earnings. Mr. Trudeau 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 and is the author of Kevin Trudeau's Mega Memory book which was
published in 1995 by William Morrow.

          During the past five years, Mr. Trudeau also engaged in other 
activities, including KT Corp., which was a distributor of the Company, the 
Trudeau Marketing Group, and Distributor Services, L.L.C., which marketed 
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 January 1998 Mr. 
Trudeau and Mega Systems, Inc. entered into a settlement with the U.S. 
Federal Trade Commission ("FTC"), in which Mr. Trudeau agreed to pay $500,000 
in consumer redress and to be barred from making false claims regarding the 
"Mega Memory" System.  Mr. Trudeau also agreed to establish a $500,000 escrow 
account or performance bond to assure compliance. Mr. Trudeau also agreed 
with the FTC that he would be required to have substantiation, which, when 
appropriate, must be scientific, for claims about the benefits, performance 
or efficacy or any product he advertises, promotes, sells or distributes in 
the future. He was also barred from misrepresenting the existence, contents, 
validity, results, conclusions or interpretations of any test, study or 
research. It is unknown whether this matter will affect the Company's distribu
tion and marketing of "Mega Memory" tapes or other products produced by Mega 
Systems, Inc. See Item 1.  "Business - 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 
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 was a key 
independent distributor of the Company, but was not an officer or director of 
the Company, and was not authorized to make statements about Company policy.  
See Item 1. "Business - Risk Factors".

          In August 1998 the Company and Mr. Trudeau entered into an 
agreement to end their business relationship. Mr. Trudeau and the Company 
agreed that their October 1997 agreement and his distributorship were 
terminated and that Mr. Trudeau would not contest such terminations. Mr. 
Trudeau agreed that he would comply with the nine-month non-competition 
provisions of the October 1997 agreement. Additionally the Company and Mr. 
Trudeau agreed that the Company would purchase the approximate 70,000 shares 
of Common Stock and 40,000 stock purchase warrants owned by Mr. Trudeau at 
the then market price of approximately $459,000.

                                       7
<PAGE>
 
          The Company is hopeful that the termination of the business 
arrangement with Mr. Trudeau will have a positive impact on its future 
operations. By refocusing attention on a large number of highly motivated 
executive level distributors rather than one individual the Company believes 
that it is better positioned to increase its sales of product and the level 
of distributor recruitment. The Company believes that the enthusiasm and 
momentum generated by executive level distributors who will now be able to 
motivate their downlines utilizing non-Trudeau methods may result in a more 
consistent and sustainable growth. See Item 1. "Business - 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.


<TABLE> 
<CAPTION> 

                                                                 YEAR ENDED SEPTEMBER 30
                                                                     (in Thousands)
        Country             YEAR ENTERED       1998           1997           1996         1995          1994
        -------             ------------       ----           ----           ----         ----          ----
       <S>                  <C>              <C>            <C>             <C>          <C>          <C> 
        United States          1984          $60,400        $73,000         $89,400      $25,800      $14,700
        Canada                 1993            4,800          6,800           6,400        4,200        2,400
        Puerto Rico            1994              200            500           1,200        2,200          300
        United Kingdom(1)      1996            3,500          2,500             200           --           --
        Korea(2)               1991               --             --             100          100          100
        Philippines(2)         1993              700            200             100          100          100

</TABLE> 

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

  (2)  The Company has historically sold its products in Korea and the 
       Philippines which do not use the Company's network marketing system. The
       Company introduced its network marketing system in the Philippines in
       July 1997.
          
          The Company's long-term plan is to enter additional markets outside
the continental United States. Regulatory approvals may be required in some
instances. 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. The Company also
maintains distribution centers in Alaska, Hawaii and Puerto Rico. The Company
has established an office and warehouse center in Warrington, England to provide
administrative, shipping and warehouse support for the Company's operations in
the United Kingdom and Ireland. The Company has also established an office in
Pasig City, Philippines in addition to warehouse centers in Quezon, Davao and
Cebu, Philippines.

          The Company is currently evaluating its options relative to 
continuing certain of its international operations. Such options include but are
not limited to the continued operation of its subsidiaries or the sale or
closure of certain operations. As of September 30, 1998 the Company has
established no formal plan of action.

          The uncertain Asian economic situtation has had a negative impact 
on the Company's operations in the Philippines. The exchange rate between the 
Philippines peso and the US dollar has declined from approximately 28 to 1 at
the formation of that subsisdiary to approximately 44 to 1 as of September 30,
1998. As a result the Company has realized exchange rate losses of approximately
$212,000 and $78,500 for the years ended September 30, 1998 and 1997,
respectively in the Philippines. 

                                       8
<PAGE>
 
Products
          The Company markets and distributes an extensive product line of 
approximately 380 items in nine different categories:  (1) vitamins, minerals 
and antioxidants; (2) Nutique personal care items; (3) food and weight 
management items; (4) herbal formulas;
(5) homeopathic and special formulas; (6) cleaning concentrates; (7) 
filtration systems; (8) self-improvement programs; and (9) 
services.  The line consists of primarily consumable products that are 
designed to target the growing consumer interest in natural health 
alternatives for nutrition and personal care.  In developing its product 
line, the Company has emphasized quality, purity, potency, and safety.

          Vitamins and minerals and antioxidants. The Company markets 47 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 28 Nutique hair 
and skin care products including skin care formulas for men and women, 
shampoo and conditioner, hand and body lotions, sunscreen, an alphahydroxy 
acid skin rejuvenating complex, and a thigh creme.  Each of these products 
contains ingredients that are formulated to promote healthier looking skin 
and hair.
          
          
          Food and weight management items.  The Company markets 70 food and 
weight management products.  These include a whey beverage in five flavors, 
the Nutri-Mac line of pastas, the Nutri-Blend flour and baking mixes, instant 
food shakes, fiber products, the Nutri-Cookie(R), and Lean Life(R), a herbal
weight management formulation, and a line called Heartful Gourmets(R), which are
soy-based meals and snacks .

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

          Homeopathic and special formulas.  Homeopathic remedies, when 
prepared in minute amounts, mimic disease symptoms and stimulate the body's 
defense systems.  The Company offers 75 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 29 products, 
including a liquid hand and body soap, dishwasher concentrate, laundry 
concentrates, laundry softener, a heavy duty cleaner-degreaser, and a pine 
disinfectant, and a line of anti-microbial and anti-viral disinfectants.
          
          Filtration systems.  The Company markets 51 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 47 motivational 
and self improvement tapes and other products. Prior to September, 1998 the 
self improvement tapes were purchased primarily through arrangements with 
Nightingale-Conant Corporation. Effective September, 1998 the Company began 
internally producing such tapes to supplement tapes available from 
Nightingale-Conant Corporation.

          Services. The Company began a ninth marketing category in the 
fiscal year ended September 30, 1997 called "Services." Two services are 
currently being offered to distributors and customers: LIFEdial 1 Plus and 
Body Check. LIFEdial 1 Plus is a discounted long distance package. 
Distributors may sign-up for the service and sell it to customers. Body Check 
is a hair analysis which tests the level of 21 elements normally found in the 
body. The resulting report also includes information regarding exposure to 
toxic substances. The Body Check report can then be used to make 
recommendations for the individual's specific nutritional supplements.

          During the last three fiscal years, no single product has accounted 
for 10 percent or more of the Company's revenue. The Company continually 
seeks to identify, develop and introduce innovative, effective and safe 
products.  During the fiscal year ended September 30, 1998, 1997 and 1996, 
the approximate number of new products and services introduced by the Company 
was 16, 44, and 50, respectively. Management believes that its ability to 
introduce new products increases its distributors' visibility and competitiven
ess in the marketplace.

                                       9
<PAGE>
 
          The Company maintains significant amounts of products in its 
inventory to meet rapid delivery requirements of customers and to minimize 
product back orders, which historically have not been significant. However, 
the Company did experienced significant backorders in the fiscal year ended 
September 30, 1997. See Item 7. "Management's Discussion and Analysis of 
Financial Condition and Results of Operations". Due to the nature of the 
Company's business, the Company typically does not carry a 
substantial backlog of orders.

New Product Development

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

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

Consumer Product Warranties and Returns 

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

Management Information System

          The Company maintains a proprietary computerized system for 
processing distributor orders and calculating distributor commission and 
bonus payments which enables it to remit such payments promptly to 
distributors.  The Company believes that prompt remittance of commissions and 
bonuses is vital to maintaining a motivated network of distributors and that 
this has enhanced the loyalty of the distributors to the Company.
          
          The Company's computer system makes available to the Company's 
distributors a detailed monthly accounting of sales and recruiting activity.  
These convenient statements eliminate the need for substantial record keeping 
on behalf of the distributor. The computer system also is fully integrated 
with the Company's financial reporting system that generates monthly reports, 
invoices and payroll.  As a precaution, duplicate copies of the Company's 
computer records are transferred frequently to an off-site location for 
safekeeping.

          The Company installed a White(R) automated inventory storage and
retrieval system in 1997 in its warehouse/shipping facilities in Houston during
1997. The system has improved operator productivity, reduced error rates and
increased the speed of throughput. The Company believes that it wil be able to
handle substantially increased sales volumes without material staffing increases
as a result of the installation of the White(R) system. The total cost including
implementation and training was approximtely $1,000,000.
          
          The Company completed the installation of SAP(R), an enterprise wide
state-of-the-market computer information system during 1998. The system is
expected to provide improved administrative cost control, enhanced customer
service and improved multinational support. The total cost, including
implementation and training, was approximately $3,000,000. The Company has
entered into a lease arrangement for a portion of this system. See Item 1.
"Business-Risk Factors" and Item 7. "Management's Discussion and Analysis of
Financial Conditions and Results of Operations".

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 $494,000, $4,190,000, $5,234,000 for the fiscal years ended September 30, 
1998 and 1997 and 1996, respectively.  Richard S. Kashenberg, a director of 
the Company, served as the chief executive officer of NION until December 
1996, and as a consultant to NION from January to October 1997.  Until June, 
1995 NION was owned by

                                       10
<PAGE>
 
Shermfin Corp., the Company's largest shareholder, and Mr. Kashenberg. Since
June 1995 NION has continued to be a supplier of product to the Company.

          In July 1998, the Company entered into an agreement with VitaRich 
Laboratories, Inc. ("VitaRich") in which the Company agreed to advance 
VitaRich up to $800,000 to secure the purchase of a sufficient quantity of 
certain nutritional supplement raw materials to meet the Company's 
anticipated need for rapid delivery of product and to obtain such product at 
discounted prices.  The agreement is for three years and requires that the 
Company provide VitaRich with periodic estimates of anticipated needs, as well
 as actual use rates of the requested product.

          The Company made an initial deposit of $400,000 to VitaRich and has 
agreed that it will maintain a deposit in the amount of 40% of its 
outstanding purchase orders with VitaRich.  VitaRich is required to use the 
deposit for the purchase of raw material and the processing of finished 
product in sufficient kinds and quantifies to enable the Company to (i) meet 
its anticipated need for the product, (ii) maximize the costs savings to 
VitaRich and provide the Company with reduced prices through the purchase of 
bulk quantities of raw materials, and (iii) enable VitaRich to meet the 
Company's rapid delivery requirements.

          Unless the agreement is terminated before its expiration, the Company
is not required to make additional deposits beyond the third year. Additionally,
VitaRich is required to repay any outstanding deposits by crediting the Company
with an amount equal to 10% of each purchase order placed by the Company until
such time as all advances have been repaid. The Company has a first priority
security interest in all of VitaRich's interest in the inventory, warehouse
receipts, documents of title, accounts receivable and proceeds of insurance
related to the raw materials purchased by VitaRich on behalf of the Company. 
As of September 30, 1998 the Company had advanced VitaRich a total of $400,000
which amount is included in prepaid expenses in the financial statements in 
Item 7.
          
          The Company does not have long term supply agreements with any vendor
other than VitaRich. Although the Company believes that it could establish
alternate sources for most of its products, any delay in locating and
establishing relationships with new sources could result in product shortages
and back orders for the products, with a resulting loss of revenues to the
Company. In addition, such delays could interrupt growth of product sales and
distributor recruitment.

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

Trademarks and Service Marks

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

Competition

          The Company competes with many companies marketing products similar 
to those it sells and markets.   It also competes intensely with other 
network marketing companies in the recruitment of distributors. The Company's 
ability to remain competitive depends, in significant part, on its success in 
recruiting and retaining distributors. From the last quarter of the fiscal 
year ended September 30, 1995 through the last quarter of the year ended 
September 30, 1998, one executive level distributor, Kevin Trudeau and his 
marketing organization, made a significant contribution to the growth of the 
Company. The Company and Mr. Trudeau recently terminated their relationship. 
See Item 1. "Business - Distribution and Marketing" and "Risk Factors". There 
can be no assurance that the Company's programs for recruitment and retention 
of distributors will be successful in the future.

          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.

                                       11
<PAGE>
 
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.

          The Dietary Supplement Law broadly regulates nutritional labeling 
requirements for dietary supplements. The final regulations were published 
September 23, 1997. Provisions relating to notification to FDA of product 
label claims considered "Statements of Nutritional Support" and provisions 
relating to new dietary ingredients became effective October 23, 1997. 
Regulations specifying product label content will become effective March 23, 
1999.
          
          The Dietary Supplement Law provides for regulation of Statements of 
Nutritional Support ("Statements"). These Statements may be made if they are 
truthful and not misleading and if "adequate" substantiation for the claims 
if available. Statements can describe claims of enhanced well-being from use 
of the dietary supplement or product statements that relate to affecting a 
structure or function of the body. However, Statements cannot claim to 
diagnose, treat, cure, or prevent any disease, regardless of the possible 
existence of scientific reports substantiating such claims.
          
          Statements appearing in dietary supplement labeling must be 
accompanied by a disclaimer stating that the FDA has not 
evaluated the Statements. Notification to the FDA of these Statements is not 
considered approval of the Statements of products. If the FDA determines in 
possible future proceedings that dietary supplement Statements fail to met 
the requirements of the Dietary Supplement Law., a product may be subject to 
regulation as a drug. The FDA retains all enforcement means available to it 
(i.e. seizure, civil or criminal penalties, etc.), when investigating or 
enforcing labeling claims.

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

          The FDA also regulates the formulation and manufacture of dietary 
supplements distributed by the Company. The FDA has published proposed 
regulations for the manufacture of dietary supplements called cGMP's. Final 
cGMP regulations are not expected any earlier than the first quarter of 1999. 
The Company complies with good manufacturing practices for foods, as 
currently required by the FDA. The Company cannot predict whether this new 
legislation regulating manufacturing activities could have a material adverse 
effect on the Company.

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

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

                                       12
<PAGE>
 
zation is based on sales of products rather than investment in the organization.
These laws and FTC regulations include the federal securities laws, matters
administered by the FTC and various state anti-pyramid and business opportunity
laws. Although the Company believes that it is in compliance with all such laws
and regulations, the Company remains subject to the risk that, in one or more of
its present or future markets, its marketing system or the conduct of certain
distributors could be found not to be in compliance with applicable laws or
regulations. Failure by the Company or significant distributors to comply with
these laws and regulations could have an adverse material effect on the Company
in a particular market or in general. See Item 1. "Business-Risk Factors" and
"Distribution and Marketing" for further discussion regarding the AVC with the
Illinois Attorney General and other states, and Item 3. "Legal Proceedings"
regarding the recently resolved class action litigation against the Company.

Employees

          At September 30, 1998, the Company employed 269 persons; 186 of 
whom are employed in the U.S.  The majority of the Company's employees are 
office, clerical and warehouse employees.  The Company believes that its 
relationship with its employees is good.

Risk Factors

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

Risks Related to the Company

          Recent Losses. Although the Company experienced rapid growth in sales
and income during its fiscal years ended September 30, 1995 and 1996 its net
sales have declined and, it has incurred losses in each of the fiscal years
ended September 30, 1998 and 1997. The 1998 loss was principally the result of
lower sales, significant losses experienced by the Company's foreign
subsidiaries and the Company recognizing in September 1998, the cost associated
with the termination of its 1996 Agreement with Nightingale-Conant. The loss in
1997 was attributable primarily to accrual of expenses related to the settlement
of class action lawsuits against the Company. The Company also experienced
declines in net sales for the year ended September 30, 1998 as compared to the
year ended September 30, 1997 and for the year ended September 30, 1997 as
compared to the year ended September 30, 1996. In addition, the Company
experienced increased operating costs in 1998 and 1997. Particularly in view of
the Company's increased level of expenditures, the Company's future operating
results will be negatively impacted if the Company is not successful in
regaining its growth in sales. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

          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 market the 
Company's products on a part-time basis, 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 future 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. See "Product Competition; Competition for Distributors".

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

                                       13
<PAGE>
 
          In April 1996, the Attorney General of the State of Illinois (the 
"Attorney General") filed suit against the Trudeau Marketing Group, Inc., 
Kevin Trudeau and Jules Leib, People v. Trudeau (the "Illinois Suit") 
alleging violations of the Illinois Consumer Fraud and Deceptive Practices 
Act and the Illinois Business Opportunities Sales Law of 1995 by, among other
things, operating a "pyramid sales scheme." Mr. Leib worked with Mr. Trudeau and
is an independent distributor of the Company's products. In addition, the
Illinois Secretary of State 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 Item
1. "Business-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
preserved 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 a business training
program. Under the AVC, the Company may maintain its same executive level
qualifications, but to aid clarification, it will no longer use the "Instant
Executive" designation. The Company entered into similar agreements with the
States of Florida, Hawaii, Idaho, Kansas, Kentucky, Michigan, Missouri, New
Jersey and Pennsylvania. The effect of the ongoing compliance with 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. Compliance with 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.

          The Company was 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 agreed 
to abide by all applicable provisions of the AVC entered into between the 
Company and the Illinois Attorney General.  The Company was also informed 
that Mr. Leib entered an Assurance of Voluntary Compliance with the Illinois 
Attorney General.  

          In April 1996, the Company received notice from the Securities and 
Exchange Commission of a formal order of private investigation into possible
violations by the Company of the federal securities laws. In December 1996 the
Company received a letter from the Securities and Exchange Commission notifying
the Company that the staff inquiry had been terminated and that no enforcement
action had been recommended at that time to the Commission.
          
          In 1996 class action lawsuits were commenced against the Company
alleging, among other things, that the Company's distributor compensation
program constituted an illegal "pyramid scheme." In 1997, the Company entered
into settlement agreements. The pendancy and settlement of these actions had a
material adverse effect upon the Company's operations and financial condition.
See Item 3. "Legal Proceedings" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

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

          Negative Media and Other Reports. The Company's ability to grow 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 growth was attributable to the efforts of Kevin Trudeau and his 
marketing organization. Effective October 24, 1997, the Company entered into 
an agreement with Mr. Trudeau providing for the exclusive use of Mr. 
Trudeau's service in the network marketing industry. In August 1998 the 
Company and Mr. Trudeau entered into an agreement to end their business 
relationship. See Item 1. "Business - Distribution and Marketing".

                                       14
<PAGE>
 
            Mr. Trudeau was twice convicted of criminal charges during the 
past 10 years. See Item 1." Business - Distribution and Marketing" above for 
biographical information concerning Mr. Trudeau and the exclusive services 
agreement with him. 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 Mr. Trudeau's marketing practices 
and, in particular, the recruitment of executive level distributors. Similar 
negative reports were published on the same day by Bloomberg, a news wire 
service, and by cable television station CNBC. Other negative media reports 
occurred subsequently.
          
          The Company believes that the negative reports in the financial 
media had a negative impact on its retention and recruitment of distributors 
and the price of its common stock.  It is presently unknown whether there 
will be negative reports or adverse legal developments in the future, but if 
that occurred, distributor recruitment and/or retention could suffer and 
there could be an adverse effect on the Company's future sales. Moreover, 
even if the Company's operating results were unaffected, the negative media 
coverage could adversely impact the price of the Common Stock.

          In addition, an individual who several years ago was associated 
with, and a major shareholder of a predecessor of the Company, embarked on a 
substantial campaign in 1996 to discredit and harm the Company and Mr. Trudeau.
He published negative statements on the Internet and elsewhere regarding the
Company and Mr. Trudeau and 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 individua l. The Company was
awarded a default judgment and Mr. Trudeau was awarded damages of $10 million.
This individual subsequently filed for bankruptcy, and the Company has
determined not to pursue a claim against him for money damages. 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 they 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. Although the Company continually monitors its distributors'
statements and activities, there can be no assurance that it will be able to
accomplish this objective and the Company could be subject to additional
regulatory scrutiny and potential claims. In addition, distributors could make
predictive statements about the Company's operations or other unauthorized
remarks regarding the Company which the Company may be unable to control.
Distributors are not authorized to make such statements on behalf of the
Company. Nonetheless, statements or actions by distributors could also adversely
affect the Company.

          Product Competition; Competition for Distributors.  The business of 
distributing and marketing vitamins and minerals, personal care items, weight
management items, and other products offered by the Company is highly
competitive. Numerous manufacturers, distributors and retailers compete actively
for consumers. Many of the Company's competitors are substantially larger than
the Company and have greater financial resources. The market is highly sensitive
to the introduction of new products or weight management plans that may rapidly
capture a significant share of the market. As a result, the Company's ability to
remain competitive depends in part upon the successful introduction of new
products. 
         
          The Company is subject to significant competition from other marketing
organizations for the recruitment of distributors. The Company's ability to
remain competitive depends, in significant part, on the Company's success in
recruiting and retaining distributors. From the last quarter of the fiscal year
ended September 30, 1995 to the last quarter of the fiscal year ended September
30, 1998, one executive level distributor, Mr. Kevin Trudeau and his marketing
organization, made a significant contribution to the growth of the Company. In
August 1998, the Company and Mr. Trudeau entered into an agreement to end their
business relationship. Mr. Trudeau and the Company agreed that their October
1997 agreement and his distributorship were terminated and that Mr. Trudeau
would not contest such terminations. Additionally, the Company and Mr. Trudeau
agreed that he would comply with the nine month non-competition provisions of
the October 1997 agreement. In October 1998 the Company also entered into a
severance agreement with NC and DS, which had been producing and marketing
recruiting and training materials and sponsoring promotional events for the
Company since July 1996. The Company is now internally providing the services
previously performed by NC and DS. See "Business -Distribution and Marketing."
There can be no assurance that the Company's programs for recruitment, training
and retention of distributors will be successful or that existing distributors
will not join Mr. Trudeau in another business venture or otherwise lose interest
in the Company's products and programs.

          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 B. 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

                                       15
<PAGE>
 
of $1,060,000 and $660,000, respectively. The Company's growth and profitability
also depends on its ability to attract and retain other management personnel.
          
          Family Relationships.  At September 30, 1998, the Company employed 
approximately 269 persons.  Of these 269 persons, 11  persons have a family 
relationship, through birth or marriage, with either David P. Bertrand or Jana
B. 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. The manufacturing, processing, formulation, 
packaging, labeling and advertising of the Company's products are subject to 
regulation by federal,state and foreign agencies, including the United States 
Food and Drug Administration (the "FDA"), the Federal Trade Commission, the 
Consumer Product Safety Commission, the United States Department of 
Agriculture, the United States Postal Service and the United States 
Environmental Protection Agency.  Among other matters, such regulation is 
concerned with health claims made with respect to a product that asserts the 
healing or nutritional value of such product. Such agencies have a variety of 
remedies and processes available to them, including initiating 
investigations, issuing warning letters and cease and desist orders, 
requiring corrective labels or advertising, requiring consumer redress (for 
example, by requiring that a Company offer to repurchase products previously
sold to consumers), seeking injunctive relief or product seizure, imposing civil
penalties, or commencing criminal prosecution.

          In November 1991, the FDA issued proposed regulations designed to, 
among other things, amend its food labeling regulations. The proposed 
regulations met with substantial opposition. In October 1994 the "Dietary 
Supplement Health and Education Act of 1994" (the Dietary Supplement Law") 
was enacted. The Dietary Supplement Law broadly regulates nutritional 
labeling requirements for dietary supplements. Final regulations were 
published September 23, 1997. Provisions relating to FDA notification of 
product label claims considered "Statements of Nutritional Support" and 
provisions relating to new dietary ingredients became effective October 23, 
1997. Regulations specifying product label content will become effective 
March 23, 1999. The Company cannot determine what effect FDA regulations will 
have on its business in the future. Such regulations may, among other things, 
require expanded or different labeling, additional record keeping and 
expanded documentation of the properties of certain products and scientific 
substantiation. In addition, negative publicity associated with a regulatory 
inquiry regarding products sold by the Company may adversely affect the 
Company. There can be no assurance that the regulatory environment in which 
the Company operates will not change or that such regulatory environment, or 
any specific action taken against the Company, will not result in a material 
adverse effect on the Company's business, financial condition or results of
operations. The Company also cannot predict whether new legislation regulating
its activities will be enacted, which new legislation could have a material
adverse effect on its operations. See Item 1. "Business-Government Regulations."

          Expansion Into Foreign Markets.  Although the Company intends to 
continue to expand into foreign markets, there can be no assurance that the 
Company can open markets on a timely basis or that such new markets will 
prove to be profitable. See Item 7. "Management's Discussion and Analysis of 
Financial Condition and Results of Operations"  for a discussion of recent 
start-up expenditures and increased operating costs associated with expansion 
into the United Kingdom and the Republic of Philippines. Significant 
regulation and legal barriers must be overcome before marketing can begin in any
foreign market. Also, before marketing has commenced, it is difficult to assess
the extent to which the Company's products and sales techniques will be
successful in any given country. In addition to significant regulatory barriers,
the Company may also expect problems related to entering new markets with
different cultural bases and legal systems from those encountered in the past.
See Item 1. "Business-Markets." 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.

          During the years ended September 30, 1998, 1997 and 1996 the 
Company realized exchange rate losses of approximately $318,000, $78,500 and 
$0, respectively. There can be no assurance that exchange rates will improve 
in the future or that future exchange rate losses will not exceed those 
experienced in recent periods. Further, if exchange rates fluctuate 
dramatically, it may become uneconomical for the Company to establish or 
continue activities in certain countries.

          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 other than a three 
year agreement with VitaRich Laboratories, Inc. ("VitaRich). See Item 1. 
"Business - Manufacturing and Supplies."  A portion of the products purchased 
by the Company have been supplied by NION Laboratories ("NION").  Mr. Richard 

                                       16
<PAGE>
 
S. Kashenberg, a director of the Company, served as the chief executive 
officer of NION until December 1996, and as a consultant to NION from January 
to October 1997. Until June 1995 NION was owned by Mr. Kashenberg and 
Shermfin Corp., the Company's largest shareholder. Since June 1995, NION has 
been owned by a corporation with no affiliation to the Company other than Mr. 
Kashenberg's continuation as the chief executive officer of, and then as a 
consultant to, NION. Since June 1995 NION has continued to be a supplier of 
product to the Company.

          Pursuant to an agreement entered into in July 1998, the Company 
agreed to advance VitaRich up to $800,000 to secure the purchase of a sufficient
quantity of certain nutritional supplement raw materials to meet the Company's
anticipated need for rapid delivery of product and to obtain such product at
discounted prices. The agreement is for three years and requires that the
Company provide VitaRich with periodic estimates of anticipated needs, as well
as actual use rates of the requested product. The Company does not have long
term supply agreements with any vendor other than its agreement with VitaRich.
Accordingly, there is a risk that any of the Company's suppliers or
manufacturers could discontinue selling their products to the Company for any
reason. Although the Company believes that it could establish alternate sources
for most of its products, any delay in locating and establishing relationships
with other sources could result in product shortages and back orders for the
products, with a resulting loss of revenues to the Company.

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

          Dividends.  The Company declared an initial cash dividend of $.02 
per share of common stock in September 1996, and paid dividends quarterly 
until June 1998. The Company has not declared any dividends subsequent to 
June 1998. The determination of whether to pay dividends in the future will 
be made by the Board of Directors and will depend on the earnings, capital 
requirements, and operating and financial condition of the Company, among 
other factors. It is not likely that the Company will pay dividends in the 
fiscal year ended September 30, 1999. See Item 5. "Market for Registrant's 
Common Equity and Related Stockholder Matters".

          Impact of Year 2000. The Year 2000 issue is the result of computer 
programs being written using two digits rather than four to define the 
applicable year. Any computer programs that have time sensitive software may 
recognize a date using 00 as the year 1900 rather than the year 2000. The 
failure of the Company's or a third party supplier's or vendor's computer 
system to properly recognize the date could result in a system failure or 
miscalculation causing a disruption of the Company's activities. Such a 
disruption could have a material adverse impact on the Company's ability to 
conduct its business.

        The Company recently completed the installation of SAP(R), an enterprise
 wide state-of-the-market computer information system. Additionally, the Company
 also installed a White(R) automated inventory storage and retrieval system in
 its Houston warehouse facility. The total cost of installation and training
 associated with both systems was approximately $4,000,000. The Company has
 received certification from SAP(R) and White(R) that their systems are Year
 2000 compliant. The Company is currently developing a plan that will test for
 such compliance.

        The Company also relies on certain other less significant software
systems in its day to day activities. The Company has not yet performed the
detailed tasks necessary to properly test the Year 2000 compliance of these
particular systems; however an implementation plan is currently being developed
to complete such task in sufficient time to allow for any required updating and
additional testing. The Company presently believes that, with the recent
conversion to the new SAP(R) and White(R) systems software and modifications to
existing, less significant software, the Year 2000 problem should not pose
significant operational problems for the Company's internal information systems.

        Additionally, the Company has performed a preliminary assessment of 
its significant vendors' and suppliers' information and non-information 
systems using a broad overview and management's informal understanding of 
their systems. The detailed tasks necessary to directly assess their Year 
2000 compliance (such as direct coordination with those significant vendors 
and suppliers) have not been performed by the Company. The Company is 
currently developing a plan to complete such review. It is anticipated that 
such review will be completed in sufficient time to allow for adequate 
testing of such compliance.

        Based on the Company's initial assessment of its significant vendors' 
and suppliers' vulnerability to Year 2000 related systems failures, management
believes that the Company should not have significant exposure with respect to
such third parties. The Company's preliminary assessments indicate that the
worst case scenario with regard to Year 2000 third party issues would be delays
in receiving inventory and/or shipping product to its distributors. Management
has not yet assessed the expense related to the testing of significant third
party vendors' or suppliers' compliance with Year 2000 issues.

                                       17
<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 37,000 square feet and 
the current monthly rental is $19,700 which escalates over the two year term 
remaining on the lease.  Additionally, the Company's warehouse consists of 
approximately 52,000 square feet and the current monthly rental is $13,400 
which escalates over the three year term remaining on the lease.  The Company 
also leases warehouse facilities in Alaska and Hawaii with a combined 3,000 
square feet of space for approximately $5,800 per month. Additionally, the 
Company leases an office and warehouse center in Warrington, England from a 
non-affiliate consisting of approximately 16,000 square feet. The current 
monthly rental is $11,000 which escalates over the eight year term remaining 
on the lease. The Company also leases warehouse facilities in the Philippines 
aggregating 3,900 square feet for an aggregate monthly rental of $9,100 through
2000. See Item 7. "Management's Discussion and Analysis of Financial 
Condition and Results of Operation" and Item 8. "Financial Statements and 
Supplementary Data".

ITEM 3. LEGAL PROCEEDINGS

          In 1996 class action lawsuits were initiated against the Company. 
These actions were concluded in 1997. See Item 1. "Business", Item 7. 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operation" and Item 8. "Financial Statements and Supplementary Data". The 
Company entered into an "Assurance of Voluntary Compliance" with the Illinois 
Attorney General and similar agreements with other states.  In the future, 
inquiries may continue from various state agencies concerning the marketing 
of the Company's programs.  

          A formal investigation was commenced during the fiscal year 
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.

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

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

                                       18
<PAGE>
 
                                    PART II

              ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND
                          RELATED STOCKHOLDER MATTERS
          
          The Company's Common Stock is traded on the National Market System 
of the Nasdaq Stock Market under the symbol "NFLI"  and its warrants trade 
under the symbol "NFLIW".

          In connection with a public offering in July 1995 the Company 
issued warrants to purchase Common Stock (the "Warrants"). The holder of one 
Warrant is entitled to purchase one share of Common Stock at $3.75 per share 
until June 15, 1999, unless earlier redeemed by the Company.

<TABLE> 
<CAPTION> 
                                                           Common Stock       Warrants
                                                          --------------    -------------
          QUARTER ENDED                                    HIGH    LOW      HIGH      LOW
          -------------                                    ----    ---      ----      ---
          <S>                                             <C>      <C>      <C>      <C> 
          FISCAL 1997                                       
          December 31, 1996                              $17.50   $11.00   $14.00    $8.25
          March 31, 1997                                  13.25     7.00     9.38     4.00
          June 30, 1997                                   10.50     7.50     6.63     3.75
          September 30, 1997                              10.75     6.00     6.88     2.00

          FISCAL 1998                                                                 
          December 31, 1997                                7.88     5.50     3.94     2.38
          March 31, 1998                                   6.44     4.94     2.69     1.63
          June 30, 1998                                    9.00     5.56     5.13     1.88
          September 30, 1998                               7.13     3.00     3.63     0.50
</TABLE> 

          As of December 30, 1998, there were 1,451 record holders of common 
stock.

          The Company declared its first cash dividend on its common stock in 
September 1996, which dividend of $.02 per share was paid in October 1996. 
The Company continued to pay quarterly dividends of $.02 per share of common 
stock until June 1998. No dividends have been declared by the Company 
subsequent to June 1998. It is not likely that dividends will be paid in the 
fiscal year ending September 30, 1999. The determination of the payment of 
dividends in the future will be within the discretion of the Company's Board 
of Directors and will depend on the earnings, capital requirements and 
operating and financial condition of the Company, among other factors. See 
Item 1. "Business" and Item 7. "Management's Discussion and Analysis of 
Financial Condition and Results of Operations".

                                       19
<PAGE>
 
                       ITEM 6.  SELECTED FINANCIAL DATA

          The selected financial data presented below for each year in the 
five-year period ended September 30, 1998 have been derived from the audited 
financial statements of the Company. The data presented below should be read 
in conjunction with Company's financial statements and notes thereto and, 
except for operating data included therein, Item 7. "Management's Discussion 
and Analysis of Financial Condition and Results of Operations".

<TABLE> 
<CAPTION> 
                                                                           
                                                                               YEARS ENDED SEPTEMBER 30,
                                                                    (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
                                                                     -------------------------------------------------
                                                                 1998         1997         1996         1995       1994
                                                                 ----         ----         ----         ----       ----
<S>                                                             <C>          <C>          <C>          <C>        <C> 
   Statements of Operations
     Net Sales                                                  $69,658      $83,045      $97,404      $32,290    $17,583
     Gross Profit                                                21,719       22,767       29,577        8,774      4,801
     Operating income (loss)                                        698       (3,276)      13,347        2,921        442
     Net income (loss)                                             (867)      (1,981)       8,705        2,244        250(4)
   Earnings (loss) per share:
     Basic                                                         (.15)        (.35)        1.61          .65       0.09
     Diluted                                                       (.15)        (.35)        1.36          .51       0.08
   Weighted average number of
   shares outstanding (1):
     Basic                                                        5,833        5,625        5,408        3,437      2,824
     Diluted                                                      5,833        5,625        6,405        4,444      3,792
   Operating data:
     Number of Distributors (2)                                  80,000       88,500       87,400       57,300     37,800
     Average monthly                
      sales per Distributor (3)                                      69           74          112           58         44
     Total products offered                                         380          364          320          270        258
   Balance Sheet Data:
     Working capital                                              7,019        9,570       14,617        6,082        546
     Total assets                                                27,858       29,347       27,689       12,566      2,633
     Total liabilities                                           13,415       13,489       10,087        5,407      1,985
     Stockholders' equity                                        14,443       15,858       17,602        7,159        648
</TABLE> 

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

  (2) Includes "active" distributors only at the end of the period indicated.
      See Item 1. "Business-Distribution and Marketing".
  
  (3) Computed using a simple average for the periods indicated.

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

                                       20
<PAGE>
 
                   SELECTED QUARTERLY FINANCIAL INFORMATION

<TABLE> 
<CAPTION> 
                                                                             
                                                                              QUARTER ENDED
                                                                    (IN THOUSANDS, EXCEPT PER SHARE)
                                             DECEMBER 31        MARCH 31         JUNE 30      SEPTEMBER 30    FISCAL YEAR
                                             -----------        --------         -------      ------------    -----------
<S>                                           <C>               <C>             <C>           <C>              <C> 
            Fiscal 1998
          Net Sales                           $18,384           $17,579         $15,415         $18,280         $69,658
          Gross profit                          5,028             5,735           4,758           6,198          21,719
          Operating income                       (181)              925            (385)            339             698
          (loss)                                                                                                       
          Net income (loss)                      (248)              605            (321)           (903)(1)        (867)
          Earnings (loss) per
           Share:
           Basic                                (0.04)             0.10           (0.05)          (0.16)          (0.15)   
           Diluted                              (0.04)             0.10           (0.05)          (0.16)          (0.15)   
          Dividends per share                    0.02              0.02            0.02              --            0.06     
                                                                     
            Fiscal 1997
          Net Sales                            19,269            21,200          22,600          19,976          83,045
          Gross profit                          5,085             5,511           5,391           6,780          22,767
          Operating income
          (loss)                               (6,921)(2)         1,078             218           2,349(3)       (3,276)
          Net income (loss)                    (4,496)              726             180           1,609          (1,981)
          Earnings (loss) per
           Share:
           Basic                                (0.71)             0.12            0.03             .21           (0.35)
           Diluted                              (0.71)             0.12            0.03             .21           (0.35)
          Dividends per share                     .02               .02             .02             .02             .08
                                                                                                              
            Fiscal 1996
          Net Sales                            21,263            30,315          26,281          19,545          97,404
          Gross profit                          6,770             9,677           8,240           4,890          29,577
          Operating income                      3,869             5,561           3,284             633(4)       13,347
          Net income                            2,553             3,642           1,877             633           8,705
          Earnings per
           Share:
           Basic                                 0.49              0.67            0.34             .11            1.61
           Diluted                               0.40              0.56            0.30             .09            1.36
          Dividends per share                      --                --              --             .02             .02
</TABLE> 
           
          (1)  Includes a $702,000 charge for warrants issued in connection with
               a severance agreement.
          (2)  Includes a $6,425,000 charge incurred and accrued for the
               settlement of class action lawsuits.
          (3)  Includes an $890,000 credit to recognize a reduction in the
               remaining estimated liability for the class action lawsuits.
          (4)  Includes a $782,000 charge for resolution of the state regulatory
               issues.

                                       21
<PAGE>
 
                 FINANCIAL INFORMATION RELATING TO FOREIGN AND
                     DOMESTIC OPERATIONS AND EXPORT SALES


<TABLE> 
<CAPTION> 
                                                                               YEARS ENDED SEPTEMBER 30,
                                                                                     (IN THOUSANDS)
                                                                   1998               1997                1996
                                                                   ----               ----                ----
         <S>                                                    <C>                  <C>                 <C> 
          Sales to unaffiliated customers:                                                              
             North America (1)                                  $65,387             $80,325              $97,248
             United Kingdom (2)                                   3,533               2,549                  156
             Philippines (3)                                        738                 171                   --
                                                                                                        
          Sales or transfers between geographic areas:                                                  
             North America                                           --                  --                   --       
             United Kingdom                                         622                 682                   82
             Philippines                                            290                 269                   --    
                                                                                                        
          Operating profit (loss):                                                                      
             North America                                        1,937              (2,342)              13,382
             United Kingdom                                        (959)               (906)                 (35)
             Philippines                                           (280)                (28)                  --
                                                                                                        
          Identifiable assets:                                                                          
             North America                                       29,635              29,827               27,524
             United Kingdom                                       1,435               1,355                  871
             Philippines                                            883                 708                   --
</TABLE> 
            (1)  Includes the United States, Canada, and Puerto Rico.
            (2)  First began operations in fiscal 1996.
            (3)  First began operations in fiscal 1997.

                                       22
<PAGE>
 
               ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

          The Company develops products that are designed for health conscious
consumers, and sells those products through its network of approximately 80,000
independent distributors. The Company offers a line of approximately 380
products in nine categories, including nutritional supplements, health foods,
weight management items, skin care products, other consumer products and
services.

          After two fiscal years of rapid growth in both net sales and income,
the Company experienced a decline in net sales and incurred a net loss in fiscal
1998 and 1997. The principal reasons for the fiscal 1998 loss, were lower sales
revenue, significant losses incurred by the Company's foreign subsidiaries and
the recognition by the Company of the warrant cost associated with the
termination of certain agreements with Nightingale-Conant. The fiscal 1997 net
loss included expenses incurred with the settlement of class action lawsuits
filed against the Company in 1996. Management believes that the regulatory
scrutiny and legal proceedings filed against it in fiscal 1996 and concluded
during fiscal 1997 as well as related negative media reports were significant
factors affecting distributor recruitment and retention and sales efforts by
distributors during all of fiscal 1997 and part of fiscal 1998.

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,
                                                                               -------------------------
                                                                                1998      1997      1996 
                                                                                ----      ----      ---- 
                <S>                                                           <C>        <C>       <C>       
                 Net sales.........................................            100.0%    100.0%    100.0%
                 Cost of sales.....................................             68.8      72.6      69.6
                                                                               -----     -----     -----
                 Gross profit......................................             31.2      27.4      30.4             
                 Operating expenses................................             30.2      31.3      16.7
                 Income (loss) from operations.....................              1.0      (3.9)     13.7  
                 Other income (expense), net.......................             (1.1)      1.0       0.6
                                                                               -----     -----     -----    
                 Income (loss) before income tax expense (benefit).              (.1)     (2.9)     14.3      
                 Income tax expense (benefit)......................              1.1      (0.5)      5.4
                                                                               -----     -----     -----      
                 Net income (loss).................................             (1.2)%    (2.4)%     8.9%
                                                                               ======    =====     ===== 
</TABLE> 

Year Ended September 30, 1998 Compared to Year Ended September 30, 1997

        Net sales for the twelve months ended September 30, 1998 decreased by 
$13,387,000 or 16.1% to $69,658,000 as compared to net sales of $83,045,000 
for the twelve months ended September 30, 1997. At September 30, 1998, the 
Company had approximately 80,000 distributors as compared to approximately 
88,500 at September 30, 1997. During the twelve months ended September 30, 
1998 the number of active international distributors increased by 
approximately 500, while active distributors in North America decreased by 
approximately 9,000. Management believes that the regulatory scrutiny and 
legal proceedings filed against the Company in fiscal 1996 and concluded 
during fiscal 1997 as well as negative media reports continued to have a 
negative impact on distributor recruitment and retention and sales efforts by 
distributors during fiscal 1998. The ability of the Company to increase its 
number of active distributors and its sales per average number of 
distributors is material to the future operations and financial condition of 
the Company. The decrease in net sales is recapped below:
   
<TABLE> 
<CAPTION> 
  
   <S>                                                                                <C> 
   Decrease in sales due to decreased average number of distributors                  $ (8,010,000)
   Decrease in distributors average sales                                               (5,377,000)
                                                                                      ------------
                                                                                      $(13,387,000)
                                                                                      ============
</TABLE> 
 
          The Company's net sales per average number of distributors per 
month decreased from $74 during the twelve months ended September 30, 1997 to 
$69 for the twelve months ended September 30, 1998.

          Cost of sales decreased by $12,339,000 or 20.5% to $47,939,000 for 
the twelve months ended September 30, 1998 from $60,278,000 for the twelve 
months ended September 30, 1997.  Cost of sales as a percentage of net sales 
decreased from 72.6% in

                                       23
<PAGE>
 
the twelve months ended September 30, 1997 to 68.8% in the twelve months ended
September 30, 1998. Cost of sales, which includes product costs, commissions and
bonuses paid to distributors, and shipping costs, is recapped below:
        
<TABLE> 
<CAPTION> 
                                                                                
                                                                    YEAR ENDED SEPTEMBER 30,
                                                                    -----------------------
                                                                     1998              1997
                                                                     ----              ----
                 <S>                                                <C>               <C> 
                    Product costs                                    27.6%             27.1%                
                    Commissions and bonuses paid to distributors     35.0              36.2        
                    Shipping costs                                    6.2               9.3
                                                                     ----              ----
                                                                     68.8%             72.6%
                                                                     ====              ====
</TABLE> 
                                                                                

          Reduced margins resulting from lower initial qualifications for 
becoming an Executive resulted in a .5% increase in product cost from 1997 to 
1998. The percentage of commissions and bonuses paid to distributors 
decreased 1.2% because of price adjustments initiated during December 1997 
and changes in the mix of higher versus lower bonus value products purchased 
by distributors. The 3.1% decrease in shipping costs resulted from lower 
carrier rates and lower cost of backorders than the prior year.

          Gross profit decreased 4.6% or $1,048,000 from $22,767,000 for the 
twelve months ended September 30, 1997 to $21,719,000 for the twelve months 
ended September 30, 1998. Gross profit as percentage of net sales increased 
from 27.4% for the twelve months ended September 30, 1997 to 31.2% for the 
twelve months ended September 30, 1998.
          
          Operating expenses decreased $5,022,000 or 19.3% from $26,043,000 
for the year ended September 30, 1997 to $21,021,000 for the twelve months 
ended September 30, 1998. The primary reason for the decrease was that no 
class action lawsuit costs were incurred during the twelve months ended 
September 30, 1998. The $6,425,000 lawsuit settlement charge in the three 
months ended December 31, 1996 represented the Company's estimate of all 
costs of the lawsuit. Based upon subsequent experience, the Company revise d the
estimate to $5,535,000 during the three months ended September 30, 1997. As a
percentage of net sales, marketing, distribution, and administrative expenses
exclusive of the lawsuit charge in 1997 increased to 30.2% for the twelve months
ended September 30, 1998 from 24.7% for the year ended September 30, 1997
principally because of the decline in net sales. As a result of its lower sales
and higher operating costs, the Company's future operating results may be
negatively impacted if it is not successful in regaining its growth in sales or
decreasing its expenditures below current levels.

          Income (loss) from operations for the year ended September 30, 1998 
increased $3,974,000 or 121.3% to $698,000 of income from operations from 
$3,276,000 of loss from operations for the year ended September 30, 1997 
principally as a result of the decrease in operating expenses as explained 
above. The income (loss) from operations for the twelve ended September 30, 
1998 and 1997 includes approximately $1,340,000 and $934,000, respectively, 
of operating loss from the Company's wholly-owned, consolidated subsidiaries 
which operate in foreign countries.

          Other income (expense) decreased to an expense of $775,000 for the 
year ended September 30, 1998 from income of $850,000 for the year ended
September 30, 1997. The decrease was principally the result of a decline in net
interest income due to a decrease in interest bearing deposits, to the
recognition of interest expense on capital lease obligations and to the
recognition of a $702,000 expense associated with the warrants issued to
Nightingale-Conant in connection with the severance agreement described in Item
1 and an increase in foreign exchange losses.

          Income tax expense for the year ended September 30, 1998 is higher 
than the amount computed at the statutory rate. As the Company is not currently
able to recognize any tax benefits from foreign operating losses, tax expense is
accrued on the taxable income of domestic operations.

          Net loss was $867,000 for the year ended September 30, 1998, 
compared to a net loss of $1,981,000 for the year ended September 30, 1997. 
The decrease was the result of the items discussed above.

Year Ended September 30, 1997 Compared to Year Ended September 30, 1996  

          Net sales for the year ended September 30, 1997 decreased by 
$14,359,000 or 14.7% to $83,045,000 from $97,404,000 for the year ended 
September 30, 1996.  At September 30, 1997, the Company had approximately 
88,500 distributors compared to approximately 87,400 at September 30, 1996.  
Although there was a net addition of approximately 1,100 distributors during 
fiscal 1997, two additional factors contributed to the decline in net sales - 
(1) fewer new distributors elected to qualify promptly as executive distributors
and (2) beginning in March 1997 new distributors could qualify right away 
as executive distributors for $500 rather than $1,000.  The ability of the 
Company to increase its number of distributors and its sales per average 
number of distributors is material to the growth of the Company.  Although 
the Company has resolved the regulatory scrutiny and legal proceedings 
initiated during fiscal 1996 and the negative media reports have diminished, 
the ability of the Company to regain the rate of growth realized during 
fiscal 1996 cannot be predicted with certainty. The decrease in net sales is 
recapped below:
                        

                                       24
<PAGE>
 
<TABLE> 
<CAPTION> 
  
          <S>                                                                               <C> 
          Decrease in executive initial purchases                                            $(21,500,000)
          Growth in sales due to increased number of distributors                              21,022,000
          Decrease in distributor average sales                                               (13,881,000)
                                                                                             ------------
                                                                                             $(14,359,000)
                                                                                             ============
</TABLE> 
         
          The Company's net sales per average number of distributors per 
month decreased from $112 during the year ended September 30, 1996 to $79 for 
the year ended September 30, 1997.  No one distributor has directly accounted 
for more than 5% of the Company's net sales in any of the past three fiscal 
years.
          
          Cost of sales decreased by $7,549,000 or 11.1% to $60,278,000 for 
the year ended September 30, 1997 from $67,827,000 for the year ended 
September 30, 1996.  Cost of sales as a percentage of net sales increased 
from 69.6% in the year ended September 30, 1996 to 72.6% in the year ended 
September 30, 1997.  Cost of sales, which includes product costs, commissions 
and bonuses paid to distributors, and shipping costs, is recapped below:

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

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

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

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

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

          Income (loss) from operations for the year ended September 30, 1997 
decreased $16,623,000 or 124.5% to a loss of $3.276,000 from income of 
$13,347,000 for the year ended September 30, 1996, principally as a result of 
the lower level of sales, the decrease in the gross profit as a percentage of 
sales, and the increase in marketing, distribution and administrative 
expenses.  Income (loss) from operations as a percentage of sales decreased 
from 13.7% for the year ended September 30, 1996 to a negative 3.9% for the 
year ended September 30, 1997.
          
          Other income increased 31.2% to $850,000 for the year ended 
September 30, 1997 from $648,000 for the year ended September 30, 1996.  The 
increase in other income resulted primarily from $183,000 of net other income 
items.

                                       25
<PAGE>
 
          An income tax benefit of $445,000 is accrued for the year ended 
September 30, 1997. Of this amount, $370,000 is to recognize the benefit of 
the carryback of the operating loss for the year ended September 30, 1997 and 
$119,000 is to recognize a net deferred tax benefit.

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

           The Company had cash and cash equivalents of $4,404,000 at September
30, 1998 compared to $8,904,000 at September 30, 1997. The cash used in
operating activities of $571,000 for the year ended September 30, 1998 was
significantly less than the cash used in by operating activities of $2,693,000
for the twelve months ended September 30, 1997. The Company used approximately
$1,986,000 and $4,076,000, respectively, to purchase property and equipment
during the years ended September 30, 1998 and 1997. The Company had working
capital of $7,019,000 at September 30, 1998 compared to $9,570,000 at September
30, 1997.

           The $2,551,000 decline in working capital was primarily the result of
the previously mentioned acquisition of property and equipment and the net 
reduction of current liabilities. Dividends of $350,000 were also declared and 
paid during the year ended September 30, 1998. In addition, the Company received
$272,000 from the exercise of Warrants issued in the public offering completed
in July, 1995 and the exercise of stock options.

           During October, 1998 $459,000 was disbursed for the purchase of 
Common Stock and stock purchase warrants owned by Kevin Trudeau and $967,000 was
disbursed as part of the settlement with Distributors Services, L.L.C.

          The Company 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. As a result of the cost of the class
action settlement discussed above, the Company's pace of expansion may be
reconsidered. The Company has no immediate plans for expansion into new foreign
markets. However, the Company anticipates considering various expansion plans,
as well as other opportunities for growth through acquisitions or other means.
While Management is hopeful that the business disruption associated with the
regulatory scrutiny and legal issues and the negative media reports will
subside, there can be no guarantee that profitable operations will result in the
future.

Impact of Year 2000

        The Year 2000 issue is the result of computer programs being written 
using two digits rather than four to define the applicable year. Any computer 
programs that have time sensitive software may recognize a date using 00 as 
the year 1900 rather than the year 2000. The failure of the Company's or a 
third party supplier's or vendor's computer system to properly recognize the 
date could result in a system failure or miscalculation causing a disruption 
of the Company's activities. Such a disruption could have a material adverse 
impact on the Company's ability to conduct its business.

        The Company recently completed the installation of SAP(R), an enterprise
 wide state-of-the-market computer information system. Additionally, the Company
 also installed a White(R) automated inventory storage and retrieval system in
 its Houston warehouse facility. The total cost of installation and training
 associated with both systems was approximately $4,000,000. The Company has
 received certification from SAP(R) and White(R) that their systems are Year
 2000 compliant. The Company is currently developing a plan that will test for
 such compliance.

        The Company also relies on certain other less significant software
systems in its day to day activities. The Company has not yet performed the
detailed tasks necessary to properly test the Year 2000 compliance of these
particular systems; however an implementation plan is currently being developed
to complete such task in sufficient time to allow for any required updating and
additional testing. The Company presently believes that, with the recent
conversion to the new SAP(R) and White(R) systems software and modifications to
existing, less significant software, the Year 2000 problem should not pose
significant operational problems for the Company's internal information systems.

        Additionally, the Company has performed a preliminary assessment of 
its significant vendors and suppliers information and non-information systems 
using a broad overview and management's informal understanding of their 
systems. None of the detailed tasks necessary to directly assess their Year 
2000 compliance (such as direct coordination with those significant vendors 
and suppliers) have been performed by the Company. The Company is currently
developing a plan to complete such review and it anticipates that such review
will be completed in sufficient time to allow for adequate testing of such
compliance.

        Based on the Company's initial assessment of its significant vendors' 
and suppliers' vulnerability to Year 2000 related systems failures, 
management believes that the Company should not have significant exposure 
with respect to such third parties. The Company's preliminary assessments 
indicate that the worst case scenario with regard to Year 2000 third party 
issues would be delays in receiving inventory and/or shipping product to its 
distributors. Management has not yet assessed the expense related to the 
testing of significant third party vendors' or suppliers' compliance with 
Year 2000 issues.

                                       26
<PAGE>
 
Recent Accounting Pronouncements 

            STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130, 
"REPORTING COMPREHENSIVE INCOME," establishes standards for the reporting and 
display of comprehensive income, its components and accumulated balances. 
Comprehensive income is defined to include all changes in equity except those 
resulting from investments by owners and distributions to owners. Among other 
disclosures, SFAS No. 130 requires that all items that are required to be 
recognized under current accounting standards as components of comprehensive 
income be reported in a financial statement that is displayed with the same 
prominence as other financial statements. SFAS No. 130 is effective for 
financial statements for the periods beginning after December 15, 1997 and 
requires the restatement of comparative information for earlier years. The 
Company does not believe this statement will have a material impact on its 
financial statement reporting. 

            SFAS NO. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report 
information about operating segments in annual financial statements and 
requires reporting of selected information about operating segments in 
interim financial statements issued to the public. It also establishes 
standards for disclosures regarding products and services, geographic areas 
and major customers. SFAS No. 131 is effective for financial statements for 
the periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. The Company does not believe this
statement will have a material impact on its financial statements.

            SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER 
POST-RETIREMENT BENEFITS," standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Adoption of SFAS No. 132 is not expected to have a material effect on the
Company's financial statement disclosures.

            SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING 
ACTIVITIES," requires companies to recognize all 
derivative contracts as either assets or liabilities in the balance sheet and 
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to have a
material effect on its financial statements.

              ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
                               ABOUT MARKET RISK

          The Company is exposed to market risks, which include changes in 
currency exchange rates as measured against the U.S. dollar. The value of the 
U.S. dollar affects the Company's financial results. Changes in exchange 
rates may positively or negatively affect the Company's sales (as expressed in 
U.S. dollars), gross margins, operating expenses, and retained earnings. When 
the U.S. dollar sustains a strengthening position against currencies in which 
the Company sells products or a weakening exchange rate against currencies in 
which it incurs costs, its sales or costs are adversely affected. The Company 
does not believe that its exposure to exchange rate fluctuations will have a 
material impact on its results of operations.

                                       27
<PAGE>
 
             ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 

<S>                                                                                                                 <C> 
Nutrition For Life International, Inc. Consolidated Financial Statements                                             PAGE
                                                                                                                     ----
Independent Certified Public Accountants' Report...........................................................          F-2

Consolidated Balance Sheets as of September 30, 1998 and 1997..............................................          F-3

Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996................          F-4

Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996......          F-5

Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996................          F-6

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

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



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

        
        We have audited the consolidated balance sheets of Nutrition For Life 
International, Inc. as of September 30, 1998 and 1997, and the related 
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

        In our opinion, the consolidated financial statements referred to 
above present fairly, in all material respects, the consolidated financial
position of Nutrition For Life International, Inc. at September 30, 1998 and
1997 and the results of its operations and its cash flows for each of the three
years in the period ended September 30, 1998 in conformity with generally
accepted accounting principles.

                                                                

                                                                           
                                                 BDO Seidman, LLP




Houston, Texas
December 29, 1998

                                      F-2
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1998 AND 1997
 
<TABLE> 
<CAPTION> 
                                                                                    1998         1997
                                                                                    ----         ----
            <S>                                                                 <C>           <C> 
                      ASSETS        
                      ------              
              Current Assets:                                                              
                Cash and cash equivalents                                      $ 4,404,388  $ 8,903,957 
                Restricted cash                                                      --         513,195
                Marketable securities                                              968,196        --    
                Receivables                                                        568,931    1,547,479  
                Inventories                                                      9,697,495    7,920,454  
                Deferred tax asset, net (Note 6)                                 1,982,000    2,258,608
                Refundable federal income taxes (Note 6)                           200,000      659,111
                Prepaid expenses and other assets                                  953,161      496,517
                                                                               -----------   ----------                  
                   Total Current Assets                                         18,774,171   22,299,321
              Property and equipment, net (Note 2)                               7,306,650    6,534,042
              Audio production rights (Note 11)                                  1,400,000        --          
              Other assets                                                         377,328      514,073
                                                                               -----------   ----------                  
                                                                               $27,858,149  $29,347,436
                                                                               ===========  =========== 
             LIABILITIES AND STOCKHOLDERS' EQUITY                                                                       
              
              Current Liabilities:                                                                                                  

                Accounts payable                                               $ 3,282,750  $ 3,707,930
                Accrued bonuses and commissions                                  1,646,638    1,734,395
                Deferred income (Note 7)                                         3,252,598    3,824,471 
                Accrued cruise (Note 8)                                              --       1,195,150
                Lawsuit settlement accrual (Note 8)                                  --       1,332,314
                Accrued expenses and other liabilities                           1,420,338      618,187
                Accrued liability - Nightingale Conant (Note 11)                 1,669,122        --   
                Federal and franchise tax payable (Note 6)                           --          43,216
                Current portion of capital lease obligation (Note 3)               163,324      157,739
                Current portion of long term debt (Note 11)                        320,263        --
                Dividends payable (Note 4)                                           --         115,798
                                                                               -----------   ----------  
                   Total Current Liabilities                                    11,755,033   12,729,200
              
              Deferred tax liability (Note 6)                                      682,000      282,000
              Long-term portion of capital lease obligation (Note 3)               349,520      478,220
              Long-term debt (Note 11)                                             628,737        --
              
              Commitments and contingencies (Note 8)                             
              
              Stockholders' Equity (Note 4):                             
                Preferred stock, $.001 par value; 1,000,000 authorized;
                 none issued                                                         --            --
                Common stock; $.01 par value; 20,000,000 shares authorized          58,875        57,758
                Additional paid-in capital                                      11,074,044    10,688,951
                Retained earnings                                                3,958,757     5,176,539
                Unrealized loss on investment                                      (38,364)        --
                Cumulative foreign currency translation adjustment                 (77,968)        8,578
                                                                               -----------   -----------                 
                                                                                14,975,344    15,931,826 
                Less: Treasury stock 79,000 shares in 1998 and 9,000 shares
                      in 1997, at cost                                            (532,485)      (73,810)
                                                                               -----------   ----------  
                   Total Stockholders' Equity                                   14,442,859    15,858,016
                                                                               -----------   ----------- 
                                                                               $27,858,149   $29,347,436
                                                                               ===========   ===========

      See accompanying summary of accounting policies and notes to consolidated financial statements.

</TABLE> 

                                      F-3
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                                                                           
                                                                    1998               1997              1996
                                                                    ----               ----              ---- 
             <S>                                                <C>               <C>               <C>              
              Net sales (Notes 7 and 10)                        $69,658,095       $83,044,577       $97,403,757
              Cost of sales (Note 9)                             47,939,482        60,277,742        67,826,803
                                                                -----------       -----------       -----------
              
              Gross profit                                       21,718,613        22,766,835        29,576,954
                                                                -----------       -----------       -----------
              Operating expenses:                                                                            
                  Marketing, distribution and administrative
                   expenses                                      21,021,056        20,508,294        16,230,023
                  Lawsuit settlement (Note 8)                         --            5,535,000             --  
                                                                -----------       -----------       -----------
                                                                 21,021,056        26,043,294        16,230,023 
                                                                -----------       -----------       -----------
              
              Income (loss) from operations                         697,557        (3,276,459)       13,346,931  
                                                                -----------       -----------       -----------              
              Other income (expense)                                                                             
                  Interest income, net                               70,184          667,338            711,563      
                  Foreign exchange loss                            (336,842)         (78,561)             --    
                  Other, net (Note 11)                             (508,305)         261,161            (63,533)
                                                                -----------       ----------        -----------           
                                                                   (774,963)         849,938            648,030
                                                                -----------       ----------        -----------
              Income (loss) before income tax expense (benefit)     (77,406)      (2,426,521)        13,994,961
              Income tax expense (benefit) (Note 6)                 790,050         (445,420)         5,289,797
                                                                -----------       ----------        -----------
              Net income (loss)                                 $  (867,456)     $(1,981,101)       $ 8,705,164
                                                                ===========      ===========        ===========      
              Basic earnings (loss) per common share            $      (.15)     $      (.35)       $      1.61
                                                                ===========      ===========        ===========   
              Diluted earnings (loss) per common share          $      (.15)     $      (.35)       $      1.36
                                                                ===========      ===========        ===========   
              Weighted average common shares outstanding:                                                        
                  Basic                                           5,832,887        5,625,464          5,407,957
                                                                ===========      ===========        ===========   
                  Diluted                                             --              --              6,344,682
                                                                ===========      ===========        ===========
   
                                   See accompanying notes to consolidated financial statements.
</TABLE> 

                                      F-4
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                                                                    Cumulative
                                                                       Unrealized    Foreign 
                         Common Stock     Additional      Retained       Loss        Currency     Treasury Stock         Total     
                       ----------------     Paid-In       Earnings         on      Translation  ------------------    Stockholders'
                       Shares    Amount     Capital       (Deficit)    Investment   Adjustment  Shares     Amount        Equity    
                       ------    ------   -----------   -----------    ----------   ----------  ------   ---------    -------------
<S>                  <C>        <C>       <C>           <C>           <C>           <C>         <C>      <C>          <C>          
Balance, at                                                                                                                        
October 1, 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 4)                --       --            --     (111,371)          --           --        --          --       (111,371) 
Foreign currency                                                                                                                   
translation                                                                                                                        
    adjustment              --       --            --           --           --       (4,609)       --          --         (4,609) 
Exercise of stock                                                                                                                  
    options and                                                                                                                    
    warrants           512,038    5,121     1,849,067           --           --           --        --          --      1,854,188  
                     ---------  -------   -----------   ----------     --------     --------  --------   ---------    -----------  
Balance, at                                                                                                                        
September 30, 1996   5,568,562   55,686     9,939,059    7,611,580           --       (4,609)       --          --     17,601,716  
Net loss                    --       --            --   (1,981,101)          --           --        --          --     (1,981,101) 
Cash dividends                                                                                                                     
    (Note 4)                --       --            --     (453,940)          --           --        --          --       (453,940) 
Issuance of common                                                                                                                 
    stock options for                                                                                                              
    services (Note 5)       --       --       105,362           --           --           --        --          --        105,362  
Registration                                                                                                                       
    expenses                --       --       (43,872)          --           --           --        --          --        (43,872) 
Foreign currency                                                                                                                   
    translation                                                                                                                    
    adjustment              --       --            --           --           --       13,187        --          --         13,187  
Purchase of treasury                                                                                                               
    stock (Note 2)          --       --            --           --           --           --    (9,000)    (73,810)       (73,810) 
Exercise of stock                                                                                                                  
    options and                                                                                                                    
    warrants           207,273    2,072       688,402           --           --           --        --          --        690,474  
                     ---------  -------   -----------   ----------     --------     --------   -------   ---------    -----------  
Balance, at                                                                                                                        
September 30, 1997   5,775,835   57,758    10,688,951    5,176,539           --        8,578    (9,000)    (73,810)    15,858,016  
                                                                                                                                   
Net loss                    --       --            --     (867,456)          --           --        --          --       (867,456) 
Cash dividends (Note 4)     --       --            --     (350,326)          --           --        --          --       (350,326) 
Purchase of                                                                                                                        
  treasury stock (Note 8)   --       --            --           --           --           --   (70,000)   (458,675)      (458,675) 
Foreign currency                                                                                                                   
  translation adjustment    --       --            --           --           --      (86,546)       --          --        (86,546) 
Issuance of common                                                                                                                 
  stock options for                                                                                                                
  services (Note 5)         --       --       144,705           --           --           --        --          --        144,705  
Registration expense        --       --       (31,487)          --           --           --        --          --        (31,487) 
Unrealized loss on                                                                                                                 
  investment                --       --            --           --      (38,364)          --        --          --        (38,364) 
Exercise of stock                                                                                                                  
 options and                                                                                                                       
 warrants              111,760    1,117       271,875           --           --           --        --          --        272,992  
                     ---------  -------   -----------   ----------     --------     --------   -------   ---------    -----------  
Balance at
September 30, 1998   5,887,595  $58,875   $11,074,044   $3,958,757     $(38,364)    $(77,968)  (79,000)  $(532,485)   $14,442,859  
                     =========  =======   ===========   ==========     ========     ========   =======   =========    ===========   

</TABLE> 



  See accompanying summary of accounting policies and notes to consolidated 
                             financial statements.

                                      F-5
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS  
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
               INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE> 
<CAPTION> 
                                                                                      1998              1997             1996
                                                                                      ----              ----             ----
            <S>                                                                    <C>              <C>             <C> 
              Cash flows from operating activities:          
                  Net income (loss)                                               $  (867,456)    $ (1,981,101)      $ 8,705,164
                  Adjustments to reconcile net income (loss) to net cash                                          
                   provided by (used in) operating activities:                                                                  
                     Depreciation and amortization                                  1,397,810          801,039           400,368
                     Bad debt expense                                                 530,880          653,458           671,198
                     Deferred tax expense (benefit)                                   676,608         (488,802)       (1,420,858)
                     Stock options/warrants issued for services                       144,705          105,362                --
                     Unrealized losses on available for sale securities                38,364               --                --
                     Changes in assets and liabilities:                                                                           
                       Cash-restricted                                                513,195         (513,195)               --
                       Receivables                                                    447,668       (1,756,875)         (866,498)
                       Inventories                                                 (1,777,041)      (1,555,104)       (4,097,733)
                       Refundable federal income taxes                                459,111         (159,111)         (500,000)
                       Prepaids and other assets                                     (456,643)        (236,426)         (170,840)
                       Other assets                                                     5,186         (102,995)          (63,606)
                       Accounts payable                                              (425,181)       1,130,829           187,395
                       Deferred income                                               (571,873)         (69,099)        3,545,776
                       Accrued expenses and other liabilities                        (642,865)       2,285,944           768,070
                       Federal and franchise tax payable                              (43,216)        (806,784)            6,263
                                                                                  -----------      -----------       -----------
                  Net cash provided by (used in) operating activities                (570,748)      (2,692,860)        7,164,699
                                                                                  -----------      -----------       -----------
                  Cash flows from investing activities:                                                                           
                    Acquisition of property and equipment                          (1,986,114)      (4,076,384)       (2,174,214)
                    Purchase of marketable securities                              (1,006,560)              --                --
                    Purchase of intangible assets                                          --          (51,769)         (211,660)
                                                                                  -----------      -----------       -----------
                                                                                
                  Net cash used in investing activities                            (2,992,674)      (4,128,153)       (2,385,874)
                                                                                  -----------      -----------       -----------
                  Cash flows from financing activities:                                                                           
                    Payment of capital lease obligations                             (166,307)              --                --
                    Exercise of stock options                                         223,642          523,655            36,998
                    Exercise of warrants                                               49,350          166,819         1,817,190 
                    Dividends paid                                                   (466,124)        (449,513)               --
                    Registration fees                                                 (31,487)         (43,872)               --
                    Purchase of warrants                                              (73,675)              --                --    
                                                                                  
                    Purchase of treasury stock                                       (385,000)         (73,810)               --
                                                                                  -----------      -----------       -----------
                                                                                
                  Net cash provided by (used in) financing activities                (849,601)         123,279         1,854,188
                                                                                  -----------      -----------       ----------- 
                  Net increase (decrease) in cash and cash equivalents             (4,413,023)      (6,697,734)        6,633,013
                  Cash and cash equivalents, beginning of year                      8,903,957       15,588,504         8,960,100
                  Cumulative foreign currency translation adjustment                  (86,546)          13,187            (4,609)
                                                                                  -----------      -----------       -----------
                  Cash and cash equivalents, end of year                          $ 4,404,388      $ 8,903,957       $15,588,504
                                                                                  ===========      ===========       ===========

</TABLE> 

  See accompanying summary of accounting policies and notes to consolidated 
                             financial statements.

                                      F-6
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS

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

            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 380 products in nine categories,
including nutritional supplements, health foods, weight management items, skin
care products, other consumer products, and services.

            The Company develops products that it believes will have market 
appeal to its distributors and their customers, and assists its distributors 
in building their own businesses. The 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
directly generate. The Company's operations depend 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.

            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 sells products. 
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 marketin
g organization is based on sales of products rather than investments in the 
organization.

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

Principles Of Consolidation

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

Cash And Cash Equivalents

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

Restricted Cash

            In accordance with the settlement of the Federal Action (See Note
8), the Company was required to set up a reserve fund of $1,500,000 for
reimbursements to certain distributors. As of September 30, 1997, the Company
made reimbursements totaling $986,805. The remaining $513,195 was disbursed
during the year ended September 30, 1998.

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

Concentration Of Credit Risk

            At September 30, 1998 and 1997, the Company's cash in financial 
institutions exceeded the federally insured deposit limit by approximately  
$3,998,000 and $4,675,000, respectively.

Fair Market Value Of Financial Instruments

            The Company's financial instruments include accounts receivable,
accounts payable, long-term debt and capital lease obligations. The fair market
value of accounts receivable and accounts payable approximates their carrying
values because their maturities are generally less than one year.

            Marketable Securities

            The Company's marketable securities are categorized as 
available-for-sale securities, as defined by the Statement of Financial 
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains and losses on available for sale
securities are reflected as a net amount in a separate component of
stockholders' equity until realized. For the purposes of computing realized
and unrealized gains and losses cost is identified on a specific identification
basis.

            Marketable securities are categorized as available-for-sale 
securities and summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                       Gross
                                                                                     Unrealized
                                                    Cost          Fair Value           Loss
                                                   ------         ----------         ----------
           <S>                                  <C>                <C>               <C> 
            Bond funds                          $  674,035         $635,671          $(38,364)     
                                                                               
            Money-market funds                     332,525          332,525              --
                                                ----------         --------          --------
                                                $1,006,560         $968,196          $(38,364)
                                                ==========         ========          ========
</TABLE> 

Receivables

            Receivables consist principally of amounts due from distributors
resulting from credit card sales in the normal course of business. All amounts
are considered collectible. At September 30, 1997 receivables also included
approximately $968,000 due from the Canadian government from overpayment of
goods and services taxes. The Canadian receivable was collected in 1998. Due to
fluctuations in the exchange rate between the U.S. and Canadian dollar, the
Company realized an exchange rate loss upon collection of the receivable of
approximately $100,000.

Inventories

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

Property And Equipment

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

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

Capital Lease

            The Company leases certain computer equipment under a capital lease
agreement which expires in 2002. The asset and liability under this capital
lease are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The asset is being amortized beginning
in fiscal 1998 over the lesser of the related lease term or its estimated useful
life. At the inception of the capital lease, the Company's incremental borrowing
rate was used to determine the

                                      F-8
<PAGE>
 
present value of the minimum lease payment. Therefore, the carrying value of the
capital lease obligation approximates market value.

Stock Options And Warrants

            The Company has elected to continue to account for stock options 
issued to employees in accordance with APB No. 25. During the years ended 
September 30, 1998 and 1997, all options issued to officers and employees 
were granted at an exercise price, which equaled or exceeded the market price 
per share at the date of grant and accordingly, no compensation expense was 
recorded relative to those grants.
            
            Effective for the year ended September 30, 1997, the Company 
adopted the disclosure requirements of SFAS No. 123 "Accounting for 
Stock-based Compensation". This statement requires that the Company provide 
proforma information regarding net income (loss) and income (loss) per share 
as if compensation cost for the Company's stock options granted had been 
determined in accordance with the fair value based method prescribed in SFAS 
No. 123. See Note 5. Additionally, SFAS No. 123 generally requires that 
the Company record options issued to non-employees as an expense.

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 are made for
estimated returns and allowances at the time of sale. Included in cost of sales
are rebates and other commissions which are paid monthly and are calculated
using specific rates based on actual sales volume.

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

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

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 (Loss) Per Common Share

            Basic earnings per share includes no dilution and is computed by 
dividing net earnings (loss) available to stockholders by the weighted number 
of common shares outstanding for the period. Dilutive earnings per share 
reflects the potential dilution of securities that could share in the 
Company's earnings similar to fully diluted earnings per share. 

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

            Earnings per share amounts as required by Statement of Financial
Accounting Standards No. 128 are calculated as follows:

<TABLE> 
<CAPTION> 
                                                                                                           
                                                                          For the Year Ended September 30, 
                                                                    -----------------------------------------
                                                                     1998              1997             1996
                                                                    ------            ------           ------
            <S>                                                     <C>            <C>              <C> 
              Basic earnings (loss) per share:                                                                                     
              
              Net income (loss) available to common                                                              
                  stockholders                                      $ (867,456)    $(1,981,101)      $8,705,164

              Weighted average common shares outstanding             5,832,887       5,625,464        5,407,957      

                  Basic earnings (loss) per share                   $    (0.15)    $     (0.35)      $     1.61
                                                                    ==========     ===========       ==========
              Diluted earnings (loss) per share:                                                

              Net income (loss) available to
                   common stockholders                              $ (867,456)    $(1,981,101)      $8,705,164

              Weighted average common shares outstanding             5,832,887       5,625,964        5,407,957

              Effect of dilutive warrants and options                  366,498         645,079          936,725
                                                                    ----------     -----------       ----------
              Weighted average shares outstanding plus
                  assumed conversions                                6,199,385       6,270,543        6,344,382
                                                                    ==========     ===========       ==========
                  Diluted earnings (loss) per share                 $     (.15)    $      (.35)      $     1.36
                                                                    ==========     ===========       ==========
</TABLE> 

              Diluted earnings per share for the years ended September 30, 1998
and 1997 did not consider the effect of the warrants and options because they
were anti-dilutive.

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

Foreign Currency Translation

            The asset and liability accounts of the Company's foreign 
subsidiaries are translated into US dollar amounts for financial reporting 
purposes using year-end exchange rates. Revenue and expense accounts are 
translated at the average rates during the year. Foreign exchange rate 
translation adjustments are accumulated in a separate component of 
stockholders' equity. Exchange losses of approximately $318,000, $78,500, and 
$0 for the years ended September 30, 1998, 1997 and 1996, respectively, are 
included in the accompanying financial statements as "Other income 
(expense)".

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.

Recent Accounting Pronouncements 

            STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130, 
"REPORTING COMPREHENSIVE INCOME," establishes standards for the reporting and 
display of comprehensive income, its components and accumulated balances. 
Comprehensive income is defined to include all changes in equity except those 
resulting from investments by owners and distributions to owners. Among other 
disclosures, SFAS No. 130 requires that all items that are required to be 
recognized under current accounting standards as components of comprehensive 
income be reported in a financial statement that is displayed with the same 
prominence as other financial statements. SFAS No. 130 is effective for 
financial statements for the periods beginning after December 15, 1997 and 
requires the restatement of comparative information for earlier years. The 
Company does not believe this statement will have a material impact on its 
financial statement reporting. 


            SFAS NO. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report 
information about operating segments in annual financial statements and 
requires reporting of selected information about operating segments in 
interim financial statements issued to the public. It also establishes 
standards for disclosures regarding products and services, geographic areas 
and major customers. SFAS No. 131 is effective for financial statements for 
the periods beginning after December 15, 1997 and requires comparative informa
tion for earlier years to be restated. The Company does not believe this 
statement will have a material impact on its financial statements. 

            SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER 
POST-RETIREMENT BENEFITS," standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. SFAS No. 132
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Adoption of SFAS No. 132 is not expected to have a material effect on the
Company's financial statement disclosures.

            SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING 
ACTIVITIES," requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the
Company has not entered into derivative contracts either to hedge existing risks
or for speculative purposes. Accordingly, the Company does not expect adoption
of the new standard to have a material effect on its financial statements.

Reclassifications

            Certain reclassifications were made to the 1997 accounts to 
conform to the 1998 financial statement presentation. These reclassifications 
did not have an impact on previously reported results.

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


NOTE 2 - PROPERTY AND EQUIPMENT

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

<TABLE> 
<CAPTION> 
                                                                                 September 30,
                                                          LIVES              1998            1997  
                                                          -----              ----            ----
             <S>                                          <C>             <C>             <C> 
              Equipment                                      7            $4,498,928      $4,364,327 
              Computer software                             10             3,038,391       1,577,004
              Leasehold improvements                         5             1,110,167       1,045,058
              Furniture and fixtures                      5-10               656,809         612,498 
              Automobiles                                    5               151,059          93,905
              Equipment held under capital            
                  lease (Note 3)                             4               679,151         635,959
                                                                         -----------      ----------               
                                                                          10,134,505       8,328,751
              
              Less: Accumulated depreciation and amortization              2,827,855       1,794,709  
                                                                         -----------      ---------- 
                                                                         $ 7,306,650      $6,534,042 
                                                                         ===========      ==========
</TABLE> 

NOTE 3 - CAPITAL LEASE OBLIGATION

              Minimum future lease payments under capital leases as of 
September 30, 1998 for each of the next four years and in the aggregate are:

<TABLE> 
<CAPTION> 
             <S>                                                           <C> 
                                                                             Amount  
              Year ended September 30:                                       ------
              1999                                                        $ 194,880
              2000                                                          194,880
              2001                                                          179,738
              2002                                                              789    
                                                                          ---------  

              Total minimum lease payments                                  570,287                       
              Less: Amount representing interest                            (57,443)
                                                                          ---------
              Present value of net minimum lease payments                   512,844
              Current portion of capital lease obligation                  (163,324)
                                                                          ---------
              Long-term portion of capital lease obligation               $ 349,520 
                                                                          =========
</TABLE> 
                  
 
              An interest rate of 7.21% on the capital lease was imputed based
on the Company's incremental borrowing rate at the inception of the lease.

NOTE 4 - COMMON STOCK

            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 
adjusted to give effect to the stock split on October 1, 1995 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 adjusted to reflect this split.
            
            On September 16, 1996 the Company's Board of Directors authorized 
a stock repurchase program, whereby the Company had the discretion to 
purchase up to 200,000 shares of its common stock. During the year ended 
September 30, 1997, the Company purchased 9,000 shares of common stock for 
$73,810. The repurchase program terminated on June 30, 1997.
            
            During the years ended September 30, 1998, 1997, and 1996 the 
Company's Board of Directors declared cash dividends totaling $350,326, 
$453,940 and $111,371, respectively. Of such dividends, $466,124, $449,513 
and $0 was paid during the years ended September 30, 1998, 1997 and 1996, 
respectively.

                                      F-13
<PAGE>
 
NOTE 5 - STOCK OPTIONS AND WARRANTS

1993 Plan

            In planning the Merger, NEC-Utah and NEC-Colorado determined that 
a stock option plan would provide incentives for employees and consultants of 
NFLI who promote the interests of the Company and its stockholders. The 
Company's Board of Directors approved the 1993 Stock Option Plan (the "1993 
Plan") in connection with the approval of the Merger. Pursuant to the 1993 
Plan, a total of 282,000 shares of common stock were reserved for the grant 
of options to purchase the Company's common stock. Generally, one-third of 
the shares underlying the options become exercisable in cumulative 
installments of 12 months, 24 months and 36 months after the date of grant. 
The maximum term of the options is 10 years, except that if an employee 
leaves the Company, the options will terminate 30 days thereafter. The 
issuance of options is at the discretion of the Company's Board of Directors.

1995 Discretionary Plan

            The Company's Board of Directors approved the 1995 Stock Option 
Plan (the "1995 Plan") in March 1995. Pursuant to the 1995 Plan, as amended 
in June 1996, the Company reserved a total of 640,000 shares of common stock for
the grant of options to purchase Common Stock of the Company. The terms of the
options are similar to those of the 1993 Plan.

1995 Non-Discretionary Plan

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

            During the years ended September 30, 1998 and 1997, the Company 
issued 15,000 options to Directors under this plan. For the year ended September
30, 1997, the Company recorded directors fees of $105,362 based on the 
Black-Scholes model. For the year ended December 31, 1998, the Company 
determined that the value of the options was not material.

Options and warrants issued in public offering

            In connection with a public offering, the Company issued 920,000 
stock warrants. Each warrant entitles the holder to purchase one share of 
common stock at a price of $3.75. The warrant expiration date of has been 
extended by the Company's Board of Directors until June 15, 1999. The Company 
has the right to call all of the warrants for redemption on 30 days written 
notice at a redemption price of $.05 per warrant, subject to certain defined 
criteria. In addition, the Company issued warrants to underwriters to 
purchase 80,000 shares of the Company's common stock at $3.75 and options to 
purchase 160,000 shares of the Company's common stock at $3.23.

Other Warrants

            In April 1998 the Company retained the services of Piedmont 
Consulting, Inc., ("Piedmont") a public/investor relations firm, to assist in 
its efforts to gain a broader investor following. As compensation for its 
services Piedmont was paid a monthly retainer and was granted a three year 
warrant entitling it to purchase up to 30,000 shares of the Company's common 
stock at $5.25 per share and 40,000 shares at $7.00 per share. In July 1998 
the Company terminated its relationship with Piedmont. Pursuant to the 
provisions of Financial Accounting Standards No. 123 "Accounting for 
Stock-Based Compensation", the Company recognized approximately $144,705 as 
compensation expense related to the warrants in the year ended September 
30,1998.

            In October 1998 the Company issued a warrant to Nightingale 
Conant to purchase up to 290,000 shares of the Company's common stock at 
$5.50 per share. The warrant is exercisable at any time until October 31, 
2003 and is entitled to the benefit of adjustment of the exercise price and 
number of shares deliverable upon exercise thereof in the event of certain 
specified dilutive transactions. Expense of $702,000 has been accrued in the 
accompanying September 30, 1998 financial statements.

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

            The Company estimates the fair value of each stock option at the 
grant date by using the Black-Scholes option pricing model with the following 
weighted average assumptions used for grants in 1998, 1997 and 1996, a dividend
yield of 1%, an interest free interest rate of 5.7%, and an expected life 
ranging from 5-10 years, and an expected volatility of 67%.

            Had compensation cost been determined on the basis of fair value 
pursuant to SFAS No. 123 for stock options issued to employees, net income 
(loss) and earnings (loss) per share for years ended September 30, 1998, 1997 
and 1996 would have been reduced as follows:

<TABLE> 
<CAPTION> 
                                                                          1998           1997              1996
                                                                          ----           ----              ----  
            <S>                                                       <C>            <C>                <C> 
            Net income (loss):        
            As reported                                               $  (867,456)   $(1,981,101)       $8,705,164
                                                                      ===========    ===========        ==========
            Pro forma                                                 $(1,063,456)   $(2,457,533)       $8,657,534
                                                                      ===========    ===========        ==========
            Basic and diluted earnings (loss) per share:                   
            Basic:
            As reported                                               $      (.15)   $      (.35)       $     1.61
                                                                      ===========    ===========        ==========
              Pro forma                                               $      (.18)   $      (.43)       $     1.60
                                                                      ===========    ===========        ==========
            Diluted:
              As reported                                             $      (.15)   $      (.35)       $     1.37
                                                                      ===========    ===========        ==========
              Pro forma                                               $      (.17)   $      (.43)       $     1.35
                                                                      ===========    ===========        ==========        

</TABLE> 

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

<TABLE> 
<CAPTION>  
                                                                                                 Weighted
                                                                         Number                   Average      
                                                                           of                    Exercise
                                                                         Shares                    Price
                                                                         -------                  --------
           <S>                                                           <C>                      <C> 
            Options outstanding as of October 1, 1995                    491,854                   $ 2.35
               Options granted                                            40,000                   $16.31
               Options exercised                                         (27,454)                  $ 1.41
               Options forfeited                                              --  
               Options cancelled                                          (2,400)                  $ 1.67
                                                                         -------
            Options outstanding as of September 30, 1996                 502,000                   $ 3.51

               Options granted                                           266,850                   $12.15
               Options exercised                                        (157,220)                  $ 3.15
               Options forfeited                                          (2,300)                  $13.00
               Options cancelled                                          (1,200)                  $ 7.33
                                                                         -------
            Options outstanding as of September 30, 1997                 608,130                   $ 7.38

               Options granted                                            80,000                   $ 5.67
               Options exercised                                         (97,400)                  $ 2.27
               Options forfeited                                         (73,233)                  $11.31
               Options cancelled                                         (12,417)                  $11.56
                                                                         -------
            Options outstanding as of September 30, 1998                 505,080                   $ 7.39
                                                                         =======
            Options exercisable as of:
               September 30, 1996                                        485,333                   $ 3.14
               September 30, 1997                                        349,146                   $ 3.81
               September 30, 1998                                        362,548                   $ 5.83

            Weighted average fair value of options granted
             during the year ended:
               September 30, 1996                                                                  $ 9.62
               September 30, 1997                                                                  $ 8.85
               September 30, 1998                                                                  $ 2.45
</TABLE> 
                                                                      
                                      F-15

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


        The following is a summary of the status of stock warrants for the 
years ended September 30, 1998, 1997 and 1996:
                                                           
<TABLE> 
<CAPTION> 
                                                                                                       
                                                          Number            Weighted                                
                                                            of              Average                
                                                          Shares         Exercise Price                   
                                                        ---------        --------------
<S>                                                     <C>              <C> 
Warrants outstanding as of October 1, 1995                999,000            $3.75          
   Exercised                                             (484,684)           $3.75
                                                         --------
Outstanding as of September 30, 1996                      514,316            $3.75          
   Exercised                                              (50,053)           $3.75
                                                         --------
Outstanding as of September 30, 1997                      464,263            $3.75
   Issued                                                  70,000            $5.25
   Exercised                                              (13,160)           $3.75
                                                         --------
Warrants outstanding as of                                                
   September 30, 1998                                     521,103            $3.84
                                                         ========
</TABLE> 

        All warrants were exercisable upon issuance. The weighted average fair 
value of warrants issued in 1998 was $3.35.

                                                                 

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

            Following is a summary of the status of the option and warrants 
outstanding at September 30, 1998:

<TABLE> 
<CAPTION> 
                               
                          Options and Warrants Outstanding                                          Options and Warrants Exercisable
               ----------------------------------------------------------                           --------------------------------
                                                        Weighted-Average                                            
                                                            Remaining                                                       
                   Range of                              Contractual Life        Weighted-Average                  Weighted-Average
                Exercise Prices          Number              (years)              Exercise Price        Number      Exercise Price
               -------------------       ------         -----------------        ----------------      -------     ----------------
              <S>           <C>          <C>            <C>                      <C>                  <C>          <C>  
               $ 0.00   -   $ 1.98       154,500              6.1                      $ 1.72          154,500            $ 1.72
                 1.98   -     3.95       501,683              0.9                        3.62          501,683              3.62
                 3.95   -     5.93        95,000              7.2                        5.33           70,000              5.18
                 5.93   -     7.90        15,000              4.2                        7.00           15,000              7.00
                 7.90   -     9.88        20,000              8.6                        9.00            6,668              9.00
                 9.88   -    11.85        10,000              8.1                       11.50            3,334             11.50
                11.85   -    13.83       150,000              7.6                       12.94           60,800             12.85
                13.85   -    15.80        25,000              7.6                       14.25           16,666             14.25
                17.78   -    19.75        15,000              2.2                       19.75           15,000             19.75
                                         -------              ---                      ------          -------            ------
                                         986,183              3.8                      $ 5.66          843,651            $ 4.70
                                         =======              ===                      ======          =======            ======
                                                                                           
</TABLE> 
           

                                
NOTE 6 - 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.

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

            The (benefit) provision for income taxes for the years ended 
September 30, 1998, 1997 and 1996 consisted of the following:


<TABLE> 
<CAPTION> 
                                                                        1998            1997          1996 
                                                                        ----            ----          ---- 
              <S>                                                    <C>              <C>          <C> 
              Federal tax (benefit) - current                        $ 68,009       $ (12,028)    $ 5,860,655
              Federal tax (benefit) - deferred                        676,298        (476,608)     (1,420,858)
              State tax                                                45,743          43,216         850,000
                                                                     --------       ---------     -----------
                                                                     $790,050       $(445,420)    $ 5,289,797
                                                                     ========       =========     ===========
</TABLE> 
            The following reconciles federal income taxes (benefit) computed 
at the statutory rate with income taxes as reported for the years ended 
September 30:

<TABLE> 
<CAPTION> 
                                                                        1998            1997          1996 
                                                                        ----            ----          ---- 
              <S>                                                    <C>              <C>          <C> 
              Expected income tax (benefit) expense at 34%           $(26,318)      $(825,017)     $4,758,287 
              Graduated tax rate effect                                    --              --         140,000      
              State taxes, net of federal benefit                      30,190          28,523         560,155      
              Loss from foreign subsidiaries                          498,000         380,000              --             
              Nondeductible amortization of intangible assets              --              --          30,694        
              Overaccrual of 1997 lawsuit settlement and distributor
               cruise                                                 153,000              --              --                
              Utilization of loss carryforwards                            --              --        (150,335)   
              Accrual differences from 1997 taxes                     113,608              --              --
              Other items, net                                         21,570         (28,926)        (49,004)
                                                                     --------       ---------      ----------        
              Income tax expense (benefit)                           $790,050       $(445,420)     $5,289,797  
                                                                     ========       =========      ==========

              Current deferred tax assets at September 30, 1998 and 1997 were as follows:

                                                                        1998            1997    
                                                                        ----            ----       
              Deferred income - certificates                        $ 891,000      $1,023,325                      
              Class action lawsuit accrual                                 --         463,512                  
              Additional capitalized inventory costs                  584,000         348,332                  
              Cruise accrual                                               --         406,351                  
              Loss carryforwards                                      111,000              --                
              Deferred settlement costs - Nightingale Conant          275,000              --                
              Deferred income - product and literature                101,000              --                
              Other                                                    20,000          17,088            
                                                                   ----------      ----------
                                                                    1,982,000       2,258,608  
              Less valuation allowance                                     --              --
                                                                   ----------      ----------
              Current deferred tax assets                          $1,982,000      $2,258,608                    
                                                                   ==========      ==========

              Non-current deferred tax liability at September 30, 1998 and 1997 were as follows:
                                                                                               
                                                                       1998             1997
                                                                       ----             ----
              Differences between financial reporting and tax
               depreciation                                        $ (682,000)     $ (282,000)                  
                                                                   ==========      ==========
</TABLE> 

            For the year ended September 30, 1998, the Company had a taxable 
net operating loss of $326,000 which is available to offset future taxable 
income through the year 2018. It is management's opinion, based on past 
operating results and expected future operating results, that it is more likely 
than not that the Company will utilize its entire net operating loss 
carryforward prior to expiration.

            For the year ended September 30, 1997, the Company recorded a 
federal income tax receivable of $659,111 from an overpayment of taxes. Of this 
receivable, approximately $459,000 was refunded during the year ended September 
30, 1998 and $200,000 remained a receivable as of September 30, 1998.

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


NOTE 7 - DEFERRED INCOME

            The Company's 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 approximately $12,500,000, $14,400,000, and $7,647,000 for the 
years ended September 30, 1998, 1997 and 1996. The Company recognized revenue 
from unredeemed expired certificates of approximately $3,100,000,
$7,028,000, and $3,025,000 for the years ended September 30, 1998, 1997 and 
1996. At September 30, 1998 and 1997 the Company had a liability for unredeemed
certificates, net of applicable commissions, of approximately $2,809,000 
and $2,941,000, which is included as deferred income in the accompanying 
consolidated balance sheets.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

401(k) Plan

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

Operating Leases

 The Company has noncancelable operating leases, primarily for office, 
warehouse space and equipment. Rental expense under 
operating leases for the years ended September 30, 1998, 1997 and 1996 
amounted to approximately $621,000, $670,000, and $365,000, respectively.

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

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

<TABLE> 
<CAPTION> 

         YEAR ENDED SEPTEMBER 30,                                                AMOUNT
         ------------------------                                                -------
         <S>                                                                     <C>       
             1999                                                             $  870,166
             2000                                                                801,446
             2001                                                                576,512
             2002                                                                175,426
             2003                                                                137,690                             
             2004 and thereafter                                               1,024,752  
                                                                              ----------  
                                                                              $3,585,992
                                                                              ==========
</TABLE> 

Government Regulations

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

Employment Agreements

            Effective October 1, 1996, the Company entered into employment 
agreements with its chief executive officer and its executive vice-president 
through September 30, 1999. Under the agreements, both individuals will 
receive their annual salary, plus 5% of pre-tax income from $3,000,000 to 
$5,000,000, 4% of the next $5,000,000 of pretax income, and 3% of the next 
$10,000,000 of pretax income. No bonuses were paid to these individuals for
either of the years ended September 30, 1998 or 1997, as the Company did not
achieve sufficient pretax income in either year.

            In March 1998 each of these individuals agreed to a 25% reduction 
in their annual salaries. Concurrent with the salary reduction each was 
granted a three year option, pursuant to the Company's 1995 Stock Option 
Plan, to purchase up to 20,000 shares of the Company's Common Stock st $5.13 
per share, the closing price of the Company's Common Stock on the date of the 
grant. 

Distributor Agreement

            Effective October 24, 1997, the Company entered into an eight 
year exclusivity in network marketing agreement with a significant 
distributor, Mr. Kevin Trudeau, in which the Company agreed to pay Mr. 
Trudeau a percentage, as defined in the agreement, of gross revenues of the 
Company.

            In August 1998 the Company and Mr. Trudeau entered into an 
agreement to end the Company's business relationship with Mr. Trudeau. Mr. 
Trudeau and the Company agreed that their October 1997 agreement and his 
distributorship were terminated and that Mr. Trudeau would not contest such 
terminations. Additionally, the Company and Mr. Trudeau agreed that Mr. 
Trudeau would comply with the nine-month non-competition provisions of the 
October 1997 agreement and that the Company would purchase the approximate 
70,000 shares of common stock and 40,000 stock purchase warrants then owned by 
Mr. Trudeau. In September 1998 the Company purchased Mr. Trudeau's common 
stock and stock purchase warrants for approximately $459,000.

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

Legal Proceedings

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

            During August 1996, an action was brought against the Company in 
the United States District Court (the "Federal Action") for damages relating 
to an alleged illegal pyramid scheme by: (1) certain of its distributors who 
enrolled in the "Instant Executive Program" or the "Instant Executive Pack" and
who allegedly incurred net economic loss; and (2) all individuals who purchased
common stock and warrants during the period from 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 
were that certain aspects of the executive distributor compensation program
constituted an illegal pyramid scheme and that the Company failed to disclose
that its outstanding financial results were directly attributable to the
questioned aspects of its marketing practices and failed to adequately disclose
a certain distributor's past. The state action was dismissed in November 1997.

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

               (A) As part of the distributor settlement, the Company was
                   required to set aside $1,500,000 in a reserve fund to pay any
                   individuals who became instant executives from April 1995 to
                   January 1996. The Company reimbursed these individuals for
                   any unused perishable product which the distributor returned
                   prior to January 2, 1998 in unused condition.
               
               (B) In addition, as part of the distributor settlement, the
                   Company was required to ship product of the Company's choice,
                   with a retail value of $3,900,000 to distributors who became
                   instant executives during the period from April 1995 through
                   April 1996 and had expired, unredeemed order assurance
                   certificates. The Company's cost associated with these
                   products was approximately $534,000.

                                      F-21
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (C) As part of the stockholders agreement, the Company
                   agreed to pay $2,000,000 in cash to individuals who purchased
                   common stock and warrants from July 11, 1995 through July 16,
                   1996.
               (D) In addition, the Company agreed to pay the plaintiffs
                   attorney fees up  to $600,000 and $300,000 of the 
                   stockholder class and distributor class,  respectively.

            The total settlement, including Company legal and administrative 
fees for the Federal Action was $5,535,000 which is reflected in operating 
expenses in the accompanying statement of operations for the year ended 
September 30, 1997. The unpaid portion of the settlement at September 30, 
1997 totaled $1,332,314, of which $1,244,651 was paid during the year ended 
September 30, 1998. The overaccrual of the settlement cost of $87,663 is 
reflected in other income in the accompanying financial statements for the 
year ended September 30, 1998.

            The Securities and Exchange Commission (SEC) had initiated an 
investigation into possible violations by the Company 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.

Cruise

            On February 11, 1997, the Company's Board of Directors approved 
the rights of certain distributors to participate in a cruise during February 
1998. In connection with this cruise, the Company conducted seminars for the 
education and development of its distributors. The $1.2 million estimated and 
accrued cost of the cruise is included in operating expenses for the year 
ended September 30, 1997. During the year ended September 30, 1998 the 
Company paid $833,026 representing payment of all obligations related to the 
cruise. The $362,124 of overaccrued cost of the cruise is reflected in operating
expenses in the accompanying financial statements for the year ended September
30, 1998.

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

Product Liability

            The Company does not engage in the manufacturing of any of the 
products it markets and distributes; however, it 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.

Purchase Commitment

        In July 1998, the Company entered into a supply agreement with 
VitaRich Laboratories, Inc. ("VitaRich")  in which the Company agreed to 
advance VitaRich up to $800,000 to secure the purchase of a sufficient 
quantity of certain nutritional supplement raw materials to meet the 
Company's anticipated need for rapid delivery of product and to obtain such 
product at discounted prices.  The agreement is for three years and requires 
that the Company provide VitaRich with periodic estimates of anticipated 
needs, as well as actual use rates of the requested product.

        The Company made an initial deposit of $400,000 to VitaRich and has 
agreed that it will maintain a deposit in the amount of 40% of its 
outstanding purchase orders with VitaRich.  VitaRich is required to use the 
deposit for the purchase of raw material and the processing of finished 
product in sufficient kinds and quantifies to enable the Company to (i) meet 
its anticipated need for the product, (ii) maximize the costs savings to 
VitaRich and provide the Company with reduced prices through the purchase of 
bulk quantities of raw materials, and (iii) enable VitaRich to meet the 
Company's rapid delivery requirements.

        Unless the agreement is terminated before its expiration, the Company 
is not required to make additional deposits beyond the third year.  
Additionally, VitaRich is required to repay any outstanding deposits by 
crediting the Company with an amount equal to 10% of each purchase order 
placed by the Company until such time as all advances have been repaid.  The 
Company has a first priority security interest in all of VitaRich's interest 
in the inventory, warehouse receipts, documents of title, accounts receivable 
and proceeds of insurance related to the raw materials purchased by VitaRich 
of behalf of the Company. As of September 30, 1998 the Company had advanced 
VitaRich a total of $ 400,000 which is included in prepaid expense in the 
accompanying financial statements.

                                      F-22
<PAGE>
 
                    NUTRITION FOR LIFE INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - RELATED PARTY TRANSACTIONS

            In August and September 1998 the Company purchased approximately 
41,000 copies of a book, "MAKING A DIFFERENCE WHILE YOU'RE MAKING A LIVING", 
written by its CEO, David P. Bertrand and his son J. Mark Bertrand, also an 
employee of the Company, at a cost to the Company of $5.00 per book. New 
Paradigm Publishing, a company established by J. Mark Bertrand, published 
the book and subsequently sold it the Company. The Company sold approximately 
3,000 copies of the book at its Annual Convention in August at an average 
selling price of approximately $10.95 per copy. The book has been placed in 
the Company's product catalog at per copy prices ranging from $8.95 to 
$12.95, based upon quantity ordered, and it is using the book as part of the 
materials provided to new distributors in the Company's starter kits. 
Additionally, in September 1998 approximately 19,000 copies of the book were 
shipped to distributors as part of the Company's Business Training Systems 
for that month. New Paradigm Publishing has agreed to accept return of any 
books ordered, but not sold by the Company and to refund to the Company $5.00 
per returned copy. The Company's Board of Directors unanimously approved the 
purchase of the aforementioned books. As of September 30, 1998 nothing was 
owed to New Paradigm Publishing by the Company. 

            The Company purchases a portion of its inventory from one vendor. 
Until October 1997, a director of the Company was the president or a 
consultant of the vendor, and until June 1995, the vendor was owned by a 
major stockholder of the Company. The items purchased are readily available 
from other vendors. During the years ended September 30, 1998, and 1997, the
Company purchased $494,000 and $4,190,000, respectively, of goods, from this
vendor.

NOTE 10 - FOREIGN SALES

            For the years ended September 30, 1998, 1997, and 1996 the 
Company's net sales from foreign operations were approximately $9,000,000, 
$10,000,000 and $7,982,000, respectively, including sales to customers in 
Canada totaling approximately $4,800,000, $6,795,000, $6,422,000, 
respectively. The gross profit percentages on all foreign sales are 
consistent with the Company's overall gross profit percentages, however 
exchange rate fluctuations could have an impact on the Company's future gross 
profit margins. Information related to the Company's domestic and 
international operations is as follows:

          The Company is evaluating its options relative to continuing its
international operations. Such options include but are not limited to the
continued operation of those subsidiaries or the sale or closure of those
operations. As of September 30, 1998 the Company has established no formal plan
of action.

          The uncertain Asian economic situtation has had a negative impact 
on the Company's operations in the Philippines. The exchange rate between the 
Philippines peso and the US dollar has declined from approximately 28 to 1 at
the formation of that subsidiary to approximately 44 to 1 as of September 30,
1998. As a result the Company has realized exchange rate losses of approximately
$212,000 and $78,500 for the years ended September 30, 1998 and 1997,
respectively in the Philippines.

<TABLE> 
<CAPTION> 

                                                                                
                                                                                  YEARS ENDED SEPTEMBER 30,
                                                                      -------------------------------------------------
                                                                                       (IN THOUSANDS)
                                                                        1998                 1997                 1996
                                                                        ----                 ----                 ----
          <S>                                                        <C>                 <C>                   <C> 
          Sales to unaffiliated customers:
            North America (1)                                         $65,387             $80,325               $97,248
            United Kingdom (2)                                          3,533               2,549                   156
            Philippines (3)                                               738                 171                    --  

          Sales or transfers between geographic areas:
            North America                                                  --                  --                    --
            United Kingdom                                                622                 682                    82
            Philippines                                                   290                 269                    --
          
          Operating profit (loss):
            North America                                               1,937              (2,342)               13,382
            United Kingdom                                               (959)               (906)                  (35)
            Philippines                                                  (280)                (28)                   --
          
          Identifiable assets:
            North America                                              29,635              29,827                27,524
            United Kingdom                                              1,435               1,355                   871
            Philippines                                                   883                 708                    --   
</TABLE> 

            (1)  Includes the United States, Canada, and Puerto Rico.
            (2)  First began operations in fiscal 1996.
            (3)  First began operations in fiscal 1997.

                                      F-23
<PAGE>
 
NOTE 11 - CONTRACT TERMINATION

            In July 1996, the Company entered into an Administrative and 
Consulting Services Agreement (the 1996 "Agreement") with Distributor 
Services, L.L.C. ("DS"). DS is an affiliate of Nightingale-Conant ("NC"), at 
the time a major supplier to the Company of self-improvement programs. The 
1996 Agreement provided that, except to the extent the Company produced its 
own material in-house, DS had the exclusive right to produce and sell all of 
the Company's recruiting and training material. Such materials were to be 
produced and marketed at the expense of DS and DS was entitled to all 
revenues received from sales of such materials. DS also was 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 derived therefrom. The Company had the exclusive right of approval 
over content of all materials and meetings produced by DS. Without additional 
compensation, DS was to 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 communication with 
distributors. For a fee, DS also produced and provided 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 1996 Agreement was fifteen years and 
the parties agreed to negotiate in good faith successive fifteen-year terms. 
The 1996 Agreement could be terminated earlier for breaches of any material 
obligation. Kevin Trudeau, formerly a key distributor of the Company's 
products, was principally responsible for DS's performance in connection with 
the 1996 Agreement.

            In October 1998, the Company, DS and NC agreed to terminate the 1996
Agreement. The Company agreed to pay NC and DS $2,047,000 and to issue to NC a
warrant to purchase up to 290,000 shares of the Company's common stock to
satisfy all accounts payable and other amounts claimed by them for materials
previously delivered to the Company, as well as for the purchase of all of DS's
inventory of audio and video tapes, including all of the audio production rights
for such audio and video tapes, and other materials used to promote the Company,
and for cancellation of the remaining term of the 1996 Agreement.

            Approximately $967,000 of the amount was paid upon execution of 
the agreement in October 1998 with the balance of $1,080,000 represented by a 
promissory note payable in 30 equal monthly interest free payments of $36,000 
beginning November 1, 1998. The note is subordinated to working capital loans 
obtained by the Company in the ordinary course of business, tax and other 
governmental charges, and other obligations incurred in the ordinary course 
of business for obtaining goods and services. For financial accounting 
purposes, the Company has discounted the non-interest bearing note at 10.25% 
resulting in a note payable of $949,000.

            The warrant issued to NC entitles NC to purchase up to 290,000 
shares of the Company's common stock at 
$5.50 per share at any time until October 31, 2003. The warrant is entitled 
to the benefit of adjustment of the exercise price and number of shares of 
common stock deliverable upon exercise thereof in the event of certain 
specified dilutive transactions.

            The Company has accounted for the transactions as of September 30,
1998. The amount paid for the audio production rights was approximately
$1,400,000 and will be amortized beginning in November 1998 over an expected
recovery period of three-years. Expense relative to the warrants issued to NC
has been determined by utilizing the Black-Scholes method to be approximately
$702,000. Such expense is included in the accompanying financial statements as
"Other expense - Contract termination" and "Accrued expense - Nightingale
Conant". Since the warrants were actually issued in October 1998 the Company has
accrued an expense of $702,000 as of September 30, 1998 and will record that
amount in "Additional Paid In Capital" in October 1998. Additionally, the cash
paid upon the execution of the agreement of approximately $967,000 has also been
included in "Accrued expenses - Nightingale Conant".

            NC also agreed that for a five year period it would not directly 
or indirectly seek to acquire a controlling interest, as defined under the 
rules and regulations promulagated by the Securities and Exchange Commission, in
the Company without the prior written consent of the Company's Board of
Directors.
                                      F-24
<PAGE>
 
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE> 
<CAPTION> 

                                                                     1998                 1997                 1996
                                                                     ----                 ----                 ----
                                                                 <S>                    <C>                  <C> 
          Supplemental disclosure of noncash investing and 
          financing activities:                                                                                                
            Purchase of property and equipment under
             capital lease                                        $   43,192            $  635,959            $     --
                                                                                                                         
            Declaration of dividends                                    --              $  115,798            $  111,371
                                                                  
            Settlement of Nightingale Conant contract:                                                               
              Purchase of audio production rights                 $1,400,000                  --                    --
                                                                  
              Issuance of long-term debt                          $  949,000                  --                    --
                                                                  
              Net  increase in liabilities                        $  451,000                  --                    --
                                                                  
          Supplemental disclosure of cash flow information:
            Federal and state income taxes paid                         --              $1,400,000            $7,210,000
                                                                  
            Interest paid                                         $  129,161                  --                    --

                                                                  
</TABLE> 
                                      F-25
<PAGE>
 
                                   PART III


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

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

<TABLE>
<CAPTION> 

            <S>           <C> 
            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.* 
</TABLE> 

                                       28
<PAGE>
 
<TABLE> 
<CAPTION>

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

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

            Exhibit 10.22   Agreement, effective October 24, 1997, among K.T. Corp., Kevin Trudeau and Registrant, filed as an
                            Exhibit to the Report on Form 10-K for the fiscal year ended September 30, 1997 of the Registrant which
                            Exhibit is incorporated herein by this reference.

            Exhibit 10.23   Agreement, dated August 19, 1998, among the Registrant, Kevin Trudeau and K.T. Corp., filed as an 
                            Exhibit to the Report on Form 8-K, which Exhibit is incorporated herein by this reference.

            Exhibit 10.23.1 Settlement Agreement and Release, dated October 27, 1998, among the Registrant, Kevin Trudeau and K.T. 
                            Corp.

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

            Exhibit 10.25   Agreement, dated October 30, 1998, between Distributor Services, L.L.C. and the Registrant, filed as 
                            an Exhibit to the Report on Form 8-K, which Exhibit is incorporated herein by this reference. 
 
            Exhibit 21      Subsidiaries of the Company.

            Exhibit 23      Consent of BDO Seidman, LLP.

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

</TABLE> 

                                       29
<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:  January 13, 1999             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: January 13, 1999                  /s/ David P. Bertrand 
                                        --------------------------------------  
                                        David P. Bertrand, President, Director
                                        and Chairman of the Board of Directors


Date: January 13, 1999                  /s/ Jana B. Mitcham
                                        --------------------------------------  
                                        Jana Mitcham, Executive Vice President,
                                        Secretary, and Director


Date: January 13, 1999                  /s/ David O. Rodrigue
                                        --------------------------------------  
                                        David O. Rodrigue, Vice President and
                                        Chief Financial Officer


Date: January 13, 1999                  /s/ John R. Brown, Jr.   
                                        --------------------------------------  
                                        John R. Brown, Jr., Vice President-
                                        Finance, Treasurer and Assistant 
                                        Secretary

Date: January 13, 1999                  /s/ F. Wayne Ballenger
                                        --------------------------------------  
                                        F. Wayne Ballenger, Director


Date: January 13, 1999                  /s/ M.F. Florence
                                        --------------------------------------  
                                        M.F. Florence, Director


Date: January 13, 1999                  /s/ Richard S. Kashenberg 
                                        --------------------------------------  
                                        Richard S. Kashenberg, Director

                                       30