<PAGE>


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

      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, 2000


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

                        Commission file number 0-26362

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

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

             9101 Jameel
             Houston, Texas                               77040
             --------------                               -----
(Address of principal executive office)                 (Zip Code)

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

           Advanced Nutraceuticals, Inc. is the successor issuer to
                    Nutrition For Life International, Inc.

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on January 10, 2001 was $2,247,000.

The number of shares outstanding of the Registrant's common stock on January 10,
2001 was 8,019,865.

                                   SIGNATURES

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

                                    ADVANCED NUTRACEUTICALS, INC.
                                    (Registrant)
     Date: April 2, 2001            By:  /s/  John R. Brown, Jr.
                                         -----------------------
                                              John R. Brown, Jr.,
                                               Vice President-Finance



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                DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

  Advanced Nutraceuticals, Inc. ("ANI" or the "Company") was organized in March
2000 to be the holding company for Nutrition For Life International, Inc.
("NFLI") and NFLI's subsidiaries. NFLI has been engaged in the sale of
nutritional supplements and other consumer products through a network marketing
system since 1983. In late 1999, the Company acquired Bactolac Pharmaceutical
Inc. ("Bactolac") and ASH Corp. ("ASH"), manufacturers of nutraceutical and
pharmaceutical products. The Company adopted the holding company structure to
better reflect the diversification of its operations and to improve its
organizational structure for its acquisition program.

  On December 29, 2000, ANI entered into a definitive agreement to sell NFLI.
Closing of the sale is subject to approval of the Company's shareholders and
senior lender, as well as customary closing conditions. Assuming the completion
of the sale, the Company's business operations will consist of the manufacture
of nutraceutical and pharmaceutical products by Bactolac and ASH.

  Bactolac is engaged in the formulation, manufacturing and packaging of
encapsulated and compressed tablets and powder blended vitamins and related
nutritional supplements. ASH, which is operated as a division of Bactolac, is
engaged primarily in the contract manufacture of liquid and powder
pharmaceutical products. Bactolac and ASH provide private label contract and
over-the-counter manufacturing services to various companies engaged in the
marketing and distribution of vitamins, mineral supplements, herbs and other
health and nutrition consumer products and over-the-counter drugs.

  The Company's near term strategy is to strengthen its financial position and
to expand and diversify its revenue base. The Company believes it can
successfully implement this strategy by completion of the sale of NFLI, improved
management of its working capital assets, and aggressive efforts to obtain new
customers by emphasizing its cost effective and high quality manufacturing
operations.

  The Company's long-term strategy, which commenced with its acquisitions of
Bactolac and ASH, is to pursue strategic acquisition opportunities in the
manufacturing and distribution segments of the nutritional and pharmaceutical
industries. Due to the operating losses of NFLI, management of the Company
determined that for the near term, it would not be feasible to attempt to
acquire additional companies. With the pending sale of NFLI, the Company
anticipates refocusing on select acquisition candidates.

                            MANUFACTURING OPERATIONS

Products and Manufacturing

  The Company has significant internal manufacturing competencies in the
following distinct areas: over the counter liquids and powder manufacturing,
bottling and packaging; powder blending, filling; and capsule and tablet
manufacturing, filling and packaging. The Company currently manufactures its
products in two facilities. In September 2000, the Company



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commenced relocation to a state-of-the-art facility that more than doubled the
Company's previous capacity for manufacturing capsules and tablets. The facility
is located in Hauppauge, New York. The Company also operates an over the counter
liquids production facility located in Gulfport, Mississippi. The Company is
continuously upgrading its facilities and enhancing its manufacturing
capabilities through new equipment purchases.

  The Company manufactures at its Hauppauge facility a comprehensive assortment
of vitamin, mineral and nutritional supplement products, which include vitamins
C and E, beta carotene, magnesium, folic acid, calcium and potassium, as well as
various herbs such as Echinacea, St. John's Wort, Ginko Biloba, Saw Palmetto and
Ginseng and various multivitamin combinations. The Company has the capacity to
produce millions of tablets per day using technologically advanced high-speed
manufacturing equipment. The Company is in the process of developing fully
automated packaging lines. At its Gulfport facility, the Company manufactures
liquids, tablet, powders, and over the counter drugs. Examples of the products
that it produces include liquid antacids, cough and cold syrups and elixirs,
acetaminophen elixirs, baby powders, medicated powders, antifungal powders and
other consumer products.

  The Company is committed to providing high quality products. The Company's
facilities are designed to meet USP compliance standards. The Company's quality
management systems are detailed and rigorous, and include analytical processes
and procedures. The quality management systems also include well equipped and
professionally staffed analytical laboratories to assure raw material acceptance
as well as in-process and finished product evaluation for compliance to
specification. The Company's OTC pharmaceutical products are also subject to
shelf life stability testing through which the Company determines the effects of
aging on its products. The Company's product retention program allows the
Company the ability to maintain samples from each product batch shipped and,
when appropriate, to analyze such samples for product quality.

  The Company focuses on maximizing buying power through volume leverage with a
smaller select supplier base. As a result of this effort, material supply
savings have been achieved. In addition, key supply relationships have been
established with raw material and packaging suppliers who bring significant
financial, technical, quality and service resources to the Company

  The Company believes its current manufacturing facilities and efficiencies, as
well as, laboratory and quality control capabilities, are a major factor in
customer relationships. The standards for formulating, manufacturing and
labeling nutritional and pharmaceutical products should, in the opinion of
management, assist the Company in serving its present and future customers and,
ultimately, the consumer.

Customers and Markets

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

  During the first quarter of the new fiscal year, the Company has concentrated
on increasing its customer base through expanded marketing and sales efforts.
The Company has engaged independent sales agents with established customer
relationships and has developed marketing materials in addition to commencing
attendance at trade shows. As a result of these activities the Company has
entered into negotiations and talks with several new potential customers.

  In the fourth quarter ended September 30,2000, Bayer Corporation informed the
Company that it decided to internally produce most of the products produced at
ASH's facility by the Company for Bayer. Bayer accounted for 5% of the Company's
consolidated sales for the fiscal year ended September 30, 2000.  ASH has
expanded its marketing efforts by engaging independent sales agents with
established customer relationships and expanding sales opportunities with
customers other than Bayer. In addition, ASH has initiated a cost containment
program aimed at reducing its expenses at its Gulfport facility.

Research and Development

  The primary areas of the Company's research and development activities are
assisting customers in the development of new products and enhancement of
existing products. Such assistance is normally in the form of product component
identification and formulation, as well as product and packaging trends. In
addition, as part of its quality control procedures the Company produces pilot
or sample runs of product formulation prototypes to ensure stability and/or
efficacy and to determine ingredient interaction. The Company has implemented
quality control procedures to verify that all products



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comply with established specifications and standards in compliance with both USP
and Good Manufacturing Practices promulgated by the Food and Drug
Administration. Research of this type is a part of the operating expenses
incurred by the Company, and the associated costs of research and development
activities have not been significant to date.

Sources and Availability of Raw Materials

  Raw materials used in the Company's products consist of nutrient powders,
excipients, empty gelatin capsules, and necessary components for packaging and
distribution of finished vitamin and nutritional supplement products. The
nutrient powders and the empty gelatin capsules are purchased from manufacturers
in the United States, and foreign countries. Pharmaceutical ingredients used
products manufactured by the ASH division are purchased from reliable sources in
the United States. All materials procured by the Company undergo quality control
review to ensure conformance to product specification prior to acceptance and
release into materials inventory. To date, the Company has not experienced any
difficulty in obtaining adequate sources of supply. Although there can be no
assurance that the Company will continue to be able to obtain adequate sources
in the future, the Company believes that it will be able to do so.

Competition

  The Company's products are sold primarily in domestic as well as limited
foreign markets in competition with other private label manufacturing and
marketing companies. The vitamin, nutritional supplement and over-the-counter
pharmaceutical industry is highly competitive, and competition continues to
increase. Competition for the sale of products comes from many sources,
including companies which sell pharmaceuticals and nutraceuticals to
supermarkets, large chain discount retailers, drug store chains and independent
drug stores, health food stores, pharmaceutical companies and others who sell to
wholesalers, as well as mail order vendors, eCommerce and network marketing
companies. The Company does not believe it is possible to accurately estimate
the number or size of its many competitors as the vitamin industry is largely
privately held and highly fragmented.

  The Company believes the industry continues to see significant consolidation
as merger and acquisition activity was reported to total over $4 billion in
transactions during the first half of calendar 2000. Many industry experts
expect this activity to continue for the foreseeable future in food and
nutrition companies, multilevel marketing organizations and eCommerce internet
firms.

  The Company believes competition among manufacturers of over-the-counter
pharmaceuticals, vitamin and supplement products is based, among other things,
on price, timely delivery, product quality and consistency, safety,
availability, product innovation, marketing assistance and customer service. The
competitive position of the Company will likely depend upon continued acceptance
of its products, its ability to attract and retain qualified personnel, future
Governmental regulations affecting the Company's products as well as the
publication of vitamin product safety and efficacy studies by the government and
authoritative health and medical authorities.

  Based on industry data, the botanicals and supplements industry experienced a
30% sales growth in calendar year 1998, while 1999 experienced a decelerating
growth rate of 7.8%. Intense competition among industry members during the same
period narrowed overall operating margins from 9.7% to 4.3%. The industry is
believed to be moving into a mature stage where greater price pressure and
modest market expansion will continue to increase competition.

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

Employees

  At September 30, 2000, the Company employed 113 full time employees in its
manufacturing operations, with 3 employed in holding company executive
management while the remaining employees are engaged in management and sales,
quality control, production and administration. At September 30, 2000, NFLI
employed 145 persons; 115 of whom are employed in the U.S. The majority of
NFLI's employees are office, clerical and warehouse employees.

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

Government Regulation



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  The formulation, manufacturing, packaging, labeling, advertising and
distribution of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product Safety
Commission ("CPSC"), the United States Department of Agriculture ("DOA") and the
Environmental Protection Agency ("EPA"). These activities are also regulated by
various agencies of the states and localities in which the Company's products
are sold, including without limitation the California Department of Health
Services, Food and Drug branch. The FDA in and FTC particular regulate the
advertising, labeling and sales of vitamin and mineral supplements and may take
regulatory action concerning medical claims, misleading or untruthful
advertising, and product safety issues. These regulations include the FDA's Good
Manufacturing Practices ("GMP") for foods. Detailed dietary supplement GMPs have
been proposed but no regulations have been adopted. Additional dietary
supplement regulations were adopted by the FDA pursuant to the implementation of
the Dietary Supplement Health and Education Act of 1994 ("DSHEA").

  The Company may be subject, from time to time, to additional laws or
regulations administered by the FDA or other Federal, State or foreign
regulatory authorities, or to revised interpretations of current laws or
regulations. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the Company to: reformulate certain products to meet new standards;
recall or discontinue certain products not able to be reformulated; expand
documentation of the properties of certain products; expand or provide different
labeling and scientific substantiation; or, impose additional record keeping
requirements. Any or all such requirements could have a material adverse effect
on the Company's results of operations and financial position.

                       NETWORK MARKETING OPERATIONS- NFLI

  On December 29, 2000, the Company signed a definitive agreement to sell
Nutrition For Life International, Inc. ("NFLI") to Everest International, L.L.C.
("Everest"). The agreement provides for $5 million in cash at closing subject to
a working capital adjustment and a $5 million note, payable based on a ten-year
amortization with quarterly payments for three years and a final balloon payment
at the end of the third year. In addition, Bactolac will enter into a product
supply agreement with NFLI and will also receive a $650,000 note representing a
currently outstanding inter-company liability, due in one year and a day from
closing. The purchase price may also be increased up to an additional $750,000,
depending upon future operating results of NFLI's Japanese operation. The
transaction is subject to approval by the Company's stockholders and its senior
lender and customary closing conditions.

  Distribution and Marketing

  NFLI develops products that are designed for health-conscious consumers, and
sells those products to consumers through its network of independent
distributors. Distributors are independent contractors who purchase products
directly from NFLI for their own use and for resale to retail consumers.
Distributors may elect to work on a full-time or part-time basis. Distributors'
revenues are derived from several sources. First, distributors may receive
revenues by purchasing NFLI's products at wholesale prices and selling those
products to customers at retail prices. Second, distributors earn the right to
receive commissions upon attaining the level of "executive." Executive level
distributors may earn commissions on product purchases by other distributors in
their downline organization.

  The number of active independent distributors of NFLI has declined during the
past three fiscal years from 80,000 at September 30, 1998, to 67,000 and 58,000
at September 30, 1999 and 2000, respectively.  A distributor remains active by
generating a minimum of $40 in sales volume at least once every 12 months.

  In July 1996 NFLI 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 NFLI. The 1996 Agreement provided that, except to the
extent NFLI produced its own material in-house, DS had the exclusive right to
produce and sell all of NFLI'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. NFLI purchased product and services in the aggregate of
approximately $350,000, $607,000 and $4,387,000 from DS and NC in the years
ended September 30, 2000, 1999 and 1998, respectively. Kevin Trudeau, formerly a
key distributor of NFLI, was principally responsible for DS's performance in
connection with the 1996 Agreement.

  In August 1998, NFLI and Kevin Trudeau entered into an agreement regarding the
termination of Mr. Trudeau's distributorship and in October 1998, NFLI, DS and
NC entered into a severance agreement terminating the 1996



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Agreement. NFLI is now internally providing the services previously performed by
DS. NFLI 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 NFLI's recruiting and training materials, including its
monthly Business Training System.

  NFLI provides a program, Order Assurance 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 NFLI 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. As of
September 30, 2000, 1999, and 1998, respectively, there were approximately
23,703, 29,000, and 35,000 distributors enrolled in the OAP.

  Prior to June 1, 1999, NFLI sold product redemption certificates to
distributors who were enrolled in the Company's order assurance program ("OAP").
Revenues were recorded when these certificates were redeemed for product.
However, if the certificates were not redeemed for product, the Company recorded
revenues ratably over a 150 day period commencing with the ending of the
expiration period of 120 days.  The period of recognition was based upon NFLI's
historical redemption experience. Such revenues were recorded as part of the
Company's net sales for periods prior to June 1, 1999.

  Subsequent to June 1, 1999, NFLI began shipping product packs for most OAP
purchases, the shipment of which results in the recognition of revenue.
Approximately $4,800,000 and $2,600,000 of revenue related to the shipment of
the product packs was recognized in fiscal 2000 and 1999.  Except in very
limited circumstances, NFLI no longer sells any type of product redemption
certificates.  It now only provides its distributors with a deferred arrangement
for product purchases under a plan similar to a "layaway" program for "big
ticket" items.  The distributor makes payments against the product purchase for
a period not to exceed six months, and upon payment in full, NFLI ships the
product to the distributor.  Revenues collected in advance of shipment are
recorded as deferred revenues until the product is shipped.  The distributor has
the right to substitute other products or receive a cash refund or product
replacement under the same terms as regular product sales.

  Markets

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

                                     Year Ended September 30
                                    -------------------------
                                          (in Thousands)
     Country          Year Entered    2000     1999     1998
     ---------------  ------------  -------  -------  -------
     United States        1984      $42,800  $57,900  $60,400
     Canada               1993        3,600    3,100    4,800
     Puerto Rico          1994           --      100      200
     Europe               1996        4,200    4,700    3,500
     Philippines          1993          600      800      700
     Japan                1999        2,000       --       --


  The uncertain Asian economic situation has had a negative impact on NFLI's
operations in the Philippines. The exchange rate between the Philippine peso and
the US dollar has declined from approximately 28 to 1 at the formation of that
subsidiary to approximately 41 to 1 as of September 30, 1999. NFLI has realized
exchange rate gains (losses) of approximately $ (146,000), $72,500, and
$(212,000) for the years ended September 30, 2000, 1999 and 1998, respectively,
in the Philippines. NFLI sold the operations in the Philippines effective
September 1, 2000, resulting in an immaterial loss on the sale transaction.



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  Products

  NFLI markets and distributes an extensive product line of approximately 500
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, NFLI has emphasized quality,
purity, potency, and safety.

  Vitamins and minerals and antioxidants. NFLI markets 44 vitamin and mineral
products that are offered in a variety of combinations including NFLI's
proprietary Grand Master, Master-Key-Plus, and OraFlow Plus  formulations.

  JaNique. NFLI markets a high-quality cosmetics offering providing the latest
American and European technologies. The line consists of foundations, eye
shadows, blushes, lipstick, powders, mascaras, lip and eye pencils and specialty
color items.

  Nutique personal care items. NFLI markets 42 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. NFLI markets 84 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, and Lean Life, a herbal weight management
formulation, and a line called Heartful Gourmets, which are soy- based meals and
snacks.

  Herbal formulas. NFLI'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 NFLI.

  Homeopathic and special formulas. Homeopathic remedies, when prepared in
minute amounts, mimic disease symptoms and stimulate the body's defense systems.
NFLI offers 76 homeopathic remedies that have been formulated in accordance with
the Homeopathic Pharmacopoeia of the United States. In addition, NFLI 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. NFLI 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. NFLI markets 17 products designed to test or improve the
quality of air and water, including electrostatic air filters and water
filtration systems.

  Self improvement programs. NFLI markets a number of motivational and self
improvement tapes and other products. NFLI internally produces such tapes to
supplement tapes available from third party suppliers.

  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 NFLI's revenue. NFLI continually seeks to identify, develop
and introduce innovative, effective and safe products. During the fiscal years
ended September 30, 2000, 1999, and 1998, the approximate number of new products
and services introduced by NFLI was 88, 36, and 16, respectively. Management
believes that its ability to introduce new products increases its distributors'
visibility and competitiveness in the marketplace.



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  NFLI 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. Due to the nature of NFLI's business,
NFLI typically does not carry a substantial backlog of orders.

  Consumer Product Warranties and Returns

  NFLI'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
NFLI'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
NFLI for an exchange of equal value. The manufacturers of those products warrant
most products against defect. Most products returned to NFLI, however, are not
found to be defective in manufacture. As a result, NFLI at its cost replaces
most products returned to NFLI.

  Management Information System

  NFLI completed the installation of SAP(R), an enterprise wide state-of-the-
market computer information system during 1998. The total cost, including
implementation and training, was approximately $3,000,000. NFLI has entered into
a lease arrangement for a portion of this system. Currently, NFLI has elected to
maintain the current SAP software installation at NFLI and not upgrade to a
newer version. NFLI is evaluating its options regarding maintenance and support
agreements covering the system.

  Manufacturing and Supplies

  During the past three fiscal years NFLI purchased all of its vitamins,
nutritional supplements and all other products from third parties that
manufacture such products to NFLI's specifications and standards.

  In July 1998, NFLI entered into an agreement with VitaRich Laboratories, Inc.
("VitaRich") in which NFLI agreed to advance VitaRich up to $800,000 to secure
the purchase of a sufficient quantity of certain nutritional supplement raw
materials to meet NFLI'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 NFLI provide VitaRich with periodic estimates of anticipated
needs, as well as actual use rates of the requested product.

  NFLI 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 NFLI to (i) meet its anticipated need for the product, (ii)
maximize the costs savings to VitaRich and provide NFLI with reduced prices
through the purchase of bulk quantities of raw materials, and (iii) enable
VitaRich to meet NFLI's rapid delivery requirements.

  Unless the agreement is terminated before its expiration, NFLI is not required
to make additional deposits beyond the third year. Additionally, VitaRich is
required to repay any outstanding deposits by crediting NFLI with an amount
equal to 10% of each purchase order placed by NFLI until such time as all
advances have been repaid. NFLI 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 NFLI. As of September 30, 2000, the
outstanding advance to VitaRich was $262,859.

  NFLI does not have long term supply agreements with any vendor other than
VitaRich. Although NFLI 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 NFLI. In addition, such delays could
interrupt growth of product sales and distributor recruitment.

  Trademarks and Service Marks

  Most products are packaged under NFLI's "private label". NFLI has registered
trademarks with the United States Patent and Trademark Office for its Master Key
Plus(R), Oraflow Plus(R), LeanLife(R), Nutri-Cookie(R), Requin 3(R), Grand
Master(R), Phytonol(R), BioWater(R), E-Lemonator(R), Phytogreen(R), BioGlow(R),
BioRub(R), Whey-To-Go(R), Heartful Gourmets(R), Lifedial Plus(R), Arthro Support
Tri-Pack(R), Enviro Defense System(R), NutriBuddies(R), ,and Nutrition For
Life(R). It has applied for trademark registration for its Snoreless(TM),
ItchBuster(TM), Healthy Chocolates(TM), Soy B-Nuts(TM), JaNails(TM),
Kholesterol-Blocker(TM), Healthy Start(TM), O2 Support(TM), Ki.Sweet(TM), Immune
Support(TM), and PyruBalance(TM).



                                      -8-
<PAGE>

  Competition

  NFLI 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. NFLI's ability to remain competitive
depends, in significant part, on its success in recruiting and retaining
distributors. There can be no assurance that NFLI's programs for recruitment and
retention of distributors will be successful in the future.

  There are many network marketing companies with which NFLI 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 NFLI and has significantly greater resources. NFLI
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 NFLI, and some
competitors market products and services in addition to those marketed by NFLI.
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. NFLI's principal
methods of competition for the sale of products are its responsiveness to
changes in consumer preferences and its commitment to quality, purity, and
safety.

  Government Regulation

  The manufacturing, processing, formulation, packaging, labeling and
advertising of NFLI'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 NFLI'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
utrition 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 became effective March 23, 1999. More detailed regulations
regarding claim language became effective January 7, 2001.

  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 is
available. Statements can describe claims of enhanced well-being from use of the
dietary supplement or product statements that relate to affecting a structure or
function of the body. However, Statements 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
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



                                      -9-
<PAGE>

regarding the safety of dietary supplement products. NFLI 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 NFLI. In February 1997 the FDA published proposed regulations for
the manufacture of dietary supplements. These regulations, if finalized would
require at least some of the quality control provisions related to drugs to be
applied to nutritional supplements. NFLI believes that it complies with good
manufacturing practices for foods, as currently required by the FDA.

  The Federal Trade Commission ("FTC") regulates advertising of NFLI'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 NFLI has not
been the target of a FTC investigation, there can be no assurance that the FTC
will not investigate NFLI's advertising in the future.

  On November 18, 1998, the FTC issued it's "Dietary Supplements: An Advertising
Guide for Industry". Such guide provides an application of FTC law to dietary
supplement advertising and includes examples of how principles of advertisement
interpretation and substantiation apply in the context of dietary supplement
advertising. The guide provides additional explanation but does not
substantially change the FTC's existing policy that all supplement marketers
have an obligation to ensure that claims are presented truthfully and to specify
the adequacy of the support behind such claims.

  NFLI 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 NFLI's results of
operations and financial condition.

  NFLI's network marketing system is subject to governmental laws and
regulations generally directed at ensuring that product sales are made to
consumers of the products and that compensation and advancement within the
marketing organization is based on sales of products rather than investment in
the organization. These laws and FTC regulations include the federal securities
laws, matters administered by the FTC and various state anti-pyramid and
business opportunity laws. Although NFLI believes that it is in compliance with
all such laws and regulations, NFLI 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 NFLI or significant distributors to comply with
these laws and regulations could have an adverse material effect on NFLI in a
particular market or in general.

  NFLI's products are subject to regulation by foreign countries where they are
sold. Government regulations in foreign countries where NFLI plans to commence
or expand sales may prevent or delay entry into a market or prevent or delay the
introduction or require the reformulation or relabeling of certain of NFLI's
products.

                                 RISK FACTORS

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

  Risks Related to the Company and its Manufacturing Operations

  Recent Losses. The Company has incurred losses in each of the fiscal years
  -------------
ended September 30, 2000, 1999 and 1998. The losses were incurred primarily from
the operations of NFLI, which are expected to be discontinued upon completion
primarily of the pending sale. The Company experienced declines in net sales for
the network marketing business operated by NFLI during each of those years when
compared to the preceding fiscal year. In addition, NFLI experienced increased
costs in each of those years. Particularly in view of the Company's increased
level of expenditures, NFLI's future financial condition and operating results
could be negatively impacted if the Company is not successful in completing the
NFLI sale. The Company completed the acquisitions of Bactolac and ASH in late
1999. Although those operations had income before income tax expense in the
fiscal year ended September 30, 2000, because of the brief operating history,
future profitable operations cannot be predicted with certainty.



                                      -10-
<PAGE>

  Sale of NFLI. On December 29, 2000, ANI signed a definitive agreement to sell
  ------------
NFLI and NFLI's subsidiaries in the network marketing business. The sales price
consists of $5,000,000 in cash, subject to a working capital adjustment at
closing, and a $5,000,000 note payable based upon a ten year amortization
schedule with quarterly payments for three years and a final balloon payment at
the end of the third year. The purchase price may also be increased up to an
additional $750,000, depending upon future operating results of NFLI's recently
established Japanese subsidiary. The note will be subordinate to the purchaser's
secured lender and will be without recourse to the purchaser. Accordingly,
collectability of the note will depend upon the success of operations of NFLI
after the closing of the sale, including NFLI's ability to service its debt with
its senior lender.

  The working capital adjustment will be based upon an adjusted working capital
calculation using $1,000,000 as a base figure. If at closing the computation
yields more or less than $1,000,000, the purchase price will be adjusted
accordingly. As of December 31, 2000, such computation would have resulted in a
base amount deficit and if the sale were closed as of that date, the $5,000,000
cash purchase price would have been decreased to approximately $ 3,725,000.  It
is currently unknown what adjustment will be made at closing as this will depend
upon a number of factors, primarily future operations of NFLI. If the working
capital adjustment results in a significant reduction in the purchase price, or
if the future operations of NFLI are not sufficient to repay the note, the
financial position and liquidity of ANI would be adversely affected.

  Secured Lender Relationships. In connection with the acquisitions of Bactolac
  ----------------------------
and ASH, the Company entered into a credit facility, and through Bactolac,
assumed a mortgage obligation outstanding on the ASH facility. As of September
30, 2000, the balances outstanding on those obligations amounted to $6,589,783
and $1,350,053, respectively. The Company has not been in compliance with
certain covenants under the credit facility and has been granted waivers by the
lender and, in the case of the mortgage obligation, has been granted extensions
of the original due date of the loan. The Company is attempting to amend its
credit agreements and believes based on its discussion with the lenders, that it
will be successful in such efforts. If the Company's secured lenders will not
modify the agreements or continue to work with the Company in granting waivers
and extensions, until such time as the Company may be able to modify, refinance
or repay such obligations, the financial position and liquidity of the Company
would be adversely affected.

  Replacement Of Principal Customer Of ASH. Approximately 5%  (31% of the
  ----------------------------------------
manufacturing divisions sales) of the Company's consolidated sales in for the
fiscal year ended September 30, 2000 were made to Bayer Corporation. During the
fiscal year, Bayer informed ASH that, effective January 1, 2001, it intended to
produce in-house products which had been produced for it by ASH. ASH is
aggressively attempting to expand its customer base to compensate for the loss
of the Bayer business and has initiated a cost containment program. Failure to
replace this substantial customer, or the inability to substantially reduce
ASH's operating expenses, would have an adverse effect on the Company's business
and financial condition.

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

  Nasdaq Listing.  The Company's common stock is currently traded under the
  --------------
symbol - ANIIC, on the Nasdaq SmallCap Market based on a temporary exception
granted by Nasdaq. The Company's common stock has failed to maintain a minimum
bid price of $1.00 as required by Nasdaq. The exception will expire on May 18,
2001.  If the Company meets this requirement, the common stock will continue to
be listed on Nasdaq.  Should the Company's shares be delisted from Nasdaq, and
be quoted on either the "bulletin board," or the "pink sheet" system, it could
have a negative impact on the trading activity and price of the Company's common
stock as well as the Company's ability to raise additional equity capital and/or
consummate additional acquisitions.

  Government Regulations.  The manufacturing, processing, formulation and
  ----------------------
packaging of the Company's products are subject to regulation by federal, state
and foreign agencies, including the United States Food and Drug Administration
(the "FDA"), the Federal trade Commission, the Consumer Product Safe Commission,
the United States Department of Agriculture, the United States Postal Service
and the United States Environmental Protection Agency.  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.



                                      -11-
<PAGE>

  There can be no assurance that the regulatory environment in which the Company
operates will not change or that such regulatory environment, or any specific
action taken against the Company will not result in a material adverse effect on
the Company's business, financial condition or results of operations. The
Company also cannot predict whether new legislation regulating its activities
will be enacted, which new legislation could have a material adverse effect on
its operations.

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

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

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

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

  Subject to future operating results and/or obtaining additional financing, the
availability of which is not assured, the Company plans to seek additional
acquisitions. The timing, size and success of the Company's acquisition efforts
and any associated capital commitments cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its stock,
cash, borrowed funds (including the issuance of promissory notes to the sellers
of the companies to be acquired) or a combination thereof. If the Company's
stock does not maintain a sufficient market value, or if potential acquisition
candidates are otherwise unwilling to accept stock as part of the consideration
for the sale of their businesses, the Company may be required to use more of its
cash resources or more borrowed funds, in each case if available, in order to
acquire additional companies. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. There can be no assurance that the
Company will be able to obtain any additional financing that it may need for
future acquisitions on the terms that the Company deems acceptable.



                                      -12-
<PAGE>

  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
Company's credit facility prohibits dividend payments without the consent of the
lender.  The determination of whether to pay dividends in the future will be
made by the Board of Directors and will depend on the earnings, capital
requirements, and operating and financial condition of the Company, among other
factors. It is not anticipated that the Company will pay dividends in the fiscal
year ending September 30, 2001 or in the foreseeable future.

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

  Risks Related to NFLI and the Company's Network Marketing Operations

  Distributor Network.  NFLI's products are distributed through an extensive
  -------------------
network marketing system of distributors. Distributors are independent
contractors who purchase products directly from NFLI for resale and/or for their
own use. Distributors typically market NFLI's products on a part-time basis, and
may engage in other business activities, including the sale of products offered
by competitors of NFLI. NFLI has a large number of distributors, and a
relatively small corporate staff to implement its marketing programs and provide
motivational support. NFLI'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 and Competition for Distributors".

  Regulatory Scrutiny and Legal Proceedings.  NFLI's  network marketing system
  -----------------------------------------
is subject to governmental laws and regulations generally directed at ensuring
that product sales are made to consumers of the products and that compensation
and advancement within the marketing organization is based on sales of products
rather than investment in the organization. These laws and regulations include
the federal securities laws, matters administered by the Federal Trade
Commission and various state anti-pyramid and business opportunity laws.
Although NFLI believes that it is in compliance with all such laws and
regulations, NFLI 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 NFLI or significant distributors to comply with these
laws and regulations could have a material adverse effect on NFLI in a
particular market or in general.

  To become a distributor of NFLI, a person must be sponsored by an existing
distributor, sign the official Distributor Agreement, and purchase a
"distributor success kit" from NFLI, which is currently priced at $49. NFLI'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. NFLI 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.

  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 (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 NFLI'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.

  NFLI was not named as a defendant in the Illinois Suit, but NFLI's management
viewed the Illinois Suit as an opportunity to discuss NFLI's marketing program
and to resolve confusion surrounding the program.  On July 16, 1996,



                                      -13-
<PAGE>

NFLI 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, NFLI may maintain its same
executive level qualifications, but to aid clarification, it will no longer use
the "Instant Executive" designation. Other key features of the AVC focus on
NFLI'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 NFLI's policies and
procedures; and (d) create a World Wide Web site on the Internet to provide more
information about NFLI's products and programs. NFLI 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 NFLI'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. NFLI 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.

  NFLI entered into similar agreements with the states of Florida, Hawaii,
Idaho, Kansas, Kentucky, Michigan, Missouri, New Jersey and Pennsylvania. NFLI
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. NFLI has agreed to establish procedures to
independently verify consumer sales on a random basis and to sanction
distributors submitting false information. Compliance by NFLI with these
agreements may make the program less attractive to distributors and prospective
distributors. In particular, NFLI believes that the special requirements in the
Florida agreement have had a negative impact on NFLI's ability to retain and
attract distributors in Florida. These factors could negatively impact NFLI's
future operating results. NFLI maintains an ongoing compliance program, which
includes periodic reporting to the states.

  NFLI 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 NFLI and the Illinois
Attorney General.  NFLI was also informed that Mr. Leib entered an Assurance of
Voluntary Compliance with the Illinois Attorney General.

  In April 1996, NFLI received notice from the Securities and Exchange
Commission of a formal order of private investigation into possible violations
by NFLI of the federal securities laws.  In December 1996 NFLI received a letter
from the Securities and Exchange Commission notifying NFLI 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 NFLI  alleging, among
other things, that NFLI's distributor compensation program constituted an
illegal "pyramid scheme." In 1997, NFLI entered into settlement agreements. The
pendancy and settlement of these actions had a material adverse effect upon
NFLI's operations and financial condition.

  NFLI 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.  NFLI does not pay a fee or other
compensation to distributors as direct remuneration for enrolling distributors
in their "downline" and NFLI encourages all distributors to retail their
products to consumers who are not NFLI executives.  In addition, NFLI 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.  NFLI 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 NFLI   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 NFLI for violation of applicable laws.
Furthermore, there can be no assurances that NFLI 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 NFLI.

  Adverse Publicity. The size of the distribution force and results of NFLI's
  -----------------
operations can be particularly impacted by adverse publicity regarding NFLI, or
its competitors, including the legality of network marketing, the quality of
NFLI's products and product ingredients or those of NFLI's competitors,
regulatory investigations of NFLI or its competitors and their products, actions
by NFLI's distributors and the public's perception of NFLI's distributors and
network marketing



                                      -14-
<PAGE>

businesses generally. Such adverse publicity could have a material adverse
effect on NFLI's ability to attract and retain customers or distributors, or in
NFLI's results from operations or financial condition generally.

  Statements and Other Actions by Distributors.  NFLI's distributors are
  --------------------------------------------
required to sign NFLI's official Distributor Agreement that requires them to
abide by NFLI's policies.  Nonetheless, in certain instances distributors have
created promotional material which does not accurately describe NFLI's marketing
program or they may have made statements regarding potential earnings or other
matters not in accordance with NFLI's policies.  Although regulatory authorities
did not sue NFLI, such actions lead to increased regulatory scrutiny as
described above. Although NFLI attempts to monitor its distributors' statements
and activities, there can be no assurance that it will be able to accomplish
this objective and NFLI could be subject to regulatory scrutiny and potential
claims. In addition, distributors could make predictive statements about NFLI's
operations or other unauthorized remarks regarding NFLI that NFLI may be unable
to control. Distributors are not authorized to make such statements on behalf of
NFLI. Nonetheless, statements or actions by distributors could also adversely
affect NFLI.

  Product Competition and Competition for Distributors.  The business of
  ----------------------------------------------------
distributing and marketing vitamins and minerals, personal care items, weight
management items, and other products offered by NFLI is highly competitive.
Numerous manufacturers, distributors and retailers compete actively for
consumers.  Many of NFLI's competitors are substantially larger than NFLI 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, NFLI's ability to remain
competitive depends in part upon the successful introduction of new products.

  NFLI is subject to significant competition from other marketing organizations
for the recruitment of distributors. NFLI's ability to remain competitive
depends, in significant part, on NFLI'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, were
involved in recruiting distributors for NFLI. In August 1998, NFLI and Mr.
Trudeau entered into an agreement to end their business relationship. Mr.
Trudeau's agreement not to compete with NFLI expired in May 1999. In October
1998 NFLI 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 NFLI since July 1996. NFLI is now internally providing
the services previously performed by NC and DC. There can be no assurance that
NFLI'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 NFLI's products and programs.

  Dependence on Key Personnel. NFLI's success depends on the continued
  ---------------------------
availability of certain key management personnel, including David P. Bertrand
and Jana B. Mitcham, founders and officers of NFLI.  NFLI has obtained "key man"
insurance on the lives of Mr. Bertrand and Ms. Mitcham with benefit amounts to
NFLI of $1,060,000 and $660,000, respectively.  NFLI's growth and profitability
also depends on its ability to attract and retain other management personnel.

  Family Relationships.  At September 30, 2000, NFLI's operations in the United
  --------------------
States employed approximately 115 persons. Of these 115 persons, 11 persons have
a family relationship, through birth or marriage, with either David P. Bertrand
or Jana B. Mitcham, executive officers of NFLI. NFLI's management believes that
all of NFLI's employees have been employed by NFLI on the basis of their
qualifications, and that their retention by, and advancement within, NFLI has
been, and will continue to be, determined by their individual performances as an
employee of NFLI, 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 NFLI'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.

  There can be no assurance that the regulatory environment in which NFLI
operates will not change or that such regulatory environment, or any specific
action taken against NFLI, will not result in a material adverse effect on
NFLI's



                                      -15-
<PAGE>

business, financial condition or results of operations. NFLI also cannot predict
whether new legislation regulating its activities will be enacted, which new
legislation could have a material adverse effect on its operations.

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

  Effect of Exchange Rate Fluctuations.   During the fiscal years ended
  ------------------------------------
September 30, 2000 and 1998 NFLI realized exchange rate losses of approximately
$453,000, and $337,000, respectively. During the year ended  September 30, 1999
the Company realized an exchange rate gain of approximately $65,600. There can
be no assurance that exchange rates will continue to 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 NFLI to establish or continue activities in certain countries.

  Contracts with Suppliers or Manufacturers.  NFLI 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 NFLI other than a
three year agreement with VitaRich Laboratories, Inc. ("VitaRich").

  Pursuant to an agreement entered into in July 1998, NFLI agreed to advance
VitaRich up to $800,000 to secure the purchase of a sufficient quantity of
certain nutritional supplement raw materials to meet NFLI'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 NFLI provide VitaRich with
periodic estimates of anticipated needs, as well as actual use rates of the
requested product. Other than its agreement with VitaRich, NFLI does not have
long term supply agreements with any vendor. Accordingly, there is a risk that
any of NFLI's suppliers or manufacturers could discontinue selling their
products to NFLI for any reason. Although NFLI 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 NFLI.

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

                        ITEM 2. DESCRIPTION OF PROPERTY

Manufacturing Operations

ASH manufactures pharmaceutical products at its company owned 132,000 square
foot facility in Gulfport, Mississippi. Bactolac headquartered in Hauppauge, New
York, conducts its operations in a leased facility comprising approximately
25,000 square feet. Bactolac current monthly rental is approximately $25,000, of
which $6,000 pertains to improvement made by a related party, that escalates
over the 5 year term remaining on the lease. The Company has two five year
renewal options and a purchase option on the facility. The Bactolac lease is
with Shilpa Saketh Realty, Inc., an entity owned by a member of the Company's
Board of Directors. In addition, ANI currently rents administrative office space
on a temporary, short-term basis for $1,000 per month.

Network Marketing Operations

NFLI's offices and warehouse facilities in Houston, Texas are leased from non-
affiliates.  NFLI's office building consists of approximately 37,000 square feet
and the current monthly rental is  approximately $20,000. Additionally, NFLI's
warehouse consists of approximately 52,000 square feet and the current monthly
rental is  approximately $19,000.  NFLI also leases warehouse facilities in
Alaska and Hawaii with a combined 3,000 square feet of space for approximately
$6,000 per month. Additionally, the Company leases an office and warehouse
center in Warrington, England from a non-affiliate



                                      -16-
<PAGE>

consisting of approximately 16,000 square feet. The current monthly rental is
approximately $10,000 that escalates over the eight year term remaining on the
lease.

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

                           ITEM 3. LEGAL PROCEEDINGS

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

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

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

PART II

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

The Company's Common Stock  was traded on the National Market System of the
Nasdaq Stock Market under the symbol "ANII" and its Warrants were traded under
the symbol "ANIIW" during the past three fiscal years. The Company has been
notified by Nasdaq that its common stock is subject to delisting for the failure
to meet the minimum bid price  requirement of $1.00 per share. The Company's
Common Stock and Warrants are currently traded on the Nasdaq SmallCap Market
under a temporary exception which expires on May 18, 2001.  For the duration of
the exception, the Company's Nasdaq symbols will be ANIIC for the Common Stock
and ANIWC for the Warrants. There can be no assurance that the Company will be
able to maintain its Nasdaq listing.

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 December 31, 2001,
unless earlier redeemed by the Company.



                                Common Stock      Warrants
                                ------------  ---------------
        Quarter Ended            High    Low    High     Low
        -------------           -----  -----  --------  -----
      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

      Fiscal 1999:
          December 31, 1998      3.94   2.00      1.06   0.38
          March 31, 1999         3.34   2.06      1.13   0.38
          June 30, 1999          2.63   2.06      0.88   0.25
          September 30, 1999     3.63   1.63      0.94   0.31

      Fiscal 2000
          December 31, 1999      3.00   2.13      0.38   0.19
          March 31, 2000         2.44   1.63      0.75   0.19
          June 30, 2000          2.19   1.38      0.31   0.25
          September 30, 2000     2.00   0.75      0.31   0.03



  As of January 10, 2001, there were 1,542 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, 2000. The Company may not declare any dividends without the
consent of GECC.



                                      -17-
<PAGE>

Subject to obtaining the lender's consent the determination of the payment of
dividends in the future will be within the discretion of the Company's Board of
Directors and will depend on the earnings, capital requirements and operating
and financial condition of the Company, among other factors.


                        ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for each year in the five-year
period ended September 30, 2000 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)
                                           -----------------------------------------------
                                             2000      1999      1998      1997      1996
                                           -------   -------   -------   -------   -------
<S>                                        <C>       <C>       <C>       <C>       <C>
Statements of Operations
          Net Sales                        $69,258   $66,570   $69,658   $83,045   $97,404
          Gross Profit                      20,938    21,828    21,719    22,767    29,577
          Operating income (loss)           (3,619)     (502)      698    (3,276)   13,347
          Net income (loss)                 (4,004)     (848)     (867)   (1,981)    8,705

Earnings (loss) per share:
          Basic                              $(.52)    $(.15)    $(.15)    $(.35)    $1.61
          Diluted                            $(.52)    $(.15)    $(.15)    $(.35)    $1.36

Weighted average number of
    shares outstanding (1):
          Basic                              7,714     5,809     5,833     5,625     5,408
          Diluted                            7,714     5,809     5,833     5,625     6,405

Operating data:
          Number of Distributors (2)        58,000    67,000    80,000    88,500    87,400
          Average monthly
              sales per Distributor (3)    $    71   $    76   $    69   $    74   $   112
          Total products offered               500       400       380       364       320

Balance Sheet Data:
          Working capital (deficit)        $(3,597)  $ 7,849   $ 7,019   $ 9,570   $14,617
          Total assets                      39,663    22,241    27,858    29,347    27,689
          Total liabilities                 22,835     7,893    13,415    13,489    10,087
          Stockholders' equity              16,827    14,348    14,443    15,858    17,602
</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 net sales for NFLI network marketing operations only
         using a simple average for the periods indicated.



                                      -18-
<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 2000:
      Net Sales                      $16,587    $18,410   $17,428      $  16,833       $69,258
      Gross profit                     5,110      6,063     4,012          5,753        20,938
      Operating income (loss)           (508)        22    (2,880)          (253)       (3,619)
      Net income (loss)                 (498)      (418)   (2,771)          (317)       (4,004)

   Earnings (loss) per Share:
      Basic                          $  (.09)   $  (.05)  $  (.35)     $    (.03)      $  (.52)
      Diluted                        $  (.09)   $  (.05)  $  (.35)     $    (.03)      $  (.52)

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

Fiscal 1999:
      Net Sales                      $16,992    $16,536   $17,210      $  15,832       $66,570
      Gross profit                     5,971      5,574     6,006          4,277        21,828
      Operating income (loss)            358        107       983         (1,950)         (502)
      Net income (loss)                  404         15       493         (1,760)         (848)

   Earnings (loss) per Share:
      Basic                          $   .07    $   .00   $   .08      $    (.30)      $  (.15)
      Diluted                        $   .07    $   .00   $   .08      $    (.30)      $  (.15)

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

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 (loss)           (181)       925      (385)           339           698
      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
</TABLE>

   (1)  Includes a $702,000 charge for warrants issued in connection with a
        severance agreement.



                                      -19-
<PAGE>

                 FINANCIAL INFORMATION RELATING TO FOREIGN AND
                      DOMESTIC OPERATIONS AND EXPORT SALES
                           YEARS ENDED SEPTEMBER 30,
                                  (In thousands)
                                  --------------
<TABLE>
<CAPTION>

                                                     2000      1999      1998      1997      1996
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
   Sales to unaffiliated customers:
     North America (1)                             $62,500   $61,100   $65,400   $80,300   $97,200
     Europe (2)                                      4,200     4,700     3,500     2,500       200
     Philippines (3)                                   600       800       700       200        --
     Japan (4)                                       2,000        --        --        --        --

   Sales or transfers between geographic areas:
     North America                                      --        --        --        --        --
     Europe                                            700     1,000       600       700       100
     Philippines                                       100       100       300       300        --
     Japan                                              --        --        --        --        --

   Operating profit (loss):
     North America                                  (1,300)    1,500     1,900    (2,300)   13,400
     Europe                                         (1,300)     (900)     (900)     (900)       --
     Philippines                                      (300)     (500)     (300)       --        --
     Japan                                            (700)       --        --        --        --

   Identifiable assets:
     North America                                  37,900    19,600    29,600    29,800    27,500
     Europe                                          1,300     1,700     1,400     1,400       900
     Philippines                                        --       300       900       700        --
     Japan                                             500        --        --        --        --
</TABLE>

   (1) Includes the United States, Canada, and Puerto Rico.
   (2) First began operations in fiscal 1996.
   (3) First began operations in fiscal 1997 and ceased operations in fiscal
       2000.
   (4) First began operations in fiscal 2000.



                                      -20-
<PAGE>

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

Results of Operations

  Manufacturing Operations

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

                                Pro Forma Year ended September 30,
                             ---------------------------------------
                                    2000                 1999
                             ------------------   ------------------
                                Amount      %       Amount       %
                             -----------  -----   -----------  -----

  Net sales                  $18,762,000  100.0%  $19,296,000  100.0%
  Cost of sales               12,932,000   68.9    16,110,000   83.5
  Gross profit                 5,830,000   31.1     3,186,000   16.5
  Operating expenses           3,486,000   18.6     2,449,000   12.7
  Goodwill amortization          484,000    2.6       484,000    2.5
  Operating income (loss)      1,860,000    9.9       253,000    1.3


  Net sales for the 2000 pro forma period decreased $534,000 or 2.8% over the
1999 pro forma period. The decrease was primarily attributable to a net
$2,612,000, increase in the sales of Bactolac, through a number of customers,
offset by a $3,146,000 reduction in the sales of ASH. The majority of the ASH
decrease was attributable to a decline in sales to Bayer Corporation. Bayer
Corporation has historically represented a significant portion of ASH's revenue
base, and Bayer has informed ASH, that effective January 1, 2001, it intends to
produce in-house substantially all of the products currently produced for it by
ASH.  Sales to Bayer during the pro forma periods above represented 31% of the
manufacturing division pro forma sales for 2000, and 42% of the manufacturing
division pro forma sales for 1999.  On the same basis, Bayer represented 17% of
the manufacturing division pro forma gross profit in 2000 and 31% of the
manufacturing division gross profit for 1999.   ASH is aggressively attempting
to expand its customer base to compensate for the loss of the Bayer business.
Failure to replace this substantial customer, or the inability to substantially
reduce ASH's operating expenses, would have an adverse effect on the Company's
business and operations.

  Gross profit for the 2000 pro forma period increased to $5,830,000, a
$2,644,000 increase over the 1999 pro forma amount. On a pro forma basis, gross
profit as a percentage of net sales increased to 31.1% in 2000, as compared to
16.5% in the 1999 pro forma period. The majority of the increase was due to
higher levels of sales at the Bactolac operation, without a corresponding level
of increase in the labor and overhead components of the cost of sales amounts.
Additionally, as Bactolac purchases materials in higher volumes and better
manages its purchasing activities, it is able to reduce, as a percentage of
sales, its material costs. Shortly after the end of the current fiscal year,
Bactolac moved into a larger facility, which will cause an increase in costs,
but is also anticipated to provide for improved operating efficiencies and
expanded in-house capabilities of certain processes for coating and packaging
that had been previously outsourced and allow for higher revenue levels to be
obtained.

  Operating expenses on a pro forma basis increased to $3,486,000 in 2000, from
$2,449,000 in 1999. This represents an increase of $1,037,000 or 42.3%. The
majority of the increase relates to additional personnel costs, in addition to
higher administrative costs being incurred for insurance, professional fees and
sales and marketing expenses following the acquisitions.



                                      -21-
<PAGE>

     Network Marketing Operations

  The following table sets forth for the network marketing line of business for
the periods indicated the percentages that selected items bear to net sales as
included in the Consolidated Statements of Operations:


                                Year Ended September 30,
                                 ----------------------
                                  2000    1999     1998
                                 -----   ------   -----
Net sales                        100.0%   100.0%  100.0%
Cost of sales                     71.0     67.2    68.8
                                 -----   ------   -----
Gross profit                      29.0     32.8    31.2
Operating expenses                37.3     33.6    30.2
                                 -----   ------   -----
Income (loss) from operations    (8.3)%   (0.8)%    1.0%
                                 =====   ======   =====



Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

  Net sales for the twelve months ended September 30, 2000 decreased by
$13,380,000 or 20.1% to $53,190,000 as compared to net sales of $66,570,000 for
the twelve months ended September 30, 1999.

  At September 30, 2000, the Company had approximately 58,000 distributors as
compared to approximately 67,000 at September 30, 1999. During the twelve months
ended September 30, 2000 the number of active international distributors
increased by approximately 2,400, while active distributors in North America
decreased by approximately 11,400. 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:


     Decrease in sales due to decreased average
      number of distributors                            $ (9,775,000)
     Decrease in distributor average sales                (3,605,000)
                                                        ------------
                                                        $(13,380,000)
                                                        ============

  The Company's net sales per average number of distributors per month decreased
from $76 during the twelve months ended September 30, 1999 to $71 for the twelve
months ended September 30, 2000.

  Cost of sales decreased by $6,992,000 or 15.6% to $37,750,000 for the twelve
months ended September 30, 2000 from $44,742,000 for the twelve months ended
September 30, 1999. Cost of sales as a percentage of net sales increased from
67.2% in the twelve months ended September 30, 1999 to 71.0% in the twelve
months ended September 30, 2000. Cost of sales, which includes product costs,
commissions and bonuses paid to distributors, and shipping costs, is recapped
below:

                                                          Year Ended
                                                         September 30,
                                                          -----------
                                                          2000   1999
                                                          ----   ----
          Product costs                                   27.7%  27.1%
          Commissions and bonuses paid to distributors    34.4   33.0
          Shipping costs                                   8.9    7.1
                                                          ----   ----
                                                          71.0%  67.2%
                                                          ====   ====


  Product costs as a percentage of cost of sales increased 0.6%.  Commissions
and bonuses paid to distributors increased 1.4% as a percentage of cost of sales
as a result of changes in the mix of higher versus lower bonus value products
purchased by distributors. Shipping costs increased 1.8% primarily from a
combination of higher shipping rates and increased shipping to the Japan markets
from the Company's warehouse in the United States and the use of an outside
contractor for certain shipping.

  Gross profit decreased 29.3% or $6,388,000 from $21,828,000 for the twelve
months ended September 30, 1999 to $15,440,000 for the twelve months ended
September 30, 2000. Gross profit as percentage of net sales decreased from 32.8%
for the twelve months ended September 30, 1999 to 29.0% for the twelve months
ended September 30, 2000.

  Marketing, distribution and administrative expenses in decreased $2,501,000 or
11.2% from $22,330,000 for the twelve months ended September 30, 1999 to
$19,829,000 for the twelve months ended September 30, 2000.  The decrease
results primarily from a combination of reduced personnel expense and overall
expense containment in response to the Company's continued losses.  As a
percentage of net sales, marketing, distribution and administrative expenses
increased to 37.3% for



                                      -22-
<PAGE>

the year ended September 30, 2000 from 33.6% for the year ended September 30,
1999, as the rate of expense reductions did not keep pace with the decrease in
net sales.

  Loss from operations for the year ended September 30, 2000 increased
$3,887,000 to $4,389,000 from $502,000 of loss from operations for the year
ended September 30, 1999 principally as a result of reduced net sales and gross
profits partially off set by reduced operating expenses as explained above. The
loss from operations for the twelve months ended September 30, 2000 and 1999
includes approximately $1,591,000 and $1,363,000, respectively, of operating
loss from the Company's wholly-owned, consolidated subsidiaries that operate in
foreign countries.

  During the fourth quarter of the year ended September 30, 2000, the Company
consummated the previously executed letter of intent with the current managers
of RP to purchase the subsidiary.  The Company's loss on the disposition as well
as the realizable value of consideration received was minimal. During the year
ended September 30, 1999, the Company recorded asset impairments and other
writedowns (principally inventory) in RP in the aggregate amount of $300,000.

  Additionally the Company began operations in Japan in October 1999. To date
start-up costs have been minimal since the Company's operations in Japan
consisted of providing services to Japanese members who will purchase products
for personal use only directly from the Company's US operations.

Year Ended September 30, 1999 Compared to Year Ended September 30, 1998

  Net sales for the twelve months ended September 30, 1999 decreased by
$3,088,000 or 4.4% to $66,570,000 as compared to net sales of $69,658,000 for
the twelve months ended September 30, 1998.

  The Company has an Order Assurance Program("OAP"), which allows a distributor
to generate sales volume and maintain qualification to receive monthly
commissions. Prior to June 1, 1999 NFLI sold product redemption certificates to
distributors who were enrolled in the OAP. Revenues were recorded when these
certificates were redeemed for product. However, if the certificates were not
redeemed for product, the Company recorded revenues ratably over a 150-day
period commencing with the ending of the expiration period of 120 days. Such
revenues are recorded as part of the Company's net sales for periods prior to
June 1, 1999.

  Subsequent to June 1, 1999 the Company began shipping product packs for most
OAP purchases, the shipment of which results in the recognition of revenue.
Approximately $2,600,000 of revenue related to the shipment of the product packs
was recognized in fiscal 1999.  Except in very limited circumstances, NFLI no
longer sells any type of product redemption certificates.  It now only provides
its distributors with a deferred arrangement for product purchases under a plan
similar to a "layaway" program for "big ticket" items.  The distributor makes
payments against the product purchase for a period not to exceed six months, and
upon payment in full, NFLI ships the product to the distributor.  Revenues
collected in advance of shipment are recorded as deferred revenues until the
product is shipped.  The distributor has the right to substitute other products
or receive a cash refund or product replacement under the same terms as regular
product sales.

  At September 30, 1999, the Company had approximately 67,000 distributors as
compared to approximately 80,000 at September 30, 1998. During the twelve months
ended September 30, 1999 the number of active international distributors
increased by approximately 1,500, while active distributors in North America
decreased by approximately 14,000. 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:



      Decrease in sales due to decreased
        average number of distributors                  $(8,912,000)
      Increase in distributor average sales               5,824,000
                                                        -----------
                                                        $(3,088,000)
                                                        ===========

  The Company's net sales per average number of distributors per month increased
from $69 during the twelve months ended September 30, 1998 to $76 for the
twelvemonths ended September 30, 1999.

  Cost of sales decreased by $3,197,000 or 6.6% to $44,742,000 for the twelve
months ended September 30, 1999 from $47,939,000 for the twelve months ended
September 30, 1998. Cost of sales as a percentage of net sales decreased from
68.8% in the twelve months ended September 30, 1998 to 67.2% in the twelve
months ended September 30, 1999. Cost of sales, which includes product costs,
commissions and bonuses paid to distributors, and shipping costs, is recapped
below:


                                      -23-
<PAGE>

                                                 Year Ended
                                                September 30,
                                                 -----------
                                                 1999   1998
                                                 ----   ----
 Product costs                                   27.1%  27.6%
 Commissions and bonuses paid to distributors    33.0   35.0
 Shipping costs                                   7.1    6.2
                                                 ----   ----
                                                 67.2%  68.8%
                                                 ====   ====

  Product costs as a percentage of cost of sales decreased 0.5% primarily as a
result of the Company now producing and selling certain recruiting and training
materials which were primarily sold to the Company's distributors by Distributor
Services, L.L.C. during the twelve months ended September 30, 1998. The gross
profit margin on these materials is generally greater than the gross profit
margin on many of the Company's other products. Commissions and bonuses paid to
distributors decreased 2.0% as a percentage of cost of sales as a result of
changes in the mix of higher versus lower bonus value products purchased by
distributors. Shipping costs increased 0.9% primarily from a combination of
increased shipping to continental Europe from the Company's warehouse in the
United Kingdom and the use of an outside contractor for certain shipping.

  Gross profit decreased 0.5% or $109,000 from $21,719,000 for the twelve months
ended September 30, 1998 to $21,828,000 for the twelve months ended September
30, 1999. Gross profit as percentage of net sales increased from 31.2% for the
twelve months ended September 30, 1998 to 32.8% for the twelve months ended
September 30, 1999.

  Marketing, distribution and administrative expenses increased $1,309,000 or
6.2% from $21,021,000 for the twelve months ended September 30, 1998 to
$22,330,000 for the twelve months ended September 30, 1999.  The increase
results primarily from a combination of reduced personnel expenses, increased
depreciation charges on computer hardware and software, and increased promotion
costs for meetings and rallies previously performed by Distributor Services,
L.L.C. As a percentage of net sales, marketing, distribution and administrative
expenses increased to 33.6% for the year ended September 30, 1999 from 30.2% for
the year ended September 30, 1998.

  Income (loss) from operations for the year ended September 30, 1999 decreased
$1,200,000 or 172.0% to $502,000 of loss from $698,000 of income from operations
for the year ended September 30, 1998 principally as a result of the increase in
operating expenses as explained above. The income (loss) from operations for the
twelve months ended September 30, 1999 and 1998 includes approximately
$1,363,000 and $1,340,000, respectively, of operating loss from the Company's
wholly-owned, consolidated subsidiaries that operate in foreign countries.

  Subsequent to September 30, 1999, the Company executed a letter of intent with
the current managers of RP to purchase the subsidiary. The completion of the
sale is subject to various closing conditions. The Company anticipates that the
realizable value of consideration to be received will be minimal. During the
year ended September 30, 1999, the Company recorded asset impairments and other
writedowns (principally inventory) in RP in the aggregate amount of $300,000.

  Additionally the Company began operations in Japan in October 1999. Start-up
costs are expected to be minimal since the Company's operations in Japan will
consist of providing services to Japanese members who will purchase products for
personal use only directly from the Company's US operations.

  At September 30, 1999, approximately $425,000 related to the Company's recent
acquisition of ANI, ASH and Bactolac was included in Other Assets. The Company
will amortize that amount plus other acquisition cost incurred prior to the
closing of the acquisition over a twenty year period.

  As a result of the Company's foreign operations, it is subject to foreign
currency changes.  The gains and (losses) from such changes are included with
other income (loss).  For the years ended September 30, 2000, 1999 and 1998, the
Company reported gains and losses of $(453,000), $66,000 and $(337,000),
respectively.  During 2000 interest expense increased to $996,000 from $21,000
in the previous year, primarily as a result of borrowings incurred in connection
with the acquisitions made during the current fiscal year.  During the year
ended September 30, 1998, the Company reported an expense of $702,000, recorded
to recognize the cost of a Warrant issued in settlement of a contract
termination.

Income Taxes

  Historically the Company's effective tax rate has been significantly higher
that the computed statutory rate.  The higher rate has been primarily as a
result of losses of the Company's foreign subsidiaries which are not deductible
for U.S. income tax purposes.  Additionally, during the year ended September 30,
2000, the effective rate of expected tax benefit was lower



                                      -24-
<PAGE>

than the expected amount due to the non-deductible goodwill arising from the
acquisitions which were consummated in the year.

Liquidity and Capital Resources

  Since ANI consummated the acquisitions of Bactolac and ASH, it has met its
working capital and capital expenditure requirements, including funding for debt
repayments, mainly through net cash provided under the Company's revolving line
of credit provided through a secured lender. As a result of cost reductions
which have been implemented across the board and upon the closing of the pending
sale of NFLI, management believes that a significant portion of the upcoming
working capital needs can be met out of cash provided by the sale of NFLI and
cash generated from operating activities. Additionally, subsequent to September
30, 2000, the Company received a net state of Texas franchise tax refund of
approximately, $619,000, arising from amending previous years tax returns, which
amount will be used for working capital needs. Management plans to continue to
strive to restore profitability and pursue additional financing during the
current fiscal year to meet currently anticipated funding requirements.

  At September 30, 2000, the Company had a working capital deficit of
$3,597,000.  Borrowings under the revolving portion of the secured credit
facility totaled $4,653,000, with additional borrowings available of $577,000,
at that point, based upon accounts receivable and inventory levels. Under the
terms of the Agreement for the sale of NFLI, the purchaser is required to repay
or assume the NFLI portion of such borrowings, which as of September 30, 2000,
totaled approximately $1,363,000, including $220,000, outstanding under the term
loan portion of the credit facility.

Operating Activities

  Net cash outflows from continuing operating activities were approximately
$1,033,000, $2,199,000 and $571,000 in 2000, 1999 and 1998, respectively.  The
net cash outflow from operating activities in 2000, consisted of approximately
$2,520,000 in cash used to reduce accounts payable and accrued expenses
primarily during the period following the acquisitions of Bactolac and ASH and
approximately $1,209,000 increase in accounts receivable, relating primarily to
higher level of sales at the Bactolac operation. These amounts were offset in
2000 by reduced inventory levels primarily at the NFLI operations.  Net losses
consumed approximately $500,000 from operations after adding back depreciation
and amortization expense.

Investing Activities

  Investing activities consumed approximately $125,000 in 2000.  The sale of the
remaining balance in marketable securities generated approximately $997,000 in
cash.  During 2000 approximately $650,000 was used for property and  equipment
additions,  with the largest portion primarily at the new Bactolac facility,
which was leased shortly before the end of the fiscal year.  Investing
activities consumed $388,000 during 1999, primarily for equipment additions and
1998 consumed $2,993,000, with approximately $1,986,000 spent on property and
equipment, primarily computer and software additions and the remainder on the
purchase of marketable securities.

Financing Activities

  Financing activities generated approximately $517,000 in 2000. This consisted
of approximately $4,005,000 in net borrowing under the Company's credit facility
and long term debt net repayments of approximately $3,487,000.

  The Company's revolving credit facility provides for borrowings up to
$12,000,000, based upon outstanding amounts of eligible accounts receivable and
allowable inventories. Additionally, there is a $2,360,000 term loan facility
with the secured lender that requires principal payments of $49,167, monthly
over the remaining term of the Agreement. Interest on amounts outstanding under
the Agreement is payable monthly based upon the lender's index rate plus one-
half percent. The credit facility is secured by substantially all of the
Company's assets. The Agreement contains a number of covenants, which include
among other items; maintenance of specified minimum net worth and fixed charge
ratio, as well as limitations on capital expenditures. At September 30, 2000,
the Company was not in compliance with several covenants under the Agreement and
a waiver has been obtained from GECC. Due to the fact that ANI was not in
compliance with the terms of the Agreement, and the waiver did not extent beyond
one year, the entire amount outstanding under the Agreement has been classified
as a current liability on the accompanying consolidated balance sheet as of
September 30, 2000. Management of ANI plans to continue discussions with the
secured lender concerning an amendment to the credit facility which management
believes based on its discussions with such lender can be accomplished between
now and closing of the NFLI sale, to approve the agreed upon sale of NFLI and to
achieve mutually acceptable compliance conditions. If the Company is



                                      -25-
<PAGE>

not successful in its efforts to amend the Agreement, it will have adverse
effects on the Company's business, financial condition and operations.

  As a result of the acquisitions of Bactolac and ASH, during the first quarter
of the Company's fiscal year ended September 30, 2000, the Company entered into
purchase notes totaling $3,000,000, with certain of the selling stockholders and
assumed, through Bactolac, a $1,350,053, mortgage obligation of the ASH
facility. The Bactolac stock purchase note is subordinate to the GECC facility,
bears interest at 7%, and with the approval of GECC, required a
$1,000,000,payment on the first anniversary of the acquisition. The holder of
the note has agreed to extend the payment of the first installment for six
months or until the closing of the NFLI sale transaction. The $500,000, ASH
stock purchase notes are subordinate to the GECC facility, bear interest at 7%,
and subject to the approval of GECC, were payable December 29, 2000. The loan
assumption agreement for the ASH mortgage obligation bears interest at prime
plus 2%, and is secured by the ASH land and building. The assumption agreement
was originally due May 15, 2000, and the holder has agreed to four amendment
agreements that extended the due date to March 31, 2001. Management of ANI
intends to continue to try to work with the holders of these obligations in
trying to resolve the current inability to liquidate the debts under their
scheduled terms. Additionally, the ability to potentially refinance the ASH
mortgage with a new lender and provide additional cash is currently being
explored. Should the holders not agree to extensions, or an alternative loan
facility not be obtained, it would have adverse effects on the Company's
business, financial condition and operation.

  Capital expenditures, primarily for manufacturing and laboratory equipment for
fiscal 2001 are anticipated to be approximately $450,000-600,000. It is expected
that the funding for these capital needs will be provided by leases. A lease of
$70,000 has recently been approved and was funded in January 2001, and a lease
line of $407,000, has been tentatively approved for equipment needs.

Bayer has notified the Company that it will be moving substantially all
production previously produced at the ASH facility, to its own in-house facility
on or about January 1, 2001. During the first quarter of the current fiscal year
ending September 30, 2001, a significant increase in Bayer orders, which totaled
approximately $1.1 million, was received and processed at the ASH facility, as
Bayer stocked up for the transition. During the second quarter of the year, it
is expected that such revenues will be collected and associated accounts
receivable and inventory levels will be reduced. Since no new revenues are
expected from Bayer, ASH has been attempting to expand its customer base to
reduce its dependence upon Bayer and intends to continue to focus on those
efforts. Failure to replace this substantial customer or failing to implement a
substantial reduction in operating expenses would have an adverse effect on the
Company's business, financial condition and results of operations.

Year 2000 Issue Update

  The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its on-going business as a result of the "Year 2000 issue." However,
it is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues, such as leap year-related problems, may occur with billing,
payroll, or financial closings at month, quarterly or year end. The Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively impacted if its customers or
suppliers are adversely affected by the Year 2000 or similar problems that have
arisen for its customers and suppliers.

Recent Accounting Pronouncements

  Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, will be effective for the
Company's fiscal year ending September 30, 2001. SFAS 133 requires that an
entity record all derivatives on the balance sheet as either assets or
liabilities, measured at fair value. The accounting for changes in the fair
value of a derivative depends on the use of the derivative. Management believes
that the adoption of these statements will not have a significant impact on the
company's financial position or results of operations.

  The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after

                                      -26-
<PAGE>

December 15, 1999. The Company does not believe that adoption of this SAB will
have a material impact 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
against the foreign currencies in which the Company has operations affects the
Company's financial results. Changes in exchange rates 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 upon
completion of the sale of NFLI, that it will have any significant exposure to
exchange rate fluctuations.

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

On September 16, 1999, the Company determined to engage Grant Thornton LLP as
the principal accountant to audit the Company's financial statements for the
fiscal year ending September 30, 1999. The decision to change accountants was
recommended by the Audit Committee of the Board of Directors of the Company.

The Report of BDO Seidman, LLP, on the consolidated financial statements of the
Company for the fiscal year ended September 30, 1998 did not contain an adverse
opinion or disclaimer of opinion nor was it modified as to uncertainty, audit
scope or accounting principles. The Company does not believe that there were any
disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
during the past two fiscal years then ended or the subsequent period up to the
time of dismissal which, if not resolved to BDO Seidman, LLP's satisfaction,
would have caused BDO Seidman, LLP to make reference to the subject matter of
the disagreement(s) in connection with its Report. However, during fiscal 1999
BDO Seidman, LLP informed the Company of the need to evaluate for impairment the
unamortized carrying value of the Audio Production Rights which balance as of
September 30, 1998 and June 30, 1999 was $1,400,000 and $1,089,000,
respectively. The Company evaluated such Audio Production Rights for impairment
at September 30, 1999, as well as subsequently.



                                      -27-
<PAGE>

             ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



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

Report of Independent Certified Public Accountants                          F-2

   Independent Certified Public Accountants' Report                         F-3

   Consolidated Balance Sheets as of September 30, 2000 and 1999            F-4

   Consolidated Statements of Operations and Comprehensive Income (Loss)
          for the Years Ended September 30, 2000, 1999 and 1998.            F-5

   Consolidated Statements of Stockholders' Equity for the Years
          Ended September 30, 2000, 1999 and 1998.                          F-6

   Consolidated Statements of Cash Flows for the Years Ended
          September 30, 2000, 1999 and 1998.                                F-7

   Notes to Consolidated Financial Statements.                              F-8




                                      F-1
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Advanced Nutraceuticals, Inc.


  We have audited the consolidated balance sheets of Advanced Nutraceuticals,
Inc. (formerly - Nutrition For Life International, Inc.) and Subsidiaries as of
September 30, 2000 and 1999 and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Nutraceuticals, Inc. (formerly - Nutrition For Life International,
Inc.) and Subsidiaries as of September 30, 2000 and 1999 and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.


Grant Thornton LLP



Houston, Texas
January 3, 2001



                                      F-2
<PAGE>

                INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT


To the Board of Directors
and Shareholders of
Advanced Nutraceuticals, Inc.


  We have audited the consolidated statements of operations and comprehensive
loss, stockholders' equity, and cash flows of Advanced Nutraceuticals, Inc.
(formerly - Nutrition for Life International, Inc.) for the year 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 audit.

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

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Advanced Nutraceuticals, Inc. (formerly -Nutrition For Life
International, Inc.) for the year ended September 30, 1998 in conformity with
generally accepted accounting principles.


BDO Seidman, LLP



Houston, Texas
December 29, 1998



                                      F-3
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>


                                                                               2000          1999
                                                                           -----------   -----------
<S>                                                                        <C>           <C>
                                  ASSETS
                                  ------

Current Assets:
 Cash and cash equivalents                                                 $   958,365   $ 1,395,310
 Restricted cash                                                               101,266       585,866
 Marketable securities                                                              --       996,942
 Receivables, net                                                            4,578,570       362,315
 Inventories (Note 4)                                                        7,253,939     8,434,220
 Deferred tax asset (Note 5)                                                 1,707,000     1,647,000
 Prepaid expenses and other assets                                             884,831     1,062,513
                                                                           -----------   -----------
   Total Current Assets                                                     15,483,971    14,484,166

Property and equipment, net (Notes 6 and 9)                                 14,326,317     6,038,186
Audio production rights                                                         80,600       972,222
Goodwill (Note 7)                                                            9,228,829            --
Other assets                                                                   542,938       746,246
                                                                           -----------   -----------
                                                                        $   39,662,655   $22,240,820
                                                                           ===========   ===========

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

Current Liabilities:
 Accounts payable                                                       $    5,614,400   $ 2,517,020
 Accrued distributor bonuses                                                 1,133,081     1,384,950
 Deferred income                                                               348,455       826,464
 Accrued expenses and other liabilities                                      1,372,075     1,344,001
 Credit facility (Note 8)                                                    6,589,783            --
 Current portion of other installment obligations                            1,173,518       562,464
 Current portion of long-term debt (Note 9)                                  2,850,053            --
                                                                           -----------   -----------
       Total Current Liabilities                                            19,081,365     6,634,899

Deferred tax liability (Note 5)                                              2,254,000       778,000
Long-term debt (Note 9)                                                      1,500,000            --
Long-term portion of other installment obligations                                  --       479,719
                                                                           -----------   -----------
      Total Liabilities                                                     22,835,365     7,892,618
                                                                           -----------   -----------

Commitments and contingencies (Note 10)                                             --            --

Stockholders' Equity (Notes 11 and 12):
 Preferred stock, $.001 par value; 1,000,000 authorized; none issued                --            --
 Common stock; $.01 par value; 20,000,000 shares authorized                     80,198        58,875
 Additional paid-in capital                                                 17,936,253    11,837,156
 Retained earnings (deficit)                                                (1,266,831)    3,110,405
 Accumulated other comprehensive income (loss)                                  77,670      (125,749)
                                                                           -----------   -----------
                                                                            16,827,290    14,880,687
 Less: Treasury stock, 79,000 shares, at cost in 1999                               --      (532,485)
                                                                           -----------   -----------
      Total Stockholders' Equity                                            16,827,290    14,348,202
                                                                           -----------   -----------
                                                                           $39,662,655   $22,240,820
                                                                           ===========   ===========

</TABLE>
         See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
             FOR THE YEARS ENDED SEPTEMBER 30,  2000, 1999 AND 1998

<TABLE>
<CAPTION>



                                                    2000        1999           1998
                                                -----------   -----------   -----------
<S>                                             <C>           <C>          <C>
Net sales                                       $69,258,328   $66,569,875   $69,658,095
Cost of sales                                    48,320,748    44,742,050    47,939,482
                                                -----------   -----------   -----------

Gross profit                                     20,937,580    21,827,825    21,718,613

General and administrative expenses              24,556,847    22,329,914    21,021,056
                                                -----------   -----------   -----------

Operating income (loss)                          (3,619,267)     (502,089)      697,557
                                                -----------   -----------   -----------

Other income (expense):
 Interest expense, net                             (995,757)      (21,478)       70,184
 Foreign exchange gain (loss)                      (452,947)       65,596      (336,842)
 Other, net                                         406,640       166,619      (508,305)
                                                -----------   -----------   -----------
                                                 (1,042,064)      210,737      (774,963)
                                                -----------   -----------   -----------

Loss before income tax expense (benefit)         (4,661,331)     (291,352)      (77,406)

Income tax expense (benefit) (Note 5)              (657,000)      557,000       790,050
                                                -----------   -----------   -----------

Net Income (loss)                                (4,004,331)     (848,352)     (867,456)

Other comprehensive income (loss):
 Unrealized loss on investments, net of tax          45,500        (7,136)      (38,364)
 Foreign currency translation adjustment            157,919        (2,281)      (86,546)
                                                -----------   -----------   -----------
                                                    203,419        (9,417)     (124,910)
                                                -----------   -----------   -----------

Total comprehensive loss                        $(3,800,912)  $  (857,769)  $  (992,366)
                                                ===========   ===========   ===========

Basic and diluted loss per common share         $     (0.52)  $     (0.15)  $     (0.15)
                                                ===========   ===========   ===========

Weighted average common shares outstanding -
 basic and diluted                                7,713,750     5,808,595     5,832,887
                                                ===========   ===========   ===========

</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-5
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998



<TABLE>
<CAPTION>


                                                                                     Additional        Retained
                                        Preferred Stock           Common Stock         Paid-In         Earnings
                                    Shares           Amount    Shares     Amount       Capital          Deficit
                                   --------      -----------  ---------   -------   -----------     ------------
<S>                                <C>             <C>        <C>         <C>        <C>              <C>
Balance at
September 30, 1997                       --   $           --  5,775,835   $57,758   $10,688,951     $  5,176,539

Net loss                                 --               --         --        --            --         (867,456)

Cash dividends (Note 11)                 --               --         --        --            --         (350,326)

Purchase of treasury stock               --               --         --        --            --               --
Foreign currency
  translation adjustment                 --               --         --        --            --               --
Issuance of common
  stock options (Note 12)                --               --         --        --       144,705               --
Registration expenses                    --               --         --        --       (31,487)              --
Unrealized loss on investment,
  net of tax                             --               --         --        --          --                 --
Exercise of stock options
  and warrants                           --               --    111,760     1,117       271,875               --
                                   --------      -----------  ---------   -------   -----------     ------------
Balance at
September 30 ,1998                       --               --  5,887,595    58,875    11,074,044        3,958,757

Net loss                                 --               --         --        --            --         (848,352)

Foreign currency
  translation adjustment                 --               --         --        --            --               --
Issuance of common
  stock options and
  warrants (Note 12)                     --               --         --        --       763,112               --
Unrealized loss on investments,
  net of tax                             --               --         --        --            --               --
                                   --------      -----------  ---------   -------   -----------     ------------
Balance at
September 30 ,1999                       --               --  5,887,595    58,875    11,837,156        3,110,405

Net loss                                 --               --         --        --            --       (4,004,331)

Foreign currency
  translation adjustment                 --               --         --        --            --               --
Unrealized gain on
  investment, net of tax                 --               --         --        --            --               --
Issue preferred
  stock (Note 11)                   221,127        6,280,000         --        --            --               --
Convert preferred
  stock (Note 11)                  (221,127)      (6,280,000) 2,211,270    22,113     6,257,887               --
Cancel treasury stock (Note 11)          --               --    (79,000)     (790)     (158,790)        (372,905)
                                   --------      -----------  ---------   -------   -----------     ------------
Balance at
September 30, 2000                       --      $        --  8,019,865   $80,198   $17,936,253     $ (1,266,831)
                                   ========      ===========  =========   =======   ===========     ============

</TABLE>
          See accompanying notes to consolidated financial statements



                                      F-6
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>

                                                 Accumulated Other
                                             Comprehensive Income (Loss)
                                              -----------------------
                                                          Cumulative
                                              Unrealized   Foreign
                                                 Loss      Currency                                   Total
                                                  On      Translation        Treasury Stock         Stockholders'
                                              Investment  Adjustment      Shares      Amount          Equity
                                              ----------  -----------  -----------   ----------     -----------
<S>                                           <C>         <C>          <C>           <C>            <C>
Balance at
September 30, 1997                             $      --  $     8,578       (9,000)  $  (73,810)    $15,858,016

Net loss                                              --           --           --           --        (867,456)
Cash dividends (Note 11)                              --           --           --           --        (350,326)
Purchase of treasury stock                            --           --      (70,000)    (458,675)       (458,675)
Foreign currency
  translation adjustment                              --      (86,546)          --           --         (86,546)
Issuance of common
    stock options (Note 12)                           --           --           --           --         144,705
Registration expenses                                 --           --           --           --         (31,487)
Unrealized loss on  investment, net of tax       (38,364)          --           --           --         (38,364)
Exercise of stock options
    and warrants                                      --           --           --           --         272,992
                                              ----------  -----------  -----------   ----------     -----------
Balance at
September 30, 1998                               (38,364)     (77,968)     (79,000)    (532,485)     14,442,859

Net loss                                              --           --           --           --        (848,352)
Foreign currency
  translation adjustment                              --       (2,281)          --           --          (2,281)
Issuance of common stock
    options and
     warrants (Note 12)                               --           --           --           --         763,112
Unrealized loss on
    Investments,  net of tax                      (7,136)          --           --           --          (7,136)
                                              ----------  -----------  -----------   ----------     -----------
Balance at
September 30, 1999                               (45,500)     (80,249)     (79,000)    (532,485)     14,348,202

Net loss                                              --           --           --           --      (4,004,331)
Foreign currency
    translation adjustment                            --      157,919           --           --         157,919
Unrealized gain on
    investment, net of tax                        45,500           --           --           --          45,500
Issued preferred
    stock (Note 11)                                   --           --           --           --       6,280,000
Convert preferred
    stock (Note 11)                                   --           --           --           --              --
Cancel treasury stock (Note 11)                       --           --       79,000      532,485              --
                                              ----------  -----------  -----------   ----------     -----------
Balance at
September 30, 2000                            $       --  $    77,670           --   $       --     $16,827,290
                                              ==========  ===========   ==========   ==========     ===========

</TABLE>

          See accompanying notes to consolidated financial statements


                                      F-7
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>


                                                                       2000          1999        1998
                                                                   -----------   -----------   -----------
<S>                                                                <C>           <C>           <C>
Cash flows from operating activities:
 Net loss                                                          $(4,004,331)  $  (848,352)  $  (867,456)
 Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
     Depreciation and amortization                                   3,448,532     1,944,644     1,397,810
     Bad debt provision                                                200,000     1,093,119       530,880
     Deferred tax expense (benefit)                                   (654,259)      460,000       676,608
     Stock options/warrants issued for services                             --        60,990       144,705
     Loss on disposition of property and equipment                      54,627        74,809            --
     Unrealized losses on available for sale securities                     --            --        38,364
     Changes in assets and liabilities, net of acquisitions:
     Restricted cash                                                   484,600      (585,866)      513,195
     Receivables                                                    (1,208,850)     (886,503)      447,668
     Inventories                                                     3,320,771     1,263,275    (1,777,041)
     Refundable federal income taxes                                        --       200,000       459,111
     Prepaid and other assets                                          261,330      (109,352)     (456,643)
     Other assets                                                      228,825      (368,918)        5,186
     Accounts payable                                                 (456,844)     (765,730)     (425,181)
     Deferred income                                                  (644,676)   (2,426,134)     (571,873)
     Accrued expenses and other liabilities                         (2,062,582)   (1,305,025)     (642,865)
     Federal and franchise tax payable                                      --            --       (43,216)
                                                                   -----------   -----------   -----------

Net cash flows from operating activities                            (1,032,857)   (2,199,043)     (570,748)
                                                                   -----------   -----------   -----------

Cash flows from investing activities:
   Acquisition of property and equipment                              (650,158)     (323,211)   (1,986,114)
   Sale (purchase) of marketable securities                            996,942       (64,882)   (1,006,560)
   Acquisitions, net of cash acquired                                 (471,528)           --            --
                                                                   -----------   -----------   -----------

Net cash flows from investing activities                              (124,744)     (388,093)   (2,992,674)
                                                                   -----------   -----------   -----------

Cash flows from financing activities:
   Net borrowings from credit facility                               3,039,783            --            --
   Payment of capital lease obligation                                (176,334)     (164,690)     (166,307)
   Proceeds from long-term debt                                        965,109            --            --
   Payment of long-term debt                                        (3,311,321)     (254,971)           --
   Exercise of stock options                                                --            --       223,642
   Exercise of warrants                                                     --            --        49,350
   Dividends paid                                                           --            --      (466,124)
   Registration fees                                                        --            --       (31,487)
   Purchase of warrants                                                     --            --       (73,675)
   Purchase of treasury stock                                               --            --      (385,000)
                                                                   -----------   -----------   -----------

Net cash flows from financing activities                               517,237      (419,661)     (849,601)
                                                                   -----------   -----------   -----------

Effect of exchange rates on cash and cash equivalents                  203,419        (2,281)      (86,546)
                                                                   -----------   -----------   -----------

Net decrease  in cash and cash equivalents                            (436,945)   (3,009,078)   (4,499,569)

Cash and cash equivalents, beginning of year                         1,395,310     4,404,388     8,903,957
                                                                   -----------   -----------   -----------

Cash and cash equivalents, end of year                             $   958,365   $ 1,395,310   $ 4,404,388
                                                                   ===========   ===========   ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

  Advanced Nutraceuticals, Inc. ("ANI" or the "Company"), a Texas corporation,
was formed during 2000 to become the parent company of Nutrition For Life
International, Inc. ("NFLI"), in a reorganization that was completed as of March
15, 2000. Under the terms of the reorganization, each outstanding share of
common stock of NFLI issued and outstanding immediately prior to the merger was
converted into one share of ANI's common stock. Also, each outstanding option,
and each outstanding warrant, to purchase shares of NFLI's common stock was
converted into as option or a warrant, as the case may be, to purchase, on the
same terms and conditions, an identical number of shares of ANI's common stock.

  Through its Bactolac Pharmaceutical Inc.("Bactolac") subsidiary, ANI operates
as a contract manufacturer of nutritional and pharmaceutical products. ANI's
NFLI subsidiary and its related entities, operate 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. NFLI 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 500 products in
nine categories, including nutritional supplements, health foods, weight
management items, skin care products, other consumer products, and services.

Principles Of Consolidation

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

Cash And Cash Equivalents

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

Concentration of Credit Risk

  At September 30, 2000 and 1999, the Company's cash in financial institutions
exceeded the federally insured deposit limit by approximately $1,200,000 and
$893,000.

Fair Market Value Of Financial Instruments

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

Marketable Securities

  Unrealized holding gains and losses on available for sale securities are
reflected as a separate component of accumulated other comprehensive income
(loss) until realized. 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, as
defined by Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and are summarized as
follows:


                                              1999
                                 --------------------------------
                                   Bond   Money-market
                                  Funds      funds        Total
                                 --------   --------   ----------
     Cost                        $732,519   $338,923   $1,071,442
     Fair Value                   658,019    338,923      996,942
                                 --------   --------   ----------
     Gross unrealized loss       $ 74,500   $     --   $   74,500
                                 ========   ========   ==========

  The unrealized loss on investments in the amount of $45,500 at September 30,
1999, is net of tax in the amount of $29,000.



                                      F-9
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

Revenue Recognition

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

  The allowance for doubtful accounts at September 30, 2000 of $400,000 resulted
from a $200,000 bad debt provision for the year and a $200,000 allowance
recorded in connection with the Bactolac acquisition. No allowance was recorded
at September 30, 1999.

  NFLI 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 that are paid monthly and are calculated using specific rates based
on actual sales volume.

  Prior to June 1, 1999, NFLI sold product redemption certificates to
distributors who were enrolled in the Company's order assurance program ("OAP").
Revenues were recorded when these certificates were redeemed for product.
However, if the certificates were not redeemed for product, the Company recorded
revenues ratably over a 150 day period commencing with the ending of the
expiration period of 120 days.  The period of recognition was based upon NFLI's
historical redemption experience. Such revenues were recorded as part of the
Company's net sales for periods prior to June 1, 1999.

  Subsequent to June 1, 1999, NFLI began shipping product packs for most OAP
purchases, the shipment of which results in the recognition of revenue.
Approximately $4,800,000 and $2,600,000 of revenue related to the shipment of
the product packs was recognized in fiscal 2000 and 1999. Except in very limited
circumstances, NFLI no longer sells any type of product redemption certificates.
It now only provides its distributors with a deferred arrangement for product
purchases under a plan similar to a "layaway" program for "big ticket" items.
The distributor makes payments against the product purchase for a period not to
exceed six months, and upon payment in full, NFLI ships the product to the
distributor.  Revenues collected in advance of shipment are recorded as deferred
revenues until the product is shipped.  The distributor has the right to
substitute other products or receive a cash refund or product replacement under
the same terms as regular product sales.

Inventories

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

Long-lived assets

  The Company reviews the carrying value of its long-lived assets, including
property and equipment, goodwill and other intangible assets, whenever events or
changes in circumstances indicate that the carrying value of the assets may not
be recovered.  An impairment loss may be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset, including
disposition, is less than the carrying value of the asset.  The measurement of
the impairment losses to be recognized is based on the difference between the
fair value and the carrying amounts of the assets.  In order to determine if an
asset has been impaired, assets are tested by operating segment and geographic
location. During the year ended September 30, 2000, the Company recorded an
impairment of certain of its long-lived assets as disclosed in Note 2.  No such
losses were recognized for the years ended September 30, 1999 or 1998.  See
"Significant Adjustments" note.

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.

Capital Leases

  NFLI leases certain computer equipment under a capital lease agreement that
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



                                      F-10
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

inception of the capital lease, the Company's incremental borrowing rate was
used to determine the present value of the minimum lease payment. Therefore, the
carrying value of the capital lease obligation approximates market value.

Goodwill

  Goodwill represents the excess of cost over net assets acquired and is being
amortized over its estimated useful life of 20 years.

Audio Production Rights

  Audio production rights are stated at cost less accumulated amortization.
Amortization is provided using a straight-line method over the estimated three-
year life of the rights.

Stock Options and Warrants

  The Company accounts for stock options issued to employees in accordance with
APB No.25. During the years ended September 30, 2000, 1999, and 1998, all
options issued to officers and employees were granted at an exercise price which
equaled or exceeded the market price per share at the date of grant and
accordingly, based upon an intrinsic valuation, no compensation expense was
recorded relative to those grants.

  The Company has elected to adopt the disclosure requirements of SFAS No.123
"Accounting for Stock-based Compensation". This statement requires that the
Company provide proforma information regarding net income (loss) and income
(loss) per share as if compensation cost for the Company's stock options granted
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123  (See Note 12). Additionally, SFAS No. 123 generally requires that
the Company record options issued to non-employees, based on the fair value of
the options.

Income Taxes

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

Earnings (Loss) Per Common Share

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

  Weighted average Common Shares outstanding for the year ended September 30,
2000, 1999 and 1998 are 7,713,750, 5,808,595 and 5,832,887, respectively.

  Diluted earnings per share for the years ended September 30, 2000, 1999, and
1998 did not consider the effect of the warrants and options because they were
anti-dilutive.

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 gains or
(losses) are included in the accompanying consolidated statements of operations
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



                                      F-11
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

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.

Reclassification

  Certain reclassifications to the prior year numbers have been made to conform
to the fiscal year ended September 30, 2000 presentation.

Recent Accounting Pronouncements

  Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, will be effective for the
Company's fiscal year ending September 30, 2001. SFAS 133 requires that an
entity record all derivatives on the balance sheet as either assets or
liabilities, measured at fair value. The accounting for changes in the fair
value of a derivative depends on the use of the derivative. Management believes
that the adoption of these statements will not have a significant impact on the
Company's financial position or results of operations.

  The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company does not believe that adoption of this SAB will
have a material impact on its financial statements.

NOTE 2 - SIGNIFICANT ADJUSTMENTS

  During the third quarter of the year ended September 30, 2000, expense
adjustments totaling approximately $1,673,000 were recorded, of which
approximately $1,150,000 was recorded to cost of sales for non-recurring write-
downs of certain outdated literature and sales aids inventory and certain
inventory located outside the continental United States. The remainder was a
write-down in the carrying value of NFLI's audio production rights. Such write-
downs, recorded as of June 30, 2000 arose as a result of operational changes and
product discontinuance's made during that quarter. Aggregate year end
adjustments recorded in the fourth quarter of fiscal year ended September 30,
1999, included an inventory write down of $350,000, a write down of assets of
Nutrition For Life International Philippines, Inc. ("RP") of $350,000, and a bad
debts write-off of $250,000.

NOTE 3 - SUBSEQUENT EVENT - SALE OF NFLI

  On December 29, 2000, ANI signed a definitive agreement to sell NFLI and all
of its subsidiaries engaged in the network marketing business to Everest
International, L.L.C., a privately-held entity. The agreement provides for $5
million in cash at closing subject to a working capital adjustment and a $5
million prime plus one-half percent note, payable based upon a ten-year
amortization with quarterly payments for three years and final balloon payment
at the end of the third year. In addition, Bactolac is entering into a product
supply agreement with NFLI and also will receive a $650,000 note representing a
currently outstanding inter-company liability, due one year and a day from
closing. The purchase price may also be increased up to an additional $750,000,
depending upon future operating results of Nutrition For Life's recently
established Japanese subsidiary. The transaction is subject to approval by ANI
stockholders and ANI's senior lender and customary closing conditions. Closing
is anticipated to occur during the quarter ended June 30, 2001.

NOTE 4 -- INVENTORIES

  Inventories, at September 30, consisted of the following:

                               2000        1999
                            ----------  ----------
     Finished goods         $5,389,663  $6,914,417
     Work in process           528,447     633,585
     Raw materials           1,335,829     886,218
                            ----------  ----------
       Total inventories    $7,253,939  $8,434,220
                            ==========  ==========




                                      F-12
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 5 -- INCOME TAXES

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

  The (benefit) provision for income taxes for the years ended September 30,
2000, 1999 and 1998 consisted of the following:


                                  2000       1999      1998
                               ---------   --------  --------
     Federal tax - current     $      --   $ 51,000  $ 68,009
     Federal tax - deferred     (683,000)   460,000   676,298
     State tax                    26,000     46,000    45,743
                               ---------   --------  --------
                               $(657,000)  $557,000  $790,050
                               =========   ========  ========

  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>
     <S>                                                      <C>           <C>        <C>
                                                             2000        1999        1998
                                                         -----------   --------    --------
     Expected income tax expense (benefit) (34%)         $(1,585,000)  $(99,060)   $(26,318)
     State taxes, net of federal benefit                       8,800     30,400      30,190
     Loss from foreign subsidiaries                          717,000    592,800     498,000
     Non deductible amortization of intangible assets        125,000         --          --
     Over accrual of 1997 lawsuit settlement
      and distributor cruise                                      --         --     153,000
     Accrual difference from 1997 taxes                           --         --     113,608
     Other items, net                                         77,200     32,860      21,570
                                                         -----------   --------    --------
     Income tax expense (benefit)                        $  (657,000)  $557,000    $790,050
                                                         ===========   ========    ========
</TABLE>

  Deferred tax assets and liabilities consisted of the following net tax effects
of operating losses and temporary differences between the carrying amounts of
assets and liabilities for financial reporting and tax purposes at September 30,
2000 and 1999:

                                                      2000         1999
                                                   -----------   ----------
     Deferred income - certificates                $    20,000   $  132,000
     Additional capitalized inventory costs            404,000      561,000
     Inventory obsolescence reserve                    770,000           --
     Cruise accrual                                         --       85,000
     Loss carryforwards                                204,000      599,000
     Deferred income - product and literature          130,000       42,000
     Allowance for doubtful accounts reserve            25,000           --
     Other                                             154,000      228,000
                                                   -----------   ----------
        Current deferred tax asset                 $ 1,707,000   $1,647,000
                                                   ===========   ==========

 Non-current deferred tax liability at September 30, 2000 and 1999 were as
 follows:

                                                      2000         1999
                                                   -----------   ----------
     Differences between financial reporting and
       tax depreciation and amortization           $(3,264,000)  $ (778,000)
     Loss carry-forwards                             1,010,000           --
                                                   -----------   ----------
        Non-current deferred tax liability         $(2,254,000)  $ (778,000)
                                                   ===========   ==========

  At September 30, 2000, the Company had a net operating loss carry forward of
approximately $1,650,000 which expires primarily in 2019. Additionally, the
Company has obtained net operating losses of approximately $1,900,000 which
expire primarily in 2011 and are subject to annual usage limitations.

  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 and was received during
the year ended September 30, 1999.


                                      F-13
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)


NOTE 6 -- PROPERTY AND EQUIPMENT

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

                                                               September 30,
                                                   -------------------------------
                                                   Lives      2000         1999
                                                   -----  -----------  -----------
<S>                                                <C>    <C>          <C>
Land                                                      $ 1,763,567  $        --
Building and improvements                             15    2,606,509           --
Leasehold improvements                                 5    1,142,930    1,075,345
Equipment                                              7    9,592,504    3,896,260
Equipment held under capital lease                     4      732,766      679,151
Computer software                                     10    3,038,391    3,038,391
Furniture and fixtures                              5-10      883,233      813,555
Automobiles                                            5      162,015      170,970
                                                          -----------  -----------
                                                           19,921,915    9,673,672

Less: Accumulated depreciation and amortization            (5,595,598)  (3,635,486)
                                                          -----------  -----------
                                                          $14,326,317  $ 6,038,186
                                                          ===========  ===========
</TABLE>
NOTE 7 -- ACQUISITIONS

   On November 17, 1999 the Company finalized the acquisitions of Bactolac and
Advanced Nutraceuticals, Inc., a Delaware corporation ("Old - ANI"). Old - ANI
was a holding company formed to pursue a consolidation and integration program
in the nutrition industry. Former Old - ANI stockholders received an aggregate
of 75,000 shares of a newly created Series A Preferred Stock of the Company,
which was converted into 750,000 shares of the Company's common stock upon
approval by the Company's stockholders at the Company's Annual Meeting held
June 6, 2000.

   Bactolac, headquartered in Hauppauge, New York, manufactures nutritional
supplements for private labeled customers. The purchase price of Bactolac
consisted of $2,500,000 in cash, a subordinated promissory note in the principal
amount of $2,500,000 and 96,831 shares of Series A Preferred Stock, which were
converted into 968,310 shares of the Company's common stock upon approval by the
Company's stockholders at the Company's Annual Meeting held June 6, 2000.
Additionally, up to 176,060 shares of common stock may be issued pursuant to an
earn-out agreement. Bactolac entered into an employment agreement and covenant
not to compete agreement with its former owner at the closing on November
17,1999. The Company intends to continue to operate Bactolac and to use its
inventory, machinery and equipment in connection with the manufacture of
nutritional supplements.

   On December 1, 1999, the Company finalized the acquisition of Ash Corp.
("ASH") as a division of Bactolac. The purchase price of ASH consisted of
$750,000 in cash, a note payable in the amount of $500,000 and 49,296 shares of
Series A Preferred Stock, which were converted into 492,960 shares of the
Company's common stock upon approval by the Company's stockholders at the
Company's Annual Meeting held June 6, 2000. Additionally, up to 1,056,340 shares
of common stock may be issued pursuant to an earn-out agreement. The Company
intends to continue the operations of ASH and to use its inventory, machinery
and equipment in connection with the manufacture of liquid pharmaceutical and
nutraceutical products. In the fourth quarter ended September 30, 2000, Bayer
Corporation informed the Company that it decided to internally produce most of
the products produced by the Company for Bayer. Bayer accounted for 5% of the
Company's Consolidated sales for the fiscal year ended September 30, 2000.

   Financing for the acquisitions was provided primarily through a financing
arrangement entered into on November 17, 1999 with General Electric Capital
Corporation (the "GECC").  The acquisitions have been accounted for using the
purchase method of accounting, and accordingly, the operating results of the
acquired companies have been included in the accompanying consolidated financial
statements from their dates of acquisition.  The purchase price for the
acquisitions, including the equivalent common stock issued which was valued at
its market price of $2.84 per share, has been allocated to the assets purchased
and the liabilities assumed based upon their fair values at the acquisition
dates.  The excess of the purchase price over the net assets acquired was
approximately $9,690,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over twenty years.



                                      F-14
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

  Following is a summary of the consideration paid and the allocations of the
purchase prices for each of the acquired entities:

<TABLE>
<CAPTION>
                                                              Old-ANI      Bactolac        ASH          Total
                                                           -----------   -----------   -----------   -----------
<S>                                                        <C>           <C>           <C>           <C>
     Fair value of current assets acquired                 $     5,248   $ 3,413,847   $ 2,140,920   $ 5,560,015
     Fair value of long-term tangible assets acquired            3,080       449,405    10,250,888    10,703,373
     Goodwill                                                2,145,234     6,764,882       780,108     9,690,224
     Current liabilities assumed                               (23,562)   (2,353,134)   (7,186,916)   (9,563,612)
     Long-term liabilities assumed                                  --       (60,000)   (2,900,000)   (2,960,000)
                                                           -----------   -----------   -----------   -----------
       Net assets acquired and total consideration paid      2,130,000     8,215,000     3,085,000    13,430,000

     Cash and expenses paid at closing
       including credit facility proceeds                           --    (2,365,000)   (1,185,000)   (3,550,000)
     Stock purchase notes issued                                    --    (2,500,000)     (500,000)   (3,000,000)
                   Issuance of preferred stock,
       subsequently converted to common                     (2,130,000)   (2,750,000)   (1,400,000)   (6,280,000)
                                                           -----------   -----------   -----------   -----------
       Total cash paid                                              --       600,000            --       600,000
     Less cash acquired                                         (5,248)     (123,224)           --      (128,472)
                                                           -----------   -----------   -----------   -----------
       Net cash (received) paid for acquisitions           $    (5,248)  $   476,776   $        --   $   471,528
                                                           ===========   ===========   ===========   ===========
</TABLE>

  The following proforma information presents a summary of consolidated results
of operations of the Company as if the acquisitions discussed above had occurred
at the beginning of the years ended September 30, 2000 and 1999, and include
certain proforma adjustments for amortization of the goodwill, additional
depreciation expense as a result of the step-up in the basis of fixed assets and
increased interest expense on the acquisition debt.  The proforma financial
information is not necessarily indicative of the results of operations  which
actually would have resulted had the acquisitions been effected on the assumed
dates or of future results of the combined entities.

                                            Year Ended September 30,
                                           -------------------------
                                               2000          1999
                                           -----------   -----------

                     Net sales             $71,952,000   $85,866,000
                                           ===========   ===========
                     Net loss              $(4,378,000)  $(1,119,000)
                                           ===========   ===========
                     Net loss per share    $      (.55)  $      (.14)
                                           ===========   ===========


NOTE 8 - CREDIT FACILITY

  To provide financing for the acquisitions during the current year, and to
provide working capital for the entire Company, ANI entered into a three-year
Loan and Security Agreement (the "Agreement") with General Electric Capital
Corporation ("GECC") as of November 17 1999. The Agreement provides for a
$12,000,000 revolving credit line based upon eligible trade accounts receivable
and allowable inventories as defined under the terms of the Agreement.
Additionally, there is a $2,360,000 term loan facility, with principal payable
$49,167, monthly over the remaining term of the Agreement. Interest on amounts
outstanding under the Agreement is payable monthly based upon GECC's index rate
plus one-half percent. The loan facility is secured by substantially all of the
assets of ANI and its subsidiaries. As of September 30, 2000, there was
approximately $4,652,000 outstanding under the revolving credit line and
$1,937,000 outstanding under the term loan facility. The Agreement contains a
number of covenants, which include among other items, maintenance of specified
minimum net worth and fixed charge ratio, as well as limitations on capital
expenditures. At September 30, 2000, the Company was not in compliance with the
covenants regarding minimum net worth and fixed charge ratio under the Agreement
and a waiver has been obtained from GECC. Due to the fact that ANI was not in
compliance with the terms of the Agreement, and GECC's waiver did not extend
beyond one year, the entire amount outstanding under the Agreement has been
classified as a current liability on the accompanying consolidated balance sheet
as of September 30, 2000. The Company is attempting to amend its credit
agreement and believes based on its discussion with such lenders that it will be
successful in such efforts.



                                      F-15
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

  The Agreement was amended as of November 30, 1999, to provide for the
acquisition of ASH, and again as of March 9, 2000, to provide for the
reorganization of NFLI into the new holding company, ANI.  The Company has begun
discussions with GECC concerning an additional amendment to the Agreement to be
accomplished between now and closing of the NFLI sale, to address the agreed
upon sale of NFLI and to achieve mutually acceptable compliance conditions.  If
the Company is not successful in its efforts to amend the Agreement, it will
have adverse effects on the Company's business, financial condition and
operations.

NOTE 9 - STOCK PURCHASE NOTES AND MORTGAGE

  As a result of the acquisitions of Bactolac and ASH, during the first quarter
of the Company's fiscal year, the Company entered into purchase notes with
certain of the selling stockholders and assumed, through Bactolac, a $1,456,360,
mortgage obligation of the ASH facility. Following is a summary of such
obligations as of September 30, 2000:

     Stock purchase note arising from purchase of Bactolac (a)    $  2,500,000

     Stock purchase notes arising from purchase of ASH (b)             500,000

     Mortgage obligation on ASH facility (c)                         1,350,053
                                                                  ------------

                 Total                                               4,350,053

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

     Long-term portion                                            $  1,500,000
                                                                  ============

     (a)  The Bactolac stock purchase note is subordinate to the GECC facility
   and bears interest at 7%, and with the approval of GECC, is payable
   $1,000,000, on the first anniversary of the acquisition, $1,000,000, on the
   second anniversary, and $500,000 on the third anniversary. The holder of the
   note has agreed to extend the payment of the first installment for six months
   or until the closing of the NFLI sale transaction.

     (b)  The ASH stock purchase notes are subordinate to the GECC facility and
   bear interest at 7%, and subject to the approval of GECC, were payable
   December 29, 2000.

     (c)  In connection with the ASH acquisition as a division of Bactolac,
   Bactolac entered into a loan assumption agreement for an ASH  mortgage
   obligation. The obligation bears interest at prime plus 2%, and is secured by
   the ASH land and building. The assumption agreement was originally due May
   15, 2000, and the holder has agreed to three amendment agreements which
   extended the due date to December 31, 2000. Management of the Company is
   currently having discussions with the holder concerning an additional
   extension. Should  the holder not agree to an extension, or an alternative
   loan facility not be obtained, it would have adverse effects on the Company's
   business, financial condition and operations.

NOTE 10 -- 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 statutorily prescribed annual limit and
have the amount of such reduction contributed to the Plan. The Plan provides for
discretionary contributions by the Company. As of September 30, 2000, 1999 and
1998, the Company has made no such discretionary contributions.

Operating Leases

  The Company has non-cancelable operating leases, primarily for office,
warehouse space and equipment. Rental expense under operating leases for the
years ended September 30, 2000, 1999 and 1998 amounted to approximately
$716,000, $990,000, and $621,000, respectively. The Bactolac lease, requiring
total monthly payments of approximately $26,500, is with Shilpa-Saketh Realty,
Inc., an entity owned by a member of the Company's Board of Directors.



                                      F-16
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

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



             Year Ending September 30,
             -------------------------
                     2001                         $  999,000
                     2002                            524,000
                     2003                            522,000
                     2004                            449,000
                     2005                            345,000
                     Thereafter                      711,000
                                                  ----------
                                                  $3,550,000
                                                  ==========

Employment Agreements

  Effective October 1, 1996, NFLI entered into employment agreements with its
chief executive officer and its executive vice-president through September 30,
1999. On November 1, 1999, each of the employment agreements was extended until
October 30, 2000. 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 any of the years ended
September 30, 2000, 1999 or 1998 as NFLI did not achieve sufficient pretax
income in these years. In March 1998, each of these individuals agreed to a 25%
reduction in their annual salaries. Concurrent with the salary reduction each
individual 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 at
$5.13 per share, the closing price of the Company's Common Stock on the date of
the grant. During the fourth quarter of fiscal 2000, by mutual agreement between
the individuals and the Company, the employment agreements were terminated.

Cruise Expense Adjustment

  During the year ended September 30, 1998, NFLI paid $833,026 representing
payment of all obligations related to a cruise, which had been approved and
accrued for in the amount of $1.2 million during the year ended September 30,
1997. The $362,124 of over-accrued cost of the cruise is reflected as a
reduction in general and administrative expenses in the accompanying
consolidated financial statements for the year ended September 30, 1998.

Purchase Commitment

  In July 1998, the NFLI entered into a three-year supply agreement with
VitaRich Laboratories, Inc. ("VitaRich") in which the NFLI agreed to advance
VitaRich up to $800,000 to secure the purchase of a sufficient quantity of
certain nutritional supplement raw materials to meet NFLI's anticipated need for
rapid delivery of product and to obtain such product at discounted prices.

  NFLI made an initial deposit of $400,000 to VitaRich and VitaRich is required
to use such deposited amounts for the purchase of raw material and the
processing of finished product in sufficient kinds and quantifies to enable the
NFLI to (i) meet its anticipated need for the product, (ii) maximize the costs
savings to VitaRich and provide the NFLI with reduced prices through the
purchase of bulk quantities of raw materials, and (iii) enable VitaRich to meet
NFLI's rapid delivery requirements.

  Under the terms of the supply agreement, after the third year VitaRich is
required to repay any outstanding deposits by crediting NFLI with an amount
equal to 10% of each purchase order placed by NFLI until such time as all
advances have been repaid. NFLI 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 NFLI. As of September 30, 2000, the NFLI had
advanced VitaRich a total of $ 400,000, of which $ 136,541 has been repaid.



                                      F-17
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

Government Regulations

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

NOTE 11 -- PREFERRED AND COMMON STOCK

  In connection with the acquisitions which were consummated during the first
quarter of the fiscal year ended September 30, 2000, the Board of Directors
established a Series A Preferred Stock.  The Series A  Preferred Stock is $.001
par value with 1,000,000 shares authorized.  Following the stockholders approval
for the conversion (on a ten-for-one basis) of the 221,127 shares of Series A
Preferred Stock, into 2,211,270 shares of common stock, no Series A preferred
shares remain outstanding.  The Series A preferred shares had a $28.40 per share
liquidation preference on any distribution over the holders of the common stock.

  During the year ended September 30, 1998 the Company's Board of Directors
declared cash dividends totaling $350,326,of which $466,124 was paid during the
year ended September 30, 1998. No dividends have been declared or paid on the
Company's common stock subsequent to June 1998.

  The Company's Board of Directors during the fiscal year 2000 approved the
retirement of 79,000 shares of common stock previously held in treasury.

NOTE 12 -- STOCK OPTIONS AND WARRANTS

1993 Plan

  The Company's Board of Directors approved the 1993 Stock Option Plan (the
"1993 Plan") providing for a total of 282,000 shares of common stock to be
reserved for the grant of options to purchase the Company's common stock. At
September 30, 2000, there were 220,946 shares reserved for the grant of options
under the 1993 plan. Generally, one-third of the shares underlying the options
become exercisable in cumulative installments of 12 months, 24 months and 36
months after the date of grant. The maximum term of the options is 10 years,
except that if an employee leaves the Company, the options will terminate 30
days thereafter. The issuance of options is at the discretion of the Company's
Board of Directors.

1995 Discretionary Plan

  The Company's Board of Directors approved the 1995 Stock Option Plan (the
"1995 Plan") in March 1995, as amended in June 1996, April 1999 and June 2000
providing for a total of 2,085,000 shares of common stock to be reserved for the
grant of options to purchase Common Stock of the Company. The terms of the
options are similar to those of the 1993 Plan. At September 30, 2000, there were
764,661 shares reserved for the grant of options under the 1995 plan.

1995 Non-Discretionary Plan

  In November 1995, the Company adopted the 1995 Non-Discretionary Stock Option
Plan for non-employee directors of the Company who are not eligible to
participate in the other Plans (the "Non-Discretionary Plan"). The Non-
Discretionary Plan provides that the Company grant options to purchase 5,000
shares of the Company's common stock  to each person who thereafter becomes a
director of the Company and, as of December 1, of each year (commencing in
1996), options to purchase an additional 5,000 shares of common stock will be
granted to each eligible director. The exercise price of the options is the fair
value of the common stock at the date of grant of the options. The options
expire in five years and are exercisable in full at the date of grant.  During
the years ended September 30, 1998 and 1997, the Company issued 15,000 options
to Directors under this plan.  The Non-Discretionary Plan was cancelled on
October 6, 1999.



                                      F-18
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

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 Company's Board of Directors has extended the warrant
expiration date to April 30, 2001. The Company has the right to call all of the
warrants for redemption on 30 days written notice at a redemption price of $.05
per warrant, subject to certain defined criteria. In addition, the Company
issued warrants to underwriters to purchase 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 $144,700 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 recorded in the accompanying
September 30, 1998 consolidated financial statements.

SFAS NO. 123 Pro Forma Computation

   The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2000, 1999 and 1998, a dividend yield of
0%, 0% and 1%; a risk-free interest rate of 5.5%, 5.0%, 5.7%; an expected life
ranging from 5-10 years; and an expected volatility of 107%, 92% and 67%,
respectively.

   Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123 for stock options issued to employees, net loss and loss per share
for years ended September 30, 2000, 1999 and 1998 would have been reduced as
follows:

<TABLE>
<CAPTION>


                                                                2000          1999          1998
                                                             -----------   -----------   -----------
<S>                                                         <C>            <C>           <C>
                     Net loss:
                         As reported                         $(4,004,331)  $  (848,352)  $  (867,456)
                                                             ===========   ===========   ===========
                         Pro forma                           $(4,695,866)  $(1,172,062)  $(1,063,456)
                                                             ===========   ===========   ===========

                     Basic and diluted (loss) per share:
                         As reported                         $      (.52)  $      (.15)  $      (.15)
                                                             ===========   ===========   ===========
                         Pro forma                           $      (.61)  $      (.20)  $      (.18)
                                                             ===========   ===========   ===========
</TABLE>



                                      F-19
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

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


                                    Options             Warrants
                             --------------------   ---------------
                              Weighted   Weighted
                               Number     Average    Number  Average
                                 of      Exercise      of   Exercise
                               Shares      Price     Shares  Price
                             ---------   --------   ------- -------
     Outstanding as of
      September 30, 1997       608,130     $ 7.38   464,263   $3.75

      Granted                   80,000     $ 5.67    70,000   $5.25
      Exercised                (97,400)    $ 2.27   (13,160)  $3.75
      Forfeited                (73,233)    $11.31        --      --
      Cancelled                (12,417)    $11.56        --      --
                             ---------              -------
     Outstanding as of
      September 30, 1998       505,080     $ 7.39   521,103   $3.84
                             ---------              -------

      Granted                  205,000     $ 2.95   290,000   $5.50
      Exercised                     --         --        --      --
      Forfeited                 (7,200)    $13.00        --      --
      Cancelled                 (3,000)    $13.00        --      --
                             ---------              -------
     Outstanding as of
      September 30, 1999       699,880     $ 6.01   811,103   $4.59
                             ---------              -------

     Granted                   839,871     $ 2.65        --      --
     Exercised                      --         --        --      --
     Forfeited                (106,332)    $ 3.09        --      --
     Cancelled                (114,000)    $ 2.35        --      --
                             ---------              -------
     Outstanding as of
      September 30, 2000     1,319,419     $ 4.48   811,103   $4.59
                             =========              =======

     Exercisable as of
     September 30,
      1998                     362,548     $ 5.83   521,103   $3.84
      1999                     441,615     $ 6.58   811,103   $4.59
      2000                     458,543     $ 7.87   811,103   $4.59

     Weighted average fair
     value of grants during
     the year ended
     September 30,
      1998                                 $ 2.45             $3.35
      1999                                 $ 2.59             $2.42
      2000                                 $ 2.32             $  --
                                         ========           =======



                                      F-20
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

Following is a summary of the status of the options and warrants outstanding at
September 30, 2000:


<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>

                   $0.00 -  $ 1.98     40,500               4.4             $ 1.88   40,500            $ 1.88
                    1.98 -    3.95    997,452               8.6               2.68  136,576              2.70
                    3.95 -    5.93     56,667               5.3               5.31   56,667              5.31
                    5.93 -    7.90     15,000               2.2               7.00   15,000              7.00
                    7.90 -    9.88     20,000               3.4               9.00   20,000              9.00
                    9.88 -   11.85     10,000               6.1              11.50   10,000             11.50
                   11.85 -   13.83    139,800               5.3              12.93  139,800             12.93
                   13.83 -   15.80     25,000               5.6              14.25   25,000             14.25
                   15.80 -   17.78         --                --                 --       --                --
                   17.78 -   19.75     15,000                .2              19.75   15,000             19.75
                                    ---------               ===             ======  -------            ======

                                    1,319,419               7.7             $ 4.48  458,543            $ 7.87
                                    =========               ===             ======  =======            ======
</TABLE>

NOTE 13 - RELATED PARTY TRANSACTIONS

  During 1998, 1999 and 2000, respectively, the NFLI purchased approximately
41,000, 32,000 and 30,000 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 NFLI of $5.00 per book.
New Paradigm Publishing, a company established by J. Mark Bertrand, published
the book and subsequently sold it to NFLI. NFLI sold approximately 19,000,
10,000 and 3,000 copies of the book during 2000, 1999 and 1998, at an average
selling price of approximately $10.95 per copy. The book has been placed in
NFLI's product catalog at per copy prices ranging from $8.95 to $12.95, based
upon quantity ordered, and in 1999 approximately 35,000 of the books were part
of the materials provided to new distributors in NFLI's starter kits.
Additionally, in 1998, approximately 19,000 copies of the book were shipped to
distributors as part of the NFLI's Business Training Systems for that month. New
Paradigm Publishing has agreed to accept return of any books ordered, but not
sold by NFLI and to refund to the Company $5.00 per returned copy. To date no
books have been returned for refund. The Company's Board of Directors
unanimously approved the purchase of the aforementioned books. As of September
30, 2000 and 1999, $105,000 and $0, respectively were owed by the Company to New
Paradigm Publishing.

  The Company has purchased products from a vendor that until October 1997, a
director of the Company was the president (or a consultant) of the vendor, and
until June 1995, a major stockholder of the Company owned the vendor. The items
purchased are readily available from other vendors. During the years ended
September 30, 2000, 1999 and 1998, respectively, the Company purchased $ -0-, $-
0- and $494,000 of goods from this vendor.



                                      F-21
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 14 - FOREIGN SALES

  For the years ended September 30, 2000, and 1999, 1998, the Company's net
sales from foreign operations were approximately $10,400,000, $8,600,000, and
$9,000,000, respectively, including sales to customers in Canada totaling
approximately $3,600,000, $3,100,000, and $4,800,000, 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:


                                                 YEARS ENDED SEPTEMBER 30
                                                       (In thousands)
                                                ----------------------------
                                                   2000      1999      1998
                                                -------   -------   -------
Sales to unaffiliated customers:
          North America (1)                     $62,500   $61,100   $65,400
          United Kingdom                          4,200     4,700     3,500
          Philippines                               600       800       700
          Japan                                   2,000        --        --

Sales or transfers between geographic areas:
          North America                              --        --        --
          United Kingdom                            700     1,000       600
          Philippines                               100       100       300
          Japan                                      --        --        --

Operating profit (loss):
          North America                          (1,300)      900     1,900
          United Kingdom                         (1,300)     (900)     (900)
          Philippines                              (300)     (500)     (300)
          Japan                                    (700)       --        --

Identifiable assets:
          North America                          37,900    25,800    29,600
          United Kingdom                          1,300     1,700     1,400
          Philippines                                --       300       900
          Japan                                     500        --        --


(1)  Includes the United States, Canada, and Puerto Rico.



                                      F-22
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 15 - CONTRACT TERMINATION

  Effective October 24, 1997, NFLI 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 NFLI.

  In August 1998, NFLI and Mr. Trudeau entered into an agreement to terminate
the October 1997 agreement and to end the Company's business relationship and
distributorship with Mr. Trudeau. Additionally, as part of the agreement, the
Company agreed to purchase the approximate 70,000 shares of common stock and
40,000 stock purchase warrants then owned by Mr. Trudeau, which was completed in
September 1998 for approximately $459,000.

  In July 1996, NFLI entered into a fifteen-year 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 NFLI of self-improvement programs. The 1996 Agreement provided that,
with limited exceptions , DS had the exclusive right to produce and sell all of
NFLI's recruiting and training material and recruiting and promotional events.
Such materials and events were to be produced and marketed at the expense of DS
and DS was entitled to all revenues received from sales of such materials and
events.

  For a fee, DS also produced and provided to NFLI specified master cassettes
for sale by NFLI. Kevin Trudeau, formerly a key distributor of NFLI's products,
was principally responsible for DS's performance in connection with the 1996
Agreement.

  Associated with the termination of Kevin Trudeau's distributorship in August
1998, NFLI, DS and NC agreed to terminate the 1996 Agreement in October 1998.
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 at $5.50 per share
at any time until October 31, 2003, in satisfaction of all accounts payable and
other amounts claimed by them for materials previously delivered to NFLI , 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 NFLI , 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 payments, which has a remaining balance of $ 316,489
as of September 30, 2000.

  The Company accounted for the transactions as of September 30, 1998. The
amount paid for the audio production rights was approximately $1,400,000, which
was amortized over a period of three-years. Expense relative to the warrants
issued to NC was determined by utilizing the Black-Scholes method to be
approximately $702,000.

   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



                                      F-23
<PAGE>

                         ADVANCED NUTRACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

NOTE 16- SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>


                                                                       2000      1999        1998
                                                                     --------  --------  ----------
<S>                                                                  <C>       <C>       <C>
Supplemental disclosure of non-cash transactions during the year:

  Purchase of property and equipment under
     capital lease                                                   $     --  $     --  $   43,192

  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

Cash paid during the year:

  Federal and state income taxes paid                                $     --  $     --  $       --
  Interest paid                                                      $950,500  $128,900  $       --

</TABLE>



                                      F-24
<PAGE>

                                   PART III

           ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

Directors
---------

     The following persons serve as members of the Board of Directors of
Advanced Nutraceuticals, Inc. (the "Company"):

     F. Wayne Ballenger, age 54, has served as President of First Commercial
Capital since 1995. He has also served as President of Puncture Guard LLC since
December 1994. From March 1992 to December 1994, he served as director of sales
and marketing for Petrolon, Inc., a multi-level marketing organization.
Immediately prior thereto, he served as a vice president of Southwest Bank of
Texas with commercial lending responsibilities. Mr. Ballenger received a B.B.A.
degree from the University of the South in 1968. Mr. Ballenger became a director
of the Company in November 1995.

     David P. Bertrand, age 57, has served as President of the Company and its
predecessors since 1984.  Mr. Bertrand received a B.S. degree in education in
1966 and a Master of Education degree in administration and supervision in 1969,
both from McNeese State University in Lake Charles, Louisiana.  Mr. Bertrand is
the brother-in-law of Jana B. Mitcham.

     M. F. Florence, age 63, has served as President of Sherfam Inc. since 1989.
Sherfam Inc. is a holding company, principally of pharmaceutical companies,  and
is the parent of Shermfin Inc., which is a principal shareholder of the
Company.  From 1958 to 1989, Mr. Florence was associated with the firm of Wm.
Eisenberg & Co., a firm of Chartered Accountants in Canada.  He served as a
partner of the firm from 1964 to 1989.  Mr. Florence received a Bachelor of
Commerce degree from the University of Toronto.  He is the recipient of a
Chartered Accountants degree from the Institute of Chartered Accountants of
Ontario.  Mr. Florence is President of Citadel Gold Mines, Inc.  Mr. Florence is
also a Director of Barr Laboratories, Inc., a publicly held corporation whose
common shares are listed on the New York Stock Exchange.  Mr. Florence has
served as a director of the Company since 1994.

     Jana B. Mitcham, age 52, has served as Executive Vice President, Secretary
and Director of the Company and its predecessors since 1984. Ms. Mitcham
received a B.A. degree in 1974 in special education from McNeese State
University and undertook graduate work in special education at the Korean
Extension of the University of Maryland. Ms. Mitcham is a Fellow with Boston
Bio-Science Research Foundation and a member of the Board of Directors of the
Multi-Level Marketing International Association. Ms. Mitcham is the sister-in-
law of David P. Bertrand.

     Gregory Pusey, age 48, has served as Chairman of the Board of Directors of
the Company since November 1999. Mr. Pusey served as an officer and director of
Advanced Nutraceuticals, Inc. since December 1997. He served both as President
of Livingston Capital, Ltd. and President and the general partner of Graystone
Capital, Ltd., venture capital firms, from 1987 to 1999. From June 1994 to
August 1998, he served as a director and consultant to the Company. Since 1988,
Mr. Pusey has been the President and a director of Cambridge Holdings, Ltd., a
publicly held real estate development firm. Mr. Pusey graduated summa cum laude
from Boston College with a B.S. degree in finance in 1974.

     Pailla M. Reddy, age 41, is currently Chairman of the Board of Directors,
Chief Executive Officer and President of Bactolac Pharmaceutical Inc. Bactolac
was acquired by the Company in November 1999. Dr. Reddy founded Bactolac and has
served as an officer and director of Bactolac, since 1995. From 1991 to 1995, he
was production manager for Max Pharmaceutical, Inc. From 1983 to 1991, Dr. Reddy
held various positions with Wellcome Pharmaceuticals Ltd., including research
chemist and production manager. Dr. Reddy received a B.Sc. degree in chemistry
from Osmania University in India, and M.Sc. and Ph.D. degrees in organic
chemistry from Kanpur University in India.

     Neil S. Sirkin, age 37, is currently the President of the ASHCO division of
Bactolac.  ASHCO was acquired by the Company in December 1999.  Mr. Sirkin was
co-founder of ASHCO and served as an officer and director of ASHCO since 1996.
He previously performed a variety of consulting and special project activities
while affiliated with Sirkin Enterprises, Inc.  Mr. Sirkin attended the
University of Miami.

                                       23
<PAGE>

     The Company entered into an agreement in 1995 with Shermfin Corp. wherein
it agreed that, for so long as Shermfin Corp. owns 10% or more of the
outstanding Common Stock of the Company, Shermfin Corp. will be entitled to
designate one person to serve as a member of the Company's Board of Directors.
Shermfin Corp.'s designee is M. F. Florence. See Item 13.

Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

     Based solely on the Company's review of copies of Section 16(a) reports
filed by officers, directors and greater than 10% shareholders with the
Securities and Exchange Commission, which have been received by the Company and
written representations from these persons that no other reports were required
for those persons, the Company believes that all filing requirements applicable
to those persons were complied with for the fiscal year ended September 30,
2000, except that Neil Sirkin failed to file on a timely basis a Form 3
reporting his initial statement of beneficial ownership of the Company's
securities.

Officers
--------

     The following executive officers have been elected by the Board of
Directors of the Company. It is expected that the Board will elect officers
annually following each Annual Meeting of Shareholders. Information is provided
below regarding the names and ages of all executive officers of the Company who
are not directors of the Company, their position with the Company and the period
they have served as executive officers of the Company.

     John R. Brown, Jr., age 63, became Vice President-Finance of the Company in
September, 1996, and had previously served the Company on a part-time basis
commencing in December 1995.  >From April, 1989 until he joined the Company, Mr.
Brown was a management consultant performing merger and acquisition services,
systems analyses, financial reporting assistance, and other services for both
publicly and privately held companies.  From June, 1987 to March, 1989 he was
Vice President-Finance & Administration for Environmental Protective Industries,
Inc., an environmental services organization.  Mr. Brown is a Certified Public
Accountant and has over 20 years experience in public accounting with both
national and local firms.  Mr. Brown received a B.S. degree in mechanical
engineering from Stanford University and an M.B.A. degree from the University of
Texas at Austin.

     Jeffrey G. McGonegal, age 49, became Senior Vice President - Finance of the
Company in February 2000. Since 1997, Mr. McGonegal has served as Managing
Director of McGonegal and Co., a company engaged in providing accounting and
business consulting services. Mr. McGonegal served as a consultant to the
Company in connection with the acquisitions made in 1999. From 1974 to 1997, Mr.
McGonegal was an accountant with BDO Seidman LLP. While at BDO Seidman LLP, Mr.
McGonegal served as managing partner of the Denver, Colorado office. Mr.
McGonegal is a member of the board of directors of The Rockies Venture Club,
Inc. and Colorado Venture Centers, Inc. He received a B.A. degree in accounting
from Florida State University.


                       ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth certain information regarding compensation
paid by the Company and its subsidiaries to the chief executive officer and each
of the other executive officers of the Company (the "named executive officers")
during the fiscal years ended September 30, 1998, 1999 and 2000.

Summary Compensation Table
--------------------------

<TABLE>
<CAPTION>
                                              ANNUAL COMPENSATION                    AWARDS                  PAYOUTS
                                   ---------------------------------------------------------------------------------------
                                                                Other        Restricted
        Name and Principal                                      Annual         Stock     Options/     LTIP     All Other
             Position                Year   Salary   Bonus   Compensation      Awards     SAR's      Payouts  Compensation
--------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>    <C>      <C>     <C>             <C>         <C>         <C>      <C>
Greg Pusey (3)                       1998  $     -   $   -   $    -              -          -           -          -
President, Chief Executive           1999        -       -        -              -          -           -          -
Officer and Chairman of the          2000    94,769       -       -              -      50,000          -          -
Board of Directors of ANI
</TABLE>

                                       24
<PAGE>

<TABLE>
<S>                                  <C>    <C>      <C>     <C>             <C>         <C>         <C>      <C>
David P. Bertrand (1)                1998   363,969       -             -             -    20,000          -         6,744
Vice Chairman of the Board           1999   318,269       -             -             -    25,000          -         6,744
of Directors of ANI;                 2000   241,703       -             -             -   103,604          -         6,744
President and Chief
Executive Officer of NFLI

Jana Mitcham (1)                     1998   342,172       -             -             -    20,000          -         5,184
Executive Vice President             1999   298,378       -             -             -    25,000          -         5,184
and Secretary of NFLI                2000   242,143       -             -             -   103,604          -         5,184

Jeffery McGonegal (3)                1998        -        -             -             -         -          -             -
Senior Vice President                1999        -        -             -             -         -          -             -
of Finance of ANI and NFLI           2000    56,558       -             -             -   100,000          -             -

John R. Brown, Jr.                   1998    88,628   7,500             -             -         -          -             -
Vice President Finance,              1999    96,067       -             -             -    10,000          -             -
Assistant Secretary and              2000   109,899       -             -             -    22,000          -             -
Treasurer of ANI and NFLI

David O. Rodrigue (2)                1998    74,431       -             -             -    25,000          -             -
Vice President and                   1999   117,760       -             -             -    15,000          -             -
Chief Financial Officer of           2000   120,295       -             -             -    35,000          -             -
ANI and NFLI

Pailla Reddy (3)                     1998         -       -             -             -         -          -             -
President, Chief Executive           1999         -       -             -             -         -          -             -
Officer and Chairman of the          2000   218,750       -             -             -         -          -             -
Board of Directors of
Bactolac

Neil Sirkin (3)                      1998         -       -             -             -         -          -             -
President of ASHCO                   1999         -       -             -             -         -          -             -
Division                             2000   125,000       -             -             -         -          -             -
</TABLE>
_________________

(1)  The Company has obtained insurance policies on the lives of Mr. Bertrand
and Ms. Mitcham, of which benefit amounts of $1,060,000 and $660,000 on the
lives of Mr. Bertrand and Ms. Mitcham, respectively, constitute "keyman"
insurance and are payable to the Company. Approximately 51% of the aggregate
insurance benefits on the lives of Mr. Bertrand and Ms. Mitcham are payable to
beneficiaries designated by Mr. Bertrand and Ms.Mitcham. In addition, part of
the cash value may be used as retirement benefits for the executive officers.
The premiums paid by the Company allocable to these items are included in the
table.

(2)  Mr. Rodrigue resigned from the Company in September 2000.

(3)  Messrs. Pusey, McGonegal, Reddy and Sirkin became officers during the first
quarter of the fiscal year ended September 30, 2000.


Employment Agreements
---------------------

     Effective October 1, 1996, the Company entered into employment agreements
with Mr. Bertrand and Ms. Mitcham. The terms of these agreements are essentially
identical, except that Mr. Bertrand's annual salary is $400,000 and Ms.
Mitcham's annual salary is $376,000. Mr. Bertrand and Ms. Mitcham are each also
entitled to a

                                       25
<PAGE>

bonus if the Company has pre-tax annual income between $3 million and $20
million. Each is entitled to receive 5% of any annual pre-tax income between $3
million and $5 million; four percent of the annual pre-tax income between $5
million and $10 million; and three percent of the annual pre-tax income between
$10 million and $20 million. The term of each agreement is three years. Each of
the agreements may be earlier terminated upon mutual agreement, death,
disability or conviction of the officer, or a material breach of the agreement
by the officer. In March 1998 each of Mr. Bertrand and Ms. Mitcham agreed to a
25% reduction in their annual salaries.

     Effective November 1, 1999, the Company entered into new employment
agreements with Mr. Bertrand and Ms. Mitcham. The terms of these agreements are
essentially identical, except that Mr. Bertrand's annual salary is $300,000 and
Ms. Mitcham's annual salary is $282,000. Mr. Bertrand and Ms. Mitcham are each
also entitled to a bonus based on the same formula as in their prior employment
agreements. The term of each agreement is one year and will automatically renew
for two successive periods of one year each unless notice is given by either
party more than 30 days prior to the expiration of the applicable yearly period.
Each of the agreements may be earlier terminated upon mutual agreement, death,
disability or conviction of the officer, or a material breach of the agreement
by the officer.

     On November 17, 1999, the Company entered into a two year employment
agreement with Gregory Pusey with an annual salary of $120,000 and a one year
employment agreement with Barry C. Loder with an annual salary of $100,000. Both
individuals may receive a performance bonus at the Company's discretion.

     On September 20, 2000, Messrs. Bertrand, Loder, McGonegal and Pusey and Ms.
Mitcham entered into an Agreement with the Company providing for the termination
of any employment agreements or arrangements they had with the Company, and a
readjustment of their annual salaries to the following amounts: Mr. Bertrand -
$120,000; Mr. Loder - $12,000; Mr. McGonegal - $100,000; Ms. Mitcham - $120,000
and Mr. Pusey - $84,000.

     Mr. Loder subsequently resigned as the Company's Vice President of
Corporate Development. Mr. Loder has been retained by the Company to assist in
the proposed sale of NFLI. If the proposed sale is completed, Mr. Loder will
receive approximately 3% of the amounts received by the Company for the NFLI
sale.

     In connection with the acquisition of Bactolac Pharmaceuticals, Inc., the
Company entered into a two year employment agreement with Dr. Pailly Reddy, the
President of Bactolac. Dr. Reddy receives an annual salary of $200,000 and may
receive a performance bonus at the Company's discretion. He is also entitled to
continued use of the vehicle that is leased by Bactolac.

     In connection with the acquisition of Ash Corp. through Bactolac, Bactolac
entered into three year employment agreements with Neil S. Sirkin and his
father, Allan I. Sirkin. Both individuals receive an annual salary of $150,000
and may receive a performance bonus at the Company's discretion.

                                       26
<PAGE>

Option Grants in Fiscal Year Ended September 30, 2000
-----------------------------------------------------

  The following table sets forth information with respect to stock option grants
to the named executive officers during the fiscal year ended September 30, 2000.

<TABLE>
<CAPTION>
                                                        Percent                                          Potential Realizable
                                    Number of            Total                                                 Value at
                                   Securities         options/SARs                                       Assumed Annual Rates
                                   Underlying          granted to       Exercise or                       Stock Appreciation
                                  Options/SARs         Employees         base price    Expiration           For Option Term
                                                                                                         ----------------------
Name                              granted (#)       in fiscal year        ($/Sh)          date              5%           10%
-----------------------       ----------------------------------------------------------------------------------------------------
<S>                           <C>                   <C>                <C>             <C>               <C>             <C>
Greg Pusey                                50,000                 6.0%          $2.84      12/14/09       $ 89,303         $226,311

David P. Bertrand                         53,604                 6.4%          $2.13       10/6/09         71,636          181,541
                                          50,000                 6.0%          $2.84      12/14/09         89,303          226,311

Jana Mitcham                              53,604                 6.4%          $2.13       10/6/09         71,636          181,541
                                          50,000                 6.0%          $2.84      12/14/09         89,303          226,311

Jeffery McGonegal                        100,000                11.9%          $2.25       2/14/10        141,501          358,592

John R. Brown, Jr.                        22,000                 2.6%          $2.84      12/14/09         39,293           99,577

David O. Rodrigue                         35,000                 4.2%          $2.84      12/14/09         62,512          158,418
</TABLE>


Options Exercises and Year-End Values
-------------------------------------

     The following table shows options exercises by the named executive officers
during the fiscal year ended September 30, 2000 and the number and value of the
unexercised options at September 30,2000.

<TABLE>
<CAPTION>
                                                                                                                  Value of
                                                                                                                Unexercisable
                                                    Number of                                 Number of          In-the-Money
                                                      Shares                             Unexercised Options      Options at
                                                    Underlying            Value             At Year End (#)       Year End ($)
                                                     Options             Realized             Exercisable/        Exercisable/
            Name                                    Exercised              ($)                Unexercisable     Unexercisable (1)
----------------------------               ---------------------------------------------------------------------------------------
<S>                                        <C>                          <C>              <C>                    <C>
Greg Pusey                                                0                  0                    0/50,000                0/0

David P. Bertrand                                         0                  0                 106,933/120,271            0/0

Jana Mitcham                                                                 0                  99,733/120,271            0/0

Jeffery McGonegal                                         0                  0                    0/100,000               0/0

John R. Brown, Jr.                                        0                  0                  13,334/28,666             0/0
</TABLE>

__________________
(1)   Based on the price of the Common Stock of $.813 on September 29, 2000 as
reported by The Nasdaq Stock Market.

                                       27
<PAGE>

Compensation Committee Report
-----------------------------

     The Compensation Committee (the "Committee") of the Board of Directors has
been established by the Board to periodically review the compensation philosophy
for the Company's executives, and to recommend to the Board compensation
packages for the Company's executives.  The Committee also reviews and
recommends to the Board any additions to or revisions of the Company's stock
option plans.  The Committee consists exclusively of non-employee directors,
appointed by resolution of the entire Board.

     The Committee's objective is to set executive compensation at levels which
(i) are fair and reasonable to the shareholders, (ii) link executive
compensation to long-term and short-term interest of the shareholders, and (iii)
are sufficient to attract, motivate and retain outstanding individuals for
executive positions.

     Fairness to the shareholders is balanced with the need to attract, retain
and motivate outstanding individuals by comparing the Company's executive
compensation with the compensation of executives at other companies. The
Committee's overall goal is to achieve strong performance by the Company and its
executives by affording the executives the opportunity to be rewarded for strong
performance. The Committee attempts to provide both short-term and long-term
incentive pay. To accomplish its objectives, the Committee has structured the
executive compensation program with three primary components. These primary
components are base salary, annual incentives, and long-term incentives.

     During the fiscal year ended September 30, 1997, the Committee determined
to undertake a review of the Company's executive compensation program, with
particular emphasis on the Company's Chief Executive Officer and Executive Vice
President. The Company had experienced dramatic growth in the fiscal year ended
September 30, 1996, but also was experiencing problems due to regulatory
scrutiny and negative media reports. The Committee determined that it would be
in the best interest of the Company and its shareholders for the Committee to
review the existing compensation arrangements and to provide a compensation
program which recognized, among other factors, the Company's growth, problem
areas which could result in short-term performance difficulties, and appropriate
incentives to provide impetus for the long-term growth of the Company. The
Company retained an independent compensation consultant to assist it in its
review of the executive compensation program. The review included compensation
programs of publicly traded peer companies similar in characteristics to the
Company, as well as compensation paid by other network marketing companies with
different product lines.

     Effective in October 1996, the Company entered into employment agreements
with David P. Bertrand, the Company's President and Chief Executive Officer, and
Jana B. Mitcham, the Company's Executive Vice President and Secretary.  The
employment agreements are described in "Employment Agreements."  The Committee
determined that the base salaries for Mr. Bertrand and Ms. Mitcham should be
increased, based on the progress made by the Company, the tremendous effort and
energy devoted by them to the Company's business, and the recommendations of the
independent compensation consultant based on review of base salaries of other
companies.

     In March 1998, after consultation with the Committee, Mr. Bertrand and Ms.
Mitcham agreed to a 25% reduction in their annual salaries, and in November 1999
entered into new employment agreements at these reduced salary levels with
potential for bonus payments based on the Company's performance. Concurrent with
the salary reductions, the Company granted to each of Mr. Bertrand and Ms.
Mitcham stock options to purchase up to 20,000 shares of the Company's Common
Stock at $5.13 per share, the closing trading price of the Common Stock on the
date of the grant. In December 1998, the Company granted to each of Mr. Bertrand
and Ms. Mitcham options to purchase up to 25,000 shares of the Company's common
stock at $3.00 per share, the closing trading price of the common stock on the
date of the grant. The options become exercisable in one-third annual
installments commencing in December 1999. The Committee recommended these
actions in furtherance of its objectives of linking compensation with Company
performance and providing incentive for key executives.

     In late 1999, the Company finalized acquisitions of three companies. In
connection with those acquisitions, the Company entered into employment
agreements with the officers of those companies, Gregory Pusey, Barry Loder,
Pailla Reddy, Neil Sirkin and Allan Sirkin, to continue serving as officers.

     As a result of the Company's worsening financial condition, in September
2000 Mr. Bertrand, Ms. Mitcham, Mr. Pusey and Mr. Loder, as well as Jeff
McGonegal, the Company's Senior Vice President of Finance, agreed to terminate
their respective employment agreements or arrangements and to substantial
reductions in their salaries.

                                       28
<PAGE>

  The Committee periodically reviews executive salaries. In addition to the
external competitive compensation market, base salary levels reflect each
officer's performance over time and each individual's role in the Company.
Consequently, employees with higher levels of sustained performance over time
and/or employees assuming greater responsibilities will typically be paid
correspondingly higher salaries. Individual performance criteria used to assess
performance include leadership, professionalism, initiative and dependability.
However, individual performance assessments are made qualitatively and in total,
and no specific weightings are attached to these performance indicators, nor is
a formula utilized in determining appropriate salary increases or salary levels.

  The Committee periodically reviews the performance of executive officers to
determine whether bonuses should be paid to those persons. The Committee has not
established specific performance measures for determining the award of bonuses.
The Committee believes that bonuses should be provided to reward key employees
based on Company and individual performance and to provide competitive cash
compensation opportunities to the Company's executives. However, based primarily
on the Company's financial results in the fiscal year ended September 30, 2000
and 1999, no bonuses were paid to any executive officers.

  The Company's stock option plans are designed to focus executive efforts on
long-term goals of the Company and to maximize total return to the Company's
shareholders. The Committee believes that stock options advance the interests of
employees and shareholders by providing value to the executives through stock
price appreciation only. Options terminate if the employee's employment with the
Company is terminated. All options awarded must have an exercise price of at
least 100% of fair market value on the date of grant.

  The exact number of shares actually granted to a particular participant
reflects both the participant's performance and role in the Company, as well as
the Company's financial success, and its future business plans. All of these
factors are assessed subjectively and are not weighted. In determining each
grant, the Committee also considers the number of stock options which are
outstanding, and the total number of options to be awarded.

  In making grants during the fiscal year ended September 30, 2000, the
Committee also considered the number of outstanding options previously granted
to each officer. Due to the decline in the Company's stock price during the
year, all of the options granted to executive officers of the Company in fiscal
2000 were "out-of-the-money" at the fiscal year end of September 30, 2000. The
Committee believes that its awards were consistent with the Company's
compensation philosophy to increase the emphasis placed on long-term incentives
and to be competitive in its total compensation program.

                                      29
<PAGE>

  Under Section 162(m) of the Internal Revenue Code of 1986, as amended, public
companies are precluded from receiving a tax deduction on compensation paid to
executive officers in excess of $1,000,000, unless the compensation is excluded
from the $1,000,000 limit as a result of being classified performance- based. At
this time, the Company's executive officers cash compensation levels do not
exceed the payment limit and will most likely not be affected by the regulations
in the near future. Nonetheless, the Committee intends to review its executive
pay plans over time in light of these regulations.

                                    COMPENSATION COMMITTEE

                                    F. Wayne Ballenger
                                    M. F. Florence

Compensation of Directors
-------------------------

  Directors who are not employees of the Company receive $18,000 per year, $400
for each Board meeting attended, and $200 for each committee meeting of the
Board attended. Directors who are also employees of the Company receive no
additional compensation for serving as Directors. The Company reimburses its
Directors for travel and out-of-pocket expenses in connection with their
attendance at meetings of the Board of Directors.

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

  Options granted pursuant to the Non-Discretionary Plan will not qualify for
the special tax benefits given to incentive stock options under Section 422 of
the Code. Accordingly, all of the stock options granted pursuant to the Non-
Discretionary Plan may be deemed to be non-statutory stock options. The options
are generally non-transferable. In October 1999 the Board of Directors of the
Company terminated the Non-Discretionary Plan.

  During the fiscal year ended September 30, 2000, the Company granted options
to purchase 25,000 shares of Common Stock at a price of $2.84 per share to  F.
Wayne Ballenger, and 15,000 shares of Common Stock at a price of $2.84 per share
and 7,658 shares of Common Stock at a price of $2.13 per share to M.F.
Florence. The option grants were made pursuant to the Company's 1995 Stock
Option Plan, as amended.  Each option will expire ten  years from the date of
grant, except that an option will expire, if not exercised, 30 days after the
optionee ceases to be a consultant to the Company.

Corporate Performance Graph
---------------------------

  The following graph compares the yearly cumulative return on the Company's
Common Stock since July 10, 1995 (the date the Company's Common Stock began
trading on The Nasdaq Stock Market) with that of the Index for The Nasdaq Stock
Market (U.S. Companies) and a peer group including the following companies:
BeautiControl Cosmetics, Inc., Herbalife International, Inc., Nature's Sunshine
Products, Inc and Reliv' International, Inc.

                                      30
<PAGE>

                             [GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Total Return Analysis

                                         9/29/95   9/30/96   9/30/97   9/30/98   9/30/99   9/29/00
--------------------------------------------------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>       <C>       <C>
Advanced Nutraceuticals                 $    100  $ 166.42  $  91.06  $  34.48  $  28.02  $   9.34
--------------------------------------------------------------------------------------------------
Peer Group                              $    100  $ 124.42  $ 121.34  $  65.68  $  89.64  $  77.48
--------------------------------------------------------------------------------------------------
Nasdaq Composite (US)                   $    100  $ 117.58  $ 161.53  $ 162.31  $ 263.99  $ 353.71
--------------------------------------------------------------------------------------------------
</TABLE>

Source:  Carl Thompson Associates www.ctasaline.com (800) 959-9677.  Data from
Bloomberg Financial Markets.

                                      31
<PAGE>

   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The following table sets forth, as of January 10, 2000, the ownership of the
Company's Common Stock held by: (i) each person who owns of record or who is
known by the Company to own beneficially more than 5% of such stock, (ii) each
of the directors of the Company, (iii) each of the current executive officers of
the Company and (iv) all of the Company's directors and executive officers as a
group. The number of shares and the percentage of the class beneficially owned
by the persons named in the table and by all directors and executive officers as
a group, includes, in addition to shares actually issued and outstanding,
unissued shares which are subject to issuance upon exercise of options or
warrants.

<TABLE>
<CAPTION>
                                         Number of Shares        Percentage of
          Beneficial Owner                    Owned               Ownership
-------------------------------------  --------------------     ----------------

<S>                                    <C>                      <C>
Apotex Foundation                           650,000 (1)                 8.1%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9

Bernard Sherman                           1,215,390 (1)                15.2%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9

Shermfin Inc.                               565,390 (1)                 7.0%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9

M.F. Florence                               608,048 (1)(2)              7.6%
150 Signet Dr.
Weston, Ontario, Canada
9M9 1T9

Jana B. Mitcham                             561,634 (3)                 7.0%
10618 Great Plains
Houston, TX  77064

David P. Bertrand                           473,422 (4)                 5.9%
10622 Great Plains
Houston, TX  77064

F. Wayne Ballenger                           45,000 (5)                 0.6%
3134 Meadway Drive
Houston, TX  77082
</TABLE>


                                      32
<PAGE>

<TABLE>
<CAPTION>
<S>                                    <C>                     <C>
Gregory Pusey                            429,950 (6)                 5.4%
1722 Buffehr Creek Road
Vail, CO  81657

Pailla M. Reddy                          968,310 (7)                12.1%
25507 Williston Avenue
Floral Park, NY  11001

Neil Sirkin                              123,240 (8)                 1.5%
3600 25th Avenue
Gulfport, MS  39501

John R. Brown, Jr.                        47,000 (9)                 0.6%
2534 Pomeran
Houston, TX  77080

Jeffrey G. McGonegal                     140,651 (10)                 1.8%
1905 West Valley Vista Drive
Castle Rock, CO  80104

All Officers and Directors as          3,322,255                     41.4%
a Group (9 persons)
</TABLE>

_______________________________

(1)  Mr. Sherman may be deemed a beneficial owner of the shares held by the
Apotex Foundation due to his affiliations with the Apotex Foundation. Messrs.
Sherman and Florence may be deemed beneficial owners of the shares held by
Shermfin Inc. due to their affiliations with Shermfin Corp.

(2) Includes options to acquire (i) 5,000 shares of Common Stock at $19.75 per
share, (ii) 5,000 shares of Common Stock at $12.38 per share, (iii) 5,000 shares
of Common Stock at $7.00 per share and (iv) 5,000 shares of Common Stock at
$2.38 per share, (v) 7,658 shares at $2.125 per share, and (vi) 15,000 shares at
$2.84 per share.

(3)  Includes Warrants to purchase 5,000 shares of Common Stock at $3.75 per
share and options to acquire (i) 16,800 shares of Common Stock at $1.875 per
share, (ii) 16,800 shares of Common Stock at $2.25 per share, (iii) 37,800
shares of Common Stock at $13.00 per share, (iv) 25,000 shares of Common Stock
at $3.00 per share, of which options to acquire 8,333 shares become exercisable
in December 2001 and (v) 20,000 shares of Common Stock at $5.13 per share, (vi)
53,604 shares of Common Stock at $2.125 per share, (vii) 50,000 shares of Common
Stock at $284 per share. Also includes 11,554 shares of Common Stock owned by
her daughter, 9,000 shares of Common Stock owned by her husband, and options
held by her husband to acquire (i) 3,600 shares of Common Stock at $13.00 per
share, (ii) 6,126 shares of Common Stock at $2.125 per share, (iii)

                                      33
<PAGE>

20,000 shares of Common Stock at $2.84 per share which become exercisable in
one-third annual installments commencing in December 2000.

(4)  Includes options to acquire (i) 19,200 shares of Common Stock at $1.875 per
share, (ii) 19,200 shares of Common Stock at $2.25 per share, (iii) 40,200
shares of Common Stock at $13.00 per share, (iv) 25,000 shares of Common Stock
at $3.00 per share, of which options to acquire 8,333 shares become exercisable
in each of December 2000 and December 2001and (v) 20,000 shares of Common Stock
at $5.13 per share, (vi) 53,604 shares of Common Stock at $2.125 per share which
become exercisable in one-third annual installments commencing in October 2000
and (vii) 50,000 shares of Common Stock at $2.84 per share which become
exercisable in one-third annual installments commencing in December 2000 . Also
includes options held by his wife to acquire (i) 3,600 shares of Common Stock at
$13.00 per share, (ii) 10,000 shares of Common Stock at $3.00 per share, (iii)
6,126 shares of Common Stock at $2.125 per share which become exercisable in
one-third annual installments commencing in October 2000 and (iv) 20,000 shares
of Common Stock at $2.84 per share which become exercisable in one-third annual
installments commencing in December 2000.

(5)  Includes options to acquire (i) 5,000 shares of Common Stock at $19.75 per
share; (ii) 5,000 shares of Common Stock at $12.38 per share, (iii) 5,000 shares
of Common Stock at $7.00 per share and (iv) 5,000 shares of Common Stock at
$2.75 per share (v)  25,000 shares of Common Stock at $2.85 per share which
become exercisable in one-third annual installments commencing in December 2000.

(6)  Includes 14,430 shares held by his wife, individually and as custodian for
their minor children, 5,880 shares held by a corporation in which he is a
principal shareholder and warrants to purchase 15,000 shares of Common Stock at
$3.75 per share.  Includes options to acquire 75,000 shares of Common Stock at
$2.84 per share which become exercisable in one-third annual installments
commencing in December 2000.

(7)  Does not include any shares which may be earned pursuant to earnout
agreements. See Item 13.

(8)  Does not include any shares which may be earned pursuant to earnout
agreements. See Item 13.

(9)  Includes options to acquire (i) 10,000 shares of Common Stock at $11.50 per
share and (ii) 10,000 shares of Common Stock at $3.00 per share, of which
options to acquire 3,333 shares become exercisable in each of December 2000 and
December 2001, (iii)  22,000 shares at   $2.84 per share, which become
exercisable in one-third annual installments commencing in December 2000.

(10) Includes options to acquire 100,000 shares of Common Stock at $2.375 per
share which become exercisable in one-third annual installments commencing in
February 2001 and does not include options to acquire 100,000 shares of Common
Stock at $.5625 per share which become exercisable in one-third installments
commencing in November 2001.

            ITEM 13.  CERTAIN RELATIONSHPS AND RELATED TRANSACTIONS

  In March 1995, the Company entered into an agreement with Shermfin Inc.
regarding conversion to Common Stock of debt owed by the Company to Shermfin
Corp. The Company and Shermfin Inc. also agreed that, for so long as Shermfin
Corp. owns 10% or more of the outstanding Common Stock of the Company, Shermfin
Corp. will be entitled to designate one person to serve as a member of the
Company's Board of Directors. Shermfin Corp. designated M.F. Florence to serve
on the Board.

  NION Laboratories, which was a subsidiary of Shermfin Inc. until June 1995,
has been a key supplier to the Company of nutritional supplements and other
consumer-related products. The Company purchased from NION approximately
$494,000 of goods during the fiscal year ended September 30, 1998. No goods were
purchased during the fiscal years ended September 30, 1999 and 2000. Richard S.
Kashenberg, a director of the Company until October 1999, served as the chief
executive officer of NION until December 31, 1996 and as a consultant to NION
through October 31, 1997. The Company believes that the terms it has obtained
from NION are at least as favorable as could have been obtained from third
parties.

  During 1998, 1999 and 2000, respectively, the NFLI purchased approximately
41,000, 32,000 and 30,000 copies of a book, "Making A Difference While 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 NFLI of $5.00 per book. New
Paradigm Publishing, a company established by J. Mark Bertrand, published the
book and subsequently sold it to NFLI. NFLI sold approximately 19,000, 10,000
and 3,000 copies of the book during 2000, 1999 and 1998, at an average selling
price of approximately $10.95 per copy. The book has been placed in NFLI's
product catalog at per copy prices ranging

                                      34
<PAGE>

from $8.95 to $12.95, based upon quantity ordered, and in 1999 approximately
35,000 of the books were part of the materials provided to new distributors in
NFLI's starter kits. Additionally, in 1998, approximately 19,000 copies of the
book were shipped to distributors as part of the NFLI's Business Training
Systems for that month. New Paradigm Publishing has agreed to accept return of
any books ordered, but not sold by NFLI and to refund to NFLI $5.00 per returned
copy. To date no books have been returned for refund. As of September 30, 2000
and 1999, $105,000 and $0, respectively, were owed by NFLI to New Paradigm
Publishing.

  On November 17, 1999 the Company finalized the acquisitions of Bactolac
Pharmaceutical Inc. ("Bactolac") and Advanced Nutraceuticals, Inc., a Delaware
corporation ("Old - ANI"). Old - ANI was a holding company formed to pursue a
consolidation and integration program in the nutrition industry. Former Old -
ANI stockholders received an aggregate of 75,000 shares of a newly created
Series A Preferred Stock of the Company, which was converted into 750,000 shares
of the Company's common stock upon approval by the Company's stockholders at the
Company's Annual Meeting held June 6, 2000. Gregory Pusey, an officer, director
and principal stockholder of Old ANI subsequently became President and Chairman
of the Board of Directors of the Company.

  The stock of Bactolac was acquired from Dr. Reddy, who subsequently became a
director of the Company. The purchase price of Bactolac consisted of $2,500,000
in cash, a subordinated promissory note in the principal amount of $2,500,000
and 96,831 shares of Series A Preferred Stock, which were converted into 968,310
shares of the Company's common stock upon approval by the Company's stockholders
at the Company's Annual Meeting held June 6, 2000. Additionally, up to 176,060
shares of common stock may be issued pursuant to an earn out agreement.

  On December 1, 1999, the Company finalized the acquisition of Ash Corp. which
currently operates as a division of Bactolac under the name of ASHCO. The
purchase price of ASH consisted of $750,000 in cash, a subordinated promissory
note payable in the principal amount of $500,000 and 49,296 shares of Series A
Preferred Stock, which were converted into 492,960 shares of the Company's
common stock upon approval by the Company's stockholders at the Company's Annual
Meeting held June 6, 2000. Additionally, up to 1,056,340 shares of common stock
may be issued pursuant to an earn out agreement. Neil Sirkin and his father,
Allan Sirkin, were offcers, directors and principal stockholders of Ash.  Neil
Sirkin subsequently became a director of the Company.


  In connection with the acquisitions of Old ANI, Bactolac and Ash employment
agreements were made with Messrs. Loder, Pusey, Reddy and Sirkin which are
described in Item 11.

  Bactolac, headquartered in Hauppauge, New York, conducts its operations in a
leased facility comprising approximately 25,000 square feet. Bactolac's current
monthly rental is approximately $27,000, of which $6,000 pertains to improvement
made by an entity owned by Dr. Reddy, that escalates over the 5 year term
remaining on the lease. Bactolac has two five year renewal options and a
purchase option on the facility.

                                      35
<PAGE>

                                    PART IV

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

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

(3)             Exhibits

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

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

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

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

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

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

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

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

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

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

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

Exhibit 4.2     Specimen Warrant*

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

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

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

<PAGE>

Exhibit 10.2      1995 Stock Option Plan, as amended***

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

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

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

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

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

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

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 filed on August 21, 1998, 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. filed as
                  an Exhibit to the Report on Form 10-K for the fiscal year
                  ended September 30, 1998, which Exhibit is incorporated herein
                  by this reference.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          Exhibit 10.54   Stock Purchase Agreement, dated December 29, 2000,
                          among Advanced Nutraceuticals, Inc., Everest
                          International, LLC and Nutrition For Life
                          International, Inc.***

          Exhibit 10.55   Waiver under Loan and Security Agreement involving
                          General Electric Capital Corporation, dated
                          January 10, 2001.***

          Exhibit 21      Subsidiaries of the Company.***

          Exhibit 23.1    Consent of BDO Seidman, LLP.

          Exhibit 23.2    Consent of Grant Thornton LLP.

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

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

 ***      These exhibits were previously filed as exhibits to the initial filing
          of this Report on Form 10-K and are incorporated herein by reference.

          (b)    Reports on Form 8-K

                 None.

          (c)    Exhibits

                 (a)(3)above

          (d)    Financial Statement Schedules

                 See Item 8 above.