<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                              REPORT ON FORM 10-KSB

     |X|  Annual Report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

     For the fiscal year ended November 30, 1996.

     |_|  Transition Report pursuant to Section 13 or 15(d) of The Securities
          Exchange Act of 1934

     For the transition period from ___________________ to ___________________.

Commission File No. 0-19121

                                  PDK LABS INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           New York                                         11-2590436
---------------------------------              ---------------------------------
(State of or other jurisdiction                (IRS Employer Identification No.)
of incorporation or organization)

145 Ricefield Lane
Hauppauge, New York                                            11788
---------------------                                        ----------
(Address of Principal                                        (Zip Code)
 Executive Officers)

Registrant's telephone number, including area code: (516) 273-2630

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

 Units consisting of One (1) share of Series A convertible Preferred Stock, one
        redeemable Class B Warrant and one (1) redeemable Class C Warrant
        -----------------------------------------------------------------
                                (Title of Class)

<PAGE>

         Series A convertible Preferred Stock, $.01 par value per share
         --------------------------------------------------------------

                                (Title of Class)

                           Redeemable Class B Warrant
                           --------------------------
                                (Title of Class)

                           Redeemable Class C Warrant
                           --------------------------
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 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 the Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10K-SB
or any amendment to this Form 10-KSB. [X]

     Issuer's revenues for its most recent fiscal year were $46,563,000.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock as of
February 21, 1997, was approximately $13,505,000.

Number of shares outstanding of the issuers common stock, as of February 21,
1997, was 3,191,986.

                   DOCUMENTS INCORPORATED BY REFERENCE: None.


                                       2

<PAGE>

                                     PART I

Item 1. BUSINESS.

General

     PDK Labs Inc. ("PDK" or "Company") manufactures and distributes
over-the-counter nonprescription pharmaceutical products and vitamins. The
Company's line of products primarily consists of nonprescription caffeine
products, pain relievers, decongestants, diet aids, and a broad line of
vitamins, nutritional supplements and cosmetics. The Company markets its
products through direct mail, regional distributors, and private label
manufacturing.

Products

     The Company markets its nonprescription products under its MaxAlert(TM),
HeadsUp(TM), Reach(TM), PDK(R), Compare Generiks, Inc.(R) , and Energex Plus
brand names. On October 31, 1995, the Company sold to Compare Generiks, Inc., an
unaffiliated third party, the Energex Plus and Compare Generiks(R) product
lines. The Company has retained the rights relating to the sale by direct mail
of the Compare Generiks(R) products. On October 16, 1995, the Company licensed
its MaxAlert(TM) and HeadsUp(TM) brand names to an unaffiliated third party.
(See Item 12. Certain Relationships and Related Transactions.) The Company's
nonprescription pharmaceutical products contain active ingredients which are
identical to those contained in nonprescription products sold under national and
regional brand names, private label brands, local or regional products, and
products sold by other national and regional direct mail marketers. For
instance, the Company's acetaminophen tablets and capsules are similar to
Tylenol(R); its sleeping aids are similar to Sominex 2(R); the Company's
antihistamine tablets are similar to Benadryl ; its antihistamine-decongestant
products are similar to Actifed(R) and Sudafed(R); and its caffeine based
tablets are similar to Vivarin(R) and NO-DOZ(R).

     The Company also sells products to its majority owned subsidiary,
Futurebiotics, Inc. ("Futurebiotics"). Futurebiotics' primary product line
consists of more than 125 items, including multi-vitamin/mineral formulas, green
superfood powders, herbal/mineral tonics and herbal complexes, and specific
specialty supplements. All of Futurebiotics' products are supplied by the
Company. Futurebiotics currently sells products in 32 international markets,
including South America, Central Europe, Hong Kong, Malaysia, Japan, and
Scandinavia.

     The Company only sells over-the-counter products, which have been proven to
be generally recognized to be safe and effective for the intended uses. Proposed
rules by the Food and Drug Administration have established, after an expanded
review of all over-the counter


                                       3

<PAGE>


products, those over-the-counter drugs that will be generally recognized as safe
and effective and non-misbranded. See "Business - Government Regulations."

     The Company was incorporated under the laws of the State of New York on
July 6, 1982.

Marketing

     The Company markets its products to customers through direct salespersons
and manufacturers representatives. Approximately 27.3% of the Company's total
revenue for the fiscal year ended November 30, 1996 was from sales by its
Futurebiotics, Inc. subsidiary. Private label sales accounted for 61.7% of the
Company's total revenue for the fiscal year ended November 30, 1996. The Company
sells a complete mail order line of over-the-counter pharmaceutical products
under its Compare Generiks brand name.

     On October 16, 1995, the Company entered into an Exclusive Supply and
Licensing Agreement with a non-affiliated customer pursuant to which the Company
agreed to supply the customer with all of its requirements for vitamins,
non-prescription pharmaceutical products and health and fitness products
manufactured in tablet, capsule, caplet, liquid or equivalent form commencing on
the date of the agreement. The term of the agreement is for five years,
renewable for successive one year periods thereafter. Sales to this customer
accounted for 54.7% of total revenue for the fiscal year ended November 30,
1996.

     In addition, the Company granted the same customer an exclusive license to
use the trademarks "MaxAlert" and "Heads Up", and its trademarks for its ginseng
products, and the exclusive right to distribute products bearing such names,
using the components listed in the agreement. The Company recognized license
fees of $500,000 for the fiscal year ended November 30, 1996 in connection with
this agreement.

     The Company markets its various over-the-counter and vitamin products under
various brand names to various stores including drug store chains, health food
stores, health food store wholesalers, convenience stores, and other retailers.

     On July 24, 1995, the Company sold a customer list, trademarks, and
inventory related to its mail order vitamin line of products. The Company is no
longer engaged in the marketing of its vitamin product through mail order.

Manufacturing

     The Company's manufacturing facility is located in Hauppauge, New York.
Approximately 85% to 90% of the sales volume of the Company's products are
manufactured and/or packaged by the Company. Manufacturing and packaging
equipment has been dramatically increased in fiscal 1996. The Company believes
that the expanded capacity of its manufacturing facility is adequate to meet the
requirements of its current and future business.


                                       4


<PAGE>

     The Company's manufacturing process is specifically designed to insure the
strictest quality control. All raw materials used in production are initially
held in quarantine. Prior to being placed into production, the manufacturers
certificate of analysis is compared with an assay performed by the Company in
its own in-house laboratory. The Company's FDA approved laboratory continues its
testing to insure quality control throughout the manufacturing and packaging
process.

     The manufacture of all of the Company's products is subject to current Good
Manufacturing Practices prescribed by the FDA and by the Company's own quality
control procedures. See "Business - Government Regulation" below. The Company
uses tamper resistant caps on all of its over-the-counter products with an inner
seal that indicates whether the container has been opened prior to sale. In
addition, the Company seal wraps each container for added protection.

     The Company's manufacturing facility contains equipment which in one
operation can produce the tablets, package the products, and label the
containers. The Company also has equipment for filling capsules and wrapping
each container with heat sealed plastic wrap.

Material Suppliers

     Substantially all of the Company's products are manufactured from readily
available raw material. In addition to manufacturing many of its own products,
the Company purchases finished goods from suppliers in the United States. The
Company has not encountered any significant difficulties in purchasing supplies
of principal raw material or finished goods. The Company believes that if any
source of a product's ingredients becomes unavailable, alternative sources of
supply are available at comparable prices and delivery schedules. In the event
the Company were unable to find such alternate sources at a competitive price
and on a timely basis for its principal products, the Company could be
materially adversely affected.

     On May 14, 1996, the Company entered into a supply agreement with Superior
Supplements, Inc., a Delaware corporation ("SSI"), pursuant to which SSI agreed
to supply the Company with vitamins and dietary supplements manufactured to the
Company's specifications in bulk tablet form for a three (3) year period,
renewable for successive one (1) year periods thereafter. The Company agreed to
purchase products at a price equal to 115% of SSI's material cost having a
minimum aggregate sales price of $2,500,000 per annum during the term of the
agreement and to pay liquidated damages of $100,000 to SSI (pro-rated based on
purchases) in the event the Company does not meet that minimum purchase
requirement. Prior to the full commencement of manufacturing operations, SSI is
operating as a wholesale supplier to the Company. All wholesale purchases made
by the Company are to offset the minimum aggregate sales per annum under the
Supply Agreement dated May 14, 1996. As of November 30, 1996, the Company made
purchases of approximately $1,796,000 under this agreement. The Company supplies
certain management and personnel to SSI and Reginald Spinello, the Company's
Executive Vice President, is also a director of SSI. Reginald Spinello and two
other directors of



                                       5
<PAGE>
SSI have more than fifty percent (50%) voting power of the common stock and the
preferred stock of the Company pursuant to a Voting Trust Agreement.

     Although raw materials are available from numerous sources, two suppliers
currently provide approximately 14% and 12% of the Company's purchases, and no
other supplier accounts for more than 10% of the Company's raw material
purchases.

Acquisitions/Disposals

     In January 1995, the Company sold 300,000 shares of common stock of
Futurebiotics for net proceeds of approximately $2,155,000.

     On March 1, 1995, PDK Labs Inc. acquired all assets and rights relating to
the "Energex Plus" product line ("Energex") from Nu-Tek Laboratories, Inc.
("Nu-Tek") pursuant to a sale of assets agreement (the "Nu-Tek Agreement"). The
Energex Assets included all of Nu-Tek's interest in its Energex business, all
customer lists, trademarks, tradenames, licenses, trade secrets, know-how, and
use of the name "Energex Plus." The aggregate consideration for this transaction
was $300,000.

     On July 24, 1995, the Company sold a customer list, trademarks, and
inventory related to a mail order vitamin line of products for approximately
$50,000. The Company recognized a loss of approximately $612,000 in connection
with this disposition.

     On October 31, 1995, all of the Energex Assets and the Compare Generiks
Assets were transferred from PDK to Compare Generiks, Inc. ("CGI") for a
purchase price of approximately $1,700,000. In exchange (i) PDK was issued
500,000 shares of CGI common stock, representing $1,200,000 of the purchase
price ($2.40 per share), (ii) CGI delivered to PDK a promissory note in the
aggregate principal amount of $500,000 together with interest at the rate of
eight percent (8%) per annum, payable to PDK on October 31, 1996, and (iii) CGI
agreed to purchase PDK's Energex Plus inventory at the cost specified in the
Supply Agreement (defined and referred to below). CGI agreed to assume certain
liabilities associated with the Energex Assets. Since October 31, 1995, CGI has
purchased all of its products and materials from PDK at PDK's cost, plus one
hundred (100%) percent, pursuant to a supply agreement between PDK and CGI (the
"Supply Agreement"). The term of the Supply Agreement is for a period of five
(5) years, automatically renewable for successive one (1) year terms.

     In January 1996, the $500,000 promissory note payable to PDK was converted
to 500,000 shares of Series B Preferred Stock. The Series B Preferred Stock
earns cumulative annual dividends of 12% or $.12 per share and is redeemable by
CGI after one year from the date of issuance.

     In March 1996, the Company sold 500,000 shares of common stock of CGI for
gross proceeds of $1,875,000.

     On December 30, 1996, Futurebiotics, Inc. effected a one-for-ten reverse
stock split with respect to its shares of common stock outstanding on December
30, 1996 and, accordingly, the


                                       6

<PAGE>

Company owns 700,000 shares of common stock of Futurebiotics, Inc. (post-reverse
split) and continues to own 8,335,000 shares of preferred stock of
Futurebiotics, Inc.

Product Liability

     The Company may potentially be exposed to product liability claims by
consumers. Such claims arise as the result of, among other things, the misuse of
a Company product or the tampering of a product. In an event, such as a
successful suit against the Company, insufficiency of insurance coverage or
inadequacy of indemnification, the results could have a material adverse effect
on the Company.

Competition

     The industry in which the Company is engaged is characterized by intense
competition. The Company competes against established pharmaceutical and
consumer product companies that currently market products which have identical
active ingredients or are equivalent or functionally similar to or in
competition with those the Company markets. Moreover, many of the Company's
competitors and their products have national and regional name brand
recognition. In addition, numerous companies are developing or may, in the
future, engage in the development of products competitive with the Company's
products. Examples of the many products which have achieved significant brand
name recognition which are competitive with the Company's products include
Tylenol(R), Advil(R) , Nuprin(R), Benadryl(R), Actifed(R), Sudafed(R), 
No-Doz(R), Vivarin(R), and Dexatrim(R). The Company believes it competes
effectively against its competitors on the basis of price and service.

Trademarks

     The Company owns numerous trademarks that have been registered with the
United States Patent and Trademark Office ("PTO"). To the Company's knowledge,
the Company has the common law right to use such service marks on its products
and in the marketing of its services. The Company has retained trademark counsel
and presently intends to make appropriate filings and registrations and take all
other actions necessary, to protect all of its intellectual property rights. The
Company views its trademarks and other proprietary rights as valuable assets and
believes they have significant value in the marketing of its products.

Government Regulation

     The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Food and Drug Administration ("FDA"), the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission, the United States Department of
Agriculture and the Environmental Protection Agency ("EPA"). These activities
may also be regulated by various agencies of the states and localities in which
the Company's products are sold and the Department of Health for the State



                                       7

<PAGE>

of New York monitors the facility used by the Company, checks for cleanliness,
audits the record keeping and observes the control and labeling. It is this
latter agency that issues the Company the license which allows the Company to
carry out its operations.

     Nutritional Supplements

     The FDA, in particular, regulates the manufacturing, advertising, labeling
and sales of those vitamin and mineral supplements which the FDA determines are
unapproved drugs or food additives rather than food supplements.

     Partially in response to the enactment of the Nutrition Labeling and
Education Act of 1990 (the "NLBA"), the FDA, in November 1991, issued proposed
regulations designed to amend its food labeling regulations, establish specific
regulations for the nutrition labeling of vitamins and mineral supplements,
establish up-to-date reference standards for nutrients and food components and
establish procedures of FDA approval of health claim messages. The legislation
required that final regulations be published by November 8, 1992. The proposed
regulations met with substantial opposition from a number of sources, including
the dietary supplement industry. Principally through the efforts of that
industry, the Dietary Supplement Act was passed in October 1992 which prohibited
the issuance of final regulations, as they applied to nutrition supplements,
until December 15, 1993 and, further, required that certain studies be conducted
in the interim concerning the manner in which supplements are regulated in this
country and in foreign countries.

     The FDA issued on June 18, 1993 proposed regulations and adopted on
December 30, 1993 final regulations concerning the nutrition labeling of and use
of health claims on dietary supplements. The regulations require, effective July
1, 1995, nutrition labeling on all dietary supplements and, effective July 5,
1994, prohibit the use of any health claim on a dietary supplement unless the
supplement is consumed as a food, its components have been demonstrated to be
safe, and the health claim is supported by significant scientific agreement and
approved by the FDA. Presently, the FDA has approved only the use of health
claims for calcium in connection with osteoporosis, dietary fat in connection
with cancer and folic acid in connection with certain birth defects.
Accordingly, most dietary supplements will be precluded from bearing most health
claims. The Company cannot determine at this time the effect of the new
regulations on its future operations although it believes they will not have a
material adverse effect.

     On June 18, 1993, the FDA published an Advance Notice of Proposed
Rulemaking ("ANPR") soliciting comments on the concept of the overall regulatory
strategy to assure the safety of vitamins, minerals, herbs, amino acids and
other supplements. This follows a study by an internal FDA committee of the
current regulatory framework for dietary supplements and an FDA commissioned
study by the Federation of American Societies for Experimental Biology ("FASEB")
on the safety of amino acids. Although the internal FDA report has not yet been

issued, agency representatives have indicated that it will include a
recommendation that certain manufactured amino acids be available by
prescription only. The FASEB report, published in


                                       8

<PAGE>


September 1992, concluded that there was insufficient research and information
on amino acids to allow them to assert that single or incomplete mixtures of
amino acids were safe and, therefore, recommended that further research be
conducted. The internal FDA report, issued in conjunction with the publication
of the ANPR, contains recommendations concerning the possible regulation of
dietary supplements by category including the regulation of single and
incomplete mixtures of amino acids either as drugs, "food additives" or
"generally recognized as safe" substances with potencies low enough to ensure
safety. The ANPR has requested input and comments from interested parties. Sales
by the Company of such products did not constitute more than 5% of the Company's
sales during 1994. Whether regulations will or will not be recommended and
adopted and, if adopted, on what dietary supplements, is presently unclear.
Implementation of ANPRs normally involves longer time periods than those cited
above in connection with the proposed NLEA regulations. The legislation
sponsored by the dietary supplement industry would impact the FDA's ability to
issue and implement any such regulations.

     The Company cannot determine what effect the proposed rule making referred
to above, or other 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 to meet new standards, require the
recall or discontinuance of certain products not capable of reformulation, or
impose additional record keeping, expanded or different labeling, and scientific
substantiation. Any or all of such requirements could adversely affect the
Company's operations and its financial conditions.

     Over-the-Counter Pharmaceuticals

     On December 17, 1993, Congress enacted the Domestic Chemical Diversion
Control Act ("DCDCA"). The DCDCA, which became effective April 16, 1994, amended
a provision of the Chemical Diversion and Trafficking Act of 1988, which
permitted drugs that were marketed or distributed lawfully in the United States
in accordance with the Federal Food, Drug, and Cosmetic Act ("FDCA") and which
contained a list chemical to be sold without the record keeping or reporting
otherwise required for transactions involving list chemicals in amounts over
specified quantitative thresholds.

     In terms of list chemicals contained in drugs marketed or distributed
lawfully in accordance with the FDCA, the DCDCA removed all the exemptions for
drug products which contain ephedrine as the only active medicinal ingredient,
or with only therapeutically insignificant quantities of another active
medicinal ingredient ("single-entity ephedrine"). The DCDCA also allows the
Attorney General to remove exemptions for other list chemicals contained in
drugs marketed or distributed lawfully in accordance with the FDCA, upon a

showing that such products are being diverted.

     On March 17, 1994, the Drug Enforcement Administration ("DEA") issued a
proposal to eliminate the threshold for bulk ephedrine and single-entity
ephedrine drug products, thereby requiring reporting and record keeping for all
transactions involving single-entity ephedrine


                                       9

<PAGE>

products in any amount. This regulation became effective in final form on
November 10, 1994.

     The Company has complied with the record keeping and reporting requirements
in the above mentioned regulations.

     On October 12, 1995, the DEA issued final regulations requiring all
companies engaged in transactions involving single-entity ephedrine drug
products to file an application for registration with the DEA on or before
November 13, 1995. Any Company which did not file for registration with the DEA
on or before the deadline can no longer import, export, manufacture, or
distribute single-entity ephedrine products. Companies which timely filed an
application may continue in transactions unless the DEA ultimately denies the
application, at which time the applicant would have the opportunity for a
hearing on the issue.

     Although the Company filed a timely application for registration with the
DEA for the manufacture and distribution of single-entity ephedrine, the Company
may not sell to customers who have not complied with the requirement to file. As
a result of the above, the Company has realized a significant decline in its
single-entity ephedrine customer base and has recognized an inventory write off
of approximately $2,374,000 on single-entity ephedrine products for the year
ending November 30, 1995.

     The Company believes that it is in compliance with all environmental
regulations affecting the Company.

Employees

     As of February 18, 1997, the Company employed 157 full-time persons,
including 16 persons in sales, marketing and related activities, 123 persons in
manufacturing and production and 18 persons in general administration and
finance. The Company has experienced no work stoppages and considers its
employee relations to be satisfactory. The Company's employees are not
represented by a labor union.

Item 2. PROPERTIES.

     The Company leases a 44,000 square foot facility in Hauppauge, New York.
This facility serves as the Company's corporate headquarters and
manufacturing/production center. The annual rent is $242,000 and increases up to
$286,000 in the final year. The current lease has four years remaining.


     In 1995, the Company leased a second property in Hauppauge, New York. This
30,000 square foot property serves as the Company's distribution center. This
lease is for a term of five years with an annual rental of $172,500.

     The Company also leases additional space in Hauppauge, New York on a
month-to-month basis which is being utilized for storage.


                                       10

<PAGE>

Item 3. LEGAL PROCEEDINGS.

     Except as set forth below, management is not aware of any material legal
proceeds pending against the Company.

     On February 4, 1994 the Company was named as a defendant in a litigation
entitled Hillary L. Dufficy v. PDK Labs Inc in the Superior Court of the State
of Connecticut, alleging a product liability claim pursuant to Section 52-572m
of the Connecticut General Statutes. The action seeks unspecified monetary
damages. The Company intends to vigorously defend the lawsuit and has referred
the action to its product liability insurer. See "Business - Product Liability."

     On July 29, 1996, the Company served a complaint (the "Complaint") against
a former executive. The Complaint alleges, in pertinent part, that the former
executive breached his employment agreement with PDK by competing with PDK and
soliciting PDK's customers in violation of the terms of the agreement. The
complaint further alleges that the executive has defaulted on payments due to
PDK pursuant to a promissory note and that while serving as an officer of PDK
made inappropriate investments for PDK's Profit Sharing Plan and Trusts. By
virtue of the foregoing, PDK alleges that the executive has breached his
Employment Agreement and the Amendment, engaged in unfair competition breached
the terms of the personal guarantee, defaulted upon the promissory note,
converted funds belonging to PDK and breached his fiduciary duty to the Company.

     In his Answer and Counterclaim (the "Counterclaim"), the executive offers
general denials of these allegations and interposes both personal counterclaims
and claims. The executive's counterclaims, assert in pertinent part, that the
company and certain officers and directors have breached their fiduciary duty to
him and that the Restrictive Covenant and agreement is unenforceable and should
be deemed a nullity. PDK and the directors deny that they engaged in any
improper conduct which would support the executive's counterclaims. Each intends
to vigorously defend against such claims and PDK intends to proceed with its
action against the executive.

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

     No matters were submitted to the Company's shareholders for vote during the
last quarter of its fiscal year.


                                       11

<PAGE>

                                    PART II

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

     The Company's securities commenced trading in the over-the-counter market
on the effectiveness of the Company's Initial Public Offering on May 8, 1990 in
the form of Units each consisting of one (1) share of Common Stock and one (1)
Old Warrant. Effective July 12, 1990 the Common Stock and Old Warrant component
parts of the Units were separated and began trading under the symbols PDKL and
PDKLW. The Common Stock is regularly quoted and traded on the NASDAQ system.
Since November 8, 1995, the Old Warrants are not quoted or traded on the NASDAQ
system.

     On April 14, 1992 the Company Units each consisting of one (1) share of
Preferred Stock, one (1) Class B warrant and one (1) Class C Warrant commenced
trading on the NASDAQ System as Units and separately under the symbols PDKLP,
PDKLZ and PDKLM.

     The Company invested $335,575 in its own stock in fiscal 1996, repurchasing
73,500 shares at an average price of $4.57. In addition, the Company repurchased
47,000 shares at an average price of $6.05 between December 1, 1996 and February
21, 1997. As of February 21, 1997, the Company had authorization to repurchase
an additional $380,000 worth of its own stock.

     The following table indicates the high and low bid prices for the Company's
Common Stock, Preferred Stock, Old Warrants, Class B Warrants and Class C
Warrants for the period up to November 30, 1996 based upon information supplied
by the NASDAQ system. Prices represent quotations between dealers without
adjustments for retail markups, markdowns or commissions, and may not represent
actual transactions. All of the prices have been adjusted to reflect the
Company's 1 for 10 reverse stock split which became effective in the Third
Quarter of 1995.

Common Stock
------------
                  1994 Calendar Year
                  ------------------

                  First Quarter                       11 1/4     9 1/16

                  Second Quarter                      16 1/4     10

                  Third Quarter                       18 3/4     10

                  Fourth Quarter                      13 3/4     9 3/8


                                       12

<PAGE>

                  1995 Calendar Year

                  ------------------

                  First Quarter                        7 1/2    5

                  Second Quarter                       6 9/16   3 3/4

                  Third Quarter                        6 9/16   3 3/4

                  Fourth Quarter                       5 1/8    2 3/8

                  1996 Calendar Year
                  ------------------

                  First Quarter                        4 3/4    3 1/2

                  Second Quarter                       3 7/8    3 1/8

                  Third Quarter                        4 7/8    3 1/4

                  Fourth Quarter                       6 3/8    3 7/8

Preferred Stock
---------------

                  1994 Calendar Year
                  ------------------

                  First Quarter                        3 1/2    2 7/8

                  Second Quarter                       4 3/4    3 1/4

                  Third Quarter                        5 3/8    3 1/2

                  Fourth Quarter                       4        3 1/8

                  1995 Calendar Year
                  ------------------

                  First Quarter                        3 1/4    3 1/8

                  Second Quarter                       3 3/4    3 1/8

                  Third Quarter                        4        3 1/4

                  Fourth Quarter                       4 3/4    3 1/4


                                       13
<PAGE>

                  1996 Calendar Year
                  ------------------

                  First Quarter                        4 1/2    3 3/4

                  Second Quarter                       5 3/8    4

                  Third Quarter                        5        4

                  Fourth Quarter                       5 3/4    4 1/2

         Old Warrants
         ------------

                                                       Quoted Bid Price
                                                       ----------------
                                                       High     Low
                                                       ----     ---

                  1994 Calendar Year
                  ------------------

                  First Quarter                        1/8      1/8

                  Second Quarter                       1/8      1/8

                  Third Quarter                        1/8      1/8

                  Fourth Quarter                       1/8      1/8

                  1995 Calendar Year
                  ------------------

                  First Quarter                        1/18     1/8

                  Second Quarter                       1/8      1/32

                  Third Quarter                        DID NOT TRADE

                  Fourth Quarter                       DID NOT TRADE

         Class B Warrants
         ----------------

                  1994 Calendar Year
                  ------------------

                  First Quarter                        15/32    5/6

                  Second Quarter                       N/A      N/A


                                       14

<PAGE>

                  Third Quarter                        3/16     5/32

                  Fourth Quarter                       3/16     1/8


                  1995 Calendar Year
                  ------------------

                  First Quarter                        3/32     1/16

                  April                                1/16     1/32

                  Third Quarter                        DID NOT TRADE

                  Fourth Quarter                       DID NOT TRADE


                  1996 Calendar Year
                  ------------------

                  First Quarter                        DID NOT TRADE

                  Second Quarter                       DID NOT TRADE

                  Third Quarter                        DID NOT TRADE

                  Fourth Quarter                       DID NOT TRADE

         Class C Warrants
         ----------------

                  1994 Calendar Year
                  ------------------

                  First Quarter                        1/4      3/16

                  Second Quarter                       1/4      1/8

                  Third Quarter                        3/32     1/16

                  Fourth Quarter                       DID NOT TRADE


                  1995 Calendar Year
                  ------------------

                  First Quarter                        1/16     1/16

                  Second Quarter                       1/16     1/32

                  Third Quarter                        3/32     1/32


                                       15

<PAGE>

                  Fourth Quarter                       1/32     1/32


                  1996 Calendar Year
                  ------------------

                  First Quarter                        DID NOT TRADE

                  Second Quarter                       DID NOT TRADE

                  Third Quarter                        DID NOT TRADE

                  Fourth Quarter                       DID NOT TRADE

     On February 21, 1997, the closing price of the Common Stock as reported on
the NASDAQ System was $6.625. On February 21, 1997, the closing price of the
Preferred Stock reported on the NASDAQ System was $5.75. On February 21, 1997,
there were 807 holders of record of Common Stock.

     On April 22, 1996, the Company paid $.25 per share of Preferred Stock
dividend to holders of record on April 16, 1996 payable in cash. On October 15,
1996, the Company paid $.24 per share of Preferred Stock dividend to holders of
record on October 11, 1996 payable in cash.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

Results of Operations

Fiscal Year 1996 compared to Fiscal Year 1995

     Net sales for fiscal year ended 1996 were approximately $46,563,000 as
compared to net sales in 1995 of $31,904,000. This represents a 46% increase
over sales in 1995. The increase is principally attributable to increased volume
in private label sales resulting from an exclusive supply and licensing
agreement with a major customer, continued expansion of advertising and
marketing efforts of the Futurebiotics product line, and the introduction of new
products.

     Gross profits amounted to $19,275,000 or 41% of sales in 1996 as compared
with $14,796,000 or 46% of sales in 1995. The decrease in the gross margin is
principally attributable to an increase in wholesale private label sales which
yield lower gross profit margins as well as competitive pricing.

     Selling, general and administrative expenses were $16,918,000 in 1996 and
$13,115,000 in 1995. As a percentage of sales, selling, general and
administrative expenses were 36% in 1996 and 41% in 1995. The overall decrease
as a percentage of sales is primarily attributable to the

                                       16
<PAGE>
Company having entered into an Exclusive Supply and License Agreement with a
major non-affiliated customer in October 1995. Under this agreement, the Company
supplies the customer with all of its requirements for vitamins,
non-prescription pharmaceutical products and health and fitness products
manufactured in tablet, capsule, caplet, liquid or equivalent form commencing on

the date of the agreement. The term of the agreement is for five years,
renewable for successive one year periods thereafter. Sales to this customer
accounted for 55% of total revenue for the fiscal year ended November 30, 1996.
As a result of this agreement, the Company manufactures and sells products under
this contract with minimal sales and marketing expenses. 

     On May 14, 1996, the Company entered into a supply agreement with Superior
Supplements, Inc. ("Superior"), pursuant to which Superior agreed to supply PDK
with vitamins and dietary supplements manufactured to PDK's specifications in
bulk tablet form for a three (3) year period, renewable for successive one (1)
year periods thereafter. PDK has agreed to pay a purchase price of 115% of
Superior's actual material expenses incurred in the manufacture of certain of
the products. PDK agreed to purchase products having a minimum aggregate sales
price of $2,500,000 per annum during the term of the agreement and to pay
liquidated damages of $100,000 to the Company in the event PDK does not meet the
minimum purchase requirement. As of November 30, 1996, PDK purchased
approximately $1,796,000 of product from Superior under this supply agreement.

     Interest expenses, net of interest income, was $490,000 in 1996, as
compared to $27,000 in 1995. The increase in interest expense in 1996 is a
result of greater borrowings to finance the purchase of additional machinery and
equipment, make necessary plant modifications, and meet working capital needs.

     The provision for income taxes reflects an effective tax rate of 41% in
1996 and 83% in 1995. The rate for 1996 was lower as a result of the Company
recognizing a tax benefit on its proportionate share of Futurebiotics' loss and
the effect of certain permanent differences.

     Management believes that inflation did not have a material effect on
operations or the financial condition in 1996 and 1995. Management also believes
that its business is not seasonal; however, significant promotional activities
have a direct impact on sales volume in any given quarter.

Fiscal Year 1995 compared to Fiscal Year 1994

     Net sales for fiscal year ended 1995 were approximately $31,904,000 as
compared to net sales in 1994 of $21,152,000. This represents a 51% increase
over sales for 1994. The increase is principally attributable to increased sales
volume resulting from continued expansion of advertising and marketing efforts,
increased wholesale sales, and the introduction of new products.

     Gross profits amounted to approximately $14,796,000 in 1995 compared with
$9,802,000 in 1994. Gross profit as a percentage of sales was 46% in 1995 and
1994.

     In December 1994, the Company entered into an "Amended Sales and Management
Agreement" with its subsidiary Futurebiotics, Inc. The Company manufactured
Futurebiotics entire product line at a price equal to PDK's cost and provided
certain administrative services on behalf of Futurebiotics.


                                       17



<PAGE>

     Selling, general and administrative expenses were $13,115,000 in 1995 and
$8,366,000 in 1994. As a percentage of sales, selling, general and
administrative expenses were 41% in 1995 and 40% in 1994. The increase is
attributable to expanded advertising and promotion of the Futurebiotics product
line, including increased cooperative advertising with large distributors and
greater attendance at trade shows.

     In October 1995, the Company entered into an agreement to transfer certain
assets, liabilities, and the on-going business of its Energex/Compare division
product lines to Compare Generiks, Inc. ("CGI"). The transfer consisted of
certain assets and rights relating to the "Energex Plus" and "Compare Generiks"
product lines, including customer lists, trade secrets, trademarks and trade
names, and the assumption of a $50,000 obligation under a promissory note.
Consideration consisted of 500,000 shares of CGI common stock (valued at
$1,200,000) and a $500,000 promissory note. CGI also agreed to pay the
obligation under royalty and commission agreements relating to the Energex
product lines. The Company realized a gain of approximately $1,170,000 on this
transaction.

     In addition, CGI entered a five year "Supply Agreement" with the Company
under which CGI will purchase all of its products from PDK at a price equal to
PDK's material cost plus 100%.

     In July 1995, the Company sold a customer list, trademarks, and inventory
related to a mail order vitamin line of products for approximately $50,000. The
Company is no longer engaged in the marketing of its vitamin products through
mail order. A loss of approximately $612,000 was recognized in connection with
this disposal.

     In October 1995 the Company entered into an exclusive supply and licensing
agreement with a non-affiliated company. Sales to this customer accounted for
17% of total revenue for the year ended November 30, 1996.

     On October 12, 1995, the Drug Enforcement Administration ("DEA") issued
final regulations requiring all companies engaged in transactions involving
single-entity ephedrine drug products to file an application for registration
with the DEA on or before November 13, 1995. Any company which did not file for
registration with the DEA on or before the deadline can no longer import,
export, manufacture, or distribute single-entity ephedrine products. Companies
which timely filed an application may continue in transactions unless DEA
ultimately denies the application, at which time the applicant would have the
opportunity for a hearing on the issue.

     Although the Company filed a timely application for registration with the
DEA for the manufacture and distribution of single-entity ephedrine, the Company
may not sell to customers


                                       18

<PAGE>

who have not complied with the requirement to file. As a result of the above,
the Company has realized a significant decline in its single-entity ephedrine
customer base and has recognized an inventory write off of approximately
$2,374,000 on single-entity ephedrine products. Sales of single-entity ephedrine
drug products were approximately $1,733,000 or 5% of total sales for fiscal year
end 1995 and $5,052,000 or 24% of total sales for fiscal year ended 1994. These
sales have been replaced by sales of other approved multiple ingredient over the
counter ephedrine drug products.

     Interest expenses, net of interest income, was $27,000 in 1995, as compared
to $309,000 in 1994. The decrease in interest expense in 1995 is a result of
greater investment balances in 1995.

     The provision for income taxes reflects an effective tax rate of 83% in
1995 and 46% for 1994. The rate for 1995 was higher as a result of the Company
recognizing a deferred tax liability on its proportionate share of
Futurebiotics' earnings and the effect of certain permanent differences.

     Management believes that inflation did not have material effect on
operations or the financial condition in 1995 and 1994. Management also believes
that its business is not seasonal; however, significant promotional activities
have a direct impact on sales volume in any given quarter.

Liquidity and Capital Resources

     The Company had working capital of approximately $31,855,000 and
$23,084,000 at the end of 1996 and 1995, respectively.

     The Company's statement of cash flows for 1996 reflects cash used in
operating activities of approximately $1,819,000. The use of cash is primarily
attributable to an increase in inventory ($10,025,000), accounts receivable
($1,688,000) and prepaid income taxes ($417,000), offset by a decrease in other
assets ($1,088,000) and an increase in accounts payable ($3,197,000). The change
in inventory, accounts receivable and accounts payable is a result of increased
sales and operations as well as anticipated future growth.

     Net cash used in investing activities approximated $839,000 representing
the purchase of property, plant and equipment ($2,440,000) and the acquisition
of intangible assets ($2,532,000), offset by net proceeds from PDK's sale of
500,000 shares of Compare Generiks, Inc. common stock ($1,775,000) and the sale
and maturity of government securities ($2,358,000).

     The statement also reflects net cash provided by financing activities of
approximately $4,615,000, representing bank borrowings net of repayments
($5,313,000), offset by payment of cash dividends ($362,000) and the purchase of
treasury stock ($336,000).

     The Company invested $335,575 in its own stock in fiscal 1996, repurchasing
73,500


                                       19


<PAGE>

shares at an average price of $4.57. In addition, the Company repurchased 47,000
shares at an average price of $6.05 between December 1, 1996 and February 21,
1997. As of February 21, 1997, the Company had authorization to repurchase an
additional $380,000 worth of its own stock.

     On March 28, 1996, the Company entered into a second term loan with its
bank. The term loan aggregating $1,500,000, is payable in 19 quarterly principal
installments of $75,000, plus interest at prime. Payments commenced on the last
business day of May 1996 and continue through February 2001 when the remaining
prinicpal amount is due. The proceeds of the loan were used to finance the
purchase of additional machinery and equipment.

     On September 15, 1996,the Company entered into a Revolving Credit Agreement
with its bank. The agreement provides for aggregate borrowings of up to
$15,000,000 with a sub-limit of $11,000,000 for the Company and $4,000,000 for
its subsidiary and expires September 1999. This agreement replaces the existing
revolving credit facility. Borrowings under this agreement bear interest at the
prime rate or 2% above the Eurodollar rate (at the Company's option) and are
collateralized by all of the Company's assets. The Company and its subsidiary
are jointly and severally liable for the unpaid balance of this credit line.

    The revolving line of credit and term loan agreements as amended, contain 
various covenants pertaining to the maintenance of certain financial ratio
restrictions, limitations on dividends and restrictions on borrowings. 

     On November 22, 1996, the Company entered into a term loan with its bank.
The term loan, aggregating $348,000, is payable in 60 monthly principal
installments of $5,800 plus interest at prime. Payments commenced January 1,
1997 and continue through December 2001 when the remaining principal amount is
due. The proceeds of the loan were used to finance machinery and equipment
purchases.

     The Company expects to meet its cash requirements from operations, current
cash reserves, and existing financial arrangements.

Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See financial statements following Item 13 of this Annual Report on Form
10-KSB.

Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE.

     None.

                                       20

<PAGE>

                                    PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.

     The following persons are the current executive officers and directors.

Name                            Age               Position
----                            ---               --------

Michael B. Krasnoff             42                Chairman of the Board,
                                                  President, Chief Executive
                                                  Officer, Chief Financial
                                                  Officer and Secretary

Stanley Krasnoff (1)            69                Director

Ira Helman                      65                Director

Hartley T. Bernstein            45                Director, Assistant Secretary

Robin Marks-Kaufman             43                Director

----------
(1) Stanley Krasnoff is the father of Michael Krasnoff.

     All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.

     Outside directors shall receive $10,000 per year as compensation for their
services. Directors who are also officers of the Company do not receive any
compensation for serving on the Board of Directors. All Directors are reimbursed
by the Company for any expenses incurred in attending Director's meetings.

Background of Executive Officers and Directors

     Michael B. Krasnoff has been the President, Chief Executive Officer and
Chief Financial Officer of the Company since July 31, 1991. Mr. Krasnoff had
been Executive Vice President of the Company since July 1989, and has been a
director since August 1, 1989. Mr. Krasnoff has been the Secretary of the
Company since April 1, 1990. Prior to joining the Company in 1988,


                                       21

<PAGE>

Mr. Krasnoff was an independent financial and marketing consultant to the
Company. From September 1982 to September 1988, Mr. Krasnoff was President and
Chairman of the Board of M-D Natural Vitamins, Inc., a company which was engaged

in the mail order and retail distribution of natural vitamins and food
supplements. Mr. Krasnoff received a B.A. degree from State University of New
York at Buffalo and an M.B.A. degree in Accounting and Finance from New York
University Graduate School of Business Administration. Mr. Krasnoff will
continue to devote substantially all of his business time to the Company.

     Stanley Krasnoff has served as a director of the Company since January
1991. He was a founder and Executive Vice President of Nature's Bounty, Inc.
from 1961 through 1982. Since 1982, Mr. Krasnoff has been a private investor.
Mr. Krasnoff is a graduate of the New York University School of Business
Administration. Mr. Krasnoff is the father of Michael Krasnoff, who is a
director of the Company and President, Chief Executive Officer and Secretary of
PDK.

     Ira Helman has served as a director of the Company since August 1989. For
the past 22 years, Mr. Helman has been an independent investor and financial
consultant as well as a breeder and owner of harness horses. Mr. Helman
currently serves as a financial consultant to National Raceline, Inc., a
corporation which provides race results information. From 1967 to 1970 Mr.
Helman was President and Chief Executive Officer of Cryplex Industries, Inc., a
publicly traded company which manufactured electronic components. Mr. Helman was
from 1957 to 1967 engaged in the practice of law in New York City specializing
in real estate and professional sports related matters. Mr. Helman received his
B.A. degree from Princeton University and his law degree from Brooklyn Law
School.

     Hartley T. Bernstein has been a Director since September 1991 and is a
member of the law firm of Bernstein & Wasserman specializing in corporate and
securities law. He was associated with the firm of Parker Chapin Flattau &
Klimpl from 1976-1977, served as an Assistant District Attorney for New York
County from 1977-1979 and was associated with the law firm of Guggenheimer &
Untermyer from 1979-1982. In 1982, Mr. Bernstein formed his own law practice
which subsequently merged with his present firm. Mr. Bernstein also serves as a
director of Futurebiotics, Inc. and Bev-Tyme, Inc. (formerly New Day Beverage,
Inc.). Mr. Bernstein is a member of the adjunct faculty of Yale Law School where
he teaches a course in corporate negotiations and has served previously on the
adjunct faculties of New York Law School and Mercy College. He is also an
instructor at the National Institute of Trial Advocacy and a member of the
Boards of Arbitration of the National Association of Securities Dealers and the
New York Stock Exchange. Mr. Bernstein serves as a commentator on securities law
matters on the nationally syndicated Business Radio Network and Money Radio. Mr.
Bernstein graduated from Columbia University with a B.A. and received his J.D.
from New York University School of Law.

     Ms. Marks-Kaufman is an assistant professor of psychology at Tufts
University. Ms. Marks-Kaufman has a degree in biology from Cornell University
and received her Ph.D. in psychology from Tufts University. She is on the
faculty at the Institute of Human Nutrition at


                                       22

<PAGE>


Columbia University where she conducted research on diet and metabolism, diet
selection, and drug addition. She has published numerous scientific articles,
and is co-editor of The Columbia University Encyclopedia of Nutrition.


                                       23

<PAGE>

Item 10.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                   Long Term Compensation
                                                                              --------------------------------
                                                Annual Compensation             Awards            Payouts
                                      -------------------------------------   ------------    ----------------
            (a)                (b)       (c)        (d)          (e)             (f)            (g)       (h)          (i)
                                                                              Restricted                          All
                                                            Other             Stock                     LTIP      Other
                                                            Annual            Awards          Options/  Payouts   Compensation
Name and Principal Position   Year    Salary($)   Bonus($)  Compensation($)   ($)             SARs(#)   ($)       ($)
----------------------------  ----    ---------   -------   ----------------  -------------   --------  -------   --------
<S>                           <C>     <C>         <C>         <C>             <C>              <C>      <C>        <C> 
Michael Krasnoff, CEO         1996    $400,000    $250,000    $200,000(1)     $   -0-          -0-      $  -0-     $  -0-
                              1995    $400,000    $250,000    $125,000(1)     $650,000(2)      -0-      $  -0-     $  -0-
                              1994    $300,000    $200,000    $445,000(1)     $   -0-          -0-      $  -0-     $  -0-

Reginald Spinello, V.P. of
Operations                    1996    $200,000(3) $150,000    $  -0-          $   -0-          -0-      $  -0-     $  -0-
                              1995    $200,000(3) $125,000    $75,000(1)      $325,000(5)      -0-      $  -0-     $  -0-
                              1994    $150,000(4) $ 75,000       -0-          $   -0-          -0-      $  -0-     $  -0-
</TABLE>

----------
(1) Represents reimbursements to pay taxes resulting from stock grants.
(2) Represents issuance of 400,000 shares in accordance with October 1995
    employment agreement. Shares were valued at $1.625 per share.
(3) Represents salary of $150,000 paid by the Company and $50,000 paid by its
    subsidiary.
(4) Represents salary of $100,000 paid by the Company and $50,000 paid by its
    subsidiary.
(5) Represents issuance of 200,000 shares in accordance with October 1995
    employment agreement. Shares were valued at $1.625 per share.


                                       24

<PAGE>

Employment Agreements


     On October 6, 1995, the Company entered into an amended employment
agreement with Michael Krasnoff, the Company's Chief Executive Officer, in
recognition of Mr. Krasnoff's leadership and services which have constituted a
major factor in the growth and development of the Company (the "Krasnoff
Agreement"). The Krasnoff Agreement provides for Mr. Krasnoff's employment by
the Company through December 31, 2005 at a minimum salary of $400,000 per year
with cost of living increases. The Krasnoff Agreement also provides for a
discretionary bonus as the Board of Directors may determine from time to time
and the issuance of 400,000 shares of the Company's Common Stock. The Krasnoff
Agreement also provides for the issuance to Mr. Krasnoff of options to purchase
250,000 shares of Common Stock at $2.63 per share. As of November 30, 1996, Mr.
Krasnoff owed the Company the sum of $627,000.00 pursuant to the loan provisions
of his employment agreement. The loan bears interest at the prime rate plus 1/2
of 1% per annum. In the event any sums are outstanding upon termination or
expiration of the employment agreement, such sums shall be automatically
converted to a five (5) year loan which shall be fully amortized over sixty (60)
months.

     On October 6, 1995, the Company entered into an amended employment
agreement with Reginald Spinello, the Company's Executive Vice President, which
provides for a minimum salary of $200,000 per year and the issuance of 200,000
shares of Common Stock (the "Spinello Agreement"). The agreement terminates in
October 2002. The Spinello Agreement may be terminated by the Company, at its
sole discretion, on ninety days notice at any time after October 5, 1996.


                                       25

<PAGE>

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth certain information, as of February 21, 1997
with respect to the beneficial ownership of the outstanding Common Stock by (i)
any holder of more than five (5%) percent; (ii) each of the Company's officers
and directors; and (iii) the directors and officers of the Company as a group:

                                     AMOUNT AND
                                     NATURE OF
NAME AND ADDRESS                     BENEFICIAL             APPROXIMATE
OF BENEFICIAL OWNER                  OWNERSHIP              PERCENT OF CLASS (3)
-------------------                  ---------              --------------------

Perry D. Krape                          205,488                       6.8%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY  11788

Michael B. Krasnoff                     950,000 (1)                  31.2
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY  11788

Ira Helman                                 -0-                        -0-

c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY  11788

Hartley T. Bernstein, Esq.              100,000 (2)                   3.3
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY  11788

Stanley  K. Krasnoff                       -0-                        -0-
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY  11788

Robin Marks-Kaufman                        -0-                        -0-
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY  11788


                                       26

<PAGE>

Reginald Spinello                       200,000                       6.6
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788

Dune Holdings, Inc.                     200,000                       6.6
132 Dune Road
Westhampton Beach, NY 11978

All officers and directors as a
 group (5 persons)                    1,050,000 (3)                  34.5%

(1) Includes (i) 400,000 shares of common stock issued in accordance with the
    October 1995 Employment Agreement,(ii) 200,000 shares of common stock owned
    by Reginald Spinello, (iii) 200,000 shares of common stock owned by Dune
    Holdings, Inc., (iv) 50,000 shares of common stock owned by Karine
    Hollander and (v) 100,000 shares of Common Stock owned by Michael Lulkin.
    All of the Spinello, Dune, Hollander and Lulkin shares of common stock are
    subject to a ten (10) year voting trust held by the Company's Chief
    Executive Officer, Mr. Krasnoff.

(2) Includes 100,000 shares of common stock owned by Bernstein & Wasserman,
    LLP, a law firm which Mr. Bernstein is a partner.

(3) Includes shares beneficially owned by Michael Krasnoff, Ira Helman, Stanley
    Krasnoff, Reginald Spinello, Hartley Bernstein, and Robin Marks-Kaufman.
    Neither Hollander, Dune or Lulkin are officers or directors of the Company.


                                       27


<PAGE>

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     As of November 30, 1996, Mr. Krape owed the Company the sum of $61,000
pursuant to a promissory note dated as of May 1, 1994 (the "Krape Note"). The
Krape Note bears interest at 9.0% per annum.

     As of November 30, 1996, Mr. Krasnoff owed the Company the sum of $627,000,
pursuant to the loan provisions in his Employment Agreement. The Loan bears
interest at the prime rate plus 1/2 of 1% per annum. In the event any sums are
outstanding upon termination or expiration of the employment agreement, such
sums shall be automatically converted to a five (5) year loan which shall be
fully amortized over sixty (60) months.

     In October 1995, the Company entered into a two (2) year consulting
agreement with Bernstein & Wasserman for legal services. As consideration for
the agreement, the Company paid BW 100,000 shares of its restricted common
stock.

     In January 1995, the Company sold 3,000,000 common shares (pre-reverse
stock split) of Futurebiotics to a non-affiliated third party for gross proceeds
of $2,250,000. After the sale, the Company owns 7,000,000 shares (pre-reverse
stock split) of Common Stock of Futurebiotics, Inc. representing 51.9% of the
outstanding shares of Futurebiotics. The Company owns 8,335,000 shares of
Preferred Stock of Futurebiotics representing 100% of the outstanding Preferred
Stock. Each share of Preferred Stock has one vote.

     On November 7, 1995, the Company completed a binding Exclusive Supply and
Licensing Agreement with Body Dynamics, Inc. ("BDI") pursuant to which the
Company agreed to supply BDI with all of its requirements for vitamins,
non-prescription pharmaceutical products and health and fitness products
manufactured in tablet, capsule, caplet, liquid or equivalent form commencing on
the date of the agreement. The term of the agreement is for five (5) years,
renewable for successive one (1) year periods thereafter. In addition, the
Company granted BDI an exclusive license to use the trademarks "Max Alert" and
"Heads Up", and its trademarks for its ginseng products, and the exclusive right
to distribute products bearing such names, using the components listed in the
agreement.

     On July 24, 1995, the Company sold a customer list, trademarks, and
inventory related to a mail order vitamin line of products for approximately
$50,000. The Company recognized a loss of approximately $612,000 in connection
with this disposition.

     In October 1995, the Company signed a consulting agreement with Dune
Holdings, Inc. in consideration for the issuance of 200,000 shares of Common
Stock.

Miscellaneous

     For the year ended November 30, 1996, legal fees of approximately $129,000
were incurred for services from the law firm of Bernstein and Wasserman, LLP.

For the year ended November 30, 1995, legal fees of approximately $178,000 were
incurred for services from the


                                       28

<PAGE>

same firm. The Company also issued 300,000 shares of its Common Stock
(pre-reverse stock split) to the law firm in January 1994, and 100,000 shares of
its Common Stock in October 1995, in consideration for legal services. Hartley
T. Bernstein, a partner in the firm, is a Director of the Company hereunder.

     In October 1995, the Company entered into a five (5) year employment
agreement with Mr. Lulkin which provides for Mr. Lulkin to act as Vice
President-Legal. The agreement provides for Mr. Lulkin to be paid a minimum
salary of $100,000 per annum and for Mr. Lulkin to receive 100,000 shares of the
Company's Common Stock.

General

     The Company believes that material affiliated transactions and loans
between the Company and its directors, officers, principal shareholders or any
affiliates thereof have been and will be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.


                                       29

<PAGE>

                                     PART IV

Item 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements.

     The following financial statements are included in Part II, Item 8:

Index to Financial Statements and Schedules                           F-1
                                                                      
Report of Independent Certified Public Accountants                    F-2
                                                                      
Balance sheets as of November 30, 1996                                F-3
                                                                      
Statements of operations for the years ended                          
  November 30, 1996 and 1995                                          F-4
                                                                      
Statements of stockholders' equity for the years                      
  ended November 30, 1996 and 1995                                    F-5
                                                                      
Statements of cash flows for the years ended                          
  November 30, 1996 and 1995                                          F-6
                                                                      
Notes to financial statements                                         F-7 - F-16
                                                                      

                                       30

<PAGE>

(a)(3) Exhibits.

   *3.1     Restated Certificate of Incorporation

   *3.2     Amended and Restated By-Laws of Registrant

   *4.1     Warrant Agreement

 **10.1     Stock Option Plan and form of Stock Option Agreement

 **10.2     Employment Agreement with Perry D. Krape dated August 1, 1989

 **10.3     Employment Agreement with Michael B. Krasnoff dated August 1, 1989

 **10.4     Term Loan Agreement between Manufacturers Hanover Trust Company
            ("Bank") and the Company

 **10.5     Mortgage between the Bank and the Company

 **10.6     Securities Agreement and promissory notes between the Bank,
            Registrant and Perry Krape in connection with a $500,000 loan from
            Bank


 **10.7     Consulting Agreement between the Company and LIDCO

 **10.14    Promissory Note between Perry Krape and the Company.

 **10.15    Letter Agreements between the Company and Perry Krape.

 **10.16    Profit Sharing Plan

 **10.19    Form of Financial Consulting Agreement between Hibbard Brown & Co.,
            Inc. and the Company

  +10.21    Unsigned purchase agreement dated of November 8, 1990 by and among
            the Company, Sturdee Health Products, Inc. and Sturdee Company, with
            all exhibits thereto

  +10.22    Unsigned purchase agreement dated as of November 8, 1990 by and
            between the Company, and Bi Organic Brands, Inc., with all exhibits
            thereto

  +10.23    Agreement dated as of November 5, 1990 by and among the Company, and
            Sturdee Health Products, Inc. and Sturdee Company, Bi Organic
            Brands, Inc.

  *10.24    Conformed, execution copy of Asset Purchase Agreement dated as of
            October 1, 1990 by and among Reach Pharmaceuticals, the Company and
            Robert A. Hardin.


                                       31

<PAGE>

  *10.25    Conformed, execution copy of Employment Agreement dated as of
            October 1, 1990 by and between the Company and Robert A. Hardin

  *10.26    Conformed, execution copy of Voting Trust Agreement dated as of
            October 1, 1990 by and among Robert A. Hardin, the Company and Perry
            D. Krape.

  *10.27    Conformed, execution copy of Escrow Agreement dated as of October 1,
            1990 by and among Robert A. Hardin, the Company and Grant,
            Konvalinka & Grubbs.

 ++10.28    Asset Purchase Agreement among the Company, Silver Streak Vitamin
            List Company, Inc. and Arthur Fishbein dated February 25, 1991.

 ++10.29    Consulting Agreement between the Company and KAM Group, Inc. dated
            February 15, 1991.

 ++10.30    Amendment Agreement dated February 7, 1991 to employment agreement
            between Michael B. Krasnoff and the Company.

+++10.31    Michael Krasnoff's Employment Agreement dated as of December 1,

            1991.

+++10.32    Perry Krape's Amendment to Employment Agreement dated as of July 31,
            1991.

***10.33    Amendment dated as of March 6, 1992 to Consulting Agreement between
            Reginald Spinello and the Company

***10.34    Amendment date March 11, 1992 to Consulting Agreement between KAM
            Group, Inc. and the Company

***10.35    Asset Purchase Agreement dated as of March 12, 1992 between Gannon
            Lists, Inc. and the Company.

  *10.36    Revolving Credit Agreement by and between PDK Labs, Inc. and
            Manufacturers Hanover Trust Company dated as of February 25, 1992.

 #10.37     Term Loan Agreement by and between PDK Labs Inc. and Manufacturers
            Hanover Trust Company dated as of November 30, 1992.

 #10.38     Promissory Notes and Security Agreement by and between PDK Labs Inc.
            and Coast to Coast Generics, Inc. dated November 30, 1992.

##10.39     Asset Purchase Agreement by and among Futurebiotics, the Company and
            Donald Zinman dated December 16, 1992.

##10.40     Consulting Agreement by and between Donald Zinman and the Company
            dated December 16, 1992.


                                       32

<PAGE>

##10.41     Non-Competition Agreement by and between the Company and Donald
            Zinman dated December 16, 1992.

##10.42     Amendment to Consulting Agreement dated December 16, 1992 by and
            between Donald Zinman and the Company dated January 12, 1994.

##10.43     Voting Trust Agreement by and among Donald Zinman, Michael Krasnoff
            and the Company dated as of January 12, 1994.

##10.44     Stock Option Agreement by and between Donald Zinman and the Company
            dated January 12, 1994.

##10.45     Promissory note from Donald Zinman to the Company dated January 1,
            1994.

##10.46     Employment Agreement with Michael Krasnoff dated as of October 18,
            1993.

##10.47     Employment Agreement with Reginald Spinello dated as of October 18,
            1993.


##10.48     Amendment of Consulting Agreement by and between K.A.M. Group, Inc.
            and the Company dated January 19, 1994.

###10.49    Sales and Management Agreement by and between the Company and
            Futurebiotics dated April 14, 1994.

###10.50    Amendment of Sales and Management Agreement by and between the
            Company and Futurebiotics dated December 8, 1994.

###10.51    Consulting Agreement by and between the Company and Carico, Inc.
            dated April 4, 1994.

####10.52   Supply and Licensing Agreement with Body Dynamics, Inc. dated
            October 16, 1995.

####10.53   Asset Purchase Agreement with Compare Generiks, Inc. dated October
            31, 1995.

####10.54   Supply Agreement with Compare Generiks, Inc. dated October 31, 1995.

                                       33
<PAGE>
10.55       Third Amendment to Revolving Credit Agreement by and between PDK
            Labs Inc. and Chemical Bank dated as of July 6, 1995.

10.56       Term Loan Agreement by and between PDK Labs Inc. and Chemical Bank
            dated as of March 28, 1996.

10.57       Supply Agreement with Superior Supplements, Inc. dated May 14,
            1996.

10.58       Revolving Credit Agreement by and among PDK Labs Inc.,
            Futurebiotics, Inc., PDI Labs Inc. and The Chase Manhattan Bank
            dated September 25, 1996.

10.59       First Amendment and Waiver to Revolving Credit Agreement between PDK
            Labs Inc., Futurebiotics, Inc., PDI Labs Inc., and The Chase 
            Manhattan Bank dated February 26, 1997.

----------
*     Incorporated by Reference to the Company's Registration Statement on
      Form S-1, No. 33-46454

**    Incorporated by Reference to the Company's Registration Statement on
      Form S-18, No. 22-31006 NY.

+     Incorporated by Reference to the Company's Report on Form 8-K dated
      November 14, 1990.

++    Incorporated by Reference to the Company's Registration Statement on
      Form S-1, No. 33-39250

+++   Incorporated by Reference to the Company's Form 10-K for the year

      ended November 30, 1991

#     Incorporated by Reference to the Company's Form 10-KSB for the year
      ended November 30, 1992.

##    Incorporated by Reference to the Company's Form 10-KSB for the year
      ended November 30, 1993.

###   Incorporated by Reference to the Company's Form 10-KSB for the year
      ended November 30, 1994.

####  Incorporated by Reference to the Company's Form 10-KSB for the year
      ended November 30, 1995.

(B) Reports on Form 8-K.

     None.


                                       34

<PAGE>

                             FINANCIAL STATEMENTS



Index to Financial Statements and Schedules                           F-1

Report of Independent Certified Public Accountants                    F-2

Balance sheets as of November 30, 1996                                F-3

Statements of operations for the years ended
  November 30, 1996 and 1995                                          F-4

Statements of stockholders' equity for the years
  ended November 30, 1996 and 1995                                    F-5

Statements of cash flows for the years ended
  November 30, 1996 and 1995                                          F-6

Notes to financial statements                                         F-7 - F-16


                                      F-1


<PAGE>

                          Independent Auditors' Report

Board of Directors and Stockholders
PDK Labs Inc. and Subsidiary
Hauppauge, New York

We have audited the consolidated balance sheet of PDK Labs Inc. and Subsidiary
as of November 30, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended November 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PDK Labs Inc. and Subsidiary as
of November 30, 1996 and the results of its operations and its cash flows for
each of the two years in the period ended November 30, 1996, in conformity with
generally accepted accounting principles.

                                                     HOLTZ RUBENSTEIN & CO., LLP

Melville, New York
February 7, 1997

                                       F-2


<PAGE>

                          PDK LABS INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET

                                NOVEMBER 30, 1996

<TABLE>
<S>                                                                                           <C>
         ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                                                      $    2,885,517
   Investment in marketable securities, at fair value                                                  3,463,596
   Accounts receivable - less allowance for doubtful accounts of $42,000                               8,015,159
   Inventories (Note 4)                                                                               23,272,516
   Prepaid income taxes (Note 10)                                                                        416,685
   Prepaid expenses and other current assets                                                           1,043,313
   Deferred income tax asset (Note 10)                                                                   383,211
                                                                                                  --------------
     Total current assets                                                                             39,479,997

INVESTMENT IN MARKETABLE SECURITIES                                                                    1,650,512
PROPERTY, PLANT AND EQUIPMENT, net (Notes 5 and 8)                                                     5,132,548
INTANGIBLE ASSETS, net (Note 6)                                                                        3,552,696
INVESTMENT IN COMPARE GENERIKS (Note 15)                                                                 500,000
OTHER ASSETS (Note 7)                                                                                  2,938,755
                                                                                                  --------------

                                                                                                  $   53,254,508
                                                                                                  ==============

     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                                                          $    5,750,701
   Dividends payable (Note 9)                                                                             45,223
   Income taxes payable (Note 10)                                                                        500,611
   Current portion of long-term debt (Note 8)                                                          1,328,509
                                                                                                  --------------
     Total current liabilities                                                                         7,625,044

LONG-TERM DEBT (Note 8)                                                                               13,602,768
                                                                                                  --------------
DEFERRED INCOME TAX LIABILITY (Note 10)                                                                1,251,117
                                                                                                  --------------
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY                                                            4,114,371
                                                                                                  --------------

COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)

STOCKHOLDERS' EQUITY:  (Notes 9 and 12)
   Common stock, $.01 par value; authorized 30,000,000 shares;

     3,191,986 issued and outstanding                                                                     31,919
   Preferred stock, $.01 par value; authorized 5,000,000 shares;
     739,555 issued and outstanding                                                                        7,396
   Additional paid-in capital                                                                         27,754,634
   Unearned compensation                                                                              (4,939,907)
   Retained earnings                                                                                   4,442,741
   Treasury stock, at cost; 103,500 shares                                                              (635,575)
                                                                                                  --------------
                                                                                                      26,661,208
                                                                                                  --------------

                                                                                                  $   53,254,508
                                                                                                  ==============
</TABLE>

                 See notes to consolidated financial statements

                                       F-3


<PAGE>

                          PDK LABS INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                        Years Ended
                                                                                        November 30,
                                                                            ------------------------------------
                                                                                 1996                  1995
                                                                            -------------         --------------
<S>                                                                         <C>                   <C>           
NET SALES (Notes 14 and 15)                                                 $   46,562,870        $   31,903,558
                                                                            --------------        --------------

COSTS AND EXPENSES: (Notes 5, 6, 11, 12 and 13)
   Cost of sales                                                                27,288,130            17,107,396
   Selling, general and administrative                                          16,918,362            13,114,980
                                                                            --------------        --------------
                                                                                44,206,492            30,222,376
                                                                            --------------        --------------

OPERATING INCOME                                                                 2,356,378             1,681,182
                                                                            --------------        --------------

OTHER EXPENSES (INCOME):
   Interest income                                                                (432,300)             (565,544)
   Interest expense                                                                922,464               592,773
   Gain on sale of subsidiary stock (Note 2)                                            -               (219,531)
   Other (Note 15)                                                                (624,954)            1,812,991
                                                                            --------------        --------------
                                                                                  (134,790)            1,620,689
                                                                            --------------        --------------

EARNINGS BEFORE PROVISION FOR INCOME
   TAXES AND MINORITY INTEREST                                                   2,491,168                60,493

PROVISION FOR INCOME TAXES (Note 10)                                             1,018,000                50,000
                                                                            --------------        --------------

EARNINGS BEFORE MINORITY INTEREST                                                1,473,168                10,493

MINORITY INTEREST IN NET (LOSS)
   EARNINGS OF SUBSIDIARY                                                         (139,638)              190,594
                                                                            --------------        --------------

NET EARNINGS (LOSS)                                                         $    1,612,806        $     (180,101)
                                                                            ==============        ==============

EARNINGS (LOSS) PER SHARE (Note 9)                                                 $.40                 $(.24)
                                                                                   ====                 =====


WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING (Note 9)                                                   3,088,486             2,259,232
                                                                                 =========             =========
</TABLE>

                 See notes to consolidated financial statements

                                       F-4


<PAGE>

                                  PDK LABS INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                   Common Stock           Preferred Stock                   
                                                               ---------------------     ------------------      Paid-In    
                                                 Total         Shares        Amount      Shares      Amount      Capital    
                                               -----------     ---------     -------     -------    -------    -----------  
<S>                                            <C>             <C>          <C>          <C>       <C>        <C>           
BALANCE AT NOVEMBER 30, 1994                   $22,440,061     2,105,359    $ 21,054     739,555   $  7,396   $ 24,832,500  

ISSUANCE OF STOCK FOR SERVICES
   (Notes 9 and 12)                                     -      1,050,000      10,500          -          -       1,695,750  

AMORTIZATION OF UNEARNED
   COMPENSATION                                  1,319,335            -           -           -          -              -   

UNEARNED MANAGEMENT FEE FROM
   ISSUANCE OF SUBSIDIARY STOCK
   FOR SERVICES (Note 2)                         1,427,500            -           -           -          -       1,427,500  

AMORTIZATION OF UNEARNED
   MANAGEMENT FEE                                 (142,750)           -           -           -          -        (142,750) 

DIVIDENDS (Note 9)                                (177,513)       36,627         365          -          -         184,506  

ISSUANCE OF STOCK BY SUBSIDIARY
   TO MINORITY HOLDERS (Note 2)                   (249,580)           -           -           -          -        (249,580) 

NET (LOSS)                                        (180,101)           -           -           -          -          -       
                                               -----------     ---------     -------     -------    -------    -----------  

BALANCE AT NOVEMBER 30, 1995                    24,436,952     3,191,986      31,919     739,555      7,396     27,747,926  

AMORTIZATION OF UNEARNED
   COMPENSATION                                  1,302,699            -           -           -          -              -   

ACQUISITION OF TREASURY STOCK                     (335,575)           -           -           -          -              -   

AMORTIZATION OF UNEARNED
   MANAGEMENT FEE                                 (142,750)           -           -           -          -        (142,750) 

AMORTIZATION OF SUBSIDIARY

   UNEARNED MANAGEMENT FEE                         149,458            -           -           -          -         149,458  

DIVIDENDS (Note 9)                                (362,382)           -           -           -          -              -   

NET EARNINGS                                     1,612,806            -           -           -          -              -   
                                             -------------    ----------    --------   ---------   --------   ------------  


BALANCE AT NOVEMBER 30, 1996                 $  26,661,208     3,191,986    $ 31,919     739,555   $  7,396   $ 27,754,634  
                                             =============    ==========    ========   =========   ========   ============  
</TABLE>

<TABLE>
<CAPTION>

                                                                             Treasury Stock
                                              Unearned       Retained     ---------------------
                                             Compensation    Earnings      Shares       Amount
                                             ------------    ----------   --------    ---------
<S>                                          <C>            <C>             <C>      <C>        
BALANCE AT NOVEMBER 30, 1994                 $ (5,855,691)  $ 3,734,802     30,000   $ (300,000)

ISSUANCE OF STOCK FOR SERVICES
   (Notes 9 and 12)                            (1,706,250)           -          -            -

AMORTIZATION OF UNEARNED
   COMPENSATION                                 1,319,335            -          -            -

UNEARNED MANAGEMENT FEE FROM
   ISSUANCE OF SUBSIDIARY STOCK
   FOR SERVICES (Note 2)                               -             -          -            -

AMORTIZATION OF UNEARNED
   MANAGEMENT FEE                                      -             -          -            -

DIVIDENDS (Note 9)                                     -       (362,384)        -            -

ISSUANCE OF STOCK BY SUBSIDIARY
   TO MINORITY HOLDERS (Note 2)                        -             -          -            -

NET (LOSS)                                             -       (180,101)        -            -
                                              -----------    ----------   --------    ---------

BALANCE AT NOVEMBER 30, 1995                   (6,242,606)    3,192,317     30,000     (300,000)

AMORTIZATION OF UNEARNED
   COMPENSATION                                 1,302,699            -          -            -

ACQUISITION OF TREASURY STOCK                          -             -      73,500     (335,575)

AMORTIZATION OF UNEARNED
   MANAGEMENT FEE                                      -             -          -            -

AMORTIZATION OF SUBSIDIARY
   UNEARNED MANAGEMENT FEE                             -             -          -            -

DIVIDENDS (Note 9)                                     -       (362,382)        -            -

NET EARNINGS                                           -      1,612,806         -            -
                                             ------------   -----------   --------   ---------


BALANCE AT NOVEMBER 30, 1996                 $ (4,939,907)  $ 4,442,741    103,500   $ (635,575)
                                             ============   ===========   ========   ==========
</TABLE>

                 See notes to consolidated financial statements

                                       F-5


<PAGE>

                          PDK LABS INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                        Years Ended
                                                                                        November 30,
                                                                           -------------------------------------
                                                                                 1996                  1995
                                                                           ---------------        --------------
<S>                                                                        <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net earnings (loss)                                                     $     1,612,806        $     (180,101)
                                                                           ---------------        --------------
   Adjustments to reconcile net earnings (loss) to
     net cash used in operating activities:
       Depreciation and amortization                                             4,802,639             3,381,776
       Minority interest in (loss) earnings of subsidiary                         (139,638)              190,594
       Loss on regulatory action                                                        -              2,373,516
       Gain on sale on subsidiary stock                                                 -               (219,531)
       Gain on sale of investment in Compare Generiks                             (574,954)                   -
       Gain on sale of assets                                                           -               (560,525)
       Deferred income tax (benefit)                                               (91,000)              (77,637)
       Changes in operating assets and liabilities:
         (Increase) decrease in assets:
           Accounts receivable                                                  (1,687,794)           (1,453,086)
           Inventories                                                         (10,025,371)           (7,187,396)
           Prepaid income taxes                                                   (416,971)                   -
           Prepaid expenses and other current assets                                33,061              (388,512)
           Other assets                                                          1,088,611              (738,490)
         Increase (decrease) in liabilities:
           Accounts payable and accrued expenses                                 3,196,539               801,001
           Income taxes payable                                                    382,792              (240,978)
                                                                           ---------------        --------------
       Total adjustments                                                        (3,432,086)           (4,119,268)
                                                                           ---------------        --------------
       Net cash used in operating activities                                    (1,819,280)           (4,299,369)
                                                                           ---------------        --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   (Increase) decrease in marketable securities                                  2,358,210            (7,472,318)
   Purchase of property, plant and equipment                                    (2,440,251)             (908,825)
   Acquisition of intangible assets                                             (2,532,318)           (2,413,719)
   Proceeds from sale of subsidiary stock                                               -              2,155,300
   Net proceeds from sale of assets                                                     -                 37,500
   Net proceeds from sale of investment in Compare Generiks                      1,774,954                    -
                                                                           ---------------        -------------
       Net cash used in investing activities                                      (839,405)           (8,602,062)
                                                                           ---------------        --------------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Net proceeds of revolving credit line                                         4,750,000             1,250,000
   Proceeds from term loan                                                       1,848,000             4,000,000
   Repayment of debt                                                            (1,284,602)             (562,495)
   Payment of cash dividends                                                      (362,382)             (177,513)
   Purchase of treasury stock                                                     (335,575)                   -
                                                                           ---------------        -------------
     Net cash provided by financing activities                                   4,615,441             4,509,992
                                                                           ---------------        --------------

Net increase (decrease) in cash and cash equivalents                             1,956,756            (8,391,439)

Cash and cash equivalents at beginning of year                                     928,761             9,320,200
                                                                           ---------------        --------------

Cash and cash equivalents at end of year                                   $     2,885,517        $      928,761
                                                                           ===============        ==============
</TABLE>

                 See notes to consolidated financial statements

                                       F-6


<PAGE>

                          PDK LABS INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED NOVEMBER 30, 1996 AND 1995

1.     Summary of Significant Accounting Policies:

       a. Description of business

          The Company manufactures and distributes non-prescription
pharmaceutical products, vitamins and food supplement products, and cosmetics
and beauty aids.

       b. Principles of consolidation

          The consolidated financial statements include the accounts of PDK Labs
Inc. and its 52% owned subsidiary, Futurebiotics, Inc. ("Futurebiotics"). Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.

       c. Investment in marketable securities

          Investments in debt and equity securities are designated as trading,
held-to-maturity, or available for sale. Management considers the Company's
marketable securities, consisting principally of government and
government-backed debt securities, to be available-for-sale. Available-for-sale
securities are reported at amounts which approximate fair value. A decline in
the market value of any available-for-sale security below cost that is deemed
other than temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.

          At November 30, 1996, debt securities classified as non-current have
contractual maturities within 1-5 years.

       d. Inventories

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

       e. Deferred catalog costs

          Costs related to mail order catalogs and promotional material are
amortized over their estimated productive lives, based on historical results,
generally not exceeding one year.

       f. Depreciation and amortization

          Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease, whichever

is shorter. Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale or
other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations.

          Intangible assets are amortized using the straight-line method over
the following periods:

           Customer lists                               3-7 years
           Trademarks                                   7-10 years
           Covenants not to compete                     5-7 years
           Deferred loan costs                          Term of related debt
           Goodwill                                     10 years
           Distribution rights                          1-5 years

                                       F-7

<PAGE>

1.     Summary of Significant Accounting Policies:  (Cont'd)

       g. Income taxes

          Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

          The Company and its subsidiary file separate tax returns.

       h. Statement of cash flows

          For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

       i. Reclassifications

          Certain reclassifications have been made to the prior year financial
statements to conform with the classifications used in 1996.

       j. Estimates

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

          k. Advertising

          The Company charges to expense, advertising costs as incurred.

Advertising costs amounted to $1,818,000 and $1,735,000 for the years ended 1996
and 1995, respectively.

2.     Futurebiotics Stock Transactions:

          On December 30, 1996, Futurebiotics effected a one for ten reverse
stock split of common stock outstanding. All Futurebiotics share amounts have
been restated to reflect this stock split.

          In January 1995, the Company sold 300,000 shares of common stock of
Futurebiotics for net proceeds of approximately $2,155,000. The Company realized
a gain of approximately $220,000.

          In January 1995, Futurebiotics entered into two separate multi-year
consulting agreements. As consideration for these services, the Company issued
60,000 shares of common stock to each of the companies and a consulting fee of
$210,000 to one company. Consideration paid, including the value of the common
stock granted, is being charged to operations ratably over the lives of the
consulting agreements.

3.     Supplementary Information - Statement of Cash Flows:

       Cash paid during the years for:

                                                      Years Ended
                                                      November 30,
                                          -----------------------------------
                                               1996                   1995
                                          -------------           -----------

       Interest                           $     922,000           $   593,000
                                          =============           ===========

       Income taxes                       $   1,252,000           $   270,000
                                          =============           ===========

                                       F-8

<PAGE>

3.     Supplementary Information - Statement of Cash Flows:  (Cont'd)

       During the year ended November 30, 1996, the Company incurred capital
lease obligations of approximately $193,000 for the acquisition of various
property and equipment. Further, the Company and its majority-owned subsidiary
issued stock and/or options to various parties in consideration of services
provided (see Note 12).

4.     Inventories:

       Inventories consist of the following at November 30, 1996:

       Raw materials                                       $    5,829,483
       Work-in-process                                          9,211,383

       Finished goods                                           8,231,650
                                                           --------------

                                                           $   23,272,516
                                                           ==============

5.     Property, Plant and Equipment:

       Property, plant and equipment, at cost, consist of the following at
November 30, 1996:

       Land                                                $      493,448
       Manufacturing equipment                                  5,248,902
       Vehicles                                                   245,518
       Office equipment and fixtures                            2,112,413
       Leasehold improvements                                   1,408,867
                                                           --------------
                                                                9,509,148
       Less accumulated depreciation and amortization           4,376,600
                                                           --------------

                                                           $    5,132,548
                                                           ==============

       Depreciation and amortization of plant and equipment for the years ended
1996 and 1995 was $909,000 and $654,000, respectively.

6.     Intangible Assets:

       Intangible assets acquired at various dates consist of the following at
November 30, 1996:

       Customer lists                                           $   4,430,104
       Trademarks                                                     250,098
       Covenants not to compete                                     2,039,000
       Deferred loan costs                                            258,436
       Goodwill                                                       300,000
       Distribution rights                                          2,587,133
                                                                -------------
                                                                    9,864,771
       Less accumulated amortization                                6,312,075
                                                                -------------

                                                                $   3,552,696
                                                                =============

       Amortization expense for the years ended 1996 and 1995 was $2,445,000 and
$1,527,000, respectively.

       The Company acquired a customer list for approximately $320,000 during
the year ended November 30, 1996. During the year ended November 30, 1995, the
Company acquired customer lists and covenants not to compete for an aggregate
price of approximately $908,000. Approximately $315,000 of these assets were
subsequently disposed of in the sale of a product line (see Note 15).


                                       F-9

<PAGE>

6.     Intangible Assets:  (Cont'd)

       Futurebiotics has implemented a marketing program with select retail
stores and distributors in order to obtain premium shelf space. Contracts with
retailers are for a fixed period of not less than one year. Costs associated
with these distribution rights are being charged to operations ratably over the
lives of the agreements.

7.     Other Assets:

       Included in other assets is a loan to an officer approximating $763,000,
including $136,000 of accrued interest. The employment agreement with this
officer includes a provision under which the officer may borrow from the Company
under a credit line. Borrowings under the line bear interest at prime plus 1/2%.
In the event of the termination of employment, any amounts outstanding shall be
converted into a term loan payable over a specified period.

8.     Long-Term Debt:

       Long-term debt consists of the following:

       Revolving lines of credit (a)(b)                        $   10,000,000
       Term loan, payable in quarterly installments of
         $200,000, plus interest at prime, through August
         2000; collateralized by the Company's assets (b)           3,000,000
       Term loan, payable in quarterly principal installments
         of $75,000, plus interest at prime, through February
         2001; collateralized by the Company's assets (b)           1,350,000
       Term loan, payable in monthly installments of
         $5,800 plus interest at prime; collateralized
         by certain equipment (c)                                     348,000
       Capital lease obligations, expiring in various years
         through 2001, payable in monthly installments
         approximating $3,750                                         196,277
       Other                                                           37,000
                                                               --------------
                                                                   14,931,277
       Less current portion                                         1,328,509
                                                               --------------

                                                               $   13,602,768
                                                               ==============

       (a) The Company and its subsidiary as co-borrowers have secured a
revolving credit agreement with a bank. The agreement provides for aggregate
borrowings of up to $15,000,000, with a sublimit of $11,000,000 for the Company
and $4,000,000 for its subsidiary. Interest is charged monthly on the
outstanding balance at prime. Unpaid interest and principal is due on September
29, 1999. This loan agreement is secured by all the assets of the Company and

its subsidiary. The Company and its subsidiary are jointly and severally liable
for the unpaid balance of this credit line.

       (b) The revolving line of credit and term loan agreements as amended, 
contain various covenants pertaining to the maintenance of certain financial
ratio restrictions, limitations on dividends, and restrictions on borrowings. 

       The prime rate at November 30, 1996 was 8 1/4%.



                                      F-10


<PAGE>

8.     Long-Term Debt:  (Cont'd)

       Maturities of long-term debt are as follows:

                       Years Ending
                       November 30,
                       ------------
                           1997                            $    1,329,000
                           1998                                 1,211,000
                           1999                                11,213,000
                           2000                                 1,009,000
                           2001                                   164,000
                        Thereafter                                  5,000

9.     Stockholders' Equity:

       a.    Capitalization

             The Company's authorized capital consists of 30,000,000 shares of
common stock and 5,000,000 shares of preferred stock. All stock has a $.01 par
value.

             The Board of Directors has the authority to issue preferred stock
in one or more series and to fix the rights, voting rights and other terms. The
preferred shares issued and outstanding at November 30, 1996 have no voting
rights and, in the event of any liquidation of the Company, are entitled to
$7.00 per share plus accrued dividends before any distribution to other
stockholders. Each share of preferred stock may be converted into .3 shares of
common stock. Preferred shareholders are entitled to cumulative dividends of
$.49 per share, payable at the election of the Company in cash, common stock, or
a combination thereof. Dividends are payable semi-annually on or about April 15
and October 15 of each year.

       b.    Earnings (loss) per share

             Earnings (loss) per common share were computed by dividing net
income (loss) available to common shareholders by the weighted average number of
shares of common stock outstanding during the period. The effect of common stock

equivalents on the computation of earnings (loss) per share was anti-dilutive in
1996 and 1995. Treasury shares have been excluded from the weighted average
number of shares.

             Net earnings (loss) available to common shareholders was computed
as follows:

<TABLE>
<CAPTION>
                                                                                         Years Ended
                                                                                         November 30,
                                                                             -----------------------------------
                                                                                  1996                  1995
                                                                             -------------         -------------
<S>                                                                          <C>                   <C>           
             Net earnings (loss)                                             $   1,612,806         $    (180,101)
             Dividends on preferred shares                                        (362,382)             (362,384)
                                                                             -------------         -------------
             Net income (loss) available to common shareholders              $   1,250,424         $    (542,485)
                                                                             =============         =============
</TABLE>

       c.    Stock option plan

             The Company's Non-Qualified Stock Option Plan provides for the
granting of options to purchase not more than 23,250 shares of common stock to
employees, directors, and consultants of the Company. Pursuant to the Plan, and
at the Board's discretion, the options expire up to ten years from the date of
grant, and the exercise price will be determined by the Board. At November 30,
1996, no options have been granted under the Plan.

             At November 30, 1996, the Company has approximately 949,000 shares
of common stock reserved for future issuances. 

                                      F-11

<PAGE>

10.    Income Taxes:

       The provision (benefit) for income taxes consists of the following:

                                                Years Ended
                                                November 30,
                                    -----------------------------------
                                         1996                   1995
                                    -------------           -----------
       Current:
         Federal                    $   1,012,000           $    (4,500)
         State                             97,000               (19,500)
                                    -------------           -----------

                                        1,109,000               (24,000)
                                    -------------           -----------


       Deferred:
         Federal                          (10,000)               85,000
         State                            (81,000)              (11,000)
                                    -------------           -----------

                                          (91,000)               74,000
                                    -------------           -----------

                                    $   1,018,000           $    50,000
                                    =============           ===========

       Net deferred income tax asset (liability) are comprised of the following
at November 30, 1996:

                                      Net Deferred         Net Deferred
                                         Income             Income Tax
                                        Tax Asset           (Liability)
                                      -----------         -------------
       Inventories                    $   357,825         $          -
       Prepaid salaries                   (57,731)                   -
       Property, plant and equipment           -                (66,667)
       Intangible assets                       -                763,117
       Investment in subsidiary                -               (522,000)
       Unearned compensation                   -             (1,375,340)
       Tax carryforwards                   54,000                    -
       Accrued commissions                 65,290                    -
       Other                              (36,173)                 (227)
       Valuation allowance                     -                (50,000)
                                      -----------         -------------

                                      $   383,211         $  (1,251,117)
                                      ===========         =============

       A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:

                                                         % of Pre-Tax Earnings
                                                         -----------------------
                                                              1996      1995
                                                           ---------   -------

       U. S. Federal statutory income tax rate               34.0        34.0
       State income tax, net of federal tax benefit            .4         4.0
       Other                                                   .7        10.5
       Adjustment to prior year liability                     -         (51.3)
       Permanent differences                                  5.8        85.5
                                                            -----      ------

                                                             40.9        82.7
                                                            =====      ======

       In accordance with the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes", the Company recognized a

deferred tax (benefit) provision on its proportionate share of Futurebiotics'
(loss) earnings.

                                      F-12

<PAGE>


11.    Retirement Plans:

       a. The Company has a voluntary, non-contributory defined contribution
profit sharing plan which covers substantially all of its employees.
Contributions to the profit sharing plan are based on a percentage of eligible
compensation up to a maximum of 15%, at the discretion of the Board of
Directors. There was no contribution made in 1996 or 1995.

       b. Qualified employees are eligible to participate in a salary reduction
plan under Section 401(k) of the Internal Revenue Code. Participation in the
plan is voluntary, and any participant may elect to contribute up to 17% of
earnings. The Company may, at its discretion, contribute up to 3% of an
employee's earnings. The Company contributed $58,000 and $47,000 to the Plan for
the years ended November 30, 1996 and 1995, respectively.

12.    Commitments and Contingencies:

       a. Employment agreements

          Pursuant to employment agreements with certain key executives, which
expire at various dates through October 2005, the Company has granted 1,002,000
shares of common stock which are earned by the executives and charged to
operations ratably over the respective terms of their employment. The shares
have been valued at prices ranging from $1.625 to $15.00 per share, dependent
upon their date of grant (aggregating approximately $3,349,000). One employment
agreement provides for reimbursement of any tax liability arising from the
officer's stock grant, and also a payment of two times his aggregate unpaid
compensation in the event of a change in control of the Company (as defined). In
1995, the Company granted an executive options to purchase 250,000 shares of
common stock at an exercise price of $2.63 per share.

          The Company's remaining aggregate commitment at November 30, 1996
under such contracts is approximately $5,760,000.

       b. Consulting agreements

          The Company is a party to a nine year consulting agreement with the
former president/stockholder of Futurebiotics, Ltd. ("Consultant"). Under the
terms of the Agreement, as amended, the Consultant is providing consulting
services through December 2001 for consideration consisting of 500,000 shares of
the Company's common stock, fixed cash payments ranging from $50,000 to $62,500
through 1998, and an annual bonus equal to 2.75% of annual net sales of
Futurebiotics' products in excess of $7,000,000. The Company also issued to the
Consultant warrants to purchase an additional 20,000 shares of the Company's
common stock at $20.00 per share, exercisable through January 1999.


          During 1995, the Company entered into a two year consulting agreement
with a law firm and a seven year agreement with a third party. As consideration
for these services the Company issued an aggregate of 300,000 shares, valued at
$487,500. Additionally, included in operations are charges approximating
$200,000 in each of the years ended 1996 and 1995, respectively, representing
the compensatory value of the Company's common stock issued in connection with
two separate consulting agreements entered into in 1994.

       c. Lease commitment

          The Company is obligated under two non-cancellable operating leases
for its manufacturing and office facilities. The leases, as extended, require
minimum future rental payments of $438,000, $456,000, $489,000 and $436,000 in
1997, 1998, 1999 and 2000, respectively and provide for the payment of real
estate taxes.

          The Company subleases warehouse and office space to Compare Generiks
(see Note 15) at a rate of $5,000 per month.

                                      F-13

<PAGE>

12.    Commitments and Contingencies:  (Cont'd)

       c. Lease commitment  (Cont'd)

          Rent expense, net of rental income, approximated $419,000 and $279,000
for 1996 and 1995, respectively.

       d. Purchase commitment

          On May 14, 1996, the Company entered into a supply agreement with
Superior Supplements, Inc. ("Superior"), pursuant to which Superior agreed to
supply PDK with vitamins and dietary supplements manufactured to PDK's
specifications in bulk tablet form for a three (3) year period, renewable for
successive one (1) year periods thereafter. PDK has agreed to pay a purchase
price of 115% of Superior's actual material expenses incurred in the manufacture
of the products. PDK agreed to purchase products having a minimum aggregate
sales price of $2,500,000 per annum during the term of the agreement and to pay
liquidated damages of $100,000 to the Company in the event PDK did not meet that
minimum purchase requirement. Purchases from Superior approximated $1,796,000
for the year ended November 30, 1996.

       e. Litigation

          On July 29, 1996, the Company served a complaint against a former
executive citing that he, among other things, breached his agreement with PDK by
competing with PDK and soliciting PDK's customers in violation of his separation
agreement.

          The former executive has denied the Company's allegations and, through
a counterclaim, asserts that the Company, an officer and an outside director
have breached their fiduciary duty to the Company and its stockholders. PDK, the

officer, and the director deny that they engaged in any improper conduct which
would support the former executive's counterclaim. Each intends to vigorously
defend against such claims and PDK intends to proceed with its action against
the former executive.

13.    Related Party Transactions:

       In December 1994, the Company amended its "Sales and Management
Agreement" with Futurebiotics. The revised agreement is for a fixed ten (10)
year term under which the Company, in exchange for 600,000 shares of
Futurebiotics' unregistered common stock, will provide Futurebiotics' entire
line of products at the Company's cost (as defined). The agreement provides PDK
with registration rights for up to 60,000 shares of the stock per year in order
to effect transfers of such shares.

       In the event that the Company is unable to supply products having a cost
of at least $2,000,000 during any fiscal year (such shortage being defined as
the "PDK Deficiency") then the Company shall forfeit to Futurebiotics either (i)
fifteen percent (15%) of the PDK Deficiency in cash, or (ii) a portion of the
60,000 shares of stock, determined by multiplying the 60,000 shares of stock by
a percentage which is arrived at by dividing the PDK Deficiency by $2,000,000.

14.    Exclusive Supply and Licensing Agreement:

       On October 16, 1995, the Company entered into an Exclusive Supply and
Licensing Agreement with a non-affiliated customer pursuant to which the Company
agreed to supply the customer with all of its requirements for vitamins,
non-prescription pharmaceutical products and health and fitness products
manufactured in tablet, capsule, caplet, liquid or equivalent form commencing on
the date of the agreement. The term of the agreement is for five years,
renewable for successive one year periods thereafter.

                                      F-14

<PAGE>

14.    Exclusive Supply and Licensing Agreement:  (Cont'd)

       In addition, the Company granted the customer an exclusive license to use
the trademarks "Max Alert" and "Heads Up", and its trademarks for its ginseng
products, and the exclusive right to distribute products bearing such names,
using the components listed in the agreement. The Company recognized license fee
income of $500,000 for each of the fiscal years ended November 30, 1996 and 1995
in connection with this agreement.

       Revenues from this customer accounted for 55% and 18% of total revenue in
1996 and 1995, respectively.

15.    Other Expense (Income):

       Other expense consists of the following:

                                                     Years Ended
                                                     November 30,

                                          ---------------------------------
                                              1996                  1995
                                          ------------         ------------
       Loss on regulatory action (a)      $         -          $   2,373,516
       Gain on sale of product lines (b)            -               (560,525)
       Gain on sale of securities (b)         (574,954)                   -
       Dividend income                         (50,000)                   -
                                          ------------         ------------

                                          $   (624,954)        $   1,812,991
                                          ============         =============

       (a) On October 12, 1995, the Drug Enforcement Administration ("DEA")
issued final regulations requiring all companies engaged in transactions
involving single-entity ephedrine drug products to file an application for
registration with the DEA on or before November 13, 1995. Any company which did
not file for registration with the DEA on or before the deadline could no longer
import, export, manufacture, or distribute single-entity ephedrine products.

       Although the Company filed a timely application for registration, it may
not sell to customers who have not complied with the requirement to file. As a
result of the above, the Company has realized a significant decline in its
single-entity ephedrine customer base and has recognized an inventory write off
of approximately $2,374,000 on single-entity ephedrine products during the
fourth quarter of the year ended November 30, 1995.

       (b) On October 31, 1995, the Company entered into an agreement to
transfer certain assets, liabilities and the on-going business of its
Energex/Compare Division product lines to Compare Generiks, Inc. ("CGI"). The
transfer consisted of certain assets and rights relating to the "Energex Plus"
and "Compare Generiks" product lines, including customer lists, trade secrets,
trademarks and tradenames and the assumption of a $50,000 obligation under a
promissory note. Consideration consisted of 500,000 shares of CGI common stock
(valued at $1,200,000) and a $500,000 promissory note. CGI also agreed to pay
the obligation under royalty and commission agreements relating to the Energex
product lines.

             In addition, CGI entered into a five-year "Supply Agreement" with
the Company under which CGI will purchase certain of its products from PDK at a
price equal to PDK's material cost plus 100%. Sales under this agreement
approximate $1,459,000 in 1996.

             On January 30, 1996, the $500,000 promissory note was converted to
500,000 shares of CGI's Series B Preferred Stock. The Series B Preferred Stock
earns cumulative annual dividends of 12% or $.12 per share, and is redeemable by
CGI after one year from the date of issuance. Dividend income for the year ended
November 30, 1996 totaled $50,000.

                                      F-15

<PAGE>

15.    Other Expense (Income):  (Cont'd)


             In March 1996, the Company sold the 500,000 shares of CGI common
stock for net proceeds of approximately $1,775,000.

             On July 24, 1995, the Company sold a customer list, trademarks, and
inventory related to a mail order vitamin line of products. The Company
recognized a loss of approximately $610,000 in connection with this disposition.

16.    Fair Value of Financial Instruments:

       In 1996, the Company adopted Financial Accounting Standards Board
Statement No. 107, which requires disclosures about the fair value of the
Company's financial instruments. The methods and assumptions used to estimate
the fair value of the following classes of financial instruments were:

       Current Assets and Current Liabilities: The carrying amount of cash and
       temporary cash investments, current receivables and payables and certain
       other short-term financial instruments approximate their fair value.

       The carrying amount and fair value of the Company's financial instruments
at November 30, 1996 are as follows:
<TABLE>
<CAPTION>

                                                                                Carrying                Fair
                                                                                 Amount                 Value
                                                                            -------------         --------------
<S>                                                                         <C>                   <C>           
Cash and cash equivalents                                                   $    2,885,500        $    2,885,500
Investments in marketable securities, at fair value                              5,114,100             5,114,100
Accounts receivable                                                              8,015,200             8,015,200
Investment in Compare Generiks                                                     500,000               500,000
Accounts payable and accrued expenses                                            5,750,700             5,750,700
Dividends payable                                                                   45,200                45,200
       Current and long-term debt                                               14,931,300            14,931,300
</TABLE>

                                      F-16

<PAGE>
                                    SIGNATURE

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated:  New York, New York
        February 26, 1997

                                        PDK LABS INC.


                                        By:/s/ Michael B. Krasnoff
                                           ----------------------------------
                                               Michael B. Krasnoff, President
                                               Chief Executive Officer
                                               Chief Financial Officer and
                                               Principal Accounting Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

Signature                            Title                    Date
---------                            -----                    ----

/s/ Michael B. Krasnoff              President, Chief         February 26, 1997
---------------------------          Executive Officer  
Michael B. Krasnoff                  and Chief Financial
                                     Officer
                                     
/s/ Stanley Krasnoff
---------------------------          
Stanley Krasnoff                     Director                 February 26, 1997

/s/ Ira Helman
---------------------------          
Ira Helman                           Director                 February 26, 1997

/s/ Hartley T. Bernstein
---------------------------          
Hartley T. Bernstein                 Director                 February 26, 1997

/s/ Robin Marks-Kaufman
---------------------------          
Robin Marks-Kaufman                  Director                 February 26, 1997


                                       35