<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------

                                    FORM 10-K

                       FOR ANNUAL AND TRANSITIONAL REPORTS
                    PURSUANT TO SECTIONS 13 AND 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

|X| For the fiscal year ended December 31, 1998

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

        For the transition period from ________________ to _____________

                         Commission File Number: 0-21003

                               TWINLAB CORPORATION
             (Exact name of Registrant as Specified in Its Charter)

                  Delaware                                     11-3317986
       (State or Other Jurisdiction of                      (I.R.S. Employer
       Incorporation or Organization)                     Identification No.)

              150 Motor Parkway                                  11788
             Hauppauge, New York                               (Zip Code)
   (Address of Principal Executive Offices)

       Registrant's telephone number, including area code: (516) 467-3140

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value 

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

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

      The aggregate market value of shares of Common Stock of the registrant
held by non-affiliates based on the closing sale price of the Common Stock on
March 25, 1999, as reported on the Nasdaq National Market, was $166,978,928.

      As of March 25, 1999, the registrant had 32,705,049 shares of Common Stock
outstanding.

<PAGE>   2

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant's definitive proxy statement for the 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.

                                      NOTE

Twinlab Corporation's Report on Form 10-K filed with the Securities and Exchange
Commission includes all exhibits required to be filed with the Report. Copies of
this Report on Form 10-K, not including any of the exhibits listed under Item
14(c) of this Report, are available without charge upon written request. Please
contact the office set forth below to request copies of this Report on Form 10-K
and for information as to the number of pages contained in each of the exhibits
and to request copies of such exhibits:

                               Corporate Secretary
                               Twinlab Corporation
                                150 Motor Parkway
                               Hauppauge, NY 11788


                                       2
<PAGE>   3

      TWINLAB CORPORATION 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS

                                     PART I

                                                                    Page

Item 1.  Business..................................................    4

Item 2.  Properties................................................   18

Item 3.  Legal Proceedings.........................................   19

Item 4.  Submission of Matters to a Vote of Security Holders.......   20


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related
         Stockholder Matters.......................................   20

Item 6.  Selected Financial Data...................................   22

Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.......................   23

Item 8.  Financial Statements and Supplementary Data...............   29

Item 9.  Changes in and Disagreements with Accountants on 
         Accounting and Financial Disclosure.......................   29


                                    PART III

Item 10. Directors and Executive Officers of the Registrant........   30

Item 11. Executive Compensation....................................   30

Item 12. Security Ownership of Certain Beneficial Owners and 
         Management................................................   30

Item 13. Certain Relationships and Related Party Transactions......   30


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on 
         Form 8-K..................................................   30

SIGNATURES........................................................    34


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<PAGE>   4

                                     PART I

      Information contained or incorporated by reference in this annual report
may contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. See, e.g., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Business Strategy."
Forward-looking statements involve substantial risks and uncertainties and
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance, the Company's operations,
performance, financial condition, growth and acquisition strategies, margins and
growth in sales of the Company's products. Such forward looking statements by
their nature involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the Company's control, which may cause actual results,
performance or achievements to differ materially from those projected or implied
in such forward-looking statements. As a result, no assurance can be given that
the future results covered by such forward-looking statements will be achieved.
Factors that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things, those discussed in "Factors Affecting Future
Performance" under the caption "Business" in Item 1 of this annual report. Other
factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. For the purpose of this
annual report, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. The Company
accepts no obligation to update any forward-looking statements and does not
intend to do so.

      Unless the context otherwise requires, the terms "Company" and "Twinlab"
refer to Twinlab Corporation and, as applicable, its direct and indirect
subsidiaries, Twin Laboratories Inc. ("Twin"), Advanced Research Press, Inc.
("ARP"), Changes International of Fort Walton Beach, Inc. ("Changes
International"), Bronson Laboratories, Inc. ("Bronson"), Health Factors
International, Inc. ("Health Factors") and PR*Nutrition, Inc. ("PR*Nutrition").

Item 1. BUSINESS

General

      The Company is one of the leading manufacturers and marketers of brand
name nutritional supplements sold through domestic health and natural food
stores and various direct sales channels, including network and catalog
marketing and is also engaged in the sale of products through national and
regional drug store chains, supermarkets and mass merchandise retailers. The
Company produces a full line of nutritional supplements and offers one of the
broadest product lines in the industry with more than 1,300 products and 2,400
stockkeeping units (SKU's). The Company's product line includes: vitamins,
minerals, amino acids, fish and marine oils, sports nutrition products and
special formulas marketed under the TWINLAB(R) trademark; a full line of herbal
supplements and phytonutrients marketed under the Nature's Herbs(R), HealthCare
Naturals(R) and Twinlab TruHerbs(R) trademarks; a line of specially formulated
nutritional supplements marketed under the Changes(R) trademark; herb teas
marketed under the Alvita(R) trademark; vitamins, herbs and nutritional
supplements and health and beauty aids marketed under the Bronson(R) trademark;
and nutritionally enhanced food bars marketed under the PR*Bar(R) and Ironman
Triathlon(R) trademarks. The Company emphasizes the development and introduction
of high-quality, unique nutraceuticals and other products in response to
emerging trends in the nutritional supplement industry. The Company's premium
product quality, broad product line, strong history of new product introductions
and innovations and superior marketing and advertising programs have established
TWINLAB, Nature's Herbs, Bronson, PR*Nutrition, Changes and Alvita as leading
and widely-recognized brands in the nutritional supplement industry.

      Under the leadership of the Blechman family, Twinlab has achieved
increased net sales and income from operations every year since 1990. Since
1994, the Company's net sales and income from operations have grown at compound
annual growth rates of 29.1% and 25.8%, respectively. For the year ended
December 31, 1998, the Company generated net sales, net income and basic and
diluted net income per share of $333.4 million, $29.7 million and $.94,
respectively.

      The Company's products target consumers who utilize nutritional
supplements in their daily diet and who demand premium quality ingredients in a
broad variety of dosages and delivery methods. To reach the broadest possible
consumer market, the Company has developed a multi-branded and multi-channel
distribution strategy, consisting of the following categories:


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<PAGE>   5

o     Health and Natural Food Store Channel -- The Company's TWINLAB, Nature's
      Herbs, Ironman Triathlon and Alvita brand products are sold primarily
      through a network of approximately 80 distributors to nearly 11,000 health
      and natural food stores and other selected retail outlets. The health and
      natural food store channel of distribution has grown in recent years as
      national chains, including those which sell the Company's products, such
      as General Nutrition Companies, Inc. ("GNC"), Whole Foods Markets, Inc.
      ("WFM"), Wild Oats Markets, Inc. ("Wild Oats") and other industry
      participants continue to add stores in new and existing markets. The
      Company believes that it has a competitive advantage in the health and
      natural food store channel due to the high quality of its products, which
      is a direct result of its use of premium ingredients, its state of the art
      manufacturing facilities and its comprehensive quality control procedures.
      Sales to the health and natural food store channel, primarily through
      distributors, continue to represent the Company's largest market, totaling
      approximately $211.8 million, or approximately 63.5%, of the Company's net
      sales in 1998. The Company believes that its products have a presence in
      over 95% of the health and natural food stores in the United States, but
      that only approximately 20% of such stores carry a comprehensive line of
      the Company's products. Management believes that the continued expansion
      of health and natural food store retail outlets and the strong demographic
      and consumer awareness fundamentals driving the nutritional supplement
      industry, combined with health and natural food retailers' success with
      the Company's product lines, provide Twinlab with significant
      opportunities to increase sales in the health and natural food store
      channel. Through its Bronson division, Twinlab markets its MD
      Pharmaceutical(R)brand of vitamins, herbs and nutritional supplements
      exclusively to United States military commissaries and also manufactures,
      through Health Factors, private label vitamins and nutritional supplements
      for a number of other companies on a contract manufacturing basis.

o     Mass Market Channel -- The Company is actively engaged in efforts to
      expand its penetration of the mass market retail channel, which consists
      of drug store chains, supermarkets and other mass merchandisers. The
      Company is currently a provider of private label herbal products to
      Wal-Mart Stores, Inc. ("Wal-Mart"), which are being sold under Wal-Mart's
      proprietary Spring Valley brand name. The Company also sells its products
      through national and regional drug store and supermarket chains, such as
      Rite Aid Corporation, Walgreen, CVS, Kroger, American Stores, Inc. and
      Albertson's, Inc., under its TWINLAB, HealthCare Naturals and Alvita brand
      names. Approximately $47.0 million or 14.1% of the Company's 1998 net
      sales were attributable to mass market retailers compared to $14.1 million
      or 6.1% in 1997. Twinlab has recently introduced its nutritionally
      enhanced food bars under the Ironman Triathlon brand name in the mass
      market channel of distribution. During 1998, the Company introduced the
      first line of herbs to be sold under the TWINLAB name to the mass market
      under the brand name Twinlab TruHerbs, as well as a line of nutritional
      supplements under the Ironman Triathlon trademark.

o     Direct Sales Channel -- The Company markets and sells a variety of
      products through the direct sales distribution channel, which includes
      network marketing, catalog and direct response sales. Through Changes
      International, the Company develops, markets and sells vitamins, herbs and
      nutritional supplements under the Changes brand name. Changes
      International operates through a large sales force of independent
      distributors located throughout the United States, Canada and the United
      Kingdom who sell directly to consumers. At this time, all of Changes
      International's products are specially formulated and packaged for
      distribution through a network marketing sales force and are not intended
      for sale to retail outlets. The Company more than doubled the size of
      Changes International's nutritional supplement line during 1998 and
      expects to further expand the Changes line of products in 1999. Changes
      International generated net sales of $51.3 million in 1998. Twinlab also
      manufactures, markets and distributes a line of over 400 vitamins, herbs
      and nutritional supplements and health and beauty aids under the Bronson
      brand name which are sold through catalogs and specialty direct mailings
      to customers, including healthcare and nutritional professionals. In
      August of 1998, the Company acquired PR*Nutrition, a company that markets
      and distributes nutritionally enhanced food bars and other nutritional
      products. The Company markets products under the PR*Bar brand name
      directly to consumers through, direct mailings, and direct response sales.
      Approximately $70.5 million or 21.1% of the Company's 1998 net sales were
      attributable to the direct sales channel compared to $17.1 million or 5.2%
      in 1997.

Operating Divisions

      While the Company's products are marketed through the distribution
channels discussed above, the Company's operations are organized around the
following six divisions:

o     TWINLAB Division -- The TWINLAB division develops and manufactures
      vitamins, minerals, herbs, amino acids and sports nutrition products under
      the TWINLAB, TruHerbs, Ironman Triathlon, MaxiLife, "Fuel" and other brand
      names for distribution in the health and natural food store and mass
      market distribution channels. The TWINLAB division accounted for
      approximately $172.7 million, or 51.8%, of the Company's net sales in
      1998.


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<PAGE>   6

o     Herbal Supplements and Teas Division -- The herbal supplements and teas
      division develops and manufactures the Company's products marketed and
      sold under the Nature's Herbs, HealthCare Naturals and Alvita brand names
      through the health and natural food store and mass market distribution
      channels. This division generated approximately $65.8 million, or 19.7%,
      of the Company's net sales in 1998.

o     Changes International Division -- The Changes International division
      develops and markets a line of vitamins, herbs and nutritional supplements
      under the Changes brand name for distribution exclusively through a
      network marketing sales force of independent distributors. This division
      accounted for approximately $51.3 million, or 15.4%, of the Company's net
      sales in 1998.

o     Bronson Division -- Twinlab's Bronson division manufactures, markets and
      distributes products under the Bronson brand name, which are sold through
      catalogs and direct mailings to customers, and under the MD Pharmaceutical
      brand name exclusively to United States military commissaries. Through
      Health Factors, this division also manufactures private label vitamins and
      nutritional supplements for a number of other companies on a contract
      manufacturing basis. The Bronson division, following its acquisition in
      late April 1998, generated net sales of $18.7 million or 5.6% of the
      Company net sales in 1998.

o     PR*Nutrition Division -- The PR*Nutrition division develops, markets and
      sells nutritionally enhanced food bars and other nutritional products
      under the PR*Bar and Ironman Triathlon brand names for sale to consumers
      through direct and specialty mailings, direct response sales, and the
      health and natural food stores and mass market channels. This division
      generated net sales of $20.9 million in 1998, or 6.3% of the Company's
      1998 net sales.

o     Publishing Division - Through Advanced Research Press, the Publishing
      division is responsible for the publishing activities of the Company,
      including the publication of a monthly fitness magazine, Muscular
      Development, a monthly newsletter and select books concerning nutritional
      supplements and related subjects. ARP generated net sales of $4.0 million,
      or 1.2% of the Company's 1998 net sales.

      Twinlab was incorporated under the laws of the State of Delaware in 1996
and maintains its principal executive offices at 150 Motor Parkway, Suite 210,
Hauppauge, New York 11788. Its telephone number is 516-467-3140.

Business Strategy

      The Company's strategy is to continue to increase sales and profits by
furthering its leadership position in the sale of vitamins, herbs, sports
nutrition products and other nutritional supplements to the health and natural
food store channel while continuing to increase sales and market share in the
mass market and direct sales distribution channels. Twinlab plans to implement
this strategy both by capitalizing on the strength of its established brands as
well as through the development and introduction of new brands. In addition, the
Company expects to continue to develop and introduce new products and product
innovations for each of its distribution channels, to increase its penetration
of foreign markets and to provide the advertising, marketing, operational and
personnel support necessary to grow its businesses.

Specifically, the Company seeks to:

      Further Develop Portfolio of Brands -- Twinlab has developed a portfolio
of core brands which are among the most recognized in the vitamin and
nutritional supplement industry. The Company intends to continue to nurture and
extend the reach of its TWINLAB, Nature's Herbs and Alvita brands in the health
food distribution channel while furthering the development of its portfolio of
proprietary brands, including the TruHerbs, Ironman Triathlon, Bronson,
PR*Nutrition and Changes brands, targeted to the Company's respective channels
of distribution. As in the past, the Company will promote its brands through
strong marketing and advertising programs. Management believes that Twinlab has
one of the largest marketing and advertising budgets as a percentage of sales in
the nutraceutical industry and that the strong brand name recognition of its
products is, in part, a direct result of this support. In fiscal 1998, the
Company spent $26.4 million, an increase of 30% over fiscal 1997, on marketing
and advertising to promote its products. The Company has budgeted for
significantly greater marketing and advertising expenses in fiscal 1999, as
compared to 1998.

      Further Develop Multiple Channels of Distribution -- The Company intends
to continue to increase its penetration of the domestic and international health
and natural food store channel and expand its mass market, retail, network
marketing and catalog businesses. By utilizing a multiple distribution channel
approach, the Company believes it will be well positioned to also reach
customers who historically have not shopped in health and natural food stores.
If appropriate, the Company may seek to acquire selective products or product
lines to distribute through these established channels.


                                       6
<PAGE>   7
      Continue to Introduce New Products and Product Innovations -- A
cornerstone of the Company's success has been its ability to rapidly utilize
innovative scientific and medical findings in its new product development
efforts. The Company has consistently been among the first in its industry to
introduce new products and product innovations that anticipate and meet customer
demands for newly identified nutritional supplement benefits. As part of its
ongoing research and development effort, the Company maintains an extensive
database and actively researches and monitors a wide variety of publications
containing scientific and medical research. The Company's geographically diverse
network of distributors allows it to achieve immediate and broad distribution
for new product launches. From 1991 through 1998, the Company introduced over
700 products, with over 140 new products introduced in 1998 alone. Net sales
from new products introduced in 1998 were approximately $15.9 million, or
approximately 4.8% of the Company's net sales. The Company expects to introduce
new products in 1999 in the health and natural food store and mass market retail
channels. Eighteen new products have already been introduced in 1999. Additional
products are likewise expected to be introduced through the catalog and network
marketing channels.

      Increase Penetration of Foreign Markets -- Management believes that
there are substantial opportunities for the Company to expand its presence in
foreign markets. The Company's international sales force is supported by a
network of approximately 60 overseas distributor organizations, serving over 70
foreign countries. Approximately 6.0%, or $19.9 million, of the Company's net
sales in 1998 were derived from international sales originating from overseas
distributor organizations. The Company presently has distribution agreements
covering many western European countries, including Great Britain, France,
Italy, Belgium, the Netherlands and the Scandinavian countries; eastern European
countries, including Russia; Latin American countries, including Mexico, Brazil,
Chile and Argentina; Middle Eastern countries, including Israel and Saudi
Arabia; several countries in the Far East, including China and Singapore; and
the Caribbean. As part of its continuing efforts to expand its international
presence, the Company recently opened a branch office in the United Kingdom. The
Company also initiated programs in 1998 to qualify distributors in Japan and
Australia.

      Supplement Internal Growth Through Strategic Acquisitions -- The Company
actively pursues acquisition opportunities that will complement or extend its
existing product lines or that would be compatible with its business philosophy
and strategic goals. The Company believes that its leading and widely recognized
brand names, broad distribution capabilities and ability to generate sales of
its products through successful marketing programs provide it with a strategic
advantage in pursuing and consummating such opportunities.

      Ongoing Investment in Personnel and Infrastructure -- The Company
continues to make significant investments in developing its management team and
building its infrastructure to support the growth of its businesses. As part of
its ongoing efforts to maintain its reputation for providing the highest quality
products and services to its customers, the Company continues to invest in its
manufacturing and distribution facilities and management information systems. In
1998, the Company leased an approximately 106,000 square foot warehouse and
distribution facility in Bohemia, New York and substantially completed the
expansion of its state-of-the-art manufacturing, distribution and warehouse
facility in American Fork, Utah (the "Utah Facility"). The total size of the
Utah Facility will increase from 57,000 square feet to approximately 160,000
square feet and will substantially increase the Company's production capacity.
The total budget for the Utah Facility expansion is approximately $13.3 million.
Approximately 140,000 square feet of construction was complete by the end of
1998, at an approximate cost of $9.1 million in capital expenditures. During
1998, the Company also added significant management and staff to support its
mass market and Changes International operations. Bronson's fulfillment and
telemarketing operations were consolidated in 1998 with the operations of the
herbal supplements and teas division at the Company's expanded Utah Facility
(with the exception of product production which remains with Health Factors in
Tempe, Arizona). The management of Bronson's catalog business is currently
conducted by an independent mail order consulting group.

      There can be no assurance that the Company will successfully implement all
or any part of its business strategy.

Industry

      Based on estimates in 1998 market reports conducted by Packaged Facts (the
"Packaged Facts Report"), an independent research firm, the retail market for
vitamins, minerals and other supplements (excluding sports nutrition food bars
and diet products; the "VMS Products") has grown at a compounded annual rate of
15.4% from $5.0 billion in 1994 to $8.9 billion in 1998. A large portion of this
growth is attributable to an increase in sales of supplements (primarily herbal
products), which grew from $1.3 billion in 1994 to $3.9 billion in 1998. Growth
in this category has been fueled by the popularity of such herbs as echinacea,
garlic, ginseng, gingko, saw palmetto and St. John's Wort. Packaged Facts
forecasts 13.3% compound annual growth in the market for VMS Products, including
19.8% compound annual growth in the market for supplements, through the year
2003. In addition, according to Packaged Facts, the retail market for sports
nutrition products has grown at a compound annual rate of 15.2% from
approximately $720 million in 1994 to approximately $1.3 billion in 1998.

      Management believes that the growth rate in the nutritional supplement
industry has slowed significantly compared to the growth rate experienced in the
first six months of 1998. The Company believes the slow down in growth is in
part due to a decline in sales at the retail level of St. John's Wort and other
herbal products that were in greater demand in the first half 


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<PAGE>   8

of 1998 and to a more generalized industry-wide slowing of growth across most
product categories. The Company believes that as a result, inventories at the
retail and distributor level have become excessive and therefore orders to
manufacturers and suppliers have been reduced.

     US Retail Sales of VMS Products and Sports Nutrition Products 1994-1998
                            (in millions of dollars)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      Category                             1994          1998          CAGR
================================================================================
<S>                                       <C>          <C>              <C> 
Vitamins .............................    $ 3,140      $ 4,160          7.3%
Supplements ..........................      1,250        3,865         32.6
Minerals .............................        615          855          8.6
                                          -------      -------      -------
           Total VMS Products ........      5,005        8,880         15.4
                                          -------      -------      -------
Sports Nutrition .....................        720        1,268         15.2
                                          -------      -------      -------
                     Total ...........    $ 5,725       10,148         15.4%
                                          -------      -------      -------
--------------------------------------------------------------------------------
</TABLE>

Source: Packaged Facts

      Management believes continued industry growth will be fueled by (i)
favorable demographic trends towards older Americans, who are more likely to
consume nutritional supplements; (ii) product introductions in response to new
scientific research findings supporting the positive health effects of certain
nutrients; (iii) the nationwide trend toward preventive medicine in response to
rising health care costs; (iv) increased consumer interest in herbs and
herb-related supplements; and (v) the heightened understanding and awareness of
healthier lifestyles and the connection between diet and health. Moreover,
although the industry has grown dramatically in recent years, there is still a
large untapped domestic market as only an estimated 60% of Americans currently
consume vitamins, herbs and nutritional supplements on a regular basis.

      Vitamin and nutritional supplements are sold through several channels of
distribution: health and natural food stores, mass market retailers (drug store
chains, supermarkets and other mass merchandisers), and direct sales channels
(including network marketing and catalog distribution). In 1998, according to
Packaged Facts, the mass market channel accounted for approximately 49% of sales
of VMS Products, health and natural food stores accounted for 39% of sales and
12% of sales were generated through direct selling, mail order and the internet.

      The United States health and natural food store market is comprised of
approximately 11,000 stores, which are generally either independently owned or
associated with one of several regional or national chains, including GNC and
WFM. According to the Packaged Facts Report, nutritional supplements account for
over 49% of a typical health and natural food store's sales. The health and
natural food store channel of distribution has continued to experience growth in
recent years as national chains, including those which sell the Company's
products, such as GNC, WFM and other industry participants continue to add
stores in new and existing markets. The growth in the health and natural food
channel of distribution is partially attributable to the general growth in
natural product sales. Natural products are defined as products that are
minimally processed, environmentally friendly, largely or wholly free from
artificial chemicals and, in general, as close to their natural states as
possible.

      In the mass market channel, sales of vitamins, herbs and nutritional
supplements have generally grown in line with the growth in all channels due to
the proliferation of retail outlets and the expansion of SKU's offered by these
stores. However, within the mass market channel, mass merchandisers have
captured increasing market share from traditional drug store chains and
supermarkets. According to Packaged Facts, these mass merchandisers accounted
for 18.7% of total retail sales of VMS Products in 1998 compared to 11.5% in
1994. This compares to traditional drug store chains and supermarkets which
accounted for 30.5% and 34.6% of total retail sales of VMS Products in 1998 and
1994, respectively.

      Although growing, sales generated via direct selling, mail order and the
internet have not grown as quickly as sales in other channels of distribution.
According to Packaged Facts, sales via direct selling as a percentage of total
retail sales of VMS Products were 9.9% in 1998 compared to 13.1% in 1994. Sales
via mail order and the internet were 2.4% and 4.2% of total retail sales of VMS
Products in 1998 and 1994, respectively. It is expected that the market for
internet sales will increase in the future as consumers become more accustomed
to ordering products online.


                                       8
<PAGE>   9

      Share of VMS Products Market -- Sales by Retail Outlets, 1994, 1996 and
1998

<TABLE>
<CAPTION>
          Outlet                               1994          1996          1998
          ------                               ----          ----          ----
<S>                                          <C>             <C>           <C>  
Health and Natural Food Stores .......         36.6%         38.2%         38.5%
Mass Market Drug Store Chains ........         23.1          20.2          18.4
Mass Merchandisers ...................         11.5          14.8          18.7
Supermarkets .........................         11.5          10.8          12.1
                                             ------        ------        ------
Total Mass Market ....................         46.1          45.8          49.2
                                             ------        ------        ------
Direct Selling .......................         13.1          12.6           9.9
Mail Order and Internet
                                                4.2           3.4           2.4
                                             ------        ------        ------
          TOTAL ......................        100.0%        100.0%        100.0%
                                             ======        ======        ======
</TABLE>

----------
Source: Packaged Facts

Products

      The Company has a highly diversified array of products and product
categories and manufactures and markets over 1,300 products and over 2,400 SKU's
in several product categories. The Company's product line includes vitamins,
minerals, amino acids, fish and marine oils, sports nutrition products
(including food bars) and special formulas marketed under the TWINLAB trademark,
a full line of herbal supplements, phytonutrients and herb teas marketed under
the Nature's Herbs, HealthCare Naturals, TruHerbs and Alvita trademarks, a line
of nutritional supplements marketed through Changes International under the
Changes trademark, a full line of vitamins, herbal supplements and personal care
items under the Bronson brand name through its catalog division and a line of
food bars under the PR*Bar and Ironman Triathlon trademarks through its
PR*Nutrition division. The Company also sells certain products under private
label arrangements with third parties. Some of these products are manufactured
by Health Factors, which also manufactures the majority of the Bronson catalog
products. The Company also publishes health, fitness and nutrition-related
publications through its Publishing division.

      The following table sets forth certain information concerning each of the
Company's product categories:

<TABLE>
<CAPTION>
                                                                               Five-Year                                   
                                            Number of    Percentage of       Compound Annual       
         Product Category                     SKU's     1998 Gross Sales    Gross Sales Growth    
         ----------------                     -----     ----------------    ------------------    
<S>                                           <C>         <C>               <C>    
TWINLAB Products .....................        1,165          54.6%                 18.0%  
Herbal Supplement and Teas Products                                                       
                                                                                          
                                                742          19.3                  36.5   
Bronson Products .....................          421           5.1                   N/A   
Changes Products .....................           67          14.0                   N/A   
PR Nutrition Products ................           57           5.9                  90.8   
Publishing ...........................          N/A           1.1                   8.7   
                                             ------        ------                ------   
          TOTAL ......................        2,452         100.0%                 28.2%  
                                             ======        ======                ======   
</TABLE>

      Twinlab Division. The TWINLAB division is responsible for the manufacture
and sale of vitamins, minerals, amino acids, sports nutrition formulas and other
nutritional supplement products marketed under the TWINLAB brand name including
multivitamins, such as Daily One Caps and Animal Friends, single-entity
vitamins, such as B-1 Caps and Mega E Softgels, minerals, such as Calcium
Citrate Caps and Magnesium Caps, and amino acids such as L-Glutamine Caps and
Mega L-Carnitine Tabs. These products are generally available in a variety of
delivery forms, including liquid, powder, capsule and tablet to accommodate a
variety of consumer tastes and preferences. This category targets a broad array
of health conscious consumers, with particular emphasis on consumers who utilize
nutritional supplements in their daily diet and who demand premium quality
ingredients in a broad variety of dosages and delivery methods.

      The sports nutrition products sold under the Twinlab brand consist of a
wide variety of nutritional supplements designed for


                                       9
<PAGE>   10
 and targeted to active lifestyle consumers. These products are specially
formulated to help individuals achieve their personal physical goals and enhance
performance. Sports nutrition products include Hydra Fuel and Ultra Fuel drinks,
which replenish glucose and electrolytes depleted during strenuous exercise;
DietFuel, RxFuel and Ripped Fuel, which are marketed for the preservation of
lean body mass and the building of muscle mass in conjunction with a low fat
diet and exercise program; Creatine Fuel, a university tested supplement
designed to increase body mass and muscular performance; and Metabolift, a
successful thermogenic formula. The Company's sports nutrition products are
utilized by a variety of health conscious consumers including amateur and
professional athletes in a variety of competitive sports. The Company believes
that its sports nutrition business serves to increase the Company's brand
awareness among customers who, as they grow older, are likely to shift their
buying patterns to include the Company's vitamins, herbs and other
nutraceuticals.

      Twinlab's special formulas consist of a broad assortment of products
formulated with specific health conditions or objectives in mind. Special
formulas are primarily targeted to sophisticated users of health related
products, including regular customers of health and natural food stores.
Examples include Beyond Cholesterol, which assists with a healthy cholesterol
level, OcuGuard Plus with Lutein, which is formulated for nutritional support
for the eyes, Coenzyme Q10, which is designed for cardiovascular health,
MaxiLIFE Glucosamine and Chondroitin Sulfate Formula, which nutritionally
supports healthy bone and joint function, and the MaxiLIFE Protector Series, a
premium supplement line for the body's most aging-prone areas. In addition, the
Company sells a variety of fish and marine oils in a number of different
delivery forms which offer a number of nutritional benefits, including favorable
effects on cardiovascular health.

      In 1998, the Twinlab division introduced the first line of herbs to be
sold under the Twinlab trademark. Twinlab TruHerbs are a full line of
approximately 45 products of which approximately seven are manufactured
utilizing a "Time Release" technology for a sustained herbal activity level.

      In 1998, the Twinlab division also introduced a line of six supplements to
the mass market channel under the Ironman Triathlon trademark which is licensed
to the Company. The Company believes this supplement line compliments the
nutritionally enhanced food bar line marketed by the Twinlab division under the
Ironman Triathlon mark

      Herbal Supplements and Teas. Herbal supplements and phytonutrients
(produced from nutrients from botanical sources that are considered to have
medicinal properties) have become increasingly important categories across all
distribution channels. Through its Nature's Herbs product line, the Company
produces a full line of herbal supplements and phytonutrients which offer
natural alternatives to over-the-counter medications. The Company manufactures
and markets approximately 575 herbal and botanical supplements which are
produced at the Company's modern FDA registered Utah Facility and sold primarily
under the Nature's Herbs and TruHerbs brand names. Twinlab's herbal products
include single herbs, such as saw palmetto, garlic, ginseng and golden seal;
traditional combinations, such as echinacea-golden seal; standardized extracts,
such as St. John's Wort Power, Gingko Power, Bilberry Power and Milk Thistle
Power sold under the POWER HERBS(R) brand name; and natural health care product
formulations, such as Allerin and Coldrin. The Company supplies herbal
supplements to Wal-Mart for its Spring Valley private label line. Twinlab
introduced the first line of time-release herbs ever developed. This advanced
technology includes a unique micro-encapsulation process that permits the
Company's finely granulated herbal extracts to dissolve gradually and
consistently throughout the day. Nature's Herbs brand products are packaged
using the innovative FRESH CARE System developed by the Company. The FRESH CARE
System is the first all-glass and antioxidant-protected herbal packaging system
that helps remove oxygen while locking out air, moisture and light in order to
maintain potency and to extend freshness.

      Through its Alvita product line, the Company offers approximately 144 herb
teas in both single use bags and bulk. Alvita is a leading brand of herb tea and
is one of the most recognizable tea brands sold through health and natural food
stores. Founded in 1922, Alvita is one of the nation's oldest herb tea
companies. Alvita purchases tea in bulk form, formulates blends of natural herb
teas and designs the packaging for its products. Alvita's teas are currently
blended and packaged at the Company's Utah facility and by an independent
contractor. Alvita teas include Peppermint Leaf, Chamomile, Echinacea, Golden
Seal, Ginger and Senna Leaf, as well as new-age blends such as Chinese Green
Tea, available in a choice of citrus flavors. Alvita markets its products with
an environmentally conscious theme by packaging bulk tea and tea bags in paper
and recyclable foil pouches and by not utilizing shrink wrap for either its
outer boxes or tea bags. In the fall of 1998, the Company launched a line of
teas under the trademark Herbal Orchard. Initially, six medicinal teas made with
real fruit and decaffeinated green tea were introduced with names such as Lazy
Lemontime and Blackberry Moon.

      Direct Sales Products. Through Changes International, a network marketing
company that was acquired in November 1997, the Company develops, markets and
sells vitamins, herbs and nutritional supplements under the Changes brand name.
Changes International operates through a large sales force of independent
distributors located throughout the United States, Canada and the United
Kingdom. Changes International's products include Thermolift, a thermogenic diet
product, Changes Relief, an advanced supplement that nutritionally supports
healthy bone and joint functions, and Perfor-Max, an antioxidant formula. All of
Changes International's products are specially formulated and packaged and are
manufactured by an independent contractor pursuant to the 


                                       10
<PAGE>   11

Company's specifications solely for the network marketing sales force and are
not intended for sale to retail outlets at this time. During 1999, the Company
intends to solidify its distribution base through the introduction of new and
innovative products.

      Bronson was acquired in April 1998. The Bronson catalog is a leading
source for the direct sale of high quality nutritional supplement products.
Since its acquisition in April, the Bronson catalog and mailing lists have been
significantly updated, and a number of new products have been added to the
catalog, such as 7-Keto DHEA and Bronson Tomato Power (an antioxidant product
containing lycopene). Bronson also recently introduced, via a specialty mailing,
ten innovative products under the Bronson Pro-Complex Formula brand name.

      PR*Nutrition. In August of 1998, the Company acquired PR*Nutrition, a
distributor of nutritionally enhanced food bars and related drink powders. The
bars sold by the PR*Nutrition division are generally based upon a dietary ratio
of forty percent carbohydrates, thirty percent protein and thirty percent fat.
PR*Nutrition's products are manufactured by a third party pursuant to the
Company's specifications. The formulations necessary to make such products are
owned by the Company. The Ironman Triathlon bar is sold through retail channels.
The PR*Bar and PR*Powder are sold by PR*Nutrition through direct response sales.

      Publications. Through ARP, the Company publishes Muscular Development, a
high-quality fitness magazine featuring a scientific advisory board and
contributors considered to be among the most accomplished and knowledgeable in
their respective fields. The magazine covers recent developments and provides
innovative information in the fields of training and nutrition research,
supplements, health, sports, fitness and diet. This publication serves as a
vehicle to increase public awareness of the Company's products and as an outlet
for a portion of the Company's advertising program. Muscular Development
currently has a monthly paid circulation of approximately 100,000 readers. The
Company also publishes a monthly newsletter and select books concerning
nutritional supplements and related subjects.

Product Development

      The Company is recognized as an industry leader in new product
development. The Company closely monitors consumer trends and scientific
research, and has consistently introduced innovative products and programs in
response thereto. The Company's product development staff regularly studies
numerous health and nutrition periodicals, including the New England Journal of
Medicine and the Journal of the American Medical Association, in order to
generate ideas for new product formulations. Management believes that the
Company's introduction of new products has increased market share for both the
Company and its retail customers, and the Company intends to continue developing
new products and programs in the future. The Company was the first major
nutritional supplement manufacturer to introduce such industry-wide innovations
as: an all-capsule vitamin and mineral line that is well tolerated by
allergy-prone individuals; a complete line of amino acids and fish and marine
oils; the most advanced and complete array of antioxidants, including beta
carotene, lutein, lycopene, L-glutathione, N-acetyl cysteine (NAC), lipoic acid
and an entirely new class of antioxidants, including polyphenols, flavonoids and
isoflavones; concentrated Coenzyme Q10; chondroitin sulfate; thermogenic
products; standardized herbal extracts guaranteeing potency (Certified Potency);
the FRESH CARE packaging system, designed to preserve potency and freshness; a
full line of Ayurvedic Indian herbal products; and a complete line of herb teas
in single use bag and bulk form. From 1991 through 1998, the Company introduced
over 700 products, with over 140 new products introduced in 1998, including
Twinlab TruHerbs. In 1999, the Company expects to introduce many new products in
the health and natural food and mass market channels, 18 of which have already
been introduced. Representative products introduced in 1999 include Cell Boost
with IP6 and Diet Fuel/Chitosan Formula. The Company more than doubled the
number of products offered through Changes International's distribution network
during 1998. Bronson introduced its Pro-Complex Formula line in a special 1998
mailing and PR*Nutrition introduced several new products, including its Kona
Krunch and Cookies-n-Cream Ironman Triathlon bars. The Company's research and
development expenses were $1.7 million in 1998, compared to $1.1 million in
1997.

Sales and Distribution

      The Company believes that its TWINLAB products have a presence in over 95%
of the health and natural food stores in the United States, but that only
approximately 20% of such stores carry a comprehensive line of the Company's
products. The Company sells its products primarily through a network of
approximately 80 distributors, which service approximately 11,000 health and
natural food stores throughout the country and selected retail outlets. Sales to
domestic distributors represented approximately 54.1% of the Company's net sales
in 1998. The Company's distributor customers include GNC, Tree of Life, Super
Nutrition, United Natural Foods, Inc. ("United Naturals"), Nature's Best, Inc.
and other distributors that supply retailers of vitamins, herbs, food bars and
other nutritional supplements. Management believes that it sells its products to
every major domestic nutritional supplement distributor servicing health and
natural food stores and is generally the largest independent supplier of
nutritional supplements to such distributors.

      Several of the Company's distributors, such as GNC, Tree of Life and
United Naturals, are national in scope, but most are 


                                       11
<PAGE>   12

regional in nature and operate one or more localized distribution centers.
Generally, the Company enters into nonexclusive area rights agreements with its
domestic distributors, who are also responsible for new account development.
Retailers typically place orders with and are supplied directly by the Company's
distributors. In the past ten years, the Company has not lost a major
distributor customer other than through consolidation with an existing customer
of the Company. The breadth and depth of the products manufactured and the
ability to manufacture with minimal throughput times enables the Company to
maintain extremely high order fill rates, which management believes are among
the highest in the industry, with its customer base.

      Tree of Life and GNC accounted for approximately 12% and 14%,
respectively, of the Company's net sales in 1998. Net sales to Wal-Mart
accounted for approximately 12% of the Company's 1998 net sales. No other single
customer accounted for more than 10% of the Company's net sales in 1998. The
largest retail organization in the health and natural food store channel which
sells the Company's products is GNC, with approximately 3,400 stores.

      The Company believes that substantial long-term growth opportunities exist
within the mass market distribution channel. The Company's customers among mass
market retailers include Wal-Mart, Albertson's, Inc., American Stores, Inc.,
Rite Aid Corporation, Walgreen, CVS, Kroger and Target. Management is continuing
its efforts to expand its presence in mass market retail outlets and in 1998
hired a President of Mass Market Sales to oversee the Company's efforts in this
distribution channel, as well as additional management and staff to focus on
this market.

      Changes International currently markets and distributes over 20 products
through a network of over 60,000 independent distributors in the United States,
Canada and the United Kingdom. The distributor network markets Changes
International's products directly to consumers.

      Approximately 6.0%, or $19.9 million, of the Company's net sales in 1998
were derived from international sales originating from overseas distributor
organizations. The Company presently has distribution agreements covering many
western European countries including Great Britain, France, Belgium, Italy, the
Netherlands and the Scandinavian countries; eastern European countries including
Russia; Latin American countries including Mexico, Chile, Brazil and Argentina;
Middle Eastern countries including Israel and Saudi Arabia; and several other
countries in the Far East, including China and Singapore, and the Caribbean. In
1998, the Company initiated new programs to qualify distributors in Japan and
Australia and established a representative office in the United Kingdom.

Marketing

      The Company's marketing strategy, which centers around an extensive
advertising and promotion program, has been a critical component of the
Company's growth, strong brand name recognition and leading position within the
nutritional supplement industry.

      The Company's advertising expenditures were approximately $20.7 million in
1998, $15.9 million in 1997 and $12.4 million in 1996. The Company has
significantly increased its budget for marketing and advertising expenditures in
fiscal 1999, compared to fiscal 1998. As the Company's customers align
themselves with fewer vendors of brand name products, the Company believes that
its strong commitment to advertising and promotion will continue to constitute a
significant competitive advantage. The Company's advertising strategy stresses
brand awareness of the Company's various product categories in order to generate
purchases by customers and also communicates the points-of-difference between
the Company's products and those of its competitors.

      The Company supports its key product categories through its sponsorship of
television and radio programming on network and cable stations such as ABC, CBS,
Fox, VH-1, USA and ESPN. During 1998, the Company sponsored the CBS television
Wellness Report, and its products were advertised on such popular programs as
Melrose Place, Millennium, America's Funniest Home Videos and coverage of Major
League Baseball and the National Basketball Association.

      Print advertisements continue to be an integral part of the Company's
advertising efforts. The Company regularly advertises in consumer magazines such
as Better Nutrition, Delicious, Vegetarian Times, Let's Live, Natural Health,
Nutrition Science Journal, New Age Journal, Muscle & Fitness and Flex.

      Other marketing and advertising programs conducted by the Company include
participation in or sponsorship of sporting events such as the Boston Marathon,
the San Diego Marathon, the New York Marathon, the Ironman Triathlon World
Championship in Hawaii, and bodybuilding shows, including Team Universe and
Fitness America. In addition, the Company promotes its products at major
industry trade shows and through in-store point of sale materials. The Company
also engages athletic personalities as well as scientists to communicate on the
Company's behalf with the trade and the public and to promote the Company's
products.

      The Company has extended its marketing efforts to include various sites on
the World Wide Web, including http://www.twinlab.com, which provides an overview
of the Company in addition to a product catalog. The site also provides a list
of 


                                       12
<PAGE>   13

retailers carrying the Company's products and is linked to other Company sites,
including those of the Company's herbal supplement and teas division
(http://www.herbalvillage.com); the PR*Nutrition division
(http://www.prbar.com); the Bronson division
(http://www.bronson-nutritional.com) and the publishing division
(http://www.musculardevelopment.com). Changes International's web site can be
reached at http://www.changesinternational.com. Information contained in any of
the Company's World Wide Web sites shall not be deemed to be a part of or
incorporated by reference into this Annual Report on Form 10-K.

Customer Sales Support

      The Company's established customer relationships are based upon the
Company's long-standing commitment to a high level of customer service. The
Company's sales force currently consists of approximately 40 dedicated sales
professionals who work to gain better placement and additional shelf space for
TWINLAB, Nature's Herbs, Alvita and PR*Nutrition products and to stay abreast of
customer needs. These sales representatives are assigned to specific territories
covering the entire continental United States, Hawaii and Alaska. These
personnel work with direct accounts, distributors and individual retailers to
enhance knowledge of the Company's products and to maximize exposure for
TWINLAB, Nature's Herbs, Alvita and PR*Nutrition products. An additional sales
and marketing staff supports Nature's Herbs products and the servicing of
customer needs. During 1998, the Company expanded its administrative and sales
infrastructure to service sales in the mass market channel, particularly its
sales of Twinlab, TruHerbs and Ironman Triathlon supplements. The Company also
designs and supplies a broad range of marketing literature, including brochures,
pamphlets and in-store display materials to help educate retailers and consumers
as to the benefits of the Company's products.

      The Company maintains in-house customer service and customer sales support
departments to respond to inquiries concerning product applications, background
data, ingredient compositions and the efficacy of products. The customer service
departments of each division are staffed by full time nutrition experts and
other specially trained employees.

      Changes International provides its independent distributors with a broad
range of informational materials, including product brochures, sales tools,
business and information forms, audio materials and initial distributor startup
kits. Changes International maintains a 24-hour toll-free phone line for
receiving distributors' orders and a separate customer service line to answer
product questions.

Manufacturing and Product Quality

      Most of the Company's TWINLAB products are manufactured at the Company's
72,000 square foot manufacturing facility located in Ronkonkoma, New York (the
"Ronkonkoma Facility"). Most of the Company's TWINLAB products are packaged at
and distributed from the Company's 106,515 square foot warehousing and packaging
facility located in Bohemia, New York (the "Bohemia Facility"). The Bohemia
Facility was leased by the Company commencing in 1998. Herbal supplements and
phytonutrients, including the TruHerbs line, are manufactured at the Company's
FDA registered Utah Facility and at the Ronkonkoma Facility. The Utah Facility
is currently undergoing construction to expand from 57,000 square feet in 1997
to approximately 160,000 square feet during the first half of 1999, of which
approximately 140,000 square feet was completed by the end of 1998. Herb teas
are currently packaged at the Utah Facility and by an independent contractor and
are warehoused at and shipped from the Utah Facility. The products of Changes
International and PR*Nutrition are currently manufactured and packaged by
independent contractors pursuant to the Company's specifications and warehoused
in Florida, and California, respectively. In connection with the Bronson
acquisition, the Company acquired two adjacent, approximately 15,000 square foot
manufacturing and warehouse facilities in Tempe, Arizona (collectively the
"Tempe Facility") that manufacture and store the Bronson brand products and
manufacture certain other products for third parties. The Company's modern
manufacturing facilities provide the Company with the capability to promptly
meet customers' sales demands and to maintain the highest level of quality
control. The Company is continuously upgrading its facilities and enhancing its
manufacturing capabilities through new equipment purchases and technological
improvements. Management believes that the Company's manufacturing facilities
are among the most advanced in the nutritional supplement industry. In March
1998, the Company commenced construction of the addition to the Utah Facility
which will provide additional capacity for the production, warehouse and
distribution operations, as well as additional office space for the herbal
supplement and teas division. The cost of the project, including land,
construction and equipment, will total approximately $13.3 million.
Approximately $9.1 million of this amount was financed with working capital in
1998 of which approximately $8 million will be converted to a ten year mortgage.
Management believes that the Company's Ronkonkoma, Bohemia, Utah and Tempe
Facilities will be sufficient to enable the Company to meet sales demand for the
foreseeable future. If additional space is required, management believes that it
will have the option to lease or purchase additional space or to construct
additional facilities. See Item 2 "Properties."

      The Company's modern manufacturing operations feature the highest quality
blending, filling and packaging capabilities, which enable the Company to offer
quality and consistency in formulation and dosage forms. The Company operates
flexible manufacturing lines which enable it to efficiently and effectively
shift output among various products as dictated by customer demand. The Company
is capable of producing over 40 million capsules and tablets, over 100,000
pounds of blended powder and up to 2,500 


                                       13
<PAGE>   14

gallons of liquid preparations per day. The Company has twelve high-speed
capsule and tablet packaging lines, two high-speed liquid filling lines and two
powder filling lines, which are capable of operating simultaneously, at its
Ronkonkoma, Bohemia, Utah and Tempe Facilities. The Company manufactures the
powders used in its Ultra Fuel, Hydra Fuel and Nitro Fuel single-serving sports
drink products and utilizes a contract bottler for the hydration and bottling of
these products. The Ronkonkoma Facility operates, when necessary, on a 24-hour
work day that includes two production shifts and a third shift primarily for
cleaning, maintenance and equipment set-up.

      The Company sources its raw material needs from over 200 different
suppliers, including some of the largest pharmaceutical and chemical companies
in the world. The Company's raw materials and packaging supplies are readily
available from multiple suppliers, and the Company is not dependent on any
single supplier for its needs. No single supplier accounted for more than 10% of
the Company's total purchases in 1998.

      The Company's quality standards are a significant factor in consumer
purchase decisions, and the Company believes it has established a competitive
advantage based on the premium quality of its products. All capsule and tablet
products manufactured by the Company are visually inspected before being
packaged. Moreover, each of the Company's products undergoes comprehensive
quality control testing procedures from the receipt of raw materials to the
release of the packaged product. The Company utilizes real-time computerized
monitoring of its manufacturing processes to ensure proper product weights and
measures. In addition, the Company maintains three in-house laboratories with
state-of-the-art testing and analysis equipment where the Company performs most
of its testing, including stability tests, active component characterization
utilizing thin-layer and high-pressure liquid chromatography, and UV visible and
infrared spectrometry. The Company contracts with independent laboratories to
perform the balance of its testing requirements. A team of full-time quality
assurance professionals regularly conducts a wide variety of visual and
scientific tests on all manufactured products, and samples of raw materials and
finished products are generally retained for quality control purposes.

      The Company has a strong commitment to maintaining the quality of the
environment. All of the Company's plastic and corrugated cardboard containers
are recyclable and, wherever possible, the Company uses recyclable glass. The
Company was also one of the first companies in the industry to use biodegradable
starch pellets for packing materials. In addition, the Company has removed most
solvents from its production processes (using natural, environmentally-safe
alternatives) and helped develop a special glue, for manufacturing purposes,
that contains virtually no harmful hydrocarbons. The Company believes it is in
material compliance with all applicable environmental regulations.

Competition

      Vitamins and nutritional supplements are sold primarily through several
channels of distribution: health and natural food stores, mass market retailers
(drug store chains, supermarkets and other mass merchandisers), and direct sales
channels (including network marketing, catalog and internet distribution).

      The Company's principal competitors in the health and natural food store
market include Nutraceutical International Corporation, Weider Nutrition
International, Inc., Nature's Way Products, Inc., Natrol, Inc. and Nature's Plus
Inc. Solgar Vitamin and Herb Company, one of the Company's competitors, was
acquired by American Home Products, Inc. during 1998. Private label products of
the Company's customers also provide competition to the Company's products. For
example, a substantial portion of GNC's vitamin and mineral supplement offerings
are products offered under GNC's own private label.

      The Company believes that the growing number of health and natural food
retailers are increasingly likely to align themselves with those companies which
offer a wide variety of high quality products, have a loyal customer base,
support their brands with strong marketing and advertising programs and provide
consistently high levels of customer service. The Company believes that it
competes favorably with other nutritional supplement companies because of its
comprehensive line of premium products, premium brand names, commitment to
quality, ability to rapidly introduce innovative products, , high customer-order
fill rate, strong and effective sales force and distribution network, and
sophisticated advertising and promotional support. The wide variety and
diversity of the forms, potencies and categories of the Company's products are
important points of differentiation between the Company and many of its
competitors.

      In the mass market channel of distribution, the Company competes with
major private label and broadline brand manufacturers, including Leiner Health
Products Inc., Pharmavite Corp., Rexall Sundown, Inc. and NBTY, Inc. ("NBTY"),
certain of which are larger and have access to greater resources than the
Company. The Company believes it competes on the basis of customer service,
product quality, pricing and marketing support. The Company believes that it
competes favorably with other companies because of its (i) sales and marketing
strategies, (ii) customer service (including speed of delivery) and (iii)
reputation as being a supplier of premium quality products.


                                       14
<PAGE>   15

      Many of the Company's competitors in markets other than the health and
natural food store market, including the major pharmaceutical companies, have
substantially greater financial and other resources than the Company. During
1998, several major pharmaceutical companies, including American Home Products,
Warner-Lambert and Bayer, introduced proprietary lines of herbal supplements
into the mass market channel.

      Although Changes International competes with other health and nutritional
food companies, the Company believes Changes International's primary competition
stems from other network marketing companies. Changes International competes in
the recruitment of independent distributors with other network marketing
organizations, including Avon, NuSkin, Rexall Showcase International and others,
whose product lines may or may not compete with the products of Changes
International.

      In addition to the aforementioned retail competitors, the Bronson catalog
competes with many other nutritional supplement catalogs, including those
distributed by Amrion, NBTY and individual retail stores and chains. Bronson
also competes with the many internet sites that are devoted to the sale of
nutritional supplements. With respect to both the PR*Bar and the Ironman
Triathlon Bar, PR*Nutrition competes against other manufacturers and
distributors of nutritionally enhanced food bar products, including Powerbar,
Clif Bar and MetRx. With respect to bars that are formulated based on a
nutritional concept of forty percent carbohydrates, thirty percent protein and
thirty percent fat, the primary competitor is Balance Bar, marketed by Balance
Bar, Inc.

Regulatory Matters

Government Regulation

      The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the United States Department
of Agriculture and the Environmental Protection Agency ("EPA"). These activities
are also regulated by various agencies of the states, localities and foreign
countries to which the Company's products are distributed and in which the
Company's products are sold. The FDA, in particular, regulates the formulation,
manufacture and labeling of vitamin and other nutritional supplements.

      On October 25, 1994, the President signed into law the Dietary Supplement
Health and Education Act of 1994 ("DSHEA"). This law revised the provisions of
the Federal Food, Drug, and Cosmetic Act (the "FFDC Act") concerning the
composition and labeling of dietary supplements and, in the judgment of the
Company, is favorable to the dietary supplement industry. The legislation
creates a statutory class of "dietary supplements." This class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients on the market before October 15, 1994. A
dietary supplement which contains a new dietary ingredient, one not on the
market before October 15, 1994, requires evidence of a history of use or other
evidence of safety establishing that it will reasonably be expected to be safe.
The substantial majority of the products marketed by the Company are classified
as dietary supplements under the FFDC Act.

      Both foods and dietary supplements are subject to the Nutrition Labeling
and Education Act of 1990 (the "NLEA"), which prohibits the use of any health
claim for foods, including dietary supplements, unless the health claim is
supported by significant scientific agreement and is either pre-approved by the
FDA or the subject of substantial government scientific publications and a
notification to the FDA. To date, the FDA has approved the use of only limited
health claims for dietary supplements. However, among other things, the DSHEA
amends, for dietary supplements, the NLEA by providing that "statements of
nutritional support" may be used in labeling for dietary supplements without FDA
preapproval if certain requirements, including prominent disclosure on the label
of the lack of FDA review of the relevant statement, possession by the marketer
of substantiating evidence for the statement and post-use notification to the
FDA, are met. Such statements may describe how particular nutritional
supplements affect the structure, function or general well-being of the body
(e.g. "promotes your cardiovascular health").

      The FDA issued final dietary supplement labeling regulations in 1997 that
required the Company to revise, by the end of March 1999, most of its product
labels. The Company believes it is in material compliance with these
regulations.

      Advertising and label claims for dietary supplements and conventional
foods have been regulated by state and federal authorities under a number of
disparate regulatory schemes. There can be no assurance that a state will not
interpret claims presumptively valid under federal law as illegal under that
state's regulations, or that future FDA regulations or FTC decisions will not
restrict the permissible scope of such claims.

      Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.


                                       15
<PAGE>   16

These distributors are independent contractors over whom the Company has limited
control.

      As a result of the Company's efforts to comply with applicable statutes
and regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.

      The Company's Utah Facility is registered with the FDA as a manufacturer
of OTC drugs and is subject to periodic inspection by the FDA.

      Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive position of
the Company. See "Legal Proceedings."

Ma Huang

      Approximately 15 of the Company's products include an herb known as "Ma
Huang," which contains naturally-occurring ephedrine. Certain of such products
also contain caffeine or other central nervous system stimulants. Such products
accounted for approximately 19% of the Company's net sales in 1998. The
Company's products which contain Ma Huang are generally marketed for
bodybuilding, weight loss, sports nutrition and other purposes, including
increased endurance and energy, generally in conjunction with diet or exercise,
and as natural alternatives to over-the-counter medications.

      Ma Huang has been the subject of certain adverse publicity in the United
States and other countries relating to alleged harmful or adverse effects. The
FDA has proposed regulations relating to the sale of dietary supplements
containing Ma Huang which, if promulgated in final form, would require the
Company to substantially reformulate and relabel almost all of its Ma Huang
products and would limit potency, require warnings, prohibit certain combination
products and would preclude the Company from making bodybuilding and weight loss
claims for such products. Comments from industry participants and inquiries from
Committees of the United States Congress have been filed with the FDA
challenging the scientific and legal basis for the proposed regulations. The
Company is not able to predict whether the FDA's proposed regulations will
become final. There can be no assurance as to the effect that any resulting
reformulation, relabeling or change in the marketing of the Company's products
would have on the sales of such products.

      A number of state and local governments have proposed or passed
legislation prohibiting or regulating the sale of Ma Huang products. The
Company's products containing Ma Huang may become subject to further federal,
state, local or foreign laws or regulations, which could also require the
Company to reformulate its products with reduced ephedrine levels or with a
substitute for Ma Huang and/or relabel its products with different warnings or
revised directions for use. There can be no assurance that the loss of sales of
the Company's Ma Huang products would not have a material adverse effect on the
Company. See Item 3 "Legal Proceedings."

Employees

      At December 31, 1998, the Company employed 974 persons, of which 248 were
involved in executive, sales and administrative activities. The balance of the
Company's employees were engaged in production, packaging and shipping
activities. Changes International also subcontracts approximately 80 persons
from an independent personnel agency. None of the Company's employees are
covered by a collective bargaining agreement, and management considers relations
with its employees to be good.

Trademarks and Patents

      The Company owns trademarks registered with the United States Patent and
Trademark Office and/or similar regulatory authorities in many other countries
for its TWINLAB, Nature's Herbs, Alvita, and Fuel family of trademarks, and has
rights to use other marks material to its business. In addition, the Company has
obtained over two hundred trademarks for various of its products and has
trademark registrations with the United States Patent and Trademark Office for
the TWINLAB, Nature's Herbs, PR, Alvita and Changes brands. The Ironman
Triathlon trademark is licensed to the Company. Federally registered trademarks
have perpetual life, provided they are renewed on a timely basis and used
properly as trademarks, subject to the rights of third parties to seek
cancellation of the marks. The Company regards its trademarks and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products. The Company vigorously protects its
trademarks against infringement. The


                                       16
<PAGE>   17

Company currently has one patent application pending

FACTORS AFFECTING FUTURE PERFORMANCE

Uncertainty Related to Acquisitions

      The Company may pursue acquisition opportunities that complement or extend
its existing products or are compatible with its business philosophy and
strategic goals. Acquisitions involve a number of risks that could adversely
affect the Company's operating results, including the diversion of management's
attention, the assimilation of operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees of the acquired companies. There can be no assurance that the
Company will consummate future acquisitions on satisfactory terms, if at all,
that adequate financing will be available on terms acceptable to the Company, if
at all that any acquisition will be permitted under the Company's financing
instruments, that any acquired product lines or businesses will be successfully
integrated or that such product lines or businesses will ultimately have a
positive impact on the Company, its financial condition or operations. In
addition, such acquisitions could result in substantial equity dilution to
existing stockholders.


FTC Inquiry

      The Company received an inquiry from the FTC with respect to the Company's
substantiation for certain advertising claims made for its product "Herbal Phen
Fuel". After the Company submitted scientific substantiation to the FTC, the FTC
forwarded a proposed consent order (the "Consent Order") to the Company. The
proposed Consent Order provides for, among other things, injunctive relief
prohibiting the Company from making weight-loss claims for its products without
adequate scientific substantiation. The proposed Consent Order is the subject of
negotiation between the FTC and the Company. The Company is unable to predict
whether it will be able to reach a negotiated settlement of this matter.

Restrictions Imposed by Terms of the Company's Indebtedness

      The Company's borrowing arrangements impose upon the Company certain
financial and operating covenants, including, among others, requirements that
the Company maintain certain financial ratios and satisfy certain financial
tests, limitations on capital expenditures and restrictions on the ability of
the Company to incur debt, pay dividends or take certain other corporate
actions, all of which may restrict the Company's ability to expand or to pursue
its business strategies. Changes in economic or business conditions, results of
operations or other factors could in the future cause a violation of one or more
covenants in the Company's debt instruments.

Competition

      The business of developing, manufacturing and selling vitamins, herbs,
sports nutrition products, nutritional supplements and other nutraceuticals is
highly competitive in all channels of distribution. There are numerous companies
in the vitamin and nutritional supplement industry selling products to mass
merchandisers, drug store chains, independent drug stores, supermarkets, health
and natural food stores, as well as through catalogs, the internet and network
marketing. Certain of the Company's competitors are substantially larger and
have greater financial resources than the Company. See "Competition."

Absence of Clinical Studies and Scientific Review; Effect of Publicity

      While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies on
its products. The Company's products consist of vitamins, minerals, herbs and
other ingredients that the Company regards as safe when taken as suggested by
the Company. However, because the Company is highly dependent upon consumers'
perception of the safety and quality of its products as well as similar
products distributed by other companies (which may not adhere to the same
quality standards as the Company), the Company could be adversely affected in
the event any of the Company's products, or any similar products distributed by
other companies, should prove or be asserted to be harmful to consumers. In
addition, because of the Company's dependence upon consumer perceptions,
adverse publicity associated with illness or other adverse effects resulting
from consumers' failure to consume the Company's products as suggested by the
Company or other misuse or abuse of the Company's products or any similar
products distributed by other companies could have a material adverse effect on
the Company's results of operations and financial conditions.

                                       17
<PAGE>   18
      Furthermore, the Company believes that the recent growth experienced by
the nutritional supplement market is based in part on national media attention
regarding recent scientific research suggesting potential health benefits from
regular consumption of certain vitamins and other nutritional products. Such
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and there
can be no assurance of future favorable scientific results and media attention
or of the absence of unfavorable or inconsistent findings.


Dependence on Distributors and Customers

      The Company's success depends in part upon its ability to attract, retain
and motivate a large base of distributors, and its ability to maintain a
satisfactory relationship with Tree of Life, GNC and Wal-Mart. Tree of Life, GNC
and Wal-Mart accounted for approximately 12%, 14% and 12% respectively, of the
Company's net sales in 1998. The loss of Tree of Life or GNC as a distributor or
Wal-Mart as a customer, or the loss of a significant number of other
distributors, or a significant reduction in purchase volume by Tree of Life,
GNC, Wal-Mart or such other distributors or customers, for any reason, would
have a material adverse effect on the Company's results of operations and
financial condition.


Availability of Raw Materials

      Substantially all of the Company's herbal supplements and herb teas
contain ingredients that are harvested by and obtained from third-party
suppliers, and many of those ingredients are harvested internationally and only
once per year or on a seasonal basis. An unexpected interruption of supply, such
as a harvest failure, could cause the Company's results of operations derived
from such products to be adversely affected. Although the Company has generally
been able to raise its prices in response to significant increases in the cost
of such ingredients, the Company has not always in the past been, and may not in
the future always be, able to raise prices quickly enough to offset the effects
of such increased raw material costs.


Item 2. PROPERTIES

      The Company owns a vitamin, mineral and nutritional supplement
manufacturing facility in Ronkonkoma, New York. The 72,000 square foot
Ronkonkoma Facility is in the process of being redesigned to permit additional
and updated manufacturing capacity. The estimated cost of this project is $5
million, which is expected to be financed with working capital. In April 1998,
the Company moved substantially all of its executive and administrative offices
to approximately 21,000 square feet of leased space in a modern office building
in Hauppauge, New York. The Company also leases 26,300 square feet of warehouse
space in Ronkonkoma, 106,515 square feet of packaging, warehousing and shipping
space in Bohemia, New York and 5,000 square feet of office space in Ronkonkoma.
In addition, the Company owns the modern FDA-registered Utah Facility. The Utah
Facility, which was initially constructed as a 57,000 square foot facility in
1993, houses office, manufacturing and warehousing facilities for the operations
of the herbal supplements and teas division. The Company is in the process of
expanding the Utah Facility to approximately 160,000 square feet, of which
approximately 140,000 square feet were completed by the end of 1998. The Company
also leases 21,500 square feet of warehouse and office space in Destin, Florida
for Changes International. The Company owns approximately 30,000 square feet of
total manufacturing and warehouse space in two separate 15,000 square foot
adjacent properties in Tempe, Arizona and leases an additional 2,200 square feet
of warehouse space in Tempe. The Company leases approximately 14,500 square feet
of office and warehouse space for its PR*Nutrition operations in San Diego,
California.


      The Company believes that its facilities and equipment generally are well
maintained and in good operating condition. During 1998, the Company
substantially completed construction of an approximately 85,000 square foot
addition to its Utah Facility that provides additional capacity for production,
warehouse and distribution operations, as well as additional office space for
the herbal supplement and teas division. The cost of the Utah Facility expansion
project, including land, construction and equipment, is expected to total
approximately $13.3 million, of which $9.1 million was expended in 1998 and
financed out of working capital. Approximately $8 million of this cost will be
converted to a ten year mortgage. Management believes that the Company's
Ronkonkoma, Utah and Tempe Facilities, coupled with its leased space in Bohemia,
Hauppauge, Destin and San Diego will be sufficient to enable the Company to meet
manufacturing and sales demand for the foreseeable future. If additional space
is required, management believes that it will have the option to lease or
purchase additional space or to construct an additional facility.


                                       18
<PAGE>   19

Item 3. LEGAL PROCEEDINGS

      The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. The Company may be subjected to various product liability
claims, including, among others, that its products contain contaminants or
include inadequate instructions as to use or inadequate warnings concerning side
effects and interactions with other substances. While such claims to date have
not been material to the Company and the Company maintains product liability
insurance, there can be no assurance that product liability claims and the
resulting adverse publicity will not have a material adverse effect on the
Company. The Company carries insurance in the types and amounts that management
considers reasonably adequate to cover the risks associated with its business.
There can be no assurance that such insurance will continue to be available at a
reasonable cost, or if available will be adequate to cover liabilities.

      The Company has been named as a defendant in five currently pending
lawsuits alleging that its Ma Huang containing products caused injuries and/or
damages, as well as two proceedings seeking class action certification for
alleged deceptive advertising claims related to its Ma Huang products. The
Company intends to vigorously defend these lawsuits. The Company believes that
such claims, if successful, would not have a material adverse effect on the
financial condition or results of operations of the Company. There can be no
assurance that the Company will not be subject to further private civil actions
with respect to its Ma Huang products.

      The State of California and the NRDC filed lawsuits against the Company
and a large number of manufacturers of dietary supplements containing calcium,
claiming that naturally-occurring lead levels in these supplements exceed
acceptable levels under California law ("Proposition 65"). The NRDC and State of
California have settled these suits with the manufacturers, including the
Company. The Company also received notice of a possible State of California
legal claim relating to alleged toxic impurities in fish oil products. No action
has been filed. There can be no assurance that the Company will not be the
subject of future Proposition 65 claims asserted by the State of California or
private parties.

Securities Law Litigation

      In December 1998, two shareholder class action lawsuits were filed in the
United States District Court for the Eastern District of New York against the
Company and certain of its officers and directors. The plaintiffs allege that
the Company and the other defendants violated the securities laws by making
material misstatements and failing to state material facts about the Company's
business and financial condition, among other things, in securities act filings
and public statements. Plaintiffs have moved to consolidate these lawsuits and
all subsequent lawsuits relating to the same issues. On February 25, 1999,
proposed plaintiffs' co-lead counsel announced that it would amend the
complaints to enlarge the class of plaintiffs suing the Company to include all
buyers of the Company's stock from March 17, 1998 through February 24, 1999.

      On February 11, 1999, William Logue, Sheri Sears and Barry Nussbaum, the
former owners of PR*Nutrition, commenced a lawsuit in the United States District
Court for the Southern District of New York against the Company, Twin and
certain of its officers and directors. The plaintiffs' claims include alleged
violations of the securities laws, breach of contract, fraud and negligent
misrepresentation in connection with the Company's purchase of 100% of the stock
of PR*Nutrition. More specifically, the plaintiffs allege that the Company and
the other defendants made material misstatements or failed to disclose material
facts about the Company's business and financial condition, among other things,
in securities act filings and other statements.

      In the first quarter of 1999, a series of separate shareholder class
action lawsuits were filed in the United States District Court for the Eastern
District of New York against the Company, and certain of its officers and
directors. These lawsuits have not yet been served on the Company. The
plaintiffs generally allege that the Company and the other defendants violated
the securities laws by making material misstatements and failing to state
material facts about the Company's business and financial condition, among other
things, in securities act filings and public statements. The class of plaintiffs
suing the Company in these actions is generally all buyers of the Company's
stock from April 28, 1998 through February 24, 1999.

      The Company intends to vigorously defend itself against these securities 
law litigations. It is premature, however, to determine the effect, if any, 
such actions may have on the Company's consolidated financial position, results
of operations or liquidity.

Other Legal Actions

      The Company is presently engaged in various other legal actions that arise
in the ordinary course of business. Although ultimate liability cannot be
determined at the present time, the Company believes that the amount of any such
liability, if any, from these other actions, after taking into consideration the
Company's insurance coverage, will not have a material adverse effect on its
results of operations or financial condition.


                                       19
<PAGE>   20

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

      During the fourth quarter of fiscal year 1998, no matters were submitted
to a vote of security holders of the Company.

                                    PART II

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

      The Common Stock of the Company has traded on the Nasdaq National Market
since the Company's initial public offering (the "IPO") of its common stock, par
value $1.00 per share (the "Common Stock"), in November 1996, in which 8,500,000
shares of Common Stock were issued by the Company. Prior to the IPO, there was
no public market for the Common Stock. On March 25, 1999, the last reported
sales price of the Company's Common Stock as reported on the Nasdaq National
Market was $8.563. As of March 25, 1999, there were 194 holders of record of the
Company's Common Stock. The high and low sale prices for the Common Stock as
reported by the Nasdaq National Market for  1997 and 1998 are summarized below.

<TABLE>
<CAPTION>
                                                 High          Low
                                                 ----          ---
<S>                                             <C>          <C>    
1997
First Quarter...............................    $15.250      $12.000
Second Quarter..............................     24.000       12.125
Third Quarter...............................     24.750       19.000
Fourth Quarter..............................     25.375       17.750

1998
                                                $33.875       $22.58
Second Quarter..............................     45.750       35.250
Third Quarter...............................     47.875       24.375
Fourth Quarter..............................     26.438       11.500
</TABLE>

      From 1993 until May 7, 1996, the Company consisted solely of "S"
corporations. While maintaining such status, the Company periodically declared
and paid dividends to its shareholders, including amounts sufficient for its
shareholders to pay their income taxes on the earnings of the Company that were
treated as having been earned by the Company's shareholders. The Company
terminated its "S" corporation status on May 7, 1996.

      The Company currently intends to retain earnings to finance its operations
and future growth and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Twinlab conducts its business through
its direct and indirect subsidiaries and has no operations of its own. The
principal assets of Twinlab are the capital stock of its direct and indirect
subsidiaries, Twin, ARP, Changes International, Bronson, Health Factors and
PR*Nutrition. Accordingly, Twinlab has no independent means of generating
revenues. As a holding company, Twinlab's internal sources of funds to meet its
cash needs, including payment of expenses, are dividends and other permitted
payments from its direct and indirect subsidiaries. Financing arrangements under
which Twin is the borrower restrict the payment of dividends and the making of
loans, advances or other distributions to Twinlab, except in certain limited
circumstances. The payment of cash dividends in the future will depend upon,
among other things, the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Company's Board of
Directors.

      On May 7, 1996, Twin sold $100,000,000 aggregate principal amount of its
10 1/4% Senior Subordinated Notes due 2006 (the "Old Notes") to Donaldson,
Lufkin & Jenrette Securities Corporation and Chase Securities Inc.
(collectively, the "Initial Notes Purchasers") for $100,000,000 in cash (less
the Initial Notes Purchasers' discount of $3,000,000) (the "Note Offering").
Such securities were sold in a transaction that was exempt from registration
under Section 4(2) of the Securities Act. Subsequently, pursuant to a
Registration Statement on Form S-4, on October 28, 1996, the Company consummated
a fully-subscribed registered exchange offer under the Securities Act for the
Old Notes and issued in exchange therefor $100,000,000 aggregate principal
amount of its registered 10 1/4% Senior Subordinated Notes due 2006
(collectively with the Old Notes, the "Notes").

      On May 7, 1996, Twinlab sold (i) an aggregate of 30,000 shares of its 14%
Non-Voting Senior Cumulative Preferred Stock (the "Senior Preferred Stock") to
five investors (the "Senior Preferred Stock Purchasers") for $30,000,000 in
cash, (ii) 37,000 shares of its 11 1/4% Non-Voting Junior Cumulative Preferred
Stock (the "Junior Preferred Stock") to Green Equity Investors II, L.P. ("GEI")
for $37,000,000 in cash, (iii) 1,295,000 shares of Common Stock to the Senior
Preferred Stock Purchasers for an aggregate of 


                                       20
<PAGE>   21

$700,000 in cash, (iv) 8,880,000 shares of Common Stock to GEI for an aggregate
of $4,800,000 in cash, and (v) an aggregate of 8,325,000 shares of Common Stock
valued at $4,500,000 to certain members of its senior management in exchange for
certain of their shares of common stock of Natur-Pharma Inc. Such securities
were sold in transactions that were exempt from registration under Section 4(2)
of the Securities Act. In connection with the consummation of the IPO, in
November 1996, the Company redeemed all of the outstanding shares of Senior
Preferred Stock and Junior Preferred Stock, which together had an aggregate
liquidation preference of $67.0 million, plus accrued and unpaid dividends
thereon.

      On November 12, 1997, Twinlab issued an aggregate of 312,500 shares of
Common Stock to the shareholders of Changes International as the stock portion
of the purchase price for all of the outstanding common stock of Changes
International; the cash portion of such purchase price was $7.9 million,
including acquisition costs. Such Common Stock was issued in a transaction that
was exempt from registration under Section 4(2) of the Securities Act.

      On August 20, 1998, Twinlab issued an aggregate of 1,150,000 shares of
Common Stock to the shareholders of PR*Nutrition as the purchase price for all
of the outstanding common stock of PR*Nutrition. Such Common Stock was issued in
a transaction that was exempt from registration under Section 4(2) of the
Securities Act.


                                       21
<PAGE>   22

Item 6. SELECTED FINANCIAL DATA

The selected historical financial data as of December 31, 1998, 1997, 1996, 1995
and 1994 and for each of the years then ended has been derived from the audited
consolidated financial statements of the Company. The report of Deloitte &
Touche LLP, independent auditors, on the consolidated financial statements as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 is included elsewhere herein. The selected financial data
below also presents pro forma financial data relating to (i) the Company's
conversion of tax status from an "S" corporation to a "C" corporation as a
result of the Transactions (as hereinafter defined), (ii) the Transactions and
the IPO and (iii) PR*Nutrition's conversion of tax status from an "S"
corporation to a "C" corporation as a result of its acquisition by the Company.
The selected historical financial data should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company and the notes thereto and the other financial information included in
Item 14 to this Annual Report.

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                   -----------------------
                                                               1998           1997(1)     1996(1)(a)(e)     1995(1)         1994(1)
                                                               ----           -------     -------------     -------         -------
                                                                        (in thousands, except per share data and percentages)
<S>                                                          <C>             <C>            <C>            <C>            <C>      
Operating Data:
  Net sales ..............................................   $ 333,375       $ 229,614      $ 182,010      $ 154,805      $ 120,095
  Gross profit ...........................................     169,942         104,188         79,792         63,888         49,436
  Operating expenses .....................................     106,755          52,072         37,108         30,607         24,757
  Merger expenses ........................................       1,462              --             --             --             --
  Income from operations .................................      61,725          52,116         42,684         33,281         24,679
  Interest expense .......................................       8,119          12,336         10,012            875            761
  Nonrecurring and transaction expenses ..................          --              --         15,700(b)         656             --
  Net income .............................................      29,691          25,876         14,970(b)      31,857         22,302
                                                             =========       =========      =========      =========      =========

  Basic and diluted net income per share(c) ..............   $    0.94       $    0.92      $0..36(b)      $    1.13      $    0.79
                                                             =========       =========      =========      =========      =========
  Basic weighted average shares outstanding(d) ...........      31,492          28,192         28,150         28,150         28,150
                                                             =========       =========      =========      =========      =========

  Diluted weighted average shares outstanding (d) ........      31,607          28,228         28,150         28,150         28,150
                                                             =========       =========      =========      =========      =========

Pro forma relating to change in tax status:(e)
  Historical income before provision for income
  Taxes and extraordinary item ...........................   $  54,989       $  40,022      $  17,608      $  32,127      $  22,547
  Pro forma provision for income taxes ...................      21,524          15,429          6,788         12,742          9,337
                                                             ---------       ---------      ---------      ---------      ---------
  Pro forma income before extraordinary item .............      33,465          24,593         10,820         19,385         12,310
  Extraordinary item .....................................      (4,941)(f)          --         (1,792)(g)         --             --
                                                             ---------       ---------      ---------      ---------      ---------
  Pro forma net income ...................................   $  28,524       $  24,593      $   9,028      $  19,385      $  12,310
                                                             =========       =========      =========      =========      =========
  Basic income before extraordinary item per share (c) ...   $    1.06       $    0.87      $    0.21      $    0.69
                                                             =========       =========      =========      =========
  Diluted income before extraordinary item per share (c) .   $    1.06       $    0.87      $    0.21      $    0.69
                                                             =========       =========      =========      =========
  Basic net income per share (c) .........................   $    0.91       $    0.87      $    0.15      $    0.69
                                                             =========       =========      =========      =========
  Diluted net income per share (c) .......................   $    0.90       $    0.87      $    0.15      $    0.69
                                                             =========       =========      =========      =========
  Pro forma for the Transactions and the IPO:(h)
  Net income .............................................                                  $  18,631      $  12,410
                                                                                            ---------      ---------
  Basic and diluted net income per share .................                                  $    0.66      $    0.44
                                                                                            =========      =========
Other Data:
  Income from operations margin (i) ......................        18.5%           22.7%          23.5%          21.5%          20.5%
  Capital expenditures ...................................   $  13,407       $   4,022      $   2,480      $   2,740      $   1,839
</TABLE>


<TABLE>
<CAPTION>
Balance Sheet Data:                                             1998           1997          1996(a)          1995           1994
                                                                ----           ----          -------          ----           ----
<S>                                                            <C>             <C>          <C>                   <C>            <C>
Net working capital (excluding cash and cash
  equivalents, marketable securities and current debt)       $  96,443       $  57,604      $  43,871      $  39,205      $  34,878
Property, plant and equipment, net                              29,551          14,263         14,424         13,153         12,109
Total assets                                                   290,018         173,010        142,978         75,857         64,882
Total debt (including current debt)                             43,531         114,379        120,728          8,792          9,291
Shareholders' equity                                           205,485          30,881          2,367         55,673         48,616
</TABLE>                                                                        

      (1) Amounts restated to include the acquisition of PR Nutrition which was
accounted for as a pooling of interests.

(a)   The Blechman Brothers, their parents, David and Jean Blechman, Stephen L.
      Welling, the President of the Nature's Herbs division of the Company
      (collectively, the "Stockholders"), GEI and certain other parties entered
      into a Stock Purchase and Sale Agreement, dated as of March 5, 1996, as
      amended (the "Acquisition Agreement"), pursuant to which, among other
      things, on May 7, 1996 (i) GEI acquired 48% of the Common Stock of Twinlab
      for aggregate consideration of $4.8 million and shares of Junior Preferred
      Stock for aggregate consideration of $37.0 million, (ii) certain other
      investors acquired 7% of the Common Stock of Twinlab for aggregate
      consideration of $0.7 million and shares of Senior Preferred Stock
      (together with 


                                       22
<PAGE>   23

      the Junior Preferred Stock, the "Preferred Stock") for aggregate
      consideration of $30.0 million, (iii) the Senior Executive Officers
      exchanged certain of their shares of common stock of Twin (formerly known
      as Natur-Pharma Inc.) for 45% of the outstanding shares of Common Stock of
      Twinlab valued at $4.5 million and, (iv) Twinlab purchased all of the
      remaining shares of common stock of Twin from the Stockholders for cash,
      resulting in Twin becoming a wholly owned subsidiary of Twinlab. The total
      cash consideration that the Stockholders received was approximately $212.5
      million, the majority of which was paid to David and Jean Blechman. The
      transactions described above are hereinafter referred to as the
      "Acquisition." Concurrently with the consummation of the Acquisition, the
      Company entered into a credit facility (the "Original Credit Facility")
      (which provided for a term loan facility in the amount of $53.0 million
      and a revolving credit facility in the amount of $15.0 million) and issued
      $100.0 million principal amount of its Old Notes in the Note Offering
      (collectively with the Acquisition and the Original Credit Facility, the
      "Transactions"). The net cash proceeds of the Note Offering were used,
      together with borrowings under the Original Credit Facility, the proceeds
      from the issuance of the Common Stock and Preferred Stock of Twinlab and
      available cash of the Company, to finance the Acquisition, to refinance
      approximately $7.0 million aggregate principal amount of debt of the
      Company and to pay related fees and expenses. The net proceeds of the IPO
      of approximately $93.7 million, together with available cash resources of
      the Company and approximately $20.0 million of borrowings under the
      Amended and Restated Credit and Guarantee Agreement, dated November 15,
      1996 (the "Revolving Credit Facility"), were used to repay all of the
      Company's outstanding indebtedness under the Original Credit Facility and
      to redeem all of the outstanding shares of Preferred Stock. See Note 1 to
      the Consolidated Financial Statements of the Company included under Item
      14 of this Annual Report.

(b)   Reflects $15.3 million of nonrecurring non-competition agreement expense
      and $0.4 million of Transaction expenses.

(c)   Basic and diluted income per share has been computed by dividing net
      income (and pro forma income before extraordinary item and pro forma net
      income for 1995 and 1996), after reduction for Preferred Stock dividends,
      by the applicable weighted average shares outstanding.

(d)   Diluted weighted average shares outstanding for 1994 through 1996
      represents the number of equivalent shares outstanding after giving
      retroactive effect to Twinlab's 18.5 for 1 stock split (effected in the
      form of a stock dividend) and assumes that the 10,175,000 shares of Common
      Stock issued in connection with the Acquisition and the 8,500,000 shares
      of Common Stock issued in connection with the Company's IPO were
      outstanding. See Notes to the Consolidated Financial Statements of the
      Company included under Item 14 of this Annual Report.

(e)   Prior to May 1996, the Company consisted of "S" corporations and,
      accordingly, federal and state taxes were generally paid at the
      shareholder level only. Upon consummation of the Transactions, the Company
      eliminated its "S" corporation status and, accordingly, became subject to
      federal and state income taxes. In addition, PR*Nutrition was an "S"
      corporation prior to its acquisition. Upon consummation of its
      acquisition, PR*Nutrition terminated its "S" corporation status.

(f)   Represents the write-off of previously deferred finance costs incurred in
      connection with the Note offering.

(g)   Represents the write-off of previously deferred finance costs incurred in
      connection with the Original Credit Facility (the "Extraordinary Item").

(h)   The unaudited pro forma results of operations assume the Transactions and
      the subsequent IPO occurred on January 1, 1995, and exclude the effect of
      (i) the nonrecurring non-competition agreement expense, (ii) the
      Transaction expenses, (iii) the Extraordinary Item and (iv) the dividends
      paid on the Preferred Stock which was redeemed with a portion of the net
      proceeds of the IPO, and reflects the additional interest expense relating
      to the financing of the Acquisition and the change in tax status described
      in Note (e) above. This data has been prepared for comparative purposes
      only and does not purport to represent what the Company's actual results
      of operations would have been had the Transactions and the subsequent IPO
      in fact occurred on January 1, 1995.

(i)   Income from operations margin equals income from operations as a
      percentage of net sales.

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

      The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the audited Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report.


                                       23
<PAGE>   24

Results of Operations

      The Company operates primarily in one business segment, the manufacture
and marketing of brand name nutritional supplements. Within this segment, the
Company operates through six primary business divisions: the TWINLAB division,
the herbal supplements and teas division, the Changes International division,
the Bronson division and the PR*Nutrition division. Products sold by the TWINLAB
division include vitamins, minerals, amino acids, herbs, sports nutrition
products and special formulas primarily under the TWINLAB brand name. The herbal
supplements and teas division produces and markets a full line of herbal
supplements and phytonutrients marketed under the Nature's Herbs and HealthCare
Naturals brands and a full line of herb teas marketed under the Alvita brand.
The Company's network marketing activities are conducted through Changes
International, which was acquired by the Company in November 1997. The Bronson
division, acquired effective April 30, 1998, markets vitamins, herbs,
nutritional supplements and health and beauty aids through its Bronson catalog,
and produces and markets a line of vitamins and supplements for sale exclusively
to United States military commissaries and also manufactures, through Health
Factors, private label vitamins and supplements for a number of other companies
on a contract marketing basis. The PR*Nutrition division markets nutritionally
enhanced food bars marketed under the PR*Bar and Ironman Triathlon trademarks.
The Company's publishing activities are conducted through ARP.

      The following table sets forth, for the periods indicated certain
historical income statement and other data for the Company and also sets forth
certain of such data as a percentage of net sales.

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                            -----------------------
                                                   1996(1)           1997(1)           1998
                                                   -------           -------           ----
Net Sales:                                                    (dollars in millions)
<S>                                           <C>        <C>    <C>        <C>    <C>        <C>  
TWINLAB Division ..........................   $136.2     74.8%  $156.0     67.9%  $172.7     51.8%
Herbal Supplements &
Herbal Teas Division ......................     28.7     15.7     45.2     19.7     65.8     19.7

Changes International Division ............       NA       NA      7.0      3.1     51.3     15.4
Bronson Division ..........................       NA       NA       NA       NA     18.7      5.6
PR*Nutrition Division .....................     11.9      6.6     16.4      7.1     20.9      6.3
Publishing Division .......................      5.2      2.9      5.0      2.2      4.0      1.2
                                              ======   ======   ======   ======   ======   ======
Net Sales .................................    182.0    100.0    229.6    100.0    333.4    100.0
Gross Profit ..............................     79.8     43.8    104.2     45.4    169.9     51.0
Operating Expenses ........................     37.1     20.4     52.1     22.7    106.8     32.0
Merger Expenses ...........................       NA       NA       NA       NA      1.4       .4
                                              ------   ------   ------    -----   ------   ------
Income From Operations ....................    $42.7     23.5%   $52.1     22.7%   $61.7     18.5%
</TABLE>

      (1) Amounts restated to include the acquisition of PR*Nutrition which was
accounted for as a pooling-of-interests.

Fiscal 1998 Compared to Fiscal 1997

      Net Sales. Net sales in 1998 were $333.4 million compared to $229.6
million in 1997, an increase of $103.8 million or 45.2%. Sales at the TWINLAB
division increased from $156.0 million in 1997 to $172.7 million in 1998, an
increase of $16.7 million or 10.7%. This increase was primarily the result of
increased demand in each of the vitamin, mineral and nutritional supplements,
sports nutrition and special formula product lines and reflected, in part,
increased promotion and advertising and in part the successful introduction of
new products, as well as strong consumer interest in existing products. Sales of
herbal supplements and teas increased to $65.8 million in 1998 from $45.2 in
1997, an increase of $20.6 million or 45.6% compared to 1997. The herbal
supplements and teas category benefited from strong consumer demand for St.
John's Wort, Gingko, Kava Kava and Saw Palmetto through a mass market private
label sales program and in the health and natural food store channel.. Changes
International, which operates a network marketing sales force was acquired in
November 1997 and contributed $7.0 million to 1997 sales for the two month
period ended December 31, 1997, and $51.3 million to 1998 net sales.

      The Bronson division, which was acquired effective April 30, 1998,
contributed $18.7 million to 1998 net sales. PR*Nutrition sales in 1998 were
$20.9 million, an increase of $4.5 million or 27.4% from the $16.4 million in
sales in 1997. The increase was 


                                       24
<PAGE>   25

primarily due to the strong consumer demand for nutritionally enhanced food bar
products as well as increased penetration of the health and natural food store
and mass market channels with the Ironman Triathlon food bar. Publishing sales
declined from $5.0 million in 1997 to $4.0 million in 1998.

      Gross Profit. Gross profit for the year ended December 31, 1998 was $169.9
million, representing an increase of $65.7 million, or 63.1% as compared to
$104.2 million for the year ended December 31, 1997. Gross profit margin was
51.0% for the year ended December 31, 1998, as compared to 45.4% for the year
ended December 31, 1997. The overall increase in gross profit dollars was
primarily attributable to the Company's higher sales volume for the year ended
December 31, 1998 and to the increase in gross profit margin. The increase in
gross profit margin for the year ended December 31, 1998, as compared to the
year ended December 31, 1997, was primarily due to higher gross profit margins
of the Changes International division compared to the other divisions of the
Company.

      Operating Expenses. Operating expenses for the year ended December 31,
1998 were $106.8 million, representing an increase of $54.7 million, or 105.0%,
compared to $52.1 million for the year ended December 31, 1997. As a percent of
net sales, operating expenses increased to 32% for the year ended December 31,
1998 from 22.7% for the year ended December 31, 1997. The increase in operating
expenses and operating expenses as a percent of net sales was primarily
attributable to increased selling and marketing expenses and higher general and
administrative expenses resulting from the Company's increased level of
operations for the year ended December 31, 1998. These expenses were comprised
primarily of increased variable commission expense for the Changes International
division, an increase in the Company's advertising and marketing expenses and
increased general administrative expenses incurred to support the increased
level of business activity.

      Merger Expenses. Merger expenses were $1.4 million for the year ended
December 31, 1998 and were incurred, as a result of the acquisition of
PR*Nutrition.

      Income from Operations. Income from operations for the year ended December
31, 1998, was $61.7 million, representing an increase of $9.6 million, or 18.4%,
as compared to $52.1 million for the year ended December 31, 1997. Income from
operations margin decreased to 18.5% of net sales for the year ended December
31, 1998 from 22.7% of net sales for the year ended December 31, 1997. The
increase in income from operations as a percent of net sales was primarily due
to the Company's higher sales volume together with higher gross margins. The
decrease in income from operations margin was primarily due to higher operating
expenses as a percent of net sales.

      Other Expense. Other expense for the year ended December 31, 1998 was $6.7
million, as compared to $12.1 million for the year ended December 31, 1997. The
net decrease of $5.4 million is primarily due to increased interest income of
$1.2 million and decreased interest expense of $4.2 million, both primarily as a
result of reduced debt levels and increased cash balances which resulted
primarily from the Company's second public offering in April 1998.

      Income Taxes. PR*Nutrition was an "S" Corporation prior to it acquisition
on August 21, 1998. Accordingly, federal taxes were generally paid at the
shareholder level only. The PR*Nutrition provision for taxes for the year ended
December 31, 1997 and through August 21, 1998 included state taxes only. The
Consolidated Statements of Income include pro forma information which reflects
adjustments to historical net income as if PR*Nutrition had not elected "S"
Corporation status for income tax purposes.

Fiscal 1997 Compared to Fiscal 1996

      Net Sales. Net sales for fiscal 1997 were $229.6 million, an increase of
$47.6 million, or 26.2%, as compared to net sales of $182.0 million for fiscal
1996. The 26.2% increase was attributable to increased sales in each of the
Company's product categories other than publishing. TWINLAB division sales were
$156.0 million, an increase of $19.8 million or 45.5% compared to the $136.2
million in sales in 1997. The increase was due to increased demand for its
sports nutrition and special formula products. The increase in demand was
primarily due to the expansion of established accounts, increased sales of
existing products, new product introductions and product specific advertising.
Sales of the herbal supplements and teas division were $45.2 million, an
increase of $16.5 million or 57.5% from the $28.7 million in sales in 1997. The
net sales increase in herbal supplements and herbal teas was primarily due to
the expansion of established accounts in domestic health and natural food
stores, improved business development, including a new private label
relationship in the mass market channel of distribution, increased sales of
existing products and new product introductions. Changes International
contributed net sales of $7.0 million after its acquisition in November 1997.
PR*Nutrition sales were $16.4 million, an increase of $4.5 million, or 37.8%,
compared to sales of $11.9 million in 1996. The increase was a result of
increased demand for nutritionally enhanced bar products.

      Gross Profit. Gross profit for fiscal 1997 was $104.2 million, which
represented an increase of $24.4 million or 30.6%, as compared to $79.8 million
for fiscal 1996. Gross profit margin was 45.4% for 1997, as compared to 43.8%
for fiscal 1996. The 


                                       25
<PAGE>   26

overall increase in gross profit was primarily attributable to the Company's
higher sales volume for fiscal 1997 as compared to fiscal 1996. The increase in
gross profit margin for fiscal 1997 as compared to fiscal 1996 was due primarily
to a more favorable product mix, primarily due to higher margin sports
nutrition, special formulas, and nutritionally enhanced bar products; to higher
gross profit margins on recently introduced new product formulations and product
line extensions, to lower unit manufacturing overhead as a result of overhead
costs increasing at a rate lower than sales and to higher gross margins on sales
through the network marketing business, partially offset by an increase in sales
discounts and allowances.

      Operating Expenses. Operating expenses were $52.1 million for fiscal 1997,
representing an increase of $15.0 million, or 40.4%, as compared to $37.1
million for fiscal 1996. As a percent of net sales, operating expenses increased
from 20.4% for fiscal 1996 to 22.7% for fiscal 1997. The increase in operating
expenses and operating expenses as a percent of net sales was primarily
attributable to increased selling and marketing expenses and higher general and
administrative expenses due to increased levels of promotional and sales
activities, including variable commission expense relating to Changes
International, and the hiring of additional administrative staff.

      Income from Operations. Income from operations was $52.1 million for
fiscal 1997, representing an increase of $9.4 million or 22.1% as compared to
$42.7 million for fiscal 1996. Income from operations margin decreased to 22.7%
of net sales for fiscal 1997, as compared to 23.5% of net sales for fiscal 1996.
The increase in income from operations for 1997 was primarily due to the
Company's higher sales volume together with higher gross margins, offset in part
by higher operating expenses. The decrease in operating margin as a percent of
net sales in 1997 was due to higher operating expenses as a percent of net
sales, partially offset by increased sales volumes together with higher gross
margins.

      Other Income (Expense). Other expense was $12.1 million for fiscal 1997,
as compared to $25.1 million for fiscal 1996. The net decrease of $13.0 million
is primarily attributable to $15.7 million of nonrecurring non-competition
agreement expense and transaction expenses which were incurred in 1996 in
connection with the Transactions offset by an increase in net interest expense
of $2.7 million resulting from increased borrowings during 1997 as compared to
1996.

      Income Taxes. The Company consisted of "S" Corporations through the
consummation of the Acquisition on May 7, 1996. Accordingly, federal and state
taxes were generally paid at the shareholder level only. The provision for
income taxes through May 7, 1996 represented state taxes for New York, which
imposes a corporate tax for all income in excess of $0.2 million. Upon
consummation of the Transactions, the Company eliminated its "S" Corporation
status and, accordingly, became subject to Federal and state income taxes.
PR*Nutrition was an "S" Corporation prior to its acquisition on August 21, 1998 
Accordingly, federal taxes were generally paid at the shareholder level only. 
The PR*Nutrition provision for taxes for the years ended December 31, 1996, and
1997 and through August 21, 1998 included state taxes only. The consolidated 
Statements of Income include pro forma information which reflects adjustments 
to historical net income as if the company and PR*Nutrition had not elected "S"
Corporation status for income tax purpose.

Liquidity and Capital Resources

      For fiscal 1998, cash provided by operating activities was $13.9 million,
as compared to $14.9 million for fiscal 1997 and $28.2 million for fiscal 1996.
The decrease in fiscal 1998 compared to fiscal 1997 was primarily due to a net
increase in operating assets, principally inventory, partially offset by higher
net income and by an increase in accounts payable and accrued liabilities. The
increase in inventory is due to higher sales volume and to a reduction in
inventory turnover. The decrease in fiscal 1997 compared to fiscal 1996 was
primarily due to higher accounts receivable and inventory balances due to higher
levels of sales volume as well as the timing of payments of accrued expenses and
other current liabilities.

      Cash provided from financing activities in 1998 was $68.1 million, which
came from the Company's public offering in April 1998. Approximately $74.9
million of the net proceeds of such offering were used to redeem senior
subordinated notes and repay debt, as discussed in the succeeding two
paragraphs. Cash used in financing activities was $9.6 million for fiscal 1997,
and represented repayment of certain outstanding indebtedness. Cash used in
financing activities for fiscal 1996 was $30.7 million, reflecting the net cash
effect of the Transactions (including the payments to the Stockholders made
pursuant to the Acquisition) and the IPO, and the application of the proceeds
therefrom, the repayment of $6.0 million of outstanding indebtedness and
distributions of $8.9 million to the Stockholders prior to the consummation of
the Acquisition.

      In April 1998, the Company completed a public offering of 9.2 million
shares of its common stock priced at $36.50 per share. Of the total shares
offered, 4.2 million shares were sold by the Company. The net proceeds to the
Company from the offering, after expenses, were approximately $147.5 million. Of
the net proceeds to the Company, approximately $56.1 million was used to pay the
purchase price for the Bronson acquisition (discussed in Note 3 of the Notes to
the Consolidated Financial Statements), including related fees and expenses;
approximately $40.1 million was used to redeem $35.0 million of the Company's
senior subordinated notes at a redemption price of 109 1/2 percent, plus accrued
and unpaid interest; approximately $9.9 million was 


                                       26
<PAGE>   27

used to reduce outstanding borrowings under the Company's revolving credit
facility, including accrued and unpaid interest; and approximately $41.4 million
was available for working capital and other general corporate purposes.

      In July 1998, the Company purchased $18.1 million aggregate principal
amount of senior subordinated notes in the open market at a price of 112 1/2
percent or an aggregate of $20.8 million, including accrued interest of $.4
million. In September 1998, the Company purchased an additional $3.6 million
aggregate principal amount of senior subordinated notes in the open market at a
price of 108 1/2 percent or an aggregate of $4.1 million, including accrued
interest of $.1 million. The Company may from time to time purchase additional
senior subordinated notes in the open market.

      Capital expenditures were $13.4 million in 1998. Capital expenditures in
1998 included approximately $9.0 million for an 85,000 square foot expansion of
the Utah Facility expected to be completed in the first half of 1999. The
balance of the 1998 capital expenditures was used primarily for production
equipment and computer hardware and software. In addition, $4.2 million of the
increase in other assets in 1998 represented deposits made on fixed assets to be
completed in 1999. Capital expenditures in 1997 were $4.0 million ($3.1 million
of which was for equipment that was subsequently sold and leased back) and $2.5
million for fiscal 1996. Historical capital expenditures were primarily used to
purchase production equipment, expand capacity and improve manufacturing
efficiency. Capital expenditures are expected to be approximately $10.0 million
during fiscal 1999, of which approximately $3.0 million will be used to complete
the Company's $13.3 million Utah Facility expansion (approximately $8.0 million
of which will be financed by a ten year mortgage). The remainder of which will
be used primarily to purchase manufacturing equipment and computer hardware and
software and additional acreage adjacent to the Utah Facility ($1.3 million) The
Company estimates that its historical level of maintenance capital expenditures
has been approximately $1.0 million per fiscal year.

      On November 12, 1997, the Company acquired Changes International for a
purchase price (including fees and expenses) of approximately $13.7 million,
consisting of $7.9 million in cash and 312,500 shares of Twinlab Common Stock.
The cash portion of the purchase price was financed through borrowings under the
Company's Revolving Credit Facility. Changes International markets and
distributes a line of nutritional supplements through a network of independent
distributors located primarily throughout the United States and Canada. The
acquisition was recorded using the purchase method of accounting.

      On April 30, 1998 the Company acquired substantially all of the assets and
assumed certain liabilities of the Bronson Division of Jones Medical Industries,
Inc. The purchase price was approximately $56.1 million, including related fees
and expenses. Bronson manufactures, markets and distributes a line of over 400
vitamins, herbs and nutritional supplements and health and beauty aids, which
are sold under the Bronson brand name through catalogs and direct mailings to
customers, including healthcare and nutritional professionals. Bronson markets
the MD Pharmaceutical brand of vitamins, herbs and nutritional supplements to
United States military commissaries and also manufactures, through Health
Factors, private label vitamins and nutritional supplements on a contract
manufacturing basis. This acquisition was recorded using the purchase method of
accounting.

      On August 21, 1998, the Company acquired PR*Nutrition for 1,150,000 shares
of Twinlab common Stock having a market value at the date of the merger of
approximately $39.7 million. The Company incurred approximately $1.4 million in
merger related expense in connection with this transaction which is included in
a separate item in operating expenses in the Company's Statement of Income.
PR*Nutrition markets and distributes nutritionally enhanced food bars and other
nutritional products that are marketed to active lifestyle consumers. The
transaction has been accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements have been retroactively restated to
include the accounts of PR*Nutrition for all periods presented.

      Twinlab Corporation has no operations of its own and accordingly has no
independent means of generating revenue. As a holding company, Twinlab
Corporation's internal sources of funds to meet its cash needs, including
payment of expenses, are dividends and other permitted payments from its direct
and indirect subsidiaries. The Indenture relating to the Notes and the Revolving
Credit Facility impose upon the Company certain financial and operating
covenants, including, among others, requirements that the Company maintain
certain financial ratios and satisfy certain financial tests, limitations on
capital expenditures and restrictions on the ability of the Company to incur
debt, pay dividends or take certain other corporate actions. In addition, the 
Revolving Credit Agreement requires the Company to be Year 2000 compliant by 
September 30, 1999.

      On February 25, 1999, the Company announced that its Board of Directors
had approved a share repurchase program authorizing the Company to buy up to 5
million shares of its Common Stock. The Company has obtained the required
waivers under its $50 million Revolving Credit Agreement to engage in purchases
and intends to use funds available under the agreement and internally generated
cash to purchase such shares. The Company will purchase Common Stock from time
to time in the open market and in individually negotiated transactions. The
amount and timing of any purchase will be dependent upon a number of factors,
including the price and availability of the Company's shares and general market
conditions.

      Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all


                                       27
<PAGE>   28

required capital expenditures, purchase its shares under the share repurchase
program and pursue its business strategy for at least the next 18 to 24 months.
The Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations, borrowings under the existing $50 million
Revolving Credit Facility and a planned expansion of the facility currently
under discussion with its banks. As of December 31, 1998, $50.0 million of
borrowings were available under the Revolving Credit Facility for working
capital requirements and general corporate purposes.

      One of the Company's business strategies is to pursue acquisition
opportunities that complement or extend its existing products or product lines,
or are compatible with its business philosophy and strategic goals. Future
acquisitions could be financed by internally generated funds, bank borrowings,
public offerings or private placements of equity or debt securities, or a
combination of the foregoing. Up to $35.0 million of borrowings under the
Revolving Credit Facility is available to fund acquisitions subject to certain
conditions and reductions (approximately $35.0 million of which was available as
of December 31, 1998). There can be no assurance that the Company will be able
to make acquisitions on terms favorable to the Company and that funds to finance
an acquisition will be available or permitted under the Company's financing
instruments.

Recent Developments (Trends)

      The company believes that the growth rate in the nutritional supplement
industry has slowed significantly compared to the growth rate experienced in the
first six months of 1998. The Company believes the slow down in growth is in
part due to a decline in sales at the retail level of St. John's Wort and other
herbal products that were in greater demand in the first half of 1998 and to a
more generalized industry-wide slowing of growth across most product categories.
The Company believes that as a result, inventories at the retail and distributor
level have become excessive and therefore orders to manufacturers and suppliers
have been reduced. The Company's incoming orders showed a significant decline
from the third to the fourth quarters of 1998, which is expected to continue
into the first quarter of 1999. For these reasons, the Company announced on
February 24, 1999, that with respect to the first quarter of 1999, sales are
expected to somewhat trail the first quarter for 1998 and that net income will
be significantly below the first quarter of 1998. The Company indicated that the
industry and the Company had been impacted by a backlog of inventory that was
produced to sustain the significantly higher growth rates that had been
experienced in early 1998 as compared to current rates. In an effort to reduce
retail inventories, the Company has determined that a modest increase in sales
and marketing expense in the first quarter of 1999 compared to fourth quarter of
1998 levels is warranted, which will represent a significant increase over such
expenses in the first quarter of 1998.

Impact of Inflation

      Generally, the Company has been able to pass on inflation-related cost
increases; consequently, inflation has not had a material impact on the
Company's historical operations or profitability.

Recent Financial Accounting Standards Board Statements

      During 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS No. 133 is not expected to have a material effect on the
Company's financial statements.

Year 2000

      The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 instead of the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations.

      The Company recognizes the importance of ensuring that neither its
customers nor its business operations are disrupted as a result of Year 2000
software failures. The Company has surveyed, and continues to communicate with,
customers, suppliers, financial institutions and other vendors with which it
does business to coordinate Year 2000 conversion efforts. Based on the results
of this ongoing information exchange, the Company believes it has identified any
existing risks to be addressed. At this time, the Company believes that any
risks are minimal and it believes that its systems are substantially Year 2000
compliant. Management has initiated a Company-wide program to prepare the
Company's internal computer systems for Year 2000 compliance by August 1, 1999.
The Company expects to incur internal staff costs as well as other expenses
necessary during the course of such compliance efforts and the Company expects
to both replace some systems and upgrade others. The total cost of this effort
is estimated to be 


                                       28
<PAGE>   29

in the range of $150,000 - $250,000. The Company does not expect Year 2000
issues to materially effect its products, services, competitive position or
financial performance. However, there can be no assurance that this will be the
case. The ability of third parties with whom the Company transacts business to
adequately address their internal Year 2000 issues is outside the Company's
control. There can be no assurance that the failure of such third parties to
adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

General

      The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by the Company of future events or losses.

      The Company's cash flows and earnings are subject to fluctuations
resulting from changes in interest rates. The Company currently is not party to
any derivative instruments and its current policy does not allow speculation in
derivative instruments for profit or execution of derivative instrument
contracts for which there are no underlying exposures. The Company does not use
financial instruments for trading purposes.

      The Company measures its market risk, related to its holdings of financial
instruments, based on changes in interest rates utilizing a sensitivity
analysis. The sensitivity analysis measures the potential loss in fair values,
cash flows and earnings based on a hypothetical 10% change in interest rates.
The Company used current market rates on its market risk sensitive assets and
liabilities to perform the sensitivity analysis.

      Interest Rate Risk

      The Company is exposed to changes in interest rates on its floating rate
revolving credit facility and fixed rate Senior Subordinated Notes. At December
31, 1998, based on a hypothetical 10% decrease in interest rates related to the
Company's fixed rate Senior Subordinated Notes, the Company estimates that the
fair value of its fixed rate debt would have increased by $2.0 million. The
Company had no amounts outstanding under its revolving agreement at December 31,
1998.

      Additional information regarding the Company's debt is contained in Note 8
to the consolidated financial statements.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Consolidated Financial Statements and notes thereto are presented
under Item 14 of this Report.

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

      Not applicable.


                                       29
<PAGE>   30

                                    PART III

Information required under PART III (Items 10, 11, 12, and 13) is incorporated
herein by reference to the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission within 120 days after the year covered by
this Form 10-K with respect to its Annual Meeting of Stockholders to be held on
June 17, 1999.


                                     PART IV

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

(a)    (1) and (2). Financial Statements and Financial Statement Schedules:

                                                                           Page
TWINLAB CORPORATION AND SUBSIDIARIES

   Independent Auditors' Report............................................F-1

   (1)  Financial Statements
        Consolidated Balance Sheets as of December 31, 1998 and 1997.......F-2
        Consolidated Statements of Income for the Years Ended December 
        31, 1998, 1997 and 1996............................................F-3
        Consolidated Statements of Shareholders' Equity for the Years 
        Ended December 31, 1998, 1997 and 1996.............................F-4
        Consolidated Statements of Cash Flows for the Years Ended 
        December 31, 1998, 1997 and 1996...................................F-5
        Notes to Consolidated Financial Statements.........................F-6

   (2)  Financial Statement Schedules
        For the Three Years Ended December 31, 1998........................S-1

Schedule I - Condensed Financial Information of Registrant*................S-1

Schedule II - Valuation and Qualifying Accounts............................S-4

(b) Reports on Form 8-K:

      No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this Report.

(c)   Exhibits:

Exhibit
Number      Description of Exhibit

2.1      -- Stock Purchase and Sale Agreement, dated as of March 5, 1996,
            among David Blechman, Jean Blechman, Brian Blechman, Neil Blechman,
            Ross Blechman, Steve Blechman, Dean Blechman, Stephen Welling, the
            Registrant, Natur-Pharma Inc. and GEI (the "Stock Purchase and Sale
            Agreement") (incorporated by reference to Exhibit 2.1 to the
            Registration Statement on Form S-1, dated June 4, 1996, as amended,
            filed by the Registrant, Registration No. 333-05191; "Twinlab S-1").

2.1.1    -- Amendment to the Stock Purchase and Sale Agreement, dated May 6,
            1996 (incorporated by reference to Exhibit 2.1.1 to Twinlab S-1).

3.1      -- Second Amended and Restated Certificate of Incorporation of the
            Registrant (incorporated by reference to Exhibit 3.4 to the
            Registration Statement on Form S-4, dated June 25, 1996, as amended,
            filed by Twin, Registration No. 333-06781; "Twin S-4").

3.2      -- Amended and Restated By-laws of the Registrant (incorporated by
            reference to Exhibit 3.5 to Twin S-4).


                                       30
<PAGE>   31

4.1      -- Indenture, dated May 7, 1996, among Twin, and ARP and the
            Registrant (together, the "Guarantors"), and Fleet National Bank as
            Trustee, Registrar, Paying Agent and Securities Agent, regarding
            Twin's 10 1/4% Senior Subordinated Notes due 2006 and the 10 1/4%
            Senior Subordinated Notes due 2006 issued in exchange therefor
            (incorporated by reference to Exhibit 4.2 to Twin S-1).

4.2      -- First Supplemental Indenture, dated as of December 1, 1997, to
            the Indenture dated as of May 7, 1996, among Twin and ARP, Changes
            International and the Registrant, as Guarantors and State Street
            Bank and Trust Company (as successor to Fleet National Bank), as
            Trustee regarding Twin's 101/4% Senior Subordinated Notes due 2006
            (incorporated by reference to Exhibit 4.2 to the Registration
            Statement on Form S-3, dated March 17, 1998, Registration No.
            333-48091).

4.3      -- Second Supplemental Indenture, dated as of May 14, 1998, to the
            Indenture dated as of May 7, 1996, among Twin and ARP, Changes
            International, Bronson, Health Factors and the Registrant, as
            Guarantors and State Street Bank and Trust Company (as successor to
            Fleet National Bank), as Trustee regarding Twin's 10 1/4% Senior
            subordinated Notes due 2006.*

4.4      -- Third Supplemental Indenture, dated as of September 15, 1998, to the
            Indenture dated as of May 7, 1996, among Twin and ARP, Changes
            International, Bronson, Health Factors, PR* Nutrition and the
            Registrant, as Guarantors and State Street Bank and Trust Company
            (as successor to Fleet National Bank), as Trustee regarding Twin's
            10 1/4% Senior Subordinated Notes due 2006.*

10.1     -- Credit and Guarantee Agreement, dated May 7, 1996, among Twin,
            the Registrant, the financial institutions named therein, Chemical
            Bank as Administrative Agent and The Bank of New York as
            Documentation Agent (incorporated by reference to Exhibit 4.3 to
            Twinlab S-1).

10.2     -- Amended and Restated Credit and Guarantee Agreement, dated
            November 15, 1996, among Twin, the Registrant, the financial
            institutions named therein, The Chase Manhattan Bank as
            Administrative Agent and The Bank of New York as Documentation Agent
            (incorporated by reference to Exhibit 10.2 to the Registrant's 1996
            Annual Report on Form 10-K; the "1996 Annual Report").

10.3     -- Guarantee and Collateral Agreement, dated May 7, 1996, among the
            Registrant, Twin, and ARP in favor of Chemical Bank, as
            Administrative Agent (incorporated by reference to Exhibit 10.1 to
            Twinlab S-1).

10.4     -- Form of Revolving Credit Note (incorporated by reference to
            Exhibit 10.4 to the 1996 Annual Report).

10.5     -- Form of Swing Line Note (incorporated by reference to Exhibit
            10.5 to the 1996 Annual Report).

10.6     -- Deed of Trust, dated May 7, 1996 (the "Deed of Trust"), from Twin
            to First American Title Company of Utah, Trustee for the use and
            benefit of Chemical Bank, as Administrative Agent, Beneficiary
            (incorporated by reference to Exhibit 10.6 to Twinlab S-1).

10.7     -- Amendment to Deed of Trust, dated November 20, 1996, among Twin
            and The Chase Manhattan Bank (incorporated by reference to Exhibit
            10.7 to the 1996 Annual Report).

10.8     -- Stockholders Agreement, dated May 7, 1996, among Brian Blechman,
            Neil Blechman, Ross Blechman, Steve Blechman, Dean Blechman and
            Stephen Welling, the Registrant and GEI (incorporated by reference
            to Exhibit 10.8 to Twinlab S-1).

10.9     -- Secondary Stockholders Agreement among Brian Blechman, Neil
            Blechman, Ross Blechman, Steve Blechman, Dean Blechman and Stephen
            Welling, the Registrant, GEI, 


                                       31
<PAGE>   32

            DLJ Investment Funding, Inc., DLJ Investment Partners, L.P., Chase
            Equity Associates, L.P., PMI Mezzanine Fund, L.P. and State
            Treasurer of the State of Michigan, Custodian of the Michigan Public
            School Employees' Retirement System, State Employees' Retirement
            System, Michigan State Police Retirement System, and Michigan Judges
            Retirement System (incorporated by reference to Exhibit 10.9 to
            Twinlab S-1).

10.10    -- Employment Agreement, dated May 7, 1996, between Twin and Brian
            Blechman (incorporated by reference to Exhibit 10.10 to Twinlab
            S-1).

10.11    -- Employment Agreement, dated May 7, 1996, between Twin and Neil
            Blechman (incorporated by reference to Exhibit 10.11 to Twinlab
            S-1).

10.12    -- Employment Agreement, dated May 7, 1996, between Twin and Ross
            Blechman (incorporated by reference to Exhibit 10.12 to Twinlab
            S-1).

10.13    -- Employment Agreement, dated May 7, 1996, between Twin and Steve
            Blechman (incorporated by reference to Exhibit 10.13 to Twinlab
            S-1).

10.14    -- Employment Agreement, dated May 7, 1996, between Twin and Dean
            Blechman (incorporated by reference to Exhibit 10.14 to Twinlab
            S-1).

10.15    -- Employment Agreement, dated May 7, 1996, between Twin and Stephen
            Welling (incorporated by reference to Exhibit 10.15 to Twinlab S-1).

10.16    -- Consulting Agreement, dated May 7, 1996, between Twin and David
            Blechman (incorporated by reference to Exhibit 10.16 to Twinlab
            S-1).

10.17    -- Consulting Agreement, dated May 7, 1996, between Twin and Jean
            Blechman (incorporated by reference to Exhibit 10.17 to Twinlab
            S-1).

10.18    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            David Blechman (incorporated by reference to Exhibit 10.18 to
            Twinlab S-1).

10.19    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Jean Blechman (incorporated by reference to Exhibit 10.19 to Twinlab
            S-1).

10.20    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Brian Blechman (incorporated by reference to Exhibit 10.20 to
            Twinlab S-1).

10.21    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Neil Blechman (incorporated by reference to Exhibit 10.21 to Twinlab
            S-1).

10.22    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Ross Blechman (incorporated by reference to Exhibit 10.22 to Twinlab
            S-1).

10.23    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Steve Blechman (incorporated by reference to Exhibit 10.23 to
            Twinlab S-1).

10.24    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Dean Blechman (incorporated by reference to Exhibit 10.24 to Twinlab
            S-1).

10.25    -- Noncompetition Agreement, dated May 7, 1996, between Twin and
            Stephen Welling (incorporated by reference to Exhibit 10.25 to
            Twinlab S-1).

10.26    -- Management Services Agreement, dated May 7, 1996, between Twin
            and Leonard Green & Partners, L.P. (incorporated by reference to
            Exhibit 10.26 to Twinlab S-1).

10.27    -- Form of Restated Standard Indemnity Agreement, dated August 1992,
            between Twin and 


                                       32
<PAGE>   33

            Showa Denko America, Inc. (incorporated by reference to Exhibit
            10.28 to Twinlab S-1).

10.28    -- Form of SDR Guaranty Agreement, dated August 1992, between Twin
            and Showa Denko K.K. (incorporated by reference to Exhibit 10.29 to
            Twinlab S-1).

10.29    -- Twinlab Corporation 1996 Stock Incentive Plan (incorporated by
            reference to Exhibit 10.30 to Twinlab S-1).

10.30    -- Stock Option Agreement, dated November 5, 1997, between the
            Registrant and John McCusker. (incorporated by reference to Exhibit
            10.30 to the Registrant's 1997 Annual Report on Form 10-K, as
            amended; the 1997 Annual Report)

10.31    -- Letter, dated October 7, 1997, between the Registrant and John
            McCusker. (incorporated by reference to Exhibit 10.31 to the 1997
            Annual Report)

10.32    -- Construction Contract, dated February 27, 1998, between Twin and
            Interwest Construction Company, Inc. (incorporated by reference to
            Exhibit 10.32 to the 1997 Annual Report)

10.33    -- Lease, dated January 16, 1998, between Twin and Reckson Operating
            Partnership, L.P. (incorporated by reference to Exhibit 10.33 to the
            1997 Annual Report)

10.34    -- Asset Purchase Agreement, dated as of March 17, 1998, among Jones
            Medical Industries, Inc., JMI-Phoenix Laboratories, Inc., Twin and
            Bronson Laboratories, Inc. (incorporated by reference to Exhibit
            10.34 to the 1997 Annual Report)

10.35    -- Stock Purchase Agreement, dated as of August 19, 1998, by and
            among Twinlab, Twin, William Logue, Sheri Sears and Barry Nussbaum
            (incorporation by reference to Exhibit 2.1 to the Registrant's
            Current Report on Form 8-K dated, August 21, 1998).

10.36    -- Twinlab Corporation 1998 Stock Incentive Plan*

21.1     -- List of Registrant's Subsidiaries.*

23.1     -- Consent of Deloitte & Touche LLP.*

27       -- Financial Data Schedule.*

----------

* Filed herewith.


                                       33
<PAGE>   34

                                   SIGNATURES

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.

                                        TWINLAB CORPORATION

                                        By: /s/ Ross Blechman

                                        Ross Blechman Chairman of the Board,
                                        Chief Executive Officer and President


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 and
in the capacities and on the dates indicated.


Signature                  Title(s)                               Date

/s/ Ross Blechman          Chairman of the Board, Chief           March 31, 1999
-----------------          Executive Officer, President 
Ross Blechman              and Director (Principal      
                           Executive Officer)           
                           

/s/ Neil Blechman          Executive Vice President, Secretary    March 31, 1999
-----------------          and Director
Neil Blechman              

/s/ Brian Blechman         Executive Vice President, Treasurer    March 31, 1999
------------------         and Director
Brian Blechman             

/s/ Steve Blechman         Executive Vice President and           March 31, 1999
------------------         Director
Steve Blechman             

/s/ Dean Blechman          Executive Vice President and           March 31, 1999
-----------------          Director
Dean Blechman              

/s/ John McCusker          Chief Financial Officer (Principal     March 31, 1999
-----------------          Financial and Accounting Officer)
John McCusker              

/s/ Stephen L. Welling     Director                               March 31, 1999
----------------------
Stephen L. Welling

/s/ Jonathan D. Sokoloff   Director                               March 31, 1999
------------------------
Jonathan D. Sokoloff

/s/ John G. Danhakl        Director                               March 31, 1999
-------------------
John G. Danhakl
<PAGE>   35
INDEPENDENT AUDITORS' REPORT


To the Shareholders of
  Twinlab Corporation and subsidiaries
  Hauppauge, New York

We have audited the accompanying consolidated balance sheets of Twinlab
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Twinlab Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


/s/ Deloitte & Touche LLP


Jericho, New York
March 16, 1999


                                      F-1
<PAGE>   36
TWINLAB CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                         1998             1997
                                                                       ---------        ---------
                                                                                        RESTATED
                                                                                        (NOTE 3)
<S>                                                                    <C>              <C>      
ASSETS (Note 8)
CURRENT ASSETS:
   Cash and cash equivalents                                           $  12,489        $   4,212
   Accounts receivable, net of allowance for bad debts of
     $502 and $467, respectively (Note 13)                                60,254           44,890
   Inventories (Note 4)                                                   72,355           37,525
   Deferred tax assets (Note 10)                                           1,629            1,615
   Prepaid expenses and other current assets                               3,207            1,324
                                                                       ---------        ---------
           Total current assets                                          149,934           89,566
PROPERTY, PLANT AND EQUIPMENT, Net (Note 5)                               29,551           14,263
DEFERRED TAX ASSETS (Note 10)                                             45,347           48,777
OTHER ASSETS (Note 6)                                                     65,186           20,404
                                                                       ---------        ---------
TOTAL                                                                  $ 290,018        $ 173,010
                                                                       =========        =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Current portion of long-term debt (Note 8)                          $      80        $  14,112
   Accounts payable                                                       30,959           17,172
   Accrued expenses and other current liabilities (Note 7)                10,043           10,578
                                                                       ---------        ---------
           Total current liabilities                                      41,082           41,862
LONG-TERM DEBT, less current portion (Note 8)                             43,451          100,267
                                                                       ---------        ---------
           Total liabilities                                              84,533          142,129
                                                                       ---------        ---------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
SHAREHOLDERS' EQUITY (Notes 1 and 9):
   Preferred stock, $.01 par value; 2,000,000 shares authorized;
     none issued                                                              --               --
   Common stock, $1.00 par value; 75,000,000 shares authorized;
     32,705,049 shares outstanding as of December 31, 1998
     and 28,470,100 as of December 31, 1997                               32,705           28,470
   Additional paid-in capital                                            289,327          145,917
   Accumulated deficit                                                  (116,547)        (143,506)
                                                                       ---------        ---------
           Total shareholders' equity                                    205,485           30,881
                                                                       ---------        ---------
TOTAL                                                                  $ 290,018        $ 173,010
                                                                       =========        =========
</TABLE>

See notes to consolidated financial statements.


                                      F-2
<PAGE>   37
TWINLAB CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                     1998             1997            1996
                                                                  ---------        ---------        ---------
                                                                                   RESTATED         RESTATED
                                                                                    (NOTE 3)         (NOTE 3)
<S>                                                               <C>              <C>              <C>      
NET SALES (Note 13)                                               $ 333,375        $ 229,614        $ 182,010
COST OF SALES                                                       163,433          125,426          102,218
                                                                  ---------        ---------        ---------
GROSS PROFIT                                                        169,942          104,188           79,792
OPERATING EXPENSES                                                  106,755           52,072           37,108
MERGER EXPENSES (Note 3)                                              1,462               --               -- 
                                                                  ---------        ---------        ---------
INCOME FROM OPERATIONS                                               61,725           52,116           42,684
                                                                  ---------        ---------        ---------
OTHER (EXPENSE) INCOME:
   Interest income                                                    1,421              215              603
   Interest expense                                                  (8,119)         (12,336)         (10,012)
   Transaction expenses (Note 1)                                         --               --             (400)
   Nonrecurring non-competition agreement expense (Note 1)               --               --          (15,300)
   Other                                                                (38)              27               33
                                                                  ---------        ---------        ---------
                                                                     (6,736)         (12,094)         (25,076)
                                                                  ---------        ---------        ---------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM                                               54,989           40,022           17,608
PROVISION FOR INCOME TAXES (Note 10)                                 20,357           14,146              846
                                                                  ---------        ---------        ---------
INCOME BEFORE EXTRAORDINARY ITEM                                     34,632           25,876           16,762
EXTRAORDINARY ITEM, net of income tax benefit of
   $3,133 in 1998 and $1,134 in 1996(Notes 1 and 8)                  (4,941)              --           (1,792)
                                                                  ---------        ---------        ---------
NET INCOME                                                           29,691           25,876           14,970
Preferred Stock Dividends                                                --               --            4,862
                                                                  ---------        ---------        ---------
NET INCOME APPLICABLE TO COMMON STOCK                             $  29,691        $  25,876        $  10,108
                                                                  =========        =========        =========
Basic AND DILUTED income per share (Note 9):
   Income before extraordinary item                               $    1.10        $    0.92        $    0.42
   Extraordinary item                                                 (0.16)              --            (0.06)
                                                                  ---------        ---------        ---------
   Net income                                                     $    0.94        $    0.92        $    0.36
                                                                  =========        =========        =========
   Basic weighted average shares outstanding                         31,492           28,192           28,150
                                                                  =========        =========        =========
   Diluted weighted average shares outstanding                       31,607           28,228           28,150
                                                                  =========        =========        =========
PRO FORMA RELATING TO CHANGE IN TAX STATUS (Note 10):
   Historical income before provision for income taxes and
     extraordinary item                                           $  54,989        $  40,022        $  17,608
   Pro forma provision for income taxes                              21,524           15,429            6,788
                                                                  ---------        ---------        ---------
   Pro forma income relating to change in tax status before
     extraordinary item                                              33,465           24,593           10,820
   Extraordinary item                                                (4,941)              --           (1,792)
                                                                  ---------        ---------        ---------
   Pro forma net income relating to change in tax status             28,524           24,593            9,028
   Preferred Stock dividends                                             --               --            4,862
                                                                  ---------        ---------        ---------
                                                                                                        
   Pro forma net income relating to change in tax status
     applicable to common stock                                   $  28,524        $  24,593        $   4,166
                                                                  =========        =========        =========
PRO FORMA BASIC income per share:
   Income before extraordinary item                               $    1.06        $    0.87        $    0.21
   Extraordinary item                                                 (0.15)              --            (0.06)
                                                                  ---------        ---------        ---------
   Net income                                                     $    0.91        $    0.87        $    0.15
                                                                  =========        =========        =========
   Basic weighted average shares outstanding                         31,492           28,192           28,150
                                                                  =========        =========        =========
PRO FORMA DILUTED income per share:
   Income before extraordinary item                               $    1.06        $    0.87        $    0.21
   Extraordinary item                                                 (0.16)              --            (0.06)
                                                                  ---------        ---------        ---------
   Net income                                                     $    0.90        $    0.87        $    0.15
                                                                  =========        =========        =========
   Diluted weighted average shares outstanding                       31,607           28,192           28,150
                                                                  =========        =========        =========
</TABLE>

See notes to consolidated financial statements.


                                      F-3
<PAGE>   38
TWINLAB CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)



<TABLE>
<CAPTION>
                                                                                       ADDITIONAL       RETAINED
                                                                 COMMON STOCK           PAID-IN         EARNINGS
                                                          SHARES         AMOUNT         CAPITAL         (DEFICIT)          TOTAL
                                                        ----------       -------       ----------       ---------        ---------
<S>                                                     <C>              <C>           <C>              <C>              <C>      
Balance at January 1, 1996 (as previously
   reported)                                               450,000       $   450       $      68        $  54,887        $  55,405
Changes resulting from acquisition accounted
   for as pooling of interests                              62,162            62               2              205              269
                                                        ----------       -------       ---------        ---------        ---------
Balance at January 1, 1996 (Restated)                      512,162           512              70           55,092           55,674
Net income and comprehensive income                             --            --              --           14,970           14,970
Distributions to shareholders                                   --            --              --          (11,693)         (11,693)
Issuance of common stock (Note 1)                          550,000           550           4,950               --            5,500
Repurchase of shareholders' common stock and
   recapitalization including income tax effects
   (Note 1)                                                     --            --          68,654         (219,542)        (150,888)
Additional shares issued in 18.5 for 1 stock
   split effected in the form of a stock dividend
   (Note 9)                                             18,587,838        18,588         (18,588)              --               --
Dividends on Preferred Stock                                    --            --              --           (4,862)          (4,862)
Initial public offering of common stock                  8,500,000         8,500          85,166               --           93,666
                                                        ----------       -------       ---------        ---------        ---------
Balance at December 31, 1996 (Restated)                 28,150,000        28,150         140,252         (166,035)           2,367
Net income and comprehensive income                             --            --              --           25,876           25,876
Distributions to shareholders                                   --            --              --           (3,347)          (3,347)
Shares issued in connection with the acquisition
   of Changes International (Note 3)                       312,500           312           5,547               --            5,859
Shares issues in connection with the exercise of
   stock options and related tax benefit                     7,600             8             118               --              126
                                                        ----------       -------       ---------        ---------        ---------
Balance at December 31, 1997 (Restated)                 28,470,100        28,470         145,917         (143,506)          30,881
Net income and comprehensive income                             --            --              --           29,691           29,691
Second public offering of common stock                   4,228,749         4,229         143,277               --          147,506
Shares issues in connection with the exercise of
   stock options and related tax benefit                     6,200             6             133               --              139
Distributions to shareholders                                   --            --              --           (2,732)          (2,732)
                                                        ----------       -------       ---------        ---------        ---------
Balance at December 31, 1998                            32,705,049       $32,705       $ 289,327        $(116,547)       $ 205,485
                                                        ==========       =======       =========        =========        =========
</TABLE>


See notes to consolidated financial statements.


                                      F-4
<PAGE>   39
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                      1998            1997            1996
                                                                                   ---------        --------        ---------
                                                                                                    RESTATED         RESTATED
                                                                                                    (NOTE 3)         (NOTE 3)
<S>                                                                                <C>              <C>             <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                      $  29,691        $ 25,876        $  14,970
   Adjustment to reconcile net income to net cash provided
     by operating activities:
     Extraordinary item                                                                4,941              --            1,792
     Depreciation and amortization                                                     5,004           2,099            1,965
     Gain on sale of equipment                                                            --              (3)              --
     Bad debt expense                                                                     35             211              146
     Deferred income taxes                                                             3,416           3,684           (3,484)
     Nonrecurring non-competition agreement expense                                       --              --           15,300
     Changes in operating assets and liabilities (net of effect of business
       acquired):
       Accounts receivable                                                           (13,496)        (13,530)          (7,319)
       Inventories                                                                   (27,818)         (7,178)          (4,341)
       Prepaid expenses and other current assets                                      (1,641)            (12)            (425)
       Accounts payable                                                               12,828           5,800            3,665
       Accrued expenses and other current liabilities                                    946          (2,033)           5,959
                                                                                   ---------        --------        ---------
              Net cash provided by operating activities                               13,906          14,938           28,228
                                                                                   ---------        --------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of business, net of cash acquired                                        (56,104)         (3,726)              --
   Maturities of marketable securities                                                    --              --              201
   Proceeds from sales of property, plant and equipment                                   --           3,099               10
   Acquisition of property, plant and equipment                                      (13,407)         (4,022)          (2,480)
   (Increase) decrease in other assets                                                (4,223)           (462)             452
                                                                                   ---------        --------        ---------
              Net cash used in investing activities                                  (73,734)         (5,111)          (1,817)
                                                                                   ---------        --------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Redemption of senior subordinated notes                                           (62,687)             --               --
   Proceeds from issuance of debt                                                        700             400          173,097
   Proceeds from issuance of Preferred Stock                                              --              --           67,000
   Dividends on Preferred Stock                                                           --              --           (4,862)
   Distributions to shareholders                                                      (2,732)         (3,347)         (11,693)
   Payments of debt                                                                  (14,606)         (6,603)         (61,025)
   Redemption of Preferred Stock                                                          --              --          (67,000)
   Issuance of common stock                                                               82             126            5,500
   Repurchase of shareholders' common stock and recapitalization                          --              --         (216,780)
   Net proceeds from public offering of common stock                                 147,506              --           93,666
   Payment of financing costs                                                             --              --           (8,450)
   Principal payments of capital lease obligations                                      (158)           (146)            (136)
                                                                                   ---------        --------        ---------

              Net cash provided by (used in) financing activities                     68,105          (9,570)         (30,683)
                                                                                   ---------        --------        ---------
Net increase (decrease) in cash and cash equivalents                                   8,277             257           (4,272)
Cash and cash equivalents at beginning of year                                         4,212           3,955            8,227
                                                                                   ---------        --------        ---------
Cash and cash equivalents at end of year                                           $  12,489        $  4,212        $   3,955
                                                                                   =========        ========        =========
Supplemental disclosures of cash flow information:
 Cash paid during the year for:
     Interest                                                                      $   9,048        $ 12,272        $   8,026
                                                                                   =========        ========        =========
     Income taxes                                                                  $  15,676        $  9,807        $   3,084
                                                                                   =========        ========        =========
</TABLE>

See notes to consolidated financial statements 


                                      F-5
<PAGE>   40
TWINLAB CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)

1.     DESCRIPTION OF ENTITY, BASIS OF PRESENTATION AND PUBLIC OFFERINGS

       The Company is one of the leading manufacturers and marketers of brand
       name nutritional supplements sold through domestic health and natural
       food stores and various direct sales channels, including network and
       catalog marketing and is also engaged in the sale of its products through
       national and regional drug store chains, supermarkets, and mass market
       retailers.

       Prior to May 7, 1996, Twin Laboratories Inc. ("Old Twin") and its
       affiliates, Twinlab Export Corp. ("Export"), Twinlab Specialty
       Corporation ("Specialty"), Alvita Products, Inc. ("Alvita"),
       Natur-Pharma, Inc. ("Natur-Pharma"), B. Bros. Realty Corporation ("B.
       Bros.") and Advanced Research Press, Inc. ("ARP") (collectively, the
       "Companies") operated as separate corporations, all of which were
       wholly-owned by the same individuals (with some companies having
       different ownership percentages among such individuals) except for
       Natur-Pharma and B. Bros., which were 97 percent owned by such
       individuals.

       On February 27, 1996, Twinlab Corporation (formerly TLG Laboratories
       Holding Corp.) ("Twinlab") was incorporated in contemplation of the
       Acquisition (as hereinafter defined). The accompanying consolidated
       financial statements include the accounts of Twinlab and subsidiaries
       (the "Company") after giving retroactive effect, in a manner similar to a
       pooling of interests, to the merger of the Companies pursuant to the
       Acquisition.

       The shareholders of the Companies entered into a stock purchase and sale
       agreement dated as of March 5, 1996 and which was consummated on May 7,
       1996 pursuant to which (i) Green Equity Investors II, L.P. ("GEI")
       acquired 8,880,000 shares (adjusted for the 18.5 for 1 stock split - see
       Note 9a) (48 percent) of the common stock of Twinlab for aggregate
       consideration of $4,800 and shares of 11.25 percent non-voting junior
       redeemable preferred stock of Twinlab (the "Junior Preferred Stock") for
       aggregate consideration of $37,000, (ii) certain other investors acquired
       1,295,000 shares (adjusted for the 18.5 for 1 stock split see Note 9a) (7
       percent) of the common stock of Twinlab (each of these other investors
       owns less than 5 percent of the common stock of Twinlab) for aggregate
       consideration of $700 and shares of 14 percent non-voting senior
       redeemable preferred stock of Twinlab for aggregate consideration of
       $30,000 (the "Senior Preferred Stock", and together with the Junior
       Preferred Stock, the "Preferred Stock"), (iii) certain of the
       shareholders of the Companies (the "Continuing Shareholders") exchanged
       certain of their shares of common stock of Natur-Pharma for 8,325,000
       shares (adjusted for the 18.5 for 1 stock split - see Note 9a) (45
       percent) of the outstanding shares of common stock of Twinlab, valued at
       $4,500, (iv) Twinlab purchased all of the remaining shares of common
       stock of Natur-Pharma from the existing shareholders for cash, resulting
       in Natur-Pharma becoming a wholly-owned subsidiary of Twinlab, (v) Old
       Twin, Alvita, Export, Specialty, and B. Bros. merged into Natur-Pharma
       and ARP merged with Natur-Pharma II, Inc., a wholly-owned subsidiary of
       Natur-Pharma (the surviving entity in such merger is referred to herein
       as "ARP"), and (vi) in connection with such mergers, the existing
       shareholders received cash in consideration for all their shares of
       capital stock of Old Twin, Alvita, Export, Specialty, B. Bros., and ARP.
       The total cash consideration that the existing shareholders received 


                                      F-6
<PAGE>   41
       was approximately $212,500, approximately $15,300 of which represented
       consideration for non-competition agreements with each of the existing
       shareholders, which was recognized as a nonrecurring expense upon the
       consummation of the Acquisition. The transactions described above are
       hereinafter referred to as the "Acquisition." Concurrently with the
       consummation of the Acquisition, the Company entered into a credit
       facility (which provided for a term loan facility in the amount of
       $53,000 and a revolving credit facility in the amount of $15,000) (the
       "Original Credit Facility") and issued $100,000 aggregate principal
       amount of senior subordinated notes in a private placement (the "Note
       Offering", and, collectively with the Acquisition and the Original Credit
       Facility, the "Transactions"), which notes were subsequently exchanged in
       October 1996 for publicly registered notes. The net cash proceeds of the
       Note Offering were used, together with borrowings under the Original
       Credit Facility, the proceeds from the issuance of the common stock and
       Preferred Stock of Twinlab and available cash of the Company, to finance
       the Acquisition, to refinance approximately $7,000 aggregate principal
       amount of debt of the Company and to pay related fees and expenses. In
       connection with the Acquisition, Natur-Pharma's name was changed to Twin
       Laboratories Inc. ("Twin"). In connection with the Transactions, the
       Company has expensed $400 of professional fees for the year ended
       December 31, 1996.

       Because the Acquisition did not result in a change in control as defined
       in Emerging Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout
       Transactions" ("EITF 88-16"), the transactions were accounted for as a
       recapitalization under the guidance of EITF 88-16 and the Companies'
       historical basis of accounting were applied to the consolidated financial
       statements of Twinlab.

       The following unaudited pro forma results of operations assume the
       Transactions occurred on January 1, 1996 and excludes the effect of (i)
       the nonrecurring non-competition agreement expense, and (ii) the
       Transaction Expenses, and reflects the additional interest expense
       relating to the financing of the Acquisition and the change in tax
       status. The pro forma operations data has been prepared for comparative
       purposes only and does not purport to represent what the Company's actual
       results of operations would have been had the Transactions in fact
       occurred on January 1, 1996.

<TABLE>
<CAPTION>
                                                            1996 
                                                         --------
<S>                                                      <C>     
Net sales                                                $182,010
Interest expense                                              402
Income before extraordinary item                           18,116
Diluted income before extraordinary item per share           0.64
Weighted average shares outstanding
  (in thousands)                                           28,150
</TABLE>

       On November 15, 1996, the Company consummated an initial public offering
       of common stock (the "IPO"), with the sale to the public of 8,500,000
       shares of common stock at $12.00 per share. In connection with the
       consummation of the IPO, the Company entered into an amended credit
       agreement which provides for a revolving credit facility of $50,000 (the
       "Revolving Credit Facility") (see Note 8). The net proceeds to the
       Company of the IPO of approximately $93,666 (after underwriters'
       discounts of $6,630 and offering expenses of $1,704), together with
       available cash resources of the Company and approximately $20,000 of
       borrowings under the Revolving Credit Facility, were used to repay all of
       the Company's outstanding indebtedness under the term loan contained in
       the Original Credit Facility, plus accrued and unpaid interest thereon of
       approximately $233, and to redeem all of the outstanding shares of
       Preferred Stock having an aggregate 


                                      F-7
<PAGE>   42
       liquidation preference of $67,000, plus accrued and unpaid dividends
       thereon of approximately $4,862 (the "Repayments"). In connection with
       the prepayment of outstanding indebtedness under the term loan facility
       and the establishment of the Revolving Credit Facility, the Company
       recorded an extraordinary charge, in 1996, representing the write-off of
       previously deferred finance costs incurred in connection with the
       Original Credit Facility of approximately $1,792 (net of tax benefit of
       $1,134).

       In April 1998, the Company completed a second public offering of the
       Company's common stock (the "Offering"). A total of 9,200,000 shares of
       common stock was offered to the public, of which 4,971,251 was sold by
       certain of the Company's stockholders. The net proceeds to the Company
       from the Offering were approximately $147,506. Of the net proceeds to the
       Company, approximately $56,104 was used to pay the purchase price for the
       Bronson acquisition (as described in Note 3), including related fees and
       expenses; approximately $40,119 was used to exercise the Company's option
       to redeem $35,000 of the senior subordinated notes at a redemption price
       of 109-1/2 percent, plus accrued and unpaid interest; and approximately
       $9,900 was used to reduce outstanding borrowings under the Revolving
       Credit Facility, including accrued and unpaid interest. The remaining net
       proceeds to the Company was used for working capital and other general
       corporate purposes.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       a.  PRINCIPLES OF CONSOLIDATION - All material intercompany accounts and
           transactions have been eliminated.

       b.  CASH EQUIVALENTS - Investments with original maturities of three
           months or less are considered cash equivalents.

       c.  INVENTORIES - Inventories are stated at the lower of cost (first-in,
           first-out method) or market value.

       d.  PROPERTY, PLANT AND EQUIPMENT - Depreciation is computed using the
           straight-line method based upon the estimated useful lives of the
           related assets which range from three to forty years. Amortization of
           leasehold improvements is computed by the straight-line method over
           the shorter of the estimated useful lives of the related assets or
           lease term.

       e.  INTANGIBLE ASSETS - Trademarks are being amortized on the
           straight-line method over their expected lives, not to exceed forty
           years. Goodwill, which represents the excess of purchase price over
           fair value of net assets acquired, is being amortized on the
           straight-line method over periods ranging from twenty to forty years.
           Other intangible assets acquired in connection with Changes
           International and Bronson are being amortized on the straight-line
           method over periods ranging from five years to thirty years.


                                      F-8
<PAGE>   43
       f.  INCOME TAXES - The Company accounts for income taxes under the
           provisions of Statement of Financial Accounting Standards ("SFAS")
           No. 109, "Accounting For Income Taxes", which requires recognition of
           deferred tax assets and liabilities for the expected future tax
           consequences of events that have been included in the Company's
           financial statements or tax returns. Under this method, deferred tax
           assets and liabilities are determined based on the differences
           between the financial accounting and tax bases of assets and
           liabilities using enacted tax rates in effect for the year in which
           the differences are expected to reverse.

       g.  REVENUE RECOGNITION - Revenue from product sales is recognized at the
           time of shipment to the customer. Revenue from magazine subscriptions
           is recorded as deferred revenue at the time of sale and a pro rata
           share is included in revenue as magazines are delivered to
           subscribers. Advertising revenue is recognized when the related
           magazines are issued.

       h.  RESEARCH AND DEVELOPMENT EXPENSES - The Company charges research and
           development expenses to operations as incurred. Research and
           development expenses were $1,655, $1,095 and $1,119 for the years
           ended December 31, 1998, 1997 and 1996, respectively.

       i.  EARNINGS PER SHARE - The Company retroactively adopted SFAS No. 128,
           "Earnings Per Share" during 1997. SFAS No. 128 changed the
           computation, presentation and disclosure requirements for earnings
           per share. SFAS No. 128 requires presentation of "basic" and
           "diluted" earnings per share. The adoption of SFAS No. 128 did not
           have a material impact on the Company's income per share.

       j.  COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130,
           "Reporting Comprehensive Income". This statement establishes rules
           for the reporting of comprehensive income and its components.
           Comprehensive income, as presented in the Consolidated Statement of
           Shareholders' Equity, is equivalent to net income as the Company has
           no other items of comprehensive income. The adoption of SFAS No. 130
           had no impact on total shareholders' equity.

       k.  IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS No. 121,
           "Accounting For the Impairment of Long-Lived Assets and For
           Long-Lived Assets To Be Disposed Of", the Company reviews its
           long-lived assets, including property and equipment, goodwill and
           intangible assets for impairment whenever events or changes in
           circumstances indicate that the carrying amount of the assets may not
           be fully recoverable. To determine recoverability of its long-lived
           assets, the Company evaluates the probability that future
           undiscounted net cash flows will be less than the carrying amount of
           the assets. Impairment costs, if any, are measured by comparing the
           carrying amount of the related assets to their fair value.

       l.  USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - 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.


                                      F-9
<PAGE>   44
       m.  RECLASSIFICATIONS - Certain prior year balances have been
           reclassified to conform with current year classifications.

3.     ACQUISITIONS

       a.  PR NUTRITION - On August 21, 1998, the Company acquired all of the
           outstanding capital stock of PR Nutrition, Inc. ("PR Nutrition") for
           1,150,000 shares of the Company's common stock, having a market value
           at the date of acquisition of approximately $39,675. PR Nutrition
           develops, markets and sells nutritionally enhanced food bars and
           other nutritional products. This acquisition has been accounted for
           as a pooling of interests and accordingly the consolidated financial
           statements have been restated to include PR Nutrition's amounts for
           all periods presented. Included in the operating results of the
           Company for the year ended December 31, 1998 are approximately
           $13,404 of net sales and approximately $3,007 of net income of PR
           Nutrition prior to the date of acquisition. Expenses of approximately
           $1,462 have been incurred related to this acquisition.

       The following is a reconciliation of certain restated amounts with
amounts previously reported:
<TABLE>
<CAPTION>
                                                        1997           1996 
                                                      --------       --------
<S>                                                   <C>            <C>     
Net sales:
    As previously reported                            $213,229       $170,075
    Effect of PR Nutrition pooling of interests         16,385         11,935
                                                      --------       --------
    As restated                                       $229,614       $182,010
                                                      ========       ========

Net income:
    As previously reported                            $ 22,671       $ 11,796
    Effect of PR Nutrition pooling of interests          3,205          3,174
                                                      --------       --------
    As restated                                       $ 25,876       $ 14,970
                                                      ========       ========

Basic and diluted net income per share:
    As previously reported                            $   0.84       $   0.26
    Effect of PR Nutrition pooling of interests           0.08           0.10
                                                      --------       --------
    As restated                                       $   0.92       $   0.36
                                                      ========       ========
</TABLE>

       b.  BRONSON - On April 30, 1998, the Company acquired substantially all
           of the assets and assumed certain liabilities of the Bronson division
           ("Bronson") of Jones Medical Industries, Inc. Bronson, through
           Bronson Laboratories, Inc., manufactures, markets and distributes a
           line of over 400 vitamins, herbs, and nutritional supplements and
           health and beauty aids, through catalogs and specialty direct
           mailings, markets its MD Pharmaceutical brand of vitamins, herbs and
           nutritional supplements exclusively to United States military
           commissaries and also manufactures through Health Factors
           International, private label vitamins and nutritional supplements for
           a number of other companies on a contract manufacturing basis. The
           Company paid $56,104 in cash, including acquisition costs, which was
           financed through proceeds from the Offering. This acquisition has
           been accounted for as a purchase and, accordingly, the results of
           Bronson are included in the consolidated statements of income of the
           Company since the date of acquisition and the purchase price
           (including acquisition costs) has been allocated to net assets
           acquired based upon their fair values. Goodwill relating to the
           acquisition of $14,480 is being amortized over 30 years.

       c.  CHANGES INTERNATIONAL - In November 1997, the Company acquired all of
           the outstanding shares of Changes International of Fort Walton Beach,
           Inc. ("Changes 


                                      F-10
<PAGE>   45
           International"). Changes International is a network marketer of
           nutritional supplements. The Company paid $7,888 in cash, including
           acquisition costs, and issued 312,500 shares of its common stock
           (which had a market value of approximately $5,859 on the date of the
           acquisition). This acquisition has been accounted for as a purchase
           and, accordingly, the results of Changes International are included
           in the consolidated statements of income of the Company since the
           date of acquisition and the purchase price (including acquisition
           costs) has been allocated to net assets acquired based upon their
           fair values. Goodwill relating to the acquisition of $10,714 is being
           amortized over 20 years.

           The following unaudited pro forma information assumes that the
           acquisition of Bronson and Changes International had occurred as of
           January 1, 1997, including the impact of the amortization expense
           associated with intangible assets acquired, increased interest
           expense on acquisition debt and related income tax effects. The pro
           forma operations data has been prepared for comparative purposes only
           and does not purport to represent what the Company's actual results
           of operations would have been had the acquisitions, in fact, occurred
           on January 1, 1997.
<TABLE>
<CAPTION>
                                                                       1998           1997 
                                                                     --------       --------
<S>                                                                  <C>            <C>     
              Net sales                                              $343,392       $296,126
              Income before extraordinary item                         35,879         31,704
              Basic and diluted income before extraordinary
                item per share                                           1.12           1.05
              Diluted weighted average shares outstanding
                (in thousands)                                         32,041         30,159

4 INVENTORIES

       Inventories consist of the following:
                                                                       1998           1997 
                                                                     --------       --------
              Raw materials                                          $ 36,257       $ 16,340
              Work in process                                          11,337          7,393
              Finished goods                                           24,761         13,792
                                                                     --------       --------
                   Total                                             $ 72,355       $ 37,525
                                                                     ========       ========

5 PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment consist of the following:
                                                                       1998           1997 
                                                                     --------       --------
       Land, building and leasehold improvements                     $ 22,769       $ 12,363
       Plant equipment                                                 10,730          7,461
       Office equipment                                                 6,672          3,157
       Automobiles                                                         65             56
                                                                     --------       --------
                                                                       40,236         23,037
       Less:  accumulated depreciation and amortization                10,685          8,774
                                                                     --------       --------
         Property, plant and equipment - net                         $ 29,551       $ 14,263
                                                                     ========       ========
         Depreciation and amortization expense                       $  1,940       $  1,120
                                                                     ========       ========
</TABLE>


                                      F-11
<PAGE>   46
6.     OTHER ASSETS
       Other assets consist of the following:

<TABLE>
<CAPTION>
                                                                                        1998           1997 
                                                                                      --------       --------
<S>                                                                                   <C>            <C>     
       Goodwill, net of accumulated amortization of $1,113
         and $166, respectively                                                       $ 24,784       $ 11,251
       Acquired tradenames, net of accumulated amortization
         of $474                                                                        20,861             --
       Acquired customer lists and distribution networks,
         net of accumulated amortization of $1,162 and $54,
         respectively                                                                    9,686          1,946
       Deferred finance costs, net of accumulated amortization
         of $741 and $872, respectively                                                  1,712          4,337
       Other                                                                             8,143          2,870
                                                                                      --------       --------
              Total                                                                   $ 65,186       $ 20,404
                                                                                      ========       ========

7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

       Accrued expenses and other current liabilities consist of the following:
                                                                                        1998           1997 
                                                                                      --------       --------
       Accrued salaries, employee benefits and payroll taxes                          $  3,816       $  2,645
       Accrued commissions                                                               2,219          1,795
       Other                                                                             4,008          6,138
                                                                                      --------       --------
            Total                                                                     $ 10,043       $ 10,578
                                                                                      ========       ========

8 LONG-TERM DEBT

       Long-term debt consists of the following:
                                                                                        1998           1997 
                                                                                      --------       --------
       Revolving Credit Facility (a)                                                  $     --       $ 13,750
       Senior subordinated notes (b)                                                    43,215        100,000
       Note payable to a power authority, payable in monthly installments
         of $2, including interest at 6.38 percent, maturing February 2011                 251            266
       Obligations under capital lease                                                      --            158
       Other                                                                                65            205
                                                                                      --------       --------
                                                                                        43,531        114,379
       Less:  current portion                                                               80         14,112
                                                                                      --------       --------
         Total                                                                        $ 43,451       $100,267
                                                                                      ========       ========
</TABLE>

       (a) The Revolving Credit Facility, as amended on March 22, 1999, expires
           on May 7, 2002 and provides for borrowings up to $50,000. Borrowings
           under the Revolving Credit Facility bear interest, at the Company's
           discretion, at either the Alternative Base Rate, as defined, or at
           the Eurodollar Rate (maximum six-month term), plus a margin of 1.25
           percent, as defined. Interest rates are subject to increases or
           reduction based upon Twin's meeting certain financial tests. The
           proceeds of the Revolving Credit Facility are available for working
           capital requirements and for general corporate purposes, including up
           to $35,000 of which is available to fund permitted acquisitions, as
           defined, subject to certain conditions and reductions. A portion of
           the Revolving Credit Facility not to exceed $15,000 is available for
           the issuance of letters of credit which generally have an initial
           term of one year or less. The Revolving Credit Facility is secured by
           first priority security interests in all of the tangible and
           intangible assets of Twin and its direct subsidiaries and is
           guaranteed by Twinlab, ARP, Changes International, Bronson and PR
           Nutrition. The Revolving Credit Facility contains certain restrictive
           covenants including, 


                                      F-12
<PAGE>   47
           among other things, the maintenance of certain debt coverage ratios,
           as well as restrictions on additional indebtedness, dividends and
           certain other significant transactions. In addition, the Revolving
           Credit Facility requires the Company to be Year 2000 compliant by
           September 30, 1999.

       (b) The senior subordinated notes mature on May 15, 2006 and bear
           interest at a rate of 10-1/4 percent per annum. The senior
           subordinated notes are jointly and severally guaranteed by Twinlab,
           ARP, Changes International, Bronson and PR Nutrition on a full and
           unconditional unsecured senior subordinated basis. The senior
           subordinated notes are callable after five years at a premium to par
           which declines to par after eight years. Upon a change of control, as
           defined, Twin is required to offer to redeem the senior subordinated
           notes at 101 percent of the principal amount plus accrued and unpaid
           interest. Restrictive covenants contained in the indenture governing
           the senior subordinated notes (the "Note Indenture") include, among
           other things, limitations on additional indebtedness, investments,
           dividends and certain other significant transactions.

           In May 1998, Twin redeemed 35 percent ($35,000) of the senior
           subordinated notes at a redemption price of 109 -1/2 percent with a
           portion of the proceeds of the Offering. In addition, in July 1998
           and September 1998, Twin repurchased an additional $18,136 and
           $3,649, respectively, of senior subordinated notes at prices of
           112-1/2 percent and 108-1/2 percent, respectively. In connection,
           with the redemptions and repurchases of the senior subordinated
           notes, the Company recorded an extraordinary charge, representing the
           premium paid and the write-off of previously deferred finance costs,
           of approximately $4,941 (net of tax benefit of $3,133).

           The Revolving Credit Facility and the Note Indenture restrict the
           payment of dividends and the making of loans, advances or other
           distributions of assets to Twinlab, except in certain limited
           circumstances.

           Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING DECEMBER 31,
<S>                         <C>                                               <C>    
                            1999                                              $    80
                            2000                                                   15
                            2001                                                   16
                            2002                                                   17
                            2003                                                   18
                            Thereafter                                         43,385
                                                                              -------
                            Total                                             $43,531
                                                                              =======
</TABLE>

           The carrying amount of the borrowing under the Revolving Credit
           Facility approximated fair value as of December 31, 1998 and 1997
           based on borrowing rates available to the Company at such dates for
           loans with similar terms. The fair value of the senior subordinated
           notes approximated $49,770 and $100,000 at December 31, 1998 and
           1997, respectively, based on borrowing rates available to the Company
           at such dates.


                                      F-13

<PAGE>   48
    9. SHAREHOLDERS' EQUITY

       (a) CHANGES IN AUTHORIZED CAPITAL AND STOCK SPLIT - In July 1996, the
           Board of Directors (the "Board") and the stockholders authorized an
           increase in the number of common shares authorized to 75,000,000 and
           an increase in the number of shares of preferred stock authorized to
           2,000,000, which preferred stock may be issued by the Board on such
           terms and with such rights, preferences and designations as the Board
           may determine, without further stockholder action. Prior to the IPO,
           on November 15, 1996, the Board authorized a stock split (effected in
           the form of a stock dividend) of all issued and outstanding common
           shares at the rate of 18.5 for 1. The stock split and the change in
           authorized common stock have been retroactively reflected for
           purposes of calculating income per share for all periods presented
           herein.

       (b) STOCK INCENTIVE PLAN - In November 1996, the Board and stockholders
           of the Company approved and adopted the Twinlab Corporation 1996
           Stock Incentive Plan (the "1996 Plan"). The 1996 Plan provides for
           the issuance of a total of up to 400,000 authorized and unissued
           shares of common stock, treasury shares and/or shares acquired by the
           Company for purposes of the 1996 Plan. Awards under the 1996 Plan may
           be made in the form of (i) incentive stock options; (ii) nonqualified
           stock options; (iii) stock appreciation rights; (iv) restricted
           stock; and (v) performance shares. On January 27, 1998, the Board
           adopted, subject to stockholder approval which was received on June
           17, 1998, the Twinlab Corporation 1998 Stock Incentive Plan (the
           "1998 Plan"). The 1998 Plan provides initially for the issuance of a
           total of up to 1,000,000 authorized and unissued shares of common
           stock, treasury shares and/or shares acquired by the Company for
           purposes of the 1998 Plan, and may be increased annually commencing
           January 1, 1999, at the discretion of the Board, by an amount up to 1
           percent of the shares of common stock then outstanding. Awards under
           the 1998 Plan may be made in the form of (i) incentive stock options;
           (ii) non-qualified stock options; (iii) stock appreciation rights;
           (iv) restricted stock; (v) restricted stock units; (vi) dividend
           equivalent rights; and (vii) other stock based-awards. Options become
           exercisable over five years from the date of grant at the rate of 20
           percent of the grant each year and expire up to ten years after the
           date of grant.

           The following table sets forth summarized information concerning
           stock option activity relating to the Company's 1996 Plan and 1998
           Plan (collectively, the "Plans"):

<TABLE>
<CAPTION>
                                                                                                   WEIGHTED
                                                                                                   AVERAGE
                                                                  NUMBER           EXERCISE        EXERCISE
                                                                 OF SHARES       PRICE RANGE        PRICE 
                                                                ----------   -------------------  ---------
<S>                                                             <C>          <C>                  <C>   
              Balance, January 1, 1996                                  --     $       --           $   --
              Granted                                              120,000         $12.00           $12.00
                                                                ----------   -------------------    ------
              Balance, January 1, 1997                             120,000         $12.00           $12.00
              Granted                                               56,000     $18.13 - $19.38      $19.24
              Canceled                                              (6,000)        $12.00           $12.00
              Exercised                                             (7,600)        $12.00           $12.00
                                                                ----------  --------------------    ------
              Balance, December 31, 1997                           162,400     $12.00 - $19.38      $14.50
              Granted                                              264,000     $25.00 - $29.38      $28.55
              Canceled                                             (11,400)    $12.00 - $29.38      $25.72
              Exercised                                             (6,200)    $12.00 - $18.13      $13.19
                                                                ----------     ---------------      ------
              Balance, December 31, 1998                           408,800     $12.00 - $29.38      $23.28
                                                                ==========     ===============      ======
           Shares exercisable at December 31, 1998                  50,560                          $13.57
                                                                ==========                          ======
           Shares reserved for issuance at December 31, 1998     1,386,200
                                                                ==========
</TABLE>


                                      F-14
<PAGE>   49
           Significant option groups outstanding at December 31, 1998 and
           related weighted average price and life information were as follows:

<TABLE>
<CAPTION>
                                                        WEIGHTED
                                                         AVERAGE        WEIGHTED                        WEIGHTED
                                                        REMAINING        AVERAGE                         AVERAGE
                RANGE OF             NUMBER            CONTRACTUAL      EXERCISE         NUMBER         EXERCISE
             EXERCISE PRICE        OUTSTANDING            LIFE            PRICE        EXERCISABLE        PRICE
             --------------        -----------         -----------      --------       -----------      ---------
<S>          <C>                   <C>                 <C>              <C>            <C>              <C>   
                $12.00                99,000               8.0            $12.00         39,600          $12.00
             $18.13 - $19.38          54,800               8.8            $19.27         10,960          $19.27
                $25.00                50,000               9.4            $25.00             --          $   --
                $29.38               205,000               9.8            $29.38             --          $   --
</TABLE>

           The Company applies Accounting Principles Board Opinion No. 25,
           "Accounting For Stock Issued To Employees", and selected
           interpretations in accounting for the Plans. Accordingly, as all
           options have been granted at exercise prices equal to fair market
           value on the date of grant, no compensation expense has been
           recognized by the Company in connection with its stock-based
           compensation plan. Had compensation cost for the Company's Plans been
           determined based upon the fair value at the grant date for awards
           under the 1996 Plan consistent with the methodology prescribed under
           Statement of Financial Accounting Standards No. 123, "Accounting For
           Stock-Based Compensation", the Company's net income would have been
           reduced by approximately $642, $188 and $14 in 1998, 1997 and 1996,
           respectively. The Company's pro forma net income and diluted earnings
           per share would have been $29,000 and $0.92 per share for 1998;
           $25,700 and $0.91 per share for 1997; and $15,000 and $0.53 per share
           for 1996. The weighted average fair value of the options granted
           during 1998, 1997 and 1996 is estimated at $19.50, $10.89 and $6.81,
           respectively, on the date of grant (using Black-Scholes option
           pricing model) with the following weighted average assumptions for
           1998, 1997 and 1996, respectively: volatility of 65 percent, 46
           percent and 45 percent, risk-free interest rate of 5.71 percent, 5.75
           percent and 6.09 percent, and an expected life of seven years.

       (c) NET INCOME PER SHARE - In 1997, the Company adopted SFAS No. 128,
           "Earnings Per Share". Basic income per share is determined by using
           the weighted average number of shares of common stock outstanding
           during each period. Diluted income per share further assumes the
           issuance of common shares for all dilutive outstanding common stock
           options. The calculation for income before extraordinary item per
           share for each of the three years ended December 31, 1998 was as
           follows:

<TABLE>
<CAPTION>
                                              1998                           1997                            1996
                                 ----------------------------   -----------------------------     -------------------------------
                                                       PER-                            PER-                                PER-
                                                      SHARE                           SHARE                               SHARE
                                 INCOME     SHARES    AMOUNT    INCOME      SHARES    AMOUNT      INCOME      SHARES      AMOUNT
                                 -------    ------    ------    -------     ------    -------     -------     ------      -------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                 -----------------------------------------------------------------------------------------------
<S>                              <C>        <C>       <C>       <C>         <C>       <C>         <C>         <C>         <C>    
          Income before                                                                         
           extraordinary item    $34,632                        $25,876                           $16,762
          Less:  Preferred                                                                      
           dividends                  --                             --                           (4,862)
                                 --------                       --------                          -------
          BASIC INCOME PER                                                                      
           SHARE                                                                                
            Income before                                                                       
            extraordinary item    34,632    31,492    $1.10      25,876     28,192    $  0.92      11,900     28,150(a)   $  0.42
                                                      =====                           =======                             =======
          EFFECT OF DILUTIVE                                                                    
           SECURITIES:                                                                          
           Options                    --       115                   --         36                     --         --
                                 -------    ------              -------     ------                -------    -------
          DILUTED INCOME PER                                                                    
           SHARE                                                                                
            Income before                                                                       
            extraordinary item   $34,632    31,607    $1.10     $25,876     28,228    $  0.92     $11,900     28,150      $  0.42
                                 =======   =======    =====     =======     ======    =======     =======     ======      =======
</TABLE>


                                      F-15
<PAGE>   50
(a)  Amount assumes, as outstanding for the entire year, the 10,175,000 shares
     (adjusted for the 18.5 for one stock split - see Note 9a) issued in
     connection with the Acquisition and the 8,500,000 shares issued in
     connection with the IPO (see Note 1).


       (d) STOCK REPURCHASE PROGRAM - On February 25, 1999, the Company
           announced that its Board of Directors had approved a share repurchase
           program authorizing the Company to buy up to 5 million shares of its
           common stock. The Company has obtained the required waivers under its
           Revolving Credit Facility to engage in purchases of its common stock
           and intends to use funds available under the Revolving Credit
           Facility and internally generated cash to purchase such shares. The
           Company will purchase common stock from time to time in the open
           market and in individually negotiated transactions. The amount and
           timing of any purchase will be dependent upon a number of factors,
           including the price and availability of the Company's shares and
           general market conditions.

   10. INCOME TAXES

       Prior to the consummation of the Acquisition, all of the Companies were
       "S" corporations and as such Federal and state taxes were generally paid
       at the shareholder level only. The provision for income taxes from
       January 1, 1996 through the consummation of the Acquisition on May 7,
       1996, represents state taxes for those states that impose a tax on "S"
       corporations. In addition, prior to being acquired by the Company, PR
       Nutrition was an "S" corporation and as such, Federal and state taxes
       were generally paid at the shareholder level only. The pro forma
       provisions for income taxes for the years ended December 31, 1998, 1997,
       and 1996 in the accompanying Consolidated Statements of Income assume the
       Companies and PR Nutrition were "C" corporations for the entire fiscal
       years.

       Upon consummation of the Acquisition, the Companies terminated their S
       Corporation status. The mergers of Old Twin, Alvita, Export, Specialty
       and B. Bros. into Natur-Pharma were treated as taxable asset purchases
       for Federal and state income tax purposes and as a recapitalization for
       financial accounting purposes. For Federal and state income tax purposes,
       the purchase price was allocated among the various corporations and their
       respective assets and liabilities based on the respective fair values as
       of the closing of the Acquisition. This resulted in different book and
       tax asset bases for the assets of these companies, which resulted in
       deferred tax assets of approximately $55,571.

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

<TABLE>
<CAPTION>
                          1998           1997           1996 
                        -------       --------        -------
<S>                     <C>           <C>             <C>    
Current:
  Federal               $14,267       $  8,916        $ 3,662
  State and local         2,674          1,546            668
                        -------       --------        -------
                         16,941         10,462          4,330
                        -------       --------        -------
Deferred:
  Federal                 2,923          3,515         (3,108)
  State and local           493            169           (376)
                        -------       --------        -------
                          3,416          3,684         (3,484)
                        -------       --------        -------
                        $20,357       $ 14,146        $   846
                        =======       ========        =======
</TABLE>


                                      F-16
<PAGE>   51
       The difference between the statutory Federal tax rate and the Company's
       effective tax rate is as follows (as a percentage of pre-tax income):

<TABLE>
<CAPTION>
                                              1998           1997           1996 
                                             ------         ------         ------
<S>                                          <C>            <C>            <C>  
Statutory Federal income tax rate              35.0%          35.0%          34.0%
State and local income taxes (net of
  Federal tax benefit)                          3.7            2.8            1.1
Exempt income due to "S" Corporation
  status                                       (2.0)          (2.8)         (28.0)
Other                                           0.3            0.3           (2.3)
                                             ------         ------         ------
Effective tax rate                             37.0%          35.3%           4.8%
                                             ======         ======         ======
</TABLE>

       At December 31, 1998 and 1997, the deferred tax assets, which required no
       valuation allowance, consisted of:
<TABLE>
<CAPTION>
                                      1998           1997 
                                    --------        -------
<S>                                 <C>             <C>    
Accounts receivable                 $    327        $ 1,099
Inventories                            1,064            380
Property, plant and equipment           (249)            34
Intangible and other assets           45,596         48,743
Other                                    238            136
                                    --------        -------
                                    $ 46,976        $50,392
                                    ========        =======
</TABLE>

   11. EMPLOYEE BENEFIT PLANS

       Old Twin provided a profit sharing plan, and Natur-Pharma provided an
       Employee Savings and Investment Plan to all eligible employees, as
       defined, through July 1, 1996. Effective July 1, 1996, the Company
       adopted the Twin Laboratories Inc. 401(k) Plan (the "401(k) Plan") which
       is an amendment and restatement of the Old Twin profit sharing plan and
       merged the Natur-Pharma Employee Savings and Investment Plan into the
       401(k) Plan. Eligible employees may contribute up to 15 percent of their
       annual compensation, subject to certain limitations, and the Company will
       match 50 percent of an employee's contribution. Total provisions with
       respect to these plans approximated $518, $367 and $164 for the years
       ended December 31, 1998, 1997 and 1996, respectively.

   12. COMMITMENTS AND CONTINGENCIES
       a.  LEASES - The Company leases certain warehouse space and equipment
           under operating leases. Generally, the leases carry renewal
           provisions and require the payment of maintenance costs. Rental
           payments may be adjusted for increases in taxes and other costs above
           specific amounts. Rental expense charged to operations for the years
           ended December 31, 1998, 1997 and 1996 was approximately $3,476,
           $2,006, and $1,664, respectively.


                                      F-17
<PAGE>   52
           Future minimum payments under noncancellable operating leases with
           initial or remaining terms of more than one year are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING DECEMBER 31,
<S>                           <C>                                             <C>       
                              1999                                            $    4,929
                              2000                                                 4,585
                              2001                                                 4,198
                              2002                                                 4,030
                              2003                                                 2,802
                              Thereafter                                           1,290
                                                                              ----------
                              Total                                           $   21,834
                                                                              ==========
</TABLE>

           During 1997, the Company entered into several agreements for the sale
           and leaseback of certain production equipment. The Company received
           $3,099 which approximated the net book value of the assets sold.
           These leases have been classified as operating leases.

       b.  LEGAL MATTERS - The Company has been named as a defendant in five
           currently pending lawsuits alleging that its Ma Huang-containing
           products caused injuries and/or damages, as well as two proceedings
           seeking class action certification for alleged deceptive advertising
           claims related to its Ma Huang products. The Company intends to
           vigorously defend these lawsuits. The Company believes that such
           claims, if successful, would not have a material adverse effect on
           the consolidated financial statements.

           In December 1998, two shareholder class action lawsuits were filed in
           the United States District Court for the Eastern District of New York
           against the Company and certain of its officers and directors. The
           plaintiffs allege that the Company and the other defendants violated
           the securities laws by making material misstatements and failing to
           state material facts about the Company's business and financial
           condition, among other things, in securities act filings and public
           statements. Plaintiffs have moved to consolidate these lawsuits and
           all subsequent lawsuits relating to the same issues. On February 25,
           1999, proposed plaintiffs' co-lead counsel announced that it would
           amend the complaints to enlarge the class of plaintiffs suing the
           Company to include all buyers of the Company's stock from March 17,
           1998 through February 24, 1999. The Company intends to vigorously
           defend against these actions; however, it is premature to determine
           the effect, if any, of such litigation on the consolidated financial
           statements.

           On February 11, 1999, the former shareholders of PR Nutrition
           commenced a lawsuit in the United States District Court for the
           Southern District of New York against the Company and certain of its
           officers and directors. The plaintiffs' claims include alleged
           violations of the securities laws, breach of contract, fraud and
           negligent misrepresentation in connection with the Company's purchase
           of 100 percent of the stock of PR Nutrition. More specifically, the
           plaintiffs allege that the Company and the other defendants made
           material misstatements or failed to disclose material facts about the
           Company's business and financial condition, among other things, in
           securities act filings and other statements. The Company intends to
           vigorously defend against these actions; however, it is premature to
           determine the effect, if any, of such litigation on the consolidated
           financial statements.


                                      F-18
<PAGE>   53
           In the first quarter of 1999, a series of separate shareholder class
           action lawsuits were filed in the United States District Court for
           the Eastern District of New York against the Company and certain of
           its officers and directors. These lawsuits have not yet been served
           on the Company. The plaintiffs generally allege that the Company and
           the other defendants violated the securities laws by making material
           misstatements and failing to state material facts about the Company's
           business and financial condition, among other things, in securities
           act filings and public statements. The class of plaintiffs suing the
           Company is all buyers of the Company's stock from April 28, 1998
           through February 24, 1999. The Company intends to vigorously defend
           against these actions; however, it is premature to determine the
           effect, if any, of such litigation on the consolidated financial
           statements.

           The Company received an inquiry from the Federal Trade Commission
           ("FTC") with respect to the Company's substantiation for certain
           advertising claims made for its product "Herbal Phen Fuel". After the
           Company submitted scientific substantiation to the FTC, the FTC
           forwarded a proposed consent order (the "Consent Order") to the
           Company. The proposed Consent Order provides for, among other things,
           injunctive relief prohibiting the Company from making weightloss
           claims for its products without adequate scientific substantiation.
           The proposed Consent Order is the subject of negotiating between the
           FTC and the Company. The Company is unable to predict whether it will
           be able to reach a negotiated settlement of this matter.

           The Company is also engaged in various other litigation in the
           ordinary course of business. Management is of the opinion that the
           amounts which may be awarded or assessed, if any, in connection with
           these matters will not have a material adverse effect on the
           consolidated financial statements.

   13. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS

       During the years ended December 31, 1998, 1997, and 1996, the Company
       recognized net sales to significant customers as set forth below:

<TABLE>
<CAPTION>
                     1998      1997      1996 
                     ----      ----      ---- 
<S>                  <C>       <C>       <C>
Major customers:
    Customer A         14%       22%       19%
    Customer B         12        18        23
    Customer C         12         4        --
</TABLE>

       The Company's customers are primarily large independent distributors of
       health food products. At December 31, 1998 and 1997, approximately 47 and
       62 percent, respectively, of accounts receivable related to two
       customers.

   14. SUMMARIZED FINANCIAL INFORMATION

       Twin is a direct wholly-owned subsidiary of Twinlab. ARP, Changes
       International, Bronson Laboratories, Inc., Health Factors International,
       Inc. and PR Nutrition are indirect wholly-owned subsidiaries of Twinlab.
       Twinlab, ARP, Changes International, Bronson Laboratories, Inc., Health
       Factors International, Inc. and PR Nutrition have provided joint and
       several full and unconditional senior subordinated guarantees of the
       senior subordinated notes of Twin (see Note 8b).


                                      F-19
<PAGE>   54
       The assets, results of operations and shareholders' equity of Twin
       comprise substantially all of the assets, results of operations and
       shareholders' equity of Twinlab on a consolidated basis. Twinlab has no
       separate operations and has no significant assets other than Twinlab's
       investment in Twin and, through Twin, in ARP, Changes International,
       Bronson Laboratories Inc., Health Factors International, Inc. and PR
       Nutrition. Twin has no other stockholder than Twinlab. Accordingly, the
       Company has determined that separate financial statements of Twin, ARP,
       Changes International, Bronson Laboratories Inc., Health Factors Inc. and
       PR Nutrition would not be material to investors and, therefore, are not
       included herein.

       Summarized financial information for the year ended December 31, 1998 is
as follows:

<TABLE>
<CAPTION>
                                                                        BRONSON      HEALTH
                                                        CHANGES      LABORATORIES    FACTORS         PR
                               TWIN           ARP     INTERNATIONAL      INC.          INC.       NUTRITION
                             --------       ------    -------------  ------------    -------      ---------
<S>                          <C>            <C>          <C>           <C>           <C>           <C>    
Current assets               $149,611       $1,571       $ 9,008       $ 7,279       $ 4,295       $ 3,373
Noncurrent assets             140,084          186        12,520        39,566         7,491           417
Current liabilities            44,152          470         3,575         1,417           356         1,916
Noncurrent liabilities         43,451           --            --            --            --            --
Shareholder's equity          202,092        1,287        17,953        45,428        11,430         1,874
Net sales                     333,375        4,670        51,313        11,495         7,192        20,878
Gross profit                  169,942          997        42,714         6,601         1,218        14,418
Net income                     29,199          263         3,662           719            35         4,070
</TABLE>

       Summarized financial information for the year ended December 31, 1997 is
as follows:


<TABLE>
<CAPTION>
                                                         CHANGES          PR
                               TWIN          ARP      INTERNATIONAL   NUTRITION
                             --------       ------    -------------   ---------
<S>                          <C>            <C>       <C>             <C>    
Current assets               $ 89,397       $1,399       $ 4,005       $ 1,321
Noncurrent assets              83,444          193        13,026           365
Current liabilities            45,952          568         2,685         1,127
Noncurrent liabilities        100,267           --            --            22
Shareholder's equity           26,622        1,024        14,346           537
Net sales                     229,614        5,661         7,037        16,385
Gross profit                  104,188        1,329         5,854        11,906
Net income                     26,061          465           598         3,205
</TABLE>

       Summarized financial information for the year ended December 31, 1996 is
as follows:


<TABLE>
<CAPTION>
                                                            PR
                               TWIN           ARP       NUTRITION
                             --------       ------      ---------
<S>                          <C>            <C>         <C>    
Current assets               $ 69,251       $1,577       $ 1,151
Noncurrent assets              75,268          182           289
Current liabilities            40,134        1,200           708
Noncurrent liabilities        100,478           --            55
Shareholder's equity            3,909          559           679
Net sales                     182,010        5,862        11,935
Gross profit                   79,792          886         9,544
Net income                     14,916          392         3,174
</TABLE>

   15. OPERATING SEGMENTS

       In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
       an Enterprise and Related Information", which changes the way the Company
       reports information about its operating segments.


                                      F-20
<PAGE>   55
       The Company has four reportable segments: Twinlab Division; Herbal
       Supplements and Teas Division; Changes International Division; and
       Bronson Division. The Company manufactures and markets nutritional
       products, including a complete line of vitamins, herbs, and
       nutraceuticals, antioxidants, fish and marine oils, and sports nutrition
       supplements through its Twinlab Division; a full line of herbs,
       phytonutrients, and teas through its Herbal Supplements and Teas
       Division; a line of specially formulated nutritional supplements through
       a sales force of independent distributors through its , Changes
       International Division; and a line of vitamins, herbs, nutritional
       supplements and health and beauty aids through its Bronson Division.

       The accounting policies of the segments are the same as those described
       in the summary of significant accounting policies. The Company evaluates
       the financial performance of its business units based on operating income
       of the respective business units.

       Segment information for the years ended December 31, 1998, 1997, and 1996
was as follows:
<TABLE>
<CAPTION>
                                             HERBAL
                                           SUPPLEMENTS    CHANGES                                   INTER-
                              TWINLAB       AND TEAS    INTERNATIONAL   BRONSON                    COMPANY 
                             DIVISION(1)    DIVISION      DIVISION      DIVISION       OTHER(2)   ELIMINATION         TOTAL
                             -----------   ----------   -------------   --------       --------   -----------        --------
<S>                          <C>           <C>          <C>             <C>            <C>        <C>                <C>     
1998
  Net sales from external    
    customers                 $172,665       $65,824       $51,313       $18,687       $24,886       $     --        $333,375
  Intersegment net sales         3,971           300            --            --           662         (4,933)             --
  Operating income              30,545        18,873         5,829         1,231         5,247                         61,725
  Interest expense               8,075            24            --            --            20             --           8,119
  Interest income                  249            --           157            --         1,015             --           1,421
  Long-lived assets             10,994        15,287        12,490        47,047           586             --          86,404
  Capital expenditures           2,691         9,391           703           368           254             --          13,407
  Depreciation and
    amortization                 1,501           511         1,019         1,805           168             --           5,004

1997
  Net sales from external
   customers                  $155,982       $45,206       $ 7,037       $    --       $21,389       $     --        $229,614
  Intersegment net sales           150            82            --            --           658           (890)             -- 
  Operating income              35,486        11,805           832            --         3,993             --          52,116
  Interest expense              12,294            21            --            --            21             --          12,336
  Interest income                  156            --            17            --            41             --             214
  Long-lived assets              9,252         6,294        12,820            --           538             --          28,904
  Capital expenditures           2,570         1,258            13            --           181             --           4,022
  Depreciation and
    amortization                 1,374           433           136            --           156             --           2,099

1996 
  Net sales from external
     customers                $136,140       $28,713       $    --       $    --       $17,157       $     --        $182,010
  Intersegment net sales           209            18            --            --           639           (866)             -- 
  Operating income              32,523         6,497            --            --         3,664             --          42,684
  Interest expense               9,843           241            --            --            17            (89)         10,012
  Interest income                  610            --            --            --         8,270            (89)            603
  Long-lived assets              9,520         6,428            --            --           205             --          16,153
  Capital expenditures             842         1,411            --            --           227             --           2,480
  Depreciation and
    amortization                 1,534           341            --            --            90             --           1,965
</TABLE>

[1]  Interest expense relating primarily to borrowings under the Revolving
     Credit Agreement and the senior subordinated notes of $8,075 in 1998,
     $12,294 in 1997 and $9,843 in 1996 has been recorded in the Twinlab
     Division and not allocated to the other operating segments.

[2]  The "other" column includes corporate-related items and the results of two
     divisions, PR Nutrition and ARP, whose segment information is below the
     reportable quantitative thresholds. The Company markets nutritionally
     enhanced food bars and other nutritional products through PR Nutrition and
     publishes a sports fitness magazine and health and fitness-related books,
     audios and newsletters through ARP.


                                      F-21
<PAGE>   56
       The Company primarily distributes its products through three distribution
       channels: the health and natural food store channel; the mass market
       channel, which consists of drug store chains, supermarkets and mass
       market retailers; and the direct sales channel, which includes network
       marketing, catalog and direct response. Net sales by distribution channel
       were as follows:

<TABLE>
<CAPTION>
                                       1998           1997           1996
                                     --------       --------       --------

<S>                                  <C>            <C>            <C>     
Health and natural food stores       $211,837       $193,464       $164,444
Mass market                            47,039         14,057          2,780
Direct sales                           70,492         17,087          9,563
Other                                   4,007          5,006          5,223
                                     --------       --------       --------
                                     $333,375       $229,614       $182,010
                                     ========       ========       ========
</TABLE>


                                      F-22
<PAGE>   57
                                                                      SCHEDULE I

TWINLAB CORPORATION AND SUBSIDIARIES
(PARENT COMPANY ONLY)                                              

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                              1998             1997 
                                                                            ---------        ---------
                                                                                             RESTATED)
<S>                                                                         <C>              <C>      
ASSETS

Cash                                                                        $     323        $     169
Investment in subsidiaries                                                    205,162           30,712
                                                                            ---------        ---------

Total                                                                       $ 205,485        $  30,881
                                                                            =========        =========


SHAREHOLDERS' EQUITY

Preferred stock, $.01 par value; 2,000,000
  shares authorized; none issued                                            $      --        $      --
Common stock , $1.00 par value; 75,000,000
  shares authorized; 32,705,049 shares outstanding
  as of December 31, 1998 and 28,470,100 as of
  December 31, 1997                                                            32,705           28,470
Additional paid-in capital                                                    289,327          145,917
Accumulated deficit                                                          (116,547)        (143,506)
                                                                            ---------        ---------

Total                                                                       $ 205,485        $  30,881
                                                                            =========        =========
</TABLE>

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

Note: Investment in subsidiaries is accounted for under the equity method of
accounting.



See notes to consolidated financial statements included elsewhere herein.


                                      S-1
<PAGE>   58
                                                                      SCHEDULE I
TWINLAB CORPORATION AND SUBSIDIARIES
(PARENT COMPANY ONLY)                                              

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)                               


<TABLE>
<CAPTION>
                                                            1998          1997          1996 
                                                          -------       -------       -------
                                                                      (RESTATED)    (RESTATED)
<S>                                                       <C>           <C>           <C>    
Equity interest in net income of subsidiaries             $28,221       $25,677       $14,916
Interest income                                               981             7            54
                                                          -------       -------       -------
Income before provision for income taxes                   29,202        25,684        14,970
Provision for income taxes                                    489           192            -- 
                                                          -------       -------       -------
Net income                                                $29,691       $25,876       $14,970
                                                          =======       =======       =======
</TABLE>


See notes to consolidated financial statements included elsewhere herein.


                                      S-2
<PAGE>   59
                                                                   SCHEDULE I

TWINLAB CORPORATION AND SUBSIDIARIES
(PARENT COMPANY ONLY)

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       1998            1997             1996 
                                                                    ---------        --------        ---------
<S>                                                                 <C>              <C>             <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:                           
   Net income                                                       $  29,691        $ 25,876        $  14,970
                                                                    ---------        --------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Equity investment in subsidiaries                                  118,289         (18,922)         119,361
                                                                    ---------        --------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Purchase of business, net of cash acquired                         (56,104)         (3,726)              --
   Proceeds from issuance of Preferred Stock                               --              --           67,000
   Dividends on Preferred Stock                                            --              --           (4,862)
   Distributions to shareholders                                       (2,732)         (3,347)         (11,693)
   Redemption of Preferred Stock                                           --              --          (67,000)
   Issuance of common stock                                                82             126            5,500
   Repurchase of shareholders' common stock and recapitalization           --              --         (216,780)
   Proceeds from public offering of common stock                      147,506              --           93,666
                                                                    ---------        --------        ---------
        Net cash provided by (used in) financing activities            88,752          (6,947)        (134,169)
                                                                    ---------        --------        ---------
   Net increase in cash                                                   154               7              162
   Cash at beginning of year                                              169             162               -- 
                                                                    ---------    -----------       -----------
   Cash at end of year                                              $     323     $       169      $       162   
                                                                    =========     ===========      ===========
</TABLE>                                                     

See notes to consolidated financial statements included elsewhere herein.


                                      S-3
<PAGE>   60
                                                                     SCHEDULE II


TWINLAB CORPORATION AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)  




<TABLE>
<CAPTION>
       COLUMN A                         COLUMN B                 COLUMN C                  COLUMN D       COLUMN E
       --------                         --------                 --------                  --------       --------
                                                                ADDITIONS                         
                                                                        CHARGED TO
                                       BALANCE AT        CHARGED TO        OTHER                           BALANCE
                                        BEGINNING         COST AND       ACCOUNTS         DEDUCTIONS      AT END OF
     DESCRIPTIONS                       OF PERIOD         EXPENSES      - DESCRIBE        - DESCRIBE       PERIOD
     ------------                       ---------         --------      ----------        ----------       ------
<S>                                     <C>               <C>           <C>               <C>              <C>
YEAR ENDED DECEMBER 31, 1998:
  Allowance for bad debts                $   467           $   35          $--              $    [1]       $   502
                                         =======           ======          ===              =====          =======
  Reserve for excess and
    slow moving inventory                $ 1,000           $1,801          $--              $  --          $ 2,801
                                         =======           ======          ===              =====          =======

YEAR ENDED DECEMBER 31, 1997:
  Allowance for bad debts                $   220           $  249          $--              $   2[1]       $   467
                                         =======           ======          ===              =====          =======
  Reserve for excess and
    slow moving inventory                $   625           $  375          $--              $  --          $ 1,000
                                         =======           ======          ===              =====          =======


YEAR ENDED DECEMBER 31, 1996:
  Allowance for bad debts                $   177           $  137          $--              $  94[1]       $   220
                                         =======           ======          ===              =====          =======
  Reserve for excess and
    slow moving inventory                $   515           $  625          $--              $ 515[1]       $   625
                                         =======           ======          ===              =====          =======
</TABLE>


(1)    Amounts written off.


                                      S-4