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

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

 
For the fiscal year ended DECEMBER 31, 1996
                                       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
                         (State or Other Jurisdiction of
                         Incorporation or Organization)

                              2120 SMITHTOWN AVENUE
                              RONKONKOMA, NEW YORK
                    (Address of Principal Executive Offices)

                                   11-3317986
                                (I.R.S. Employer
                               Identification No.)

                                      11779
                                   (Zip Code)
       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
21, 1997 as reported on The Nasdaq National Market System was $127,654,800.

     As of March 21, 1997, the registrant had 27,000,000  shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive proxy statement for the 1997 Annual
Meeting of  Stockholders  are  incorporated  by reference  into Part III of this
Report.


<PAGE>

                               TWINLAB CORPORATION
                         1996 ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS


<TABLE>

                                     PART I


<S>      <C>                                                                                                       <C>
Item 1.  Business....................................................................................................1

Item 2.  Properties.................................................................................................11

Item 3.  Legal Proceedings..........................................................................................11

Item 4.  Submission of Matters to a Vote of Security Holders........................................................12


                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters......................................13

Item 6.  Selected Financial Data....................................................................................14

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................16

Item 8.  Financial Statements and Supplementary Data................................................................19

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................19


                                    PART III


Item 10. Directors and Executive Officers of the Registrant.........................................................19

Item 11. Executive Compensation.....................................................................................19

Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................19

Item 13. Certain Relationships and Related Party Transactions.......................................................19


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................20
</TABLE>


Signatures


<PAGE>

     Information  contained or incorporated by reference in this report contains
"forward-looking   statements"   which   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."  No  assurance  can be given  that the future
results  covered  by  the  forward-looking  statements  will  be  achieved.  The
following  information  includes  cautionary  statements  identifying  important
factors with respect to such forward-looking statements, including certain risks
and  uncertainties,  that could cause actual results to vary materially from the
future results covered in such forward-looking  statements.  Other factors could
also cause actual results to vary  materially from the future results covered in
such forward-looking statements.

                                     PART I

ITEM 1.  BUSINESS

     Unless the context  otherwise  requires,  the term "Company"  refers to (a)
Twinlab  Corporation  ("TLC")  and,  as  applicable,  its  direct  and  indirect
subsidiaries,  Twin Laboratories Inc. and Advanced Research Press, Inc. ("ARP"),
when used with respect to information  about events  occurring since May 7, 1996
and (b) collectively Natur-Pharma Inc., Twin Laboratories Inc., Alvita Products,
Inc.,  Twinlab Export Corp.,  Twinlab  Specialty  Corporation,  B. Bros.  Realty
Corporation  and Advanced  Research  Press,  Inc., all of which were  affiliated
entities,  as such entities existed prior to May 7, 1996, when used with respect
to historical  information  contained herein.  Except where otherwise indicated,
the  information  in this  report  gives  effect  to an 18.5  for 1 stock  split
effected as a stock dividend with respect to the Common Stock which was effected
prior to the  consummation  of TLC's  initial  public  offering  (the  "IPO") in
November 1996.

GENERAL

     The Company believes based upon its knowledge of the nutritional supplement
industry that it is one of the leading manufacturers and marketers of brand name
nutritional  supplements  sold through  domestic  health food stores.  Since the
Company's  founding in 1968,  the Company has  emphasized  the  development  and
introduction of high-quality,  unique products in response to emerging trends in
the  nutritional  supplement  industry.  The  Company  produces  a full  line of
nutritional  supplements  and offers the  broadest  product line in the industry
with more than 840 products and 1,600 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 and a full line of
herbal  supplements and phytonutrients and herb teas marketed under the Nature's
Herbs  (R) and  Alvita  (R)  trademarks,  respectively.  None  of the  Company's
products  individually  accounted for more than 5.3% of total net sales in 1996.
The Company's  broad product line,  strong history of new product  introductions
and innovations, superior marketing and advertising programs and premium product
quality have established TWINLAB, Nature's Herbs and Alvita as leading brands in
the nutritional supplement industry.

     The Company has  diversified  its product  line  through  internal  growth,
product development and selected acquisitions, including the acquisition in 1989
of Natur-Pharma Inc., a leading  manufacturer and marketer of herbal supplements
and  phytonutrients  under the Nature's Herbs brand name, and the acquisition in
1991 of Alvita Products,  Inc., a leading marketer of herb teas. The Company has
achieved  increased net sales and income from operations  every year since 1990.
In particular,  during the three-year period from 1994 through 1996, the Company
achieved a compound  annual growth rate in net sales and income from  operations
of 20.4% and 28.0%,  respectively.  For the fiscal year ended December 31, 1996,
the Company  achieved net sales growth of 14.3% to $170.1  million and growth in
income from  operations  of 24.8% to $39.5  million,  as compared to fiscal year
1995.

     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.  The  Company's  products  compete
primarily  in the  health  food store  market,  where the  dominant  competitive
factors include product  attributes such as quality,  potency and the uniqueness
of  the  product  formulation.  The  Company  sells  its  products  domestically
primarily  through  a network  of  approximately  60  distributors  who  service
approximately  11,000 health food stores and other selected retail outlets.  The
Company  believes that its products are available in over 90% of the health food
stores  in  the  United  States.  However,  the  Company  believes  that  growth
opportunities  are  available in this market as only  approximately  12% of such
stores carry the full line of TWINLAB products. The health food store channel of
distribution has expanded  significantly in recent years and is expected to grow
further as national  chains,  including those which sell the Company's  products
such as General Nutrition Companies,  Inc. ("GNC"),  Whole Foods Market ("WFM"),
Wild Oats Markets, Fresh Fields, and other industry participants continue to add
stores in new and  existing  markets.  The  health  food  store  market  differs
significantly from the mass market for vitamin and other nutritional supplements
where price and  convenience  constitute the primary bases of  competition.  The
nutritional  supplement  products sold in grocery  stores,  drug stores and mass
merchandisers are typically


                                        1


<PAGE>

manufactured by large pharmaceutical  companies and private label manufacturers.
The Company's products are also offered in Europe, Asia, South America and other
international markets through arrangements with overseas distributors.

     The Company  believes it is well  positioned to capitalize on the growth of
the nutritional  supplement  market which management  believes 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;  (iii) the  nationwide  trend toward  preventive
medicine  in  response to rising  health  care  costs;  and (iv) the  heightened
understanding and awareness of 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 40% of Americans  currently
consume vitamins, minerals and herbal supplements on a regular basis.

     In November  1996,  following the  consummation  of the Company's  IPO, the
Common  Stock of TLC was listed on the Nasdaq  National  Market under the symbol
"TWLB". TLC was incorporated under the laws of the State of Delaware in 1996 and
maintains its principal executive offices at 2120 Smithtown Avenue,  Ronkonkoma,
New York 11779. Its telephone number is (516) 467-3140.

BUSINESS STRATEGY

     The Company's strategy is to continue to enhance its leadership position in
the sale of vitamins,  minerals and other  nutritional  supplements  in domestic
health food stores and to increase its market  share and sales while  continuing
to improve its overall  operating  efficiency  and  financial  performance.  The
Company  intends to capitalize on the TWINLAB brand name by growing market share
domestically,  increasing penetration of the Company's other brands,  continuing
to introduce new products and product extensions, and expanding internationally.
Specifically, the Company seeks to:

     Capitalize on Powerful  Brand Name  Recognition.  The Company's  recognized
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  and  Alvita  as  leading  brands  in the
nutritional   supplement   industry.   The  Company's  extensive  marketing  and
advertising programs have been critical components of its products' strong brand
name recognition,  and management believes that the Company offers its customers
the strongest  marketing and advertising  support  programs in the industry.  In
fiscal  1996,  the Company  invested  $12.7  million,  an increase of 14.0% over
fiscal 1995, in marketing and advertising to promote its products.

     Increase Penetration in the Growing Health Food Market. Management believes
that the  expansion  of  retail  distribution  channels  and the  strong  growth
characteristics of the nutritional  supplement industry provide the Company with
significant  opportunities to increase sales.  Management  further believes that
the established brand name recognition of the Company's products positions it to
increase its  penetration  of shelf space as health food retailers seek to align
themselves with companies  which possess strong brand names,  offer a wide range
of products, demonstrate continued marketing and advertising support and provide
consistently  high levels of customer  service.  Since Nature's Herbs and Alvita
products  currently  are  available  in fewer  domestic  health food stores than
TWINLAB  products,  the Company  believes  that it will be able to capitalize on
health  food  retailers'  success  with  the  TWINLAB  product  line in order to
significantly  increase  shelf  space  for  the  Company's  herbal  supplements,
phytonutrients and herb teas.

     Continue to Introduce New Products and Product  Innovations.  A cornerstone
of the  Company's  success  has been  its  ability  to  rapidly  utilize  recent
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 which anticipate and meet customer demands for
newly identified  nutritional  supplement benefits.  Furthermore,  the Company's
geographically  diverse network of more than 60 distributors  allows the Company
to achieve immediate and broad distribution for new product launches. 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.  From 1991 through 1996, the Company
introduced  over 460  products,  with over 110 new products  introduced  in 1996
alone.  Gross sales during 1996 from new products  introduced in 1996 were $16.3
million,  or approximately  9.0% of gross sales. The Company intends to continue
to introduce new and innovative products.

     Build Upon Established Customer  Relationships.  The Company's  established
relationships  with  distributors and health food store retailers are based upon
the Company's commitment to a high level of customer service. In order to ensure
that its customers receive prompt and reliable service, the Company has designed
a flexible and responsive  manufacturing process and has achieved a fill rate of
approximately  98% for customer orders.  In addition,  the Company's sales force
consists of approximately 30 dedicated sales  professionals who operate in sales
territories  which cover the entire  continental  United States and Alaska.  The
primary  functions of the Company's sales force are to gain better placement and
additional  shelf  space  for the  Company's  products  and to stay  abreast  of
customer  needs.   The  sales  force   personnel  work  with  direct   accounts,
distributors and individual retailers to enhance knowledge of TWINLAB,  Nature's
Herbs and Alvita products and to achieve maximum exposure for these products.


                                        2


<PAGE>

     Increase Penetration of Foreign Markets. Management believes that there are
substantial  opportunities  for the  Company to expand its  presence  in foreign
markets. The Company has an international  department,  headed by a senior sales
professional,  dedicated to  increasing  sales in such  markets.  The  Company's
foreign  marketing  effort  is  primarily  focused  on  establishing  additional
relationships   with   leading   overseas   distributor   organizations   as   a
cost-effective  method of increasing  international sales. The Company presently
has distribution  agreements  covering over 44 foreign  countries.  In 1996, the
Company had net sales of $11.7 million to foreign markets.

     Supplement   Internal  Growth  Through  Strategic   Acquisitions.   As  the
nutritional  supplement  industry  is  highly  fragmented  with  many  companies
producing only a single  product line or single  product,  the Company  believes
that it is strategically  positioned to participate in the  consolidation of the
industry due to its established brand name, broad distribution  capabilities and
ability to generate sales of its products through successful marketing programs.
Since 1989 the Company has acquired two businesses,  Natur-Pharma Inc. (Nature's
Herbs) and Alvita  Products,  Inc.,  and in each case has  embarked on expansion
programs which resulted in substantially higher sales and income from operations
for the acquired companies. Net sales for Nature's Herbs products increased from
$5.2  million  in 1990 (the  first  full year  after its  acquisition)  to $21.0
million in 1996, and net sales for Alvita  products  increased from $1.7 million
in 1992 (the first full year after its acquisition) to $7.7 million in 1996. The
Company  intends to pursue  acquisition  opportunities,  including  product line
acquisitions,  that complement its existing  products,  expand its  distribution
channels or are compatible with its business philosophy and strategic goals.

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

INDUSTRY

     The retail  market for  vitamins,  minerals and other  supplements,  herbal
supplements,  and herb teas has demonstrated  strong growth in recent years. The
Company  believes that these market segments will continue to experience  strong
growth due to recent scientific  research  suggesting  potential health benefits
from regular consumption of vitamins and other nutritional  supplement products,
increasing  national  interest  in  preventive  health  measures  and  favorable
demographic   trends  that  indicate  increased  usage  of  vitamins  and  other
nutritional supplements.

     The  Company  expects  that the  aging  of the  United  States  population,
together with a  corresponding  increased focus on preventive  health  measures,
will  result in  increased  demand  for  nutritional  supplement  products.  The
35-and-older age group of consumers, which represent a significant proportion of
regular  users  of  vitamin  and  mineral  supplements,   is  expected  to  grow
dramatically  over the  next two  decades.  Based on data  provided  by the U.S.
Bureau of the Census,  from 1990 to 2010, the 35-44 and  45-and-older age groups
are  projected  to grow at rates  175% and 225%  faster  than the  general  U.S.
population,  respectively.  In addition,  the "baby boom echo" (the  children of
baby  boomers) is  projected  to result in  substantial  growth in the 16-21 age
group,  the largest  segment of  consumers  of sports  nutrition  products.  The
Company  expects that growth in this age group will result in  increased  demand
for its sports nutrition products.

     Vitamins and other  nutritional  supplements are sold primarily through six
channels of  distribution:  health food stores,  drug stores,  supermarkets  and
other  grocery  stores,   discount   stores,   mail  order,   and  direct  sales
organizations.  Mass market retailers (drug stores,  grocery stores and discount
stores) account for approximately 60% of sales,  while health food stores,  mail
order and direct selling account for approximately 40% of sales.

     The United  States  health 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. The health
food store channel of distribution  has grown  significantly in recent years and
is expected to continue to grow as customers of the Company,  such as GNC,  WFM,
Wild Oats Markets and Fresh Fields, and other industry  participants continue to
add stores in new and existing markets.

     The Company  believes  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.


                                        3


<PAGE>

PRODUCTS

     The Company has a highly diversified array of products which achieve strong
gross margins.  The Company  manufactures and markets over 840 products and over
1,600 SKU's in two primary  business areas:  the TWINLAB Division and the herbal
products category.  Products sold under the TWINLAB brand name include vitamins,
minerals,  amino acids,  fish and marine  oils,  sports  nutrition  products and
special  formulas.  The herbal products  category includes a full line of herbal
supplements  and  phytonutrients  marketed by the Nature's  Herbs Division and a
full line of herb teas  marketed by the Alvita Tea  Division.  The Company  also
operates a subsidiary  which  publishes  health,  fitness and  nutrition-related
publications.

TWINLAB Products

     Vitamins,  Minerals  and Amino  Acids.  Vitamin,  mineral  and  amino  acid
products include a complete line of  multivitamins  and  single-entity  vitamins
(such as B-complex, C and E), minerals (such as calcium and magnesium) and amino
acids (such as glutamine and  carnitine)  marketed under the TWINLAB brand name.
These products are available in a variety of delivery forms,  including  liquid,
powder,  capsule and tablet to  accommodate  a variety of consumer  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.

     Sports  Nutrition.  Sports  nutrition  products  include a wide  variety of
nutritional supplements designed for and targeted to athletes.  Sports nutrition
products include Hydra Fuel and Ultra Fuel drinks,  which replenish  glucose and
electrolytes  depleted during  strenuous  exercise;  and DietFuel,  RxFuel,  and
Ripped Fuel, which are marketed, as part of a low fat diet and exercise program,
for the  preservation  of lean body mass and the  building of muscle  mass.  The
Company's   sports   nutrition   products  are  utilized  by  both  amateur  and
professional  athletes in a variety of competitive  sports. The Company believes
that its strong sports nutrition business serves to increase the Company's brand
awareness  among  customers  who,  as they grow older,  will shift their  buying
patterns to include  vitamins,  minerals and herbal products,  and who, based on
their  positive  experiences  with the Company's  brand name, are more likely to
purchase the Company's other products.

     Special  Formulas.  Special formulas include 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 food stores.  Examples include
OcuGuard, which is formulated for nutritional support of the eyes, Coenzyme Q10,
which is designed for cardiovascular  health, and the MaxiLIFE Protector Series,
a complete  array of formulas  marketed  towards the aging "baby  boomers" which
includes women's  protector  formulas for the skin and bones and a complete line
of MaxiLIFE  formulas for  prostate,  colon and heart health.  In addition,  the
Company  sells a  variety  of fish  and  marine  oils in a number  of  different
delivery  forms which  offer a  multitude  of  nutritional  benefits,  including
favorable effects on cardiovascular health.

Herbal Products

     Herbal   Supplements   and    Phytonutrients.    Herbal   supplements   and
phytonutrients  (nutrients  from  botanical  sources that are considered to have
medicinal  properties) have become increasingly  important  categories in health
food stores.  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  ("OTC") medications.  The Company manufactures
and markets  approximately  500 SKU's of herbal and botanical  supplements which
are produced at the Company's  modern FDA registered  manufacturing  facility in
American Fork, Utah and sold under the Nature's Herbs brand name. Nature's Herbs
products include single herbs, such as saw palmetto, garlic, gingko, ginseng and
golden  seal;   traditional   combinations,   such  as  echinacea-golden   seal;
standardized extracts,  such as Bilberry Power and Milk Thistle Power sold under
the POWER HERBS(R) brand name; and natural HealthCare product formulations, such
as  Allerin  and  Coldrin.  Nature's  Herbs  products  are  packaged  using  the
innovative FRESH CARE(R) 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.   Management  believes  that  the
association of the Nature's Herbs product line with TWINLAB's  strong name brand
recognition  and reputation for premium  quality and service,  combined with the
increased  penetration of herbal  supplements and  phytonutrients in the growing
health food store channel of distribution,  have contributed to the rapid growth
experienced by this product line.

     Herb  Teas.   Through  its  Alvita   product  line,   the  Company   offers
approximately 185 SKU's of herb teas in both single use bags and bulk. Alvita is
a leading brand of herb teas and is one of the most recognizable tea brands sold
through  health  food  stores.  Alvita  was  founded  in 1922  and 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 by an independent


                                        4


<PAGE>

contractor.  Representative  Alvita teas  include  Peppermint  Leaf,  Chamomile,
Echinacea, Golden Seal, Ginger and Senna Leaf, as well as new-age blends such as
Chinese Green Tea which is available in a choice of citrus flavors, and TrimTime
Thermogenic  Diet Tea.  Alvita  markets  its  products  with an  environmentally
conscious theme by packaging bulk tea and tea bags in paper and by not utilizing
shrink wrap for either its outer boxes or tea bags.  Alvita recently  launched a
new line of herbal tea blends named Herbal Remeteas, including Highland Lullaby,
Manchurian  Brain Blend,  Jamaica Digesti Brew, and Canadian  Natur-Tussin.  The
Company also recently  expanded its Alvita product line by combining Alvita teas
with vitamins and other  nutritional  supplements,  creating a new delivery form
for vitamins and other nutritional supplements.

Publishing

     Through Advanced  Research Press,  Inc., the Company  publishes All Natural
Muscular Development, a high-quality bodybuilding and fitness magazine featuring
a scientific  advisory  board and  contributors  considered to be among the most
accomplished and knowledgeable in their respective fields. In 1996, the magazine
reinforced its commitment to drug-free bodybuilding by becoming the first modern
periodical to showcase and endorse only steroid-free bodybuilding.  The magazine
covers recent developments and provides innovative  information in the fields of
training and nutrition  research,  supplements,  health,  fitness and diet. This
publication  serves as a useful  vehicle to  increase  public  awareness  of the
Company's  products and as an outlet for a portion of the Company's  advertising
program.  All  Natural  Muscular  Development   currently  has  a  monthly  paid
circulation of approximately  115,000 readers. The Company also publishes health
and fitness  related books and is exploring the  introduction  of new health and
fitness related products.

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 to respond to such
trends and research.  The Company's product  development staff regularly studies
over 50 different  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
L-glutathione,  L-cysteine, N-acetyl cysteine (NAC) and an entirely new class of
antioxidants,  including polyphenols,  flavonoids and isoflavones;  concentrated
Coenzyme  Q10;  high potency  phosphatidyl  choline and  patented GTF  Chromium;
pioneering  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  1996,  the  Company  introduced  over 460  products  with  over 110 new
products introduced in 1996 alone.

     The Company's research and development  expenses were $1.1 million in 1996,
$1.1  million  in 1995 and  $1.0  million  in 1994,  including  the  support  of
scientific   research  at  independent   research   centers   located  at  major
universities and medical centers.

SALES AND DISTRIBUTION

     The  Company   believes   that  its  TWINLAB   products  are  available  in
approximately 90% of domestic health food stores.  However, the Company believes
that growth opportunities are available in this market as only approximately 12%
of such stores carry the full line of TWINLAB  products.  The Company  sells its
products  primarily  through a network of approximately  60 distributors,  which
service  approximately  11,000  health  food stores  throughout  the country and
selected   retail   outlets.   Sales  to   domestic   distributors   represented
approximately   88%  of  the  Company's  gross  sales  in  1996.  The  Company's
distributor  customers  include  GNC,  Tree of  Life,  Cornucopia,  Stow  Mills,
Nature's Best and other distributors that supply retailers of vitamins, minerals
and  other  nutritional  supplements.  Management  believes  that it  sells  its
products to every major domestic nutritional  supplement  distributor  servicing
health  food  stores  and is  generally  the  largest  independent  supplier  of
nutritional supplements to each such distributor.  The Company is also currently
expanding distribution into domestic military exchanges.

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


                                        5


<PAGE>

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.

     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 GNC, the largest retail organization which sells
the Company's products and which operates  approximately  3,000 stores.  Tree of
Life and GNC accounted for approximately 25.0% and 20.0%,  respectively,  of the
Company's  net sales in 1996. No other single  customer  accounted for more than
10% of the  Company's  net sales in 1996.  The loss of either  Tree of Life as a
distributor or GNC 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
or such other distributors, for any reason, would have a material adverse effect
on the Company's results of operations and financial condition.

     Approximately  6.9%, or $11.7  million,  of the Company's net sales in 1996
were derived from international sales which originate from overseas  distributor
organizations.   The  Company   presently  has   distribution   agreements   for
approximately  fifteen European countries,  including Great Britain, The Benelux
Countries and the Scandinavian countries;  approximately fourteen Latin American
countries,  including Mexico,  Brazil and Paraguay;  approximately  eight Middle
Eastern  countries,  including  Israel  and  Saudi  Arabia;  and  various  other
countries in the Far East and the Caribbean.

MARKETING AND CUSTOMER SALES SUPPORT

     The  Company's  marketing  strategy,  which  centers  around  an  extensive
advertising and promotion program, and customer sales support services have been
critical  components of the Company's growth,  strong brand name recognition and
leading position within the nutritional supplement industry.

     The Company's  marketing and advertising  expenditures  were  approximately
$12.7  million in 1996,  $11.1  million in 1995 and $8.7 million in 1994. Of the
Company's $10.2 million in 1996  advertising  expenditures,  approximately  $6.5
million, or 64%, was spent on print advertising,  approximately $2.2 million, or
21%,  was spent on  television  and radio  advertising  and  approximately  $1.5
million,  or 15%,  was spent on  production  of  advertising  materials.  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
segments in order to generate  purchases by customers and also  communicates the
points-of-difference   between  the   Company's   products   and  those  of  its
competitors.

     A  significant  portion of the Company's  advertising  budget is focused on
advertisements  in  magazines.  The  Company  regularly  advertises  in consumer
magazines such as Better Nutrition,  Delicious,  Vegetarian  Times,  Let's Live,
Natural  Health,  New Age Journal,  Bicycling,  VeloNews,  Triathlete,  Runner's
World,  Muscle & Fitness,  Flex, and Ironman, as well as trade magazines such as
Natural Foods  Merchandiser,  Vitamin  Retailer,  Nutrition Science News, Health
Foods Business and Whole Foods.

     Other marketing and advertising  programs  conducted by the Company include
participation in or sponsorship of sporting events such as running competitions,
including the Boston  Marathon and the Los Angeles  Marathon,  and  bodybuilding
competitions,  including  the Arnold  Classic and the NPC National  Bodybuilding
Championships, and sponsorship of health-oriented television and radio programs.
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'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  30 dedicated sales
professionals   whose  primary  functions  are  to  gain  better  placement  and
additional  shelf space for TWINLAB,  Nature's Herbs and Alvita  products and to
stay  abreast of customer  needs.  These sales  representatives  are assigned to
specific  territories  covering the entire continental United States 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 and Alvita  products.  An additional three person sales
and  marketing  staff  supports  Nature's  Herbs  products and the  servicing of
customer needs.  The Company also designs and supplies  marketing  literature to
help  educate  retailers  and  consumers  as to the  benefits  of the  Company's
products.


                                        6


<PAGE>

     The Company operates an in-house customer service  department to respond to
inquiries requesting  information  concerning product  applications,  background
data,  ingredient  compositions and the efficacy of products.  The department is
currently staffed by six nutrition experts.

MANUFACTURING AND PRODUCT QUALITY

     Virtually all of the Company's  TWINLAB  products are  manufactured  at the
Company's 80,000 square foot manufacturing  facility located in Ronkonkoma,  New
York. Herbal  supplements and  phytonutrients  are manufactured at the Company's
60,000 square foot FDA registered manufacturing facility in American Fork, Utah.
Herb teas are currently packaged by an independent contractor and are warehoused
at the American Fork,  Utah,  facility.  The Company's two modern  manufacturing
facilities  provide the Company with the  capability  to meet  customers'  sales
demands with a prompt response time 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.  See
"Properties."

     The  Company's  modern  manufacturing   operations  feature  pharmaceutical
quality blending,  filling and packaging capabilities,  which enable the Company
to offer  quality and  consistency  in  formulation  and  delivery.  The Company
operates  flexible  manufacturing  lines  which  enables it to  efficiently  and
effectively  shift output among various products as dictated by customer demand.
The Company is capable of producing over 25 million  capsules and tablets,  over
100,000 pounds of blended powder and up to 2,500 gallons of liquid  preparations
per day. The Company has seven  high-speed  capsule and tablet  packaging lines,
two high-speed  liquid filling lines,  two powder filling lines and one chewable
tablet  packaging  line which are  capable of  operating  simultaneously  at its
Ronkonkoma,   New  York,  and  American  Fork,  Utah,  facilities.  The  Company
manufactures  the  powders  used in its  line  of  single-serving  sports  drink
products but utilizes a contract bottler for the hydration and bottling of these
products.  The  Company  operates  on a  24-hour  work  day  that  includes  two
production shifts and a third shift dedicated primarily to 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 1996.

     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.

     The Company's  quality standards are a critical factor in consumer purchase
decisions,  and the Company believes it has established a competitive  advantage
based on the quality of its products.  All of the  Company's  capsule and tablet
products are visually  inspected before being packaged in virtually  light-proof
amber glass for better product  freshness and stability.  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 two in-house  analytical  laboratories  with  state-of-the-art
testing and analysis  equipment where the Company  performs most of its testing,
including   active   component   characterization   utilizing   thin-layer   and
high-pressure liquid chromatography,  UV visible and infrared spectrometry,  and
atomic   absorption   spectrometry.   The  Company  contracts  with  independent
laboratories  to perform the balance of its testing  requirements.  A team of 57
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 retained for quality control purposes for up
to four years. See "--Regulatory Matters--Government Regulation."

     The  Company  has a strong  commitment  to  maintaining  the quality of the
environment.  All  of the  Company's  plastic  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.


                                        7


<PAGE>

COMPETITION

     Within the nutritional  supplement industry,  suppliers can be divided into
three  major  categories:  specialty  firms,  like the  Company,  which focus on
vitamins,  minerals and other  nutritional  supplements  targeted to health food
store retailers;  major pharmaceutical  companies and private label contractors,
which sell vitamins and other nutritional  supplements that are targeted to mass
market  retailers;  and  direct  sale and mail  order  companies.  The  domestic
nutritional  supplement  industry that targets products to the health food store
market is highly  fragmented,  with a number of small  competitors  involved  in
manufacturing and marketing vitamin and other nutritional supplement products to
health food retailers and  distributors.  Most of these companies are relatively
small businesses operating on a local or regional level. Although most companies
are privately held, resulting in the Company's inability to precisely assess the
size of its competitors,  management  believes that the Company is substantially
larger than the next largest firm that targets  independently-owned  health food
stores and that, among competitors which sell through independent  distributors,
it is the largest company which manufactures a majority of its own products.

     The Company's principal competitors in the health food store market include
Nutraceuticals,  Weider/Schiff,  Nature's Way, Solgar and Nature's Plus. 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.
Many of the  Company's  competitors  in markets other than the health food store
market, including the major pharmaceutical companies, have substantially greater
financial and other resources than the Company.

     The Company  believes that the growing  number of health 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
products,  premium  brand  names,  commitment  to  quality,  ability  to rapidly
introduce  innovative products,  competitive  pricing,  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.

     The business of developing,  manufacturing and selling vitamins,  minerals,
sports  nutrition   products  and  other   nutritional   supplements  is  highly
competitive.  Certain of the Company's  competitors are substantially larger and
have greater financial resources than the Company.

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 Consumer Product Safety
Commission,  the United States  Department of Agriculture and the  Environmental
Protection  Agency.  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 new law revises 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 new statutory class of "dietary  supplements." This new 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,  will require  evidence of a history of use or
other evidence of safety  establishing that it will reasonably be expected to be
safe, such evidence to be provided by the manufacturer or distributor to the FDA
before it may be  marketed.  The DSHEA also  invalidated  the FDA's  enforcement
theory  that  dietary  supplements  were  food  additives  requiring  pre-market
approval.

     The  substantial  majority  of the  products  marketed  by the  Company are
classified  as dietary  supplements  under the FFDC Act.  Advertising  and label
claims  for  dietary  supplements  have  been  regulated  by state  and  federal
authorities under a number of disparate


                                        8


<PAGE>

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.

     The labeling  requirements  for dietary  supplements  have not been clearly
established. In December 1995, the FDA issued proposed regulations to govern the
labeling of dietary supplements.  These regulations are expected to become final
in 1997 and would  require the  Company to revise all of its dietary  supplement
labels by 1998.

     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 pre-approved by the FDA. To
date, the FDA has approved the use of health claims for dietary supplements only
in  connection  with  calcium for  osteoporosis,  and folic acid for neural tube
defects. 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   pre-approval   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").

     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.
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 American Fork, 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 also "Legal Proceedings."

     FTC Proceeding

     In  1989,  the  Company  received  an  informal  inquiry  from the New York
Regional Office of the FTC seeking substantiation for certain advertising claims
made for a segment  of its "Fuel"  bodybuilding  and  sports  nutrition  line of
products.  In response,  the Company  submitted  scientific  substantiation  and
financial information to the FTC.

     The  Company  has  engaged in  negotiations  with the FTC  relating  to the
proposed  terms of a consent order (the "Consent  Order") to settle this matter.
The most recent draft of the proposed  Consent Order  provides for,  among other
things,  injunctive  relief  prohibiting  the Company from making certain muscle
building and fat burning claims for four of its Fuel products and  substantially
similar products without scientific substantiation and a $200,000 payment to the
FTC. The FTC staff has indicated  that unless a settlement is reached,  it would
proceed  to  recommend  to the FTC  Commissioners  that a  civil  administrative
complaint  be issued  against the  Company.  The Company has  determined  at the
current time not to settle this matter on the terms set forth in the most recent
draft of the  Consent  Order,  which draft the FTC has stated is its final offer
for a negotiated settlement.  The Company cannot at this time predict whether it
will be able to reach a negotiated settlement of this matter.

     The Company believes that it has adequate scientific substantiation for the
claims at issue, and intends to vigorously defend this matter if a settlement is
not reached.  There can be no assurance  that any  injunctive  relief,  monetary
payment (including potential


                                        9


<PAGE>

consumer  redress  payments)  or other  terms  resulting  from a  negotiated  or
litigated resolution of this matter would be limited to those sought in the most
recent draft of the Consent Order or would not have a material adverse effect on
the Company.

     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  9.8% of the  Company's  gross sales in 1996.  The
Company's   products   which  contain  Ma  Huang  are  generally   marketed  for
bodybuilding,  weight loss,  sports nutrition and for 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,
including the deaths of several individuals. The FDA has placed on public file a
list of over 600 such alleged adverse events.  On April 10, 1996, the FDA issued
a statement  warning  consumers not to purchase or consume  dietary  supplements
containing  ephedrine  with labels that often  portray the  products as apparent
alternatives  to illegal  street  drugs.  None of the Company's  products  which
contain Ma Huang are marketed for such purpose. In August 1996, the FDA convened
a Food Advisory Committee meeting to review and make recommendations  concerning
the safety and appropriate labeling of Ma Huang-containing  dietary supplements.
The FDA may propose  regulations  that will require reduced dosages coupled with
strict manufacturing standards,  labeling restrictions and a prohibition against
combining  Ma  Huang  with  other  central  nervous  system  stimulants  such as
caffeine.  There can be no  assurance  that such  regulations  will not prohibit
either the sale of dietary  supplements  containing Ma Huang in combination with
any other ingredients or the sale of all dietary  supplements  containing any Ma
Huang.  The  promulgation  of such  regulations  would  require  the  Company to
reformulate and relabel substantially all of its Ma Huang products and there can
be no assurance as to the effect that any resulting reformulation and relabeling
of the  Company's  products  would  have  on the  sales  of such  products.  The
Company's  sales of products  that contain Ma Huang  increased  slightly  during
fiscal year 1996, as compared to fiscal year 1995.

     A number of states and local governmental  entities have instituted bans on
sales  of  Ma   Huang-containing   products   that  are  portrayed  as  apparent
alternatives  to illegal  street drugs;  other states and foreign  jurisdictions
limit  ephedrine  levels and require  appropriate  warnings  on product  labels,
regulate  ephedrine-containing products as controlled substances or prohibit the
sales of products  which  contain Ma Huang  other than by licensed  pharmacists.
There are also federal,  state and local proposals to broaden the regulation of,
or otherwise limit or prohibit,  the sale of products containing ephedrine.  The
Company's  products  containing Ma Huang may become subject to further  federal,
state, local or foreign laws or regulations,  which could 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. See "Legal Proceedings."

EMPLOYEES

     At December 31, 1996, the Company  employed 551 persons,  of which 120 were
involved in executive,  sales and administrative  activities. The balance of the
Company's   employees  were  engaged  in  production,   packaging  and  shipping
activities.  None  of  the  Company's  employees  are  covered  by a  collective
bargaining  agreement,  and management considers relations with its employees to
be good.

TRADEMARKS

     The Company's  trademarks  are valuable  assets which are very important to
the marketing of its products.The  Company's  policy is to pursue  registrations
for all of the  trademarks  associated  with its key products.  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 names
material to its business.  In addition,  the Company has obtained trademarks for
various of its products and has approximately 250 trademark  registrations  with
the United States Patent and Trademark  Office for TWINLAB,  Nature's  Herbs and
Alvita brands.  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
relies on common law trademark  rights to protect its  unregistered  trademarks.
Common law  trademark  rights do not provide the Company  with the same level of
protection as would U.S. federal registered trademarks.  In addition, common law
trademark  rights extend only to the  geographic  area in which the trademark is
actually  used,  while  U.S.  federal  registration  prohibits  the  use  of the
trademark  by any  third  party  anywhere  in the  United  States.  The  Company
vigorously protects its trademarks against infringement.


                                       10


<PAGE>

ITEM 2.    PROPERTIES

     The  Company  owns a modern  vitamin,  mineral and  nutritional  supplement
manufacturing facility in Ronkonkoma, New York. This 80,000 square foot facility
also houses the Company's  executive  offices.  The Company leases 26,300 square
feet of warehouse space in Ronkonkoma,  60,000 square feet of warehouse space in
Hauppauge,  New York,  and 5,000 square feet of office space in  Ronkonkoma.  In
addition,   the  Company  owns  a  modern   FDA-registered  60,000  square  foot
manufacturing  facility  in  American  Fork,  Utah.  This  facility,  which  was
initially  constructed in 1993,  houses office,  manufacturing  and  warehousing
facilities  for the operations of the Nature's Herbs Division of the Company and
office and warehousing  facilities for the operations of the Alvita Tea Division
of the Company.

     The Company  believes that its facilities and equipment  generally are well
maintained and in good operating  condition.  The Company recently  completed an
8,500  square  foot  addition to its Utah  facility  at a cost of  approximately
$700,000 to provide additional plant capacity for the operations of the Nature's
Herbs and Alvita Tea  Divisions of the  Company.  Management  believes  that the
Company's  Utah  facility will be sufficient to enable the Company to meet sales
demand for the foreseeable  future.  The Company has entered into a contract for
the purchase of an approximately 110,000 square foot facility near its currently
owned  facility  in  Ronkonkoma,  New York,  which  would be used to expand  the
Company's  manufacturing  and  warehousing  capabilities  and  office-space in a
manner  which  the  Company  believes  would be  sufficient  to meet its  growth
requirements  for  the  foreseeable  future.  The  cost  to the  Company  of the
facility,   including   anticipated   renovations,   is  expected  to  aggregate
approximately  $6.5 million.  The purchase is expected to be  consummated in the
second  quarter of 1997 and is subject to customary  conditions,  including  due
diligence review by the Company. There can be no assurance at this time that the
Company will acquire this facility.


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 currently has $75.0 million of product liability
insurance (which does not cover matters relating to L-Tryptophan) with a $10,000
self insurance retention per occurrence and $100,000 self insurance retention in
the aggregate. 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, like various other participants in the nutritional  supplement
industry,  has been a defendant  in court  actions  seeking  damages for alleged
personal  injuries  resulting from products  containing  allegedly  contaminated
added manufactured L-Tryptophan. To date, approximately 131 of the approximately
133  suits  in  which  the  Company  was a named  defendant  (the  "L-Tryptophan
Actions") have been  dismissed or settled at no cost to the Company  pursuant to
an  Indemnification  Agreement  (the  "Indemnification  Agreement")  between the
Company and a U.S.  subsidiary  of the Japanese  manufacturer  of the  allegedly
contaminated  ingredient.  The Company believes, after consultation with outside
counsel,  that few new lawsuits  are likely to be brought in view of  applicable
statutes of limitation  and, in light of the  Indemnification  Agreement and the
resolution  of  virtually  all of the  L-Tryptophan  Actions  at no  cost to the
Company,  that  the  prospect  of the  remaining  L-Tryptophan  Actions  and any
possible  future  actions  having a  material  adverse  effect on the  Company's
results of  operations or financial  condition is remote.  The Company no longer
markets any products containing added manufactured L-Tryptophan.

     The State of California has  established  permissable  lead levels in foods
pursuant  to  Proposition  65 of its Health & Safety  Code  ("Proposition  65").
Proposition  65  requires  a warning on all  products  that  contain  identified
reproductive  toxins or carcinogens in excess of permitted  levels.  In February
1997,  the Attorney  General of the State of  California  filed a Complaint  for
Civil  Penalty  and  Injunctive  Relief  in the  Superior  Court of the State of
California (San Francisco) (Action No. 984503) against a number of corporations,
including the Company,  alleging  that dietary  supplements  containing  calcium
compounds  marketed by such entities contain lead levels that exceed  acceptable
levels  under   Proposition  65  without   providing  the  warning  required  by
Proposition  65. The Company  disputes  this  assertion  relating to its calcium
products.  While  it is  premature  to  assess  the  potential  outcome  of this
litigation,  the Company  believes that the resolution of this matter should not
have a  material  adverse  effect on the  Company's  results  of  operations  or
financial condition.

     The  Company is  presently  engaged in various  other  legal  actions,  and
although  ultimate  liability  cannot be  determined  at the present  time,  the
Company is currently of the opinion that the amount of any such  liability  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
and financial condition.

     See also "Business--Regulatory Matters."


                                       11


<PAGE>

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

     During the fourth quarter of fiscal year 1996, no matters were submitted to
a vote of security holders of the Company.


                                       12


<PAGE>

                                     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
System since the  Company's  initial  public  offering (the "IPO") of its 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 21, 1997,  the closing price of the Company's  Common Stock as reported
by Nasdaq was $13.00.  As of March 21, 1997,  there were 74 holders of record of
the Company's  Common Stock.  The high and low sales prices for the Common Stock
for the fourth  quarter of 1996  (from  November  15,  1996)  were  $12.375  and
$11.375, respectively.

     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.  TLC conducts its business  through its
direct and indirect subsidiaries and has no operations of its own. The principal
assets of TLC are the  capital  stock of its direct and  indirect  subsidiaries,
Twin  Laboratories  Inc. and ARP.  Accordingly,  TLC has no independent means of
generating  revenues.  As a holding company,  TLC'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  Laboratories  Inc. is the borrower  restrict the
payment of dividends and the making of loans, advances or other distributions to
TLC, 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  Laboratories  Inc.  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).  Such
securities were sold in a transaction  that was exempt from  registration  under
Section 4(2) of the Securities Act of 1933, as amended (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,  TLC 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 $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.


                                       13


<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
The  following  selected  consolidated  financial  data as of December 31, 1996,
1995, 1994, 1993 and 1992, 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, 1996 and 1995,  and for each of the three years in
the period ended December 31, 1996 is included  elsewhere  herein.  The selected
consolidated 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,  "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial  information  included  elsewhere
herein.
<TABLE>
<CAPTION>

                                                                                      YEAR ENDED DECEMBER 31,
                                                      1996              1995              1994             1993           1992
                                                  ------------     -------------     -------------     ------------   ------------
<S>                                                  <C>               <C>               <C>              <C>            <C>

STATEMENT OF INCOME DATA:
     Net sales..............................          $170,075          $148,735          $117,342         $ 99,897        $83,014
     Cost of sales..........................            99,827            89,932            70,247           62,131         51,214
                                                     ---------         ---------         ---------        ---------      ---------
     Gross profit...........................            70,248            58,803            47,095           37,766         31,800
     Operating expenses.....................            30,784            27,191            23,022           21,125         17,463
                                                      --------          --------          --------         --------       --------
     Income from operations.................            39,464            31,612            24,073           16,641         14,337
                                                      --------          --------            ------           ------       --------
     Other (expense) income:
         Interest income....................               593               313               254              242            302
         Interest expense...................          (10,005)             (866)             (761)            (487)          (494)
         Transaction expenses...............             (400)             (656)               ---              ---            ---
         Nonrecurring non-competition
         agreement expense..................          (15,300)               ---               ---              ---            ---
         Other..............................                32                61               354              510          (135)
                                                    ----------        ----------        ----------       ----------     ----------
                                                        25,080           (1,148)             (153)              265          (327)
                                                     ---------        ----------       -----------        ---------      ---------
     Income before unusual item, provision for
     income taxes and extraordinary item....            14,384            30,464            23,920           16,906         14,010
     Unusual item - nonrecurring charge for prior
     years' income tax assessment...........               ---               ---             1,982              ---            ---
     Provision for income taxes.............               796               240               245              230            651
                                                      --------          --------          --------         --------       --------
     Income before extraordinary item.......            13,588            30,224            21,693           16,676         13,359
     Extraordinary item.....................           (1,792)               --                --               --              76
                                                    ----------      ------------      ------------     ------------    -----------
     Net income.............................         $  11,796          $ 30,224         $  21,693        $  16,676       $ 13,435
                                                     =========          ========         =========        =========       ========
PRO FORMA RELATING TO CHANGE IN TAX STATUS: (A)
     Historical income before provision for
     income taxes...........................           $14,384           $30,464           $21,938          $16,906        $14,010
     Pro forma provision for income taxes...             5,466            12,060             9,087            6,644          5,436
                                                      --------        ----------         ---------        ---------      ---------
     Pro forma income relating to change in tax
     status before extraordinary item.......             8,918            18,404            12,851           10,262          8,574
     Extraordinary item.....................           (1,792)                --                --               --             --
                                                     --------       ------------      ------------      -----------    -----------
     Pro forma net income relating to change in
     tax status.............................          $  7,126           $18,404           $12,851          $10,262        $ 8,574
                                                      ========           =======           =======          =======        =======
     Pro forma net income relating to change in
     tax status per share (b)...............         $    0.08         $    0.68
                                                     =========         =========
     Weighted average shares outstanding (c)            27,000            27,000
                                                      ========          ========
PRO FORMA FOR THE TRANSACTIONS AND THE IPO: (D)
     Net sales..............................          $170,075          $148,735
     Interest expense.......................            12,372            12,355
     Net income.............................            16,729            11,429
     Net income per share...................              0.62              0.42
     Weighted average shares outstanding....            27,000            27,000
OTHER DATA:
</TABLE>


                                       14


<PAGE>

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                               -----------------------------------------------------------------------
                                                    1996         1995          1994            1993            1992
                                               -----------   ------------  ------------   ------------     -----------
<S>                                              <C>           <C>            <C>           <C>              <C>     
     EBITDA (e).............................     $ 41,619      $ 33,516       $ 25,023      $  17,446        $ 15,229
     Capital expenditures...................        2,252         2,641          1,786          4,904        $  1,304
     Depreciation...........................        1,121           909            851            710             806
     Amortization...........................          759           102             99             95              86
     Net sales growth.......................         14.3%         26.8%          17.5%          20.3%           18.3%
     Income from operations growth..........         24.8          31.3           44.7           16.1            31.2
     Pro forma net income growth............       (87.7)          43.2           25.2           19.7            35.8
     Income from operations margin (f)......         23.2          21.3           20.5           16.7            17.3
                                                                                   AS OF DECEMBER 31,
                                               -----------------------------------------------------------------------
                                                    1996         1995          1994            1993            1992
                                               -----------   ------------  ------------   ------------     -----------
BALANCE SHEET DATA:
     Net working capital (excluding cash and
     cash equivalents, marketable securities     $43,569
     and current debt........................                   $39,405        $35,056       $25,437          $18,575
     Property, plant and equipment, net.....      14,157         13,036         12,071        10,732            7,863
     Total assets...........................     141,537         75,309         64,706        55,587           44,368
     Total debt (including current debt)....     120,654          8,792          9,288         8,039            6,066
     Shareholders' equity...................       1,688         55,405         48,671        40,543           33,180
</TABLE>

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

(a)  The Company consisted of S corporations and, accordingly, federal and state
     taxes were  generally paid at the  shareholder  level only. On May 7, 1996,
     the Company eliminated its S corporation status and,  accordingly,  will be
     subject to federal and state income taxes.

(b)  Pro forma net  income per share for the year ended  December  31,  1996 has
     been  computed  by  dividing  pro forma net  income,  after  reduction  for
     Preferred Stock dividends of $4.9 million,  by the weighted  average shares
     outstanding.

(c)  Weighted  average  shares  outstanding  represents the number of equivalent
     shares  outstanding  after  giving  retroactive  effect to TLC's 18.5 for 1
     stock split (effected in the form of a stock dividend) and assumes that the
     10,175,000  shares issued in connection  with the  Acquisition  (as defined
     herein) and the  8,500,000  shares of Common  Stock  offered in the IPO are
     outstanding  during  each  of  the  periods  indicated.  See  Notes  to the
     Consolidated Financial Statements of the Company included elsewhere in this
     Report.

(d)  The unaudited pro forma results of operations  assume the  Transactions (as
     defined  herein) and the  subsequent  IPO occurred on January 1, 1995,  and
     excludes  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  in
     connection  with the IPO,  and  reflects the  additional  interest  expense
     relating to the financing of the  Acquisition  and the change in tax status
     described  in Note  (a)  above.  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 and the subsequent IPO in fact occurred on January 1, 1995.

(e)  EBITDA   represents   income  from  operations   before   depreciation  and
     amortization   expense,   and  certain  other  charges   related  to  legal
     settlements,  increases in inventory reserves, a tax settlement relating to
     a  limited  partnership  interest,  which  interest  was sold in 1996,  and
     certain  management  fees  paid to GEI.  While  EBITDA is not  intended  to
     represent  cash flow from  operations  as  defined  by  generally  accepted
     accounting principles ("GAAP") and should not be considered as an indicator
     of operating  performance  or an  alternative  to cash flow (as measured by
     GAAP)  as a  measure  of  liquidity,  it  is  included  herein  to  provide
     additional  information  with respect to the ability of the Company to meet
     its  future  debt  service,   capital   expenditure   and  working  capital
     requirements.

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


                                       15


<PAGE>

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

GENERAL

     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  herein.  The  Company
consisted of "S" corporations for the years ended December 31, 1995 and 1994 and
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 and for the years ended  December 31, 1995
and 1994 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 (as
defined  herein),  the  Company  eliminated  its  "S"  corporation  status  and,
accordingly, is subject to federal and state income taxes.

     The Company operates in one business segment, the manufacture and marketing
of brand name nutritional supplements. Within this segment, the Company operates
in two primary  business  areas:  the TWINLAB  Division and the herbal  products
category. Products sold under the TWINLAB brand name include vitamins, minerals,
amino  acids,  fish and marine  oils,  sports  nutrition  products  and  special
formulas.   The  herbal  products  category  includes  a  full  line  of  herbal
supplements  and  phytonutrients  marketed by the Nature's  Herbs Division and a
full line of herb teas  marketed by the Alvita Tea  Division.  In addition,  the
Company's publishing  activities are conducted through its subsidiary,  Advanced
Research Press, Inc.

RESULTS OF OPERATIONS

FISCAL 1996 COMPARED TO FISCAL 1995

     Net Sales.  Net sales for fiscal  1996 was $170.1  million,  an increase of
$21.4 million,  or 14.3%,  as compared to net sales of $148.7 million for fiscal
1995. The 14.3% increase was attributable to increases in gross sales, partially
offset by an increase in discounts and allowances  which was associated with the
Company's  increased  sales volume.  Net sales of TWINLAB  products  contributed
$136.1  million,  an increase of $15.6 million,  or 12.9%, as compared to $120.5
million for fiscal 1995. This increase was primarily due to increased demand for
products  sold  under  the  TWINLAB  brand  name,  which  increase  was  due  in
substantial  part to the  successful  introduction  of a number  of new  special
formula  and  sports  nutrition  products.  Herbal  products  contributed  $28.7
million, an increase of $5.2 million, or 22.1%, as compared to $23.5 million for
fiscal  1995.  The net  sales  increase  in the  herbal  products  category  was
primarily due to increased  demand for both Nature's Herbs and Alvita  products,
which increase was due in part to the successful  introduction  of new products,
continued   strong  consumer   interest  in  existing   products  and  increased
penetration of both Alvita and Nature's Herbs products into domestic health food
stores.  Publishing  contributed net sales of $5.2 million,  as compared to $4.7
million for fiscal 1995.

     Gross  Profit.  Gross  profit  for  fiscal  1996 was $70.2  million,  which
represented an increase of $11.4 million, or 19.5%, as compared to $58.8 million
for fiscal 1995.  Gross  profit  margin was 41.3% for fiscal 1996 as compared to
39.5% for fiscal 1995. The overall  increase in gross profit was attributable to
the  Company's  higher  sales volume for fiscal 1996 as compared to fiscal 1995.
The increase in gross  profit  margin for fiscal 1996 as compared to fiscal 1995
was due  primarily  to higher gross profit  margins on recently  introduced  new
product  formulations  and to continued  absorption  of  manufacturing  overhead
expenses  over  a  larger  sales  base  and  improved  manufacturing  production
efficiencies, offset in part by an increase in sales discounts and allowances.

     Operating Expenses.  Operating expenses were $30.8 million for fiscal 1996,
representing an increase of $3.6 million, or 13.2%, as compared to $27.2 million
for fiscal 1995.  As a percent of net sales,  operating  expenses  declined from
18.3% for fiscal  1995 to 18.1% for  fiscal  1996.  The  increase  in  operating
expenses  was  primarily  attributable  to  increased  selling  and  advertising
expenses and higher operating  expenses  resulting from the Company's  increased
sales for fiscal  1996.  The decline in  operating  expenses as a percent of net
sales was due to the Company's  ability to maintain its research and development
expenditures and a substantial  portion of its general and administrative  costs
at  approximately  the  same  level  as  in  fiscal  1995,  while  substantially
increasing the Company's sales volume.

     Income from Operations. Income from operations was $39.5 million for fiscal
1996,  representing an increase of $7.9 million,  or 24.8%, as compared to $31.6
million for fiscal 1995. Income from operations margin increased to 23.2% of net
sales for fiscal 1996,  as compared to 21.3% of net sales for fiscal  1995.  The
increase in income from operations and income from operations margin was


                                       16


<PAGE>

primarily  due to the Company's  higher sales  volume,  higher gross margins and
lower operating expenses as a percent of net sales for fiscal 1996.

     Other Income (Expense). Other expense was $25.1 million for fiscal 1996, as
compared  to $1.1  million  for  fiscal  1995.  The net  increase  is  primarily
attributable to a  non-recurring  $15.3 million charge relating to the write-off
of certain  non-competition  agreements and a $9.1 million  increase in interest
expense which resulted from increased borrowings.


FISCAL 1995 COMPARED TO FISCAL 1994

     Net Sales.  Net sales for fiscal  1995 was $148.7  million,  an increase of
$31.4  million,  or 26.8%,  as compared to net sales of $117.3 million in fiscal
1994.  The 26.8%  increase  was  attributable  to an  increase  in gross  sales,
partially offset by an increase in discounts and allowances due to the Company's
increased  sales  volume.  Net  sales of  TWINLAB  products  contributed  $120.5
million, an increase of $24.2 million, or 25.2%, as compared to $96.3 million in
fiscal 1994.  This increase was due primarily to increased  demand for a variety
of sports  nutrition  products and the  successful  introduction  of new product
formulations and strong growth in existing product lines in the special formulas
category,  and to a lesser  extent to  continued  strong  consumer  interest  in
vitamins,  minerals and amino acids products.  Herbal products contributed $23.5
million,  an increase of $5.9 million, or 33.3%, as compared to $17.6 million in
fiscal  1994.  The net  sales  increase  in the  herbal  products  category  was
primarily due to new product  introductions,  continued strong consumer interest
in existing products and increased penetration of both Alvita and Nature's Herbs
products into domestic health food stores.  Publishing  contributed net sales of
$4.7 million, as compared to $3.4 million in fiscal 1994.

     Gross  Profit.  Gross  profit  for  fiscal  1995 was $58.8  million,  which
represented an increase of $11.7 million, or 24.9%, as compared to $47.1 million
for fiscal 1994.  Gross  margin was 39.5% for fiscal 1995,  as compared to 40.1%
for fiscal 1994. The overall  increase in gross profit dollars was  attributable
to the  Company's  higher  sales  volume in fiscal  1995.  The decrease in gross
margin for fiscal 1995 as compared  to fiscal  1994 was due  primarily  to lower
gross  margins on certain  herbal  products due to certain raw  materials  price
increases and an increase in sales  discounts and allowances  offered on certain
TWINLAB and herbal products under certain sales incentive programs introduced in
1995, which programs were continued in 1996. Such decreases in gross margin were
partially  offset by  increased  sales  from a more  favorable  product  mix and
increases in the Company's gross margins on certain TWINLAB and herbal products.

     Operating Expenses.  Operating expenses were $27.2 million for fiscal 1995,
representing  an increase  of $4.2  million,  as  compared to $23.0  million for
fiscal 1994. As a percent of net sales,  operating  expenses declined from 19.6%
in fiscal 1994 to 18.3% in fiscal 1995.  The increase in operating  expenses was
primarily  attributable to increased selling and advertising expenses and higher
operating  expenses  resulting  from the Company's  increased  level of sales in
fiscal 1995. The decline in operating  expenses as a percent of net sales is due
to  the  Company's  ability  to  maintain  its  expenditures  for  research  and
development and certain general and  administrative  functions at  approximately
the same level as in fiscal 1994, while  substantially  increasing the Company's
sales volume.

     Income from Operations.  Income from operations was $31.6 million in fiscal
1995,  representing an increase of $7.5 million,  or 31.3%, as compared to $24.1
million for fiscal 1994. Income from operations margin increased to 21.3% of net
sales in fiscal  1995,  as  compared to 20.5% of net sales in fiscal  1994.  The
increase  in income  from  operations  and  income  from  operations  margin was
primarily  due to the  Company's  higher  sales  volume  in  fiscal  1995  and a
reduction in the Company's  operating  expenses as a percent of net sales, which
was partially offset by a reduction in gross margin as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     On May 7,  1996,  (i)  GEI  acquired  48% of the  Common  Stock  of TLC for
aggregate consideration of $4.8 million and shares of Junior Preferred Stock for
aggregate  consideration  of $37.0  million,  (ii) the  Senior  Preferred  Stock
Purchasers acquired 7% of the Common Stock of TLC for aggregate consideration of
$0.7 million and shares of Senior Preferred Stock of TLC (the "Senior  Preferred
Stock," and,  together with the Junior Preferred  Stock, the "Preferred  Stock")
for aggregate  consideration of $30.0 million,  (iii) the Blechman  Brothers and
Stephen Welling (collectively,  the "Continuing Stockholders") exchanged certain
of their shares of common stock of Natur-Pharma  Inc. for 45% of the outstanding
shares of Common Stock of TLC, valued at $4.5 million, (iv) TLC purchased all of
the  remaining  shares of common stock of  Natur-Pharma  Inc.  from the existing
stockholders for cash,  resulting in Natur-Pharma  Inc.  becoming a wholly owned
subsidiary of TLC, (v) Twin Laboratories  Inc., Alvita Products,  Inc.,  Twinlab
Export Corp.,  Twinlab  Specialty  Corporation and B. Bros.  Realty  Corporation
merged into Natur-Pharma Inc. (the "Natur-Pharma Merger");


                                       17


<PAGE>

and Advanced  Research Press,  Inc.  merged with  Natur-Pharma II Inc., a wholly
owned  subsidiary of Natur-Pharma  Inc. (the surviving  entity in such merger is
referred  to herein as "ARP"),  and (vi) in  connection  with such  mergers  the
existing  stockholders received cash in consideration for all of their shares of
capital stock of Twin Laboratories  Inc., Alvita Products,  Inc., Twinlab Export
Corp., Twinlab Specialty  Corporation,  B. Bros. Realty Corporation and Advanced
Research Press, Inc. The total cash consideration that the existing stockholders
received was approximately $212.5 million,  approximately $15.3 million of which
represented  consideration  for  non-competition  agreements  with  each  of the
existing stockholders. 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 $53.0 million and a revolving  credit  facility in the
amount of $15.0  million) (the "Old Credit  Facility") and issued $100.0 million
aggregate principal amount of the Notes (the "Note Offering," and,  collectively
with the Acquisition and the Old Credit Facility,  the "Transactions").  The net
cash proceeds of the Note Offering were used, together with borrowings under the
Old Credit  Facility,  the  proceeds  from the  issuance of the Common Stock and
Preferred  Stock  of TLC 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.  In connection with
the Acquisition,  Natur-Pharma Inc.'s name was changed to Twin Laboratories Inc.
Subsequent to the  consummation  of the  Transactions,  the Company  repaid $6.0
million of outstanding  indebtedness  under the term loan facility  contained in
the Old Credit Facility.

     The Natur-Pharma  Merger was 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  date  of  the
consummation of the  Acquisition.  This resulted in different book and tax asset
bases for the assets of Twin Laboratories  Inc., Alvita Products,  Inc., Twinlab
Export Corp.,  Twinlab Specialty  Corporation and B. Bros.  Realty  Corporation,
which resulted in deferred tax assets of approximately  $55.6 million which will
reduce future tax liabilities.

     In November  1996,  the Company  consummated  the IPO, with the sale to the
public of 8.5 million shares of Common Stock,  representing  approximately 31.5%
of the  outstanding  capital  stock  of the  Company.  In  connection  with  the
consummation of the IPO, the Company entered into the New Credit Facility, which
provides for a revolving  credit facility of $50.0 million.  The net proceeds to
the Company of the IPO of approximately  $93.7 million,  together with available
cash  resources of the Company and  approximately  $20.0  million of  borrowings
available under the New Credit Facility, were used to repay all of the Company's
outstanding  indebtedness  under the term  loan  facility  contained  in the Old
Credit Facility,  plus accrued and unpaid interest thereon, and to redeem all of
the  outstanding  shares of  Preferred  Stock  having an  aggregate  liquidation
preference of $67.0 million,  plus accrued and unpaid dividends  thereon.  As of
February  28,  1997,  the  Company  repaid  approximately  $5.0  million  of the
outstanding indebtedness under the New Credit Facility.

     For fiscal 1996,  cash provided by operating  activities was $25.5 million,
compared to $26.8  million  during fiscal 1995 and $12.9 million in fiscal 1994.
The decrease in fiscal 1996  compared to fiscal 1995 was primarily due to higher
interest expense,  substantially  offset by higher income from operations.  Cash
used in financing  activities  was $28.0 million in fiscal 1996,  reflecting the
net cash effects 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 prepayment of $6.0 million of outstanding  indebtedness
under the term loan facility  contained in the Old Credit  Facility prior to the
consummation of the IPO, and distributions of $8.9 million to stockholders prior
to the  consummation of the Acquisition.  Cash used in financing  activities was
$24.0  million in fiscal  1995 and $13.0  million in fiscal  1994 and  primarily
consisted of  distributions  to  stockholders of $23.5 million and $13.6 million
for fiscal 1995 and fiscal 1994, respectively.

     Capital  expenditures,  including purchases under capital leases for fiscal
1994, were $2.3 million,  $2.6 million and $2.5 million for fiscal 1996,  fiscal
1995 and fiscal 1994,  respectively.  Such capital  expenditures  were primarily
used to purchase production equipment, expand capacity and improve manufacturing
efficiency.  The Company  estimates  that its  historical  level of  maintenance
capital  expenditures  has been  approximately  $0.5  million  per fiscal  year.
Capital expenditures,  including maintenance capital expenditures,  are expected
to be  approximately  $4.8 million during fiscal 1997 and will be used primarily
to purchase manufacturing equipment for the Company's manufacturing  facilities.
In  addition,  the Company has entered  into a contract  for the  purchase of an
approximately  110,000 square foot warehouse,  manufacturing and office facility
in  Ronkonkoma,  New York.  The  purchase is expected to be  consummated  in the
second  quarter of 1997 and is subject to customary  conditions,  including  due
diligence review by the Company.  If this acquisition is completed,  the Company
anticipates making additional capital expenditures of approximately $6.5 million
in fiscal 1997 to acquire and renovate such facility. See "Properties."


                                       18


<PAGE>

     TLC has no operations of its own and accordingly  has no independent  means
of generating revenue. As a holding company,  TLC'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,
dated as of May 7,  1996,  among  TLC,  Twin  Laboratories  Inc.,  ARP and Fleet
National  Bank,  as trustee,  relating to the Notes and the New 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.

     Management  believes  that the Company has adequate  capital  resources and
liquidity  to  meet  its  borrowing  obligations,   fund  all  required  capital
expenditures and pursue its business strategy for 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  and  borrowings  under  the New  Credit
Facility.  As of February 28, 1997,  approximately  $35.0  million of borrowings
were available under the New Credit  Facility for working  capital  requirements
and general corporate purposes.

     One  of  the  Company's  business   strategies  is  to  pursue  acquisition
opportunities, including product line acquisitions, that complement its existing
products,  expand its distribution  channels 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 New Credit  Facility will be available
to fund  future  acquisitions,  subject to  certain  conditions  and  reductions
(including a reduction for the  approximately  $15.0 million of borrowings under
the New Credit Facility  outstanding as of February 28, 1997, until such time as
such borrowings are repaid).  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.

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.

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.


                                    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
May 29, 1997.


                                       19


<PAGE>

                                     PART IV

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


(A) (1) AND (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:

<TABLE>
<CAPTION>
                                                                                                                              Page  
<S>                                                                                                                           <C>
TWINLAB CORPORATION AND SUBSIDIARIES
Independent Auditors' Report..................................................................................................F-1

     (1) FINANCIAL STATEMENTS
         Consolidated Balance Sheets as of December 31, 1996 and 1995.........................................................F-2
         Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994...............................F-3
         Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996,
         1995 and  1994.......................................................................................................F-4
         Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994...........................F-5
         Notes to Consolidated Financial Statements...........................................................................F-6

     (2) FINANCIAL STATEMENT SCHEDULE
         For the Three Years Ended December 31, 1996

         Schedule II - Valuation and Qualifying Accounts......................................................................S-1
</TABLE>

(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 Green  Equity
               Investors  II,  L.P.   ("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;
               "TLC 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 TLC 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 Laboratories Inc. ("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).

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


                                       20


<PAGE>

               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 TLC S-1).


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
               TLC 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.*

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 TLC S-1).

10.4   --      Form of Revolving Credit Note.*
               
10.5   --      Form of Swing Line Note.*
               
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 TLC S-1).
             
10.7   --      Amendment to Deed of Trust,  dated November 20, 1996,  among Twin
               and The Chase Manhattan Bank.*
             
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 TLC S-1).
             
10.9   --      Secondary  Stockholders  Agreement  among  Brian  Blechman,  Neil
               Blechman,  Ross  Blechman,  Steve  Blechman,  Dean  Blechman  and
               Stephen  Welling,  the Registrant,  GEI, 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 TLC S-1).
             
10.10   --     Employment  Agreement,  dated May 7, 1996, between Twin and Brian
               Blechman (incorporated by reference to Exhibit 10.10 to TLC S-1).

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

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

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

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

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


                                       21


<PAGE>

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

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

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

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

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

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

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

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

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

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

10.27  --      Form of Restated Standard Indemnity Agreement, dated August 1992,
               between  Twin and Showa  Denko  America,  Inc.  (incorporated  by
               reference to Exhibit 10.28 to TLC 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 TLC S-1).

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

21.1   --      List of Registrant's  Subsidiaries  (incorporated by reference to
               Exhibit 21.1 to Twin S-4).

23.1   --      Consent of Deloitte & Touche LLP.*

27     --      Financial Data Schedule.*

------------
*    Filed herewith.


                                       22


<PAGE>

                                   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.

<TABLE>
<CAPTION>

SIGNATURE                            TITLE(S)                                         DATE
                                   
<S>                                 <C>                                             <C>
                                   
   /s/ Ross Blechman                Chairman of the Board, Chief Executive           March 24, 1997
---------------------               Officer, President and Director (Principal     
 Ross Blechman                      Executive Officer)                             


   /s/ Neil Blechman                Executive Vice President, Secretary and          March 24, 1997   
---------------------               Director                                        
    Neil Blechman                   


   /s/ Brian Blechman               Executive Vice President, Treasurer and          March 24, 1997 
-----------------------------       Director (Principal Financial and Accounting 
    Brian Blechman                  Officer) 


   /s/ Steve Blechman               Executive Vice President and Director            March  24, 1997 
-----------------------------    
    Steve Blechman              
 
 
   /s/ Dean Blechman                Executive Vice President and Director            March  24, 1997 
------------------------------     
    Dean Blechman                  


   /s/ Jonathan D. Sokoloff         Director                                         March  24, 1997
------------------------------      
    Jonathan D. Sokoloff           


   /s/ Jennifer Holden Dunbar       Director                                         March  24, 1997 
------------------------------                                                      
    Jennifer Holden Dunbar




     /s/ John G. Danhakl
------------------------------      Director                                         March  24, 1997
    John G. Danhakl
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT


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

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Twinlab
Corporation  and  subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income,  shareholders' equity and cash flows for each
of the three  years in the period  ended  December  31,  1996.  Our audits  also
included the financial  statement schedule listed in the Index at Item 14(a)(2).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedule 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 consolidated  financial position of Twinlab  Corporation
and  subsidiaries  as of December  31,  1996 and 1995,  and the results of their
consolidated  operations and their consolidated cash flows for each of the three
years in the  period  ended  December  31,  1996 in  conformity  with  generally
accepted accounting  principles.  Also, in our opinion, such financial statement
schedule,  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.


DELOITTE & TOUCHE LLP


Jericho, New York
February 4, 1997


                                       F-1


<PAGE>

TWINLAB CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                    1996               1995
                                                                                    ----               ----
<S>                                                                             <C>               <C>        
ASSETS (Note 7)
CURRENT ASSETS:
   Cash and cash equivalents                                                    $    3,794        $     7,945
   Marketable securities                                                                --                201
   Accounts receivable, net of allowance for bad debts of
     $208 and $177, respectively (Note 14)                                          31,027             24,372
   Inventories (Note 3)                                                             29,443             25,273
   Deferred tax assets (Note 10)                                                     1,218             -
   Prepaid expenses and other current assets                                         1,076                872
                                                                                ----------        -----------
           Total current assets                                                     66,558             58,663
PROPERTY, PLANT AND EQUIPMENT, Net (Notes 4 and 8)                                  14,157             13,036
DEFERRED TAX ASSETS (Note 10)                                                       52,858                 --
OTHER ASSETS (Note 5)                                                                7,964              3,610
                                                                                ----------        -----------
TOTAL                                                                           $  141,537        $    75,309
                                                                                ==========        ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Current portion of long-term debt (Note 7)                                   $   20,085        $     2,985
   Current portion of capital lease obligations (Note 8)                               146                136
   Accounts payable                                                                 10,313              6,854
   Accrued expenses and other current liabilities (Note 6)                           8,882              4,258
                                                                                ----------        -----------
           Total current liabilities                                                39,426             14,233
LONG-TERM DEBT, less current portion (Note 7)                                      100,265              5,367
CAPITAL LEASE OBLIGATIONS, less current portion (Note 8)                               158                304
                                                                                ----------        -----------
           Total liabilities                                                       139,849             19,904
                                                                                ----------        -----------
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;
     27,000,000 shares outstanding as of December 31, 1996
     and 450,000 as of December 31, 1995                                            27,000                450
   Additional paid-in capital                                                      141,338                 68
   Retained earnings (deficit)                                                    (166,650)            54,887
                                                                                ----------        -----------
           Total shareholders' equity                                                1,688             55,405
                                                                                ----------        -----------
TOTAL                                                                           $  141,537        $    75,309
                                                                                ==========        ===========

See notes to consolidated financial statements.

</TABLE>


                                       F-2
<PAGE>

TWINLAB CORPORATION AND SUBSIDIARIES

CONSOLIDATED  STATEMENTS OF INCOME FOR THE YEARS ENDED  DECEMBER 31, 1996,  1995
AND 1994 (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                           1996           1995          1994
                                                                           ----           ----          ----
<S>                                                                     <C>           <C>           <C>       
NET SALES (Note 14)                                                     $  170,075    $  148,735    $  117,342
COST OF SALES                                                               99,827        89,932        70,247
                                                                        ----------    ----------    ----------
GROSS PROFIT                                                                70,248        58,803        47,095
OPERATING EXPENSES                                                          30,784        27,191        23,022
                                                                        ----------    ----------    ----------
INCOME FROM OPERATIONS                                                      39,464        31,612        24,073
                                                                        ----------    ----------    ----------
OTHER (EXPENSE) INCOME:
   Interest income                                                             593           313           254
   Interest expense                                                        (10,005)         (866)         (761)
   Transaction expenses (Note 1)                                              (400)         (656)           --
   Nonrecurring non-competition agreement expense (Note 1)                 (15,300)           --            --
   Other                                                                        32            61           354
                                                                        ----------    ----------    ----------
                                                                           (25,080)       (1,148)         (153)
                                                                        ----------    ----------    ----------
INCOME BEFORE UNUSUAL ITEM, PROVISION
FOR INCOME TAXES AND EXTRAORDINARY ITEM                                     14,384        30,464        23,920
UNUSUAL ITEM - Nonrecurring charge for prior years'
   income tax assessment (Note 13)                                             --             --         1,982
PROVISION FOR INCOME TAXES (Note 10)                                           796           240           245
                                                                        ----------    ----------    ----------
INCOME BEFORE EXTRAORDINARY ITEM                                            13,588        30,224        21,693
EXTRAORDINARY ITEM, net of income tax benefit of
   $1,134 (Note 1)                                                          (1,792)           --            --
                                                                         ---------    ----------    ----------
NET INCOME                                                              $   11,796    $   30,224    $   21,693
                                                                        ==========    ==========    ==========
PRO FORMA RELATING TO CHANGE IN TAX STATUS
   (Note 1)
   Historical income before provision for income taxes and
     extraordinary item                                                 $   14,384    $   30,464    $   21,938
   Pro forma provision for income taxes                                      5,466        12,060         9,087
                                                                        ----------    ----------    ----------
   Pro forma income relating to change in tax status before
     extraordinary item                                                      8,918        18,404        12,851
   Extraordinary item                                                       (1,792)           --            --
                                                                        ----------    ----------    ----------
   Pro forma net income relating to change in tax status                     7,126        18,404        12,851
   Preferred Stock dividends                                                 4,862            --            --
                                                                        ----------    ----------    ----------
   Pro forma net income relating to change in tax status
     applicable to common stock                                         $    2,264    $   18,404    $   12,851
                                                                        ==========    ==========    ==========
   Pro forma income relating to change in tax status before
     extraordinary item per share                                       $     0.15    $     0.68
   Extraordinary item per share                                              (0.07)           --
                                                                        ----------     ---------
   Pro forma net income relating to change in tax status per
     share (Note 2)                                                     $     0.08    $     0.68
                                                                        ==========    ==========
   Weighted average shares outstanding (Note 2)                             27,000        27,000
                                                                        ==========    ==========
See notes to consolidated financial statements.
</TABLE>


                                       F-3

<PAGE>

TWINLAB CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS 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, 1994                                $   450,000    $      450    $        68     $     40,025    $    40,543

Net income                                                         --            --             --           21,693         21,693

Distributions to shareholders                                      --            --             --          (13,565)       (13,565)
                                                          -----------    ----------    -----------     ------------    -----------

Balance at December 31, 1994                                  450,000           450             68           48,153         48,671

Net income                                                         --            --             --           30,224         30,224

Distributions to shareholders                                      --            --             --          (23,490)       (23,490)
                                                          -----------    ----------    -----------     ------------    -----------

Balance at December 31, 1995                                  450,000           450             68           54,887         55,405

Net income                                                         --            --             --           11,796         11,796

Distributions to shareholders                                      --            --             --           (8,929)        (8,929)

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)                               17,500,000        17,500        (17,500)              --             --

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                               27,000,000    $   27,000    $   141,338     $   (166,650)   $     1,688
                                                          ===========    ==========    ===========     ============    ===========


See notes to consolidated financial statements.

</TABLE>


                                       F-4


<PAGE>

TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                           1996            1995         1994
                                                                           ----            ----         ----
<S>                                                                      <C>          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                            $  11,796    $    30,224    $    21,693
   Adjustment to reconcile net income to net cash provided
     by operating activities:
     Extraordinary item                                                      1,792         -            -
     Depreciation and amortization                                           1,880          1,011          950
     Gain on sale of equipment                                                  --            (58)        (153)
     Bad debt expense                                                          125            169          (59)
     Deferred income taxes                                                  (3,484)            --           --
     Nonrecurring non-competition agreement expense                         15,300             --           --
     Other                                                                      --             --            1
     Changes in operating assets and liabilities:
       Accounts receivable                                                  (6,780)        (6,649)      (5,880)
       Inventories                                                          (4,170)        (2,541)      (3,717)
       Prepaid expenses and other current assets                              (204)           307          295
       Accounts payable                                                      3,459          3,242         (752)
       Accrued expenses and other current liabilities                        5,758          1,123          494
                                                                       -----------    -----------    ---------
              Net cash provided by operating activities                     25,472         26,828       12,872
                                                                       -----------    -----------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Maturities of marketable securities                                         201          1,178        1,120
   Proceeds from sales of property, plant and equipment                         10            825          435
   Acquisition of property, plant and equipment                             (2,252)        (2,641)      (1,786)
   Decrease (increase) in other assets                                         411              6         (519)
                                                                       -----------    -----------    ---------
              Net cash used in investing activities                         (1,630)          (632)        (750)
                                                                       -----------    -----------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of debt                                          173,000          4,685        6,073
   Proceeds from issuance of Preferred Stock                                67,000             --           --
   Dividends on Preferred Stock                                             (4,862)            --           --
   Distributions to shareholders                                            (8,929)       (23,490)     (13,565)
   Payments of debt                                                        (61,002)        (5,056)      (5,389)
   Redemption of Preferred Stock                                           (67,000)            --           --
   Issuance of common stock                                                  5,500             --           --
   Repurchase of shareholders' common stock and recapitalization          (216,780)            --           --
   Net proceeds from initial public offering of common stock                93,666             --           --
   Payment of financing costs                                               (8,450)            --           --
   Principal payments of capital lease obligations                            (136)          (125)        (121)
                                                                       -----------    -----------    ---------

              Net cash used in financing activities                        (27,993)       (23,986)     (13,002)
                                                                       -----------    -----------    ---------
Net (decrease) increase in cash and cash equivalents                        (4,151)         2,210         (880)
Cash and cash equivalents at beginning of year                               7,945          5,735        6,615
                                                                       -----------    -----------    ---------
Cash and cash equivalents at end of year                               $     3,794    $     7,945    $   5,735
                                                                       ===========    ===========    =========
Supplemental  disclosures of cash flow  information:  
   Cash paid during the years for:
     Interest                                                          $     8,020    $       853    $     780
                                                                       ===========    ===========    =========
     Income taxes                                                      $     3,063    $       216    $     267
                                                                       ===========    ===========    =========
Supplemental disclosure of non-cash investing activities -
  Assets acquired under capital lease obligations                      $       --     $        --    $     686
                                                                       ===========    ===========    =========


                                       F-5


See notes to consolidated financial statements.
</TABLE>


<PAGE>

TWINLAB CORPORATION AND SUBSIDIARIES

NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS  FOR THE YEARS ENDED  DECEMBER 31,
1996, 1995 AND 1994 (DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)

1.     DESCRIPTION OF ENTITY, BASIS OF PRESENTATION AND INITIAL PUBLIC
       OFFERING

       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.)  ("TLC")  was   incorporated  in   contemplation  of  the
       Acquisition  (as  hereinafter  defined).  The  accompanying  consolidated
       financial  statements  include the accounts of TLC 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  TLC  for  aggregate
       consideration  of $4,800 and shares of 11.25  percent  non-voting  junior
       redeemable  preferred  stock of TLC (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 TLC (each of these  other  investors
       owns  less  than 5  percent  of the  common  stock of TLC) for  aggregate
       consideration  of  $700  and  shares  of  14  percent  non-voting  senior
       redeemable preferred stock of TLC 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 TLC,  valued at $4,500,  (iv) TLC 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 TLC, (v) 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 Twin,  Alvita,  Export,  Specialty,  B.
       Bros.,  and  ARP.  The  total  cash   consideration   that  the  existing
       shareholders received 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


                                       F-6

<PAGE>

       and a  revolving  credit  facility  in the amount of  $15,000)  (the "Old
       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 Old 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 Old Credit  Facility,  the
       proceeds from the issuance of the common stock and Preferred Stock of TLC
       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 and $656 of  professional  fees for the year ended December 31, 1996
       and 1995, respectively (the "Transaction Expenses").

       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 TLC.

       The Company  manufactures and markets brand name nutritional  supplements
       sold  primarily  through  domestic  health food stores and  international
       distributors.  The TWINLAB Division of Twin  manufactures a complete line
       of vitamins,  minerals and amino acids,  sports nutrition  products,  and
       special  formulas.  The Alvita Tea Division  markets  natural single herb
       teas and blends in both single use bags and bulk form. The Nature's Herbs
       Division  manufactures and markets a full line of herbal  supplements and
       phytonutrients.   ARP   is   a   publisher   of   health,   fitness   and
       nutrition-related publications.

       The  following  unaudited  pro forma  results  of  operations  assume the
       Transactions  occurred on January 1, 1995 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, 1995.

<TABLE>
<CAPTION>

                                                                          YEAR ENDED DECEMBER 31,
                                                                     -----------------------------------
                                                                        1996                      1995
                                                                     -----------             -----------
              <S>                                                    <C>                     <C>        
              Net sales                                              $   170,075             $   148,735
              Interest expense                                            15,395                  15,684
              Income before extraordinary item                            14,942                   9,418
              Income before extraordinary item per share                    0.55                    0.35
              Weighted average shares outstanding
                (in  thousands)                                           27,000                  27,000
</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
       "Amended  Revolving  Credit  Facility") (see Note 7). The net proceeds to
       the  Company of the IPO of  approximately  $93,666  (after  underwriters'
       discounts of $6,630 and offering expenses of


                                       F-7

<PAGE>

       $1,704),  together  with  available  cash  resources  of the  Company and
       approximately  $20,000 of borrowings  under the Amended  Revolving Credit
       Facility,   were  used  to  repay  all  of  the   Company's   outstanding
       indebtedness  under the term loan  contained in the Old 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  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 Amended  Revolving  Credit
       Facility,  the Company recorded an extraordinary  charge representing the
       write-off of previously  deferred  finance  costs  incurred in connection
       with the Old Credit Facility of approximately  $1,792 (net of tax benefit
       of $1,134).

       The  following  unaudited  pro forma  results  of  operations  assume the
       Transactions  and the  subsequent  IPO  occurred  on  January 1, 1995 and
       excludes  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 in
       connection  with the IPO, 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  and the
       subsequent IPO in fact occurred on January 1, 1995.
<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                     -----------------------------------
                                                                        1996                    1995
                                                                     -----------             -----------
              <S>                                                    <C>                     <C>        
              Net sales                                              $   170,075             $   148,735
              Interest expense                                            12,372                  12,355
              Net income                                                  16,729                  11,429
              Net income per share                                          0.62                    0.42
              Weighted average shares outstanding
                (in thousands)                                            27,000                  27,000
</TABLE>

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.     MARKETABLE  SECURITIES - The Company  accounts for its investments
              in  marketable  securities  under the  provisions  of Statement of
              Financial  Accounting  Standards ("SFAS") No. 115, "Accounting for
              Certain Investments in Debt and Equity Securities".  The Company's
              marketable securities portfolio primarily consisted of investments
              in tax-exempt municipal bonds.  Marketable  securities were stated
              at  amortized  cost as the  Company  had the intent and ability to
              hold these  securities to maturity.  The  aggregate  fair value of
              marketable securities as of December 31, 1995 was $201.  

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

       E.     PROPERTY, PLANT AND EQUIPMENT - Depreciation is computed using the
              straight-line meth-od based upon the estimated useful lives of the
              related assets which range from three to forty 


                                       F-8


<PAGE>

              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.

       F.     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 forty years.

       G.     INCOME  TAXES - The Company  accounts  for income  taxes under the
              provisions of 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.

       H.     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.

       I.     RESEARCH AND DEVELOPMENT  EXPENSES - The Company charges  research
              and development  expenses to operations as incurred.  Research and
              development expenses were $1,119,  $1,140 and $1,030 for the years
              ended December 31, 1996, 1995 and 1994, respectively.

       J.     PRO FORMA NET  INCOME  PER SHARE - Pro forma net  income per share
              for the years ended  December 31, 1996 and 1995 has been  computed
              by dividing pro forma net income,  after  reduction  for Preferred
              Stock dividends, by 27,000,000 shares, which represents the number
              of weighted average shares  outstanding and assumes as outstanding
              for the entire year, the 10,175,000  shares (adjusted for the 18.5
              for 1 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). The incremental shares relating to the effect of
              dilutive stock options were immaterial and, accordingly,  were not
              considered in the calculation of pro forma net income per share.

       K.     FAIR VALUE OF FINANCIAL  INSTRUMENTS - The  following  methods and
              assumptions  were used to estimate the fair value of each class of
              financial instruments:

              1)     MARKETABLE  SECURITIES  - Fair  value  approximates  quoted
                     market value.

              2)     RECEIVABLES - The carrying amount  approximates  fair value
                     because of the short maturity of these instruments.


              3)     DEBT - The carrying amounts approximate fair value based on
                     borrowing  rates  currently  available  to the  Company for
                     loans with similar terms.

       L.     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,   and
              intangible  assets for  impairment  whenever  events or changes in
              circumstances  indicate that the 

                                       F-9

<PAGE>

              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.

       M.     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.

       N.     RECLASSIFICATIONS   -  Certain   prior  year  balances  have  been
              reclassified to conform with current year classifications.

3.     INVENTORIES
       Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                 1996              1995
                                                                 ----              ----
       <S>                                                   <C>              <C>       
              Raw materials                                  $   10,802       $   11,006
              Work in process                                     8,712            4,550
              Finished goods                                      9,929            9,717
                                                             ----------       ----------
                   Total                                     $   29,443       $   25,273
                                                             ==========       ==========

4.     PROPERTY, PLANT AND EQUIPMENT
       Property, plant and equipment 
         consist of the following:
                                                                  1996             1995
                                                                  ----             ----
       Land, building and leasehold improvements             $   12,197       $   11,204
       Plant equipment                                            7,006            6,097
       Office equipment                                           2,292            1,942
       Automobiles                                                   12               56
                                                             ----------       ----------
                                                                 21,507           19,299
       Less: accumulated depreciation and amortization            7,350            6,263
                                                             ----------       ----------
         Property, plant and equipment - net                 $   14,157       $   13,036
                                                             ==========       ==========
         Depreciation and amortization expense               $    1,121       $      909
                                                             ==========       ==========
</TABLE>

5.     OTHER ASSETS
       Other assets consist of the following
<TABLE>
<CAPTION>

                                                                 1996              1995
                                                                 ----              ----
       <S>                                                     <C>              <C>     
       Deferred finance costs, net of accumulated 
         amortization of $321                                  $  4,915         $     --
       Trademarks, net of accumulated amortization
         of $213 and $157, respectively                           1,400            1,063
       Goodwill, net of accumulated amortization
         of $131 and $114, respectively                             573              590
       Due from related trust (a)                                    --            1,786
       Other                                                      1,076              171
                                                               --------         --------
              Total                                            $  7,964         $  3,610
                                                               ========         ========
</TABLE>


                                      F-10

<PAGE>


       (A) The Company had  advanced,  to a related  party  trust,  payments for
           premiums on a split dollar life insurance  policy on the lives of the
           former principal shareholders. The amounts advanced were to be repaid
           from the benefits or cash value of the policy and were collateralized
           by the cash  surrender  value of the  policy.  The  former  principal
           shareholders  were  covered by a "second  to die"  policy in the face
           amount  of  $10,000.  Such  policy  was  terminated  in May  1996  in
           connection  with the  consummation of the Acquisition and the related
           advances were collected.

6.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

       Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>

                                                                                      1996              1995
                                                                                      ----              ----
       <S>                                                                          <C>              <C>     
       Accrued salaries, employee benefits and payroll taxes                        $  1,957         $    935
       Deferred revenue                                                                  890              787
       Accrued professional fees                                                         371              700
       Other                                                                           5,664            1,836
                                                                                    --------         --------
            Total                                                                   $  8,882         $  4,258
                                                                                    ========         ========
</TABLE>

7.     LONG-TERM DEBT
       Long-term debt consists of the following
<TABLE>
<CAPTION>
                                                                                              1996        1995
                                                                                           ---------    --------
       <S>                                                                               <C>            <C>     
       Amended Revolving Credit Facility (a)                                             $    20,000    $     --
       Senior subordinated notes (b)                                                         100,000          --
       Mortgages payable to banks, refinanced in May 1996                                    --            4,332
       Notes payable to banks, refinanced in May 1996                                        --            2,143
       Notes payable to shareholders (c)                                                     --              846
       Borrowings under Natur-Pharma line of credit, refinanced in May 1996                  --              660
       Note payable to a power authority, payable in monthly installments
         of $2, including interest at 6.38 percent, maturing February 2011                       277         289
       Other                                                                                      73          82
                                                                                         -----------    --------
                                                                                             120,350       8,352
       Less:  current portion                                                                 20,085       2,985
                                                                                         -----------    --------
         Total                                                                           $   100,265    $  5,367
                                                                                         ===========    ========
</TABLE>

       (A)    The Amended  Revolving  Credit Facility expires on May 7, 2002 and
              provides  for  borrowings  up to  $50,000.  Borrowings  under  the
              Amended 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.   The  effective  interest  rate  on
              borrowings under the amended revolving credit facility ranged from
              6.75 to 8.25 percent as of December 31, 1996.  Interest  rates are
              subject  to  increases  or  reduction  based upon  Twin's  meeting
              certain  financial  tests.  The proceeds of the Amended  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  (including a reduction for
              the  approximately  $20,000 of borrowings  used for the Repayments
              until such time as such  borrowings are repaid).  A portion of the
              Amended  Revolving  Credit  Facility  


                                      F-11


<PAGE>

              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 Amended Revolving Credit Facility is secured by first priority
              security interests in all of the tangible and intangible assets of
              Twin and its direct  subsidiary  and is guaranteed by TLC and ARP.
              In  addition,  the  Amended  Revolving  Credit  Facility  contains
              certain restrictive  covenants including,  among other things, the
              maintenance   of  certain  debt  coverage   ratios,   as  well  as
              restrictions  on  additional  indebtedness,  dividends and certain
              other significant transactions.

       (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 TLC and
              ARP 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. Until
              May 15,  1999,  Twin has the  option to redeem up to 35 percent of
              the subordinated notes with the proceeds of a public offering at a
              redemption price of 109-1/2 percent.  Upon a change of control, as
              defined,  Twin is  required  to offer to redeem  the  subordinated
              notes at 101  percent of the  principal  amount  plus  accrued and
              unpaid interest.  Restrictive covenants contained in the indenture
              governing the subordinated  notes (the "Note Indenture")  include,
              among  other  things,   limitations  on  additional  indebtedness,
              investments, dividends and certain other significant transactions.

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

       (C)    Natur-Pharma had outstanding notes payable to certain shareholders
              totaling $500 as of December 31, 1995. Such notes bore interest at
              ten percent per annum, which was payable  semi-annually.  Interest
              expense on such notes was approximately $18, $100 and $150 for the
              years ended December 31, 1996,  1995 and 1994,  respectively.  ARP
              had  outstanding  notes payable to certain  shareholders  totaling
              $346  as of  December  31,  1995.  Such  notes  were  non-interest
              bearing. All amounts outstanding were repaid in May 1996.

         Maturities of long-term debt are as follows:

                  YEAR ENDING DECEMBER 31,
                  ------------------------
                            1997                      $    20,085
                            1998                               13
                            1999                               14
                            2000                               15
                            2001                               16
                            Thereafter                    100,207
                                                      -----------
                            Total                     $   120,350
                                                      ===========

8.     CAPITAL LEASE OBLIGATIONS

       The Company is obligated under leases for equipment, which are treated as
       capital leases for financial reporting purposes due to certain provisions
       in the lease agreements. Included in plant equipment at December 31, 1996
       and 1995 are assets held under capital  leases with a net 


                                      F-12


<PAGE>

       carrying value of $343 and $583,  respectively.  Accumulated amortization
       on these  assets  at  December  31,  1996  and  1995  was $343 and  $103,
       respectively.

       The future minimum lease payments, by year and in the aggregate,  and the
       present value of the future  minimum lease  payments at December 31, 1996
       are as follows:

                              YEAR ENDING DECEMBER 31,
           --------------------------------------------------
           1997                                                          $ 164
           1998                                                            164
                                                                         -----
           Total                                                           328
           Amount representing interest                                     24
                                                                         -----
           Present value of the future minimum lease payments
             (including $146 payable currently)                          $ 304
                                                                         =====

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,  which   increased  the  number  of  issued  and
              outstanding  shares from 1,000,000 to 18,500,000.  The stock split
              and the change in authorized common stock have been  retroactively
              reflected 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.  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.  On
              November 14, 1996, the Board granted  118,000  nonqualified  stock
              options  under the 1996 Plan to certain key persons at an exercise
              price equal to the  initial  public  offering  price of $12.00 per
              share.

              The Company applies Accounting Principles Board Opinion No. 25 and
              related interpretations in accounting for awards granted under the
              1996 Plan.  Accordingly,  no compensation cost has been recognized
              for the fixed portion of awards  granted under the 1996 Plan.  Had
              compensation  cost for the  Company's  fixed  stock  options  been
              determined  based upon the fair value at the grant date consistent
              with the methodology  prescribed  under SFAS No. 123,  "Accounting
              For  Stock-Based  Compensation  To  Employees",  the Company's pro
              forma net income and pro forma net income per share would not have
              been  materially  different  than the reported  amounts.  The fair
              value of the options  granted  during 1996 is estimated to be $804
              on the date of grant  (represent-ing a weighted average fair value
              of $6.81 per option) using the Black-Scholes options pricing model
              with the  following  assumptions:  no  dividend  yield or  assumed
              forfeiture  rate, a


                                      F-13


<PAGE>

              risk-free interest rate of 6.09 percent, an expected option life
              of seven years, and an expected volatility of 45 percent.

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. However,  when corporate taxable income of
       any company  exceeded  $200,  such  company was  required to pay New York
       State corporate income taxes equal to the difference between the personal
       and the  corporate  tax rate  (approximately  2 percent)  for all taxable
       income in excess of $200, except for  Natur-Pharma,  Alvita and B. Bros.,
       which were  subject to the tax laws of the State of Utah.  The  provision
       for  income  taxes for the years  ended  December  31,  1994 and 1995 and
       through the  consummation  of the  Acquisition on May 7, 1996  represents
       state taxes.

       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 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>

                                                                  1996           1995           1994
                                                               -----------    -----------    -----------
<S>                                                            <C>            <C>            <C>        
        Current:                                              
          Federal                                              $     3,662    $        --    $        --
          State and local                                              618            240            245
                                                               -----------    -----------    -----------
                                                                     4,280            240            245
                                                               -----------    -----------    -----------
        Deferred:                                             
          Federal                                                   (3,108)            --             --
          State and local                                             (376)            --             --
                                                               -----------    -----------    -----------
                                                                    (3,484)            --             --
                                                               -----------    -----------    -----------
                                                               $       796    $       240    $       245
                                                               ===========    ===========    ===========
                                     
       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):

                                                                      1996           1995          1994
                                                                 ---------       --------       --------
        Statutory Federal income tax rate                             34.0%          34.0%          34.0%
        State and local income taxes (net of                   
          Federal tax benefit)                                         1.1            0.8            1.0
        Exempt income due to "S" Corporation                   
          status                                                     (26.8)         (34.0)         (34.0)
        Other                                                         (2.8)            --             --
                                                                 ---------       --------       --------
        Effective tax rate                                             5.5%           0.8%           1.0%
                                                                 =========       ========       ========
</TABLE>


                                      F-14


<PAGE>

       At  December  31,  1996,  the  deferred  tax  assets,  which  required no
       valuation allowance, consisted of:
                                                                 1996
                                                              ----------
           Accounts receivable                                $      856
           Inventories                                               238
           Property, plant and equipment                             464
           Intangible and other assets                            52,394
           Other                                                     124
                                                              ----------
                                                              $   54,076
                                                              ==========
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  $164,  $287 and $261 for the years
       ended December 31, 1996, 1995, and 1994, 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, 1996, 1995 and 1994 was approximately
              $1,579, $1,370 and $1,281, respectively.

              Future minimum payments under noncancellable operating leases with
              initial or remaining terms of more than one year are as follows:

                  YEAR ENDING DECEMBER 31,
                           1997                              $  1,376
                           1998                                 1,249
                           1999                                   747
                           2000                                   650
                           2001                                   131
                           Thereafter                              76
                                                             --------
                           Total                             $  4,229
                                                             ========

       B.     LEGAL MATTERS - The Company,  like various other  participants  in
              the nutritional supplement industry, has been a defendant in court
              actions seeking damages for alleged  personal  injuries  resulting
              from products containing allegedly contaminated added manufactured
              L- Tryptophan. To date, approximately 131 of the approximately 133
              suits  in  which  the   Company   was  a  named   defendant   (the
              "L-Tryptophan  Actions") have been dismissed or settled at no cost
              to the  Company  pursuant  to an  indemnification  agreement  (the
              "Indemnification  Agreement")  between  the  Company  and  a  U.S.
              subsidiary   of  the  Japanese   manufacturer   of  the  allegedly
              contaminated ingredient.  The Company believes, after 


                                      F-15


<PAGE>

              consultation  with  outside  counsel,  that few new  lawsuits are
              likely  to  be  brought  in  view  of   applicable   statutes  of
              limitation.  Based upon  consultation  with outside counsel,  the
              Company  also  believes  that , in light  of the  Indemnification
              Agreement and the resolution of virtually all of the L-Tryptophan
              Actions at no cost to the Company,  the prospect of the remaining
              L-Tryptophan  Actions and any possible  future  actions  having a
              material adverse effect on the Company's results of operations or
              financial  condition is remote. The Company no longer markets any
              products containing added manufactured L-Tryptophan.

              In 1989,  the Company  received an informal  inquiry  from the New
              York  Regional  Office of the  Federal  Trade  Commission  ("FTC")
              seeking  substantiation for certain  advertising claims made for a
              segment of its "Fuel"  bodybuilding  and sports  nutrition line of
              products.   In   response,   the  Company   submitted   scientific
              substantiation  and financial  information to the FTC. The Company
              has engaged in negotiations  with the FTC relating to the proposed
              terms of a consent  order (the  "Consent  Order")  to settle  this
              matter.  The most  recent  draft  of the  proposed  Consent  Order
              provides for, among other things,  injunctive  relief  prohibiting
              the Company from making  certain  muscle  building and fat burning
              claims for four of its Fuel  products  and  substantially  similar
              products without  scientific  substantiation and a $200 payment to
              the FTC. The FTC staff has  indicated  that unless a settlement is
              reached,  it would  proceed to recommend to the FTC  Commissioners
              that a  civil  administrative  complaint  be  issued  against  the
              Company.  The Company has  determined  at the current  time not to
              settle this matter on the terms set forth in the most recent draft
              of the Consent Order,  which draft the FTC has stated is its final
              offer for a negotiated  settlement.  The Company  believes that it
              has adequate  scientific  substantiation  for the claims at issue,
              and intends to  vigorously  defend this matter if a settlement  is
              not reached. The Company has reserved $200 for 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.    INVESTMENT IN LIMITED PARTNERSHIP
       In connection with investments in certain limited partnerships,  Hambrose
       3 and 4 ("Partnerships"), the Company agreed to pay a total of $360 as an
       additional  capital  contribution to the  Partnerships by delivering to a
       third party a  nonrecourse  note of $240 and another  noninterest-bearing
       note due in the year  2010 in the  amount  of $120 and by  assigning  100
       percent of certain  distribution  rights  until such time as the assignee
       has   recovered   the  full  amount  of  the  such   additional   capital
       contribution.  During  1996,  the  Company  sold its  investments  in the
       Partnerships.  These  investments  had not been assigned any value in the
       accompanying consolidated balance sheets.

       The  Hambrose 3 limited  partnership  has been  audited  by the  Internal
       Revenue  Service  ("IRS") for the years ended December 31, 1985 and 1986,
       at which time Twin was a "C"  corporation.  A settlement with the IRS was
       reached during 1995 in which Twin paid  approximately  $2,082,  including
       interest.  In addition,  Twin was responsible for additional state taxes,
       inclusive of interest of  approximately  $28.  Twin recorded an estimated
       settlement  amount during 1994  totaling  $1,982 which was reflected as a
       nonrecurring  charge to  operations.  An additional  $128 of interest was
       recorded  in  1995,  and  was  included  in  operating  expenses  in  the
       accompanying consolidated statement of income.


                                      F-16


<PAGE>

14.    MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
       The  Company  has  two   significant   customers   which   accounted  for
       approximately 25 and 20 percent,  respectively, of net sales for 1996; 27
       and 21  percent,  respectively,  of net  sales  for  1995;  and 28 and 20
       percent, respectively, of net sales for 1994. No other customer accounted
       for more than 10  percent  of net sales in any of the three  years  ended
       December 31, 1996.

       The Company's  customers are primarily large independent  distributors of
       health food products. At December 31, 1996 and 1995, approximately 64 and
       73  percent,   respectively,   of  accounts  receivable  related  to  two
       customers.

15.    CONDENSED AND SUMMARIZED FINANCIAL INFORMATION

       As noted in Note 7b, the Amended  Revolving  Credit Facility and the Note
       Indenture  restrict  the  payment of  dividends  and the making of loans,
       advances,  or other  distributions  to TLC,  except  in  certain  limited
       circumstances.  After giving retroactive effect, in a manner similar to a
       pooling of  interests,  to the merger of the  Companies  pursuant  to the
       Acquisition, the condensed financial information of TLC, on a stand-alone
       basis, is as follows  (because TLC had no cash prior to the  consummation
       of the Acquisition,  no condensed  statements of cash flows are presented
       for the years ended December 31, 1995 and 1994):

<TABLE>
<CAPTION>

       CONDENSED BALANCE SHEETS
                                                                         1996           1995
                                                                     -----------    -----------
              <S>                                                    <C>            <C>            <C>
              ASSETS
              Cash                                                   $       162    $        --
              Investment in subsidiaries                                   1,526         55,405
                                                                     -----------    -----------
                                                                     $     1,688    $    55,405
                                                                     ===========    ===========
              SHAREHOLDERS' EQUITY
              Common stock ($1.00 par value;
                75,000,000 shares authorized;
                27,000,000 and 450,000 shares
                outstanding, respectively)                           $    27,000    $       450
              Additional paid-in capital                                 141,338             68
              Retained earnings (deficit)                               (166,650)        54,887
                                                                     -----------    -----------
                                                                     $     1,688    $    55,405
                                                                     ===========    ===========
       CONDENSED STATEMENTS OF INCOME
                                                                         1996           1995           1994
                                                                     -----------    -----------    -----------
              Equity interest in net income of subsidiaries          $    11,742    $    30,224    $    21,693
              Interest income                                                 54             --             --
                                                                     -----------    -----------    -----------
              Net income                                             $    11,796    $    30,224    $    21,693
                                                                     ===========    ===========    ===========


                                      F-17


<PAGE>

       CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>

                                                                                               YEAR ENDED
                                                                                           DECEMBER 31, 1996
                                                                                           -----------------
              CASH FLOWS FROM OPERATING ACTIVITIES:
              <S>                                                                            <C> 

                   Net income                                                                $    11,796
                                                                                             -----------
              CASH FLOWS FROM INVESTING ACTIVITIES:
                   Equity  investment  in  subsidiaries  119,771 CASH FLOWS FROM
              FINANCING ACTIVITIES:
                   Proceeds from issuance of senior and junior preferred stock                 67,000
                   Dividends on senior and junior preferred stock                              (4,862)
                   Distributions to shareholders                                               (8,929)
                   Redemption of senior and junior preferred stock                            (67,000)
                   Issuance of common stock                                                     5,500
                   Repurchase of shareholders' common stock and recapitalization             (216,780)
                   Proceeds from initial public offering of common stock                       93,666
                                                                                             --------
                          Net cash used in financing activities                              (131,405)
                                                                                             -------- 
              Net increase in cash                                                                162
              Cash at beginning of year                                                            --
                                                                                             --------
              Cash at end of year                                                            $    162
                                                                                             ========
</TABLE>


Twin and ARP are, respectively, a direct and indirect wholly-owned subsidiary of
TLC. TLC and ARP have provided joint and several full and  unconditional  senior
subordinated guarantees of the senior subordinated notes of Twin (see Note 7b).

The assets,  results of  operations  and  shareholders'  equity of Twin comprise
substantially all of the assets,  results of operations and shareholders' equity
of TLC on a  consolidated  basis.  TLC  has no  separate  operations  and has no
significant  assets other than TLC's  investment  in Twin and,  through Twin, in
ARP.  Twin has no direct or indirect  subsidiaries  other than ARP;  and neither
Twin  nor  ARP has any  stockholder  other  than,  respectively,  TLC and  Twin.
Accordingly,  the Company has determined that separate  financial  statements of
Twin and ARP would not be material to investors and, therefore, are not included
herein.

       Summarized financial information of Twin is as follows:
<TABLE>
<CAPTION>

                                                                        1996           1995           1994
                                                                     -----------    -----------    -----------
                <S>                                                  <C>            <C>            <C>        
                Current assets                                       $    68,100    $    58,663    $    48,716
                Noncurrent assets                                         74,979         16,646         15,990
                Current liabilities                                       39,426         14,233         10,480
                Noncurrent liabilities                                   100,423          5,671          5,555
                Shareholder's equity                                       3,230         55,405         48,671
                Net sales                                                170,075        148,735        117,342
                Gross profit                                              70,248         58,803         47,095
                Net income                                                11,742         30,224         21,693


                                      F-18


<PAGE>

              Summarized financial information of ARP is as follows:

                                                                        1996           1995           1994
                                                                     -----------    -----------    -----------
                Current assets                                       $     1,577    $     1,266    $     1,339
                Noncurrent assets                                            182            168            168
                Current liabilities                                        1,200          1,211          1,157
                Noncurrent liabilities                                        --             --             --
                Shareholder's equity                                         559            223            350
                Net sales                                                  5,862          5,200          3,930
                Gross profit                                                 886            259            711
                Net income (loss)                                            392           (128)           466
</TABLE>

       16.        SUBSEQUENT EVENT

       PLANT  EXPANSION - In January 1997,  the Company  entered into a contract
       for the purchase of an  approximately  110,000  square foot facility near
       its currently owned facility in Ronkonkoma, New York, which would be used
       to expand the Company's  manufacturing  and warehousing  capabilities and
       office-space.  The  cost  to  the  Company  of  the  facility,  including
       anticipated  renovations,  is expected to aggregate approximately $6,500.
       The purchase is expected to be  consummated in the second quarter of 1997
       and is subject to customary conditions, including due diligence review by
       the Company.


                                      F-19


<PAGE>



                                                                    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, 1996:
  Allowance for bad debts                $  177             $125           $--               $ 94[1]        $   208
                                         ======             ====           ===                ====           =======
  Reserve for excess and
    slow moving inventory                $  515             $625           $--               $515[1]        $   625
                                         ======             ====           ===               ====           =======


YEAR ENDED DECEMBER 31, 1995:
  Allowance for bad debts                $   63             $169           $--               $ 55[1]        $   177
                                         ======             ====           ===               ====           =======
  Reserve for excess and
    slow moving inventory                $  100             $415           $--               $ --           $   515
                                         ======             ====           ===               ====           =======


YEAR ENDED DECEMBER 31, 1994:
  Allowance for bad debts                $  123             $(59)          $--               $  1[1]         $    63
                                         ======             =====          ===               ====            =======
  Reserve for excess and
    slow moving inventory                $   --              $100          $--               $ --            $   100
                                         ======             =====          ===               ====            =======
</TABLE>

(1)    Amounts written off.


                                       S-1