<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

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


(Mark One)
 /X/                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       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 NO: 000-24567
                                    ---------

                                  NATROL, INC.

             (Exact name of registrant as specified in its charter)

      DELAWARE                            95-3560780
-------------------------        -------------------------
(State of Incorporation)      (I.R.S. Employer Identification No.)

                              21411 PRAIRIE STREET
                          CHATSWORTH, CALIFORNIA 91311
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                 (818) 739-6000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

None

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

Common Stock, par value $.01 per share


<PAGE>

Indicate by a 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 Registration 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 the shares of the registrant's Common Stock held
by non-affiliates of the registrant on March 14, 1999 was approximately $81.0
million based upon the closing price per share of the registrant's Common Stock
as reported on the Nasdaq National Market on such date. Calculations of holdings
by non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, and persons holding 10% or more of the
outstanding Common Stock are affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

As of March 14, 2000, the registrant had 13,499,035 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.




<PAGE>



NATROL, INC.
1999 ANNUAL REPORT ON Form 10-K
TABLE OF CONTENTS

PART I

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

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . .26

Item 3. Legal Matters . . . . . . . . . . . . . . . . . . . . . 27


Item 4. Submission of Matters to a Vote of Security Holders . . 27


PART II

Item 5. Market for Registrant's Common Equity and Related
          Stockholder Matters . . . . . . . . . . . . . . . . . 27

Item 6. Selected Consolidated Financial Data . . . . . . . . . .29


Item 7. Management's Discussion and Analysis of
        Financial Condition and Results of Operations . . . . . 30


Item 7A. Quantitative and Qualatative Disclosures About Market
          Risk . . . . . . . . . . . . . . . . . . . . . . . . .38

Item 8. Financial Statements and Supplementary Data . . . . . . 38


Item 9. Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure . . . . . . . . .  38


PART III  . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

PART IV



Item 14. Exhibits, Financial Statements, Schedules, and Reports on
         Form 8-K . . . . . . . . . . . . . . . . . . . . . . . .39

                                      2



<PAGE>



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains "forward looking statements." The Company is including this
statement for the express purpose of availing itself of protections of the safe
harbor provided by the Private Securities Litigation Reform Act of 1995 with
respect to all such forward looking statements. Examples of forward looking
statements include, but are not limited to, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof, other variations thereon, or comparable
terminology, or by discussions of strategy.

The Company's ability to predict results or the effect of certain events on the
Company's operating results is inherently uncertain. Therefore, the Company
wishes to caution each reader of this report to carefully consider the following
factors and certain other factors discussed herein and in other past reports,
including but not limited to, the Company's Prospectus dated July 22, 1998 and
the Company's annual report on Form 10-K for the year ended December 31, 1998,
each of which is filed with the Securities and Exchange Commission.

Factors that could cause or contribute to the Company's actual results differing
materially from those discussed herein or for the Company's stock price to be
affected adversely include, but are not limited to: (i) industry trends,
including a potential general downturn or slowing of the growth of the dietary
supplement industry, (ii) increased competition from current competitors and new
market entrants, (iii) adverse publicity regarding the dietary supplement
industry or the Company's products, (iv) the Company's dependence upon its
ability to develop new products,(v) an increase in returns of the Company's
products sold in past years (vi) the Company's ability to gain or expand
distribution within new or existing accounts and new or existing channels of
trade, (vii) adverse changes in government regulation, (viii) exposure to
product liability claims,(ix) dependence on significant customers, (x) the
Company's ability to keep and attract key management employees, (xi) the
Company's inability to manage growth and execute its business plan, (xii) the
Company's ability to consummate future acquisitions and its ability to integrate
acquired businesses, including without limitation Prolab Nutrition, Inc.
("Prolab"), acquired in October, 1999, and to retain key personnel associated
with any acquisition, (xiii) the absence of clinical trials for many of the
Company's products, (xiv) the Company's inability to obtain raw materials that
are in short supply, (xv) sales and earnings volatility, (xvi) the Company's
ability to manufacture its products efficiently, (xvii) the Company's reliance
on independent brokers to sell its products, (xviii) the inability of the
Company to protect its intellectual property, (xix) control of the Company by
principal shareholders, (xx) the possible sale of large amounts of stock by
controlling shareholders, (xxi) volatility in the stock markets, (xxii) a
general downturn in the national economy as a whole, and (xxiii) continued
market acceptance of Natrol supplements, Laci Le Beau teas, Prolab's sports
nutrition products, and Essentially Pure Ingredients' raw material products.
These and other such factors are discussed in more detail under the caption
"Risk Factors" and elsewhere in this report.

                                      3

<PAGE>

PART I

ITEM 1. BUSINESS

The Company's executive offices are located at 21411 Prairie Street, Chatsworth,
California 91311 and its telephone number is 818-739-6000. Unless the context
otherwise requires the terms the "Company" and "Natrol" refer to Natrol, Inc.
and, as applicable, its direct and indirect subsidiaries.

GENERAL

Natrol manufactures and markets branded, high-quality dietary supplements,
herbal teas, nutraceutical ingredients, and more recently, through its
acquisition of Prolab Nutrition, Inc., sports nutrition products.

Supplements are sold primarily under the Company's Natrol brand. These
supplements include vitamins, minerals, hormonal supplements, herbal products,
and specialty combination formulas that contribute to an individual's mental or
physical well-being. The Company sells its products through multiple
distribution channels throughout the United States. These channels include
domestic health food stores and mass market drug, retail, and grocery store
chains. The Company also sells its products through independent catalogs,
internet shopping sites, and, to a limited degree, within select foreign
countries. The Company's strategy emphasizes building strong recognition of the
Natrol brand across multiple distribution channels through a widespread
multi-media marketing and advertising strategy.


Herbal teas are sold under the Company's Laci Le Beau brand name. The Company
uses essentially the same sales people and brokers to sell teas as it does
supplements. And, as with its supplement business, the Company's strategy
emphasizes building strong recognition of the Laci Le Beau brand across multiple
distribution channels through a widespread multi-media marketing and advertising
strategy.

The Company's recently acquired Prolab sports nutrition line of products is
targeted to body builders and health minded individuals seeking a high degree of
physical fitness. Prolab's products include supplements designed to help these
individuals gain and lose weight as well as improve muscle mass and muscle
definition. Prolab products have traditionally been sold through gyms, health
food stores, and internationally, through selected distributors. The Company's
strategy is to capitalize upon Natrol's sales force and customer relations to
broaden the distribution of Prolab products.

The Company also sells nutraceutical grade ingredients, primarily garlic,
vegetable powders, kava kava, melatonin and cetyl myristoleate complex to other
manufacturers. In the year 2000, the Company renamed its ingredient supply
division from Pure-Gar to Essentially Pure Ingredients (EPI). The Company's
strategy is to establish exclusive relationships with primary manufacturers of
raw materials and to sell these ingredients to other users of nutraceutical
grade materials.

RECENT ACQUISITIONS

In October 1999, the Company purchased all of the stock of Prolab

                                      4


<PAGE>

Nutrition, Inc. (Prolab) for $29,000,000 in cash and 124,270 shares of Common
Stock.

Prolab is a formulator, packager and marketer of sports nutrition products
for body builders and health minded individuals sold through gyms, health
food stores and other outlets both domestically and internationally. The
Company is now integrating Prolab's business with its own. This integration
includes capitalizing upon Natrol's manufacturing, product development,
marketing and sales expertise to broaden the products offered by Prolab as
well as the channels through which Prolab sells product.

SALES

BRANDED PRODUCTS

The Company distributes its branded products primarily to domestic health food
stores and mass market drug, retail and food stores. Although the Company sells
the same Natrol or Laci Le Beau products to both the health food and mass market
channels of distribution, it has built different sales organizations to meet the
differing requirements of each channel of trade.

At the time of the Company's acquisition of Prolab, Prolab products were sold
primarily through gyms, health food stores and internationally through
designated distributors. Nearly all Prolab sales were to distributors who in
turn serviced retail accounts. Prolab sales were generated by in-house sales
representatives as Prolab did not maintain a field sales force. Post
acquisition, Natrol's field sales force in both the mass market and health
channels will represent Prolab products.

The Company sells its branded Natrol and Laci Le Beau products to health food
stores through leading national distributors, including United Natural Foods and
Tree of Life, as well as directly to GNC (General Nutrition Company). Prolab
products are also sold to health food stores through distributors and, to GNC
directly. Prolab's distributor network focuses on health food stores and gyms
that cater to body builders and other individuals seeking a high level of
fitness. Natrol and Laci Le Beau products are sold by health food store chains
such as Wild Oats Markets, Whole Foods Market, Hi-Health, Vitamin Cottage, Fred
Meyer Nutrition Centers and Vitamin Shoppes, as well as most independent health
food stores.

Within the health food channel of trade, the Company maintains a sales staff of
more than 20 representatives across the country who are managed by regional
managers who report to the Company's vice president of sales. These sales
representatives call on individual store owners and distributors promoting the
Natrol, Laci Le Beau and Prolab lines.

The mass market distribution channel is managed by the Company's Vice President
of Sales, a national manager of mass market sales and regional managers who work
with a network of independent brokers. The Company's employees service certain
of its larger mass market accounts directly while independent brokers service
others in conjunction with the Company's management. The Company sells its
products to mass market merchandisers either directly or through distributors of
vitamins, minerals and other supplement products such as Bergen Brunswick,
McKesson and Cardinal. Some of the

                                      5

<PAGE>

Company's major mass market retail customers are Walgreens, CVS, American
Drug Stores, Rite Aid, Long's Drug, Drug Emporium, Eckerd, Snyders, Brooks
Drug, Wal-Mart, Kmart, Target, Shopko, BJ's Wholesale Club and Sam's Clubs.
The Company also sells its products in grocery stores and supermarkets,
including Dominick's, Ralphs, Von's, Schnucks, Cub Foods, Food For Less and
Wegmans.

Within each channel of trade, the Company believes that there is opportunity for
growth in that a majority of outlets that carry the Company's products only
stock a small percentage of the products the Company offers. A prime objective
of the Natrol selling effort is to increase the amount of shelf space devoted to
Company products at each location.

The Company provides retailers in both the health food store and the mass market
distribution channel with a wide array of comprehensive services tailored to
meet their individual needs. In the health food store channel, the Company's
dedicated sales force maintains direct and regular contact with key store
personnel, informing them of new product developments and industry trends,
aiding them in the design of store sets and creating merchandising programs that
promote brand and category awareness. The Company's regional sales managers and
independent brokers in the mass market distribution channel work with corporate
buyers focusing on special promotional activities and brand and category
awareness in order to gain more shelf space. The objective of these activities
is to build strong relationships with the Company's marketing partners and to
increase the number of stores carrying its products and the amount of space
allocated to, and the overall number of, the Company's products and SKUs within
each store.

The Company had no customer whose sales amounted to more than 10% of the
Company's business during 1999 as opposed to 1998 when sales to one customer,
Walgreens, amounted to 15.9% of Natrol's total revenue or $10.9 million.


PRIVATE LABEL AND INGREDIENT SUPPLY SALES

The Company manufactures certain products pursuant to contracts with customers
who distribute the products under their own private labels. Sales to private
label customers accounted for 8% of the Company's revenues for 1999.

In its bulk ingredient business, the Company primarily sells nutraceutical grade
dehydrated vegetable products, mostly garlic, to other manufacturers,
distributors and marketers of dietary supplements. Non-vegetable based products
include Melatonin and Cetyl Myristoleate. The Company obtains its bulk vegetable
ingredients from Basic Vegetable Products, Inc. (BVP) pursuant to a multi-year
supply agreement that gives the Company the exclusive right to sell BVP's
vegetable powders in the dietary supplement industry.

Bulk ingredient sales are the responsibility of the Company's Essentially Pure
Ingredients (formerly Pure Gar) division. Sales personnel from this division
call on more than 120 customers nationwide.

The Company's strategy is to establish exclusive relationships with primary
manufacturers of raw materials and to sell these ingredients to other users of
nutraceutical grade materials. The

                                      6


<PAGE>



Company expects to broaden its product offerings as favorable distribution
opportunities arise.

MARKETING

BRANDED PRODUCTS

Management believes the Company's strategy of selling the Natrol, Laci Le Beau
and Prolab brands through all channels of distribution including the health,
mass market, convenience store, gym and internet channels distinguishes the
Company from its competition. Most competitors sell products into each channel
using different brand names within each channel. Oftentimes, in the case of the
Company's competitors, the brand sold in the health channel is positioned as the
quality brand while the mass market line is positioned as the value brand.

The Company's core strategy is to continue to build the Natrol, Laci Le Beau and
Prolab brand names within multiple channels of distribution in order to develop
increased brand awareness and strong brand recognition among consumers seeking
products with a reputation for quality. The Company believes it can leverage its
reputation for high quality products developed within the health food
distribution channel in the mass market and other channels by positioning its
products as a high quality brand rather than a value brand. By selling each
brand (Natrol, Laci Le Beau and Prolab) across multiple distribution channels
and thus maintaining in each case a single brand identity, the Company believes
it can also leverage its advertising budget across multiple distribution
channels.

The Company utilizes print, radio and television advertising as well as
cooperative and other incentive programs to build consumer awareness and
generate sales revenue. The Company spent approximately $10.9 million or nearly
13.5% of total sales in 1999 on various marketing and sales incentive programs.

The Company generally uses targeted, health-oriented magazines, such as BETTER
NUTRITION, DELICIOUS and GREAT LIFE, to support the health food store
distribution channel and uses mainstream publications such as PREVENTION,
HEALTH, USA TODAY, TV GUIDE, MCCALLS, FAMILY CIRCLE,and WOMEN'S DAY to support
the mass market distribution channel.

Throughout 1999, the Company's television commercials were featured on the
CNN/Turner Network, including CNN's Larry King Live and CNN Headline News along
with TNT and TBS programs as well as several game show programs including Wheel
of Fortune, Jeopardy and Hollywood Squares.

Radio advertising in 1999 was limited to selected opportunities throughout
the year.

The Company constantly reviews its media mix for its effectiveness in creating
consumer demand. As such, the Company's use of certain media in past operating
periods is not necessarily an indicator of media choices to be made in future
operating periods.


                                      7


<PAGE>


PRIVATE LABEL AND INGREDIENT SUPPLY SALES

The Company does not actively market its private label business and relies on
word-of-mouth as well as the delivery of information from its sales staff,
primarily its Essentially Pure Ingredients sales people.

The Company's Essentially Pure Ingredients division relies primarily on
visibility developed through trade shows, advertising in trade publications and
brochures to supplement the sales efforts of its sales people.

PRODUCTS

The Company sells premium dietary supplements, herbal tea products, and sports
nutrition products under the respective Natrol, Laci Le Beau and Prolab brand
names. The Company's EPI division markets ingredients, mostly vegetable based
powders suitable for nutraceutical usage to other manufacturers of supplements.

The Company's core Natrol brand focuses on supplements that are in high demand
as well as specialty niche and proprietary formulations that have potentially
strong margins. The Company's supplement products include vitamins, minerals,
herbs, specialty formulations, weight control products, hormones and various
nutrients. The Company positions Natrol as a premium brand of vitamins, minerals
and other supplements rather than a value brand. The Company manufactures and
sells approximately 190 products packaged into approximately 500 SKUs.

Laci Le Beau teas are flavored herbal teas. These teas include a Dieter's tea as
well as specialty teas such as Throat Care, Tummy Care, Heavenly Nights and
traditional herbal teas such as an Echinacea, St. John's Wort, Chamomile and
Green Tea. The Laci Le Beau Line consists of more than 20 herbal teas.

The Prolab sports nutrition line focuses on products used by body builders and
other athletes who perform at a high level of fitness. Prolab products are
designed to help individuals interested in fitness improve muscle mass, manage
weight and attain higher levels of overall fitness. The product line includes
creatine, whey, and diet and hormonal formulations.

EPI sells a variety of nutraceutical powders, each of which has nutraceutical
applications. The largest category is garlic powder which is refined to have
high levels of specific nutraceutical markers that are in demand by supplement
companies.

The Company's consumer products fall into the general definition of vitamin,
minerals, and supplements. Each year the Company strives to broaden its product
offering so as to increase revenue and gross profits while lessening the
Company's dependence upon any one product.

Only one branded product, Ester-C(R) accounted for more than 10% of the
Company's revenue in 1999. A buffered form of pH-neutral Vitamin C, Natrol
considers Ester-C(R) a cornerstone product. The Company sells approximately
45 SKUs of Ester-C(R), each offering a special potency, pill count, delivery
system or specialty combination, such as Ester-C(R) with zinc. Ester-C(R)
accounted for approximately 11% of the Company's gross sales.

                                      8


<PAGE>


The Laci Le Beau tea business accounted for approximately 8.5% of the Company's
gross sales in 1999 and the EPI ingredients business accounted for 9.9% of the
Company's business. Prolab, which was acquired at the beginning of the fourth
quarter of 1999, accounted for 18.2% of that quarter's gross revenue. The
Company anticipates that Prolab will account for approximately 20% of gross
revenue during the year 2000.

RESEARCH & PRODUCT DEVELOPMENT

The Company believes it has an excellent reputation among retailers for
introducing items at the front end of the consumer demand curve and then working
to develop brand loyalty after product introduction.

The Company's product development department consists of an internal staff of
professionals with extensive nutraceutical and scientific backgrounds. This
group of product development professionals reports to the Vice President of
Sales & Marketing and works with marketing brand managers to evaluate product
categories and SKUs for trends in sales and profitability, de-emphasizing or
dropping products when profitability or SKU velocity lags. New products are
introduced to replace slower moving products, capitalize on market trends and
diversify the Company's product offerings.

The Company has established a focused process to anticipate consumer demand,
monitor product developments within the dietary supplement industry, and
facilitate the generation of new ideas for product introductions. The Company's
product development staff constantly reviews periodicals, scientific research
and relevant clinical studies within medical journals and searches on-line
databases. The staff meets with vendors and evaluates new ingredients. The
product development team also consults scientists and employs research
consultants on a regular basis regarding new product concepts.

Before a product is introduced, the product development team reviews the safety
and efficacy of ingredients, standards for production, and with assistance from
the Company's General Counsel reviews labeling information, label claims and
potential patent, trademark, legal or regulatory issues.

The Company actively participates in and supports a number of scientific and
educational industry organizations that promote consumer well being. These
include the Citizens for Health and the National Nutritional Foods Association.
The Company is also a founding member of the Corporate Alliance for Integrative
Medicine, a not-for-profit organization funding research at Harvard University
that was created to increase knowledge and awareness of the efficacy and safety
of vitamins, herbs and other dietary supplements.


MANUFACTURING AND PRODUCT QUALITY

DIETARY SUPPLEMENTS

The Company manufactures its branded Natrol and private label supplements as
well as Prolab tablets and capsules at its 90,000 square foot manufacturing
facility/headquarters located in Chatsworth, California. In December 1998, the
Company purchased its


                                      9

<PAGE>


manufacturing facility/headquarters for $5.25 million (see "Properties"). At
this facility, the Company manufactures both tablets and two piece capsules
which account for more than 90% of the Company's supplement sales. The
Company uses third party vendors to produce its liquid products and softgels.

The Company places a strong emphasis on quality control because it believes that
quality standards play a critical factor in consumer purchasing decisions and in
differentiating the Natrol brand. The Company's products are manufactured in
accordance with current GMPs (Good Manufacturing Practices) of the FDA for foods
and the applicable regulations of other agencies.

The Company's manufacturing facility includes an on-site laboratory which is
staffed by the director of quality assurance, bench chemists and other quality
control personnel. The Company's laboratory contains equipment for performing
testing procedures, including high performance liquid chromatography,
ultra-violet and infra-red spectrophotometer, atomic absorption and thin layer
chromatography. The Company requires all raw materials or finished product
produced by third party vendors to be placed in quarantine upon receipt and
tested by the Company's quality control laboratory. The Company conducts sample
testing, weight testing, purity testing, dissolution testing and, where
required, microbiological testing. When raw materials are released from
quarantine, each lot is assigned a unique lot number which is tracked throughout
the manufacturing process. Materials are blended, tested and then encapsulated
or formed into pills which may or may not be coated. The Company routinely
performs qualitative and quantitative quality control procedures on its finished
products.

The Company obtains its raw materials for the manufacture of its products from
third-party suppliers. Many of the raw materials used in the Company's products
are harvested internationally. With the exception of bulk garlic and Ester-C(R),
the Company does not have contracts with any suppliers committing such suppliers
to provide the materials required for the production of its products. In the
last few years, natural vitamin E, beta carotene, Melatonin, Kava, Sam-E, and
St. John's Wort have had significant price fluctuations as a result of short
supply and/ or increases in demand. The Company has experienced occasional
shortages of raw materials for a limited number of its products, but to date has
only encountered short-term production interruptions as a result of such
shortages. Only one supplier, Inter-Cal Corporation (Inter-Cal), the Company's
source for Ester-C(R) accounted for more than 10% of raw material purchases in
1999. There can be no assurance that suppliers, including the supplier of
Ester-C(R), will provide the raw materials needed by the Company in the
quantitieS requested or at a price the Company is willing to pay. Because the
Company does not control the actual production of these raw materials, it is
also subject to delays caused by interruption in production of materials based
on conditions not within its control. Such conditions include job actions or
strikes by employees of suppliers, weather, crop conditions, transportation
interruptions and natural disasters or other catastrophic events. During 1999,
BVP encountered problems due to poor crop yields of garlic and also suffered
from work stoppages due to a strike. Both of these occurrences, from time to
time, affected the Company's ability of the Company's EPI division to deliver
garlic powders in a timely manner. With respect to products that are sold by the
Company under the supplier's trademark, such as Ester-C(R), the Company is
limited to that single


                                      10

<PAGE>


supplier as a source of raw materials for that product. As a result, any
shortage of raw materials from that supplier would adversely affect the
Company's ability to manufacture that product. The inability of the Company
to obtain adequate supplies of raw materials for its products at favorable
prices, or at all, could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company is a party to a multi-year Distributorship/Packager/Supply
Agreement (the "Inter-Cal Agreement") with Inter-Cal under which Inter-Cal is
required to supply the Company with its requirements of bulk Ester-C(R).
Ester-C(R) products accounted for approximately 11% of the Company's gross
sales in 1999. The Inter-Cal Agreement requires the Company to use its best
efforts to promote and sell Ester-C(R) vitamin products worldwide with the
exception of certain specified countries, including Australia, New Zealand
and certain European countries. The Inter-Cal Agreement may be terminated by
Inter-Cal immediately if the Company violates the terms of certain provisions
relating to distribution and packaging and may be terminated by either party
upon a default of the obligations of the other party if the default has not
been cured within 60 days.

The Company has current manufacturing capability to produce four million tablets
and capsules per eight hour shift and 420,000 bottles per week per eight hour
shift. The Company believes it can triple current sales volumes without the
necessity of expanding its current manufacturing facility. Such a tripling of
production would require additional space for the warehousing of raw material as
well as the addition of some manufacturing and packaging equipment.

The Company operates flexible manufacturing lines which enable it to shift
output efficiently among various pieces of equipment depending upon such factors
as batch size, tablets or capsule count and labeling requirements. The Company
strives to fulfill and ship all orders within 48 hours.

During 1999, the Company shipped finished product from a leased 26,000 sq. ft.
facility located less than one-quarter mile from its manufacturing facility. In
December, 1999, the Company purchased a 132,000 sq. ft. warehouse facility also
located less than one-quarter mile from its manufacturing facility.
Approximately 52,000 sq. ft. of this warehouse facility is subleased. The
remaining 80,000 sq. ft. is now being used by the Company to ship finished goods
to the Company's customers. Finished goods are transferred from the Company's
packaging lines to the shipping facility for storage prior to shipment to
customers. The Company has two years remaining on the original 26,000 sq. ft.
shipping facility used during 1999 and is now working with its real estate
broker to sub-lease the facility. The cost of this unused facility is
approximately $17,000 per month.

TEAS

The Company primarily relies upon third parties for the milling, processing and
packaging of its herbal teas. The Company directly provides a majority of the
herbs and other raw materials used in the production of its teas.

PROLAB

The Company produces, at its headquarters/manufacturing facility,


                                      11

<PAGE>


Prolab supplements that are sold in tablet or capsule form. However, the
Company relies on third party vendors to process and package a majority of
Prolab's products which consists of powders, nutrition bars and drinks.
Prolab, at its facility in Connecticut, packages a limited amount of powdered
product which is manufactured by third party vendors.

INGREDIENT SUPPLY

The Company's Essentially Pure Ingredients division provides raw material
ingredients to the Company and approximately 120 other customers. The Company
acquires nutraceutical grade garlic and other vegetable powders pursuant to a
multi-year Supply Agreement (the "BVP Agreement") with BVP, which requires Basic
Vegetable Products to sell and the Company to purchase specified amounts of
certain vegetable, fruit, herbal and botanical products (the "BVP Products").
The BVP Agreement gives the Company the exclusive right to sell certain BVP
Products in the dietary supplement industry. The BVP Agreement may be terminated
by either party upon a material breach of the obligations of the other party, or
certain other specified conditions, if the breach is not cured within 60 days,
or within 15 days in the case of non-payment by the Company.

The EPI division may source other raw ingredients and contract for the
processing of these ingredients when management feels market conditions are such
that the purchasing and processing of these materials would be beneficial to the
Company and its customers.

TRADEMARKS AND PATENTS

The Company regards its trademarks, patent applications and other proprietary
rights as valuable assets. The Company believes that protecting its key
trademarks is crucial to its business strategy of building strong brand name
recognition and that such trademarks have significant value in the marketing of
its products. The Company may in some cases seek to protect its research and
development efforts by filing patent applications for proprietary products.

The Company's policy is to pursue registrations for all of the trademarks
associated with its key products. The Company relies on common law trademark
rights to protect its unregistered trademarks as well as its trade dress rights.
Common law trademark rights generally are limited to the geographic area in
which the trademark is actually used, while a United States federal registration
of a trademark enables the registrant to stop the unauthorized use of the
trademark by any third party anywhere in the United States. Furthermore, the
protection available, if any, in foreign jurisdictions may not be as extensive
as the protection available to the Company in the United States.

Currently, the Company has received one United States patent for its Kavatrol
product, has a second United States patent application pending for a method of
using its Kavatrol product and has received two United States patents on its
amino acid products, SAF and SAF for Kids. To the extent the Company does not
have patents on its products, another company may replicate one or more of the
Company's products.

Although the Company seeks to ensure that it does not infringe on the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property


                                      12

<PAGE>


infringement claims against the Company. Natrol was contacted in June 1997 by
a third party that claimed Natrol's marketing of Melatonin infringed on the
third party's patents relating to a method of using Melatonin and sought to
license such patents to Natrol. Since Natrol does not believe its marketing
of Melatonin infringes on the third party's patent claims, Natrol has
declined to enter into a license agreement with the third party. Any
infringement claims by third parties against the Company may have a material
adverse effect on the Company's business, financial condition and results of
operations.

COMPETITION

The dietary supplement industry is highly competitive. Numerous companies, many
of which have greater size and financial, personnel, distribution and other
resources than the Company, compete with the Company in the development,
manufacture and marketing of dietary supplements. The Company's principal
competition in the health food store distribution channel comes from a limited
number of large nationally known manufacturers and many smaller manufacturers of
dietary supplements. In the mass market distribution channel, the Company's
principal competition comes from broadline manufacturers, major private label
manufacturers and other companies. In addition, several large pharmaceutical
companies, including Warner Lambert, Bayer and American Home Products, have
begun to compete with the nutritional supplement companies, especially in the
herbal market. Increased competition from such companies could have a material
adverse effect on the Company because such companies have greater financial and
other resources available to them and possess manufacturing, distribution and
marketing capabilities far greater than those of the Company. The Company also
faces competition in both the health food store and mass market distribution
channels from private label dietary supplements and multivitamins offered by
health and natural food store chains, drugstore chains, mass merchandisers and
supermarket chains.

The Company competes on the basis of product quality, pricing, customer service
and marketing support. The Company believes that it competes favorably with its
competitors on the strength of the Company's brand recognition across multiple
distribution channels, an ability to quickly develop new products with market
potential, sophisticated marketing, advertising and promotional support, product
quality and an effective sales force and distribution network.

REGULATORY MATTERS

The manufacture, packaging, labeling, advertising, promotion, distribution and
sale of the Company's products are subject to regulation by numerous
governmental agencies, the most active of which is the U.S. Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by, among
other regulatory agencies, the Consumer Product Safety Commission, the U.S.
Department of Agriculture (the "USDA") and the Environmental Protection Agency
(the "EPA"). Advertising of the Company's products is subject to regulation by
the U.S. Federal Trade Commission (the "FTC"), which regulates the Company's
advertising under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products


                                      13

<PAGE>


are also regulated by various state and local agencies as well as each
foreign country to which the Company distributes its products.

The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised the
provisions of the FDCA concerning the regulation of dietary supplements. In the
judgment of the Company, the DSHEA is favorable to the dietary supplement
industry. The legislation for the first time defined "dietary supplement." The
term "dietary supplement" is defined as a product intended to supplement the
diet that contains one or more of certain dietary ingredients, such as a
vitamin, a mineral, an herb or botanical, an amino acid, a dietary substance for
use by man to supplement the diet by increasing the total dietary intake, or a
concentrate, metabolite, constituent, extract, or combination of the preceding
ingredients. The substantial majority of the products marketed by the Company
are regulated as dietary supplements under the FDCA.

Under the current provisions of the FDCA there are four categories of claims
that pertain to the regulation of dietary supplements. Health claims are claims
that describe the relationship between a nutrient or dietary ingredient and a
disease or health related condition and can be made on the labeling of dietary
supplements if supported by significant scientific agreement and authorized by
the FDA in advance via notice and comment rulemaking. Nutrient content claims
describe the nutritional value of the product and may be made if defined by the
FDA through notice and comment rulemaking and if one serving of the product
meets the definition. Health claims may also be made if a scientific body of the
U.S. government with official responsibility for the public health has made an
authoritative statement regarding the claim, the claim accurately reflects that
statement and the manufacturer, among other things, provides the FDA with notice
of and the basis for the claim at least 120 days before the introduction of the
supplement with a label containing the health claim into interstate commerce.
For health claims that the FDA has approved, no prior notification is required.
Statements of nutritional support or product performance, which are permitted on
labeling of dietary supplements without FDA pre-approval, are defined to include
statements that: (i) claim a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States; (ii)
describe the role of a nutrient or dietary ingredient intended to affect the
structure or function in humans; (iii) characterize the documented mechanism by
which a dietary ingredient acts to maintain such structure or function; or (iv)
describe general well-being from consumption of a nutrient or dietary
ingredient. In order to make a nutritional support claim the marketer must
possess substantiation to demonstrate that the claim is not false or misleading
and if the claim is for a dietary ingredient that does not provide traditional
nutritional value, prominent disclosure of the lack of FDA review of the
relevant statement and notification to the FDA of the claim is required. Drug
claims are representations that a product is intended to diagnose, mitigate,
treat, cure or prevent a disease. Drug claims are prohibited from use in the
labeling of dietary supplements.

Claims made for the Company's dietary supplement products may include statements
of nutritional support and health and nutrient content claims when authorized by
the FDA or otherwise allowed by law. The FDA's interpretation of what
constitutes an acceptable statement of nutritional support may change in the
future thereby requiring that the Company revise its labeling. The FDA recently
issued a proposed rule on what constitutes permitted


                                      14

<PAGE>


structure/function claims as distinguished from prohibited disease claims.
Although the Company believes its product claims comply with the law,
depending on the content of the final regulation, it may need to revise its
labeling. In addition, a dietary supplement that contains a new dietary
ingredient (i.e., one not on the market before October 15, 1994) must have a
history of use or other evidence of safety establishing that it is reasonably
expected to be safe. The manufacturer must notify the FDA at least 75 days
before marketing products containing new dietary ingredients and provide the
FDA the information upon which the manufacturer based its conclusion that the
product has a reasonable expectation of safety.

The FDA issued final dietary supplement labeling regulations in 1997 that
required a new format for product labels and necessitated revising dietary
supplement product labels by March 23, 1999. All companies in the dietary
supplement industry are required to comply with these labeling regulations and
the Company believes it does comply with these regulations. The FDA has also
announced that it is considering promulgating new GMPs specific to dietary
supplements. Such GMPs, if promulgated, may be significantly more rigorous than
currently applicable GMP requirements and contain quality assurance requirements
similar to GMP requirements for drug products. Therefore, the Company may be
required to expend additional capital and resources on manufacturing in the
future in order to comply with the law.

The failure of the Company to comply with applicable FDA regulatory requirements
could result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines and criminal prosecutions.

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 of its advertising claims.
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
record keeping, 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
business, financial condition and results of operations.

The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to drugs or foods,
which would include dietary supplements, is an unfair or deceptive act or
practice. Under the FTC's Substantiation Doctrine, an advertiser is required to
have a "reasonable basis" for all objective product claims before the claims are
made. Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant to this FTC requirement the Company is
required to have adequate substantiation for all material advertising claims
made for its products.


                                      15

<PAGE>


On November 18, 1998, the FTC issued "Dietary Supplements: An Advertising
Guide for Industry." This guide provides marketers of dietary supplements
with guidelines on applying FTC law to dietary supplement advertising. It
includes examples of the principles that should be used when interpreting and
substantiating dietary supplement advertising. Although the guide provides
additional explanation, it does not substantively change the FTC's existing
policy that all supplement marketers have an obligation to ensure that claims
are presented truthfully and to verify the adequacy of the support behind
such claims. The Company's General Counsel, in conjunction with outside
counsel, reviews its advertising claims.

The FTC has a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process, cease and
desist orders and injunctions. FTC enforcement can result in orders requiring,
among other things, limits on advertising, corrective advertising, consumer
redress, divestiture of assets, rescission of contracts and such other relief as
may be deemed necessary. A violation of such orders could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Advertising and labeling for dietary supplements and conventional foods are also
regulated by state and local authorities. There can be no assurance that state
and local authorities will not commence regulatory action which could restrict
the permissible scope of the Company's product claims.

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

In addition, the Company has in the past, from time to time, been the subject of
investigation by the FTC, however, the Company is not currently a party to any
consent order or other decree of the FTC. The Company may be the subject of
investigation in the future. The FTC may impose limitations on the Company's
advertising of its products. Any such limitations could materially adversely
affect the Company's ability to successfully market its products.

The Company manufactures certain products pursuant to contracts with customers
who distribute the products under their own or other trademarks. Such private
label customers are subject to government regulations in connection with their
purchase, marketing, distribution and sale of such products. The Company is
subject to government regulations in connection with its manufacture, packaging
and labeling of such products. However, the Company's private label customers
are independent companies, and their labeling, marketing and distribution of
such products is beyond the Company's control. The failure of these customers to
comply with applicable laws or regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company may be subject to additional laws or regulations by the FDA or other
federal, state or foreign regulatory authorities, the


                                      16

<PAGE>


repeal of laws or regulations which the Company considers favorable, such as
the Dietary Supplement Health and Education Act of 1994, or more stringent
interpretations of current laws or regulations, from time to time in the
future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the
recall or discontinuance of certain products not able to be reformulated,
imposition of additional record keeping requirements, expanded documentation
of the properties of certain products, expanded or different labeling and
scientific substantiation. Any or all of such requirements could have a
material adverse affect on the Company's business, financial condition and
results of operations.

EMPLOYEES

As of March 1, 2000, the Company had approximately 316 employees. Of such
employees, approximately 50 were engaged in marketing and sales, 193 were
devoted to production and distribution and 73 were responsible for management
and administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.

RISK FACTORS

The Company's ability to predict results or the effect of certain events on the
Company's operating results is inherently uncertain. Therefore, the Company
wishes to caution each reader of this report to carefully consider the following
factors and certain other factors discussed herein and in other past filings
with the Securities and Exchange Commission.

Factors that could cause or contribute to the Company's actual results differing
materially from those discussed herein or for the price of the Company's Common
Stock to be affected adversely include but are not limited to:

INDUSTRY TRENDS.

The total United States retail market for nutritional supplements, the vitamin,
mineral and supplement market ("VMS") is highly fragmented. Industry sources
report that the industry has grown from $6.5 billion in 1996 to $8.9 billion in
1998, a 17% growth rate. There is evidence, however that the industry rate of
growth slowed substantially during 1999.

Information Resources, Inc. ("IRI") tracks sales data within the food, drug, and
mass market channels of distribution. Its data gives evidence that the rapid
growth rate between 1996 and 1998 has slowed. Dollar sales for VMS products in
the 52 weeks ending February 6, 2000 grew 2.6% in the drug class of trade, 10.5%
in the food class of trade and 13.3% in the mass market channel of trade. Growth
across all channels combined was only 8.1% during this 52 week period.

There can be no assurance that the higher industry growth rates of prior years
can be sustained, or, if not sustained, will return. In addition, there can be
no assurance that the industry growth rate


                                      17

<PAGE>


will not continue to decline in future operating periods. Such a failure to
sustain growth in the industry may have a material adverse effect on the
Company's ability to sustain its historic rates of growth and its results of
operations.

COMPETITION. The dietary supplement industry is highly competitive. Numerous
companies, many of which have greater size and financial, personnel,
distribution and other resources than the Company, compete with the Company in
the development, manufacture and marketing of dietary supplements. The Company's
principal competition in the health food store distribution channel comes from a
limited number of large nationally known manufacturers and many smaller
manufacturers of dietary supplements. In the mass market distribution channel,
the Company's principal competition comes from broadline manufacturers, major
private label manufacturers and other companies. In addition, large
pharmaceutical companies have begun to compete with the Company and others in
the dietary supplement industry, in particular in the herbal sector of the
business. Packaged food and beverage companies compete with the Company on a
limited basis in the dietary supplement market. Increased competition from such
companies could have a material adverse effect on the Company because such
companies have greater financial and other resources available to them and
possess manufacturing, distribution and marketing capabilities far greater than
those of the Company. The Company also faces competition in both the health food
store and mass market distribution channels from private label dietary
supplements and multivitamins offered by health and natural food store chains,
drugstore chains, mass merchandisers and supermarket chains.

EFFECT OF UNFAVORABLE PUBLICITY. The Company believes the dietary supplement
market is significantly affected by national media attention regarding the
consumption of dietary supplements. Future scientific research or publicity may
not be favorable to the dietary supplement industry or to any particular
product, and may not be consistent with earlier favorable research or publicity.
Because of the Company's dependence on consumers' perceptions, adverse publicity
associated with illness or other adverse effects resulting from the consumption
of the Company's products or any similar products distributed by other companies
and future reports of research that are perceived as less favorable or that
question earlier research could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is highly
dependent upon consumers' perceptions of the safety and quality of its products
as well as dietary supplements distributed by other companies. Thus, the mere
publication of reports asserting that such products may be harmful or
questioning their efficacy could have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of whether
such reports are scientifically supported or whether the claimed harmful effects
would be present at the dosages recommended for such products. See "Absence of
Conclusive Clinical Studies."

DEPENDENCE ON NEW PRODUCTS. The Company believes growth of its net sales is
substantially dependent upon its ability to introduce new products. The Company
seeks to introduce additional products each year. The success of new products is
dependent upon a number of factors, including the Company's ability to develop
products that will appeal to consumers and respond to market trends in a timely
manner. There can be no assurance that the Company's efforts to develop new
products will be successful or that consumers will


                                      18

<PAGE>


accept the Company's new products. In addition, products currently
experiencing strong popularity and rapid growth may not maintain their sales
volumes over time. For example, the Company's net sales of Kava and St.John's
Wort products fell approximately 64% during 1999, from more than $11 million
in 1998 to less than $4 million in 1999.

PRODUCT RETURNS. Product returns are a recurring part of the Company's business.
Products may be returned for various reasons including expiration dates or lack
of sufficient sales velocity. The Company accrues a reserve for returns based on
historical data. There is no guarantee that future returns will be in line with
past return percentages. As such it is possible that the Company could, at some
future time, have to accept returns substantially larger in scope than those
received in the past and that these returns could have an adverse material
effect on the Company's business, financial condition and results of operations.

DISTRIBUTION GAINS. One of the Company's prime goals is to gain additional
distribution in all channels of trade that sell vitamins and supplements to
consumers. Additional distributions gains will be necessary for the Company's
business to grow. During recent years the Company has gained substantial
additional distribution in the mass market channel of distribution, in
particular, chain drug stores. During 1999, the Company gained major new
distribution with Eckerd Drug, Rite Aid, and CVS stores, three of the largest
chain drug stores in the United States. Combined these stores have more than
10,000 outlets. The Company continues to seek distribution gains with chain drug
stores as well as with food, mass market retail, internet and convenience store
accounts. In order to maintain the Company's growth rate, additional
distribution gains are important. There is no certainty that the Company will
obtain additional distribution or will be able to maintain the distribution it
has in these retail and other retail outlets. The Company's failure to make
addition distribution gains or to maintain current distribution could have an
adverse material effect on the Company's business, financial condition and
results of operations.


GOVERNMENT REGULATION. The manufacture, packaging, labeling, advertising,
promotion, distribution and sale of the Company's products are subject to
regulation by numerous governmental agencies, the most active of which is the
U.S. Food and Drug Administration (the "FDA"), which regulates the Company's
products under the Federal Food, Drug and Cosmetic Act (the "FDCA") and
regulations promulgated thereunder. The Company's products are also subject to
regulation by, among other regulatory entities, the Consumer Product Safety
Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). Advertising and other forms of
promotion and methods of marketing of the Company's products are subject to
regulation by the U.S. Federal Trade Commission (the "FTC"), which regulates
these activities under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products are also
regulated by various state and local agencies as well as those of each foreign
country to which the Company distributes its products.

The Company's products are generally regulated as dietary supplements under the
FDCA, and are, therefore, not subject to pre-market approval by the FDA.
However, these products are subject


                                      19

<PAGE>


to extensive regulation by the FDA relating to adulteration and misbranding.
For instance, the Company is responsible for ensuring that all dietary
ingredients in a supplement are safe, and must notify the FDA in advance of
putting a product containing a new dietary ingredient (i.e., an ingredient
not marketed for use as a supplement before October 15, 1994) on the market
and furnish adequate information to provide reasonable assurance of the
ingredient's safety. Further, if the Company makes statements about the
supplement's effects on the structure or function of the body, the Company
must, among other things, have substantiation that the statements are
truthful and not misleading. In addition, the Company's product labels must
bear proper ingredient and nutritional labeling and the Company's supplements
must be manufactured in accordance with current Good Manufacturing Practice
regulations ("GMPs") for foods. The FDA has issued an advanced notice of
proposed rulemaking to consider whether to develop specific GMP regulations
for dietary supplements and dietary supplement ingredients. Such regulations,
if promulgated, may be significantly more rigorous than current requirements
and contain quality assurance requirements similar to GMPs for drug products.
A product can be removed from the market if it is shown to pose a significant
or unreasonable risk of illness or injury. Moreover, if the FDA determines
that the "intended use" of any of the Company's products is for the
diagnosis, cure, mitigation, treatment or prevention of disease, the product
would meet the definition of a drug and would require pre-market approval of
safety and effectiveness prior to its manufacture and distribution. Failure
of the Company to comply with applicable FDA regulatory requirements may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines and criminal prosecutions.

The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to, among other things,
drugs or foods, which includes dietary supplements, is an unfair or deceptive
act or practice. Under the FTC's "substantiation doctrine," an advertiser is
required to have a "reasonable basis" for all product claims at the time the
claims are first used in advertising or other promotions. Failure to adequately
substantiate claims may be considered either as a deceptive or unfair practice.
Pursuant to this FTC requirement, the Company is required to have adequate
substantiation for all advertising claims made about its products. The type of
substantiation will be dependent upon the product claims made. For example, a
health claim normally would require competent and reliable scientific evidence,
while a taste claim would require only survey evidence.

In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist dietary supplement marketers in
understanding and complying with the substantiation requirement. Upon release of
this guidance document, Natrol will be required to evaluate its compliance with
the guideline and may be required to change its advertising and promotional
practices.


                                      20

<PAGE>

On two occasions, claims made by the Company have been the subject of
investigation by the FTC. In both matters, the FTC terminated its investigation
without further action or any formal findings. The Company is not currently a
party to any investigation, consent order or other decree of the FTC. The
Company may be subject to investigation by the FTC in the future. If the FTC has
reason to believe the law is being violated (e.g., the Company does not possess
adequate substantiation for product claims), it can initiate enforcement action.
The FTC has a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process authority,
cease and desist orders and injunctions. FTC enforcement could result in orders
requiring, among other things, limits on advertising, consumer redress,
divestiture of assets, rescission of contracts and such other relief as may be
deemed necessary. Violation of such orders could result in substantial financial
or other penalties. Any such action by the FTC could materially adversely affect
the Company's ability to successfully market its products.

The Company manufactures certain products pursuant to contracts with customers
who distribute the products under their own or other trademarks. Such private
label customers are subject to government regulations in connection with their
purchase, marketing, distribution and sale of such products, and the Company is
subject to government regulations in connection with its manufacture, packaging
and labeling of such products. However, the Company's private label customers
are independent companies, and their labeling, marketing and distribution of
such products is beyond the Company's control. The failure of these customers to
comply with applicable laws or regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.

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

The Company may be subject to additional laws or regulations by the FDA or other
federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"), or more stringent
interpretations of current laws or regulations, from time to time in the future.
The Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products that cannot be reformulated, imposition of
additional record keeping requirements, expanded documentation of the properties
of certain products, or expanded or different labeling or scientific
substantiation. Any or all of these requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.

PRODUCT LIABILITY. The Company, like other retailers, distributors


                                      21

<PAGE>


and manufacturers of products designed for human consumption, faces an
inherent risk of exposure to product liability claims in the event that the
use of its products results in injury. The Company may be subjected to
various product liability claims, including, among others, that its products
include inadequate instructions for use or inadequate warnings concerning
possible side effects and interactions with other substances. In addition,
although the Company maintains strict quality controls and procedures,
including the quarantine and testing of raw materials and qualitative and
quantitative testing of selected finished products, there can be no assurance
that the Company's products will not contain contaminated substances. In
addition, in certain cases the Company relies on third party manufacturers
for its products. With respect to product liability claims, the Company has
$2.0 million in aggregate liability insurance. If such claims should exceed
$2.0 million, the Company has excess umbrella liability insurance of up to
$25.0 million. However, 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 generally seeks to obtain
contractual indemnification from parties supplying raw materials for its
products or manufacturing or marketing its products, and to be added as an
additional insured under such parties' insurance policies. Any such
indemnification or insurance, however, is limited by its terms and any such
indemnification, as a practical matter, is limited to the creditworthiness of
the indemnifying party. In the event that the Company does not have adequate
insurance or contractual indemnification, product liabilities relating to its
products could have a material adverse effect on the Company's business,
financial condition and results of operations.

DEPENDENCE ON SIGNIFICANT CUSTOMERS. No customer during 1999 accounted for more
than 10% of the Company's business. However, the Company's top 10 customers
account for approximately 51% of the Company's business. The loss of any one of
these customers would have an adverse effect on the Company's growth rate. The
Company does not have long-term contracts with any of its customers. There is no
assurance that the Company's major customers will continue as major customers of
the Company. The loss of a significant number of other major customers, or a
significant reduction in purchase volume by or financial difficulty of such
customers, for any reason, could have a material adverse effect on the Company's
business, financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued success
depends to a significant extent on the management and other skills of Elliott
Balbert, the Company's Chairman, Chief Executive Officer and President, and its
senior management team, as well as its ability to attract other skilled
personnel. The Company's employees are not covered by a non-competition
agreement, and the ability of the Company to enforce such an agreement in
California, the state in which the Company's operations are principally located,
is limited and uncertain. The loss or unavailability of the services of Mr.
Balbert or the other members of the Company's senior management team or the
inability to attract other skilled personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.

ABILITY TO MANAGE GROWTH. The Company believes that continued growth may strain
the Company's management, operations, sales and administrative personnel and
other resources. In order to serve the needs of its existing and future
customers, the Company has


                                      22


<PAGE>

increased and intends to continue to increase its workforce, which requires
the Company to attract, train, motivate, manage and retain qualified
employees. The Company's ability to manage further growth depends in part
upon the Company's ability to expand its operating, management, information
and financial systems, and production capacity, which may significantly
increase its future operating expenses. No assurance can be given that the
Company's business will grow in the future or that the Company will be able
to effectively manage such growth. The Company's inability to manage its
growth successfully could have a material adverse effect on the Company's
business, financial condition and results of operations.

RISKS ASSOCIATED WITH ACQUISITIONS. The Company completed one acquisition in
1999, two acquisitions in 1998, and, expects to pursue additional acquisitions
in the future as a part of its business strategy. The Company faces significant
competition for acquisition opportunities from numerous companies, many of which
have greater financial resources than the Company. Accordingly, there can be no
assurance that attractive acquisition opportunities will be available to the
Company. There can be no assurance that the Company will be able to obtain
financing for or otherwise consummate any future acquisitions. Moreover,
acquisitions involve numerous risks, including the risk that the acquired
business will not perform in accordance with expectations, difficulties in the
integration of the operations and products of the acquired businesses with those
of the Company, the diversion of the management's attention from other aspects
of the Company's business, the risks associated with entering geographic and
product markets in which the Company has limited or no direct prior experience
and the potential loss of key employees of the acquired business. The Company is
currently working to integrate its Prolab acquisition, completed in October
1999. The Prolab acquisition is subject to all of the risks listed above.

The acquisition of another business can also subject the Company to liabilities
and claims arising out of such business. Future acquisitions would likely
require additional financing, which would likely result in an increase in the
Company's indebtedness or the issuance of additional capital stock, which may be
dilutive to the Company's stockholders, including purchasers of shares offered
hereby.

The Company's acquisitions resulted in a significant increase in the Company's
goodwill and any future acquisitions may result in additional goodwill and
related amortization expense. At December 31, 1999, goodwill on the Company's
balance sheet was $39.5 million, 42.7% of the Company's total assets at that
date. In the event of any sale or liquidation of the Company or a portion of its
assets, there can be no assurance that the value of the Company's intangible
assets will be realized. In addition, the Company continually evaluates whether
events and circumstances have occurred indicating that any portion of the
remaining balance of the amount allocable to the Company's intangible assets may
not be recoverable. When factors indicate that the amount allocable to the
Company's intangible assets should be evaluated for possible impairment, the
Company may be required to reduce the carrying value of such assets. Any future
determination requiring the write-off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and operating results.

The Company regularly evaluates potential acquisitions of other


                                      23


<PAGE>

businesses, products and product lines and may hold discussions regarding
such potential acquisitions. As a general rule, the Company will publicly
announce such acquisitions only after a definitive agreement has been signed.

ABSENCE OF CONCLUSIVE CLINICAL STUDIES. Although many of the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, some of the Company's products
contain ingredients for which no such history exists. In addition, although the
Company believes all of its products are safe when taken as directed by the
Company, there is little long-term experience with human consumption of certain
of these product ingredients in concentrated form. Accordingly, there can be no
assurance that the Company's products, even when used as directed, will have the
effects intended or will not have harmful side effects. Any such unintended
effects may result in adverse publicity or product liability claims which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

RISKS ASSOCIATED WITH SUPPLY OF RAW MATERIALS. The Company obtains all of its
raw materials for the manufacture of its products from third-party suppliers.
Many of the raw materials used in the Company's products are harvested
internationally. With the exception of bulk garlic and Ester-C(R), thE Company
does not have contracts with any suppliers committing such suppliers to provide
the materials required for the production of its products. In the last few
years, natural vitamin E, beta carotene and Melatonin have had significant price
fluctuations as a result of short supply and/ or increases in demand. The
Company has experienced occasional shortages of raw materials for a limited
number of its products. There can be no assurance that suppliers, including
suppliers of bulk garlic and Ester-C(R), will provide the raw materials needed
by the Company in the quantities requested or at A price the Company is willing
pay. Because the Company does not control the actual production of these raw
materials, it is also subject to delays caused by interruption in production of
materials based on conditions not within its control. Such conditions include
job actions or strikes by employees of suppliers, weather, crop conditions,
transportation interruptions and natural disasters or other catastrophic events.
During 1999, BVP, the Company's supplier of bulk garlic, experienced work
stoppages due to a strike as well as supply problems due to a poor harvest of
garlic bulbs. With respect to products that are sold by the Company under the
supplier's trademark, such as Ester-C(R), the Company is limited to that single
supplier as a source of raw material for that product. As a result, any shortage
of raw materials from that supplier would adversely affect the Company's ability
to manufacture that product. The inability of the Company to obtain adequate
supplies of raw materials for its products at favorable prices, or at all, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

SALES AND EARNINGS VOLATILITY. The Company's sales and earnings continue to be
subject to volatility based upon, among other things: (i) trends and general
conditions in the dietary supplement industry and the ability of the Company to
recognize such trends and effectively introduce and market new products in
response to such trends; (ii) the introduction of new products by the Company or
its competitors; (iii) the loss of one or more significant customers; (iv)
increased media attention on the use and efficacy of dietary supplements; (v)
consumers' perceptions of the products


                                      24

<PAGE>


and operations of the Company or its competitors; and (vi) the availability
of raw materials from suppliers. Sales and earnings volatility as a result of
the foregoing factors may affect the Company's operating results from period
to period which may adversely affect the market price of the Common Stock.

POSSIBLE VOLATILITY OF STOCK PRICE. There can be no assurance that an active
market in the Company's stock will be sustained. The trading price of the Common
Stock has been subject to wide fluctuations.

The price of the Common Stock may fluctuate in the future in response to
quarter-to-quarter variations in the Company's operating results, material
announcements by the Company or its competitors, governmental regulatory action,
conditions in the dietary supplement industry, or other events or factors, many
of which are beyond the Company's control. In addition, the stock market has
historically experienced significant price and volume fluctuations which have
particularly affected the market prices of many dietary supplement companies and
which have, in certain cases, not had a strong correlation to the operating
performance of such companies. The Company's operating results in future
quarters may be below the expectations of securities analysts and investors. In
such event, the price of the Common Stock would likely decline, perhaps
substantially.

RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations are
dependent upon the continued operation of its manufacturing facility in
Chatsworth, California, at its current levels. The operation of dietary
supplement manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural and other disasters,
and the need to comply with the requirements of directives of government
agencies, including the FDA. In particular, the Company's manufacturing
facility is located in southern California, a geographic area that has
historically been prone to earthquakes, which in some cases have been
catastrophic. Prior to the Company's build-out of the building in which its
manufacturing facility is located, the building was severely damaged in a
major earthquake on January 17, 1994, the epicenter of which was within five
miles of the building. Although the building was rebuilt with an enhanced
ability to withstand earthquakes and conforms to current local and state code
requirements, the Company's manufacturing facility could be damaged or
destroyed in the event of an earthquake. Any such damage or destruction would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company carries earthquake insurance on its
manufacturing facility but does not carry such insurance on its distribution
facility. In addition, the Company's softgel and liquid products, the Laci Le
Beau tea products as well as all of Prolab's non-tablet and capsule products
are manufactured by third party contractors. The Company's profit margins on
these products and its ability to deliver these products on a timely basis
are dependent on the ability of the outside manufacturers to continue to
supply products that meet the Company's quality standards in a timely and
cost-efficient manner. The occurrence of any of the foregoing or other
material operational problems could have a material adverse effect on the
Company's business, financial condition and results of operations during the
period of such operational difficulties.

RELIANCE ON INDEPENDENT BROKERS. The Company places significant reliance on a
network of independent brokers to act as its primary


                                      25

<PAGE>


sales force to mass market retailers. Although the Company employs management
personnel, including regional sales managers, to closely monitor the brokers,
such brokers are not employed or otherwise controlled by the Company and are
generally free to conduct their business at their own discretion. Although
these brokers enter into contracts with the Company, such contracts typically
can be terminated upon 30 days notice by the Company or the independent
broker. The simultaneous loss of the services of a number of these
independent brokers could have a material adverse effect on the Company's
business, financial condition and results of operations

INTELLECTUAL PROPERTY PROTECTION. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products. The
Company relies on common law trademark rights to protect its unregistered
trademarks as well as its trade dress rights. Common law trademark rights
generally are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States. The Company intends to register its trademarks in
certain foreign jurisdictions where the Company's products are sold. However,
the protection available, if any, in such jurisdictions may not be as extensive
as the protection available to the Company in the United States.

Currently, the Company has received one United States patent for its Kavatrol
product, has a second United States patent application pending for a method of
using its Kavatrol product and has received two United States patents on its
amino acid products, SAF and SAF for Kids. To the extent the Company does not
have patents on its products, another company may replicate one or more of the
Company's products.

Although the Company seeks to ensure that it does not infringe the intellectual
property rights of others, there can be no assurance that third parties will not
assert intellectual property infringement claims against the Company. Natrol was
contacted in June 1997 by a third party that claimed Natrol's marketing of
Melatonin infringed the third party's patents relating to a method of using
Melatonin and sought to license such patents to Natrol. Since Natrol does not
believe its marketing of Melatonin infringes the third party's patent claims,
Natrol has declined to enter into a license agreement with the third party. Any
infringement claims by third parties against the Company may have a material
adverse effect on the Company's business, financial condition and results of
operations.

ITEM 2. PROPERTIES

In December 1998, the Company purchased, for $5.25 million, the 90,000 square
foot manufacturing, distribution and office facility in Chatsworth, California
it had been leasing. The Company has occupied this facility since March 1997.
The facility was designed and constructed to the Company's specifications and
includes areas for receiving, quarantine of new materials, manufacture, quality
control and laboratory activities, research and development, packaging,
warehousing and administrative offices.

On March 1, 1999 the Company commenced leasing a 26,640 square foot shipping
facility located within one-quarter mile of its headquarters facility in
Chatsworth, California. The Company vacated this building when it purchased, in
December 1999, a


                                      26

<PAGE>


132,000 square foot warehouse facility for $7.2 million. This facility is
also located within one-quarter mile of the Company's headquarters facility.
The Company has approximately two years left to fulfill on the lease of the
26,640 square foot shipping facility leased in March, 1999. The Company is
working with its real estate broker to sublease this facility. The
approximate cost to the Company of this facility is $17,000 per month.

The Company also leases 6,800 square feet of space in Chatsworth, California
that is subleased for the remainder of the term of the lease on this space.

ITEM 3. LEGAL MATTERS

From time to time the Company is subject to litigation incidental to its
business, including possible product liability claims. Such claims, if
successful, could exceed applicable insurance coverage.

The Company is not currently a party to any material legal proceedings.

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

During the fourth quarter of the calendar year 1999, no matters were submitted
to a vote of the security holders of the Company.

PART II

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

PRICE RANGE OF COMMON STOCK

The Common Stock of the Company has traded on the Nasdaq National Market under
the symbol "NTOL" since the Company's initial public offering ("IPO") in July
1998, in which 3,200,000 shares of Common Stock were issued and sold by the
Company. The Company sold an additional 295,500 shares in connection with the
underwriter's exercise of their over-allotment option in the IPO. Prior to the
IPO, there was no market for the Common Stock. On March 14, 2000, the last
reported sales price of the Company's Common Stock as reported on the Nasdaq
National Market was $6.00. As of March 24, 2000 there were 21 holders of record
of the Company's Common Stock.

The high and low sales prices for the Common Stock as reported by the Nasdaq
National Market for the period ended December 31, 1998 and the year ended
December 31, 1999 are set below:

<TABLE>
<CAPTION>

FISCAL YEAR ENDED DECEMBER 31, 1998                       HIGH           LOW
-----------------------------------                       ----           ---
<S>                                                       <C>            <C>
Quarter ended September 30, 1998 (from July 27, 1998)     $17.88         7.44
Quarter ended December 31, 1998                            15.63         6.13

FISCAL YEAR ENDED DECEMBER 31, 1999                       HIGH           LOW
-----------------------------------                       ----           ---
<S>                                                      <C>            <C>
Quarter ended March 31, 1999                             $10.63         $5.88
Quarter ended June 30,1999                                 9.03          5.75
Quarter ended September 30, 1999                           9.06          6.75
Quarter ended December 31, 1999                            9.13          7.00

</TABLE>

DIVIDEND POLICY

The Company currently intends to retain earnings to finance its operations and
future growth and does not anticipate paying dividends on its Common Stock in
the foreseeable future. Under Delaware law, the Company is permitted to pay
dividends only out of


                                      27

<PAGE>


its surplus, or, if there is no surplus, out of its net profits. The
Company's line of credit limits the Company's ability to issue dividends paid
during any fiscal year to a maximum of 25% of the Company's Cash Flow (as
defined in the loan documents) for the prior fiscal year. At some future
date, the Company may enter into similar loan agreements that have similar or
more restrictive covenants with respect to the payment of dividends to the
Company's shareholders.

RECENT SALES OF UNREGISTERED SECURITIES

On October 8, 1999, the Company issued an aggregate of 124,270 shares of Common
Stock to the then current stockholders of Prolab in connection with the
Company's acquisition of all of the issued and outstanding capital stock of
Prolab. The Company issued the shares of Common Stock to the then current
stockholders of Prolab in a private placement in reliance on Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended.


USE OF PROCEEDS

The Company completed the IPO in July 1998. The IPO was made pursuant to a
Registration Statement on Form S-1, originally filed with the Securities and
Exchange Commission on May 7, 1998, as amended (Commission File No. 333-52109),
which was declared effective on July 21, 1998. The IPO commenced on July 22,
1998 and terminated shortly thereafter after the sale into the public market of
all of the registered shares of Common Stock.

The shares of Common Stock sold in the IPO were offered for sale by a syndicate
of underwriters represented by Adams, Harkness & Hill, Inc., NationsBanc
Montgomery Securities LLC and Piper Jaffray Inc.

The Company registered an aggregate of 4,531,000 shares of Common Stock
(including 591,000 shares issuable upon the exercise of the underwriters'
overallotment option) for sale in the IPO at a per share price of $15.00, for an
aggregate offering price of approximately $68.0 million. Of the 4,531,000 shares
sold in the IPO, 3,495,500 shares were registered for the Company's account.

The Company incurred the following expenses in connection with the IPO:

<TABLE>
<S>                                                                 <C>
Underwriting discounts and commissions                              $3.67 million
Other expenses                                                      $1.05 million
Total expenses                                                      $4.72 million

</TABLE>

After deducting the expenses set forth above, the Company received
approximately $47.7 million in net proceeds from the IPO. The Company used
approximately (a) $8.4 million of the proceeds to repay in July 1998
borrowings under the Company's then existing senior credit facility with
Wells Fargo Bank, N.A., including fees and accrued and unpaid interest, (b)
$6.0 million to redeem all of the outstanding shares of the Company's
Redeemable Preferred Stock in July 1998, (c) $7.5 million to complete the
acquisition of the Laci Le Beau tea business in October 1998, (d) $5.25
million to purchase its headquarters/ manufacturing facility in December 1998

                                      28

<PAGE>


(e) and the balance to consummate the acquisition of Prolab Nutrition, Inc.
in October 1999.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data is derived from the consolidated financial
statements of Natrol, Inc. and subsidiaries, which have been audited by Ernst &
Young LLP, independent auditors. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and Notes thereto included herein.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                            -----------------------
<S>                                              <C>          <C>          <C>          <C>        <C>
                                                 1995         1996         1997         1998       1999
                                                -------      -------      -------      -------    -------
                                                         (in thousands except per share data)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales................................       $23,566      $40,802      $42,875      $68,207    $81,590
Cost of goods sold.......................        12,214       18,497       19,800       32,012     39,850
                                                -------      -------      -------      -------    -------
   Gross profit..........................        11,352       22,305       23,075       36,195     41,740
                                                -------      -------      -------      -------    -------


Selling and marketing expenses...........         4,458        8,736       11,398       17,757     18,916
General and administrative expenses......         3,378        5,431        4,450        6,513      8,542
                                                -------      -------      -------      -------    -------

   Total operating expenses..............         7,836       14,167       15,848       24,270     27,458
                                                -------      -------      -------      -------    -------
Operating income.........................         3,516        8,138        7,227       11,925     14,282
                                                -------      -------      -------      -------    -------

Interest income (expense), net...........           (19)          54         (220)         197        538
                                                -------      -------      -------      -------    -------

Income before income tax provision.......         3,497        8,192        7,007       12,122     14,820
Income tax provision.....................         1,453        2,299(1)     2,816        4,606      5,632
                                                -------      -------      -------      -------    -------
Net income...............................       $ 2,044      $ 5,893      $ 4,191      $ 7,516    $ 9,188
                                                -------      -------      -------      -------    -------

Basic earnings per share.................       $  0.34      $  0.94      $  0.59      $  0.76    $  0.69

Diluted earnings per share...............       $  0.34      $  0.83      $  0.41      $  0.63    $  0.67

Weighted average shares outstanding-basic         6,000        6,275        7,100        9,854     13,325
Weighted average shares
    outstanding-diluted..................         6,000        7,065       10,273       11,891     13,638

</TABLE>

                                      29


<PAGE>

<TABLE>
<CAPTION>

                                                                                     DECEMBER 31,
                                                                                     ------------
                                                                  1995        1996         1997     1998         1999
                                                                 ------     -------      -------   -------     -------
<S>                                                              <C>         <C>          <C>      <C>         <C>
                                                                          (in thousands except per share data)
  CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..........................              $  515     $   285      $ 1,800   $   559     $   485
Marketable securities..............................                   -           -           -     19,010           -
Working capital....................................               2,741       4,496        8,424    35,673      19,626
Total assets.......................................               7,608      11,345       19,716    68,708      92,596
Long-term debt, less current maturities............                  67         405        2,606         -       8,700
Convertible participating preferred stock..........                   -      12,000       12,000         -           -
Total stockholders' equity (deficit)...............               3,303      (5,755)      (1,564)   59,641      69,986
Cash dividend declared per common share............              $ 0.00       $0.55      $  0.00     $0.00       $0.00

</TABLE>

-----------


(1)     In 1996, the Company was taxed under Subchapter S of the Internal
        Revenue Code for the period from July 1, 1996 through September 29,
        1996, and was taxed under Subchapter C of the Internal Revenue Code for
        the period from January 1, 1996 through June 30, 1996 and for the
        period from September 30, 1996 through December 31, 1996. Accordingly,
        the provision for income taxes for the period in which the Company was
        taxed as a Subchapter S corporation reflects primarily state income
        tax, if any. If the Company had been subject to taxation under
        Subchapter C of the Code for the entire year ended December 31, 1996,
        the pro forma provision for income taxes would have been $3.2 million
        and pro forma basic earnings per share and pro forma diluted earnings
        per share would have been $0.80 and $0.71, respectively.

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

THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED CONSOLIDATED
FINANCIAL DATA" AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT.

OVERVIEW

Natrol's core business is the manufacturing and marketing of branded,
high-quality dietary supplements.

The Company sells its core products under the Natrol brand name through
multiple distribution channels throughout the United States, including
domestic health food stores and mass market drug, retail and grocery store
chains.

In addition to the core brand, Natrol sells herbal teas under the Laci Le Beau
brand name within the same channels of trade as the Natrol core brand. The
Company also markets sports nutrition products under the Prolab brand name.
Prolab products are sold primarily in the health food store channel of trade as
well as health clubs and gyms and internationally in select countries through
international distributors. The Company acquired the Laci


                                      30

<PAGE>


Le Beau brand of teas in October 1998 and the Prolab sports nutrition line of
products in October 1999. The Company is now expanding the distribution of
Prolab products into the mass market channel of trade.

Another aspect of the Company's business is the marketing of nutraceutical
grade raw materials, primarily garlic and other vegetable powders to other
manufacturers of nutritional supplement products.

The Company also manufactures certain products pursuant to contracts with
customers who distribute the products under their own private labels. Sales
to private label customers accounted for 8% of the Company's revenues for
1999. Approximately 66% of private label sales in 1999 were to one customer
which the Company believes was a one time opportunity and will not be
repeated in the year 2000. The Company's strategy with respect to private
label sales is to take advantage of its excess manufacturing capacity by
offering to manufacture products for other vendors. The Company does not
foresee adding capacity in order to meet private label demand and as such it
does not foresee private label sales growing as a percentage of its total
business.

The growth of the Company's revenue has been a result of success in gaining
additional distribution in new retail outlets and new channels of distribution;
new product introductions, as well as the addition of new product lines and
businesses through acquisition.

For example in 1995, the Company began a major effort to break into the mass
market channel of distribution. Sales in that channel have since grown to more
than 50% of the Company's branded business. Natrol products are now visible in
such stores as Walgreens, Rite Aid, Walmart, Eckerd, CVS, and Target. More
recently the Company has made progress in the internet channel of distribution.
The customer's internet customers include Vitamin Shoppes, Planetrx and
Mothernature.

Natrol's growth has been supported by the introduction of new products.
Melatonin, DHEA, St. John's Wort, and MSM were introduced in 1995, 1996,
1997, and 1998 respectively and have heavily affected sales in each of those
years as well as the year following. Typically, hot new products attract a
wide audience that drives high volumes of initial sales. These high volumes
generally taper off as fad users stop using the product. While hot products
sales can fade, sales of such products typically reach a base level that is
sustained by a core group of users. The length of these cycles can vary from
less than a year to several years. Melatonin, DHEA and St. John's Wort have
all cycled in this fashion. In each case the base level of sales fell to
below 50% of the product's peak. During 1999, for example, St John's Wort
sales decreased 51% from 1998's level. The Company is not certain that this
product has yet reached its base level and sales of St. John's Wort products
could fall further from the peak level reached in 1998. Offsetting the fall
in St. John's Wort were sales of the Company's MSM line of products
introduced in 1998 with broader distribution occurring in 1999. The Company
continually works to develop new products that can replace or supercede older
products whose popularity might be fading.

The Company has also grown through acquisitions, completing two in 1998 and one
in 1999. Each acquisition introduced the Company to


                                      31

<PAGE>

a new line of business. The EPI ingredient supply business, acquired in early
1998 (the Pure Gar acquisition) accounted for 9.9% of the Company's gross
sales in 1999. The Laci Le Beau tea business, also acquired in 1998,
accounted for approximately 8.5% of the Company's gross sales in 1999.
Prolab, which was acquired at the beginning of the fourth quarter of 1999,
accounted for 18.2% of that quarter's gross revenue. The Company anticipates
that Prolab will account for approximately 20% of the Company's gross revenue
during the year 2000.

As part of its business strategy, the Company expects to continue to consider
acquisitions that management believes are synergistic to the Company's core
business and which will be accretive to shareholders.


ACQUISITIONS DURING 1998 & 1999

During 1998, the Company completed two acquisitions.

On February 27, 1998, the Company acquired substantially all of the assets
and certain liabilities of Pure-Gar, L.P. The acquisition involved the
purchase of two brands of garlic supplements, Quintessence and Highgar Farms,
as well as a bulk ingredient business. In connection with the acquisition,
the Company recorded a purchase price of $11.0 million with $9.0 million of
goodwill which is being amortized on a straight line basis over 15 years,
amounting to $600,000 of annual amortization expense. Upon completing the
acquisition, the Company began the process of developing its own Garlipure
line of Natrol garlic supplements and then filling shelf space formerly
allocated by retailers to the acquired Highgar Farms and Quintessence lines
with its Garlipure line.

Many of the Company's ingredient customers are direct competitors to the
Company's core branded Natrol business and as such the Company maintains a
"Chinese Wall" between its Pure-Gar division and the rest of the Company. The
purpose is to ensure that Pure-Gar customer sales information is not
transferred to the rest of the Company. The Company's Pure-Gar ingredient
supply business was renamed Essentially Pure Ingredients in January, 2000.

On October 1, 1998, the Company acquired certain of the assets of Laci Le Beau
which consisted of Laci Le Beau Corporation as well as certain related
companies. The total purchase price for the acquisition was $7.5 million in
cash. Laci Le Beau is a formulator, packager and distributor of specialty teas
sold through the health channel of distribution as well as in food stores, drug
stores and mass market merchandisers. These channels of distribution are
essentially the same as those used by the Company's Natrol branded products.
Under the terms of the acquisition agreement, the Company acquired no accounts
receivable, nor did it assume any liabilities of Laci Le Beau. The acquisition
is being accounted for using the purchase method, and, accordingly, the assets
acquired are recorded at their estimated fair values. The excess of the cost of
the acquisition over the fair value of the assets purchased was approximately
$5.0 million and is being amortized over 15 years.

In October, 1999, the Company purchased all of the stock of Prolab Nutrition,
Inc. (Prolab) for $28,500,000 in cash and 124,270 shares of Common Stock. Prolab
is a formulator, packager and


                                      32

<PAGE>


marketer of sports nutrition products for body builders and health minded
individuals through gyms, health food stores and other outlets both
domestically and internationally. Included in the purchase price were assets,
consisting of cash of $2,259,722, trade accounts receivables of $3,667,046,
inventories of $2,063,180, fixed assets of 1,125,280 and other assets of
$623,054, and liabilities assumed consisting of accounts payable of
$3,667,832, accrued expenses of $2,033,960, debt of $763,836. The acquisition
was accounted for using the purchase method, and accordingly, the acquired
assets and liabilities assumed are recorded at their estimated fair values
with revenues and expenses from the date of acquisition included in the
consolidated statement of income. The excess of cost over the fair value of
net assets acquired will be amortized over twenty years. The approximately
$27 million of goodwill is not deductible for tax purposes.

CAPITAL ADDITIONS

The Company purchased a warehouse/shipping facility in 1999 for $7.2 million.
Other capital expenditures amounted to $2.1 million not including approximately
$1.1 million of property and equipment purchased as part of the Prolab
acquisition. The Company purchased its headquarters facility in December, 1998
for $5.3 million. Other capital additions in fiscal 1998 amounted to $861,000.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

NET REVENUE. Net revenue in 1999 increased 19.6% to $81.6 million from $68.2
million in 1998. Of the $13.4 million increase, $4.8 million was due to sales
generated by Prolab Nutrition, Inc. which was acquired at the beginning of
October, 1999. Another $7.2 million in sales was generated through the sale of
Laci Le Beau teas which was acquired in October 1998. During 1998, Laci Le Beau
tea sales generated $1.6 million in sales revenue. The EPI raw material
division, originally acquired in late February 1999 (the Pure-Gar acquisition)
generated $6.8 million in sales revenue during 1999. During 1998, $6.5 million
of sales revenue was generated from the sale of raw material ingredients,
primarily nutraceutical grade garlic, attributable to the acquisition of EPI.

Only one product, Ester-C(R) with approximately 11% of revenue accounted for
more than 10% of the Company's revenue. No other product accounted for more
than 10% of the Company's revenues in 1999.

GROSS PROFIT. Gross profit increased 15.3% to $41.7 million, or $5.5 million,
in 1999 versus $36.2 million in 1998. The gross margin decreased slightly to
51.2% in 1999 from 53.1% in 1998. The decrease was due primarily to shifts in
product mix, including the addition of the Laci Le Beau tea business
(operational for one quarter in 1998) and the Prolab Nutrition business each
of which operates with a lower gross margin than the Natrol core brand.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 6.5%,
or $1.1 million, to $18.9 million in 1999 from $17.8 million in 1998. As a
percentage of net sales, selling and


                                      33

<PAGE>


marketing expenses decreased to 23.2% in 1999 from 26.0% in 1998. The
decrease was due to sales growth being more rapid in percentage terms than
the growth in corresponding payroll or consumer marketing expenses.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 31.2%, or $2.0 million, to $8.5 million in 1999 from $6.5 million
in 1998. As a percentage of net sales, general and administrative expenses
increased to 10.5% in 1999 from 9.6% in 1998. Of the absolute dollar
increase, 34.4%, or $687,000, was due to the amortization of goodwill
recorded as a result of the acquisitions of Pure-Gar, Laci Le Beau and
Prolab. Another 13.5% or $272,000 was due to additional depreciation stemming
from capital additions including the purchase of the Company's headquarters
building in December 1998. The remainder was due to increased general and
administrative expenses incurred because of the acquisitions as well as
additional personnel and overhead that were added to support the Company's
growth during the year.

INTEREST INCOME (EXPENSE), NET. Net interest income for 1999 was $537,000
versus net interest income of $197,000 in 1998. Interest earned in 1999
amounted to $804,000. A portion of the interest earned was taxable as income
to the Company and a portion was non-taxable. Essentially all of the interest
expense paid during 1999 stemmed from a $3.5 mortgage, secured by the
Company's headquarters building, which was initiated in May of 1999.
Immediately after the Company's IPO, which was completed in July, 1998, the
Company retired all of its debt and began investing its surplus cash in
interest bearing investments. Total interest expense for 1998 amounted to
$407,000. Interest earned in 1998 amounted to $604,000.

INCOME TAX PROVISION. Provision for income taxes increased 22.3%, or $1.0
million, to $5.6 million in 1999 from $4.6 million in 1998. The effective tax
rate for 1999 and 1998 was 38.0%.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

NET REVENUE. Net revenue in 1998 increased 58.9% to $68.2 million from $42.9
million in 1997. Of the $25.3 million increase, $6.5 million was due to the
sale of raw material ingredients, primarily nutraceutical grade garlic,
attributable to the acquisition of Pure-Gar. Another $1.6 million in sales
were generated through the sale of Laci Le Beau teas. The remaining $17.2
million represents a 40% increase in sales of Natrol branded products. The
increase was achieved through distribution gains at the retail level as well
as additional sales from existing and new products.

Two product groupings represented 10% or more of sales in 1998; Ester-C(R) with
approximately 14% of revenue and Melatonin with approximately 10% of revenue.

Sales to Walgreens equaled 15.9% of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenues in 1998.

GROSS PROFIT. Gross profit increased 56.8% to $36.2 million, or $13.1 million,
in 1998 versus $23.1 million in 1997. The gross margin decreased slightly to
53.1% in 1998 from 53.8% in 1997. The decrease was due primarily to shifts in
product mix, including the


                                      34

<PAGE>


addition of the Pure-Gar ingredient supply business and the Laci Le Beau tea
business.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 56.1%,
or $6.4 million, to $17.8 million in 1998 from $11.4 million in 1997. As a
percentage of net sales, selling and marketing expenses decreased to 26.0% in
1998 from 26.6% in 1997. The decrease was due to sales growth being more rapid
in percentage terms than the growth in corresponding payroll or consumer
marketing expenses.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 44.4%, or $2.0 million, to $6.5 million in 1998 from $4.5 million in
1997. As a percentage of net sales, general and administrative expenses
decreased to 9.6% in 1998 from 10.4% in 1997. Of the absolute dollar increase,
30%, or $600,000, was due to the amortization of goodwill recorded as a result
of the acquisition of Pure-Gar and Laci Le Beau. The remainder was due to
increased general and administrative expenses incurred because of the two
acquisitions as well as additional personnel and overhead that were added to
support the Company's growth during the year.

INTEREST INCOME (EXPENSE), NET. Net interest income for 1998 was $197,000 versus
a net expense of $220,000 in 1997. Immediately after the Company's IPO, which
was completed in July, 1998, the Company retired all of its debt and began
investing its surplus cash in interest bearing investments. Total interest
expense for 1998 amounted to $407,000. Interest earned amounted to $604,000. A
portion of the interest earned was taxable as income to the corporation and a
portion was non-taxable.

INCOME TAX PROVISION. Provision for income taxes increased 64.2%, or $1.8
million, to $4.6 million in 1998 from $2.8 million in 1997. The effective tax
rate for 1998 was 38.0% compared to 40.2% for 1997.


LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, the Company had working capital of $19.6 million, as
compared to $35.7 million in working capital at December 31, 1998. The decrease
was primarily due to a decrease in cash and short term marketable securities
which were used to consummate the Prolab acquisition in October, 1999. Prolab
was purchased for $29 million in cash and 124,270 shares of Natrol stock.

Net cash provided by operating activities was $6.8 million for the year ended
December 31, 1999 versus cash provided of $4.5 million and $2.2 million in 1998
and 1997, respectively. The increase in net cash provided by operating
activities in 1999 compared to 1998 was primarily due to an increase in net
income earned, higher levels of depreciation and amortization, an increase in
provisions to reserves for doubtful accounts and other reserves, and a decrease
in inventory which were partially offset by higher levels of accounts receivable
and lower levels of accounts payables and other accrued expenses. The increase
in inventory balances shown on the balance sheet, from $13.4 million to $15.1
million, was primarily due to inventory acquired in the Prolab acquisition of
$2.1 million. Of the $5.8 increase in accounts receivable from $10.0 million in
1998 to $15.8 million in 1999, $3.6 million was due to the acquisition of Prolab
with the remaining $2.2 million being due to an increase in receivables for the
Company's non-


                                      35

<PAGE>


Prolab business. The increase is the result of increased sales by
the Company as well as a lengthening of the term of the average receivable. At
December 31, 1999, the Company's average trade receivable aging was
approximately 55 days versus 1998 when the average receivable aging was 54 days.

The increase in net cash provided by operating activities in 1998 compared to
1997 was primarily due to higher levels of depreciation and amortization, an
increase in provisions to reserves for doubtful accounts and other reserves and
an increase in accounts payable and other accruals which were partially offset
by higher levels of inventory balances and accounts receivable. The increase in
inventory balances, from $6.9 million to $13.4 million, was primarily due to the
purchase of larger quantities of raw materials to obtain favorable volume
discounts and the necessity to carry additional inventory to support the
Company's broader product offerings with its introduction of several new
products during the year. The increase in accounts receivable was the result of
increased sales by the Company. At December 31, 1998, the Company's average
trade receivable aging was approximately 54 days versus 1997 when the average
receivable aging was 46 days. The lengthening of the average accounts receivable
aging is due in part to changes in the Company's customer mix, which includes
ingredient supply customers and a high proportion of mass market business where,
in each case, payment terms are typically longer than in the rest of the
Company's business.

Net cash used in investing activities was $16.9 million for the year ended 1999
and $43.8 and $3.2 million in 1998 and 1997, respectively. Of the net cash used
in investing activities in 1999, the Company used $26.6 million to consummate
the acquisition of Prolab, $7.2 million was used to purchase a
warehouse/shipping facility and $2.1 million was invested in plant and equipment
and $19 million in marketable securities was liquidated. Of the net cash used in
investing activities in 1998, the Company used $11.1 million to consummate the
Pure-Gar acquisition, $7.6 million to complete the Laci Le Beau acquisition,
$5.3 million to purchase its corporate headquarters facility and invested
$861,000 in plant and equipment. The remainder of cash used in investing
activities, or $19.0 million net, was used to purchase marketable securities.
Substantially all net cash used in investing activities in 1997 constituted
capital expenditures made in connection with the build-out of the Company's
manufacturing facility/headquarters, which the Company began in 1996.

Net cash provided by financing activities was $10.0 million for the year ended
December 31, 1999, $38.1 and $2.6 million in 1998 and 1997, respectively. Net
cash provided by financing activities in the year ended December 31, 1999
consisted of $8.1 million of mortgage debt assumed in connection with the
purchase of the Company's headquarters' facility and the Company's warehouse and
shipping facility, each of which was financed during 1999 as well as $1.8
million of net borrowing from the Company's $10 million line of credit. The
remainder of cash provided was generated from the sale of Common Stock to
employees through the Company's employee stock purchase program, the exercise of
stockholder options and the repayment of a portion of a shareholder loan.

On July 27, 1998, the Company completed the IPO of 3,940,000 shares of Common
Stock priced at $15.00 per share. Of the total shares offered, 3,200,000 shares
were sold by the Company. The Company sold an additional 295,500 shares of
Common Stock on


                                      36

<PAGE>


August 6, 1998, pursuant to the underwriters' exercise of the overallotment
option granted in the IPO. The net proceeds to the Company from the IPO were
$47.7 million, including the shares sold pursuant to the underwriters'
exercise of the overallotment option. Of the net proceeds to the Company,
$8.4 million was used to repay in full long-term debt. As more fully
described in Natrol's prospectus dated July 22, 1998, all of the 27,000
shares of convertible participating preferred stock purchased by certain
investors in September 1996 were converted into 2,700,000 shares of Common
Stock of the Company and shares of redeemable preferred stock, which were
immediately redeemed for a total of $6.0 million. The redemption price of the
redeemable preferred stock was funded from the proceeds of the IPO.

Net cash provided by financing activities in the year ended December 31, 1998
consisted of net proceeds of $47.7 million from the Company's IPO $9.0 million
of borrowings to finance the acquisition of Pure-Gar in late February 1998. This
inflow of funds was offset by the repayment of $4.2 million of debt prior to the
IPO as well as the repayment of all of the Company's outstanding debt of $8.4
million in July 1998 and the redemption of $6.0 million of redeemable preferred
stock as described above.

Net cash provided by financing activities in 1997 was comprised of net
borrowings of $3.0 million to finance capital expenditures made in connection
with the build-out and equipping of the Company's manufacturing facility, which
was partially offset by $400,000 used to pay dividends to stockholders declared
in 1996.

As of the end of 1999, the Company had $10.5 million of outstanding debt. Of
this amount $1.8 million was from the Company's $10 million line of credit
established with its prime bank, Wells Fargo, N.A. and the remainder from a
mortgage on the Company's manufacturing/headquarters facility and a mortgage on
the Company's shipping facility.

The Company's cash balance at the close of 1999 was approximately $500,000. The
Company believes that this amount, together with cash generated from operations
and the cash availability from its line of credit, will be sufficient to fund
its anticipated working capital needs and capital expenditures (other than
financing necessary to complete future acquisitions, if any) for at least the
next 12 months. Future acquisitions, if any, could be funded with cash from
operations as well as future borrowings. Future borrowings may include covenants
restricting the Company's ability to issue dividends or to make additional
acquisitions. There can be no assurance that attractive acquisition
opportunities will be available to the Company or will be available at prices
and upon such other terms that are attractive to the Company. The Company
regularly evaluates the potential acquisition of other businesses, products and
product lines and may hold discussions regarding such potential acquisitions. As
a general rule, the Company will publicly announce such acquisitions only after
a definitive agreement has been signed. The Company currently has no commitments
or agreements with respect to any acquisition. In addition, in order to meet its
long-term liquidity needs or consummate future acquisitions, the Company may be
required to incur additional indebtedness or issue additional equity and debt
securities, subject to market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company or at all. The failure to raise the funds


                                      37

<PAGE>


necessary to finance its future cash requirements or consummate future
acquisitions could adversely affect the Company's ability to pursue its
strategy and could negatively affect its operations in future periods.

YEAR 2000 DISCLOSURE

In prior years, we discussed the nature and progress of our plans to become Year
2000 compliant. in mid 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and we believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. The costs
incurred to assess, remediate, and test the it and non-it systems through 1999
were primarily fixed labor costs and not significant. In addition, as we have
not yet encountered any significant Year 2000 disruptions in 2000, future costs
are also not expected to be significant. We will continue to monitor our
critical computer applications and those of our suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.

IMPACT OF INFLATION

Generally, inflation has not had a material impact on the Company's historical
operations or profitability.


ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates. The risks related to foreign currency
exchange rates are immaterial and the Company does not use derivative financial
instruments.

The Company is subject to interest rate market risk associated with its variable
rate line of credit and fixed rate long-term debt. Given the short-term nature
and variable rates on borrowings on the line, the Company does not believe that
the risk is significant. Additionally, the Company does not believe that the
risk is significant for its long-term debt due to the low fixed rate and
insignificance of the long-term debt to the Company's consolidated balance
sheet.


ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of Independent Accountants and 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


                                      38

<PAGE>


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
June 13, 2000.

PART IV

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

<TABLE>
<S>                                                                                                   <C>
(a)(1)              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:                                       PAGE(S)

                    Report of Independent Auditors.................................................     F-1

                    Consolidated Balance Sheets as of December 31, 1999 and 1998...................     F-2
                    Consolidated Statements of Income for the years ended
                         December 31, 1999, 1998 and 1997..........................................     F-3
                    Consolidated Statements of Stockholders' Equity for the years ended
                         December 31, 1999, 1998 and 1997..........................................     F-4
                    Consolidated Statements of Cash Flows for the years ended
                         December 31, 1999, 1998 and 1997..........................................     F-5
                    Notes to Consolidated Financial Statements.....................................     F-7

(a)(2)              Index to Consolidated Financial Statement Schedules:

                  All schedules for which provision is made in the applicable
                  accounting regulations of the Securities and Exchange
                  Commission are not required under the related instructions or
                  are not material, and therefore have been omitted.


(a)(3)            INDEX TO EXHIBITS:

         (2)      Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

                  2.1      Asset Purchase Agreement by and among Natrol
                           Acquisition Corp., the Company, Laci Le Beau
                           Corporation, Shay Lee Corporation, and the
                           Nutrition Products Trust of 1995 dated as of
                           September 18, 1998 (incorporated herein by
                           reference to Item 7(c) of the Company's Current
                           Report on Form 8-K report filed October 9, 1998)

                  2.2      Stock Purchase  Agreement by and among Natrol,
                           Inc., Thomas E. Roark, John Yves Morin, Dwight
                           Otis, Andrew M Esposito, Jr. and Prolab Nutrition,
                           Inc. dated as of October 8, 1999 (incorporated
                           herein by reference to Item 7 (c) of the Company's
                           Current Reports on Form 8-K filed October 19, 1999.

         (3)      Articles of Incorporation and By-Laws:

                  3.1      The Third Amended and Restated Certificate of
                           Incorporation of the Company incorporated herein
                           by reference to Exhibit 3.1 to the Company's
                           Annual Report on Form 10-K, as amended, filed on
                           March 31, 1999.

</TABLE>

                                      39

<PAGE>
<TABLE>

                  <S>                                                                <C>
                  3.2      The Amended and Restated By-Laws of the Company
                           (incorporated herein by reference to Exhibit 3.6 to
                           the Company's Registration Statement on Form S-1, as
                           amended, File No. 333-52109).

         (4)      Instruments Defining the Rights of Security Holders, Including
                  Indentures:

                  4.1      Specimen Stock Certificate for shares of Common
                           Stock, $.01 par value, of the Company (incorporated
                           herein by reference to Exhibit 4.1 to the Company's
                           Registration Statement on Form S-1, as amended, File
                           No. 333-52109).

(10)     Material Contracts

                  10.1     Natrol, Inc. Amended and Restated 1996 Stock Option
                           Plan (incorporated herein by reference to Exhibit
                           10.2 to the Company's Registration Statement on Form
                           S-1, as amended, File No. 333-52109);

                  10.2     Natrol, Inc. 1998 Employee Stock Purchase Plan
                           (incorporated herein by reference to Exhibit 10.3 to
                           the Company's Registration Statement on Form S-1, as
                           amended, File No. 333-52109);

                  10.3     Form of Indemnification Agreement between Natrol,
                           Inc. and each of its directors (incorporated herein
                           by reference to Exhibit 10.4 to the Company's
                           Registration Statement on Form S-1, as amended, File
                           No. 333-52109);

                  10.4     Restricted Stock Agreement, dated November 14, 1996,
                           by and between Natrol, Inc. and Dennis R. Jolicoeur
                           (incorporated herein by reference to Exhibit 10.5 to
                           the Company's Registration Statement on Form S-1, as
                           amended, File No. 333-52109);

                  10.5     Promissory Note of Dennis R. Jolicoeur, dated
                           November 14, 1996 (incorporated herein by reference
                           to Exhibit 10.6 to the Company's Registration
                           Statement on Form S-1, as amended, File No.
                           333-52109);

                  10.6     Pledge Agreement, dated November 14, 1996, by and
                           between Natrol, Inc. and Dennis R. Jolicoeur
                           (incorporated herein by reference to Exhibit 10.7 to
                           the Company's Registration Statement on Form S-1, as
                           amended, File No. 333-52109);

                  10.7     Form of Stock Option Agreement (incorporated herein
                           by reference to Exhibit 10.9 to the Company's
                           Registration Statement on Form S-1, as amended, File
                           No. 333-52109);

                  10.8     Supply Agreement, dated as of February 8, 1998, by
                           and between the Company and Basic Vegetable Products,
                           L.P. (incorporated herein by reference to Exhibit
                           10.10 to the Company's Registration Statement on Form
                           S-1, as amended, File No. 333-52109);

                  10.9     Distributorship/Packager/Supply Agreement, dated as
                           of January 1, 1995, by and between the Company and
                           Inter-Cal Corporation (incorporated herein by
                           reference to Exhibit 10.11 to the Company's
                           Registration Statement on Form S-1, as amended, File
                           No. 333-52109);

                  10.10    Letter Agreement dated July 18, 1997 between the
                           Company and Jon J. Denis (incorporated herein by
                           reference to Exhibit 10.12 to the Company's
                           Registration Statement on Form S-1, as amended, File
                           No. 333-52109);

                  10.11    Description of Salary and Incentive Bonus
                           Arrangements for Dennis R. Jolicoeur, Cheryl R.
                           Richitt and Gary P. DeMello (incorporated herein by
                           reference to Exhibit 10.13 to the Company's
                           Registration Statement on Form S-1, as amended, File
                           No. 333-52109);

</TABLE>
                                      40


<PAGE>

<TABLE>
                  <S>                                                               <C>

                  10.12    Purchase and Sale Agreement between WHLW Real Estate
                           Limited Partnership, Natrol Real Estate, Inc. and
                           incorporated herein by reference to Exhibit 10.21 to
                           the Company's Annual Report on Form 10-k as amended,
                           filed on March 31, 1999.

                  10.13    Purchase and Sale Agreement between WHLW Real Estate
                           Limited Partnership, Natrol Real Estate, Inc. II, filed
                           herewith as Exhibit 10.13.

                  (21.1)   Subsidiaries of Natrol, Inc.: A list of Subsidiaries
                           of the Company is filed herewith as Exhibit 21.1.

                  (23.1)   Consent of Experts and Counsel: Consent of Ernst &
                           Young LLP is filed herewith as Exhibit 23.1.

                  (27.1)   Financial Data Schedule: The Financial Data Schedule
                           is filed herewith as Exhibit 27.1.

                     (b)   REPORTS ON FORM 8-K:

                           The registrant filed the following Current Reports on Form 8-K
                           during the three month period ended December 31, 1999:

                           1.     On October 19, 1999, the Company filed a Current Report
                                  on Form 8-K announcing that on October 8, 1999, the
                                  Company had purchased all of the capital stock of
                                  Prolab Nutrition, Inc. pursuant to a Stock Purchase
                                  Agreement dated October 8, 1999.

                            2.    On December 21, 1999, the Company filed an amendment to
                                  a Current Report on Form 8-K/A filing the Financial
                                  Statements of Prolab Nutrition, Inc. as of September
                                  30, 1999 and for the nine months then ended as Exhibit
                                  99.1, the financial statements of Prolab Nutrition,
                                  Inc. as of December 31, 1998 and for the year ended as
                                  Exhibit 99.2, and the Pro Forma Consolidated Financial
                                  statements of Natrol, Inc. as of and for the nine
                                  months ended September 30, 1999 and Consolidated
                                  Statement of Income for the year ended December 31,
                                  1998 as Exhibit 99.3.
</TABLE>

                                      41

<PAGE>


                                    SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, this 30th day of
March, 2000.

                                                       Natrol, Inc.


                                                By:/S/ ELLIOTT BALBERT
                                                ----------------------
                                                       Elliott Balbert
                                                       President and
                                                       Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURES                                    TITLE                            DATE SIGNED
-----------------------            ----------------------------              --------------
<S>                                <C>                                       <C>

/S/ELLIOTT BALBERT                 Chairman of the Board,                    March 30, 2000
-----------------------
Elliott Balbert                    Chief Executive Officer,
                                   President and Director
                                   (Principal Executive Officer)

/S/DENNIS R. JOLICOEUR             Chief Financial Officer,                  March 30, 2000
-----------------------
Dennis R. Jolicoeur                Executive Vice President
                                   and Director (Principal
                                   Financial Officer and
                                   Principal Accounting
                                   Officer)

/S/NORMAN KAHN                     Director                                  March 30, 2000
Norman Kahn

/S/DAVID LAUFER                    Director                                  March 30, 2000
David Laufer

/S/ P. ANDREWS MCLANE              Director                                  March 30, 2000
Andrews McLane
-----------------------

/S/ DENNIS DECONCINI               Director                                  March 30, 2000
----------------------
Dennis DeConcini                                                             March 30, 2000

/S/ KRAIG KITCHIN                  Director                                  March 30, 2000
----------------------
Kraig Kitchin
</TABLE>

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Natrol, Inc.

We have audited the accompanying consolidated balance sheets of Natrol, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the years in the three year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Natrol, Inc.
and subsidiaries at December 31, 1999 and 1998 and the consolidated results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.


                                                 ERNST & YOUNG LLP


February 16, 2000
Woodland Hills, California

                                      F-1

<PAGE>



                                  Natrol, Inc.

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                  DECEMBER 31
                                                                            1999              1998
                                                                     --------------------------------------
<S>                                                                  <C>                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                           $       485,144   $       559,424
   Marketable securities                                                             -        19,010,826
   Accounts receivable, net of allowances of $502,500 and $332,000
     at December 31, 1999 and 1998, respectively                            15,776,613         9,987,002
   Inventories                                                              15,060,793        13,437,455
   Deferred taxes                                                            1,076,076         1,214,076
   Prepaid expenses and other current assets                                 1,028,213           499,366
                                                                     --------------------------------------
Total current assets                                                        33,426,839        44,708,149

Property and equipment:
   Building and improvements                                                15,455,692         6,881,707
   Machinery and equipment                                                   5,286,859         3,826,351
   Furniture and office equipment                                            1,655,290         1,238,749
                                                                     --------------------------------------
                                                                            22,397,841        11,946,807
   Accumulated depreciation and amortization                                (2,869,722)       (1,756,182)
                                                                     --------------------------------------
                                                                            19,528,119        10,190,625

Goodwill, net of accumulated amortization of $1,863,147 and $588,168
   at December 31, 1999 and 1998                                            39,543,440        13,774,701
Capitalized loan fees, net of accumulated amortization of $2,258 at
   December 31, 1999                                                            48,559                 -
Other assets                                                                    48,981            34,365
                                                                     --------------------------------------
Total assets                                                           $    92,595,938   $    68,707,840
                                                                     ======================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Line of credit                                                      $     1,800,000   $             -
   Accounts payable                                                          7,826,629         5,943,224
   Accrued expenses                                                          2,143,044         2,066,935
   Accrued payroll and related liabilities                                   1,687,741           804,623
   Income taxes payable                                                        181,790           220,135
   Current portion of long-term debt                                           160,900                 -
                                                                     --------------------------------------
Total current liabilities                                                   13,800,104         9,034,917

Deferred income taxes, noncurrent                                              109,475            32,013
Long-term debt, less current portion                                         8,700,110                 -

Commitments

Stockholders' equity:
   Preferred stock, par value of $0.01 per share:
     Authorized shares - 2,000,000
     Issued and outstanding shares - none                                            -                 -
   Common stock, par value of $0.01 per share:
     Authorized shares - 50,000,000
     Issued and outstanding shares -  13,474,035 and 13,301,990 at
       December 31, 1999 and 1998, respectively                                134,740           133,020
   Additional paid-in capital                                               61,334,380        60,187,301
   Retained earnings (deficit)                                               9,071,192          (116,911)
                                                                     --------------------------------------
                                                                            70,540,312        60,203,410
   Receivable from stockholder                                                (554,063)         (562,500)
                                                                     --------------------------------------
Total stockholders' equity                                                  69,986,249        59,640,910
                                                                     --------------------------------------
Total liabilities and stockholders' equity                             $    92,595,938   $    68,707,840
                                                                     ======================================
</TABLE>
SEE ACCOMPANYING NOTES.

                                     F-2

<PAGE>



                                  Natrol, Inc.

                        Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31
                                                            1999               1998              1997
                                                  ---------------------------------------------------------
<S>                                                 <C>                <C>               <C>
Net sales                                           $    81,589,935    $    68,206,585   $    42,874,759
Cost of goods sold                                       39,849,632         32,011,641        19,799,712
                                                  ---------------------------------------------------------
Gross profit                                             41,740,303         36,194,944        23,075,047

Selling and marketing expenses                           18,915,663         17,757,395        11,398,390
General and administrative expenses                       8,542,308          6,513,094         4,450,244
                                                  ---------------------------------------------------------
Total operating expenses                                 27,457,971         24,290,489        15,848,634
                                                  ---------------------------------------------------------
Operating income                                         14,282,332         11,924,455         7,226,413

Interest income                                             803,855            604,871            20,695
Interest expense                                           (266,668)          (407,452)         (240,250)
                                                  ---------------------------------------------------------
Income before income tax provision                       14,819,519         12,121,874         7,006,858
Income tax provision                                      5,631,416          4,606,323         2,816,158
                                                  ---------------------------------------------------------
Net income                                          $     9,188,103    $     7,515,551   $     4,190,700
                                                  =========================================================


Basic earnings per share                                      $0.69              $0.76             $0.59
                                                  =========================================================
Diluted earnings per share                                    $0.67              $0.63             $0.41
                                                  =========================================================
Weighted average shares outstanding - basic              13,324,510          9,854,411         7,100,000
                                                  =========================================================
Weighted average shares outstanding - diluted            13,637,653         11,890,513        10,272,859
                                                  =========================================================
</TABLE>
SEE ACCOMPANYING NOTES.


                                     F-3
<PAGE>


                                  NATROL, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                           Redeemable                                      Additional
                                                        Preferred Stock             Common Stock            Paid-In
                                                      Shares      Amount        Shares        Amount        Capital
                                                    --------------------------------------------------------------------
<S>                                                  <C>         <C>          <C>            <C>           <C>
Balance at January 1, 1997                                  -    $       -      7,100,000    $  71,000     $  559,500
     Net income                                             -            -            -             -             -
                                                    --------------------------------------------------------------------
Balance at December 31, 1997                                -            -      7,100,000       71,000        559,500
     Issuance of Common Stock at $15 per share
       (net of approximately $4,720,000 of
       offering costs)                                      -            -      3,495,500       34,955     47,605,218
     Conversion of convertible participating
       preferred stock to Common Stock                      -            -      2,700,000       27,000     11,973,000
     Conversion to convertible participating
       stock to redeemable preferred stock             13,500    6,000,000              -            -              -
     Redemption of redeemable preferred stock         (13,500)  (6,000,000)             -            -              -
     Issuance of Common Stock under employee
       stock purchase plan                                  -            -          6,490           65         49,583
     Net income                                             -            -              -            -              -
                                                    --------------------------------------------------------------------
Balance at December 31, 1998                                -            -     13,301,990      133,020     60,187,301
     Exercise of stock options                              -            -         29,000          290         54,085
     Shares issued in connection with Prolab
       acquisition                                          -            -        124,270        1,243        977,383
     Issuance of Common Stock under employee
       stock purchase plan                                  -            -         18,775          187        115,611
     Payments on shareholder loan                           -            -              -            -              -
     Net income                                             -            -              -            -              -
                                                    --------------------------------------------------------------------
Balance at December 31, 1999                                -    $       -     13,474,035   $  134,740    $61,334,380
                                                    ====================================================================


                                                        Retained       Receivable
                                                        Earnings          from
                                                        (Deficit)     Stockholder        Total
                                                    ------------------------------------------------

Balance at January 1, 1997                             $(5,823,162)    $ (562,500)     $(5,755,162)
     Net income                                          4,190,700            -         4,190,700
                                                    ------------------------------------------------
Balance at December 31, 1997                            (1,632,462)      (562,500)      1,564,462
     Issuance of Common Stock at $15 per share
       (net of approximately $4,720,000 of
       offering costs)                                           -              -      47,640,173
     Conversion of convertible participating
       preferred stock to Common Stock                           -              -      12,000,000
     Conversion to convertible participating
       stock to redeemable preferred stock              (6,000,000)             -               -
     Redemption of redeemable preferred stock                    -              -      (6,000,000)
     Issuance of Common Stock under employee
       stock purchase plan                                       -              -          49,648
     Net income                                          7,515,551              -       7,515,551
                                                    ------------------------------------------------
Balance at December 31, 1998                              (116,911)      (562,500)     59,640,910
     Exercise of stock options                                   -              -          54,375
     Shares issued in connection with Prolab
       acquisition                                               -              -         978,626
     Issuance of Common Stock under employee
       stock purchase plan                                       -              -         115,798
     Payments on shareholder loan                                -          8,437           8,437
     Net income                                          9,188,103              -       9,188,103
                                                    ------------------------------------------------
Balance at December 31, 1999                           $ 9,071,192    $  (554,063)    $69,986,249
                                                    ================================================
</TABLE>
SEE ACCOMPANYING NOTES.


                                        F-4
<PAGE>

                                  Natrol, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>


                                                                         YEAR ENDED DECEMBER 31
                                                                1999              1998             1997
                                                          -----------------------------------------------------
OPERATING ACTIVITIES
<S>                                                             <C>               <C>              <C>
Net income                                                  $    9,188,103   $    7,515,551    $    4,190,700
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                               1,115,797          837,014           690,335
     Amortization of goodwill                                    1,274,979          588,168                 -
     Provision for bad debts and returns                           170,630           69,230         1,002,683
     Deferred taxes                                                215,462         (700,947)          138,163
     Changes in operating assets and liabilities:
       Accounts receivable                                      (2,293,195)      (3,387,913)       (1,440,220)
       Inventories                                                 439,842       (3,335,621)       (3,059,881)
       Income taxes receivable/payable                          (1,712,624)        (201,948)          600,944
       Prepaid expenses and other current assets                  (522,980)        (158,717)         (140,126)
       Deposits                                                    (14,616)          24,337             9,570
       Accounts payable                                         (1,784,427)       1,686,466           878,849
       Accrued expenses                                           (166,385)       1,167,624          (899,368)
       Accrued payroll and related liabilities                     883,118          390,936           167,183
                                                          -----------------------------------------------------
Net cash provided by operating activities                        6,793,704        4,494,180         2,138,832

INVESTING ACTIVITIES
Assets purchased, net of liabilities assumed in
   connection with acquisitions                                (26,578,024)     (18,697,869)                -
Purchases of marketable securities                             (69,203,000)     (99,153,298)                -
Sales of marketable securities                                  88,213,826       80,142,472                 -
Purchases of property and equipment                             (9,325,753)      (6,111,223)       (3,219,650)
                                                          -----------------------------------------------------
Net cash used in investing activities                          (16,892,951)     (43,819,918)       (3,219,650)

FINANCING ACTIVITIES
Net borrowings on line of credit                                 1,800,000                -                 -
Proceeds from long-term debt                                     8,900,000        9,000,000         4,000,000
Repayments on long-term debt                                      (802,826)     (12,604,861)       (1,004,167)
Capitalized loan fees                                              (50,817)               -                 -
Repayments on shareholder loan                                       8,437                -                 -
Proceeds from issuance of Common Stock, net of issuance
   costs                                                           170,173       47,689,821                 -
Redemption of redeemable preferred stock                                 -       (6,000,000)                -
Dividends paid to stockholders                                           -                -          (400,000)
                                                          -----------------------------------------------------
Net cash provided by financing activities                       10,024,967       38,084,960         2,595,833
                                                          -----------------------------------------------------
Net increase (decrease) in cash and cash equivalents               (74,280)      (1,240,778)        1,515,015
Cash and cash equivalents, beginning of year                       559,424        1,800,202           285,187
                                                          -----------------------------------------------------
Cash and cash equivalents, end of year                      $      485,144   $      559,424    $    1,800,202
                                                          =====================================================

</TABLE>


                                     F-5
<PAGE>

                                  Natrol, Inc.

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>

                                                                         YEAR ENDED DECEMBER 31
                                                                1999              1998             1997
                                                          -----------------------------------------------------
<S>                                                            <C>                <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
       Cash paid during the year for:
       Interest                                             $      266,668   $      407,452    $      240,250
       Income taxes                                         $    6,624,087   $    5,509,261    $    2,215,000

</TABLE>

SUPPLEMENTAL NON-CASH TRANSACTION:
In October 1999, the Company issued 124,270 shares of Common Stock valued at
$978,626 in connection with its acquisition of Prolab, Nutrition, Inc.

In July 1998, upon completion of the Company's initial public offering, all of
the convertible participating preferred stock then outstanding converted into
2,700,000 shares of Common Stock and 13,500 shares of redeemable preferred
stock.

SEE ACCOMPANYING NOTES.


                                     F-6
<PAGE>



                                  Natrol, Inc.

                   Notes To Consolidated Financial Statements

                                December 31, 1999


1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS AND PRESENTATION

Natrol, Inc. (collectively with its subsidiaries, referred to as the Company)
manufactures and markets branded, high-quality dietary supplement products,
including vitamins, minerals, hormonal supplements, herbal products, specialty
combination formulations and sports nutrition supplements. The Company primarily
sells its products under the Natrol and Prolab brand names through multiple
distribution channels throughout the United States, including domestic health
food stores and mass market drug, retail and grocery store chains.

On January 15, 1998, the Company reincorporated itself in the State of Delaware.
Effective with the reincorporation, a ten-for-one reverse stock split occurred
affecting all classes of stock then outstanding. The Company's Board of
Directors approved a one hundred-for-one stock split of the Company's Common
Stock which became effective on June 19, 1998. All references in the
accompanying consolidated financial statements to the number of shares of Common
Stock and per common share amounts have been retroactively adjusted to reflect
the stock splits. In addition, the Company's capital structure was changed
effective June 19, 1998 to reflect 50,000,000 shares of Common Stock and was
further changed to authorize an additional 2,000,000 shares of preferred stock.
The Board of Directors has authority to fix the rights, preferences, privileges
and restrictions, including voting rights, of these shares of preferred stock
without any future vote or action by the shareholders.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts and operations of
Natrol, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts have been eliminated in consolidation.

ESTIMATES AND ASSUMPTIONS

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could


                                  F-7
<PAGE>

                               Natrol, Inc.

                   Notes To Consolidated Financial Statements

                               December 31, 1999


differ from those estimates, although management does not believe that any
differences would materially affect the Company's consolidated financial
position or results of operations.

CASH EQUIVALENTS

The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.


                                    F-8
<PAGE>

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

MARKETABLE SECURITIES

At December 31, 1998, marketable securities consisted of certificates of
deposits, commercial paper and corporate and municipal bonds in the amounts of
$4,086,958, $2,458,846 and $12,465,022, respectively. The Company did not hold
any marketable securities at December 31, 1999.

In accordance with Statement on Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. All marketable securities were classified as "available-for-sale"
securities at December 31, 1998. Available-for-sale securities are carried at
fair value with unrealized gains and losses reported as other comprehensive
income. Net unrealized gains and losses were not material to the consolidated
financial statements as of December 31, 1998, and therefore no amounts are
recorded in other comprehensive income. Realized gains and losses on investment
transactions are recognized when realized based on settlement dates and recorded
as interest income. Interest and dividends on securities are recognized when
earned.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
ranging from five to ten years for furniture, machinery and equipment. Buildings
and improvements are depreciated using straight-line methods over five to forty
years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated lives of the assets or
the lease terms.

TRADEMARKS AND PATENTS

Costs of obtaining trademarks and patents are capitalized and amortized using
the straight-line basis over the estimated useful life of eleven years.
Trademarks and patents are included in other assets at $50,500 and $40,500 at
December 31, 1999 and 1998, respectively, net of accumulated amortization of
$29,245 and $25,295 at December 31, 1999 and 1998, respectively. The costs of
servicing the Company's patents and trademarks are expensed as incurred.


                                  F-9
<PAGE>

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LONG-LIVED ASSETS

The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. In an impairment is indicated, the amount of the loss to be
recorded is based on an estimate of the difference between the carrying amount
and the fair value of the asset. Fair value is based upon discounted estimated
cash flows expected to result from the use of the asset and its eventual
disposition and other valuation methods. No such impairment losses have been
identified by the Company for the periods presented.

INCOME TAXES

The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between enacted rates and laws that will be in effect when the differences are
expected to reverse. Deferred taxes arising from temporary differences that are
not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse.

REVENUE RECOGNITION

The Company sells its products to retail outlets through a direct sales force
and a national broker network. Sales are recorded when products are shipped to
customers by the Company. Net sales represent products shipped, less estimated
returns and allowances for which provisions are made at the time of sale.
Generally the returns and allowances are limited to damaged goods and the
estimates recorded are based upon known claims and an estimate of additional
returns.

ADVERTISING COSTS

Advertising and promotional costs are expensed at first showing. In addition,
the Company advertises on a cooperative basis by accruing an obligation to
reimburse retailers for qualified advertising of Company products. The Company
provides for cooperative advertising obligations in the same period as the
related revenue is recognized. Advertising and promotional costs amounted to
$10,936,242, $10,942,024 and $6,944,454, respectively, for the years ended
December 31, 1999, 1998 and 1997.



                                   F-10
<PAGE>

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT COSTS

The Company incurs research and development costs relating to the development of
its dietary supplement products. Research and development costs are expensed as
incurred and amounted to $417,552, $433,549 and $357,064 for the years ended
December 31, 1999, 1998 and 1997, respectively. Research and development costs
are included in general and administrative expenses on the consolidated
statements of income.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees."

EARNINGS PER SHARE

The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share." Basic earnings per share have been computed by dividing
net income by the weighted average number of common shares outstanding. Diluted
earnings per share have been computed by dividing net income by securities or
other contracts to issue Common Stock as if these securities were exercised or
converted to Common Stock.



                                   F-11
<PAGE>

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE (CONTINUED)

The following table sets forth the calculation for basic and diluted earnings
per share for the periods indicated:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                      1999            1998             1997
                                                --------------------------------------------------
Earnings:
   Net income                                     $   9,188,103   $   7,515,551    $   4,190,700
                                                ==================================================
<S>                                                  <C>              <C>              <C>
Shares:
   Weighted average shares for basic earnings
     per share                                       13,324,510       9,854,411        7,100,000
   Conversion of convertible participating
     preferred stock                                          -       1,494,247        2,700,000
   Share equivalent for redeemable preferred
     stock                                                    -         255,247          461,538
   Stock options                                        313,144         286,429           11,321
                                                --------------------------------------------------
   Weighted average shares for diluted earnings
     per share                                       13,637,653      11,890,513       10,272,859
                                                ==================================================
</TABLE>

Shares issuable under stock options of 615,000 and 445,000 at December 31, 1999
and 1998, respectively, have been excluded from the computation of diluted
earnings per share because the effect would be antidilutive.

COMPREHENSIVE INCOME

In June 1997, SFAS 130 "Reporting Comprehensive Income" was issued. The
provisions of SFAS 130 require companies to classify items of comprehensive
income by their nature in financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings in the
financial statements. The Company's comprehensive income items are not material
at December 31, 1999, 1998 or 1997 and therefore no disclosures have been made.


                                    F-12
<PAGE>

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MAJOR CUSTOMERS

No customers had net sales which individually represented 10% or more of total
Company net sales during the year ended December 31, 1999. The Company had net
sales to one customer which individually represented 15.9% of total Company net
sales during the year ended December 31, 1998 and two customers which
individually represented 17.8% and 11.6%, respectively, of total Company net
sales during the year ended December 31, 1997.

MAJOR PRODUCTS

The Company's sales of one product comprised 11.5% of net sales during the year
ended December 31, 1999. The Company's sales of two products each comprised
approximately 14.0% and 10.0%, respectively, of net sales during the year ended
December 31, 1998. The Company's sales of two products each comprised
approximately 17.1% and 17.7%, respectively, of net sales during the year ended
December 31, 1997.

CONCENTRATION OF CREDIT RISK

Concentrations of credit risk with respect to trade receivables, other than
significant customers previously discussed, are limited, due to the distribution
of sales over a large customer base. The Company performs periodic credit
evaluations of its customers' financial conditions and generally does not
require collateral. Credit losses have been within management's expectations.

SEGMENT REPORTING

Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the reported results of operations
or financial position. In addition, the adoption of the new statements did not
affect disclosures of segment information as the Company is engaged principally
in one line of business, the manufacturing and marketing of high-quality dietary
supplement products, including vitamins, minerals, herbs and specialty
formulations, weight control products and hormones, which represents more than
90% of consolidated sales.


                                  F-13
<PAGE>

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the presentation in 1999.

2. ACQUISITIONS

In October 1999, the Company purchased all of the outstanding shares of stock
of Prolab Nutrition, Inc. (Prolab) for $28,500,000 in cash, excluding
acquisition costs, and 124,270 shares of the Company's Common Stock. Prolab is
a distributor, manufacturer and marketer of food supplement products which
are sold primarily to distributors, wholesalers and retailers located
throughout the United States and also on a worldwide basis. Included in the
purchase price were assets, consisting primarily of cash of $2,259,722, trade
accounts receivable of $3,667,046, inventories of $2,063,180, fixed assets of
$1,125,280 and other assets of $623,054, and liabilities assumed consisting
primarily of accounts payable of $3,667,832, accrued expenses of $2,033,960
and debt of $763,836. The acquisition was accounted for using the purchase
method, and accordingly, the acquired assets and liabilities assumed are
recorded at their estimated fair values with revenues and expenses from the
date of acquisition included in the consolidated statements of income. The
excess of cost over the fair value of net assets acquired of $27,041,662 will
be amortized over twenty years. Amortization expense for the Prolab
acquisition for the year ended December 31, 1999 was $334,983 and is included
in general and administrative expenses.

On October 31, 1998, the Company completed the acquisition of certain of the
assets of Laci Le Beau Tea Company of Fresno, California, which consists of Laci
Le Beau, Inc., a California corporation, as well as certain related companies
(Laci Le Beau). The total purchase price for the acquisition was $7,500,000 in
cash. Laci Le Beau is a formulator, packager and distributor of specialty teas
sold through the health channel of distribution as well as in food stores, drug
stores and mass market merchandisers. These channels of distribution are
essentially the same as the Company's channels of distribution. Assets purchased
consisted primarily of inventories of $2,146,526, as well as fixed assets of
$153,474 and intangible assets of the business of $5,200,000. No liabilities
were assumed. The acquisition was accounted for using the purchase method, and
accordingly, the acquired assets are recorded at their estimated fair values
with revenues and expenses from the date of acquisition included in the
consolidated statement of income. The excess of cost over the fair value of
assets acquired will be amortized over fifteen years. Amortization expense for
the years ended December 31, 1999 and 1998 was $399,996 and $88,168,
respectively, and is included in general and administrative expenses.


                                  F-14
<PAGE>

2. ACQUISITIONS (CONTINUED)

On February 27, 1998, the Company purchased substantially all of the assets and
assumed certain liabilities of Pure-Gar L.P. (Pure-Gar), a distributor of bulk
dehydrated vegetable products and dietary supplements, for a total purchase
price of $11,085,736, which included $85,736 of deferred acquisition costs.
Assets purchased include accounts receivable of $1,271,694 and inventories of
$1,021,127, as adjusted for purchase price accounting adjustments through
December 31, 1998, as well as fixed assets of $131,091 and intangible assets of
the business of $8,965,000. Liabilities assumed consisted primarily of trade
payables of $388,912. In addition, the Company entered into long-term supply and
royalty agreements with the seller. The supply agreement requires the seller to
sell and the Company to purchase specified amounts of certain vegetable, fruit,
herbal and botanical products (the "Products") manufactured by the seller. The
supply agreement gives the Company the exclusive right to sell certain Products
in the dietary supplement industry. The supply agreement may be terminated by
either party upon a material breach of the obligations of the other party, or
certain other specified conditions, if the breach is not cured within 60 days,
or 15 days in the case of nonpayment by the Company. The acquisition was
accounted for using the purchase method, and accordingly, the acquired assets
and liabilities are recorded at their estimated fair values with revenues and
expenses from the date of acquisition included in the consolidated statement of
income. The excess of cost over the fair value of assets acquired will be
amortized over fifteen years. Amortization expense for the years ended December
31, 1999 and 1998 was $600,000 and $500,000, respectively, and is included in
general and administrative expenses.

The following pro forma information presents a summary of consolidated
results of operations of the Company as if the acquisition of Prolab had
occurred at the beginning of the years ended December 31, 1999 and 1998 and
the acquisitions of Laci Le Beau and Pure-Gar had occurred at the beginning
of the years ended December 31, 1998 and 1997, with pro forma adjustments for
the amortization of goodwill, interest expense and certain income tax
adjustments. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
acquisitions been effected on the assumed dates or of future results of the
combined entities.

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                       1999              1998              1997
                                                --------------------------------------------------------
<S>                                                    <C>              <C>                <C>
                                                                     (Unaudited)
Revenues                                          $   105,556,000   $    92,194,000   $    58,477,000
Income from operations                                 16,615,000        11,739,000         7,537,000
Net income                                             10,414,000         7,822,000         3,831,000
Basic earnings per share                                 $0.78             $0.78              $0.54
Diluted earnings per share                               $0.76             $0.65              $0.37

</TABLE>



                                          F-15
<PAGE>



3. INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                          DECEMBER 31
                                                                       1999             1998
                                                              ------------------------------------
<S>                                                             <C>               <C>
Raw material and packaging supplies                             $    6,439,850    $    7,549,122
Finished goods                                                       8,620,943         5,888,333
                                                              ------------------------------------
                                                                $   15,060,793    $   13,437,455
                                                              ====================================
</TABLE>

4. FINANCING

On September 24, 1999, the Company entered into a credit agreement with a
bank that provides for a revolving line of credit for borrowings up to
$10,000,000, based on a formula, through 2002. Advances under the credit
agreement bear interest at the bank's adjusted LIBOR rate plus 1.25% or the
bank's prime rate at the option of the Company (8.25% at December 31, 1999).
The credit agreement requires the Company comply with certain financial
covenants and is collateralized by the Company's assets. The Company was in
compliance with all financial covenants at December 31, 1999. Interest
expense related to the credit agreement was $79,408 for the year ended
December 31, 1999.

On February 27, 1998, the Company entered into an amended credit facility
(Loan Agreement) with a bank that provided for a revolving line of credit for
borrowings up to $8,000,000, based on a formula, through April 30, 2001. The
Loan Agreement amended and restated a previous revolving line of credit
agreement with the bank. Advances under the Loan Agreement bear interest at
the bank's adjusted LIBOR rate plus 1.25% or the bank's prime rate at the
option of the Company. The credit facility was subsequently repaid in full in
July 1998 and terminated in August 1998. Interest expense related to the Loan
Agreement was $161,306 for the year ended December 31, 1998.

In addition to providing for the revolving loans, the Loan Agreement provided
for a term loan of $9,000,000 to be used for financing the acquisition of
Pure-Gar. The term loan called for monthly installments of $125,000 during
the period March 1, 1998 through February 28, 2004 and bore interest at the
bank's adjusted LIBOR rate plus 1.25% or the bank's prime rate at the option
of the Company. The term loan was repaid in full in July 1998. Interest
expense related to the term loan was $246,146 for the year ended December 31,
1998.


                                  F-16
<PAGE>

4. FINANCING (CONTINUED)

During 1999, the Company entered into two mortgage notes payable in the
aggregate amount of $8,900,000 collateralized by the Company's facilities.
These notes are payable in monthly installments of $73,779 in the aggregate
including interest ranging from 7.75% to 8.32% maturing in 2014 and 2019.
Interest expense related to these notes for the year ended December 31, 1999
was $169,876.

Future maturities of long term debt at December 31, 1999 are as follows:

<TABLE>

<S>                                                          <C>
2000                                                           $      160,900
2001                                                                  185,099
2002                                                                  201,090
2003                                                                  214,010
2004                                                                  230,371
Thereafter                                                          7,869,540
                                                             -----------------
                                                               $    8,861,010
                                                             =================
</TABLE>

5. INCOME TAXES

The income tax provision consists of the following:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31
                                                   1999              1998             1997
                                            ------------------------------------------------------
<S>                                           <C>               <C>               <C>
Current:
   Federal                                    $    4,566,332    $    4,468,728    $    2,161,400
   State                                             849,622           838,542           516,595
                                            ------------------------------------------------------
                                                   5,415,954         5,307,270         2,677,995
Deferred:
   Federal                                           172,922          (608,481)           72,202
   State                                              42,540           (92,466)           65,961
                                            ------------------------------------------------------
                                                     215,462           700,947           138,163
                                            ------------------------------------------------------
Total income tax provision                    $    5,631,416    $    4,606,323    $    2,816,158
                                            ======================================================
</TABLE>


                                     F-17
<PAGE>

5. INCOME TAXES (CONTINUED)

The difference between actual income tax expense and the U.S. Federal statutory
income tax rate is as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                                         1999           1998            1997
                                                   -----------------------------------------------
<S>                                                     <C>            <C>             <C>
Statutory rate                                           34.0%          34.0%           34.0%
State tax provision                                       4.0            4.0             6.2
                                                   -----------------------------------------------
Effective tax rate                                       38.0%          38.0%           40.2%
                                                   ===============================================
</TABLE>

The significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
                                                                            DECEMBER 31
                                                                       1999             1998
                                                              ------------------------------------
<S>                                                             <C>               <C>
Deferred tax assets:
   Accounts receivable reserves                                 $      200,038    $      139,279
   Inventory reserves                                                   78,640            98,105
   Various accrued liabilities                                         543,208           695,762
   State taxes                                                         254,190           280,930
                                                              ------------------------------------
                                                                     1,076,076         1,214,076
Deferred tax liability:
   Depreciation                                                       (109,475)          (32,013)
                                                              ------------------------------------
                                                                $      966,601    $    1,182,063
                                                              ====================================
</TABLE>

Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or noncurrent depending on the
periods in which the temporary differences are expected to reverse.

6. STOCKHOLDERS' EQUITY

In July 1998, the Company completed its initial public offering in which it sold
3,495,500 shares of Common Stock at a price of $15.00 per share, with aggregate
net proceeds to the Company of $47,640,174. At the time of the initial public
offering, all of the convertible participating preferred stock converted into
2,700,000 shares of Common Stock and 13,500 shares of redeemable preferred
stock. The shares of redeemable preferred stock were then immediately redeemed
by the Company for $6,000,000 in cash.


                                    F-18
<PAGE>


6. STOCKHOLDERS' EQUITY (CONTINUED)

In September 1996, the shares of Common Stock held by the original
stockholders were split up and converted into 7,027,780 shares of Common
Stock and 25,078.1 shares of convertible participating preferred stock. In
addition, the Company sold an additional 1,921.9 shares of its convertible
participating preferred stock to third party investors. The total of 27,000
shares of convertible participating preferred stock purchased by the
investors are convertible into (i) approximately 27% of the then outstanding
shares of Common Stock of the Company on a fully diluted basis and (ii)
shares of redeemable preferred stock which are redeemable for a total of $6.0
million. The total consideration paid by the investors for the convertible
participating preferred stock was $12.0 million.

Each share of convertible participating preferred stock is convertible based
on a formula upon the written election of not less than 66 2/3% of the
outstanding shares of convertible participating preferred stock such that
each outstanding share of convertible participating preferred stocks will
convert into one share of Common Stock (prior to giving effect the 100-for-1
stock split described in Note 1) and one-half of one share of redeemable
preferred stock, subject to adjustment for stock splits, stock dividends,
recapitalizations and similar transactions. The convertible participating
preferred stock has an automatic conversion feature which provides for each
share of convertible participating preferred stock to be automatically
converted into shares of Common Stock and redeemable preferred stock based on
the then effective conversion price immediately upon the closing of the
Company's first firm commitment public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, provided
that such registration statement covers the offer and sale of Common Stock of
which the aggregate net proceeds exceeds $15 million at a price per share
reflecting a valuation of the Company's equity of at least $50 million.

RECEIVABLE FROM STOCKHOLDER

The receivable from stockholder represents an interest bearing note from a
stockholder in the amount of $554,063 and $562,500 at December 31, 1999 and
1998, respectively, issued by the stockholder to finance in part the purchase
of 300,000 shares of the Company's Common Stock. The note bears interest at
6.60% per year with interest payments due annually. The note is due within
ten days of the receipt by the stockholder of proceeds from the sale of the
Company's Common Stock or November 14, 2006, whichever occurs first. Included
in interest income is $36,568, $37,125 and $37,125 for the years ended
December 31, 1999, 1998 and 1997, respectively, for interest from this
stockholder.


                                    F-19
<PAGE>



6. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS

The Company has adopted the 1996 Stock Option and Grant Plan, as amended (the
Plan), which authorizes the Board of Directors of the Company to grant
incentive stock options or non-qualified stock options. Incentive stock
options may be granted only to employees of the Company. Non-qualified stock
options may be granted to officers and employees of the Company as well as to
non-employees. The maximum number of shares of Common Stock to be issued
under the Plan is 2,294,325 shares, as amedned. All options granted under the
Plan have been made at prices not less than the estimated fair market value
of the stock at the date of grant. Generally the options granted under the
Plan vest over three to five years. Options granted under the plan have a
term of not more than ten years.

A summary of the Company's stock option activity, and related information is
as follows:

<TABLE>
<CAPTION>
                                                               WEIGHTED AVERAGE
                                                    NUMBER       EXERCISE PRICE   EXERCISE PRICE
                                                  OF OPTIONS       PER SHARE        PER SHARE
                                             -----------------------------------------------------
<S>                                               <C>          <C>                <C>
Outstanding at January 1, 1997                      200,000      $   1.88           $  1.88
   Granted                                          200,000          2.10              2.10
                                             -----------------------------------------------------
Outstanding at December 31, 1997                    400,000          1.99         1.88 - 2.10
   Granted                                          445,000         10.87        10.40 - 13.00
                                             -----------------------------------------------------
Outstanding at December 31, 1998                    845,000          6.67        1.88 - 13.00
   Granted                                          845,000          7.88        6.03 - 10.63
   Forfeited                                        (45,000)        10.39        6.03 - 11.25
   Exercised                                        (29,000)         1.88              1.88
                                             -----------------------------------------------------
Outstanding at December 31, 1999                  1,616,000      $   7.28        $1.88 - 13.00
                                             =====================================================

Exercisable at:
   December 31, 1997                                116,250      $   1.88            $1.88
   December 31, 1998                                304,663      $   4.78        $1.88 - $2.10
   December 31, 1999                                475,895      $   5.43        $1.88 - 13.00
                                             =====================================================
</TABLE>

At December 31, 1999 and 1998, 631,105 and 1,449,325 shares, respectively,
were available for future grant. The weighted average remaining contractual
life for the outstanding options in years was 8.83, 8.91 and 9.38 at December
31, 1999, 1998 and 1997, respectively.


                                  F-20
<PAGE>

6. STOCKHOLDERS' EQUITY (CONTINUED)

If the Company had elected to recognize compensation expense based on the
fair value of the options granted at grant date for its stock-based
compensation plans consistent with the method prescribed by SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                       1999            1998             1997
                                               --------------------------------------------------
<S>                                              <C>               <C>            <C>
Net income:
   As reported                                   $    9,188,103    $  7,515,551   $    4,190,700
   Pro forma                                          8,790,433       7,367,551        4,185,800

Earnings per share:
   As reported - basic                           $      0.69       $     0.76     $       0.59
   Pro forma - basic                                    0.66             0.75             0.59
   As reported - diluted                                0.67             0.63             0.41
   Pro forma - diluted                                  0.64             0.62             0.41
</TABLE>

The fair value of the options is estimated using a Black-Scholes option-pricing
model with the following weighted average assumptions for grants:

<TABLE>
<CAPTION>
                                                       1999            1998             1997
                                               --------------------------------------------------
<S>                                              <C>               <C>            <C>
Expected dividend yield                                 0.0%             0.0%             3.0%
Expected stock price volatility                        55.9             37.5                -
Risk free interest rate                                 5.5%             6.0%             6.0%
Expected life of options                             5 years          5 years          5 years

</TABLE>

These assumptions resulted in weighted average fair values of $3.61, $3.35
and $0.27 for each stock option granted in 1999, 1998 and 1997, respectively.

7. COMMITMENTS

The Company leases certain equipment and facilities under noncancelable
operating leases that expire in various years through 2001. Rent expense
under operating leases totaled $255,356, $570,325 and $641,731, for the years
ended December 31, 1999, 1998 and 1997, respectively.


                                    F-21
<PAGE>

7. COMMITMENTS (CONTINUED)

Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
1999:

<TABLE>
<S>                                     <C>
2000                                    $      236,463
2001                                           237,720
2002                                            20,500
                                        --------------
Total minimum lease payments            $      494,683
                                        ==============
</TABLE>

8. EMPLOYEE BENEFITS PLAN

The Company has a profit sharing 401(k) plan that covers substantially all of
its employees. Eligible employees may contribute up to 10% of their
compensation. Contributions are discretionary, however, the Company generally
matches 10% of the employees' contributions up to the maximum of 1% of
eligible compensation. Amounts recognized as expense were $10,045, $10,409
and $0 for the years ended December 31, 1999, 1998 and 1997, respectively.

In May 1998, the Board of Directors approved the Natrol, Inc. Employee Stock
Purchase Plan (the ESPP) which allows substantially all employees to purchase
shares of Common Stock of the Company, through payroll deductions, at 85% of
the fair market value of the shares at the beginning or end of the offering
period, whichever is lower. The ESPP provides for employees to authorize
payroll deductions of up to 10% of their compensation for each pay period. In
conjunction with the ESPP, the Company registered with the Securities and
Exchange Commission 225,000 shares of the Company's Common Stock reserved for
purchase under the ESPP. As of December 31, 1999, 199,735 shares are
available for issuance under this plan. For the year ended December 31, 1999,
18,775 shares were issued at prices ranging from $5.95 to $6.38 per share
under the plan. For the year ended December 31, 1998, 6,490 shares were
issued at $7.65 per share under the plan.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.

CASH AND CASH EQUIVALENTS: the carrying amount approximates fair value.

MARKETABLE SECURITIES: the carrying amount approximates fair value based upon
quoted market prices.


                                    F-22
<PAGE>

ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: the carrying amount approximates fair
value.


















                                             F-23
<PAGE>

9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

DEBT: The carrying amount of the Company's borrowings on its revolving line
of credit approximates fair value. The fair value of the Company's long-term
notes payable are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount of long-term notes payable approximate
their fair value at December 31, 1999.

10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                        MARCH 31          JUNE 30        SEPTEMBER 30      DECEMBER 31
                                    -----------------------------------------------------------------------
                                                      (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                   <C>              <C>               <C>              <C>
1999
Net sales                             $       17,837   $       17,864    $       21,173   $       24,716
Gross profit                                   9,341            9,399            10,998           12,002
Net income                                     2,049            1,871             2,539            2,729
Basic earnings per share              $        0.15    $        0.14     $        0.19    $        0.20
Diluted earnings per share            $        0.15    $        0.14     $        0.19    $        0.20

1998
Net sales                             $       13,169   $       16,344    $       19,501   $       19,193
Gross profit                                   7,017            8,788            10,174           10,217
Net income                                     1,175            1,578             2,517            2,245
Basic earnings per share              $        0.17    $        0.22     $        0.21    $        0.17
Diluted earnings per share            $        0.11    $        0.15     $        0.20    $        0.16
</TABLE>

Certain reclassifications have been made to the quarterly information as
previously reported by the Company in the table above to conform to the
presentation for the year ended December 31, 1999.



                                     F-24