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                       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)

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   /X/     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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                                       OR

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   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
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      FOR THE TRANSITION PERIOD FROM ________________ TO ________________

                         COMMISSION FILE NO: 000-24567
                           --------------------------

                                  NATROL, INC.
             (Exact name of registrant as specified in its charter)

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

    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 15, 2001 was approximately
$18.2 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 15, 2001, the registrant had 13,032,920 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the registrant's definitive proxy statement for its 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K.

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                                  NATROL, INC.
                        2000 ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS

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PART I

Item 1.                 Business....................................................      2

Item 2.                 Properties..................................................     20

Item 3.                 Legal Matters...............................................     20

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

PART II

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

Item 6.                 Selected Consolidated Financial Data........................     21

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

Item 7A.                Quantitative and Qualatative Disclosures About Market
                          Risk......................................................     30

Item 8.                 Financial Statements and Supplementary Data.................     30

PART III  Items 10, 11, 12 and 13...................................................     30

PART IV

Item 14.                Exhibits, Financial Statements, Schedules, and Reports on
                          Form 8-K..................................................     30
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           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", "intend",
"estimate", "assume", "plan" or "anticipates" or the negative thereof, other
variations thereon, or comparable terminology, or by discussions of strategy
that predict or indicate future events or trends or that are not historical
facts. The Company cannot assure the future results or outcome of the matters
described in these statements; rather, these statements merely reflect its
current expectations of the approximate outcome of the matter discussed. The
Company does not undertake to update any such statements at any time in the
future.

    The Company's ability to predict results or the effect of certain events on
the Company's operating results is inherently uncertain. Forward-looking
statements should not be relied on since they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the Company's control.
These risks, uncertainties and other factors may cause actual results,
performance or achievements to differ materially from the anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. Therefore, the Company wishes to caution each reader
of this report to carefully consider the following factors and certain other
factors discussed herein, including the factors discussed under the caption
"Business Risk Factors & Factors Affecting Forward Looking Statements," and
factors discussed in other past reports, including but not limited to the prior
year annual reports on Form 10-K filed with the Securities and Exchange
Commission. The factors discussed herein may not be exhaustive. Therefore, the
factors contained herein should be read together with other reports and
documents that are filed by the Company with the SEC from time to time, which
may supplement, modify, supersede or update the factors listed in this document.

    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 general downturn or slowing of the growth of the dietary
supplement industry which has occurred during the past year and may continue,
(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) a continued high rate (or increase in the rate) of returns of
the Company's products, (vi) the Company's ability to gain or expand
distribution within new or existing accounts and new or existing channels of
trade, (vii) an increase in the cost of obtaining and maintaining shelf space
with major national retailers who demand various forms of incentives from their
suppliers such as slotting fees, coop advertising, or rebates, (viii) adverse
changes in government regulation, (ix) exposure to product liability claims,
(x) dependence on significant customers, (xi) the Company's ability to keep and
attract key management employees, (xii) the Company's inability to manage growth
and execute its business plan, (xiii) 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, (xiv) the absence of
clinical trials for many of the Company's products, (xv) the Company's inability
to obtain raw materials that are in short supply including its ability to obtain
garlic powders under its supply agreement with ConAgra for its Essentially Pure
Ingredient (EPI) raw material sales division, (xvi) sales and earnings
volatility, (xvii) volatility of the stock market (xviii) the Company's ability
to manufacture its products efficiently, (xix) the Company's ability to manage
inventory or sell its inventory before such inventory becomes outdated,
(xx) the Company's reliance on independent brokers to sell its products,
(xxi) the inability of the Company to protect its intellectual property,
(xxii) control of the Company by principal shareholders, (xxiii) the possible
sale of large amounts of stock by controlling shareholders, (xxiv) a general
downturn in the national economy as a whole, and (xxv) continued market
acceptance of Natrol supplements, Laci Le Beau teas, Prolab's sports nutrition
products, and Essentially Pure Ingredients' raw material products.

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                                     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 sports nutrition products. 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 positions Natrol as a premium brand of vitamins,
minerals and other supplements rather than a value brand. The Company
manufactures and sells approximately 140 products packaged into approximately
380 SKUs.

    Dietary 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. 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
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.

    In October 1999, the Company acquired Prolab Nutrition, Inc. The 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 are sold through
gyms, health food stores, and internationally, through selected distributors.
Prolab products are sold primarily by a dedicated Prolab sales force. However,
Prolab shares many Natrol resources and the Prolab and Natrol sales forces
coordinate the dissemination of information on Prolab products and promotional
activity.

    The Company also sells nutraceutical grade ingredients, primarily garlic,
vegetable powders, kava kava, melatonin, soy isoflavones 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. EPI maintains an independent national sales
force.

    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 line of products, the MSM-line of joint care products with 13.4% of
net sales, accounted for more than 10% of the Company's net sales in 2000.

                                       2
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    The Laci Le Beau tea business accounted for approximately 7.5% of the
Company's sales in 2000 and the Essentially Pure Ingredients business accounted
for 6.5% of the Company's business. Prolab accounted for 24.3% of net sales
revenue during the year 2000.

SALES

BRANDED PRODUCTS

    The Company distributes its Natrol supplements and Laci Le Beau teas
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.

    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).
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 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 channels 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.

    Prolab products are sold primarily through gyms, health food stores and
internationally through designated distributors. Approximately 34% of Prolab's
business is to European and Canadian accounts.

                                       3
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    Prolab's domestic sales are primarily to distributors who in turn service
retail accounts. 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.

    Prolab's sales force is independent of Natrol's sales' force. However, the
two sales forces coordinate efforts where appropriate.

    The Company had no customer whose sales amounted to more than 10% of the
Company's business during the last two years.

PRIVATE LABEL AND INGREDIENT SUPPLY SALES

    The Company manufactures a number of products pursuant to contracts with
customers who distribute the products under their own private labels. Sales to
private label customers accounted for 3.0% of the Company's revenues for 2000.

    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 ConAgra Foods, Inc. (ConAgra) pursuant to a multi-year supply
agreement that gives the Company the exclusive right to sell ConAgra's
nutraceutical grade vegetable powders in the dietary supplement industry.

    Bulk ingredient sales are the responsibility of the Company's Essentially
Pure Ingredients (formerly Pure Gar) division and accounted for 6.5% of the
Company's revenues in 2000. 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 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. Often, 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.

    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 $6.0 million or 6.9% of
net sales in 2000 in traditional media outlets and an additional $15.4 million
or 17.6% of net sales on various forms of sales incentives with retailers such
as slotting fees, coop advertising and rebates. The amount spent with retailers
on various incentive programs in the year 2000 was substantially more than in
recent years. The increase in expenditures was due in a large part to negative
industry trends which led to lower than anticipated sales revenues and

                                       4
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necessitated additional incentive spending to drive sales and limit a higher
than anticipated rate of return caused in part by retailers seeking to lower
warehouse inventory levels.

    Although the Company is attempting to better manage its level of sales
incentive spending for such items as slotting fees, coop advertising and
rebates, the Company cannot guarantee that it will be able to manage
expenditures below the percentage levels experienced in the year 2000.

    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. Prolab uses primarily print advertising in
specialty fitness and weight-lifting publications.

    During 2000, the Company's television commercials were featured on the
CNN/Turner Network, including CNN HEADLINE NEWS along with TNT and TBS programs;
as well as several game show programs including WHEEL OF FORTUNE, JEOPARDY and
HOLLYWOOD SQUARES. Television advertising was substantially reduced during the
last half of 2000.

    Radio advertising in 2000 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.

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.

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
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.

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    Before a product is introduced, the product development team reviews the
safety and efficacy of ingredients, standards for production, and with
assistance from FDA and Patent 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. 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-Registered Trademark-, 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, Basic Vegetable
Products (BVP), accounted for as much as 10% of the Company's raw material
purchases. BVP was purchased in November 2000 by ConAgra Foods, Inc. (ConAgra)
and ConAgra has replaced BVP as a vendor. Basic Vegetable Products supplied the
Company's EPI division nutraceutical grade vegetable powders, primarily garlic,
under an exclusive supply agreement (see INGREDIENT SUPPLY below). 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

                                       6
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suppliers, weather, crop conditions, transportation interruptions and natural
disasters or other catastrophic events. For example, during 1999, the Company
encountered problems in its garlic supply due to poor crop yields of garlic and
from work stoppages caused by a strike at its major supplier. Both of these
occurrences, from time to time, affected the Company's ability of the Company's
Essentially Pure Ingredients 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-Registered Trademark-, the Company is
limited to that single 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 with Inter-Cal (the "Inter-Cal Agreement") under which Inter-Cal is
required to supply the Company with its requirements of bulk
Ester-C-Registered Trademark-. Ester-C-Registered Trademark- products accounted
for approximately 8.6% of the Company's sales in 2000. The Inter-Cal Agreement
requires the Company to use its best efforts to promote and sell
Ester-C-Registered Trademark- 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.

    The Company also owns a 132,000 sq. ft. warehouse facility 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.

TEAS

    The Company primarily relies upon third parties for the milling and
processing of its herbal teas. The Company directly provides a majority of the
herbs and other raw materials used in the production of its teas to these third
parties. Tea bags produced by these parties are packaged into boxes at the
Company's manufacturing facility in Chatsworth, California.

PROLAB

    The Company produces, at its headquarters/manufacturing facility, 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 owns a 30,000
square foot headquarters facility in Connecticut, in which it packages a limited
amount of powdered product that is manufactured by third party vendors.

                                       7
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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 with ConAgra Foods, Inc. (the "ConAgra Agreement"),
which requires ConAgra to sell and the Company to purchase specified amounts of
certain vegetable, fruit, herbal and botanical product. The ConAgra Agreement
gives the Company the exclusive right to sell certain ConAgra products in the
dietary supplement industry. The ConAgra 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 ConAgra Agreement was
originally signed with Basic Vegetable Products in 1998 when the Company
purchased BVP's Pure Gar Division. In November 2000, Basic Vegetable Products
was acquired by ConAgra Foods, Inc. As the successor to Basic Vegetable
Products, ConAgra was obligated to assume the terms and conditions of the
original Supply Agreement. Natrol and ConAgra negotiated certain modifications
to the original agreement including an extension of the Agreement. These
modifications were considered beneficial by both parties.

    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 infringement claims against the
Company.

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

                                       8
<PAGE>
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 Bayer and American Home Products, compete with the
nutritional supplement companies, especially in the herbal and vitamin 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, product development and marketing support. The Company believes that it
competes favorably in all of these areas.

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 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

                                       9
<PAGE>
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 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 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

                                       10
<PAGE>
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.

    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 internal staff, 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 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

                                       11
<PAGE>
such requirements could have a material adverse affect on the Company's
business, financial condition and results of operations.

EMPLOYEES

    As of March 1, 2001, the Company had approximately 283 employees. Of such
employees, approximately 70 were engaged in marketing and sales, 150 were
devoted to production and distribution and 63 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 AND FACTORS AFFECTING FORWARD LOOKING STATEMENTS

    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 and in any forward looking
statement 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 VMS sector grew substantially
during most of the 1990s, in many years at a double digit pace. However, there
is evidence, that during the year 2000, the industry rate of growth became
negative.

    Information Resources, Inc. ("IRI") tracks sales data within the food, drug,
and mass market channels of distribution. In the twelve weeks ended February 4,
2001, vitamin and supplement sales in these channels of distribution fell 9.3%
when compared to the same period a year earlier. Sales for the prior 52 weeks
fell 4.0% when compared to the same 52 week period a year earlier. Herbal sales
were particularly weak. During the 12 week period, sales of herbal products fell
20.8% and in the 52 week period such sales fell 13.2%. Natrol fared better than
the industry as a whole in these channels of distribution with overall sales
increasing 12.6% during the 12 week period and 2.7% during the 52 week period.
These figures include only Natrol branded products and exclude both Laci Le Beau
and Prolab products. There can be no assurance that Natrol can continue to
increase its sales in these channels as industry trends change or other
competitors seek to regain market share.

    In addition to the trends in our specific industry, the United States
economy has experienced a significant downturn in recent months which may
contribute significantly to downward trends in our industry.

    There also can be no assurance that the industry growth rates of prior years
can be regained. In addition, there can be no assurance that the industry growth
rate will not continue to decline in future operating periods or that the growth
rate of the U.S. economy may not be negative. Such a failure to achieve and
sustain growth in the industry or in the U.S. economy as a whole may have a
material adverse effect on the Company's ability to return its results to 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

                                       12
<PAGE>
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. 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 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, sales
of Gingko Biloba and St John's Wort fell approximately 50% and 68% respectively
in the year 2000 when compared to 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. During 2000, returns were far higher than in
past years and, as such, additional expense was incurred in the year 2000 for
returns. Although the Company has increased its reserves, there is no guarantee
that future returns will not exceed the high levels experienced in the year 2000
or will be in line with past return percentages. Moreover, it is possible that
current reserves may be inadequate and 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 a material adverse effect on the
Company's business, financial condition and results of operations. The risk of
returns is amplified by the current industry trend (see INDUSTRY TRENDS) which
shows negative growth. If this trend continues, retailers may decide to reduce
inventory levels from their suppliers, including Natrol, by returning goods from
their warehouse distribution centers.

    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 distribution gains will be necessary for the Company's
business to grow. During recent years, the Company has gained additional

                                       13
<PAGE>
distribution in the mass market channel of distribution, in particular, chain
drug stores. 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.

    COST OF RETAIL RELATIONSHIPS.  Many large retailers demand various forms of
incentive payments in order to conduct business with them. These payments
include slotting fees, coop advertising payments, rebate incentives, price off
promotions and other forms of monetary and non-monetary support. The Company
must continually evaluate specific demands to ascertain the profitability of
potential business from the retailer making the demand. Because of such demands,
the Company may, depending upon the demands being made, ascertain that it cannot
profitably do business with certain retailers. This may cause the Company to
stop doing business with existing customers or not allow the Company to enter
into a business relationship with a potential new customer, each of which in
turn could dampen future revenue growth.

    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 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. Furthermore, 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

                                       14
<PAGE>
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.

    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

                                       15
<PAGE>
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 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 2000 accounted for
more than 10% of the Company's business. However, the Company's top 10 customers
account for approximately 45% of the Company's business. The loss of any one of
or a significant number of these customers would have a material adverse effect
on the Company's growth. 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 and retain
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.

                                       16
<PAGE>
    ABILITY TO MANAGE GROWTH.  In reaction to current industry trends and the
Company's financial performance, the Company has trimmed its workforce through
attrition and layoffs. Should such trends continue to be negative, the Company
may have to further reduce its work force as well as various forms of overhead.
The Company may not be able to trim these expenses as rapidly as is necessary to
return to profitability in the immediate future. Moreover, if corporate or
industry trends reverse themselves and the Company's revenues begin to grow in
line with past trends, the Company's management, operations, sales and
administrative personnel and other resources may be strained in the short term.
Given the recent negative industry trends, attracting, training, motivating,
managing and retaining qualified employees may be difficult. 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. Nor
can assurance be given that if the Company's core business erodes in line with
recent industry trends, the Company can stabilize its revenue and manage the
Company back to profitability in the short term. The Company's inability to
manage its growth or negative 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, although no acquisitions were completed
in 2000, 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. The
Company's re-negotiated line of credit (see LIQUIDITY AND CAPITAL RESOURCES)
does not allow for acquisitions without the prior consent of its lender and
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 has faced all of
these challenges with its acquisition of Prolab in October 1999. While the
Company remains confident in Prolab's long-term prospects, Prolab has not
performed according to the level of the Company's original expectations. There
can be no guarantee that Prolab will grow at rates that are satisfactory to
management or shareholders.

    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.

    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, 2000, goodwill on the
Company's balance sheet was $37.3 million, 42.4% 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

                                       17
<PAGE>
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 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 a number 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-Registered Trademark-, 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-Registered Trademark-, 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, Basic Vegetable Products, the Company's supplier of bulk garlic at
that time, 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-Registered Trademark-, 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 and operations of the Company or its
competitors;(vi) the availability of raw materials from suppliers (vii) the
Company's ability to accurately predict inventory needs so that it does not
overstock items which eventually must be written off due to low demand, or, that
it fails to stock enough of an item so that sales are not lost due to lack of
supply. 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.

                                       18
<PAGE>
    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. In particular, the stock market has experienced a
significant downward trend in recent months primarily due to a general downturn
in the overall economy. In addition, 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 does not carry earthquake insurance on its facilities. 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 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

                                       19
<PAGE>
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 few patents on its products and no material
business is derived from those items that are patented. 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.

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.

    In December 1999, the Company purchased a 132,000 square foot warehouse
facility for $7.2 million. This facility is located within one-quarter mile of
the Company's headquarters facility.

    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 which
ends in June 2001.

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 2000, 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 15, 2001, the last
reported sales price of the Company's Common Stock as reported on the Nasdaq
National Market was $1.40. As of March 15, 2001 there were 27 holders of record
of the Company's Common Stock.

                                       20
<PAGE>
    The high and low sales prices for the Common Stock as reported by the Nasdaq
National Market for the years ended December 31, 2000 and 1999 are set below:

<TABLE>
<CAPTION>
                                                             FISCAL YEAR ENDED
                                                             DECEMBER 31, 2000
                                                            -------------------
                                                              HIGH       LOW
                                                            --------   --------
<S>                                                         <C>        <C>
Quarter ended March 31, 2000..............................   $8.94      $5.03
Quarter ended June 30, 2000...............................    5.63       3.25
Quarter ended September 30, 2000..........................    3.38       1.94
Quarter ended December 31, 2000...........................    2.50       1.06
</TABLE>

<TABLE>
<CAPTION>
                                                             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 its surplus, or, if there is no surplus, out of its net
profits. The Company's renegotiated line of credit does not permit the Company
to pay dividends.

RECENT SALES OF UNREGISTERED SECURITIES

    There were no sales of unregistered securities during the year 2000.

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

                                       21
<PAGE>
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,
                                                 ----------------------------------------------------
                                                   1996       1997       1998       1999       2000
                                                 --------   --------   --------   --------   --------
                                                         (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales......................................  $40,802    $42,875    $68,207    $81,590    $87,089
Cost of goods sold.............................   18,497     19,800     32,012     39,850     49,934
                                                 -------    -------    -------    -------    -------
  Gross profit.................................   22,305     23,075     36,195     41,740     37,155
                                                 -------    -------    -------    -------    -------
Selling and marketing expenses.................    8,736     11,398     17,757     18,916     32,293
General and administrative expenses............    5,431      4,450      6,513      8,542     11,216
                                                 -------    -------    -------    -------    -------
  Total operating expenses.....................   14,167     15,848     24,270     27,458     43,509
                                                 -------    -------    -------    -------    -------
Operating income(loss).........................    8,138      7,227     11,925     14,282     (6,354)
                                                 -------    -------    -------    -------    -------
Interest income (expense), net.................       54       (220)       197        538     (1,231)
                                                 -------    -------    -------    -------    -------
Income (loss) before income tax provision......    8,192      7,007     12,122     14,820     (7,585)
Income tax provision (benefit).................    2,299(1)   2,816      4,606      5,632     (2,369)
                                                 -------    -------    -------    -------    -------
Net income (loss)..............................  $ 5,893    $ 4,191    $ 7,516    $ 9,188    $(5,216)
                                                 -------    -------    -------    -------    -------
Basic earnings (loss) per share................  $  0.94    $  0.59    $  0.76    $  0.69    $ (0.39)
Diluted earnings (loss) per share..............  $  0.83    $  0.41    $  0.63    $  0.67    $ (0.39)
Weighted average shares outstanding--basic.....    6,275      7,100      9,854     13,325     13,237
Weighted average shares outstanding--diluted...    7,065     10,273     11,891     13,638     13,237
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                 ----------------------------------------------------
                                                   1996       1997       1998       1999       2000
                                                 --------   --------   --------   --------   --------
                                                         (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................  $   285    $ 1,800    $   559    $   485    $ 4,004
Marketable securities..........................       --         --     19,010         --         --
Working capital................................    4,496      8,424     35,673     19,626     15,399
Total assets...................................   11,345     19,716     68,708     92,596     87,921
Long-term debt, less current maturities........      405      2,606         --      8,700      8,369
Convertible participating preferred stock......   12,000     12,000         --         --         --
Total stockholders' equity (deficit)...........   (5,755)    (1,564)    59,641     69,986     62,892
Cash dividend declared per common share........  $  0.55    $  0.00    $  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.

                                       22
<PAGE>
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 Le Beau brand of teas
in October 1998 and the Prolab sports nutrition line of products in
October 1999.

    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. 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.

    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.

    Natrol products are now visible to some degree in most mass market chain
drug retail outlets such as WALGREENS, RITE AID, WALMART, ECKERD, CVS, and
TARGET, most health food stores including GNC, WHOLE FOODS MARKETS, and WILD
OATS and, to a more limited degree, grocery stores such as ALBERTSON's and
RALPHS.

    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 sales of hot products 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, St. John's Wort and Gingko Biloba have all cycled in
this fashion. Sales of Gingko Biloba and St John's Wort fell approximately 50%
and 68% respectively in the year 2000 when compared to 1999. In each case the
base level of sales fell to below 50% of the product's peak.

    The Company has also grown through acquisitions, completing two in 1998 and
one in 1999. Each acquisition introduced the Company to a new line of business.
The Essentially Pure Ingredient (EPI) supply business, acquired in early 1998,
accounted for 6.5% of the Company's sales in 2000. The Laci

                                       23
<PAGE>
Le Beau tea business, also acquired in 1998, accounted for approximately 7.5% of
the Company's sales in 2000. Prolab, which was acquired at the beginning of the
fourth quarter of 1999, accounted for 24.3% of the Company's 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.

    Industry trends during the year 2000 were negative and, although the Company
did increase its business with certain customers, the Company did not gain a
volume of new distribution with any particular customer that it could categorize
as material to its operations. The Company also failed to introduce any new
product that contributed materially to the growth of its revenues. No
acquisitions were made in the year 2000.

    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. During 2000, returns were far higher than in past years and, for this
reason, additional expense was incurred in the year 2000 for returns. Although
the Company has increased its reserves, there is no guarantee that future
returns will not exceed the high levels experienced in the year 2000 or will be
in line with past return percentages. Moreover, it is possible that current
reserves may be inadequate and, as such, 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 a material adverse effect on the
Company's business, financial condition and results of operations. The risk of
returns is amplified by the current industry trend (see INDUSTRY TRENDS) which
shows negative growth. If this trend continues, retailers may decide to reduce
inventory levels from their suppliers, including Natrol, by returning goods from
their warehouse distribution centers.

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 EPI division and the rest of the Company. The purpose
of this information wall is to ensure that EPI 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

                                       24
<PAGE>
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 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 are being amortized over twenty years. The approximately
$27 million of goodwill is not deductible for tax purposes.

CAPITAL EXPENDITURES

    Capital expenditures amounted to $588,000 during fiscal 2000. The Company
purchased a warehouse/shipping facility in 1999 for $7.2 million. Other capital
expenditures in 1999 amounted to $2.1 million not including approximately
$1.1 million of property and equipment purchased as part of the Prolab
acquisition.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    NET REVENUE.  Net revenue in 2000 increased 6.7%, or $5.5 million, to
$87.1 million from $81.6 million in 1999. However $21.2 million of the Company's
sales were generated by Prolab which was acquired in October 1999. Sales
generated by Prolab amounted to $4.8 million during the last quarter of 1999,
the only period in which the Company owned Prolab during 1999. Excluding Prolab,
net sales of the Company were $65.9 million in 2000 as compared to
$76.8 million in 1999.

    Net sales in the year 2000 were adversely affected by a very high level of
product returns. The level of returns was approximately 10% of gross sales, a
level that is approximately three times higher than that experienced by the
Company in prior years. The Company believes this rate of returns was caused by
industry trends which caused retailers to decrease warehouse stocking levels as
well as the failure of certain products introduced during 1998 and 1999 to gain
popularity with consumers. The Company cannot predict when or if this high rate
of returns will decrease.

    Only one line of product, MSM joint care products, which accounted for
approximately 13.4% of revenue, accounted for more than 10% of the Company's
revenue. No other product line accounted for more than 10% of the Company's
revenues in 2000.

    GROSS PROFIT.  Gross profit decreased 11.0%, or $4.6 million, to
$37.2 million, in 2000 as compared to $41.7 million in 1999. The gross margin
decreased sharply to 42.7% in 2000 from 51.2% in 1999. The decrease was due
primarily to the heavy returns as well as the percentage of the Company's
business generated by Prolab. The gross profit percentage from Prolab products
is approximately one-third less than for the rest of the Company's business.
Returns are deducted from gross sales when calculating net revenue. In a
majority of instances, the product returned is close to expiration and as such
has no value. The original cost of goods of this returned product must then be
included in the overall cost of goods calculation which in turn increases cost
of goods and decreases the gross margin. Before accounting for returns and the
change in the Company's product mix due to the Prolab acquisition, the Company's
gross margin percentage was approximately the same as that of prior years.

                                       25
<PAGE>
    SELLING AND MARKETING EXPENSES.  Selling and marketing expenses increased
70.7%, or $13.4 million, to $32.3 million in 2000 from $18.9 million in 1999. As
a percentage of net revenue, selling and marketing expenses increased to 37.1%
in 2000 from 23.2% in 1999, the highest in the Company's history. The increase
was due to an increased volume of incentive payments such as slotting and coop
advertising with major retailers. These expenses were amplified by the general
downturn in the industry as the Company created incentives for retailers to
stimulate sales at the consumer level though price off and other promotions. The
Company provided these incentives in an effort to maintain market share and to
forestall warehouse returns from these same retailers that it believes would
have been more costly.

    GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased 31.3%, or $2.7 million, to $11.2 million in 2000 from $8.5 million in
1999. As a percentage of net sales, general and administrative expenses
increased to 12.9% in 2000 from 10.5% in 1999. Of the absolute dollar increase,
$1.2 million was due to increased administration costs recorded at Prolab during
2000 and $1.0 million was due to increased goodwill amortization recorded from
the Prolab acquisition. Prolab was acquired in October 1999 and, as such, the
Company recorded one quarter of Prolab's expenses in 1999 as compared with a
full year of expenditures in 2000. Of the remaining $500,000 increase in general
and administrative expenses in the year 2000, $336,500 was due to additional
depreciation. Approximately half of the additional depreciation was due to the
acquisition of the Company's shipping facility in December 1999.

    INTEREST INCOME (EXPENSE), NET.  Net interest expense for 2000 was
$1.2 million for 2000 versus net interest income of $537,000 in 1999. Interest
earned in 2000 amounted to $146,000 versus $804,000 in 1999. A portion of the
interest earned was taxable as income to the Company and a portion was
non-taxable. Interest expense in 2000 was due to mortgage debt and an average
balance of approximately $7.5 million under the Company's line of credit.
Substantially all of the interest expense paid during 1999 stemmed from the
Company's mortgage debt because the Company had minimal borrowings under its
line of credit.

    INCOME TAX PROVISION (BENEFIT).  The Company is estimating a net income tax
benefit of $2.4 million in 2000 as compared with a net income tax provision of
$5.6 million in 1999. The Company obtained the net benefit because of the
operating losses it incurred.

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-Registered Trademark-, 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.

                                       26
<PAGE>
    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 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%.

LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 2000, the Company had working capital of $15.4 million, as
compared to $19.6 million in working capital at December 31, 1999. The decrease
was primarily due to an increase in the Company's line of credit borrowings and
a decrease in accounts receivable and inventory, offset by an increase in cash
and income tax receivables as well as a decrease in accounts payable.

    Net cash used in operating activities was $151,000 for the year ended
December 31, 2000 versus net cash provided of $6.8 million and $4.5 million in
1999 and 1998, respectively. The decrease in net cash provided by operating
activities in 2000 compared to 1999 was primarily due the Company's net loss, an
increase in income tax receivables, and a decrease in accounts payable offset by
a decrease in accounts receivable, a decrease in inventories and an increase in
depreciation and amortization.

    In reaction to industry trends, the Company reduced its inventory levels
from $15.1 million at December 31, 1999 to $12.2 million at December 31, 2000.
The Company also actively reduced trade receivables which fell to $9.6 million
at December 31, 2000 from $15.8 million at December 31, 1999. At December 31,
2000, the Company's average trade receivable aging was approximately 40 days
versus 1999 when the average receivable aging was 55 days.

    Amortization of goodwill grew to $2.3 million at December 31, 2000 from
$1.3 million at December 31, 1999 due to the amortization of goodwill incurred
through the Prolab acquisition. Depreciation grew from $1.1 million in 1999 to
$1.4 million in 2000 due to the acquisition of the Company's shipping facility
in December 1999 and the acquisition of other assets needed in the operation of
the Company's business.

                                       27
<PAGE>
    Cash from operating activities was negatively affected by a decrease in
trade payables and other accruals of $3.8 million, from $11.6 million at year
end 1999 to $7.8 million at December 31, 2000. The Company's large loss also
created a net income tax receivable of $4.1 million at December 31, 2000 as
compared with a net income tax payable of $181,000 at December 31, 1999. This
receivable reduced cash from operating activities by $4.3 million.

    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 in 1998 to $15.1 million in 1999,
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-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.

    Net cash used in investing activities was $588,000 for the year ended 2000
and $16.9 million and $43.8 million for the years ended 1999 and 1998,
respectively.

    All of the cash used for investing activities in 2000 was for the
acquisition of property, plant and equipment.

    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 $19.0 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 $4.3 million for the year
ended December 31, 2000, and $10.0 million and $38.1 million in 1999 and 1998,
respectively.

    Net cash provided by financing activities in the year ended December 31,
2000 consisted primarily of $6.5 million of net borrowing from the Company's
line of credit. The remainder of the cash provided was generated from the sale
of Common Stock to employees through the Company's employee stock purchase
program and the exercise of stockholder options. Cash provided by financing
activities was offset by $2.3 million of cash used to repurchase Company stock
on the open markets and $236,000 used to repay long-term debt.

    Net cash provided by financing activities in the year ended December 31,
1999 consisted of $8.9 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 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.

                                       28
<PAGE>
    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 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.

    As of the end of 2000, the Company had $16.9 million of outstanding debt. Of
this amount $8.3 million was from the Company's $10.0 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 2000 was approximately
$4.0 million.

    At the close of 2000, the Company was out of compliance with certain
financial ratios contained in its line of credit. On March 1, 2001 the Company
modified its original credit agreement with Wells Fargo, N.A. and has since been
in compliance with its revised credit agreement. The revised credit agreement is
substantially more restrictive than the original credit agreement that was in
place during all of 2000. The maximum amount the Company can borrow under its
revised credit agreement is $10 million as opposed to a maximum of $13 million
under the original credit agreement. The revised credit agreement does not allow
the Company to pay dividends or to acquire other companies without the prior
written consent of the lender. The Company must also maintain specific levels of
profitability and certain other ratios.

    The Company believes that its year end cash balance together with cash
generated from operations, cash it expects to receive because of its income tax
receivable and cash availability from its line of credit will be sufficient to
fund its anticipated working capital needs and permitted capital expenditures
for at least the next 12 months. Should the Company fail to meet any of the
covenants in its current line of credit, the Company may have to seek other
lenders. Should the Company fail to meet any of the covenant requirements of its
current line of credit, future restrictions on the Company's activities by the
Company's current lender or future lenders may be substantially more restrictive
than they are currently and such restrictions may hinder the Company's ability
to compete effectively in its market sector. There can be no assurance, should
the Company fail to meet the covenants set in its current facility, that its
current lender or other lenders will be willing to provide the Company with
adequate financing.

    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 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.

IMPACT OF INFLATION

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

                                       29
<PAGE>
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 of credit, the Company does
not believe 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 rates
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 Auditors and the Consolidated Financial Statements
and notes thereto are presented under Item 14 of this Report.

                                    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 14, 2001.

                                    PART IV

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

<TABLE>
<CAPTION>
                                                                                      PAGE(S)
                                                                                      --------
<C>                     <S>                                                           <C>
               (a)(1)   Index to Consolidated Financial Statements:

                        Report of Independent Auditors..............................      34
                        Consolidated Balance Sheets as of December 31, 2000 and
                          1999......................................................      35
                        Consolidated Statements of Operations for the years ended
                          December 31, 2000, 1999 and 1998..........................      36
                        Consolidated Statements of Stockholders' Equity (Deficit)
                          for the years ended December 31, 2000, 1999 and 1998......      37
                        Consolidated Statements of Cash Flows for the years ended
                          December 31, 2000, 1999 and 1998..........................      38
                        Notes to Consolidated Financial Statements..................      40

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

                        Schedule II-- Valuation and Qualifying Accounts.............     S-1

                        All other 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:
</TABLE>

<TABLE>
<CAPTION>

          <C>                     <S>        <C>
                            (2)   Plan of Acquisition, Reorganization, Arrangement, Liquidation or
                                  Succession:
</TABLE>

                                       30
<PAGE>

<TABLE>
<CAPTION>

          <C>                     <S>        <C>
                                  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.

                                  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 Appendix A filed on
                                             May 2, 2000 File No 000-24567 Proxy Statement);

                                  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       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);

                                  10.5       Amended and Restated Credit Agreement with Wells Fargo Bank,
                                             N. A (incorporated herein by reference to Exhibit 10.9 to
                                             the Company's Registration Statement on Form S-1, as
                                             amended, File No. 333-52109);

                                  10.6       Credit Agreement with Wells Fargo Bank, N.A., dated as of
                                             March 1, 2001;

                                  10.7       Loan Agreement with Wells Fargo Bank, N.A., dated as of
                                             March 1, 2001;

                                  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       Supply Agreement, dated as of November 7, 2000 by and
                                             between the Company and ConAgra Foods, Inc.
</TABLE>

                                       31
<PAGE>

<TABLE>
<CAPTION>

          <C>                     <S>        <C>
                                  10.10      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);

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

                           (23)   Consent of Experts and Counsel: Consent of Ernst & Young LLP is filed
                                  herewith as Exhibit 23.1.
</TABLE>

(b) Reports on Form 8-K:

    No current reports on Form 8-K were filed by the Company during the three
month period ending December 31, 2000.

                                       32
<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, 2001.

<TABLE>
<S>                                                    <C>  <C>
                                                       NATROL, INC.

                                                       By:             /s/ ELLIOTT BALBERT
                                                            -----------------------------------------
                                                                         Elliott Balbert
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

    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
                       SIGNED                                     TITLE                    DATE
                       ------                                     -----                    ----
<C>                                                    <S>                          <C>
                                                       Chairman of the Board,
                 /s/ ELLIOTT BALBERT                     Chief Executive Officer,
     -------------------------------------------         President and Director       March 30, 2001
                   Elliott Balbert                       (Principal Executive
                                                         Officer)

                                                       Chief Financial Officer,
                                                         Executive Vice President
               /s/ DENNIS R. JOLICOEUR                   and Director (Principal
     -------------------------------------------         Financial Officer and        March 30, 2001
                 Dennis R. Jolicoeur                     Principal Accounting
                                                         Officer)

                   /s/ NORMAN KAHN
     -------------------------------------------       Director                       March 30, 2001
                     Norman Kahn

                 /s/ DENNIS GRIFFIN
     -------------------------------------------       Director                       March 30, 2001
                   Dennis Griffin

                /s/ P. ANDREWS MCLANE
     -------------------------------------------       Director                       March 30, 2001
                   Andrews McLane

                /s/ DENNIS DECONCINI
     -------------------------------------------       Director                       March 30, 2001
                  Dennis DeConcini
</TABLE>

                                       33
<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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three year period ended December 31, 2000. Our audit
also included the financial statement schedule listed at the index in
Item 14(a). 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, 2000 and 1999 and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

                                          /s/ ERNST & YOUNG LLP

March 1, 2001
Woodland Hills, California

                                       34
<PAGE>
                                  NATROL, INC
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                              -------------------------
                                                                 2000          1999
                                                              -----------   -----------
<S>                                                           <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 4,004,445   $   485,144
  Accounts receivable, net of allowances of $479,100 and
    $502,500 at December 31, 2000 and 1999, respectively....    9,574,078    15,776,613
  Inventories...............................................   12,246,635    15,060,793
  Income taxes receivable...................................    4,091,428            --
  Deferred taxes............................................    1,075,588     1,076,076
  Prepaid expenses and other current assets.................      838,704     1,028,213
                                                              -----------   -----------
Total current assets........................................   31,830,878    33,426,839
Property and equipment:
  Building and improvements.................................   15,571,595    15,455,692
  Machinery and equipment...................................    5,538,839     5,286,859
  Furniture and office equipment............................    1,862,938     1,655,290
                                                              -----------   -----------
                                                               22,973,372    22,397,841
Accumulated depreciation and amortization...................   (4,215,475)   (2,869,722)
                                                              -----------   -----------
                                                               18,757,897    19,528,119

Goodwill, net of accumulated amortization of $4,143,075 and
  $1,863,147 at
  December 31, 2000 and 1999, respectively..................   37,263,512    39,543,440
Other assets................................................       68,378        97,540
                                                              -----------   -----------
Total assets................................................  $87,920,665   $92,595,938
                                                              ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Line of credit............................................  $ 8,300,000   $ 1,800,000
  Accounts payable..........................................    4,186,227     7,826,629
  Accrued expenses..........................................    2,967,155     2,143,044
  Accrued payroll and related liabilities...................      722,878     1,687,741
  Income taxes payable......................................           --       181,790
  Current portion of long-term debt.........................      256,061       160,900
                                                              -----------   -----------
Total current liabilities...................................   16,432,321    13,800,104
Deferred income taxes, noncurrent...........................      226,646       109,475
Long-term debt, less current portion........................    8,369,389     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--13,658,820 and 13,474,035
      at December 31, 2000 and 1999, respectively...........      136,588       134,740
  Additional paid-in capital................................   61,781,624    61,334,380
  Retained earnings.........................................    3,854,974     9,071,192
                                                              -----------   -----------
                                                               65,773,186    70,540,312
  Shares held in treasury, at cost--625,900 shares..........   (2,326,814)           --
  Receivable from stockholder...............................     (554,063)     (554,063)
                                                              -----------   -----------
Total stockholders' equity..................................   62,892,309    69,986,249
                                                              -----------   -----------
Total liabilities and stockholders' equity..................  $87,920,665   $92,595,938
                                                              ===========   ===========
</TABLE>

                            SEE ACCOMPANYING NOTES.

                                       35
<PAGE>
                                  NATROL, INC
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                        ---------------------------------------
                                                           2000          1999          1998
                                                        -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
Net sales.............................................  $87,089,154   $81,589,935   $68,206,585
Cost of goods sold....................................   49,934,486    39,849,632    32,011,641
                                                        -----------   -----------   -----------
Gross profit..........................................   37,154,668    41,740,303    36,194,944
Selling and marketing expenses........................   32,293,373    18,915,663    17,757,395
General and administrative expenses...................   11,215,339     8,542,308     6,513,094
                                                        -----------   -----------   -----------
Total operating expenses..............................   43,508,712    27,457,971    24,270,489
                                                        -----------   -----------   -----------
Operating income (loss)...............................   (6,354,044)   14,282,332    11,924,455

Interest income.......................................      146,303       803,855       604,871
Interest expenses.....................................   (1,377,767)     (266,668)     (407,452)
                                                        -----------   -----------   -----------
Income (loss) before income tax provision (benefit)...   (7,585,508)   14,819,519    12,121,874
Income tax provision (benefit)........................   (2,369,290)    5,631,416     4,606,323
                                                        -----------   -----------   -----------
Net income (loss).....................................  $(5,216,218)  $ 9,188,103   $ 7,515,551
                                                        ===========   ===========   ===========
Basic earnings (loss) per share.......................  $     (0.39)  $      0.69   $      0.76
                                                        ===========   ===========   ===========
Diluted earnings (loss) per share.....................  $     (0.39)  $      0.67   $      0.63
                                                        ===========   ===========   ===========
Weighted average shares outstanding--basic............   13,236,734    13,324,510     9,854,411
                                                        ===========   ===========   ===========
Weighted average shares outstanding--diluted..........   13,236,734    13,637,653    11,890,513
                                                        ===========   ===========   ===========
</TABLE>

                            SEE ACCOMPANYING NOTES.

                                       36
<PAGE>
                                  NATROL, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                    REDEEMABLE
                                                 PREFERRED STOCK           COMMON STOCK        ADDITIONAL     RETAINED
                                              ----------------------   ---------------------     PAID-IN      EARNINGS
                                               SHARES      AMOUNT        SHARES      AMOUNT      CAPITAL      (DEFICIT)
                                              --------   -----------   ----------   --------   -----------   -----------
<S>                                           <C>        <C>           <C>          <C>        <C>           <C>
Balance at January 1, 1998..................       --    $        --    7,100,000   $ 71,000   $   559,500   $(1,632,462)
  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 referred stock......   13,500      6,000,000           --         --            --    (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................................       --             --           --         --            --     7,515,551
                                              -------    -----------   ----------   --------   -----------   -----------
Balance at December 31, 1998................       --             --   13,301,990    133,020    60,187,301      (116,911)
  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................................       --             --           --         --            --     9,188,103
                                              -------    -----------   ----------   --------   -----------   -----------
Balance at December 31, 1999................       --             --   13,474,035    134,740    61,334,380     9,071,192
  Shares issued in exchange for services....       --             --       25,919        259       128,021            --
  Exercise of stock options.................       --             --      133,500      1,335       263,040            --
  Issuance of common stock under employee
    stock purchase plan.....................       --             --       25,366        254        56,183            --
  Purchase of treasury shares...............       --             --           --         --            --            --
  Net income (loss).........................       --             --           --         --            --    (5,216,218)
                                              -------    -----------   ----------   --------   -----------   -----------
Balance at December 31, 2000................       --    $        --   13,658,820   $136,588   $61,781,624   $ 3,854,974
                                              =======    ===========   ==========   ========   ===========   ===========

<CAPTION>

                                                            RECEIVABLE
                                              SHARES HELD      FROM
                                              IN TREASURY   STOCKHOLDER      TOTAL
                                              -----------   -----------   -----------
<S>                                           <C>           <C>           <C>
Balance at January 1, 1998..................  $       --     $(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 referred stock......          --            --             --
  Redemption of redeemable preferred
    stock...................................          --            --     (6,000,000)
  Issuance of common stock under employee
    stock purchase plan.....................          --            --         49,648
  Net income................................          --            --      7,515,551
                                              -----------    ---------    -----------
Balance at December 31, 1998................          --      (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
                                              -----------    ---------    -----------
Balance at December 31, 1999................          --      (554,063)    69,986,249
  Shares issued in exchange for services....          --            --        128,280
  Exercise of stock options.................          --            --        264,375
  Issuance of common stock under employee
    stock purchase plan.....................          --            --         56,437
  Purchase of treasury shares...............  (2,326,814)           --     (2,326,814)
  Net income (loss).........................          --            --     (5,216,218)
                                              -----------    ---------    -----------
Balance at December 31, 2000................  $(2,326,814)   $(554,063)   $62,892,309
                                              ===========    =========    ===========
</TABLE>

                            SEE ACCOMPANYING NOTES.

                                       37
<PAGE>
                                  NATROL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                       -----------------------------------------
                                                          2000           1999           1998
                                                       -----------   ------------   ------------
<S>                                                    <C>           <C>            <C>
OPERATING ACTIVITIES
Net income (loss)....................................  $(5,216,218)  $  9,188,103   $  7,515,551
Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
  Depreciation and amortization......................    1,361,256      1,115,797        837,014
  Amortization of goodwill...........................    2,279,928      1,274,979        588,168
  Provision for bad debts and returns................      400,000        170,630         69,230
  Deferred taxes.....................................      117,659        215,462       (700,947)
  Shares issued for services.........................      128,280             --             --
  Changes in operating assets and liabilities:
    Accounts receivable..............................    5,802,535     (2,293,195)    (3,387,913)
    Inventories......................................    2,814,158        439,842     (3,335,621)
    Income taxes receivable/payable..................   (4,273,218)    (1,712,624)      (201,948)
    Prepaid expenses and other current assets........      189,509       (522,980)      (158,717)
    Other assets.....................................       25,775        (14,616)        24,337
    Accounts payable.................................   (3,640,402)    (1,784,427)     1,686,466
    Accrued expenses.................................      824,111       (166,385)     1,167,624
    Accrued payroll and related liabilities..........     (964,863)       883,118        390,936
                                                       -----------   ------------   ------------
Net cash provided by (used in) operating
  activities.........................................     (151,490)     6,793,704      4,494,180

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..................     (587,647)    (9,325,753)    (6,111,223)
                                                       -----------   ------------   ------------
Net cash used in investing activities................     (587,647)   (16,892,951)   (43,819,918)

FINANCING ACTIVITIES
Net borrowings on line of credit.....................    6,500,000      1,800,000             --
Proceeds from long-term debt.........................           --      8,900,000      9,000,000
Repayments on long-term debt.........................     (235,560)      (802,826)   (12,604,861)
Capitalized loan fees................................           --        (50,817)            --
Purchases of treasury shares.........................   (2,326,814)            --             --
Repayments on shareholder loan.......................           --          8,437             --
Proceeds from issuance of common stock, net of
  issuance costs.....................................      320,812        170,173     47,689,821
Redemption of redeemable preferred stock.............           --             --     (6,000,000)
                                                       -----------   ------------   ------------
Net cash provided by financing activities............    4,258,438     10,024,967     38,084,960
                                                       -----------   ------------   ------------
Net increase (decrease) in cash and cash
  equivalents........................................    3,519,301        (74,280)    (1,240,778)
Cash and cash equivalents, beginning of year.........      485,144        559,424      1,800,202
                                                       -----------   ------------   ------------
Cash and cash equivalents, end of year...............  $ 4,004,445   $    485,144   $    559,424
                                                       ===========   ============   ============
</TABLE>

                                       38
<PAGE>
                                  NATROL, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                           ------------------------------------
                                                              2000         1999         1998
                                                           ----------   ----------   ----------
<S>                                                        <C>          <C>          <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
  Interest...............................................  $1,377,767   $  266,668   $  407,452
  Income taxes...........................................  $  786,850   $6,624,087   $5,509,261
</TABLE>

SUPPLEMENTAL NON-CASH TRANSACTIONS:

    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.

                                       39
<PAGE>
                                  NATROL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 IN 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 affecting the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates, although management does not believe any differences would materially
affect the Company's consolidated financial position or results of operations.

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

    The Company determines the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designations at each
balance sheet date. Realized gains and losses on investment transactions are
recognized when realized based on settlement dates and recorded as interest
income. Interest and dividend income on securities are recognized when earned.

INVENTORIES

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

                                       40
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 at December 31,
2000 and 1999, net of accumulated amortization of $33,584 and $29,245 at
December 31, 2000 and 1999, respectively. The costs of servicing the Company's
patents and trademarks are expensed as incurred.

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. If 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
expiring product 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

                                       41
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $17,614,623, $10,936,242 and
$10,942,024, respectively, for the years ended December 31, 2000, 1999 and 1998.

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 $649,613, $417,552 and $433,549 for the
years ended December 31, 2000, 1999 and 1998, respectively. Research and
development costs are included in general and administrative expenses on the
consolidated statements of operations.

SHIPPING AND HANDLING COSTS

    In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("Issue
00-10"). Specifically, Issue 00-10 addresses in a sale transaction for goods,
how the seller should classify amounts billed and incurred for shipping and
handling in the statements of operations, and the composition or types of costs
requiring to be classified as cost of sales. The EITF concluded all shipping and
handling billings to a customer in a sale transaction represent the fees earned
for the goods provided and, accordingly, amounts billed related to shipping and
handling should be classified as revenue. The consensus does not address how
costs incurred by the seller for shipping and handling should be classified. The
adoption of this consensus did not impact the Company's financial position or
results of operations as the Company has historically recorded all charges for
outbound shipping and handling as revenue, consistent with EITF guidance. All
outbound shipping and fulfillment costs are classified as selling and marketing
expenses and totaled $3,087,173, $2,366,578 and $1,765,351 for the years ended
December 31, 2000, 1999 and 1998, respectively.

MAJOR PRODUCTS

    The Company's sales of one product line comprised 13.4% of net sales during
the year ended December 31, 2000. The Company's sales of a different product
line 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.

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."

    In March 2000, the Financial Accounting Standards Board issued Financial
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25" or FIN 44. FIN 44
clarifies the definition of an employee for the purpose of applying APB No. 25,
the criteria for determining whether a stock plan qualifies as a noncompensatory
stock

                                       42
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
plan, the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 was generally
effective July 1, 2000 and the adoption of FIN 44 has not had a material effect
on the Company's consolidated financial statements.

EARNINGS (LOSS) PER SHARE

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

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                        ---------------------------------------
                                                           2000          1999          1998
                                                        -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
Earnings (loss):
  Net income (loss)...................................  $(5,216,218)  $ 9,188,103   $ 7,515,551
                                                        -----------   -----------   -----------
Shares:
  Weighted average shares for basic earnings per
    share.............................................   13,236,734    13,324,510     9,854,411
  Conversion of convertible participating preferred
    stock.............................................           --            --     1,494,247
  Share equivalent for redeemable preferred stock.....           --            --       255,247
  Stock options.......................................           --       313,144       286,429
                                                        -----------   -----------   -----------
                                                         13,236,734    13,637,653    11,890,513
                                                        ===========   ===========   ===========
</TABLE>

    Shares issuable under stock options of 1,987,000, 615,000 and 445,000 at
December 31, 2000, 1999 and 1998, respectively, have been excluded from the
computation of diluted earnings per share because the effect would be
antidilutive.

COMPREHENSIVE INCOME (LOSS)

    The Company's comprehensive income (loss) items are not material at
December 31, 2000, 1999 and 1998 and therefore no disclosures have been made.

MAJOR CUSTOMERS

    No customers had net sales which individually represented 10% or more of
total Company net sales during the years ended December 31, 2000 and 1999,
respectively. 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.

                                       43
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

    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.

RECENTLY ISSUED ACCOUNTING STANDARDS

    In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement establishes accounting and
reporting standards requiring every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires changes in fair values of derivatives be recognized currently in
earnings unless specific hedge accounting criteria are met. If specific hedge
accounting criteria are met, changes in fair values of derivatives will either
be offset against the changes in fair values of the hedged assets, liabilities,
or firm commitments through earnings, or recognized in other comprehensive
income (loss) until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings. SFAS No. 133, as amended by SFAS No. 137 and SFAS 138, is effective
for fiscal years beginning after June 15, 2000. The Company expects to adopt
SFAS No. 133 effective January 1, 2001. Management believes the impact of
adopting SFAS No. 133 will not have any material impact on the Company's
financial statements.

RECLASSIFICATIONS

    Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform to the presentation in 2000.

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 were recorded at their estimated fair
values with revenues and expenses from the date of acquisition included in the
consolidated statements of operations. The excess of cost over the fair value

                                       44
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS (CONTINUED)
of net assets acquired of $27,041,662 is being amortized over twenty years.
Amortization expense for the Prolab acquisition for the years ended
December 31, 2000 and 1999 was $1,339,932 and $334,983, respectively, 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 were recorded at their estimated fair values
with revenues and expenses from the date of acquisition included in the
consolidated statement of operations. The excess of cost over the fair value of
assets acquired is being amortized over fifteen years. Amortization expense for
the years ended December 31, 2000, 1999 and 1998 was $339,996, $339,996 and
$88,168, respectively, and is included in general and administrative expenses.

    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 were recorded at their estimated fair values with revenues and
expenses from the date of acquisition included in the consolidated statement of
operations. The excess of cost over the fair value of assets acquired is being
amortized over fifteen years. Amortization expense for the years ended
December 31, 2000, 1999 and 1998 was $600,000, $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
year ended December 31, 1998, with pro forma adjustments for the amortization of
goodwill, interest expense and certain income tax adjustments. The pro forma
financial information is

                                       45
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS (CONTINUED)
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
                                                    ------------   -----------
                                                           (UNAUDITED)
<S>                                                 <C>            <C>
Revenues..........................................  $105,556,000   $92,194,000
Income from operations............................    16,615,000    11,739,000
Net income........................................    10,414,000     7,822,000
Basic earnings per share..........................  $       0.78   $      0.78
Diluted earnings per share........................  $       0.76   $      0.65
</TABLE>

3.  INVENTORIES

    Inventories consist of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31
                                                     -------------------------
                                                        1999          1998
                                                     -----------   -----------
<S>                                                  <C>           <C>
Raw material and packaging supplies................  $ 5,334,997   $ 6,439,850
Finished goods.....................................    6,911,638     8,620,943
                                                     -----------   -----------
                                                     $12,246,635   $15,060,793
                                                     ===========   ===========
</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, as amended, 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 (9.50% at December 31, 2000).
Interest expense related to the credit agreement was $690,539 and $79,408 for
the years ended December 31, 2000 and 1999, respectively.

    The credit agreement requires the Company comply with certain financial
covenants and is collateralized by the Company's assets. The Company was not in
compliance with all of the financial covenants at December 31, 2000. In
March 2001, the Company entered into a new credit agreement with its bank
whereby the covenant violations of the prior credit agreement are waived. The
new credit agreement provides for a revolving line of credit for borrowings up
to $10,000,000, based on a formula, through March 2002. Advances under the
credit agreement bear interest at the bank's adjusted LIBOR rate plus 3.00% or
the bank's prime rate plus 0.50% at the option of the Company. Further, the
credit agreement requires the Company comply with certain financial covenants
and is collateralized by the Company's assets.

                                       46
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 years ended December 31, 2000 and 1999 was
$687,228 and $169,876, respectively.

    Future maturities of long-term debt at December 31, 2000 are as follows:

<TABLE>
<S>                                                           <C>
2001........................................................  $  256,061
2002........................................................     277,451
2003........................................................     300,630
2004........................................................     324,539
2005........................................................     352,866
Thereafter..................................................   7,113,903
                                                              ----------
                                                              $8,625,450
                                                              ==========
</TABLE>

5.  INCOME TAXES

    The income tax provision (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                           -------------------------------------
                                              2000          1999         1998
                                           -----------   ----------   ----------
<S>                                        <C>           <C>          <C>
Current:
  Federal................................  $(2,496,949)  $4,566,332   $4,468,728
  State..................................       10,000      849,622      838,542
                                           -----------   ----------   ----------
                                            (2,486,949)   5,415,954    5,307,270

Deferred:
  Federal................................      317,518      172,922     (608,481)
  State..................................     (199,859)      42,540      (92,466)
                                           -----------   ----------   ----------
                                               117,659      215,462      700,947
                                           -----------   ----------   ----------
Total income tax provision (benefit).....  $(2,369,290)  $5,631,416   $4,606,323
                                           ===========   ==========   ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                                 ------------------------------------
                                                   2000          1999          1998
                                                 --------      --------      --------
<S>                                              <C>           <C>           <C>
Statutory rate.............................       (34.0)%        34.0%         34.0%
Nondeductible goodwill.....................         6.0            --            --
State tax provision........................        (1.0)           --            --
Other......................................        (2.0)          4.0           4.0
                                                  -----          ----          ----
                                                  (31.0)%        38.0%         38.0%
                                                  =====          ====          ====
</TABLE>

                                       47
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  INCOME TAXES (CONTINUED)
    The significant components of the Company's deferred tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       -----------------------
                                                          2000         1999
                                                       ----------   ----------
<S>                                                    <C>          <C>
Deferred tax assets:
  Accounts receivable reserves.......................  $  190,663   $  200,038
  Inventory reserves.................................     189,846       78,640
  Various accrued liabilities........................     502,331      543,208
  State taxes........................................          --      254,190
  Net operating losses...............................     192,748           --
                                                       ----------   ----------
                                                        1,075,588    1,076,076

Deferred tax liability:
  Depreciation.......................................    (226,646)    (109,475)
                                                       ----------   ----------
                                                       $  848,942   $  966,601
                                                       ==========   ==========
</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. The Company
has state net operating loss carryforwards of approximately $3,325,000 expiring
in fiscal 2005.

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.

    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. In accordance with the terms of the
convertible participating preferred stock, 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.

RECEIVABLE FROM STOCKHOLDER

    The receivable from stockholder represents an interest bearing note from a
stockholder in the amount of $554,063 at December 31, 2000 and 1999, 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, $36,568 and $37,125 for the years ended December 31, 2000, 1999 and
1998, respectively, for interest from this stockholder.

                                       48
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  STOCKHOLDERS' EQUITY (CONTINUED)
STOCK REPURCHASE PROGRAM

    In April 2000, the Board of Directors of the Company authorized a stock
repurchase program for the Company's Common Stock. Under the stock repurchase
program, the Company can effect stock repurchases from time to time up to an
aggregate of $10,000,000 of its Common Stock. The stock repurchase program does
not have an expiration date. In the year ended December 31, 2000, the Company
repurchased 625,900 shares of its Common Stock at a cost of $2,326,814 under
this program.

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 to be issued under the Plan is 2,867,346 shares, as
amended. 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          EXERCISE
                                                        OF          PRICE PER          PRICE PER
                                                      OPTIONS         SHARE              SHARE
                                                     ---------   ----------------   ---------------
<S>                                                  <C>         <C>                <C>
Outstanding at January 1, 1998.....................    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
  Granted..........................................  1,182,000         2.87         $ 1.50 - $ 7.00
  Forfeited........................................   (677,500)        7.74         $ 2.10 - $10.40
  Exercised........................................   (133,500)        1.98         $ 1.88 - $ 2.10
                                                     ---------        -----         ---------------
Outstanding at December 31, 2000...................  1,987,000         4.59         $ 1.88 - $13.00
                                                     =========        =====         ===============
Exercisable at:
  December 31, 1998................................    304,663        $4.78         $ 1.88 - $ 2.10
  December 31, 1999................................    475,895        $5.43         $ 1.88 - $13.00
  December 31, 2000................................    675,326        $6.00         $ 1.88 - $13.00
</TABLE>

    At December 31, 2000 and 1999, 584,846 and 684,846 shares, respectively,
were available for future grant. The weighted average remaining contractual life
for the outstanding options in years was 8.82, 8.83 and 8.91 at December 31,
2000, 1999 and 1998, respectively.

    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

                                       49
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  STOCKHOLDERS' EQUITY (CONTINUED)
prescribed by SFAS No. 123, the Company's net income (loss) would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                           -------------------------------------
                                                              2000          1999         1998
                                                           -----------   ----------   ----------
<S>                                                        <C>           <C>          <C>
Net income (loss):
  As reported............................................  $(5,216,218)  $9,188,103   $7,515,551
  Pro forma..............................................   (5,768,339)   8,790,433    7,367,551

Earnings (loss) per share:
  As reported--basic.....................................  $     (0.39)  $     0.69   $     0.76
  Pro forma--basic.......................................        (0.44)        0.66         0.75
  As reported--diluted...................................        (0.39)        0.67         0.63
  Pro forma--diluted.....................................        (0.44)        0.64         0.62
</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>
                                                        YEAR ENDED DECEMBER 31
                                                    ------------------------------
                                                      2000       1999       1998
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Expected dividend yield...........................     0.0%       0.0%       0.0%
Expected stock price volatility...................     75.6       55.9       37.5
Risk free interest rate...........................     5.5%       5.5%       6.0%
Expected life of options..........................  5 years    5 years    5 years
</TABLE>

    These assumptions resulted in weighted average fair values of $2.04, $3.61
and $3.35 for each stock option granted in 2000, 1999 and 1998, 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 $118,060, $255,356 and $570,325, for the years ended
December 31, 2000, 1999 and 1998, respectively.

    Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
2000:

<TABLE>
<S>                                                           <C>
2001........................................................  $112,240
2002........................................................    90,996
2003........................................................    89,371
2004........................................................    89,371
2005........................................................    29,790
                                                              --------
Total minimum lease payments................................  $411,768
                                                              ========
</TABLE>

    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.

                                       50
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 $9,555, $10,045 and $10,409 for
the years ended December 31, 2000, 1999 and 1998, 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, 2000 and 1999, 172,579 and 199,735
shares are available for issuance under this plan. For the year ended
December 31, 2000, 25,366 shares were issued at prices ranging from $1.28 to
$2.76 per share under the 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.

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.

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

    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, 2000.

                                       51
<PAGE>
                                  NATROL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
2000:
  Net sales.......................................  $22,694    $24,083       $22,283       $18,029
  Gross profit....................................   10,775      9,275        10,174         6,931
  Net income (loss)...............................      736     (2,408)         (521)       (3,023)
  Basic earnings (loss) per share.................  $  0.06    $ (0.18)      $ (0.04)      $ (0.23)
  Diluted earnings (loss) per share...............  $  0.05    $ (0.18)      $ (0.04)      $ (0.23)

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
</TABLE>

                                       52
<PAGE>
                         NATROL, INC. AND SUBSIDIARIES

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
COLUMN A                                 COLUMN B             COLUMN C            COLUMN D        COLUMN E
--------                               ------------   ------------------------   ----------      ----------
                                        BALANCE AT    CHARGED TO    ADDITIONS                    BALANCE AT
                                       BEGINNING OF   COSTS AND    CHARGED TO                      END OF
DESCRIPTION                               PERIOD       EXPENSE     ACQUISITION   DEDUCTIONS        PERIOD
-----------                            ------------   ----------   -----------   ----------      ----------
<S>                                    <C>            <C>          <C>           <C>             <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 1998........    $  262,000    $  136,000                 $   66,000      $  332,000
Year Ended December 31, 1999........    $  332,000    $   92,700     $97,647     $   19,847      $  502,500
Year Ended December 31, 2000........    $  502,500    $  400,000                 $  423,400      $  479,100

ALLOWANCE FOR SALES RETURNS:
Year Ended December 31, 1998........    $  205,000    $  971,726                 $  509,651(1)   $  667,075
Year Ended December 31, 1999........    $  667,075    $1,108,859                 $  531,852(1)   $1,244,082
Year Ended December 31, 2000........    $1,244,082    $3,790,276                 $3,574,324(1)   $1,460,034
</TABLE>

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

(1) Represents actual returns of goods.

                                      S-1