UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB
(Mark One)

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

 [Fee  Required]
                                     For the fiscal year ended December 31, 1997

[ ] TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
OF 1934

[No Fee Required]
                           For the transition period from _________ to _________

                                 Commision file number   1-13559
                                                       -------------------------

                               Fresh'n Lite, Inc.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

Texas                                                          75-2337102
-------------------------------                              -------------------
(State of other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

1705 E. Whaley Longview, Texas                                    75605
----------------------------------------                     -------------------
(Address of principal executive offices)                       (Zip Code)

Issuer's telephone number (903) 758-2811

Securities registered under Section 12(b) of the Exchange Act:

     Title of each class                                Name of each exchange on
                                                        which registered
----------------------------                     -------------------------------
----------------------------                     -------------------------------

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, par value $.01
                                (Title of class)
--------------------------------------------------------------------------------
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No[ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of  Regulation  S-B is not  contained in this form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

The Issuer's revenues for the most recent fiscal year. $3,106,144.
                                                       ----------

The  aggregate  market  value of  Common  Stock  held by  non-affiliates  of the
registrant  based on the sale trade price of the Common Stock as reported on the
OTC-BB on April 29, 1997 was $18,607,644.  For purposes of this computation, all
officers,  directors,  and 10% beneficial  owners of registrant are deemed to be
affiliates.  Such  determination  should  not be deemed an  admission  that such
officers,  directors or 10%  beneficial  owners are, in fact,  affiliates of the
registrant.  Number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of April 19, 1997:  6,356,852 shares of common stock, par value
$.01.

Transitional Small Business Disclosure Format:  Yes [X]  No [  ]

<PAGE>


                                     PART I

Item 1.  DESCRIPTION OF BUSINESS

History
       Fresh'n  Lite,  Inc.  (the  "Company")  was  incorporated  under the laws
of the State of Delaware on May 9, 1990. The Company was originally formed under
the name of Bosko's, Inc.

       On June 5,  1989,  the  founders  of the  Company  established  the first
"Bosko's 3 N 1 D-Lite"  restaurant in Marshall,  Texas. The restaurant served an
assortment of submarine  sandwiches,  soups, salads, deli sandwiches,  croissant
sandwiches,  low fat burgers,  baked potatoes,  grilled chicken sandwiches,  fat
free pizza, steaks, seafood, pastas, no-fat frozen yogurt, fat free & sugar free
desserts,  soft drinks,  potato  chips,  and other similar food  products.  This
restaurant was sold early in 1995.

       The Company opened a second  restaurant in Tyler,  Texas, on February 15,
1991,  under the name "Bosko's 3 N 1 D-Lite." This  restaurant was sold in early
1995. The Marshall and Tyler  restaurants  were  marginally  profitable and were
sold to allow  management to focus on the Company's more profitable  restaurants
and to divest  assets  that  were less  compatible  with the  Company's  current
restaurant concept.

       The Company  opened a third  restaurant in Longview,  Texas,  on March 8,
1992,  also under the name "Bosko's 3 N 1 D-Lite." This was the Company's  first
step in the testing of a store using a geodesic dome design.  The address of the
Longview store is 2804 Judson Road, Longview, TX 75601. This store was closed in
October of 1997 in order to allow management to concentrate it's efforts on it's
higher volume and more profitable urban market stores.

       On  December  9, 1992,  the name of the  Company  was changed to "Fresh'n
Lite, Inc." Consequently, the stores' names also changed to "Fresh'n Lite Cafe &
Grill," with an accompanying marketing slogan "Tastes great, Less Fat." The name
change  came  about  due to  market  research  and  the  need  for  public  name
recognition of what the Company sells.

       The Company's fourth restaurant  (bearing the "Fresh'n Lite" name) opened
in  Nacogdoches,  Texas,  on May 24, 1993. This store was another test store for
the  Company's  geodesic  design  as  well  as the  first  location  to  have an
accompanying  recreation  center for the children of customers.  The address for
the Nacogdoches store is 1122 North Street, Nacogdoches, Texas 75961. This store
was closed in February of 1997 in order to allow  management to concentrate it's
efforts on it's higher  volume and more  profitable  urban market  stores.  This
store was sold March 17, 1998 for  $600,000.  The proceeds of the sale were used
to pay down debt at East Texas National Bank in Marshall, Texas.

       The fifth "Fresh'n Lite" restaurant  opened in Texarkana,  Texas, in June
of 1994. Although the geodesic design provides a unique,  highly visible design,
the Company determined through operations of the Longview and Nacogdoches stores
that this  design is not as  efficient  as a more  proven and  standard  design.
Therefore,  the  Texarkana  store is a 3,308  square foot  rectangular  building
utilizing a traditional  floor plan. The address of the Texarkana  store is 3520
Summerhill Road, Texarkana,  Texas 75502. This store was closed in April of 1997
in order to allow  management to concentrate  it's efforts on it's higher volume
and more profitable urban market stores.

       The sixth "Fresh'n Lite" restaurant  opened in Dallas,  Texas, in July of
1995.  The  design is  considerably  different  and has been  changed to be more
suitable to what management  believes is the urban taste.  It has  approximately
4,500 square feet. It has take-out orders and drive-thru capability. It does not
have a recreation area. It is located at 6150 Frankfort Rd., Dallas, Texas.

       The seventh  Fresh'n  Lite  restaurant  opened  in Irving (Valley Ranch),
Texas in  February,  1997.  The design in  comparable  to that of the  company's
Dallas store. The store is located at 8604 N. MacArthur Blvd., Irving, Texas.

       The  eight  Fresh'n  Lite  restaurant  opened in "The  Colony",  Texas in
October 1997.  This store is also patterned  after the more  traditional  design
used at its Dallas  store.  The store is located at 4707 Hwy 121 W. The  Colony,
Texas.

       The ninth  restaurant is scheduled to open May 7, 1998 in  Richardson,  
Texas. This will be the company's first "Street Talk Cafe" concept. The store is
located at 1840 N. Plano Rd. Richardson, Texas. (See "Company Business")

       Given that the Marshall,  Tyler, and Nacogdoches stores were sold and the
Texarkana and Longview,  stores were closed and are now under contract for sale,
there  are now a total  of three  Company  restaurants  open and a fourth  under
construction and scheduled to open May 7, 1998.

       In October 1995, Fresh'n Lite, Inc., a Delaware corporation,  merged into
its wholly owned  subsidiary,  F'NL,  Inc., a Texas  corporation,  with the name
"Fresh'n  Lite,  Inc."  continuing  as the name of the  Texas  corporation.  The
Company and its  business  continue as a Texas  corporation.  The purpose of the
merger was to merely change the domicile of the Company to Texas.


<PAGE>

Company Business

       The Company currently owns and operates three full-service cafe and grill
restaurants  located in the Texas cities of Dallas, The Colony, and Valley Ranch
(Irving)  under the name of  Fresh'n  Lite  Cafe & Grill.  The  Company's  basic
concept is to offer its customers a healthy  alternative to  traditional  casual
dining  restaurants  by  utilizing  high  quality  low-fat  fresh  cut meats and
cheeses, nonfat mayonnaise,  and fresh cut vegetables as well as fat-free pizzas
and other specialty items which are not normally associated with healthy eating.
However,  the Company  feels it is essential  that  restaurant  offerings do not
sacrifice taste for the benefit of more nutritional  eating. The majority of the
Company's  menu items are  prepared  to order using fresh  meats,  cheeses,  and
vegetables which are prepared daily in order to meet the customers' expectations
created by the name  "Fresh'n  Lite." While the  restaurants  offer full service
casual dining, the menu is geared toward fast preparation selections. Drive-thru
and take-out service has proven to be very popular with consumers.

       The Company is poised to change the name and  reposition the Fresh'n Lite
concept  as  Street  Talk  Cafe.  This  is  being  done to  eliminate  confusion
associated  with concepts that "sound" like Fresh'n Lite and to more  accurately
reflect  the  "healthy  casual"  positioning  management  believes  is a new and
winning niche in the casual dining segment.  The Company plans to develop Street
Talk Cafe  restaurants  in key Texas  markets as an immediate  and  intermediate
growth strategy.

       The  prototype  Street Talk Cafe  restaurant  utilizes  distinct  concept
elements to provide guests with a superior "total dining" experience. The design
elements  convey the "street" and "outdoor"  ambiance  associated with the name.
Guests  walk into the  restaurant  on brick  streets  and wait to be seated in a
trolley car area, complete with authentic benches.  Guests can dine in a variety
of rooms that  reflect  the type of shops,  stores,  and  surroundings  normally
associated with a "street  experience".  This makes dining at Street Talk Cafe a
true  event  and  helps  the  concept  deliver  greater  value  by  offering  an
interesting  and  entertaining  environment.  The menu for Street Talk Cafe will
carry the same  offerings  as the  Fresh'n  Lite  Cafe &  Grill's  and will also
include the nutritional content of each item.

       The Fresh'n Lite  restaurants'  menu  offerings are  competitive in price
relative to other casual  dining  restaurants  which use less  nutritional  food
products.  For this reason,  the Company feels  consumers  perceive an excellent
price/value  relationship  as they  become  aware  of the  higher  quality  food
selections they receive at comparable price points offered by competitors.

       The  Company's  restaurants  are subject to all local  health  department
codes  and  inspections,  as  well  as all  Federal  Food & Drug  Administration
policies and OSHA policies.  Certain routine  inspections  have been made of the
restaurants and have resulted in no health code or other violations.

       The Company's  primary supplier of goods is Conco Food Systems,  P.O. Box
8848, Shreveport, LA 71148. The Company currently purchases approximately 90% of
its inventory  from Conco Foods.  The Company has a written  contract with Conco
Foods and  purchases  as needed on a net thirty  (30) day basis.  The Company is
current in its account  with Conco Foods.  The Company has  accounts  with other
suppliers to insure product availability in the event that Conco Food Systems is
unable  to  meet  the  Company's  needs  in the  future.  Conco  Food's  parent,
Consolidated  Companies,  Inc., purchased 133,332 shares of the Company's Common
Stock in March, 1995, for $199,999,  and Consolidated Companies has entered into
a five-year Primary  Distribution  Agreement  pursuant to which it has agreed to
provide  90% of  products  which are  required  by the  Company and which it can
provide.

Control Systems

       The Company  utilizes point of sale computer  systems at all stores which
allow the Company's corporate  management to monitor the stores on a daily basis
via  computer  modems and  tracking  software  which will  assist the Company in
maintaining control of inventory, supplies and labor costs.

       All  personnel  are  provided  with a detailed  operations  manual  which
outlines their job duties, safety standards, Company policies, and food handling
and preparation responsibilities.  The employees are expected to comply with all
information contained in this manual.

       The Company  also  intends to utilize the  services of area  managers who
will be in the stores at least twice a week.  An area  manager  will have direct
oversight of no more than seven stores  within a given area.  The area  managers
will be  responsible  for  insuring  the  stores'  compliance  with all  Company
policies,  including but not limited to, inventory  control,  hiring and firing,
training,  maintenance of facilities, food purchasing and preparation,  customer
relations,  bookkeeping,  and etc. The Area Manager will report  directly to the
Chief Operating Officer of the Company on a weekly basis.


<PAGE>


Concept and Strategy

       The Company feels that in order to be  successful in today's  competitive
environment,  it must focus on a clearly  differentiated  identity and offer its
customers  the  highest  quality  food  product  in  a  comfortable,  attractive
atmosphere at reasonable prices. The niche which Fresh'n Lite has identified for
urban,  white-collar  markets is that of a  "healthy  casual  restaurant"  which
offers a wide selection of sandwiches,  salads, pizzas, steaks, seafood, Tex-Mex
and special dinner items and desserts  which have nonfat or low-fat  content and
appeal to the health  conscious,  yet do not sacrifice  taste and are reasonably
priced. The concept addressing this niche is the "Fresh'n Lite" concept.

       Company restaurants featuring the "Fresh'n Lite Cafe & Grill" and "Street
Talk Cafe"  concepts are designed to offer full service to the casual diner with
food  preparation  time  comparable to fast-food  restaurants.  This allows more
rapid  turnover  of busy lunch  time  crowds.  All of the  current  stores  have
substantial drive-thru and take-out business.  While the Company's design allows
those customers who are  time-constrained  to be served in an efficient  manner,
the  atmosphere of the  restaurants is such that those  customers  looking for a
more relaxed environment can be served quickly, yet not feel rushed.


Pricing

       The Company's  pricing  strategy is to compete  initially  with other low
cost producers in order to gain an initial acceptance for the Company's product.
This will be possible  because of the  relatively  low initial cost to establish
each new location.  With other restaurant  chains offering value pricing on many
items,  it will also be  necessary  to keep price  competitive  to  attract  new
customers.  However,  because  of the  quality of the  product  and the hope for
repeat  business,  it is the  Company's  expectation  that  it  will  be able to
increase prices, subject to price strategies at competing restaurants.


Management and Employees

       The Company believes that attracting and maintaining  superior  employees
will  continue  to be vital  to its  success.  Managers  receive  an  attractive
compensation package which includes performance bonuses and other incentives. In
return,  they are  expected to meet high  standards  in terms of store  margins,
sales volumes,  and overall  atmosphere in their  restaurants.  Fresh'n Lite has
established  a corporate  culture  which  emphasizes  a fun,  yet  professional,
environment  where  employees  at all  levels  take  pride  in  their  work  and
understand their individual  importance to the Company's overall success as well
as their value to senior management.  The Company currently has approximately 12
full time and 85 part time employees in its operations.


Competition

       The Company believes it is competing with other  restaurants  which offer
similar  products to that which  Fresh'n Lite serves as well as those that offer
other food types.  For  instance,  a consumer may  typically  eat at a hamburger
establishment  one day, a Mexican food  take-out  restaurant  another day, and a
deli-style   restaurant   such  as  Fresh'n  Lite  another  day.  By  serving  a
consistently  good  product  and  emphasizing  its  comparative   healthfulness,
management  expects to attract  customers back on a more  repetitive  basis than
those serving other food products.  By emphasizing this market niche the Company
hopes to maintain a competitive posture with respect to chain restaurants.

       In competing in the healthy  eating  environment  for its "Fresh'n  Lite"
restaurants, the Company has the advantage of the "expanded menu" concept, which
will allow the same  consumer to have a variety of meal  choices  for  different
days.  Yogurt and sandwich  specialty shops offer products that are seasonal and
typically eaten at certain times of the day. By offering both of these products,
as well as other  alternatives,  Fresh'n  Lite can  accommodate  the  needs of a
broader customer base, thus generating  better  productivity  throughout the day
and evening.  In competing with those restaurants serving similar food products,
the  Company  believes  that its  superior  service,  quality of food  products,
competitive  pricing, and the combination of fast food and relaxing full service
environment,  coupled with the need to eat healthier, has proven its competitive
edge in serving the consumer.

       The  restaurant  industry is  competitive on both a national and regional
basis.  On a national  level,  overall  marketing  and  pricing  strategies  are
dictated  by  the  larger,  well  established  fast  food  chains.  As  economic
conditions  change,  product  prices at major  chains  may be  lowered to entice
customers  to eat out more.  To the  extent  the  Company  competes  with  local
franchises  of these  national  chains,  the  Company's  prices  will have to be
competitive to continue  attracting their regular customers,  as well as gaining
an additional market share in new locations.


<PAGE>

National firms will also have the benefit of substantial financial resources for
advertising  and other marketing  promotions.  While Fresh'n Lite is not able to
compete on the same scale, by initially  concentrating  its efforts on a certain
geographic  region,   the  Company  hopes  to  gain  name  recognition   through
advertisements  and  promotions  with the local  media.  (See  "Advertising  and
Marketing") In competing with franchises of national restaurant chains,  Fresh'n
Lite does have the  advantage  of paying no franchise  fees to the parent.  This
allows for higher operating margins for each dollar of revenue generated.

       The  Company  also  faces   competition   from  other  local   restaurant
businesses.  This will include small, one store restaurants, as well as regional
restaurant chains. By keeping overall set-up costs and overhead low,  management
believes it will have more staying power than its competitors during those times
when consumers eat out less frequently.

       Regulation  Restaurants  are subject to licensing and regulation by state
and local health,  sanitation,  safety, fire, and other authorities and are also
subject to state and local  licensing  and  regulation  of the sale of alcoholic
beverages  and food.  The  company  has  experienced  no problems in its current
operations in complying with these authorities.

       Trademark  The  Company  has been  granted  a  registration  for the name
"Fresh'n Lite Deli Cafe." Application for registration of the name "Fresh'n Lite
Deli  and  Grill"  was  filed in June  1995.  While  no  assurance  can be given
regarding the outcome of this later application, the favorable response received
to date on the first  registration  is an  indication  the  second  registration
should also be granted.  Additionally  the Company has filed for a trademark for
"Street Talk Cafe" on March 1, 1998.

       Registration  of  these  names  does  not  assure  the  Company  that its
ownership is incontestable  until five (5) years after  registration  issues and
the Company files an additional  affidavit with the Trademark Office.  There are
other users of the name "Fresh'n  Lite,"  several of which began use of the name
before the Company,  but none of these users have made any claim  regarding  the
use of this  name by the  Company.  Whether  another  user  could  restrict  the
Company's  use of the name will  depend upon the facts of the  particular  case,
including  priority of use, priority of registration,  the area of use, the type
of use and the generic or  descriptive  nature of the name.  The Company has, by
attempting registration, taken those actions the law allows to protect its name.

Item 2: DESCRIPTION OF PROPERTY

Restaurant Locations

       The  following  table  provides  information  with respect to each of the
Company's properties.  The Dallas,  Irving, The Colony,  Longview, and Texarkana
buildings are owned,  with a lease on the land. The Company's  current plans are
to secure 20 year  lease-purchases  on the property to be used for the expansion
of the next four stores.
<TABLE>

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

       Location                   Status                 Square Feet        Lease Term (1)
------------------------------------------------------------------------------------------
<S>                                                                             <C>    

Dallas, Texas                     Open                   4.500 sq. ft.         20 Years
Irving (Valley Ranch), Texas      Open                   4,700 sq. ft.         20 Years
The Colony, Texas                 Open                   4,700 sq. ft.         20 Years
Texarkana, Texas              Under contract to sell     3,308 sq. ft.         20 Years
Longview, Texas               Under contract to sell     3,500 sq. ft.         20 Years
Richardson, Texas             Opening May 7, 1998        4,700 sq. ft.         20 Years
                                                                          
------------------------------------------------------------------------------------------
</TABLE>

(1) See Notes to Financial Statements for further information on leases.

       Per the Company's  plan to  reposition  the concept as "Street Talk Cafe"
there are currently  plans to convert the Dallas store located at 6150 Frankford
Rd. The anticipated cost for this conversion is $200,000.



<PAGE>



Item 3:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>

       The Directors and Officers of the Company are set forth below.

--------------------------------- -------- ---------------------------------------- -------------------
              Name                  Age                   Position                   In Office Since
--------------------------------- -------- ---------------------------------------- -------------------
<S>                                                                                       <C>    

                                           Chief Executive Officer, Chairman of
Stanley L. Swanson                  53                  the Board of                       1990
                                                          Directors

Henry Leonard                       49     President and Chief Operating Officer           1997

Curtis A. Swanson                   30              Director, Treasurer,                   1990
                                                   Chief Financial Officer

Jean Hedges                         36                   Controller
                                                                                           1993
Carole A. Swanson                   55                    Secretary                        1990

Edward Dmytryk                      50                    Director                         1992

Robert (Bob) Lilly                  57                    Director                         1995

Dr. Donald Whittaker                65                    Director                         1997
--------------------------------- -------- ---------------------------------------- -------------------
</TABLE>

       All  directors   hold  office  until  the  next  annual  meeting  of  the
shareholders  of the  Company,  and  until  their  successors  are  elected  and
qualified.  Officers  hold  office  until  the  first  meeting  of the  Board of
Directors  following  the  annual  meeting of  shareholders,  subject to earlier
removal by the Board of Directors.

       Family relationships among Officers and  Directors:   Stanley L.  Swanson
and Carole A.  Swanson  are husband  and wife.  Curtis A.  Swanson is the son of
Stanley L. and Carole A. Swanson.


BUSINESS EXPERIENCE OF DIRECTORS & OFFICERS

Stanley L.  Swanson,  a founder of the Company,  has served as President , Chief
Executive  Officer,  and Chairman of the Board since its inception in May, 1990.
In addition to developing the Company's  overall business strategy and expansion
plans,  Mr. Swanson is responsible for selection and negotiations for all future
locations.  Prior to establishing the first Fresh'n Lite restaurant in Marshall,
Texas in June 1989, Mr. Swanson was the President and CEO of Canaan Enterprises,
Inc.,  a  Montana  corporation  involved  in  the  development  of  real  estate
franchises within the state.  Under Mr. Swanson's  leadership,  the company grew
from one  franchise in 1986 to ten  franchises in 1988. It was at this time that
Mr. Swanson sold his holdings in Canaan Enterprises, Inc., in order to establish
the  restaurant  business that is now Fresh'n Lite,  Inc. From 1981 to 1986, Mr.
Swanson  was a real estate  broker in the state of  Montana,  where he owned and
operated two real estate sales and development companies.  From 1972 until 1981,
Mr. Swanson was an entrepreneur in the restaurant industry, owning and operating
two  restaurant  establishments.  From  1962  until  1972,  Mr.  Swanson  played
professional  baseball,  where he was primarily  associated  with the Cincinnati
Reds and Montreal Expos organizations.

Henry  Leonard has been  President  and Chief  Operating  Officer of the Company
since  December  1997.  Mr.  Leonard  handles all day to day  operations  of the
Company as well as new concept development,  marketing and real estate. Prior to
joining the Company in 1997, Mr. Leonard was President of Casa Ole' ALM,  L.L.C.
a franchise market partner joint venture with Casa Ole'  Restaurants,  Inc. From
1995 to 1996 Mr. Leonard was Director of New Concept Development for Papa Gino's
of American, Inc. From 1974 to 1994 Mr. Leonard served in a variety of posts for
Pizza  Systems / Summit  Concepts  (d.b.a.  Mazzio's and Ken's Pizza)  including
President and Chief Operating Officer.


<PAGE>



Curtis A. Swanson has been Chief  Financial  Officer,  Executive Vice President,
and  Treasurer of the Company  since its  inception in May,  1990.  Mr.  Swanson
handles all financial  matters for the Company.  Prior to his  involvement  with
Fresh'n Lite, Inc., Mr. Swanson was an officer in Canaan Enterprises, Inc., from
1986 to 1988.  His duties with Canaan  Enterprises,  Inc.,  included  the sales,
set-up,  and oversight of franchises  within the state of Montana.  From 1987 to
1989, Mr. Swanson owned and operated two real estate franchises,  a video rental
store, and a pizza establishment.

Jean M. Hedges has been  Corporate  Controller  for the Company since  September
1993.  Ms.  Hedges is  responsible  for all  accounting  and  office  management
functions  including  generating  and analyzing  financial  reports,  performing
monthly,  quarterly,  and annual closeout functions,  budget planning, cash flow
forecasting,   analyzing   capital   expenditures,   and  evaluating  return  on
investments.  Ms. Hedges has had extensive CPA firm  experience  and brings a 10
year record as a controller  and business  manager to the Company.  Prior to her
employment  with  Fresh'n  Lite,  Ms.  Hedges was the  controller  of  Stainback
Casting, a manufacturer based out of Tyler,  Texas, from 1992 to 1993. From 1990
to 1992, Ms. Hedges was the controller of American  Retirement Homes which owned
over 1/3 of all the  retirement  homes in the State of Virginia.  It was through
this position that Ms.  Hedges  gained  experience in a multi-unit  environment.
From 1987 to 1990,  Ms.  Hedges was the  business  office  manager for Goodman &
Company,  CPA, the largest CPA firm in the State of Virginia.  From 1984 to 1987
Ms.  Hedges was an internal  accounting  manager with Price  Waterhouse,  CPA in
Norfolk,  Virginia.  Ms.  Hedges  has a  Bachelor  of Arts  degree  in  Business
Management/Economics and Political Science from Randolph Macon College.

Carole A.  Swanson,  wife of Stanley L. Swanson and  co-founder of Fresh'n Lite,
Inc.,  has served as Secretary of the Company since its inception in May,  1990.
Prior to establishing  the first Fresh'n Lite restaurant in Marshall,  Texas, in
June of 1989,  Ms.  Swanson  was a  broker/owner  of a real  estate  company  in
Hamilton,  Montana,  from 1983 to 1988. From 1980 to 1983, Ms. Swanson  co-owned
and operated the Cedar Chest  restaurant  in Darby,  Montana.  From 1977 through
1980, Ms. Swanson took time off to concentrate on home and family.  From 1972 to
1976, Ms.  Swanson  co-owned and operated the Lochsa Lodge Resort and restaurant
in Powell,  Idaho. From 1954 through 1972, Ms. Swanson worked with her father in
the  development  of a  31  store  restaurant  chain  based  out  of  Knoxville,
Tennessee,  called the Blue Circle's.  This company was sold due to the death of
Ms. Swanson's father. She was involved in training, inventory control, food cost
analysis, labor cost analysis, and bookkeeping.

Edward C. Dmytryk has been a Director of the Company since 1992.  Mr. Dmytryk is
currently the Chief Executive Officer and principal owner of Benchmark,  Inc., a
metal fabricating company located in Fort Worth, Texas. Until January, 1995, Mr.
Dmytryk  was  formerly  the chief  operating  officer for  Bollinger  Industries
International,  located  in  Irving,  Texas.  Bollinger  is  a  fitness  product
corporation  with annual sales nearing $60 million.  Mr. Dmytryk served as Chief
Operating Officer for Bollinger from September,  1988 until January,  1995. From
November, 1986, until September, 1988, Mr. Dmytryk was the President and General
Manager of Mac's Snacks,  Inc., located in Arlington,  Texas. He was responsible
for the  successful  turnaround  of a national  snack food  company.  Through an
overhaul of the sales and marketing  effort,  sales  increased by 250% under his
leadership.  Mr. Dmytryk also successfully negotiated the sale of Mac's to Evans
Food Products.  From November,  1985 until  November,  1986, Mr. Dmytryk was the
Vice President of Sales and Marketing for Animed,  Inc.,  located in Roslyn, New
York. He was functionally  responsible for the overall corporate  marketing of a
veterinarian's  products and services company,  to include  research,  planning,
execution,  and  evaluation.  Under his  leadership,  sales  volume grew from $8
million to $16 million  through a combination of  acquisitions  and  incremental
sales volume. From 1973 until 1985, Mr. Dmytryk held various executive positions
with  Wulfsberg  Electronics,   Inc.,  Polaroid  Corporation,  and  We  Chemical
Products/Alfa  Laval.  From 1968 until 1973, Mr. Dmytryk was a captain,  regular
officer  and pilot in the  United  States Air  Force.  He is a  graduate  of the
Citadel in  Charleston,  South  Carolina  with a  Bachelors  degree in  Business
Administration.

Robert  (Bob) Lilly has been a director of the Company  since March,  1995.  Mr.
Lilly is  currently  the owner of  Professional  Imaging &  Promotions,  Inc., a
photography and graphics  imaging company  located in Graham,  Texas.  From 1961
through  1974,  Mr. Lilly played  football  for the Dallas  Cowboys,  a National
Football League franchise. Subsequent to his retirement from the Dallas Cowboys,
Mr.  Lilly has been  involved  in  personal  investments,  endorsements  and his
photography  and graphic  imaging  business.  Over the years he has  acquired an
interest in nutrition and has attempted to learn and apply  fundamental  healthy
nutritional  concepts  to his  personal  living and,  hence,  has  developed  an
interest in the concept of the Company.


<PAGE>

Dr. Donald  Whittaker has been a director of the Company  since May,  1997.  Dr.
Whittaker is the founder and operator of Dr. Whittaker's Vitamins and Completely
Fit Health  Foundation..  From 1968 through the present Dr. Whittaker has been a
physician in private  practice.  Dr. Whittaker has been the host of "Calling Dr.
Whittaker" a weekly program dealing with cutting edge health issues. The program
has been  broadcast  internationally  on TBN  since  1979.  Dr.  Whittaker  is a
graduate of Texas Wesleyan  College where he received a degree in Chemistry.  He
received his  postgraduate  training at Kansas City School of Medicine  where he
graduated as a D.O..





Item 4:  REMUNERATION OF DIRECTORS AND OFFICERS

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

     Name of Individual          Capacities in which              Aggregate
     Or identity of group        remuneration was received        remuneration
--------------------------------------------------------------------------------

     Stanley L. Swanson          Chief Executive Officer
                                 Chairman of the Board             $24,700

     Curtis A. Swanson           Chief Financial Officer           $24,700

     Jean M. Hedges              Controller                        $26,000


     Henry Leonard               President                         $ 2,885(a)

(a) Mr.  Leonard  joined the  company  December  15, 1997  therefore  the salary
reflected is for only1/2of 1 month.

STOCK OPTIONS PLAN

    On March 1, 1997,  the Board of  Directors  of the Company  adopted its 1997
Incentive  Stock Option Plan pursuant to which  200,000  shares of the Company's
stock were set aside for the purpose of the granting of incentive  stock options
to directors and key employees of the Company.  The purchase  price of the stock
purchased  pursuant to the exercise of such an option is required to be not less
than 100% of the fair market  value of the stock on the date of the grant of the
option. This plan was approved by the shareholders on May 23, 1997.

    Under the 1995 Incentive  Stock Option Plan, an option for 50,000 shares has
been granted to Bob Lilly for service as a member of the Board of Directors with
a purchase  price of $1.50 per share.  This option  extends until March 1, 2000.
Also under the Incentive Stock Option Plan,  Roland R. Jehl and Douglas K. Tabor
have been granted an option for 25,000 shares each for service as members of the
Board of  Directors  with a  purchase  price of $1.50 per share.  These  options
extend until October 19, 2000.

    Additionally,  Mr. Lilly was granted an option to acquire  stock at $.10 per
share in a manner so that the difference between the price of $.10 per share and
the fair  market  value of the  stock at the time of the  issuance  of the grant
multiplied by the number of shares  equaled  $2,500 for each day of  promotional
appearances  that Mr.  Lilly  made  before  December  1,  1995 on  behalf of the
Company.  Options  covering  3,572 shares were granted for personal  appearances
made by Mr. Lilly on behalf of the Company before December 1, 1995.

    A new  agreement  has been  entered  into  between the Company and Mr. Lilly
regarding  personal  appearances  made by Mr. Lilly after  December 1, 1995. For
each promotional appearance, Mr. Lilly will receive $1,500.00, plus the grant of
an option to acquire  Common  Stock of the  Company at not less than 100% of the
fair  market  value as of the grant  date.  The grant of the option  will be for
stock  having a fair  market  value of $3,000  at the time of the grant  with an
option term of 5 years.





<PAGE>





Item 5:  SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

       The following table sets forth the number of Common Shares of the Company
owned by each Director,  Officer,  and by each person of record who beneficially
owns 10% or more of the outstanding Common Stock as of December 31, 1995.
<TABLE>
<S>                                                                             <C>   

                                                Amount Owned Before &    Percent of
 Title of Class    Name & Address of Owner(1)       After Offering         Class
----------------- ----------------------------- ----------------------- -------------
Common Shares
                  Stan & Carole Swanson               1,203,921            18.94
                  3216 Page Road
                  Longview, Texas  76505

Common Shares     Curtis & Kim Swanson                 507,024              7.98
                  3218 Page Rd.
                  Longview, Texas  75605

Common Shares     Edward Dmytryk                        20,000              0.31
                  707 Kyle Drive
                  Arlington, Texas  76011
Common
Shares            Dr. Donald Whittaker                  10,000              0.16
                  210 E. Elizabeth St.
                  Jefferson, Texas  75657
----------------- ----------------------------- ----------------------- -------------
</TABLE>

(1) Bob Lilly is not listed as owners of Common Shares,  since at this time they
    only have  options to purchase  Common  Stock.  Refer to the table set forth
    below for information on these options.

    The following table sets forth information  concerning certain  options held
by Stanley L. Swanson, Curtis A. Swanson, and Bob Lilly, Director and Douglas K.
Tabor and Roland R. Jehl,  former  Directors of the Company,  and McCap,  Inc. a
former consultant to the Company.

<TABLE>
<S>                                                                             <C>    

-------------------------------------------------------------------------------------------------
     Name of Holder        Amount of Common Shares    Exercise Price     Date of Exercise
                           Called for by Options 
-------------------------------------------------------------------------------------------------

    Bob Lilly                50,000                      $1.50            On or before 02/28/2000
    Bob Lilly                 3,572                      $0.10            On or before 02/28/2000
    Douglas K. Tabor         25,000                      $1.50            On or before 10/19/2000
    Roland Jehl              25,000                      $1.50            On or before 10/19/2000
    Stanley L. Swanson      100,000                      $3.00            On or before 12/31/2002
    Curtis A. Swanson       100,000                      $3.00            On or before 12/31/2002
    McCap, Inc.             300,000                      $2.50            On or before 12/21/2001

</TABLE>

On May 23,  1997,  the  Board  of  Directors  of the  Company  adopted  its 1997
Incentive  Stock Option Plan pursuant to which  200,000  shares of the Company's
common  stock were set aside for the  purpose of  granting  of  incentive  stock
options to directors and key employees of the Company. The purchase price of the
stock purchased pursuant to the exercise of such an option is required to be not
less than 100% of the fair market value of the stock on the date of the grant of
the option, or 110% of such value in the case of a holder of 10% of the stock of
the Company.  This plan was approved by  shareholders  on May 23, 1997.  None of
these stock options have been exercised.

On March 1,  1995,  the  Board of  Directors  of the  Company  adopted  its 1995
Incentive  Stock Option Plan pursuant to which  100,000  shares of the Company's
common  stock were set aside for the  purpose of  granting  of  incentive  stock
options to directors and key employees of the Company. The purchase price of the
stock purchased pursuant to the exercise of such an option is required to be not
less than 100% of the fair market value of the stock on the date of the grant of
the option. This plan was approved by shareholders on October 19, 1995.

Under the Plan, an option for 50,000 shares has been granted to one  shareholder
for  service as a member of  the Board of  Directors  with  a purchase  price of
$ 1.50 per  share and  expires  March 1,  2000.  Also, under the Plan, two other
Directors  have been  granted  options  for 25,000  shares  each for  service as
members  of the Board  with a  purchase  price of $ 1.50 per share and expire on
October 19, 2000. None of these stock options have been exercised.

<PAGE>


Under a contract  approved by the Board of Directors,  a consulting  company was
granted options to purchase  300,000 shares of the Company's common stock with a
purchase price of $ 2.50 per share and expiring on October 10, 2002. Also, under
employment  contracts  approved by the Board of  Directors,  two officers of the
Company were granted  options to purchase  100,000  shares each of the Company's
common  stock with a purchase  price of $3.00 per share  expiring  December  31,
2002. At December 31, 1997, none of these options had been exercised.

The company applies APB Opinion 25 and related interpretations in accounting for
the Plans.  In 1995,  the FASB issued FASB  Statement  No. 123  "Accounting  for
Stock-Based  Compensation" ("SFAS 123"), which, if fully adopted by the Company,
would  change the  methods the Company  applies in  recognizing  the cost of the
Plans.  Adoption of the cost recognition  provisions of SFAS 123 is optional and
the Company has decided not to elect these  provisions  of SFAS 123. The Company
recorded no stock-based  compensation costs in 1997, 1996, or 1995. Had the fair
values of options been  recognized  as  compensation  expense,  costs would have
increased  by $  228,270  (  $172,270  after  tax) in 1997 and  $90,108 ( no tax
effect) in 1995.  No options were granted in 1996.  The effects of applying SFAS
123 in this proforma disclosure are not indicative of future amounts.

A summary of the status of the Company's  stock options as of December 31, 1995,
1996, and 1997 and the changes during the year ended on those dates is presented
below.

<TABLE>

<S>                                                                             <C>     <C>    
                                                  1995
                                                  ----
                                                             
                                                                    # Shares of             Weighted
                                                                     Underlying              Average
                                                                      Options              Exercise Prices
                                                                -------------------     ---------------------
    Outstanding at beginning of the year                                 0                      N/A
    Granted                                                           103,572                  $ 1.45
    Exercised                                                            0                      N/A
    Forfeited                                                            0                      N/A
    Expired                                                              0                      N/A
    Outstanding at end of the year                                    103,572                  $1.45
    Exercisable at end of the year                                    103,572                  $1.45
    Weighted-average FV of options granted during the year              $.87                     -



                                                  1996
                                                  ----
                                                                    # Shares of             Weighted
                                                                     Underlying              Average
                                                                      Options              Exercise Prices
                                                                -------------------     ---------------------
    Outstanding at beginning of the year                              103,572                  $1.45
    Granted                                                              0                      N/A
    Exercised                                                            0                      N/A
    Forfeited                                                            0                      N/A
    Expired                                                              0                      N/A
    Outstanding at end of the year                                    103,572                  $1.45
    Exercisable at end of the year                                    103,572                  $1.45

                                                  1997
                                                  ----
                                                                    # Shares of                 Weighted
                                                                     Underlying                Average
                                                                      Options              Exercise Prices
                                                                -------------------     ---------------------
    Outstanding at beginning of the year                              103,572                  $1.45
    Granted                                                           543,500                   2.67
    Exercised                                                             0                     N/A
    Forfeited                                                             0                     N/A
    Expired                                                               0                     N/A
    Outstanding at end of the year                                    647,072                   2.47
    Exercisable at end of the year                                    647,072                   2.47
    Weighted-average FV of options granted during the year             $ .42                     -

</TABLE>


The fair value of each stock  option  granted is  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:  dividend yield of 0%,  risk-free  interest rate of 5.57% and 7.8%,
expected  lives  of 1 1/4  years  and 3  1/4  years,  and  volatility  of  74.9%
respectively for 1997 and 1995.

<PAGE>


<TABLE>
<CAPTION>


The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<S>                                                                             <C>         <C>        <C>           <C>   

                                               Options Outstanding                                      Options Exercisable
----------------------- ------------------------------------------------------------------- ----------------------------------------
                         Number Outstanding       Weighted Avg.                              Number Exercisable
       Range of              at 12/31/97         Remaining Contr.        Weighted Avg.           at 12/31/97          Weighted Avg.
   Exercise Prices                                     Life             Exercise Price                                Exercise Price
----------------------- ---------------------- --------------------- ---------------------- ---------------------- -----------------
$  .10 - $1.50               103,572                  2.49                $ 1.45                  103,572               $ 1.45
$ 1.50 - $ 3.00              543,500                  4.86                $ 2.67                  543,500               $ 2.67
----------------------- ---------------------- --------------------- ---------------------- ---------------------- -----------------
$  .10 - $ 3.00              647,072                  4.48                $ 2.47                  647,072               $ 2.47
----------------------- ---------------------- --------------------- ---------------------- ---------------------- -----------------

</TABLE>

Item 6:  INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

    In May, 1994, the Marshall  restaurant was sold by the Company to a business
entity  owned,  in part,  by  Curtis  Swanson.  The  sales  price  was  $25,000,
consisting of the  assumption of  indebtedness  and the assumption of the lease.
The Company made this choice after determining that the Marshall  restaurant was
not  particularly  profitable and did not fit into the  long-range  plans of the
Company. It believes that the terms of the sale were commercially reasonable.

    Currently,  Mr. Curtis Swanson, a director,  treasurer,  and chief financial
officer,  and Mr. Edward Dmytryk,  a director,  formed F'NL Investments,  LLC, a
Texas limited liability  company,  which has entered into a franchise  agreement
with the Company for the establishment of a restaurant in Arlington,  Texas. The
franchise restaurant was located at 900 Six Flags Dr. in Arlington.  The parties
paid a  $50,000  franchise  fee  and  agreed  to pay  royalties  of 5% of  gross
revenues.  The  directors  have  elected to convert this  restaurant  to a pizza
restaurant  because  of  demographics  and  open  the  franchise  restaurant  in
Arlington at a location to be determined  in the future.  FNL  Investments,  LLC
will not be  required to pay  additional  franchise  fee when the new  franchise
sight is selected.

    On December 1, 1995, the Company  entered into an agreement with a Director,
Bob Lilly,  whereby Mr. Lilly receives  $1,500.00 plus the grant of an option to
acquire  Common  Stock of the  Company at not less than 100% of the fair  market
value as of the grant date, for each promotional appearance made by Mr. Lilly on
behalf of the Company.  This agreement  superseded a previous  agreement between
Mr. Lilly and the Company  through which Mr. Lilly acquired  options to purchase
3,572 shares of Common Stock at $.10 per share.

On February  17, 1995,  the Company  sold 133,333  shares of common stock to the
Company's  largest food distributor for $ 200,000,  pursuant to a stock purchase
agreement.  The agreement binds the Company to purchase 90% of its food products
from the  distributor  for five years, as well as to repurchase the common stock
at the original price if one of two  repurchasing  events occur.  As of December
31, 1996, the Company's obligation under this agreement has expired. The Company
is  unaware  of and has not been  notified  that any  repurchasing  events  have
occurred.

At  December  31,   1997,   the  Company   held  a  note   receivable   from  an
officer/shareholder  of the  Company in the amount of $ 124,500.  The note bears
interest  at 5% and is  payable  in two  semiannual  installments  of $  77,845,
together with interest beginning on June 30, 1998.

At December 31, 1997, the Company held a note  receivable  from a shareholder of
the  Company in the amount of $ 15,000.  The note  bears  interest  at 9% and is
payable  in two  semiannual  installments  of $ 8,018,  together  with  interest
beginning on June 30, 1998.

At December 31, 1997, the Company held a note receivable  from a company,  owned
by a  shareholder  of the  Company  in the  amount of $ 17,653.  The note  bears
interest  at 9% and is  payable  in  twelve  monthly  installments  of $  1,543,
together with interest beginning on February 1, 1998.

At  December  31,  1997,  the  Company  held a  note  receivable  from a  sister
corporation  in the  amount of $ 7,390.  The note bears  interest  at 10% and is
payable in one installment of $ 7,390, together with interest on March 1, 1998.

The Company has a long-term  operating lease  agreement with a corporation  that
owns a significant amount of the Company's stock. Minimum rents receivable are $
8,500 per month for five years and the lease  covers  office and retail space at
the Company's headquarters occupied by the corporation.



<PAGE>





                                     PART II

Item 1:  MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The  Company's  common stock began trading on the  OTC-Bulletin  Board under the
symbol  FLTT on May 9, 1997 The  following  table  sets  forth for the  quarters
indicated the high and low sale prices of the Company's common stock.

1997                                     High                       Low
--------------------------------------------------------------------------------
First Quarter                            N/A                        N/A
Second Quarter                           $3.000                     $2.500
Third Quarter                                 $3.750                $2.500
Fourth Quarter                           $3.625                     $2.125

1998                                     High                       Low

First Quarter                            $3.000                     $1.649
Second Quarter                           $4.625                     $1.656

As of April 29, 1998, the Company  estimates that there were  approximately  500
beneficial  owners of the Company's Common Stock,  represented by 220 holders of
record.

Item 2:  LEGAL PROCEEDINGS

The company is not currently a party to any litigation.


Item 3:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None

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

       No matter was  submitted  to a vote of the  shareholders  of the  Company
during the fourth quarter of the fiscal year ended December 31, 1997.

Item 5:  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

       A From 3 was not filed by the officers,  directors,  and 10% shareholders
of the company  when the Form 10SB was filed,  since such parties were not aware
of any filing  requirements.  Also,  a Form 5 has not been filed by such parties
for the  company's  most recent  fiscal year for the same reason.  However,  the
parties have  indicated  that such forms shall be filed  forthwith.  The company
understands  that no Form 4's were required to be filed by such parties,  except
for Curtis  Swanson who  purchased an  aggregate  of 100,024  shares on the open
market over several months.  He has indicated that  appropriate  reporting forms
will be filed.

Item 6:  REPORTS OF FORM 8-K

None

FINANCIAL STATEMENTS

The financial  statements and supplementary data are set forth herein commencing
on page F-1 of this report.




<PAGE>










                               Fresh'n Lite, Inc.

                          Financial Statements Together
                              With Auditors' Report

                                December 31, 1997














<PAGE>


                        T.G. PROTHRO & COMPANY, P.L.L.C.

                          CERTIFIED PUBLIC ACCOUNTANTS


100 Independence Place, Suite 213                       Phone: 903-534-8811fFlip
Post Office Box 7337                                      Fax: 903-534-8891
Tyler, Texas 75711-7337                                EMAIL: tylercpa@tyler.net






                          Independent Auditors' Report



Board of Directors,
   Fresh'n Lite, Inc.
Longview, Texas

We have  audited the  accompanying  balance  sheet of Fresh'n  Lite,  Inc. as of
December  31,  1997,   and  the  related   statements  of  income,   changes  in
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1997. 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 audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of Fresh'n  Lite,  Inc. as of
December 31, 1997, and the results of its operations and its cash flows for each
of the three years in the period  ended  December  31, 1997 in  conformity  with
generally accepted accounting principles.


Certified Public Accountants



/s/ T G Prothro & Company, PLLC
-------------------------------


Tyler, Texas
March 3, 1998




           Members, American Institute of Certified Public Accountants
             Members, Texas Society of Certified Public Accountants




<PAGE>













                              Financial Statements


























<PAGE>


                               Fresh 'n Lite, Inc.
                                  Balance Sheet
                                December 31, 1997


                                                                       1997
                                                                   -----------
               ASSETS

         CURRENT ASSETS
Cash                                                                 $  20,373
Inventory                                                               26,571
                                                                   -----------
         Total Current Assets                                           46,944
                                                                   -----------

         PROPERTY AND EQUIPMENT (Pledged)
Buildings                                                            3,774,141
Land                                                                   135,000
Capitalized Land Leases                                              2,175,000
Leasehold Improvements                                                  30,113
Vehicles and Equipment                                               1,250,302
                                                                   -----------
         Total Property and Equipment                                7,364,556
Accumulated Depreciation                                              (430,325)
                                                                   -----------
         Property and Equipment - Net                                6,934,231
                                                                   -----------


         OTHER ASSETS
Assets Held for Sale, Net of
  Accumulated Depreciation                                             909,835
Corporate organizational Costs
  and Other Assets, Net of
  Accumulated Amortization                                              32,651
Deferred Franchise System Cost,
  Net of Accumulated Amortization                                       57,333
Notes Receivable - Related Party                                       164,543
         Total Other Assets                                          1,164,362
                                                                   -----------
         TOTAL ASSETS                                              $ 8,145,537
                                                                   -----------










                                                                     Continued




                                       2

<PAGE>





                               Fresh 'n Lite, Inc.
                                  Balance Sheet
                                December 31, 1997



                                                                       1997
                                                                   -----------
               LIABILITIES AND SHAREHOLDERS' EQUITY

         CURRENT LIABILITIES
Accrued Expenses                                                     $ 340,635
Accounts Payable                                                        52,864
Bank Overdraft                                                          48,104
Note Payable - Short Term                                               10,249
Income Taxes Payable                                                     8,800
Current Portion of Capital Lease Obligations                            32,139
Current Portion of Notes Payable-Long Term                             465,015
                                                                   -----------
         Total Current Liabilities                                     957,806

         OTHER LIABILITIES
Capital Lease Obligations, net of Current Portion                    2,313,173
Notes Payable-Long-Term, net of Current Portion                      1,101,437
Deferred Income Tax Liability                                          141,200
                                                                   -----------
         Total Liabilities                                           4,513,616

         CONTINGENCIES


SHAREHOLDERS'EQUITY
Common Stock, $ 0.01 Par Value; 50,000,000
  Shares Authorized; 6,158,482
  Shares Issued and Outstanding                                         61,585
Additional Paid in Capital                                           3,278,499
Retained Earnings                                                      293,087
                                                                   -----------
                                                                     3,633,171

Less:    Treasury Stock, at Cost,
         1,250 Shares                                                   (1,250)
                                                                   -----------
         Total Shareholder's Equity                                  3,631,921

               TOTAL LIABILITIES AND
                SHAREHOLDERS' EQUITY                               $ 8,145,537
                                                                   -----------










See accompanying notes to financial statements.

                                       3

<PAGE>

<TABLE>
<CAPTION>


                               Fresh 'n Lite, Inc.
                              Statements of Income
              For the Years ended December 31, 1997, 1996 and 1995

                                                             1997          1996           1995
                                                         -------------  ------------   -----------
<S>                                                                     <C>            <C>      

SALES                                                    $ 3,106,144    $ 2,602,533    $ 1,840,756
COST OF SALES                                               (890,944)      (740,422)      (522,180)
                                                         -----------    -----------    -----------
               GROSS PROFIT                                2,215,200      1,862,111      1,319,576

Franchise Royalties Earned                                      --           34,774          5,211
Franchise Fees Earned                                           --             --           50,000
                                                         -----------    -----------    -----------
               Total Gross Profit and Franchise Income     2,215,200      1,896,885      1,373,787

         EXPENSES

Salaries and Contract Labor                                  744,750        590,517        473,757
Payroll and Other Taxes                                      145,993        118,574         92,619
Professional Fees                                             95,662         88,542         17,646
Advertising and Promotional                                  129,274         64,878         42,275
Rent                                                          33,079         47,423         48,932
Insurance                                                     61,424         41,525         46,390
Telephone                                                     41,346         20,823         22,765
Travel                                                        12,269          5,763          8,412
Utilities                                                    100,331         86,794         67,926
Depreciation                                                 233,891        162,793        122,633
Amortization                                                 206,480        133,731        137,445
Interest                                                     105,131        155,466        106,265
Linen and Laundry                                             39,918         22,452         10,291
Repairs and Maintenance                                       40,062         19,164         12,261
Supplies                                                      12,247         12,099          8,116
Miscellaneous                                                 46,591         19,240         11,730
                                                         -----------    -----------    -----------
           Total Expenses                                  2,048,338      1,579,784      1,229,463
                                                         -----------    -----------    -----------


               OPERATING INCOME                              166,862        317,101        144,324

  Income Tax Expense:                                          8,800           --             --
                    Current                                   47,200         94,000           --
                                                         -----------    -----------    -----------
                    Deferred

               NET INCOME                                $   110,862    $   223,101    $   144,324
                                                         -----------    -----------    -----------

</TABLE>







  See accompanying notes to financial statements.

                                       4

<PAGE>


<TABLE>
<CAPTION>



                               Fresh 'n Lite, Inc.
                  Statements of Changes in Shareholders' Equity
              For the Years ended December 31, 1997, 1996 and 1995

                                                                                              Total
                                                Additional     Retained                       Share-
                                   Common       Paid In        Earnings       Treasury        holders'
                                   - Stock      Capital       (Deficits)       Stock          Equity
                                 -----------   -----------    -----------    -----------    -----------
<S>                                                                          <C>            <C>    

Balances, January 1, 1995        $    49,729   $   999,520    $  (185,200)   $    (1,250)   $   862,799

         Net Income                     --            --          144,324                       144,324
         Sale of Common Stock,
           291,734 Shares              2,918       365,334           --                         368,252
                                 -----------   -----------    -----------    -----------    -----------
Balances, December 31, 1995           52,647     1,364,854        (40,876)        (1,250)     1,375,375


         Net Income                     --            --          223,101                       223,101
Sale of Common Stock,
           226,400 Shares              2,264       563,736           --                         566,000
         Stock Issuance Costs           --        (159,980)          --                        (159,980)
                                 -----------   -----------    -----------    -----------    -----------
Balances, December 31, 1996           54,911     1,768,610        182,225         (1,250)     2,004,496

         Net Income                     --            --          110,862                       110,862
         Sale of Common Stock,          --
           667,400 Shares              6,674     1,661,826           --                       1,668,500
         Stock Issuance Costs           --        (151,937)          --                        (151,937)
                                 -----------   -----------    -----------    -----------    -----------
Balances, December 31, 1997      $    61,585   $ 3,278,499    $   293,087    $    (1,250)   $ 3,631,921
                                 -----------   -----------    -----------    -----------    -----------

</TABLE>









See accompanying notes to financial statements.


                                       5
<PAGE>

<TABLE>
<CAPTION>

                               Fresh 'n Lite, Inc.
                            Statements of Cash Flows
              For the Years ended December 31, 1997, 1996 and 1995


                                                                               1997                 1996             1995
                                                                          -------------         ------------       ----------
<S>                                                                        <C>                  <C>                <C>    

Cash Flows from Operating Activities:
  Net Income                                                                  $ 110,962            $ 223,101        $ 144,324
                                                                          -------------         ------------       ----------
  Adjustments to Reconcile Net Income to Net
    Cash Provided by Operating Activities:
           Depreciation                                                         233,881              162,793          122,633
           Amortization                                                         206,480              133,731          137,445
           Deferred Income Taxes                                                 47,200               94,000                -
           Change in Net Capital Leases                                        (15,167)              (6,414)          (2,476)
           Not Change in Assets and Liabilities:                                    618                8,172         (11,063)
                (Increase) Decrease in Inventory                                                                     (15,173)
                Increase (Decrease) in Accounts Payable                           5,854             (13,074)
                Increase (Decrease) in Accrued Expenses                          45,924             (50,505)           96,121
                Increase in Income Taxes Payable                                  8,800                    -                -
                                                                         --------------         ------------       ----------
          Total Adjustments                                                     533,490              328,703          317,487
                                                                         --------------         ------------       ----------
                  Net Cash Provided by
                    Operating Activities                                        644,352              551,804          461,811
                                                                         --------------         ------------       ----------

Cash Flows from Investing Activities:
  Capital Expenditures                                                      (2,288,392)            (771,327)        (928,617)
  Expenditures for Preopening/Remodel
    Costs and other Assets                                                            -             (74,708)         (54,495)
  (Increase) Decrease in Note Receivable-Related Party                        (133,198)                9,712         (41,057)
  (Increase) Decrease in Deferred Stock Issuance Cost
      and Deferred Franchise System Costs                                      (10,000)               90,624         (72,392)
                                                                         --------------         ------------       ----------
                  Net Cash Used in
                    Investing Activities                                    (2,431,590)            (755,699)      (1,096,561)
                                                                         --------------         ------------      -----------

Cash Flows from Financing Activities:
    Sale of Common Stock, net of Stock Issuance Costs                         1,168,500              406,020          200,001
    Financing through Bank Overdrafts                                            48,103             (31,004)           10,675
    Borrowings on Notes Payable                                               1,451,239              144,694          487,550
    Principal payments on Notes Payable                                       (877,871)            (312,570)         (57,825)
                                                                         --------------         ------------      -----------
                    Net Cash Provided by
                      Financing Activities                                    1,789,971              207,140          640,401
                                                                         --------------         ------------      -----------

             NET INCREASE IN CASH                                                 2,733                3,245            5,651

    CASH AT BEGINNING OF YEAR                                                    17,640               14,395            8,744
                                                                         --------------         ------------      -----------
             CASH AT END OF YEAR                                               $ 20,373             $ 17,640         $ 14,395
                                                                         --------------         ------------      -----------


</TABLE>





See accompanying notes to financial statements.


                                       6


<PAGE>





                          Notes to Financial Statements















<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



           NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


ORGANIZATION AND OPERATIONS
Fresh'n Lite, Inc., "the Company" (a Texas Corporation since October,  1995) was
incorporated  as  Bosko's,  Inc.,  in May  1990 as a  Delaware  Corporation.  In
December 1992 the corporate  title was changed to Fresh'n Lite, Inc. in order to
have its  restaurants'  names more  reflective  of its  products.  The Company's
restaurants  changed their names  throughout 1992, which resulted in significant
costs being capitalized during that year. In 1995, the Corporation merged from a
Delaware  Corporation into F'NL,  Inc., a Texas  Corporation.  Immediately,  the
Corporation changed its name to Fresh'n Lite, Inc.

Prior to 1994, the Company's restaurants provided healthy foods and beverages in
a "fast food" deli atmosphere. During 1994, the Company expanded all restaurants
into "full service" restaurants,  offering dinner menus and a wait staff. During
1995, the Company closed the Texarkana, Longview and Nacogdoches restaurants and
reopened them as Aunt Bea's Home Cooking.  During 1997,  the Company  closed the
Texarkana,   Longview,  and  Nacogdoches  restaurants.   All  of  the  Company's
restaurants are now located in the Dallas/Ft. Worth Metroplex.

Following is a summary of the Company's restaurants:

                 Location                                Date Opened/Status
           Tyler, Texas (sold August 1994,
           Repurchased March 1995, Closed   December
           1997)                                         February 1991
           Longview, Texas (Closed 1997)                 March 1992
           Nacogdoches, Texas (Closed 1997)              May 1993
           Texarkana, Texas (Closed 1997)                June 1994
           Dallas (Frankford Avenue), Texas              July 1995
           Irving (Valley Ranch), Texas                  February 1997
           The Colony, Texas                             October 1997
           Richardson, Texas                             Under Construction

Other restaurant locations are under consideration.


INVENTORY
Inventory  consists of food and beverage  products and paper supplies  stated at
the lower of cost (determined on the first-in, first-out basis) or market value.






                                       7

<PAGE>





                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


PROPERTY AND EQUIPMENT
Property and equipment  items are stated at cost.  Expenditures  for maintenance
and  repairs  are  charged  to  expense  as  incurred.  Major  improvements  are
capitalized.  Significantly  all Property and  Equipment is pledged  against the
Company's notes payable.

The  Company  has  satisfactory  title  for all  owned  assets,  except  for the
Corporate headquarters, including land, purchased during the year ended December
31,  1997.  These  assets were  purchased  pursuant to a contract for sale dated
December 1, 1997,  which  transfers  title via warranty deed to the Company upon
payment in full and fulfillment of all other obligations under the contract.


RESTAURANT PREOPENING/REMODEL COSTS
During the period of  construction  or major remodel of the Company's East Texas
restaurants,   the  Company   capitalized  certain  costs  pertaining  to  these
restaurants.  These costs  include  interest,  salaries,  advertising,  contract
labor,  rent,  repairs,  supplies,  and other  costs  that  relate to either the
preopening period, in the case of a new restaurant, or the remodeling period, in
the case of a major remodel of an existing restaurant.  Once the new restaurants
open or existing  restaurants'  major  remodels were  completed,  capitalization
ceased.  During the year ended  December 31,  1997,  certain of these costs were
reclassified  as building  costs.  The remaining costs were fully amortized as a
result of the East Texas restaurants costs being closed.


DEFERRED STOCK ISSUANCE COSTS
The Company  offered stock for sale during 1996,  using an  Underwriter  for the
first time. As costs and expenses were incurred  pursuant to the stock offering,
they were  deferred  until the stock sale took  place.  When the stock sale took
place in 1996, these costs,  which aggregated $ 159,980,  reduced the additional
paid in capital realized from the sale. During the year ended December 31, 1997,
additional  attorney's  fees and expense  totaling $ 151,937  were  incurred and
reduced the additional paid in capital realized from 1997 stock sales.


DEFERRED FRANCHISE SYSTEM COSTS
During 1995, 1996, and 1997, the Company incurred certain  internal,  as well as
external, costs as it developed its franchise system. Substantially all internal
phases of the  franchise  system were in place by February of 1996.  The Company
amortizes total deferred  franchise  system costs over five years,  beginning in
February of 1996. Total  amortization of deferred  franchise system cost in 1997
and 1996  were $ 17,941  and $ 14,430,  respectively.  No costs  were  amortized
during 1995, as the franchise system was not operational.







                                       8


<PAGE>





                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


FRANCHISE FEES
The Company has sold one franchise to a franchisee  that is an entity  partially
owned by an  officer/stockholder  of the  Company.  The  terms of the  franchise
require a $ 50,000 fee to be paid to the Company.  The Company  recognizes  this
payment as revenue when it has  completed  its  obligations  under the franchise
agreement.  At December 31, 1995,  the Company had no further  obligation  under
this initial franchise and has received the fee of $ 50,000.

In addition to the franchise fee, the Company earns  royalties  based upon 5% of
the franchisee's gross sales. The Company  recognizes  franchise royalty revenue
when earned,  not when  received.  During 1996, the Company's only franchise was
closed by its owner.  Accordingly,  the Company earned no royalties during 1997.
At December 31, 1996, the Company had earned $ 34,774 from royalties, of which $
7,500 was not paid at year end. At December 31,  1995,  the Company had earned $
5,211 from such  royalties  which was not paid at year end. The Company is still
promoting its franchise operations and hopes to secure additional  franchises in
the near future.


ADVERTISING AND PROMOTIONAL COSTS
All advertising  and promotional  costs are charged to operations when incurred.
Advertising and promotional costs were $ 129,274 for the year ended December 31,
1997. Advertising and promotional costs were $ 64,878 and $ 42,275 for the years
ended December 31, 1996 and 1995, respectively.


DEPRECIATION AND AMORTIZATION
Leasehold  improvements  are amortized over the terms of the  underlying  leases
using the  straight-line  method.  Buildings are depreciated  over the estimated
useful  lives of twenty  years  using the  straight-line  method.  Vehicles  and
equipment are depreciated  over the estimated  useful lives of five to ten years
using the straight-line method.


CAPITALIZED LAND LEASES
At December  31,  1997,  the Company was  leasing  land for its  restaurants  in
Longview,  Texas;  Texarkana,  Texas; Dallas (Frankford  Avenue),  Texas; Irving
(Valley Ranch), Texas; The Colony,  Texas; and Richardson,  Texas. For financial
reporting purposes, such leases are capitalized at an amount equal to the lesser
of the present value of the lease payments or market value.  No  depreciation is
being recorded on the capitalized land leases.


CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows,  the Company  considers all highly
liquid debt instruments  purchased with a maturity of three months or less to be
cash  equivalents.  The Company paid no cash for income taxes in 1997 and paid $
231,790 for interest in 1997.  The Company paid no cash for income taxes in 1996
and paid $ 177,370  for  interest in 1996.  The Company  paid no cash for income
taxes in 1995 and paid $ 112,889 for interest in 1995.






                                       9

<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


INCOME TAXES
Income taxes are provided  for the tax effects of  transactions  reported in the
financial  statements  and consist of tax  currently  due plus  deferred  taxes.
Deferred taxes are recognized  for  differences  between the basis of assets and
liabilities for financial statement and income tax purposes.

The  differences  relate  primarily  to  depreciable  assets  (use of  different
depreciation methods and lives for financial statement and income tax purposes),
capitalized land leases  (capitalized for financial  statement  purposes but not
for income tax  purposes)  and basis of  accounting  (cash  basis for income tax
purposes and accrual basis for financial statement purposes).

The  deferred  tax  assets  and  liabilities  represent  the  future  tax return
consequences  of those  differences,  which will either be taxable or deductible
when the assets and  liabilities  are recovered or settled.  Deferred taxes also
are recognized for operating losses and tax credits that are available to offset
future taxable income.


ESTIMATES
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires the use of estimates that affect certain reported
amounts and disclosures. These estimates are based on management's knowledge and
experience. Accordingly, actual results could differ from these estimates.


CONSIDERATION OF CREDIT RISK
The  Company  maintains  its  cash  in bank  deposit  accounts  at high  quality
financial  institutions.  The balances are at all times within federal insurance
limits. The Company believes their cash management policies  effectively address
their cash in bank credit risk. All  restaurant  sales are either cash or credit
card.  The credit card sales are approved at point of sale with very little risk
of loss.


RECLASSIFICATIONS
Certain  reclassifications  have  been  made  to the  prior  periods'  financial
statements in order to conform them to the classifications  used for the current
year.


COMPENSATED ABSENCES
The Company requires  employees to use their earned vacation prior to the end of
each year.  If the employees  fail to use their  compensated  absences  prior to
year-end, they lose their benefit. Accordingly, no liability has been accrued in
the accompanying financial statements for compensated absences.






                                       10

<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


ASSETS HELD FOR SALE
In accordance with SFAS 121 "Accounting for the Impairment of Long-Lived  Assets
and for  Long-Lived  Assets to Be Disposed  Of",  the  Company has  reclassified
certain  assets from  "Property and  Equipment" to "Assets Held for Sale" in the
accompanying  financial  statements.  Management  identified  assets  totaling $
1,101,700, net of accumulated depreciation totaling $ 191,865, as being held for
sale during the year ended December 31, 1997. The assets reclassified were land,
capitalized  land  lease,  building,   furniture  and  equipment  and  leasehold
improvements  of the Company's  Longview and Nacogdoches  restaurants  that were
closed during the year ended December 31, 1997.  Management is unable to provide
an  expected  disposal  date,  but is  actively  pursuing  selling the assets as
quickly as possible while maximizing  potential sales proceeds.  Depreciation on
the reclassified  assets was ceased at the point management  committed to a plan
to dispose of the assets.



         NOTE 2 - INVENTORY


A summary of inventory, by restaurant location, is as follows:

                                                                1997
                                                             ---------
Tyler, Texas (Inventory will be transferred to 
 other locations)                                            $   5,179
Dallas (Frankfort Avenue), Texas                                 6,058
Irving (Valley Ranch), Texas                                     7,819
The Colony, Texas                                                7,515
Richardson, Texas                                                    -
                                                             ---------
                                Total Inventory              $  26,571
                                                             =========












                                       11

<PAGE>





                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 3 - CORPORATE ORGANIZATIONAL COSTS


Corporate Organizational Costs consist of the following:

                                                                Accumulated
                                         Costs                  Amortization
                                         ------------------     ----------------
     Balances, January 1, 1997                $     42,695        $      41,542
               Additions                                 -                1,153
                                         ==================     ================
     Balances, December 31, 1997              $     42,695        $      42,695
                                         ==================     ================

Other costs  included with Corporate  Organizational  Costs in the balance sheet
aggregated $ 32,651 as of December 31, 1997.


<TABLE>
<CAPTION>

         NOTE 4 - INCOME TAXES


                                                               1997                    1996                    1995
                                                         -------------------    -------------------     ------------------
<S>                                                      <C>                    <C>                     <C>  

Earnings before income taxes                                   $     166,862         $      317,101          $     144,324
Add (Deduct):
   Timing differences                                                 50,884                (60,341)                10,851
                                                         -------------------    --------------------    ------------------
      Taxable income before net operating loss                       217,746                256,760                155,175
                Net operating loss utilized                          191,877                256,760                155,175
                                                         -------------------
                                                                                ====================     =================
                    Taxable Income                             $      25,869         $             -         $           -
                                                         ===================    ====================     =================

Current income tax expense                                     $       8,800         $             -         $           -
                                                         ===================    ====================     =================

</TABLE>



During the year ended December 31, 1997 the Company completely  utilized its tax
loss carryforwards totaling $ 191,877 to offset taxable income.






                                       12

<PAGE>



                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 4 - INCOME TAXES (Continued)

<TABLE>
<CAPTION>

Deferred taxes result from  differences  in the bases of assets and  liabilities
for income tax and financial statement  purposes.  The source of the differences
and the tax effect  creating the balance at December 31, 1997, 1996 and 1995 are
as follows:

                                                         1997                    1996                     1995
                                                     -----------------    -----------------     -----------------
<S>                                                                       <C>                   <C>        

Deferred tax assets:
     Net operating loss carryforward                    $           -       $    ( 53,405)        $   ( 127,908)
     Valuation allowance                                            -                    -                11,962
                                                     -----------------    -----------------     -----------------
          Net deferred tax asset                                    -            ( 53,405)            ( 115,946)
                                                     -----------------    -----------------     -----------------
Deferred tax liabilities:
     Difference in depreciation methods                       124,000               97,800                48,500
     Deduction of startup costs                                15,900               82,750                95,040
     Cash to accrual conversion                               ( 3,000)            ( 47,900)             ( 35,060)
     Other                                                     13,100               14,755                 7,466
                                                     -----------------    -----------------     -----------------
          Net deferred tax liability                          150,000              147,405               115,946
                                                     -----------------    -----------------     -----------------

          Balance                                       $     150,000       $       94,000        $            -
                                                     =================    =================     =================



           NOTE 5 - NOTE PAYABLE-SHORT TERM


Note payable-short term at December 31, 1997 consisted of the following:

          AFCO Credit Corporation Corporation,  dated July 25, 1997, due May 28,
          1998, interest rate at 10.5%, payable in 9 monthly payments of $ 2,619
          beginning August 28, 1997 and the balance at maturity.                                    $      10,249
                                                                                                =================
</TABLE>








                                       13

<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997


<TABLE>
<CAPTION>

         NOTE 6 - NOTES PAYABLE-LONG TERM


Notes payable-long term at December 31, 1997 consisted of the following:
<S>                                                                                     <C>    
                                                                                            Amount
                                                                                        ------------------
            East Texas  National  Bank,  dated June 30, 1997, due June 20, 2000,
            interest  rate at 9.50%,  payable in 36 monthly  payments of $ 3,594
            beginning  June 30,  1997 and the  balance  at  maturity,  including
            interest, collateralized by the Company's real and personal property
            in Gregg, Nacogdoches and Bowie counties, Texas
                                                                                              $  321,794


            East Texas  National  Bank,  dated January 28, 1994, due January 28,
            1998,  interest rate at 8.50%,  payable in 36 monthly  payments of $
            3,282  beginning  February  7,  1994 and the  balance  at  maturity,
            including  interest,   collateralized  by  the  Company's  real  and
            personal property in Gregg, Nacogdoches and Bowie counties, Texas
                                                                                                 282,953


            East Texas  National  Bank,  dated November 1, 1995, due October 12,
            1998,  interest rate at 10.25%,  payable in 35 Monthly payments of $
            1,864  beginning  November  12,  1995 and the  balance at  maturity,
            including interest, collateralized by a second lien on the Company's
            Frankford  Avenue  leasehold  estate in  Dallas,  and by a  security
            interest in various equipment,  fixtures and other personal property
            at that location
                                                                                                 128,481


            Related Parties:

                     Carole A. Swanson,  dated March 12, 1997, due September 15,
                     2001,  interest  rate  at  9.26%,  payable  in  50  monthly
                     payments of $ 478 beginning  April 15, 1997 and the balance
                     at maturity, including interest, collateralized by a second
                     lien on a Company automobile.
                                                                                                  18,152


                     Four Seasons, Inc., dated December 1, 1997, due December 1,
                     2012, interest rate at 10%, payable in 180 monthly payments 
                     of $ 8,060 beginning  January 1, 1998 and  the  balance  at
                     maturity, including interest, subject  to contract for sale  
                     dated December 1, 1997.                                                     750,000


                                       14

<PAGE>





                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 6 - NOTES PAYABLE-LONG TERM (Continued)



            Infinity  Financial  Services,  dated March 13, 1997,  due March 27,
            2002,  interest rate at 9.99%,  payable in 60 monthly  payments of $
            522 beginning April 27, 1997 and the balance at maturity,  including
            interest, secured by Company automobile.
                                                                                                  21,850


            Infinity  Financial  Services,  dated March 13, 1997,  due March 27, 
            2002, interest rate at9.99%, payable in 60 monthly payments of $ 373
            beginning  April 27, 1997 and  the  balance  at maturity,  including
            interest, secured by a Company automobile.                                            15,820


            Bank One, Texas, NA, dated May 9, 1997, due, June 15, 2002, interest
            rate at 9.65%,  payable in 59 monthly  payments  of $ 474  beginning
            June 15,  1998 and  the  balance at  maturity,  including  interest,
            secured by a Company automobile.                                                      21,062


            Frost  National  Bank,  dated  March  31,  1995,  due May 31,  2000,
            interest rate at 11.990%, payable $ 241 monthly, including interest,
            secured by a Company automobile.
                                                                                                   6,340
                                                                                          --------------
                     Total Notes Payable-Long Term                                             1,566,452
            Less Current Portion                                                                (465,015)
                                                                                          ==============
                     Notes Payable-Long Term, net of Current Portion                          $1,101,437
                                                                                          ==============

</TABLE>

During the years ended December 31, 1997, 1996 and 1995, the Company capitalized
as building and equipment costs $ 124,199, $ 44,500, and $ 12,347, respectively,
in interest related to the above notes payable.

Notes  Payable-Long  Term are  expected  to mature  over the next five  years as
follows:

                            1998                            $   465,015
                            1999                                 59,061
                            2000                                341,940
                            2001                                 49,742
                            2002                                 40,818
                            Later Years                         609,876
                                                         ---------------
                                             Total           $1,566,452
                                                         ===============



                                       15

<PAGE>




                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 7 - LEASES


Following is a summary of the Company's operating and capital leases:


                Tyler, Texas restaurant (land and building):
         The sublease term is from April 1, 1995 to July 31, 1999. Minimum lease
         rentals  are $ 1,500 per month with no  contingent  rentals.  The lease
         includes a five year option at the same terms and  conditions as during
         the primary term. This has been classified as an operating lease.


                Longview, Texas restaurant (land):
         The lease term is for twenty years,  beginning January 6, 1992. Minimum
         lease rentals are $1,000 per month for the first 36 months, $ 1,300 per
         month for the next 24 months,  $ 1,500 per month for the next 60 months
         and $ 1,600 per month for the  final  120  months.  The lease  includes
         contingent rentals based upon a percentage of gross sales, that becomes
         due if the contingent rentals exceed the minimum rentals. No contingent
         rentals  have  become  due as of  December  31,  1997.  The lease  also
         contains an option to purchase the land for $ 160,000  within the first
         five years of the  lease.  Management  elected  not to  exercise  their
         option on the land. This lease has been classified as a capital lease.


                Texarkana, Texas restaurant (land):
         The lease term is for twenty years beginning February 1, 1994.  Minimum
         lease  rentals are $ 1,547 per month for the  first 36 months,  $ 1,949
         per  month for the next 60  months,  $ 2,258 per  month for the next 60
         months, $ 2,615 per month for the final 84 months,  with  no contingent
         rentals.  The  lease  also contains an option to purchase the land for 
         $ 200,000 during the first three years of the lease. Management elected
         not to  exercise  their  option  on the  land.  This  lease  has  been
         classified as a capital lease.


                Dallas (Frankford Avenue), Texas restaurant (land):
         The lease term is for twenty years beginning February 21, 1995. Minimum
         lease  rentals  are $ 4,250 per month for the first 60 months,  $ 4,583
         per  month  for the next 60  months,  $ 5,167 per month for the next 60
         months,  and $  5,417  per  month  for the  final  60  months,  with no
         contingent rentals. The lease also contains two five year extensions at
         $ 5,750 per month for the first five year  period and $ 6,083 per month
         for the second five year period.  This has been classified as a capital
         lease.






                                       16

<PAGE>



                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 7 - LEASES (Continued)


                Irving (Valley Ranch), Texas restaurant (land):
         The lease term is for twenty years beginning November 15, 1996. Minimum
         lease  rentals  are $ 3,625 per month for the first 60 months,  $ 4,167
         per month for the next sixty months,  $ 4,667 per month for the next 60
         months,  and $  5,250  per  month  for  the  final  60  months  with no
         contingent  rentals.  The lease also contains two five year extensions,
         the first at market rate, but not to exceed $ 7,083 per month,  and the
         second at market  rate.  This  lease has been  classified  as a capital
         lease.


                The Colony, Texas restaurant (land):
         The lease term is for twenty years beginning October 15, 1997.  Minimum
         lease  rentals  are $ 4,300 per month for the first 60 months,  $ 4,575
         per  month  for the next 60  months,  $ 4,900 per month for the next 60
         months,  and $  5,117  per  month  for  the  final  60  months  with no
         contingent  rentals.  The lease also contains an option to purchase the
         land for $ 550,000 at any time during,  but not after,  the first three
         years of the initial term of the lease.  This lease has been classified
         as a capital lease.


                Richardson, Texas restaurant (land):
         The lease term is for twenty years beginning December 15, 1997. Minimum
         lease  rentals  are $ 4,667 per month for the first 48 months,  $ 4,947
         per  month  for the next 36  months,  $ 5,244 per month for the next 36
         months, $ 5,559 per month for the next 36 months, $ 5,892 per month for
         the next 36  months,  $ 6,246 per month for the next 36  months,  and $
         6,620 per month for the final 36 years with no contingent rentals.  The
         Company  has the  option to renew the lease for one term of ten  years.
         This lease has been classified as a capital lease.


                Computers and related equipment:
         The lease is with AT&T Capital Corporation,  dated October 5, 1993. The
         lease term is for 60 months beginning  October 14, 1993.  Minimum lease
         rentals  are $ 579 per  month.  This  lease has been  classified  as an
         operating lease.












                                       17


<PAGE>



                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 7 - LEASES (Continued)


           OPERATING LEASES

At December  31, 1997 the  Company  was  leasing its Tyler  restaurant  land and
building as well as certain  computer  equipment  under  operating  leases.  The
annual  minimum  lease  payments  under  noncancelable  operating  leases  as of
December 31, 1997 are as follows:


           Years Ending December 31:

                1998                                           $     23,790
                1999                                                  9,000
                2000                                                      -
                2001                                                      -
                2002                                                      -
                Later Years                                               -
                                                               ------------
                    Total Minimum Lease Payments               $     32,790
                                                               ============


           CAPITAL LEASES


At December 31, 1997, the Company was leasing the land for its Longview,  Texas;
Texarkana,  Texas;  Dallas  (Frankford  Avenue),  Texas;  Irving (Valley Ranch),
Texas;  and Richardson,  Texas  restaurants  under capital leases.  The economic
substance of the leases is that the Company is financing the  acquisition of the
assets  through the leases,  and  accordingly,  it is recorded in the  Company's
assets and liabilities.
















                                       18

<PAGE>




                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 7 - LEASES (Continued)


The following is a schedule by years of future minimum lease  payments  required
under the capital  leases,  together with their present value as of December 31,
1997:

           Years Ending December 31:

                 1998                                        $     229,491
                 1999                                              243,492
                 2000                                              245,490
                 2001                                              248,572
                 2002                                              263,277
                 Later Years                                     3,982,809
                                                             --------------
                    Total Minimum Lease Payments                 5,213,131
                 Less Amount Representing Interest            ( 2,867,819)
                                                             --------------
                    Present Value of Minimum
                       Lease Payments                            2,345,312
                 Less Short Term Portion                         ( 32,139)
                                                             --------------
                    Present Value of Minimum Lease
                       Payments, net of Current Portion      $   2,313,173
                                                             ==============


During the year ended  December  31, 1997,  the Company  recognized $ 129,203 in
interest  cost  related  to the above  capital  leases.  During  the year  ended
December 31, 1996,  the Company  recognized $ 78,755 in interest cost related to
the above capital  leases.  During the year ended December 31, 1995, the Company
charged  to expense $ 51,738 in  interest  costs  related  to the above  capital
leases.












                                       19


<PAGE>



                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997

<TABLE>
<CAPTION>


         NOTE 8 - SUMMARY OF NONCASH TRANSACTIONS


Following is a summary of noncash  investing  and financing  activities  for the
years ended December 31:
  
                                                      1997            1996             1995
                                                 ------------    ------------    ------------
<S>                                             <C>              <C>             <C>     

Exchange Common Stock for Furniture
     And Equipment                               $          -     $         -    $     34,901
Exchange Common Stock for Building Costs              500,000               -          89,650
Exchange Common Stock for Deferred
     Stock Issuance Costs                                   -               -           5,000
Exchange Common Stock for Debt Repayment                    -               -          38,700
Capital Lease Obligations                           1,010,000         400,000         500,000
Accrued Deferred Stock Issuance Cost              ( 151,937 )               -       ( 82,935)
Accrued Tyler Equipment Purchase                            -               -           7,682
                                                 ------------    ------------    ------------
          Total Noncash Investing and
             Financing Activities                $  1,358,063     $   400,000    $    592,998
                                                 ============    ============    ============

</TABLE>


         NOTE 9 - CONTINGENCIES


Litigation  was  threatened  against  the  Company by AT&T  Capital  Corporation
regarding an equipment  lease entered into by the Company.  The potential  claim
was for approximately $ 30,000. Counsel has advised the Corporation on April 12,
1997 that AT&T had agreed not to pursue its claims  against the Company and that
the likelihood of a non-favorable outcome was nominal at all times.

Suit was filed against the Company in 1994 for damages  arising from an employee
accident  involving a meat slicer.  The Company has paid the employee's  medical
expenses of $ 2,014 during 1995. The employee was seeking unspecified additional
amounts for lost wages, pain and suffering,  disfigurement  and impairment.  The
suit was  scheduled for mediation on May 22, 1996 and for trial on July 8, 1996.
During 1996 the Company settled this claim for $ 14,000.

         During the year ended December 31, 1997, a plaintiff filed suit against
         the Company for an alleged  breach of lease and service  agreement with
         regards to restaurant  locations  that have been closed.  Plaintiff has
         demanded approximately $ 27,000 in damages and other costs.  Management
         denies  responsibility  in the  suit,  but may agree to an out of court
         settlement for a lesser amount in order to bring an expeditious  end to
         the  matter.  No estimate  of a  potential  settlement  amount has been
         included  in  the  accompanying  financial  statements  as  it  is  not
         reasonably estimable.




                                       20

<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 10 - RELATED PARTY TRANSACTIONS


On February  17, 1995,  the Company  sold 133,333  shares of common stock to the
Company's  largest food distributor for $ 200,000,  pursuant to a stock purchase
agreement.  The agreement binds the Company to purchase 90% of its food products
from the  distributor  for five years, as well as to repurchase the common stock
at the original price if one of two  repurchasing  events occur.  As of December
31, 1996, the Company's obligation under this agreement has expired. The Company
is  unaware  of and has not been  notified  that any  repurchasing  events  have
occurred.

At  December  31,   1997,   the  Company   held  a  note   receivable   from  an
officer/shareholder  of the  Company in the amount of $ 124,500.  The note bears
interest  at 5% and is  payable  in two  semiannual  installments  of $  77,845,
together with interest beginning on June 30, 1998.

At December 31, 1997, the Company held a note  receivable  from a shareholder of
the  Company in the amount of $ 15,000.  The note  bears  interest  at 9% and is
payable  in two  semiannual  installments  of $ 8,018,  together  with  interest
beginning on June 30, 1998.

At December 31, 1997, the Company held a note receivable  from a company,  owned
by a  shareholder  of the  Company  in the  amount of $ 17,653.  The note  bears
interest  at 9% and is  payable  in  twelve  monthly  installments  of $  1,543,
together with interest beginning on February 1, 1998.

At  December  31,  1997,  the  Company  held a  note  receivable  from a  sister
corporation  in the  amount of $ 7,390.  The note bears  interest  at 10% and is
payable in one installment of $ 7,390, together with interest on March 1, 1998.

The Company has a long-term  operating lease  agreement with a corporation  that
owns a significant amount of the Company's stock. Minimum rents receivable are $
8,500 per month for five years and the lease  covers  office and retail space at
the Company's headquarters occupied by the corporation.



           NOTE 11 - STOCK OPTIONS


On May 23,  1997,  the  Board  of  Directors  of the  Company  adopted  its 1997
Incentive  Stock Option Plan pursuant to which  200,000  shares of the Company's
common  stock were set aside for the  purpose of  granting  of  incentive  stock
options to directors and key employees of the Company. The purchase price of the
stock purchased pursuant to the exercise of such an option is required to be not
less than 100% of the fair market value of the stock on the date of the grant of
the option, or 110% of such value in the case of a holder of 10% of the stock of
the Company.  This plan was approved by  shareholders  on May 23, 1997.  None of
these stock options have been exercised.






                                       21


<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997



         NOTE 11 - STOCK OPTIONS (Continued)


On March 1,  1995,  the  Board of  Directors  of the  Company  adopted  its 1995
Incentive  Stock Option Plan pursuant to which  100,000  shares of the Company's
common  stock were set aside for the  purpose of  granting  of  incentive  stock
options to directors and key employees of the Company. The purchase price of the
stock purchased pursuant to the exercise of such an option is required to be not
less than 100% of the fair market value of the stock on the date of the grant of
the option. This plan was approved by shareholders on October 19, 1995.

Under the Plan, an option for 50,000 shares has been granted to one  shareholder
for  service as a member of the Board of  Directors  with a purchase  price of $
1.50 per  share and  expires  March 1,  2000.  Also,  under the Plan,  two other
Directors  have been  granted  options  for 25,000  shares  each for  service as
members  of the Board  with a  purchase  price of $ 1.50 per share and expire on
October 19, 2000. None of these stock options have been exercised.

Under a contract  approved by the Board of Directors,  a consulting  company was
granted options to purchase  300,000 shares of the Company's common stock with a
purchase price of $ 2.50 per share and expiring on October 10, 2002. Also, under
employment  contracts  approved by the Board of  Directors,  two officers of the
Company were granted  options to purchase  100,000  shares each of the Company's
common  stock with a purchase  price of $3.00 per share  expiring  December  31,
2002. At December 31, 1997, none of these options had been exercised.

The company applies APB Opinion 25 and related interpretations in accounting for
the Plans.  In 1995,  the FASB issued FASB  Statement  No. 123  "Accounting  for
Stock-Based  Compensation" ("SFAS 123"), which, if fully adopted by the Company,
would  change the  methods the Company  applies in  recognizing  the cost of the
Plans.  Adoption of the cost recognition  provisions of SFAS 123 is optional and
the Company has decided not to elect these  provisions  of SFAS 123. The Company
recorded no stock-based  compensation costs in 1997, 1996, or 1995. Had the fair
values of options been  recognized  as  compensation  expense,  costs would have
increased  by $  228,270  (  $172,270  after  tax) in 1997 and  $90,108 ( no tax
effect) in 1995.  No options were granted in 1996.  The effects of applying SFAS
123 in this proforma disclosure are not indicative of future amounts.





                                       22

<PAGE>



                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997




         NOTE 11 - STOCK OPTIONS (Continued)


<TABLE>
<CAPTION>

A summary of the status of the Company's  stock options as of December 31, 1995, 
1996, and 1997 and the changes during the year ended on those dates is presented
below.

<S>                                                           <C>            <C>                             <C> 
                                                              1995
                                                              ----
                                                                             # Shares of                    Weighted
                                                                                 Underlying                       Average
                                                                                  Options                     Exercise Prices
                                                                             -------------------            ---------------------
            Outstanding at beginning of the year                                     0                             N/A
            Granted                                                               103,572                         $ 1.45
            Exercised                                                                0                             N/A
            Forfeited                                                                0                             N/A
            Expired                                                                  0                             N/A
            Outstanding at end of the year                                        103,572                         $ 1.45
            Exercisable at end of the year                                        103,572                         $ 1.45
            Weighted-average FV of options granted during the year                 $ .87                            -




                                                              1996
                                                              ----
                                                                             # Shares of                    Weighted
                                                                                 Underlying                       Average
                                                                                  Options                     Exercise Prices
                                                                             -------------------            ---------------------
            Outstanding at beginning of the year                                  103,572                         $ 1.45
            Granted                                                                  0                             N/A
            Exercised                                                                0                             N/A
            Forfeited                                                                0                             N/A
            Expired                                                                  0                             N/A
            Outstanding at end of the year                                        103,572                         $ 1.45
            Exercisable at end of the year                                        103,572                         $ 1.45



                                       23

<PAGE>



                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997




         NOTE 11 - STOCK OPTIONS (Continued)

                                                              1997
                                                              ----
                                                                             # Shares of                    Weighted
                                                                                 Underlying                       Average
                                                                                  Options                     Exercise Prices
                                                                             -------------------            ---------------------
            Outstanding at beginning of the year                                  103,572                        $  1.45
            Granted                                                               543,500                           2.67
            Exercised                                                                   0                            N/A
            Forfeited                                                                   0                            N/A
            Expired                                                                     0                            N/A
            Outstanding at end of the year                                        647,072                           2.47
            Exercisable at end of the year                                        647,072                           2.47
            Weighted-average FV of options granted during the year                 $ .42                               -

</TABLE>


The fair value of each stock  option  granted is  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:  dividend yield of 0%,  risk-free  interest rate of 5.57% and 7.8%,
expected  lives  of 1 1/4  years  and 3  1/4  years,  and  volatility  of  74.9%
respectively for 1997 and 1995.

<TABLE>
<CAPTION>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<S>                                                                             <C>         <C>                      <C>    

----------------------- ------------------------------------------------------------------- ----------------------------------------
                                               Options Outstanding                                      Options Exercisable
----------------------- ------------------------------------------------------------------- ----------------------------------------
                         Number Outstanding       Weighted Avg.                              Number Exercisable
       Range of              at 12/31/97         Remaining Contr.        Weighted Avg.           at 12/31/97          Weighted Avg.
   Exercise Prices                                     Life             Exercise Price                                Exercise Price
----------------------- ---------------------- --------------------- ---------------------- ---------------------- -----------------
$  .10 - $1.50               103,572                  2.49                $ 1.45                  103,572               $ 1.45
$ 1.50 - $ 3.00              543,500                  4.86                $ 2.67                  543,500               $ 2.67
----------------------- ---------------------- --------------------- ---------------------- ---------------------- -----------------
$  .10 - $ 3.00              647,072                  4.48                $ 2.47                  647,072               $ 2.47
----------------------- ---------------------- --------------------- ---------------------- ---------------------- -----------------

</TABLE>








                                       24

<PAGE>


                               Fresh'n Lite, Inc.
                          Notes to Financial Statements
                                December 31, 1997




         NOTE 12 - RESTAURANT PREOPENING/REMODEL COSTS


A summary of Restaurant  Preopening/Remodel Costs, by restaurant location, is as
follows:

                                                                     Accumulated
                                              Costs                 Amortization
                                              ---------------     --------------
        Balances, January 1, 1997                  $ 685,778      $    397,217
             Additions                                     -           187,387
             Transfers to building costs            (122,552)          (21,378)
             Dispositions                           (563,226)         (563,226)
                                              ---------------     --------------
        Balances, December 31, 1997                $       -      $           -
                                              ===============     ==============




















                                       25

<PAGE>



                                                       Part III. EXHIBITS



Hereafter  set forth as an Exhibit to the Form 10-KSB of Fresh'n  Lite,  Inc (or
incorporated by reference) are the following exhibits:

No. as per Part III of Form 1A   Description

2.1*                              Articles of Incorporation

2.2*                              By-Laws of the Company, as currently in effect

                                  Warrant agreement

6.1*                              1997 Stock Option Plan

6.2*                              Primary Distribution Agreement

6.3*                              Texarkana Ground Lease

6.4*                              Longview Ground Lease

6.5*                              Dallas (Preston/Frankford) Ground Lease

6.6*                              Valley Ranch Ground Lease

6.7*                              Colony Ground Lease

6.8*                              Richardson Ground Lease


*Filed as an exhibit to the  Company's  Form 10SB filed  October 23rd 1997,  and
incorporated herein by reference.



                                       26

<PAGE>



Exhibit 3.1
                



                                WARRANT AGREEMENT


DATE: February 28, 1997


PARTIES:          Fresh'n Lite, Inc.
                  2804 Judson Road
                  Longview, Texas 75601


                  Securities Transfer Corporation
                  P. O. Box 701629
                  Dallas, Texas  75370-0001


RECITALS:

         A. Fresh'n Lite, Inc., a Texas corporation (the "Company"), proposes to
issue at least  100,000 and up to 650,000  Common Stock  Purchase  Warrants (the
"Warrants")  evidencing the right to purchase,  subject to limitations expressed
in Section 2.1, an aggregate of up to 650,000 authorized but previously unissued
shares of Common Stock, $.01 par value, of the Company (the "Common Stock"). The
Warrants  would be issued in  connection  with the issuance by the Company of at
least 50,000 and up to 325,000 Units, each Unit consisting of four (4) shares of
Common  Stock  and  two (2)  Warrants,  in  connection  with  an  offering  (the
"Offering") of the Company's  securities  pursuant to an Application  for Permit
(the "Registration  Statement"),  the most recent amendment which was filed with
the Texas Securities Board on February 28, 1997.

         B. The Company desires that Securities Transfer  Corporation  ("Warrant
Agent") act as the  Warrant  Agent,  and the Warrant  Agent is willing to act as
Warrant Agent, in connection with the issuance, registration, transfer, exchange
and exercise of the Warrants.

AGREEMENT:

         The Company and the Warrant Agent hereby covenant and agree as follows:




                                        1

<PAGE>



                                   ARTICLE I.
                          APPOINTMENT OF WARRANT AGENT,
              ISSUANCE, FORM AND EXECUTION OF WARRANT CERTIFICATES

         Section 1.1  Appointment of Warrant Agent.  The Company hereby appoints
Securities Transfer  Corporation,  Dallas, Texas, as Warrant Agent to act as the
agent to perform the agency duties in accordance  with the terms and  conditions
of this Warrant Agreement.

         Section 1.2 Warrant  Certificates.  The Company  shall execute and make
available  certificates  which the  Company  has  authorized  to  represent  the
Warrants  (the  "Warrant  Certifi  cates").  The Warrant  Certificates  shall be
substantially  as set  forth in  Exhibit  A hereto  and may have  such  legends,
summaries  or  endorsements  printed,  lithographed  or engraved  thereon as the
Company may deem appropriate and as are not inconsistent  with the provisions of
this Warrant Agreement, or as may be required to comply with any law or with any
rule or  regulation  relating to listing of the  Warrants on the NASDAQ  system,
including the National Market System,  or on any stock exchange or to conform to
usage. The Warrant Certificates shall be dated with the date of their issuance.

         Section   1.3.   Execution   of  Warrant   Certificates.   The  Warrant
Certificates  shall be executed  on behalf of the  Company by a duly  authorized
officer of the  Company,  either  manually  or by  facsimile  signature  printed
thereon. The Warrant Certificates shall be manually countersigned by the Warrant
Agent  and  shall not be valid for any  purpose  unless  so  countersigned.  Any
Warrant  Certificate may be signed on behalf of the Company by the person who at
the actual date of the signing of such Warrant  Certificate  shall have been the
proper  officer of the Company  although at the date of issuance of such Warrant
Certificate any such person has ceased to be such officer of the Company.


                                   ARTICLE II.
          EXERCISE OF WARRANTS, REDEMPTION AND LIMITATIONS ON TRANSFER

         Section 2.1. Conditions Precedent to Exercise.  THE WARRANTS MAY NOT BE
EXERCISED IN ACCORDANCE WITH SECTION 2.2 BELOW UNLESS (A) AS TO WARRANTS HELD BY
TEXAS  RESIDENTS,  A PERMIT HAS BEEN ISSUED BY THE STATE OF TEXAS FOR THE COMMON
STOCK WHICH ARE TO BE ISSUED UPON THE  EXERCISE OF THE WARRANTS OR (B) AS TO ANY
WARRANTS  HELD BY  NON-TEXAS  RESIDENTS,  (i) A  CURRENT  PROSPECTUS  UNDER  THE
SECURITIES  ACT OF 1933  RELATING TO THE COMMON STOCK TO BE SO ISSUED IS THEN IN
EFFECT (OR AN EXEMPTION FROM SUCH REGISTRATION OF SUCH COMMON STOCK IS AVAILABLE
UPON SUCH EXERCISE),  AND (ii) SUCH COMMON STOCK IS QUALIFIED FOR SALE OR EXEMPT
FROM  REGISTRATION  UNDER THE APPLICABLE  SECURITIES  LAWS OF THE STATE IN WHICH
SUCH HOLDER OF THE WARRANT RESIDES.



                                        2

<PAGE>



         Notwithstanding the foregoing, the Company shall use reasonable efforts
to register  such Common  Stock in states in which  holders of the  Warrants are
known to reside and to maintain a current prospectus relating to such shares.

         Section 2.2. Exercise.  Subject to Section 2.1 above, any or all of the
Warrants  represented by each Warrant Certificate may be exercised by the holder
thereof at any time before  5:00 P.M.  Dallas,  Texas time on February  27, 2002
("Exercise Period"), unless extended by the Company, by surrender of the Warrant
Certificate  with the Purchase Form, which is printed on the reverse thereof (or
a reasonable  facsimile  thereof),  duly executed by such holder, to the Warrant
Agent at its corporate  office  located at 16910 N. Dallas  Parkway,  Suite 100,
Dallas, Texas 75248, accompanied by payment, in cash or by certified or official
bank  check  payable  to the order of the  Company,  in an  amount  equal to the
product of the number of shares of Common Stock  issuable  upon  exercise of the
Warrant  represented by such Warrant  Certificate,  as adjusted  pursuant to the
provisions of Article III hereof,  multiplied by the exercise price of $ 3.00 as
adjusted  pursuant to the  provisions  of Article  III hereof  (such price as so
adjusted from time to time being herein called the "Purchase  Price"),  and such
holder shall be entitled to receive such number of fully paid and  nonassessable
shares  of Common  Stock,  as so  adjusted,  at the time of such  exercise.  The
Company  shall  promptly  notify  the  Warrant  Agent of any  extensions  of the
Exercise Period.

         Section  2.3 Time and Method of  Exercise.  Each  exercise  of Warrants
shall be  deemed  to have  been  effective  immediately  prior  to the  close of
business on the business day on which the Warrant  Certificate  relating to such
Warrants shall have been surrendered to the Warrant Agent as provided in Section
2.2,  and at such  time  the  person  or  persons  in whose  name or  names  any
certificate  or  certificates  for shares of Common Stock shall be issuable upon
such  exercise as provided  in Section  2.4,  shall be deemed to have become the
holder or holders of record thereof.

         Section 2.4. Issuance of Shares of Common Stock; No Fractional  Shares.
As soon as  practicable  after the  exercise  of any  Warrant,  and in any event
within ten (10) days  after  receipt  by the  Company of the notice of  exercise
under  Section 2.2, the Company at its expense  (including  the payment by it of
any applicable issue taxes) will cause to be issued in the name of and delivered
to the holder  thereof or as such  holder  (upon  payment by such  holder of any
applicable transfer taxes) may direct:

                  (a) a certificate or certificates for the number of fully paid
         and nonassessable  shares of Common Stock to which such holder shall be
         entitled upon such exercise  plus, in lieu of any  fractional  share to
         which such holder would otherwise be entitled,  an amount in cash equal
         to such  fraction  multiplied  by the then current  value of a share of
         Common Stocks such current value to be determined as follows:

                           (i) if the Common  Stock  shall be listed or admitted
                  to  unlisted   trading   privileges  on  any  single  national
                  securities exchange, then such current value shall be computed
                  on the basis of the last  reported  sale  price of the  Common
                  Stock on such  exchange on the last  business day prior to the
                  date of the  exercise of such  Warrant upon which a sale shall
                  have been effected; or


                                        3

<PAGE>



                           (ii) if the  Common  Stock  shall not be so listed or
                  admitted  to  unlisted  trading  privileges  and bid and asked
                  prices  therefor  in  the  over-the-counter  market  shall  be
                  reported by NASDAQ, including the National Market System, then
                  such current  value shall be computed on the basis of the Last
                  Reported Sale Valuation Method or, in the event such method is
                  not then used by NASDAQ,  the  average of the  closing bid and
                  asked prices on the last business day prior to the date of the
                  exercise of such Warrant as so reported; or

                           (iii) if the Common Stock shall be listed or admitted
                  to  unlisted  trading  privileges  on more  than one  national
                  securities   exchange  or  one  or  more  national  securities
                  exchanges  and  in  the  over-the-counter  market,  then  such
                  current value shall,  if different as a result of  calculation
                  under the applicable method(s) described above in this Section
                  2.4,  be  deemed  to  be  the  higher  number   calculated  in
                  connection therewith; or

                           (iv) if the  Common  Stock  shall not be so listed or
                  admitted to unlisted trading privileges and such bid and asked
                  prices shall not be so reported, then such current value shall
                  be computed on the basis of the book value of Common  Stock as
                  of the  close  of  business  on  the  last  day  of the  month
                  immediately  preceding  the date upon which such  Warrant  was
                  exercised, as determined by the Company; and

                  (b) in case such  exercise  includes only part of the Warrants
         represented by any Warrant  Certificate,  a new Warrant  Certificate or
         Warrant  Certificates  of like tenor,  calling in the  aggregate on the
         face or faces  thereof  for the number of shares of Common  Stock equal
         (without giving effect to any adjustment therein) to the number of such
         shares  called for on the face of such  Warrant  Certificate  minus the
         number of such  shares  designated  by the holder for such  exercise as
         provided in Section 2.2.  Warrants  represented by a properly  assigned
         Warrant  Certificate  may be  exercised by a new holder  without  first
         having a new Warrant Certificate issued.

         Section 2.5.  Extension of Exercise  Period;  Change of Exercise Price.
The Company in its sole  discretion,  may, without the consent of the holders of
the  Warrant  Certificates:  (a) reduce  the  Purchase  Price  during all or any
portion of the originally  stated  exercise period or (b) extend the period over
which the Warrants are  exercisable  beyond  February 27, 2002,  and increase or
decrease  the  Purchase  Price for any period  the  Warrant  exercise  period is
extended. In the case of the extension of the exercise period or a change in the
Purchase Price, the Company must provide the  Warrantholders of record notice of
such extension of the exercise period,  or specifying the new Purchase Price and
the periods for which such new Purchase  Price is in effect,  a reasonable  time
prior to the date such extension or new Purchase  Price is to take effect,  such
reasonable  time to be  commercially  reasonable and consistent  with applicable
securities laws and  regulations.  The Company shall promptly notify the Warrant
Agent of any extensions of the Exercise Period.



                                       4


<PAGE>


         Section 2.6. Redemption of Warrants by Company.  The Company,  if  the 
Common Stock becomes listed on a national  securities exchange and/or the NASDAQ
Small Cap Market,  shall have the right to redeem the  Warrants at a  redemption
price of $.05 per Warrant upon 30 days' notice if the average closing bid of the
Company's Common Stock on any national  securities  exchange in which the Common
Stock is listed or NASDAQ Small Cap Market,  exceeds $5.00 per share (subject to
adjustment under Article III) for 30 consecutive  business days ending within 15
days of the notice of  redemption.  The Company  will mail a prepaid,  addressed
notice to each registered  Warrantholder at the address of such Warrantholder as
shown  on the  books  of the  Company,  which  shall  state  that  this  Warrant
Certificate shall expire and be void and the Warrant and any rights  represented
thereby shall cease unless exercised on or before 5:00 P.M. Dallas,  Texas time,
on the date which is thirty days following the date of such notice, which notice
may be  delivered  by the  Company  at any time  after the  average of the daily
closing bid price of the Common Stock equals or exceeds  $5.00 or more per share
as mentioned above. After this Date, such Warrants shall be deemed to be expired
and all rights of the holders of such  un-surrendered  Warrants  shall cease and
terminate.   The  Company  shall  notify  the  Warrant  Agent   verbally,   with
confirmation in writing,  of the call of the Warrants and of the expiration Date
and  the  Company  shall  instruct  the  Warrant  Agent  accordingly  as to  the
procedures to be followed by the Warrant Agent in connection with the expiration
of the Warrants.

         Section 2.7.  Limitation  on  Transferability  of Warrants.  THE COMMON
STOCK  ISSUABLE UPON EXERCISE OF THE WARRANTS HAS NOT BEEN  REGISTERED  WITH THE
TEXAS  SECURITIES  BOARD AND HAS NOT BEEN  REGISTERED  WITH THE  SECURITIES  AND
EXCHANGE  COMMISSION.  THE WARRANTS  SOLD  PURSUANT TO THE OFFERING WERE SOLD IN
RELIANCE ON THE INTRASTATE OFFERING EXEMP TION FROM THE REGISTRATION  PROVISIONS
OF THE SECURITIES ACT.  PURSUANT TO SAID EXEMPTION,  FOR A PERIOD OF NINE MONTHS
FOLLOWING  THE LAST SALE OF COMMON STOCK OR WARRANTS BY THE COMPANY,  THE COMMON
STOCK AND  WARRANTS  MAY NOT BE RESOLD TO PERSONS  WHO ARE NOT TEXAS  RESIDENTS.
ADDITIONALLY,  THE WARRANTS MAY NOT BE SOLD TO A NON-TEXAS  RESIDENT  UNLESS THE
COMMON STOCK ISSUABLE UPON THE EXERCISE OF THE WARRANTS HAS BEEN DULY REGISTERED
WITH APPLICABLE STATE AND FEDERAL SECURITIES AUTHORITIES OR EXEMPTIONS FROM SUCH
REGISTRATION ARE AVAILABLE.


                                  ARTICLE III.
                            ANTI-DILUTION PROVISIONS

Section 3.1. Adjustment of Purchase Price.

                  (a) The  Purchase  Price  shall be  subject  to the  following
adjustments. In the event that:



                                       5

<PAGE>


                           (i)  any  dividends  on any  class  of  stock  of the
                  Company payable in Common Stock or securities convertible into
                  Common Stock shall be paid by the Company;

                           (ii) the Company shall subdivide its then outstanding
                  shares of Common Stock into a greater number of shares; or

                           (iii) the Company shall combine outstanding shares of
                  Common Stock by reclassification or otherwise;

         then, in any such event, the Purchase Price in effect immediately prior
         to such event shall (until adjusted again pursuant  hereto) be adjusted
         immediately after such event to a price (calculated to the nearest full
         cent)  determined  by dividing (A) the number of shares of Common Stock
         outstanding  immediately  prior to such event,  multiplied  by the then
         existing  Purchase  Price,  by (B) the total number of shares of Common
         Stock  outstanding  immediately after such event (including the maximum
         number of shares of Common Stock  issuable in respect of any securities
         convertible into Common Stock), and the resulting quotient shall be the
         adjusted Purchase Price per share.

                  (b) No adjustment  of the Purchase  Price shall be made if the
         amount of such  adjustments  shall be less than $.05 per share,  but in
         such case any  adjustment  that would  otherwise be required then to be
         made  shall  be  carried  forward  and  shall  be made at the  time and
         together with the next subsequent  adjustment which,  together with any
         adjustment or adjustments so carried forward,  shall amount to not less
         than $.05 per share.

         Section 3.2  Adjustment of Number of Shares  Purchasable on Exercise of
Warrants.  Upon each  adjustment of the Purchase  Price  pursuant to Section 3.1
above,  the registered  holder of each Warrant shall  thereafter  (until another
such  adjustment)  be entitled to purchase at the  adjusted  Purchase  Price the
number of shares,  calculated to the nearest full share, obtained by multiplying
the number of shares  specified  in such Warrant (as adjusted as a result of all
adjustments  in the Purchase  Price in effect prior to such  adjustment)  by the
Purchase  Price in effect prior to such  adjustment  and dividing the product so
obtained by the adjusted Purchase Price.

         Section  3.3  Notice  as to  Adjustment.  Upon  any  adjustment  of the
Purchase  Price and an  increase  or  decrease in the number of shares of Common
Stock  purchasable  upon the exercise of the  Warrants,  then,  and in each such
case,  the Company shall within ten (10) days after the  effective  date of such
adjustment give written notice thereof,  by first class mail,  postage  prepaid,
addressed to each registered  Warrantholder at the address of such Warrantholder
as shown on the books of the  Company,  which  notice  shall state the  adjusted
Purchase Price and the increased or decreased number of shares  purchasable upon
the exercise of the Warrants,  setting forth in reasonable  detail the method of
calculation and the facts upon which such calculation is based.

         Section 3.4. Effect of Reorganization,  Reclassification,  Merger, Etc.
If at any time while any  Warrant is  outstanding  there  should be any  capital


                                       6

<PAGE>

reorganization  or  reclassification  of the capital stock of the Company (other
than the issue of any  shares  of Common  Stock in  subdivision  of  outstanding
shares  of Common  Stock by  reclassification  or  otherwise  and  other  than a
combination of shares  provided for in Section 3.1 hereof) or any  consolidation
or merger of the Company with another corporation or any sale, conveyance, lease
or other transfer by the Company of all or substantially  all of its property to
any other  corporation,  the holder of any Warrant shall during the remainder of
the period such Warrant is exercisable,  be entitled to receive, upon payment of
the  Purchase  Price,  the  number  of shares  of stock or other  securities  or
property of the Company,  or of the successor  corporation  resulting  from such
consolidation  or merger,  or of the  corporation  to which the  property of the
Company has been sold, conveyed,  leased or otherwise  transferred,  as the case
may be, to which the Common  Stock (any other  securities  and  property) of the
Company, deliverable upon the exercise of such Warrant, would have been entitled
upon  such   capital   reorganization,   reclassification   of  capital   stock,
consolidation, merger, sale, conveyance, lease or other transfer if such Warrant
had  been   exercised   immediately   prior  to  such  capital   reorganization,
reclassification  of capital stock,  consolidation,  merger,  sale,  conveyance,
lease or other  transfer;  any,  in any such case,  appropriate  adjustment  (as
determined  by the  Board  of  Directors  of the  Company)  shall be made in the
application of the  provisions set forth in this Warrant  Agreement with respect
to the rights and interests thereafter of the Warrantholders to the end that the
provisions set forth in this Warrant Agreement  (including the adjustment of the
Purchase  Price and the  number  of shares  issuable  upon the  exercise  of the
Warrants)  shall  thereafter  be  applicable,  as  near  as  may  be  reasonably
practicable,  in relation to any shares or other property thereafter deliverable
upon  the  exercise  of the  Warrants  as if the  Warrants  had  been  exercised
immediately prior to such capital  reorganization,  reclassification  of capital
stock, consolidation,  merger, sale, conveyance, lease or other transfer and the
Warrantholders had carried out the terms of the exchange as provided for by such
capital reorganization,  reclassification,  consolidation or merger. The Company
shall not  effect  any such  capital  reorganization,  consolidation,  merger or
transfer  unless,  upon or  prior to the  consummation  thereof,  the  successor
corporation  or the  corporation  to which the  property of the Company has been
sold,  conveyed,  leased  or  otherwise  transferred  shall  assume  by  written
instrument  the  obligation to deliver to the holder of each Warrant such shares
of stock,  securities,  cash or property  as in  accordance  with the  foregoing
provisions such holder shall be entitled to purchase.

         Section 3.5. Prior Notice as to Certain Events. In case at any time:

                  (a) the Company  shall pay any dividend  upon its Common Stock
         payable in stock or make any  distribution  (other than cash dividends)
         to the holders of its Common Stock; or

                  (b) the Company shall offer for  subscription  pro rata to the
         holders of its Common Stock any additional shares of stock of any class
         or any other rights; or

                  (c)   there   shall   be   any   capital   reorganization   or
         reclassification  of the capital stock of the Company, or consolidation
         or merger of the  Company  with,  or sale,  conveyance,  lease or other
         transfer  of  all  or  substantially  all of  its  assets  to,  another
         corporation; or



                                       7


<PAGE>

                  (d) there shall be a  voluntary  or  involuntary  dissolution,
         liquidation or winding up of the Company;

then in any one or more of such  cases,  the  Company  shall give prior  written
notice,  by first class mail,  postage  prepaid,  addressed  to each  registered
Warrantholder at the address of such  Warrantholder as shown on the books of the
Company,  of the date on which (x) the  books of the  Company  shall  close or a
record  shall be taken for such stock  dividend,  distribution  or  subscription
rights  or (y) such  reorganization,  reclassification,  consolidation,  merger,
sale,  dissolution  liquidation or winding up shall take place,  as the case may
be.  Such  notice  shall also  specify  the date as of which the  holders of the
Common Stock of record  shall  participate  in such  dividend,  distribution  or
subscription  rights or shall be  entitled to exchange  their  Common  Stock for
securities   or   other   property   deliverable   upon   such   reorganization,
reclassification,  consolidation,  merger, sale,  dissolution,  liquidation,  or
winding  up, as the case may be.  Such  written  notice  shall be given at least
twenty (20) days prior to the action in  question  and not less than twenty (20)
days prior to the record date or the date on which the Company's  transfer books
are closed in respect thereto.

         Section 3.6. Certain Obligations of the Company.  The Company will not,
by amendment of its certificate of incorporation or through any  reorganization,
transfer  of  assets,  consolidation,  merger,  dissolution,  issue  or  sale of
securities or any other voluntary action,  avoid or seek to avoid the observance
or  performance  of any of the terms of this  Warrant  Agreement  or the Warrant
Certificate,  but will at all times in good faith  assist in the carrying out of
all such terms.  Without  limiting the generality of the foregoing,  the Company
(a) will take all such action as may be necessary or  appropriate  in order that
the Company may validly and legally issue fully paid and nonassessable shares of
such stock upon the exercise of all Warrants from time to time outstanding,  and
(b) will not (i) transfer all or substantially  all of its properties and assets
to any other person or entity,  or (ii) consolidate with or merge into any other
entity where the Company is not the continuing or surviving  entity,  unless, in
any such case, the other entity acquiring such properties and assets, continuing
or surviving after such  consolidate or merger or issuing or  distributing  such
shares or other  securities  or property,  as the case may be,  shall  expressly
assume in writing and be bound by all the terms of this  Warrant  Agreement  and
the Warrant Certificates.

         Section 3.7. Reservation of Common Stock. The Company will at all times
reserve and keep  available,  solely for issuance and delivery upon the exercise
of the Warrants, all shares of Common Stock from time to time issuable upon such
exercise.  All such  shares  shall be  authorized  and,  when  issued  upon such
exercise,  shall  be  validly  issued,  fully  paid  and  nonassessable  with no
liability on the part of the holder thereof.

         Section 3.8.  Registration or Exemption for Common Stocks.  The Company
will use its best efforts:  (a) as soon as  practicable  following the effective
date of the Registration  Statement,  register the Common Stock and the Warrants
under the  Securities  Exchange  Act of 1934,  as  amended;  (b) to qualify  for
exemption from the registration  requirements of the Securities Act of 193 3, as
amended (the "Act") the Common Stock issuable upon exercise of the Warrants; and
(c) to maintain  exemptions or qualifications,  in those  jurisdictions in which
the original  Registration  Statement  relating to the  Warrants  was  initially
qualified, to permit the


                                       8

<PAGE>


exercise of the Warrants  and the issuance of the Common Stock  pursuant to such
exercise.  The Warrant Agent shall have no responsibility for the maintenance of
such exemptions or qualifications  or for liabilities  arising from the exercise
or  attempted  exercise  of  Warrants  in  jurisdictions   where  exemptions  or
qualifications have not been maintained or are otherwise unavailable.


                                   ARTICLE IV.
                      CERTAIN OTHER PROVISIONS RELATING TO
                    RIGHTS OF HOLDERS OF WARRANT CERTIFICATES

         Section 4.1. No Rights of Shareholders.  The Warrant Certificates shall
be issued in  registered  form only.  No Warrant  Certificate  shall entitle the
holder thereof to any of the rights of a holder of shares of Common Stock of the
Company, including,  without limitation, the right to vote, to receive dividends
and other distributions,  or to receive any notice of, or to attend, meetings of
holders of Common Stock or any other proceedings of the Company.

         Section  4.2.  Loss,  Theft,   Destruction  or  Mutilation  of  Warrant
Certificates.  Upon  receipt by the Company  and the  Warrant  Agent of evidence
reasonably  satisfactory  to the Company and Warrant  Agent of the loss,  theft,
destruction  or mutilation of any Warrant  Certificate,  and: (a) in the case of
any such loss,  theft, or destruction,  upon delivery to the Warrant Agent of an
indemnity  bond in form and amount and issued by a bonding  company,  reasonably
satisfactory  to the  Company  or (b) in the case of any such  mutilation,  upon
surrender to and cancellation by the Warrant Agent of such Warrant  Certificate,
the  Company  at its  expense  will  execute  and  cause  the  Warrant  Agent to
countersign  and deliver,  in lieu thereof,  a new Warrant  Certificate  of like
tenor.

         Section 4.3.  Transfer  Agent,  Cancellation  of Warrant  Certificates;
Unexercised Warrants.  The Company desires that Securities Transfer Corporation,
Dallas,  Texas, act as transfer agent (the "Transfer Agent").  Transfer Agent is
hereby  irrevocably  authorized and directed at all times to reserve such number
of  authorized  and unissued  shares of Common Stock as shall be  sufficient  to
permit  the  exercise  in full of all  Warrants  from  time to time  outstanding
subject,  however,  to the provisions of Section 2.1. The Warrant Agent, and any
successor thereto, is hereby irrevocably  authorized to requisition from time to
time from the Transfer  Agent  certificates  for shares of Common Stock required
for exercise of Warrants.  The Company will supply the Transfer  Agent with duly
executed  certificates for shares of Common Stock for such purpose and will make
available any cash required in settlement  of fractional  share  interests.  All
Warrant Certificates surrendered upon the exercise of Warrants shall be canceled
by the Warrant  Agent and shall  thereafter  be delivered  to the Company;  such
canceled  Warrant  Certificates,  with the Purchase Form on the reverse  thereof
duly filled in and signed,  shall constitute  conclusive evidence as between the
parties  hereto of the  numbers of shares of Common  Stock which shall have been
issued upon  exercises  of  Warrants.  Promptly  after the last day on which the
Warrants are  exercisable  (set forth in Section 2.2 above),  the Warrant  Agent
shall certify to the Company the aggregate  number of Warrants then  outstanding
and unexercised.  No shares of Common Stock shall be subject to reservation with
respect to  Warrants  not  exercised  prior to the time and date  identified  in
Section 2.2 above as the last time and date at which Warrants may be exercised.


                                       9

<PAGE>

                                   ARTICLE V.
                  TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES

         Section 5.1.  Warrant  Register;   Transfer  or  Exchange  of   Warrant
Certificates.  The Warrant Agent shall cause to be kept at the corporate  office
of the Warrant Agent a register (the  "Warrant  Register") in which,  subject to
such reasonable  regulations as the Company may prescribe,  provisions  shall be
made for the  registration  of transfers and exchanges of Warrant  Certificates.
Upon  surrender for transfer or exchange of any Warrant  Certificates,  properly
endorsed,  to the Warrant Agent, the Warrant Agent at the Company's expense will
issue and  deliver  to or upon the  order of the  holder  thereof a new  Warrant
Certificate or Warrant Certificates of like tenor, in the name of such holder or
as such holder (upon payment by such holder of any  applicable  transfer  taxes)
may direct, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock called for on the face of the Warrant  Certificate  so
surrendered.  Any Warrant Certificate surrendered for transfer or exchange shall
be  canceled by the  Warrant  Agent and shall  thereafter  be  delivered  to the
Company.

         Section 5.2. Identity of Warrantholders. Until a Warrant Certificate is
transferred in the Warrant Register, the Company and the Warrant Agent may treat
the person in whose name the Warrant  Certificate  is registered as the absolute
owner  thereof  and  of the  Warrants  represented  thereby  for  all  purposes,
notwithstanding any notice to the contrary, except that, if and when any Warrant
Certificate is properly assigned in blank, the Company and the Warrant Agent may
(but shall not be obligated to) treat the bearer  thereof as the absolute  owner
of the  Warrant  Certificate  and of the  Warrants  represented  thereby for all
purposes, notwithstanding any notice to the contrary.


                                   ARTICLE VI.
                          CONCERNING THE WARRANT AGENT

         Section 6.1. Taxes.  The Company will, from time to time,  promptly pay
to the Warrant Agent,  or make provision  satisfactory  to the Warrant Agent for
the payment of all taxes and charges that may be imposed by the United States or
any State upon the Company or the Warrant Agent upon the transfer or delivery of
shares of Common Stock upon the exercise of Warrants,  but the Company shall not
be obligated to pay any tax imposed in connection with any transfer  involved in
the delivery of a certificate  for shares of Common Stock in any name other than
that  of  the  registered  holder  of the  Warrant  Certificate  surrendered  in
connection with the purchase thereof.

         Section 6.2. Registration of Warrant Agent and Appointment of New 
           Warrant Agent.

                  (a) The Warrant  agent may resign its duties as Warrant  Agent
         or the Company may  terminate  the Warrant  Agent and the Warrant Agent
         shall be discharged from all further duties and  liabilities  hereunder
         (except  liabilities  arising as a result of the  Warrant  Agent's  own
         negligence or willful  misconduct).  The Warrant Agent shall,  at least
         fifteen  (15)  days  prior to the date  such  resignation  is to become
         effective,  at the expense of the Company,  cause a copy of such notice


                                       10

<PAGE>

         of resignation  to be mailed to the Registered  Holder of each  Warrant
         Certificate.The  Company  shall  appoint a new  Warrant  Agent.  If the
         Company  shall fail to appoint a new Warrant  Agent within a  period of
         thirty (30) days then the holder of any Warrant  Certificate  may apply
         to any court of competent  jurisdiction  for  the  appointment of a new
         Warrant Agent. Any new Warrant Agent, whether appointed  by the Company
         or by such a court,  shall be a  corporation  domiciled  in the  United
         States which is authorized  under  applicable  Federal or State  law to
         exercise  corporate  trust  powers and is  subject  to  supervision  or
         examination  by  Federal or State  authority.  Any new   Warrant  Agent
         appointed  hereunder  shall  execute,  acknowledge  and  deliver to the
         Company  an  instrument  accepting  such  appointment   hereunder   and
         thereupon such new Warrant Agent without any further act or deed  shall
         become vested with all the rights, powers, duties and  responsibilities
         of the  Warrant  Agent  hereunder  with like  effect  as if it had been
         named as the Warrant Agent; but if for any reason it becomes  necessary
         or expedient to have the former  Warrant Agent execute and  deliver any
         further assurance, conveyance, act or deed, the same shall  be done and
         shall be legally  and validly  executed  and  delivered  by  the former
         Warrant  Agent.  Not  later  than  the  effective  date  of  any   such
         appointment  the  Company  shall file notice  thereof  with the  former
         Warrant  Agent.  The Company  shall  promptly  give notice of any  such
         appointment  to the  holders of the  Warrant  Certificates  by mail  to
         their addresses as shown in the Warrant  Register.  Failure to file  or
         give such notice, or any defect therein, shall not affect the  legality
         or validity of the appointment of the successor Warrant Agent.



                  (b) Any  company  into  which  the  Warrant  Agent  or any new
         Warrant  Agent  may be  merged  or  converted  or with  which it may be
         consolidated  or any company  resulting from any merger,  conversion or
         consolidation to which the Warrant Agent or any new Warrant Agent shall
         be a party shall be the  successor  Warrant  Agent  under this  Warrant
         Agreement  without any further act; provided that if such company would
         not be eligible for appointment as a successor  Warrant Agent under the
         provisions  of  paragraph  (a) of this  Section 6.2 the  Company  shall
         forthwith   appoint  a  new  Warrant  Agent  in  accordance  with  such
         provisions.  Any such  successor  Warrant  Agent  may  adopt  the prior
         countersignature  of any predecessor  Warrant Agent and deliver Warrant
         Certificates  countersigned  and  not  delivered  by  such  predecessor
         Warrant Agent or may  countersign  Warrant  Certificates  either in the
         name of any  predecessor  Warrant  Agent or the  name of the  successor
         Warrant Agent.

         Section 6.3.  Remuneration  of Warrant Agent.  The Company will pay the
Warrant  Agent  reasonable  remuneration  for  its  services  as  Warrant  Agent
hereunder  as provided in the  attached  fee  schedule  and will  reimburse  the
Warrant  Agent  upon  demand for all  expenditures  that the  Warrant  Agent may
reasonably incur in the execution of its duties hereunder.

         Section 6.4. Further  Assurances.  The Company will perform,  exercise,
acknowledge  and deliver or cause to be performed,  executed,  acknowledged  and
delivered  all such further and other acts,  instruments  and  assurances as may


                                       11


<PAGE>

reasonably  be required by the Warrant  Agent for the carrying out or performing
by the Warrant Agent of the provisions of this Warrant Agreement.

         Section 6.5. Limitations on Liabilities of the Warrant Agent.

                  (a)  Whenever,  in the  performance  of its duties  under this
         Warrant  Agreement,  the   Warrant  Agent  shall deem it  necessary  or
         desirable  that any   matter  be  proved  or  established,  or that any
         instructions  with respect  to the performance of its duties  hereunder
         be given,  by the  Company  prior to taking or  suffering  any  action
         hereunder,  such matter (unless  other  evidence in respect  thereof be
         herein  specifically  prescribed)  may  be  deemed  to be  conclusively
         proved  and  established,  or such  instructions  may  be  given,  by a
         certificate  or  instrument  signed by an officer of the  Company   and
         delivered to the Warrant  Agent:  and such  certificate  or  instrument
         shall be full  authorization to the Warrant Agent for any action  taken
         or suffered in good faith by it under the  provisions  of this  Warrant
         Agreement in reliance upon such certificate or instrument;  but  in its
         discretion the Warrant Agent may in lieu thereof accept other  evidence
         of such matter or may require such further or  additional  evidence  as
         it may deem reasonable.

                  (b) The Warrant Agent shall be liable  hereunder  only for its
         own negligence or willful  misconduct,  and the Warrant Agent shall act
         hereunder solely as agent, and its duties shall be determined solely by
         the  provisions  hereof.  The Company  agrees to indemnify  the Warrant
         Agent and save it harmless against any and all  liabilities,  including
         judgments,  costs and counsel fees, for anything done or omitted by the
         Warrant  Agent in the execution of this Warrant  Agreement  except as a
         result of the Warrant Agent's negligence or willful miscon duct.

                  (c) The Warrant  Agent shall not be liable for or by reason of
         any of the  statements  of fact or recitals  contained  in this Warrant
         Agreement or in the Warrant  Certificates  (except its countersignature
         thereof) or be required to verify the same, but all such statements and
         recitals are and shall be deemed to have been made by the Company only.

                  (d) The Warrant Agent shall not be under any responsibility in
         respect to the validity or execution of any Warrant Certificate (except
         its countersignature thereof); (ii) nor shall it be responsible for any
         breach by the Company of any  covenant or  condition  contained in this
         Warrant Agreement or in any Warrant Certificate;  (iii) nor shall it be
         responsible  for the making of any adjustment in the Purchase Price, or
         number of shares issuable upon exercise of the Warrant  Certificates or
         responsible for the manner,  method or amount of any such adjustment or
         the facts that would require any such adjustment;  (iv) nor shall it by
         any act hereunder be deemed to make any  representation  or warranty as
         to the authorization or reservation of any shares of Common Stock to be
         issued pursuant to this Warrant Agreement or any Warrant Certificate or
         as to whether  any shares of Common  Stock or other  securities  are or
         will be validly authorized and issued and fully paid and nonassessable.

                                       12

<PAGE>


         Section 6.6. Amendment and Modification. The Warrant Agent may, without
the  consent or  concurrence  of the  holders of the  Warrant  Certificates,  by
supplemental agreement or otherwise, join with the Company in making any changes
or  corrections  in this Warrant  Agreement that they shall have been advised by
counsel:  (a) are required to cure any  ambiguity or to correct any defective or
inconsistent  provision or clerical omission or mistake or manifest error herein
contained;  (b) add to the obligations of the Company in this Warrant  Agreement
further  obligations  thereafter to be observed by it, or surrender any right or
power  reserved to or conferred upon the Company in this Warrant  Agreement;  or
(c) do not or will not adversely affect, alter or change the rights,  privileges
or immunities of the holders of Warrant Certificates not provided for under this
Warrant Agreement; provided, however, that any term of this Warrant Agreement or
any Warrant Certificate may be changed,  waived,  discharged or terminated by an
instrument in writing  signed by each party against  which  enforcement  of such
change,  waiver,  discharge or termination is sought, or by which the same is to
be performed or observed.





                                       13

<PAGE>



                                  ARTICLE VII.
                                  OTHER MATTERS

         Section 7.1.  Successors and Assigns.  All the covenants and provisions
of this  Warrant  Agreement  by or for the benefit of the Company or the Warrant
Agent shall bind and inure to the  benefit of their  respective  successors  and
assigns.

         Section 7.2.  Notices.  Any notice or demand authorized by this Warrant
Agreement  to be given or made by the  Warrant  Agent  or by the  holder  of any
Warrant  Certificate to or on the Company shall be sufficiently given or made if
sent by first  class or  registered  mail,  postage  prepaid,  addressed  (until
another  address is filed in writing by the Company  with the Warrant  Agent) as
follows:

                         Fresh'n Lite, Inc.
                         2804 Judson Road
                         Longview, Texas 75601
                         Attention:  Curtis Swanson

Any notice or demand authorized by this Warrant Agreement to be given or made by
the holder of any  Warrant  Certificate  or by the  Company to or on the Warrant
Agent shall be  sufficiently  given or made if sent by first class or registered
mail,  postage prepaid,  addressed (until another address is filed in writing by
the Warrant Agent with the Company) as follows:
                         Securities Transfer Corporation
                         P. O. Box 701629
                         Dallas, Texas 75370-0001

         Section 7.3. Governing Law. This  Warrant  Agreement  and  the  Warrant
Certificates  shall be construed and enforced in accordance with and governed by
the laws of Texas.

         Section 7.4. No Benefits  Conferred.  Nothing in this Warrant Agreement
expressed and nothing that may be implied from any of the  provisions  hereof is
intended,  or shall be  construed,  to confer  upon,  or give to,  any person or
corporation  other than the Company,  the Warrant Agent,  and the holders of the
Warrant  Certificates,  any  right,  remedy or claim  under or by reason of this
Warrant  Agreement  or of  any  covenant,  condition,  stipulation,  promise  or
agreement  herein;  and all covenants,  conditions,  stipulations,  promises and
agreements  in this  Warrant  Agreement  contained  shall  be for the  sole  and
exclusive benefit of the Company, the Warrant Agent, their respective successors
and the holders of the Warrant Certificates.

         Section 7.5. Headings.  The  descriptive  headings used in this Warrant
Agreement are inserted for convenience  only and shall not control or affect the
meaning or construction of any of the provisions hereof.

         IN WITNESS  WHEREOF,  this Warrant  Agreement has been duly executed by
the parties hereto as of the day and year first above written.


                                       14

<PAGE>



                                          FRESH'N LITE, INC.


                                          By: __________________________________
                                                   Its:



                                          SECURITIES TRANSFER CORPORATION


                                          By: __________________________________
                                                   Its:




                                       15

<PAGE>



                                    EXHIBIT A

                        THIS WARRANT CERTIFICATE MAY BE
            TRANSFERRED SEPARATELY FROM THE COMMON STOCK CERTIFICATE
                       WITH WHICH IT IS INITIALLY ISSUED


                     EXERCISABLE ON OR AFTER JUNE 26, 1996,
                         AND ON OR BEFORE AND VOID AFTER
                 5:00 P.M. DALLAS, TEXAS TIME, FEBRUARY 27, 2002


 No. W-_______________________                    Certificate for _____ Warrants


                                                            WARRANT CUSIP


                      WARRANTS TO PURCHASE COMMON STOCK OF
                               FRESH'N LITE, INC.
                INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS


         THIS CERTIFIES that ___________________________________________________
or assigns,  is the owner of the number of  Warrants  set forth  above,  each of
which  represents  the  right to  purchase  from  Fresh'n  Lite,  Inc.,  a Texas
corporation  (the  "Company"),  at any time on or after June 26, 1996,  or on or
before 5:00 P.M.  Dallas,  Texas time on February 27, 2002, upon compliance with
and subject to the  conditions  set forth  herein and in the  Warrant  Agreement
hereinafter referred to, one share (subject to adjustments referred to below) of
the Common  Stock of the Company  (such shares or other  securities  or property
purchasable upon exercise of the Warrants being herein called the "Shares"),  by
surrendering this Warrant Certificate with the Purchase Form on the reverse side
duly executed, at the corporation office of Securities Transfer Corporation,  as
warrant  agent  (the  "Warrant  Agent"),  and by paying  in full,  in cash or by
certified or official bank check or other check  acceptable to the Warrant Agent
payable to the order of the Company, the purchase price of $3.00 per share.

         Upon any  exercise  of less  than all the  Warrants  evidenced  by this
Warrant  Certificate,  there  shall  be  issued  to  the  holder  a new  Warrant
Certificate in respect of the Warrants as to which this Warrant  Certificate was
not exercised.

         If the  Common  Stock  of the  Company  becomes  listed  on a  national
securities  exchange  and/or the NASDAQ  Small Cap Market,  the  Warrants may be
redeemed by the Company at a  redemption  price of $.05 per Warrant upon 30 days
written  notice to the  registered  holder  if the  average  closing  bid of the
Company's Common Stock in any national securities exchange and/or the


                                       16

<PAGE>



NASDAQ Small Cap Market,  exceeds $5.00 per share (subject to adjustment) for 30
consecutive business days ending within 15 days of the notice of redemption.

         Upon the surrender for transfer or exchange hereof,  properly endorsed,
to the Warrant Agent, the Warrant Agent at the Company's  expense will issue and
deliver to the order of the holder hereof, a new Warrant  Certificate or Warrant
Certificates  of like tenor,  in the name of such holder or as such holder (upon
payment by such holder of any applicable transfer taxes) may direct,  calling in
the  aggregate  on the face or faces  thereof for the number of shares of Common
Stock called for on the face hereof.

         The  Warrant   Certificates  are  issued  only  as  registered  Warrant
Certificates.  Until this  Warrant  Certificate  is  transferred  in the Warrant
Register,  the Company and the Warrant  Agent may treat the person in whose name
this Warrant  Certificate  is registered as the absolute owner hereof and of the
Warrants represented hereby for all purposes,  notwithstanding any notice to the
contrary.

         The  Warrants may not be  exercised  unless (a) as to Warrants  held by
Texas  residents,  a permit has been issued by the State of Texas for the Common
Stock which are to be issued upon the  exercise of the Warrants or (b) as to any
Warrants  held by  non-Texas  residents,  (i) a  current  prospectus  under  the
Securities  Act of 1933  relating to the Common Stock to be so issued is then in
effect (or an exemption from such registration of such Common Stock is available
upon such exercise),  and (ii) such Common Stock is qualified for sale or exempt
from  qualification  under the applicable  Securities laws of the state in which
such holder of the Warrant resides.

         The Common Stock  underlying the Warrants has been  registered with the
Texas  Securities  Board,  but has not been  registered  with the Securities and
Exchange Commission. The Common Stock and Warrants sold pursuant to the offering
were sold in reliance on the intrastate offering exemption from the registration
provisions of the Securities Act.  Pursuant to said  exemption,  for a period of
nine months  following the last sale of Common Stock or Warrants by the Company,
the Common  Stock and  Warrants  may not be resold to persons  who are not Texas
residents.  Additionally,  the Warrants may not be sold to a non-Texas  resident
unless the Common stock issuable upon the exercise of the Warrants has been duly
registered  with  applicable  state  and  federal   securities   authorities  or
exemptions from such registration are available.

         This Warrant Certificate is issued under the Warrant Agreement dated as
of February 28, 1997, between the Company and Securities Transfer Corporation as
Warrant  Agent,  and is subject to the terms and  provisions  contained  in said
Warrant Agreement, to all of which terms and provisions the registered holder of
this Warrant Certificate  consents by acceptance hereof.  Copies of said Warrant
Agreement  are on file at the  corporate  office of the Warrant Agent in Dallas,
Texas, and may be obtained by writing to the Warrant Agent.

         The  number of shares  receivable  upon the  exercise  of the  Warrants
represented  by this Warrant  Certificate  and the purchase  price per share are
subject to adjustment upon the happening


                                       17

<PAGE>



of certain  events  specified in the Warrant  Agreement  (which  provisions  are
contained in Article III of the Warrant Agreement and are hereby incorporated by
reference).

         No fractional  Shares of the Company's Common Stock will be issued upon
the exercise of Warrants.  As to any final fraction of a share which a holder of
Warrants  exercised  in the same  transaction  would  otherwise  be  entitled to
purchase on such  exercise,  the Company shall pay a cash  adjustment in lieu of
any fractional Share determined as provided in the Warrant Agreement.

         This Warrant  Certificate shall not entitle the holder hereof to any of
the  rights  of a holder  of  Common  Stock of the  Company,  including  without
limitation, the right to vote, to receive dividends and other distributions,  to
exercise  any  preemptive  right,  or to  receive  any  notice  of, or to attend
meetings of holders of Common Stock or any other proceedings of the Company.

         This Warrant  Certificate shall be void and the Warrants and any rights
represented  hereby shall cease unless  exercised on or before 5:00 P.M. Dallas,
Texas on February 27, 2002, unless extended by the Company.

         Reference  is hereby made to the  further  provisions  of this  Warrant
Certificate  set forth on the reverse hereof and such further  provisions  shall
for all purposes have the same effect as though fully set forth at this place.

         All terms used in this  Warrant  Certificate  which are  defined in the
Warrant  Agreement  shall  have the  meanings  assigned  to them in the  Warrant
Agreement.




                                       18

<PAGE>



         This Warrant  Certificate  shall not be valid for any purpose  until it
shall have been countersigned by the Warrant Agent.

         WITNESS the  facsimile  signatures  of the  Company's  duly  authorized
officers.

Dated: _______________             FRESH'N LITE, INC.



                                   BY:   /s/  illegible
                                       -----------------------------------------
                                    Its:  Vice President/Chief Financial Officer


ATTEST:


/s/ Carole A. swanson
-------------------------------------
Secretary




COUNTERSIGNED AND REGISTERED:

SECURITIES TRANSFER CORPORATION



BY:  /s/ Kevin Halter, Jr.
     -------------------------------
         Authorized Signature





                                       19

<PAGE>



                        (REVERSE OF WARRANT CERTIFICATE)


THE WARRANTS  REPRESENTED BY THIS  INSTRUMENT  HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR
ANY STATE  SECURITIES  ACT OTHER THAN THE TEXAS  SECURITIES  ACT. THESE WARRANTS
HAVE  BEEN SOLD IN  RELIANCE  ON THE  INTRASTATE  OFFERING  EXEMPTIONS  FROM THE
REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933. IN NO EVENT, FOR A PERIOD
OF NINE MONTHS FROM THE DATE OF THE LAST SALE OF THE COMMON  STOCK AND  WARRANTS
IN SUCH OFFERING  SHALL THE WARRANTS BE SOLD TO ANY PERSON WHO IS NOT A RESIDENT
OF THE STATE OF TEXAS.  RESALES  BY ANY PERSON OF THESE  SECURITIES  CAN BE MADE
ONLY TO A RESIDENT OF TEXAS.













                                       20

<PAGE>



TO:      Fresh'n Lite, Inc.
         c/o Fresh'n Lite, Inc., as Warrant Agent


                                  PURCHASE FORM
(To  be  Executed  by  the  Registered  Holder  in  Order  to  Exercise  Warrant
Certificates)

         The undersigned hereby  irrevocably elects to exercise  1___________ of
the Warrants represented by the Warrant Certificate and to purchase for cash the
Shares  issuable upon the exercise of said Warrants,  and herewith makes payment
of  $_______________  therefor,  and requests that  certificates for such Shares
shall be issued in the name of:


         PLEASE INSERT SOCIAL SECURITY OR
         OTHER IDENTIFYING NUMBER OF REGISTERED
         HOLDER OF CERTIFICATE

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


         ------------------------------------------------
         (Print Name)

         ------------------------------------------------
         (Address)


         ------------------------------------------------
         (Signature)

         ------------------------------------------------
         (Signature)






----------------------------------------
     1Insert  here the number of Warrants  evidenced on the face of this Warrant
Certificate  (or, in the case of a partial  exercise,  the portion thereof being
exercised),  in either case without making any adjustment for additional  Common
Stock or any  other  securities  or  property  or cash  which,  pursuant  to the
adjustment   provisions  referred  to  in  this  Warrant  Certificate,   may  be
deliverable upon exercise.


                                       21

<PAGE>





                                 ASSIGNMENT FORM
                    (To be Executed by the Registered Holder
                   in Order to Transfer Warrant Certificates)

         FOR  VALUE  RECEIVED,   the  undersigned  hereby  sells,  assigns,  and
transfers 2  ____________________  of the Warrants  represented  by this Warrant
Certificate unto:

         PLEASE INSERT SOCIAL SECURITY OR
         OTHER IDENTIFYING NUMBER OF ASSIGNEE

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

         ------------------------------------------------
         (Print Name)

         ------------------------------------------------
         (Address)

and does  hereby  irrevocably  constitute  and  appoint  _______________________
Attorney to transfer this Warrant Certificate on the records of the Company with
full power of substitution in the premises.


Dated: __________________         Signature(s)__________________________________

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

                                  Signature(s)
                                  Guaranteed:___________________________________


                                     NOTICE


         The  Signature(s)  to the  Purchase  Form or the  Assignment  Form must
correspond  to the name(s) as written upon the face of this Warrant  Certificate
in every particular without alteration or enlargement or any change whatsoever.


------------------------------------------
  2Insert  here the number of  Warrants  evidenced  on the face of this  Warrant
Certificate (or, in the case of a partial assignment,  the portion thereof being
assigned),  in either case without making any  adjustment for additional  Common
Stock or any  other  securities  or  property  or cash  which.  pursuant  to the
adjustment provisions referred to in this Warrant
Certificate, may be deliverable upon exercise.


                                          22