U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________

                        COMMISSION FILE NUMBER 000-23207

                        NEUTRAL POSTURE ERGONOMICS, INC.
                 (Name of small business issuer in its charter)

               TEXAS                                    74-2563656
  (State or other jurisdiction of         (IRS Employer Identification No.)
   incorporation or organization)

       3904 N. TEXAS AVENUE
        BRYAN, TEXAS 77803                            (409) 778-0502
(Address of principal executive offices)        (Issuer's telephone number)

      SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:

                                                    NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                        ON WHICH REGISTERED
          -------------------                        -------------------
    COMMON STOCK, $.01 PAR VALUE               NASDAQ NATIONAL MARKET SYSTEM

        CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 [ ]

        CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE 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. [ ]

        THE REGISTRANT'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE
$12,181,383

        ON SEPTEMBER 15, 1998, THE AGGREGATE MARKET PRICE OF THE VOTING STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $3,783,881. (FOR
PURPOSES OF DETERMINATION OF THE ABOVE STATED AMOUNT, ONLY DIRECTORS, EXECUTIVE
OFFICERS AND 10% OR GREATER SHAREHOLDERS HAVE BEEN DEEMED AFFILIATES).

        ON SEPTEMBER 15, 1998, THERE WERE 3,200,000 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $0.01 PER SHARE.

                  TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
                                 YES [ ] NO [X]

                      DOCUMENTS INCORPORATED BY REFERENCE:

  PORTIONS OF THE REGISTRANT'S PROXY STATEMENT RELATING TO THE 1998 ANNUAL
 MEETING OF SHAREHOLDERS OF THE COMPANY, WHICH WILL BE FILED WITHIN 120 DAYS OF
 JUNE 30, 1998, ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
<PAGE>
                               TABLE OF CONTENTS

                                                                           PAGE
                                                                          ------
                                     PART I
Item 1. Business ..........................................................    1
Item 2. Properties ........................................................    1
Item 3. Legal Proceedings .................................................    9
Item 4. Submission of Matters to a Vote of Security Holders ...............   11

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters ..........   12
Item 6. Management's Discussion and Analysis or Plan of Operations ........   13
Item 7. Financial Statements ..............................................   17
Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure ..............................................   17

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
        compliance with Section 16(a) of the Exchange Act .................   18
Item 10. Executive Compensation ...........................................   19
Item 11. Security Ownership of Certain Beneficial Owners and Management ...   19
Item 12. Certain Relationships and Related Transactions ...................   19
Item 13. Exhibits and Reports on Form 8-K .................................   19
<PAGE>
                                     PART I

        IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT ON FORM 10-KSB MAY
INCLUDE CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE "FORWARD-LOOKING" WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. THERE ARE CERTAIN IMPORTANT FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE
FORWARD-LOOKING STATEMENTS. CERTAIN OF THE IMPORTANT FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS
INCLUDE, AMONG OTHER THINGS, CHANGES FROM ANTICIPATED LEVELS OF SALES, THE
ABILITY TO INTEGRATE ACQUIRED PRODUCT LINES AND RELATED BUSINESSES, FUTURE
NATIONAL OR REGIONAL ECONOMIC AND COMPETITIVE CONDITIONS, CHANGES IN
RELATIONSHIPS WITH CUSTOMERS, CUSTOMER ACCEPTANCE OF EXISTING AND NEW PRODUCTS,
PRICING PRESSURES DUE TO EXCESS CAPACITY, RAW MATERIAL COST INCREASES, CHANGE OF
TAX RATES, CHANGE OF INTEREST RATES, DECLINING CONDITIONS IN THE INDUSTRY,
VALIDITY OF PATENTS, AVAILABILITY OF KEY COMPONENT PARTS, CASUALTY TO OR OTHER
DISRUPTION OF THE COMPANY'S PRODUCTION FACILITY AND EQUIPMENT, DELAYS AND
DISRUPTIONS IN THE SHIPMENT OF THE COMPANY'S PRODUCTS AND OTHER FACTORS THAT
GENERALLY AFFECT BUSINESS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER
THE DATE HEREOF. READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN
OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION.

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

GENERAL

        Since Neutral Posture Ergonomics, Inc. ("Neutral Posture" or the
"Company") was incorporated in 1990 under the laws of the State of Texas, the
Company has manufactured, marketed and distributed the Neutral Posture(R)
ergonomic chair line, most models of which are based upon patented and/or
patent-pending designs of Jerome Congleton, Ph.D., P.E., C.P.E., an ergonomist
certified by the Board of Certification in Professional Ergonomics who serves as
a design consultant to the Company. The chairs are assembled at the Company's
46,000 square-foot facility in Bryan, Texas which the Company acquired in 1996.
Based on anthropometrics, the scientific study of the measurements of size,
weight and proportions of the human body, the Company manufactures under the
Neutral Posture(R) tradename five series of ergonomic chairs designed to
minimize the physical stress imposed upon the human body while seated. Virtually
all chairs marketed under the Neutral Posture(R) tradename can be adjusted to
accommodate the size, weight and proportions of body types from as small as the
5th percentile female to as large as the 95th percentile male. The Company is
not aware of any other chair on the market that (i) is designed by a certified
ergonomist, (ii) is designed based on anthropometric studies, and (iii) has
interchangeable key components such as seats, backs and arms.

        In March 1998, the Company expanded its product line with the
acquisition of certain assets of the furniture business of Harvard Industries,
Inc. ("Harvard"). The acquisition included a series of chair lines which has
been in existence for approximately ten years with an established distribution
base and has allowed the Company to enter into the mid-priced chair market. The
chair lines range from highback executive chairs with minimal adjustability to a
series of ergonomic chairs with up to seven adjustments. The Company now is able
to offer lower-priced chair lines to complement its existing Neutral Posture(R)
chair line.

        The Company believes that the increase in computer users and other
domestic white collar office employees has benefited, and the anticipated
increase in white collar office employees outside of the United States will
benefit, its ergonomic furniture business. The Company also believes that
repetitive stress injuries, which affect a number of seated workers, have
created a market demand for ergonomically designed products. To address this
problem, the Company intends to research, create and develop additional
ergonomic products consistent with the Company's philosophy that its designs be
based on ergonomic research and anthropometric data.

        The Company's principal executive offices are located at 3904 North
Texas Avenue, Bryan, Texas 77803, and its telephone number is (409) 778-0502. As
of September 1, 1998, the Company had 93 full-time employees.

INDUSTRY OVERVIEW

        The Company's chairs compete in the seating segment of the office
furniture market. This segment represented approximately 24.6% of industry sales
in the United States or $2.8 billion in calendar year 1997 and is the second
largest office

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furniture industry segment. The Company's share of the U.S. seating market
segment was less than one-half of 1% on a dollar basis in calendar year 1997.
According to the Business and Institutional Furniture Manufacturer's Association
("BIFMA"), the U.S. office furniture market had estimated sales of $11.5 billion
in calendar year 1997. The dollar value of U. S. office furniture industry
shipments has increased in each of the past 15 years, with the exception of
1991, and according to BIFMA estimates, has grown at a compound annual rate of
approximately 9.2% over the three year period ended December 31, 1997.

PRODUCTS

        NEUTRAL POSTURE(R) CHAIRS. The concept for the Neutral Posture(R) chair
line arose from Dr. Congleton's research, which is derived from National
Aeronautics and Space Administration ("NASA") data concerning the human body's
reaction to weightlessness. His research determined that in weightless
conditions the body would naturally assume a neutral position in which no
tendons are extended or retracted and in which the muscles experience no strain.
This neutral position can be simulated by relaxing all muscles while floating
face down in water and represents the human body's "neutral posture" position.
The models in the Neutral Posture(R) chair line have up to 12 independent
adjustments, allowing an individual to assume this stress-free posture.

        The Neutral Posture(R) chair line has certain chairs with contoured
seats which are made with multi-densities of foam to distribute the user's body
weight over a greater surface area than conventional seating. Additionally, the
angle between the backrest and the seat structure of these chairs can be
adjusted to approximate the posture that the body assumes naturally in the
gravity-free environment of space. Five different seat designs and five
different backrest styles provide additional comfort to meet the personal
preferences of customers of various sizes and shapes. The backrests also contain
multi-densities of foam that are shaped to provide maximum support in the lumbar
area. The air lumbar pump, available on four of the Company's five series of
chairs, provides adjustable lumbar support. This feature allows the backrest to
conform more closely to the unique curvature of each person's back.

        The Neutral Posture(R) chair line requires minimal assembly by the
customer and is delivered with a computer diskette and/or owner's manual that
provides each customer with a visual explanation of how to adjust the chair for
maximum comfort. All frame parts, mechanisms, bases, casters, cylinders, seat
pans, backrests, armrests, foam and J-shaped back uprights of the Neutral
Posture(R) chair line are warranted against defects in materials and workmanship
for a period of five years from the date of delivery. Effective June 1998, the
Company began offering a limited lifetime warranty on chairs manufactured from
such date.

        Although the Company does allow pre-approved merchandise returns for a
specified period of time, the Company endeavors to minimize product returns by
offering prompt, on-site customer service and repair through its factory
personnel, its network of dealers or its independent sales representatives. The
Neutral Posture(R) chair line's interchangeable components permit easy
replacement of worn or defective components. Product returns to date have been
negligible.

        HARVARD CHAIRS. In March 1998, the Company purchased certain assets of
the furniture division from Harvard Industries, Inc. The assets acquired
included a series of chair lines designed for the mid-priced chair market. In
addition, the Company acquired the right to use the "Harvard" name for a period
of three years, which benefits the Company as the Harvard chair lines have been
in existence for approximately ten years and have an established distribution
base.

        The Harvard chair lines range from highback executive chairs with
minimal adjustability to a series of ergonomic chairs with up to seven
independent adjustments, depending on the models selected, as compared to the
Neutral Posture(R) chair line with up to 12 independent adjustments. Most models
of chairs require minimal assembly and are all warranted against defects in
materials and workmanship through a limited lifetime warranty.

        COMPUTERGO(TM) . In early 1998, the Company produced a portable
ergonomic workstation for the transport and use of a laptop computer and other
items that would otherwise be carried in a briefcase. This workstation was
marketed under the trade name computERGO(TM). computERGO(TM) was designed to
provide laptop users with (i) a fully adjustable portable work surface with two
fold-out wings for documents, an organizer, document file pockets, retractable
power/phone cords and built-in surge protection, and (ii) a compact carrying
case on wheels with a retractable handle. This product was also designed to help
alleviate repetitive stress injuries associated with the emergence of
"alternative officing," utilizing a laptop computer at any locale other than the
traditional office. In March 1997, the Company filed a patent application
relating to computERGO(TM) with the United States Patent and Trademark Office.
Based on the initial market response, the Company has decided to reevaluate
computERGO(TM) and has hired an external engineering firm to study the
marketability and design of the product.

                                       2
<PAGE>
The Company will evaluate the results of the completed study over the next few
months before making a decision on the marketability and design of this product.

RESEARCH AND DEVELOPMENT

        During fiscal years 1998 and 1997, the Company spent approximately
$311,000 and $224,000, respectively, on research and development. The Company
intends to increase its research and development expenses in an effort to create
innovative new products, broaden existing product lines and enhance the
manufacturing process.

MARKETING AND SALES

         During fiscal year 1996, the Company embarked on a program to increase
sales by attracting and hiring independent sales representatives that had
established long-term relationships with key dealers in their markets. Prior to
the Harvard acquisition, the Company marketed its products and services
throughout the United States through approximately 50 independent sales
representatives and channeled its sales through a network of approximately 320
dealers. The acquisition of the Harvard chair lines from Harvard Industries,
Inc. increased the Company's dealer network to approximately 1,200 dealers, not
all of which will sell the Neutral Posture(R) chair line. The Company believes
that using independent sales representatives and dealers provide a strategic
advantage relative to many of its competitors. The Company does not directly
employ the independent sales representatives, but rather uses a commission based
incentive system to maintain these relationships. The commission based incentive
system rewards not only the number of units sold, but the profitability of those
sales. The independent sales representatives employ personalized sales
techniques in an effort to maintain close contact with the Company's current
customers and develop new customers. The Company's independent sales
representatives receive extensive training, including annual seminars focused on
the Company's products and ergonomics.

        The Company's dealers generally coordinate their sales efforts with the
Company's independent sales representatives, handle project management,
installation and maintenance for an account after the initial product selection
and sale. Dealers typically purchase the product at a discount from retail and
resell the product at a higher price. The Company is not dependent on any one of
its dealers, the largest of them accounting for less than 6% of the Company's
fiscal year 1998 sales.

        To enhance its marketing efforts, the Company hired Danny Skeen as Vice
President - Sales. Mr. Skeen brings approximately 25 years of sales experience
in the furniture industry, primarily in seating, to the Company. The Company
expects Mr. Skeen to provide leadership and guidance to the independent sales
representatives as well as the Company's internal sales and marketing efforts.

        In addition to Mr. Skeen, the Company also hired two professional
ergonomists, who along with the Company's Vice President - Engineering and Dr.
Jerome Congleton, a consultant to the Company, have formed the Neutral Posture
Ergonomics Engineering Team ("NEET"). NEET will work with customers, dealers and
sales representatives in all areas of ergonomic engineering consulting to
provide technical support and professional qualified ergonomic assistance to the
Company's clients seeking to maximize the success of interior design projects,
office ergonomic and safety programs and chair and workstation evaluations.

               On January 12, 1997, Relax the Back Franchising Company ("Relax
the Back") granted the Company the exclusive worldwide right to manufacture
ergonomic office seating that bears the Relax the Back trademark and the Relax
the Back design pursuant to a Trademark License Agreement (the "License
Agreement"). The License Agreement requires the Company to pay to Relax the Back
2% of net revenues from Relax the Back's sales of all products marked with the
Relax the Back logo. Although the License Agreement has an indefinite term, it
may be terminated by either Relax the Back or the Company for any reason upon 90
days' prior written notice. Relax the Back has exclusive rights to an armrest
pad and a neckrest which are components of chairs manufactured by the Company
for Relax the Back. The Company believes approximately 79% of the Relax the Back
stores are independently owned and operated and may elect on a store-by-store
basis whether to sell the Company's chairs. As of June 30, 1998, the Company
believes 96% of the Relax the Back stores carried the Company's chairs under the
Relax the Back trademark.

               The Company also markets its chair lines in catalogs published by
Boise Cascade Office Products and Corporate Express. The Company believes that
catalogs provide a convenient and cost-effective way for businesses and
individuals to purchase ergonomic furniture.

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<PAGE>
        The Company intends to continue to expand consumer recognition of its
products in the marketplace by increasing awareness of the benefits of ergonomic
products and also by publicizing the quality of the Company's products within
the ergonomic products industry. The Company created an internet web site
(www.NTRL.com) which provides general information about ergonomics and the
Company's products and will continue sponsoring speaking engagements by the
Company's consultant, Dr. Jerome Congleton, to organizations such as the Texas
Back Institute and the National Exhibition of Contract Furnishings ("NEOCON"),
and conducting seminars for dealer groups led by NEET. By focusing on these
goals, the Company seeks to enhance consumer recognition for ergonomic products
in new and emerging markets in addition to improving consumer recognition in
current markets.

MANUFACTURING AND DISTRIBUTION

        The Company normally operates one shift, five days per week, at its
assembly facility located in Bryan, Texas. Additional capacity may be achieved
by adding additional shifts. Therefore, the Company believes that production
requirements for the foreseeable future can be satisfied with routine additional
capital investment, which is not expected to be substantial.

        At its facility, the Company applies foam to seats and backs,
upholsters, assembles and does machine work. As of June 30, 1998, Shepherd
Products, Inc. ("Shepherd") began injection molding a majority of the Company's
seats and backs, which is a more efficient and economical process than the
Company's vacuum-form process. The injection molds will make an exact duplicate
of the Company's seats and backs each time by heating plastic until molten and
injecting it into a mold. This process eliminates hand-cutting the rough edges
from each seat and back, which is necessary when using vacuum forms. Vacuum
forming heats plastic until pliable and then shapes it over a mold using a
suction process. The Company believes that the use of the injection molds will
reduce production costs and improve product quality.

         The Company's manufacturing goals are to: (i) continually improve
design quality, (ii) achieve the best values in purchasing, (iii) uphold
stringent quality controls, and (iv) deliver orders promptly. The Company
believes its production standards are exceptional, with an excess of 99%
customer acceptance for fiscal year 1998. The Company manufactures Neutral
Posture(R) and Harvard chairs primarily to meet customer orders placed with the
Company.

               During the fiscal year ended June 30, 1998, the Company hired
Mark Benden, a certified professional ergonomist as its Vice President -
Engineering. Mr. Benden's first priority was to examine and initiate numerous
changes to improve the ergonomic functionality and quality of the existing
Neutral Posture(R) chair line. A few of these changes have already been
incorporated and additional changes will be incorporated during the next few
months. Mr. Benden also plans to assist in the creation and development of new
ergonomic products. In addition, Mr. Benden and the Company plan to continue to
seek opportunities to develop or acquire products that are complementary to the
Company's business and philosophy.

        The Company is also working to obtain its ISO 9000 certification, an
internationally developed set of manufacturing facility quality criteria
established by the International Organization for Standardization ("ISO"). The
Company estimates the process of obtaining ISO 9000 certification will take
through the end of fiscal 1999 to complete. ISO reviews the application form and
manual and issues a report identifying any changes required. ISO also conducts
an on-site inspection to assess the Company's facility for compliance with ISO
standards, procedures and instructions. If certified, the Company still must
pass ISO yearly maintenance and surveillance visits to maintain ISO 9000 status.
The Company believes that becoming ISO 9000 certified would promote continued
quality standards in the Company's current operations.

RAW MATERIAL AND SUPPLIERS

        The Company has formed close working relationships with its main
suppliers and maintains a low level of inventory. The Company uses a variety of
materials in its manufacturing, including plastic, foam, steel, leather and
upholstery coverings. Management currently maintains no long-term supply
contracts and believes that the supply sources for these materials are adequate.
Certain components of Neutral Posture(R) chairs, principally the adjustment
mechanism, are made by third party manufacturers to the Company's
specifications. The Company is dependent upon its suppliers for timely delivery
and product quality. While the Company's strategy is to maintain multiple
sources of supply, the Company's largest supplier, Leggett & Platt, Inc., is
currently the only source of the adjustment mechanism, a key component of the
Neutral Posture(R) chair. The adjustment mechanism is proprietary to the
Company. In addition, as of June 30, 1998, Shepherd will begin to manufacture a
majority of the Company's seats and backs for the Neutral Posture(R) chair line.
While the Company has not had any adverse

                                       4
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experience with these suppliers, the Company does not have a binding supply
contract with either Leggett & Platt, Inc. or Shepherd.

PROPERTIES

        The Company's manufacturing and assembly operations are conducted in its
approximately 46,000 square-foot Bryan, Texas facility. The Company also leases
an approximately 1,400 square-foot showroom in the Chicago Merchandise Mart.

CUSTOMERS

        The Company has a diversified customer base. The Company's largest
customer group, the various facilities of the General Services Administration
("GSA"), accounted for 15.4% of the Company's sales for fiscal year 1998. The
Company's contract with the GSA which is subject to renegotiation or termination
at the convenience of the GSA expires on January 20, 2001. In addition to the
GSA, the Company's largest customers include Relax the Back, United Parcel
Service ("UPS"), Banc One Corporation ("Banc One"), Hewlett-Packard Company
("Hewlett-Packard") and Union Carbide Corporation ("Union Carbide") whose
individual sales for fiscal year 1998 represented 14.9%, 9.1%, 5.7%, 4.6% and
3.3%, respectively, of the Company's total revenues. The Company does not have a
binding contract with any of these customers.

PATENTS AND TRADEMARKS

        The Company owns a United States patent ("Patent"), on which virtually
all of the models in the Company's Neutral Posture(R) chair line are based, and
several trademarks. The Company's Patent covering virtually all of the models of
the Neutral Posture(R) chair line expires in October 2003. For a discussion of
legal proceedings involving the Company's Patent, see "Item 3 - Legal
Proceedings." Neutral Posture(R), computERGO(TM), ERGO 2000(R) and Establishing
the Standard of Acceptability(TM) are trademarks of the Company. In addition,
the Company has several pending patent applications, including the patent
application covering computERGO(TM), and possesses a wide array of unpatented
proprietary know-how and common law trademarks. The Company's success and its
ability to compete are dependent in part upon its proprietary technology. While
the Company relies on patent, trademark, trade secret and copyright laws to
protect its technology, the Company believes that factors such as the
technological, creative and design skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are also essential to establishing and maintaining a
technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
In addition, as part of the Harvard chair lines acquisition, the Company was
granted a license to use the "Harvard" name for a period of three years.

COMPETITION

        The Company faces significant competition in the contract furniture
market. The Neutral Posture(R) chair line compete on the basis of design, health
benefits, comfort, quality, durability, service and price. Existing and future
competitors for the Company's Neutral Posture(R) chair line within the office
furniture industry, including Herman Miller, Inc., Steelcase Inc., Knoll Inc.
and Haworth, Inc., offer or will offer additional ergonomic products. The
Company also has competition from numerous other ergonomic furniture companies
such as HAG, Inc., Grahl Industries, Inc. and Bodybilt , Inc. ("Bodybilt"), a
wholly-owned subsidiary of Ergobilt, Inc. ("Ergobilt") for its Neutral
Posture(R) chair line and companies such as United Chair, HON Industries Inc.
and Superior Chaircraft for its Harvard chair lines. Certain of these
competitors have much greater financial and other resources and offer a broader
product line than the Company.

        The Company believes that employers will increasingly seek it products
to enhance employee comfort and productivity through ergonomic design. The
Company believes that the following aspects of its manufacturing, marketing,
sales, distribution and customer service are its competitive strengths: (i) its
products are based on patented and/or patent-pending designs, (ii)
interchangeable seat, back and arm components accommodate a worker's physical
attributes, which is advantageous to a large scale purchaser of contract
furniture, (iii) interchangeable components facilitate on-site service and
repair, and (iv) the Company offers extensive training to its end users, dealers
and independent sales representatives about ergonomics, reducing physical stress
in the workplace and how to use the Neutral Posture(R) chair.

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<PAGE>
ENVIRONMENTAL MATTERS

        The Company believes that it is substantially in compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees based upon existing facts known to
management. Compliance with federal, state, and local and foreign environmental
regulations relating to the discharge of substances into the environment, the
disposal of hazardous wastes and other related activities may have an impact on
the operations of the Company, but has, since the formation of the Company in
1990, been accomplished without having a material adverse effect on the Company.
There can be no assurance that such regulations will not change in the future or
that the Company will not incur material costs as a result of such regulations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

        The Company operates in a changing environment that involves numerous
risks, some of which are beyond the Company's control. The following highlights
some of these risks.

        STRONG COMPETITION IN THE CONTRACT FURNITURE INDUSTRY. The contract
furniture industry is highly competitive, with a significant number of
competitors offering similar products. Many of the Company's competitors are
large and have significantly greater financial, marketing, manufacturing and
technical resources than those of the Company. The Company's most significant
competitors for its Neutral Posture(R) chair line include Herman Miller, Inc.,
Steelcase, Inc., Knoll Inc. and Haworth, Inc. These competitors have a
substantial volume of furniture installed at businesses throughout the country,
providing a continual source of demand for further products and enhancements.
Moreover, the products of these competitors have strong acceptance in the
marketplace, and such competitors could develop alternative product designs
which could give them a competitive advantage over the Company. The Company also
competes with numerous small ergonomic furniture companies such as HAG, Inc.,
Grahl Industries, Inc. and Bodybilt for its Neutral Posture(R) chair line and
companies such as United Chair, HON Industries Inc. and Superior Chaircraft for
its Harvard chair lines. In addition, the Company faces significant price
competition from its competitors and may encounter competition from new market
entrants. There can be no assurance that the Company will be able to compete
successfully in the future.

        DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend on
the continued efforts of Rebecca E. Boenigk, Chairman of the Board and Chief
Executive Officer. Mrs. Boenigk has an employment agreement with the Company
which contains non-compete and non-solicitation clauses and expires July 1,
2000, subject to automatic one-year extensions unless either party gives 90
days' notice of its intention not to renew. The Company maintains key person
life insurance on Mrs. Boenigk. The loss of the services of Mrs. Boenigk could
have a material adverse effect on the Company. The Company's success also
depends on its ability to retain its key management, marketing and sales
personnel and to attract, assimilate and retain qualified personnel at a
reasonable cost. There can be no assurance that the Company will be successful
in attracting, assimilating and retaining such personnel.

        PRODUCT CONCENTRATION; NEW PRODUCTS. At the present time, the Company's
products are primarily limited to five series of ergonomic office chairs
marketed under the Neutral Posture(R) tradename and a series of office chairs
marketed under the Harvard tradename. The Company is subject to the risk that
demand for its existing products may be diminished by changing market
conditions, consumer preferences or competition, any of which could have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to develop additional ergonomic products or that a market
would develop for any such products. Significant expenditures will be necessary
for the Company to offer new products, and it may take an extended period of
time for revenues to cover expenses. In addition, new products may have quality
or other defects in the early stages of introduction that were not anticipated
in the design of those products. The Company cannot determine the effect on
operating results of unanticipated complications in product introductions. If
the Company is able to develop new products, there can be no assurance that they
will achieve market acceptance or otherwise be successfully introduced. Any such
failure may have a material adverse effect on the Company.

        RELIANCE ON INTELLECTUAL PROPERTY. The Company owns a United States
patent and several trademarks in order to protect certain of its chair designs
and other intellectual property. The Company's Patent covering virtually all of
the Neutral Posture(R) chair line expires in October 2003. Because the Company's
chairs can be manufactured with a relatively small investment in infrastructure,
expiration of the Patent in 2003 will thereafter leave the Company with few, if
any, entry barriers against existing furniture manufacturers or new market
entrants that desire to make competitive chairs based on the design encompassed
by such Patent.

                                       6
<PAGE>
        The Company does, however, have several patents pending, including the
patent application covering computERGO(TM), and the Company possesses a wide
array of unpatented proprietary know-how and common law trademarks. The
Company's ability to compete effectively with other companies depends, to a
significant extent, on its ability to maintain the proprietary nature of its
intellectual property. There can be no assurance as to the degree of protection
offered by the claims of the Patent and various trademarks or the likelihood
that patents or trademarks will be issued on pending or contemplated
applications. If the Company were unable to maintain the proprietary nature of
its intellectual property with respect to its current or any future products, it
could have a material adverse effect on the Company.

        There can be no assurance that any patents or trademarks that the
Company has or may obtain will not be challenged, invalidated, canceled,
narrowed or circumvented, or that the rights granted thereunder will provide
significant proprietary protection of competitive advantages to the Company.
There can be no assurance that, if challenged, the Company's Patent or
trademarks would be held valid by a court of competent jurisdiction. If the
Company were to lose its Patent covering virtually all of the Company's chairs
prior to its expiration in October 2003 the Company may need to rely on its
license to use such Patent. A 1991 Settlement Agreement conditions such license
on the Company being majority-owned by Rebecca E. Boenigk and Jaye E. Congleton,
a limitation which could limit the Company's ability to obtain additional equity
capital in the future. In addition, the Company's competitors may have filed for
patent protection which is not as yet a matter of public knowledge. Moreover, a
court could interpret a third party's patents broadly so as to cover some of the
Company's products.

        The Company has sought and intends in the future to enforce its
intellectual property rights. In May 1997, the Company initiated arbitration
proceedings against Bodybilt claiming, among other things, patent infringement.
See "Legal Proceedings."

        Because Texas A&M University, where Dr. Congleton is employed as a
professor, declined to unconditionally release any right it may have had in
computERGO(TM), the Company agreed to pay to Texas A&M University a perpetual 1%
royalty of the gross sales of every computERGO(TM) sold by the Company. The
Company believes this was the least expensive way to obtain Texas A&M
University's assignment of all rights it may have had in computERGO(TM). The
Company has been informed that Texas A&M University will pay Dr. Congleton
approximately one-half of its 1% royalty in accordance with its standard policy.
Although the Company does not believe that Texas A&M University has any claims
to Dr. Congleton's inventions, there can be no assurance that Texas A&M
University will not assert such claims in the future and that, if Texas A&M
University does, such claims will not be successful.

        UNCERTAINTY OF MAINTAINING LISTING ON NASDAQ STOCK MARKET'S NATIONAL
MARKET. The National Association of Securities Dealers has informed the Company
that the Company may be delisted from the Nasdaq Stock Market's National Market
if the closing bid price of the Company's shares of Common Stock does not exceed
$3.75 per share for a minimum of ten consecutive trading days, by November 26,
1998. Consequently, there is a significant risk that the Common Stock could be
delisted from the Nasdaq Stock Market's National Market. If the Common Stock
were delisted, the Company would seek listing on Nasdaq Stock Market's SmallCap
Market and there would be a significant risk that the liquidity of the Common
Stock would diminish. However, should the Company not meet the requirements
stated, the Company may seek further procedural remedies by requesting a hearing
prior to November 24, 1998 to stop any delisting of the Company's securities.

        PENNY STOCK REGULATION. In the event the Common Stock is delisted from
trading on any Nasdaq market and the trading price of the Common Stock is less
than $5.00 per share, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company may be delisted from trading
on Nasdaq if certain maintenance standards concerning the public float of the
Common Stock, the market value of the public float of the Common Stock, the
number of shareholders of Common Stock or the number of market makers in the
Common Stock are not met. Under Rule 15g-9, broker/dealers who recommend such
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of
1990 also requires additional disclosure in connection with any trades involving
a stock defined as a "penny stock" (generally, according to regulations adopted
by the Securities and Exchange Commission (the "Commission"), any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock and the ability of purchasers to sell their
securities in the secondary market. There can be no assurance that the Company
will not be delisted from Nasdaq or that the price of the Common Stock per share
will trade above $5.00.

                                       7
<PAGE>
        DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS. The Company's largest
supplier, Leggett & Platt, Inc., is currently the only source of an adjustment
mechanism that is a key component of Neutral Posture(R) chairs. While the
Company has not had any adverse experience with this supplier, the Company has
no binding supply contract with Leggett & Platt, Inc. Unless alternative supply
sources are identified for this adjustment mechanism, the Company could be
subject to pricing risks, delivery delays and quality control problems, or even
unavailability of the component, any of which could have a material adverse
effect on the Company. As of June 30, 1998, Shepherd began manufacturing the
majority of the Company's seats and backs. Any disruption in the ability of
Shepherd to manufacture such seats and backs could have a material adverse
effect on the Company.

        ECONOMIC FACTORS AFFECTING THE CONTRACT FURNITURE INDUSTRY. Fluctuations
in industry revenues may be driven by a variety of macroeconomic factors, such
as white collar employment levels, corporate cash flows and non-residential
commercial construction, as well as industry factors such as corporate
reengineering and restructuring, technology demands, ergonomic, health and
safety concerns and corporate relocations. There can be no assurance that
current or future economic or industry trends will not adversely affect the
Company.

        DIFFICULTY OF MANAGING EXPANDING OPERATIONS. Since August 1992, the
Company has experienced substantial growth. If the Company continues to grow,
the Company's ability to manage growth successfully will require it to continue
to improve its operations and financial management and to train, motivate,
assimilate and effectively manage its employees. The Company's failure to manage
growth successfully could have a material adverse effect on the Company. The
Company's future success also depends on its continuing ability to attract,
assimilate and retain highly qualified managerial personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
retain its key managerial employees or that it will be successful in attracting,
assimilating or retaining highly qualified managerial and engineering personnel
in the future.

        DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Company's largest customers,
GSA, Relax the Back, UPS, Banc One, Hewlett-Packard and Union Carbide accounted
for approximately 15.4%, 14.9%, 9.1%, 5.7%, 4.6% and 3.3%, respectively, of its
total revenues in fiscal year 1998. The Company's contract with the GSA which is
subject to renegotiation or termination at the convenience of the GSA expires on
January 20, 2001. The Company has no binding contracts with Relax the Back, UPS,
Banc One, Hewlett-Packard or Union Carbide. The loss of any of these customers,
or a reduction in any of the customer's purchases, could have a material adverse
effect on the Company.

        POSSIBLE ACQUISITIONS AND ALLIANCES. The Company's business strategy
includes possible acquisitions and strategic marketing alliances to broaden its
product lines. However, no assurance can be given that the Company will be able
to find attractive acquisition or alliance candidates or consummate acquisitions
or that it will successfully integrate or operate any acquired business. In the
event that the Company makes any such acquisition or alliance, there can be no
assurance that any such acquisition or alliance will not have a material adverse
effect on the Company, particularly, in the case of acquisitions, during the
period in which such operations are being integrated into those of the Company.
Furthermore, the Company's ability to make acquisitions or enter into alliances
may depend upon its ability to obtain financing, and there can be no assurance
that the Company will be able to obtain financing on acceptable terms, if at
all.

        UNCERTAIN MARKET DEMAND. Public awareness of ergonomics and the
application of anthropometrics is limited. There is limited data to validate the
potential market demand for the Company's products. There can be no assurance
that this increased market demand will develop or that the Company will be
successful in marketing ergonomic contract furniture or other products.

        POTENTIAL PRODUCT LIABILITY. The Company is subject to product liability
claims as a result of alleged product design and manufacturing defects. The
Company could be liable for product liability claims for failure to provide
appropriate literature warnings or directions with its products. The Company
also could be liable for product liability claims for defective products or
components as a result of its participation in the distribution of products or
components, even if the Company did not actually design, manufacture or assemble
the products or components. Although the Company has not experienced any
material loss due to product liability claims to date and currently maintains
product liability insurance coverage that it considers appropriate, there can be
no assurance that the amount or scope of the coverage maintained by the Company
will be adequate to protect it in the event a significant product liability
claim is asserted successfully.

                                       8
<PAGE>
        WARRANTY LIABILITY. Various components of the Company's chairs are
warranted against defects in materials or work quality for up to five years. In
June 1998, the Company extended a limited lifetime warranty for all new chairs
manufactured after such date. The Company has not experienced any material loss
from warranty claims to date and maintained a reserve, at June 30, 1998, of
$162,792 for such claims. There can be no assurance, however, that material
warranty claims will not be asserted in the future or, if asserted, that the
Company's reserve will be adequate.

        RISK OF ENVIRONMENTAL LIABILITIES. The past and present business
operations of the Company and the past and present ownership and operation of
the manufacturing plant on real property owned by the Company are subject to
extensive and changing federal, state, local and foreign environmental laws and
regulations, including those relating to discharges to air, water and land, the
handling and disposal of solid and hazardous waste and the cleanup of properties
affected by hazardous substances. The Company cannot predict what environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions on its real property may be found to exist. Compliance with more
stringent laws or regulations, or stricter interpretation of existing laws, may
require additional expenditures by the Company, some of which may be material.

        CONTROL BY INSIDERS. The Company's directors, executive officers and
their relatives control approximately 67.6% of the Company's outstanding voting
securities and are in a position to elect the Company's directors and officers,
to control the policies and operations of the Company and to determine the
outcome of corporate transactions or other matters submitted for shareholder
approval. These matters may include mergers, consolidations, the sale of the
Company's assets or a change in control of the Company. The existence of these
levels of ownership concentrated in a few persons make it unlikely that any
other holder of Common Stock will be able to affect the management or direction
of the Company.

        SEASONALITY. Historically, the Company's business has been subject to
seasonality. Typically, the Company's revenue is greater during the second and
third quarters of the Company's fiscal year. These seasonal fluctuations in
sales are due to customer ordering patterns that emphasize purchases in these
two quarters. The Company's results of operations would be adversely and
disproportionally affected if customer ordering patterns were substantially
lower than those normally expected during these two fiscal quarters.

ITEM 3.        LEGAL PROCEEDINGS

        Other than routine litigation matters, the Company is currently involved
in three lawsuits and in an arbitration proceeding. Two lawsuits and the
arbitration proceedings involve the Company's United States Patent No. 4,552,404
(the "Patent") which covers the design of virtually all of models in the Neutral
Posture(R) chair line. The third lawsuit involves computERGO(TM).

         On May 21, 1997, the Company initiated arbitration proceedings against
Bodybilt claiming patent infringement, breach of contract, tortious
interference, slander, trade libel and unfair competition. The demand for
arbitration was filed with the American Arbitration Association pursuant to a
mandatory arbitration clause included in the Settlement Agreement executed in
1996 between the Company and Bodybilt. However, because of the lawsuits
involving the Patent filed by Bodybilt against Dr. Jerome Congleton as described
below, and the lawsuit filed by Ergobilt, Inc., the parent company of Bodybilt,
against the Company as described below, the Company withdrew its claim ending
this arbitration proceeding and filed a counterclaim against Ergobilt and a
crossclaim against Bodybilt in federal court.

        Dr. Jerome Congleton, to whom the Patent was originally issued in 1985,
reacquired the Patent in 1991 in connection with the settlement of litigation
with Bodybilt. Such settlement restricted Dr. Congleton to granting only two
licenses of the Patent. In 1991, Dr. Congleton licensed the right to use the
Patent to Bodybilt and to the Company provided, among other things, that in each
case such licensee, the Company and Bodybilt, not sell or transfer more than 50%
of its assets or outstanding shares of stock. According to a Registration
Statement on Form S-1 filed with the Commission by Ergobilt, Inc., the parent
company of Bodybilt, the initial public offering of common stock of Ergobilt,
Inc. caused the license from Dr. Congleton to Bodybilt to terminate. Shortly
after the termination of Bodybilt's license, Dr. Congleton assigned all his
rights, title and interest in and to the Patent to the Company. Bodybilt
disputed the validity of this assignment, and filed suit on April 1, 1997,
against Dr. Congleton in the United States District Court for the Southern
District of Texas. Bodybilt asserted that Dr. Congleton breached the 1991
Settlement Agreement when he assigned the Patent to the Company. Bodybilt sought
a declaratory judgment as to Dr. Congleton's obligations and limitations under
the Settlement Agreement executed in 1991, rescission of the 1991 patent
assignment to Dr. Congleton and indemnification for any patent infringement
claims, asserted by

                                       9
<PAGE>
the Company against Bodybilt. Although the Company was not named as a party to
the lawsuit, the lawsuit disputed the Company's exclusive rights to own and
enforce the Patent and the Company paid Dr. Congleton's defense costs. On August
22, 1997, the United States District Court for the Southern District of Texas
dismissed without prejudice Bodybilt's claims against Dr. Congleton for lack of
subject matter jurisdiction.

        On September 23, 1997, the Company was served with a suit filed by
Bodybilt on September 18, 1997 in the 361st District Court of Brazos County,
Texas against Dr. Jerome Congleton. Although the sole defendant in the suit was
Dr. Congleton, both the American Arbitration Association and the Company are
listed as "Injunctive Respondents." In general, the suit claims: (i) that Dr.
Congleton exceeded the scope of his rights when he assigned the Patent to the
Company; (ii) that Dr. Congleton's assigns are prohibited from contending that
Bodybilt's chairs infringe the Patent; and (iii) that Dr. Congleton materially
breached the 1991 Settlement Agreement. The suit sought : (v) an injunction
against both the American Arbitration Association and the Company from
proceeding with the arbitration initiated May 21, 1997; (w) unspecified monetary
damages against Dr. Congleton; (x) a declaratory judgment as to Bodybilt's
claims; (y) rescission of the 1991 assignment of the Patent to Dr. Congleton;
and (z) other relief against Dr. Congleton. The Company intervened in this
lawsuit. On September 3, 1998, the Court rescinded the original assignment of
the Patent from Dr. Congleton to the Company, however, the Court invited Dr.
Congleton to re-execute the assignment of the Patent to the Company subject to
any restrictions arising out of the 1991 Settlement Agreement. The assignment
was re-executed by Dr. Congleton on September 3, 1998, subject to any
restrictions arising out of the 1991 Settlement Agreement. Also on September 3,
1998, the Court granted a Plea in Abatement filed by the Company and Dr.
Congleton, conditioned upon Dr. Congleton's consent to participate and his
participation in binding arbitration, and the Court stayed further proceedings
in this lawsuit until further order of the Court.

        On October 16, 1997, Ergobilt, the parent company of Bodybilt, sued the
Company in the United States District Court for the Northern District of Texas.
In general, the lawsuit alleges that the Company, in violation of the Lanham
Trademark Act, (i) published false and misleading information that its chairs
are covered by the Patent, that it knows of no other chairs on the market that
are similar to its chairs and that Bodybilt's chairs infringe the Patent and
(ii) furnished false and misleading information concerning Ergobilt (including
the Company's claim that substantially all of the chairs sold by Ergobilt's
subsidiary, Bodybilt are designed in such a manner that they infringe the
Patent). The suit seeks unspecified monetary damages and injunctive relief from
the Company. The Company has obtained an opinion of counsel that virtually all
of its chairs are covered by the Patent. On October 17, 1997, the Company filed
a motion to dismiss the lawsuit or compel arbitration, and on November 26, 1997,
the Company filed its counter-claim against Ergobilt and a motion to join
Bodybilt as a third party defendant. On August 10, 1998, the Court dismissed
without prejudice Ergobilt's claims against the Company, and entered an order
compelling the Company and Bodybilt to submit their disputes to arbitration. In
this lawsuit, the Company's counter-claim against Ergobilt for patent
infringement and dilution of the Company's trademark remain pending.

        On August 31, 1998, the Company initiated a new arbitration proceeding
against Bodybilt claiming patent infringement, breach of contract, tortious
interference, slander, trade libel, unfair competition and dilution of the
Company's mark. The Company believes that substantially all of the chairs sold
by Bodybilt are designed in such a manner that they infringe the Patent. The
Company intends to enforce what it believes to be exclusive ownership rights to
the Patent by seeking injunctive relief as well as damages. The demand for
arbitration was filed with the American Arbitration Association pursuant to a
mandatory arbitration clause included in the Settlement Agreement executed in
1996 between the Company and Bodybilt, and pursuant to the Federal Court order
compelling arbitration described above. It is expected that Dr. Congleton will
participate in this arbitration.

        Regardless of the outcome of the arbitration and the Brazos county
lawsuit, the Company will continue to pay all defense costs of Dr. Congleton
associated with the arbitration and the lawsuit. Although uncertainties
associated with arbitration and other litigation risks make it impossible for
the Company to predict the outcome of the arbitration and lawsuits with
certainty, the Company does not believe that the outcome of the arbitration and
the lawsuits will have a material adverse impact on its financial position,
results of operations and cash flows.

        COMPUTERGO(TM) In May 1998, the Company was served with a suit filed by
Destech, L.L.C. ("Destech") in United States District Court, Eastern District of
Michigan. In general, the lawsuit alleges that the Company breached a contract
for the development, design and tooling cost of COMPUTERGO(TM), a portable
laptop workstation and for the cost of establishing a manufacturing assembly
line. The Company intends to vigorously defend Destech's claims and in June 1998
filed a response with the Court denying such allegations. In May 1998, the
Company also filed suit against J&J Automotive Group, Inc. ("AGI"), the parent
company of Destech, in the county court of Brazos County, Texas alleging breach
of contract and warranty to the Company. Although uncertainties associated with
jury trials and other litigation risks make it impossible for the

                                       10
<PAGE>
Company to predict the outcome of this proceeding with certainty, the Company
does not expect the outcome to have a material adverse effect upon the Company's
financial condition or results of operations.

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

        None.

                                       11
<PAGE>
                                     PART II

ITEM 5.        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock has traded on the Nasdaq National Market
System under the symbol "NTRL" since the Company's initial public offering on
October 20, 1997. On September 15, 1998, the Company had 19 shareholders of
record.

        The following table sets forth the high and low sale prices for the
Company's Common Stock for the quarters indicated.

                           PRICE RANGE OF COMMON STOCK

                                                                 High       Low
                                                                -----      -----
YEAR ENDED JUNE 30, 1998
    First Quarter ........................................        n/a        n/a
    Second Quarter .......................................      $7.25      $4.50
    Third Quarter ........................................      $6.25      $4.00
    Fourth Quarter .......................................      $4.63      $3.13


        Such over-the-counter market quotations reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.

        Since the Company's initial public offering, the Company has not
declared any cash dividends on the Common Stock. The Company presently intends
to retain all earnings, if any, to provide funds for its operations and
expansion, and therefore does not anticipate paying cash dividends or making any
other distributions on its shares of Common Stock in the foreseeable future. The
terms of the Revolving Credit Facility, Term Facility and the loan agreements,
as defined below, restrict the Company's ability to pay dividends to its
shareholders and acquire capital stock.

        Prior to completion of the Company's initial public offering, the
Company was treated for federal income tax purposes as a Subchapter S
Corporation under the Internal Revenue Code of 1986, as amended, since April 1,
1996. As a result, earnings of the Company were subject to taxation at the
shareholder level rather than the corporate level for federal income tax
purposes since April 1, 1996. For the period from April 1, 1996 through June 30,
1997, the Company had declared and paid (currently or subsequent to June 30,
1997) distributions of $323,000 to its shareholders to cover these shareholders
estimated federal income tax obligations attributable to the S Corporation
earnings. The Company's status as a Subchapter S Corporation was terminated on
the closing of the initial public offering.

         In August 1997, the Board of Directors of the Company authorized the
issuance of notes as a dividend in the aggregate principal amount of $643,000 to
the selling shareholders for a portion of the estimated remaining accumulated
earnings through June 30, 1997, a portion of which was intended to be used by
the selling shareholders to pay their estimated federal income taxes
attributable to the Company's earnings. The Board of Directors subsequently
rescinded the resolution in September 1997 in order for the Company to meet the
newly issued listing requirements concerning net tangible assets for inclusion
in the Nasdaq National Market System. The selling shareholders have waived in
writing all rights to such dividend.

        On October 9, 1997, the Company declared a cash dividend to its
shareholders of record on that date in the amount of $.0587 per share, for a
total distribution of $135,000, to provide those shareholders' estimated federal
income tax obligations attributable to the Company's earnings for the period
from July 1, 1997 through the closing of the initial public offering. The cash
dividend was paid on October 14, 1997 from earnings of the Company.

                                       12
<PAGE>
USE OF OFFERING PROCEEDS

        The Company filed a Registration Statement on Form SB-1 (File No.
333-33675), which was declared effective by the Securities and Exchange
Commission on October 16, 1997. The offering commenced on October 20, 1997 with
net proceeds of approximately $4.4 million.


        As of June 30, 1998, the Company has utilized net offering proceeds for
the following:

        (1)     approximately $45,000 in the development of computERGO(TM) ;

        (2)     approximately $875,000 in the acquisition and development of
                additional ergonomic products; of which $860,000 was used to
                acquire certain assets of the furniture business of Harvard;

        (3)     approximately $20,000 in the Company's effort to become ISO 9000
                certified;

        (4)     approximately $45,000 in enhancing the Company's marketing
                efforts primarily resulting from salaries and travel-related
                expenditures for the additional sales personnel hired, including
                a vice president - sales and two professional ergonomists;

        (5)     approximately $85,000 related to the hiring of engineering
                personnel, including a vice president - engineering;

        (6)     approximately $372,000 of working capital to fund inventory
                purchases; and

        (7)     $200,000 to repay outstanding indebtedness on its revolving
                credit facility.

               In addition, the Company had approximately $2.8 million included
in temporary investments as of June 30, 1998 comprised of short-term, interest
bearing, investment grade securities. Each of the foregoing amounts represents
the reasonable estimate of the Company for the amounts of the net proceeds
applied. None of the foregoing payments were direct or indirect payments to (i)
directors or officers of the Company or their respective associates, (ii)
persons owning 10% or more of any class of equity securities or (iii) affiliates
of the Company.

        ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

        The following discussion should be read in conjunction with the
financial statements of the Company and notes thereto.

        GENERAL. The Company generates revenue through sales of its products to
corporate customers and retailers through independent sales representatives, who
generally are paid a commission for each unit sold. These independent sales
representatives channel sales through dealers located throughout the United
States and Puerto Rico who acquire the products from the Company at a discount
from suggested retail and then resell the products to the ultimate customers.
These dealers typically provide end-users a range of "value-added" services that
may include installation, delivery, site planning and warranty repairs.

        In March 1998, the Company acquired the Harvard chair lines from Harvard
Industries, Inc. Production began on April 2, 1998 with a few of the Harvard
chair lines. Almost all of the remaining Harvard chair lines acquired began
production by June 30, 1998. Due to start-up and minor transitional issues such
as a modest disruption of production during integration, training and inventory
logistics, the integration of the Harvard chair lines had a minor impact on the
results of operation.

                                       13
<PAGE>
        RESULTS OF OPERATIONS. The following table sets forth the percentage
relationship to net sales of certain items in the Company's statements of income
for the periods indicated:

                                                                    YEAR ENDED
                                                                     JUNE 30,
                                                                  -------------
                                                                  1998     1997
                                                                  ----     ----
Net sales ....................................................     100%     100%
Cost of sales ................................................      62       63
                                                                  ----     ----
Gross profit .................................................      38       37
Selling, general and administrative expenses .................      29       28
                                                                  ----     ----
Operating income .............................................       9%       9%
                                                                  ====     ====

   FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

    NET SALES. Net sales for the fiscal year ended June 30, 1998 were $12.2
million increasing approximately $100,000 or 1%, from net sales of $12.1 million
for the fiscal year ended June 30, 1997. Although sales increased slightly
during fiscal year 1998, sales of the Neutral Posture(R) chair line decreased
approximately $500,000 or 4% from fiscal year 1997 due primarily to a temporary
strike of a major customer in mid-1997 and decreased market demand in January.
These sales decreases were offset by sales related to the addition of the
Harvard chair lines in the fourth quarter.

    GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1998 was $4.6
million, increasing approximately $100,000 or 2% from gross profit of $4.5
million for the same period in 1997. The gross profit margin increased to 38%
for fiscal year 1998 from 37% for fiscal year 1997. The Company has been able to
maintain its profit margins by continually seeking to improve the quality of the
chairs while keeping the cost of the chairs relatively constant. Gross profit
margins were not affected by the new Harvard chair lines as the Company achieved
similar profit margins on these newly acquired chair lines.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3.5 million for fiscal year 1998, increasing
approximately $100,000 or 3%, from $3.4 million for fiscal year 1997. As a
percentage of sales, the Company's selling, general and administrative expenses
increased to 29% for fiscal year 1998 from 28% for fiscal year 1997. The
increase was primarily due to increases in compensation expense as a result of
hiring additional sales and marketing personnel as well as additional staff
related to the Harvard chair lines acquisition and costs associated with being a
public entity. This increase was partially offset by reduced payments under the
Company's cash bonus plan and a decrease in legal fees.

    OPERATING INCOME. As a result of the foregoing, operating income for the
fiscal year ended June 30, 1998 remained relatively flat compared to fiscal year
ended June 30, 1997. As a percentage of net sales, operating income was 9% in
1998 and 1997.

        LIQUIDITY AND CAPITAL RESOURCES. The Company's principal sources of
capital are net cash provided by operating activities, together with the net
proceeds from its initial public offering and its unused capacity under the
Revolving Credit Facility (defined below). The Company's primary capital
requirements are to fund component parts inventory, receivables, research and
development activities and product improvements.

        Cash provided by operating activities totaled $99,259 for fiscal year
1998, declined as compared to cash provided by operating activities of
approximately $1.7 million for fiscal year 1997. The decrease in cash flow for
fiscal year 1998 was primarily the result of the increased receivables related
to late fourth quarter sales and increases in inventory resulting from the
addition of the Harvard chair lines and by reductions of accrued liabilities.

        Cash used for investing activities totaled approximately $1.2 million
for fiscal year 1998 and was primarily comprised of approximately $700,000
incurred to purchase certain assets of the furniture business of Harvard and
other miscellaneous capital expenditures for building improvements, machinery
and equipment. Cash used for investing activities totaled approximately $464,000
for fiscal year 1997 and was comprised primarily of miscellaneous capital
expenditures. During fiscal year 1999, the Company expects to continue to make
capital expenditures in connection with manufacturing equipment, computer
hardware and software improvements and to seek potential acquisitions of
ergonomic products.

                                       14
<PAGE>
        Financing activities provided funds totaling approximately $4.l million
for fiscal year 1998 and used funds of approximately $1.0 million for fiscal
year 1997. The funds provided for fiscal year 1998 were primarily generated from
proceeds from completion of the initial public offering of approximately $4.4
million, partially offset by S Corporation distributions to the selling
shareholders to pay federal income taxes related to the net income attributable
to them as shareholders of the Company during the period it elected S
Corporation status for federal income tax purposes. In fiscal year 1997, the
Company used cash flow from operations to repay existing debt and make cash
distributions to cover the selling shareholders' share of federal income taxes
for the 1997 period.

        The Company manages its inventory to maintain a level which meets its
short-term manufacturing needs. Inventory turned 9.2 times in fiscal year 1998
and 12.0 times in fiscal year 1997. The reduction in turnover is primarily due
to the increased inventory levels associated with the Harvard chair lines
acquisition. With this turnover, the Company had approximately 40 days and 30
days worth of component parts inventory on hand during the respective periods.
These low levels of inventory allow the Company to dedicate less working capital
to inventory, thereby lowering line-of-credit borrowing, interest, insurance and
property tax expenses.

        The Company currently maintains a $2.0 million revolving credit facility
("Revolving Credit Facility"). This facility is utilized to fund operating
activities, including financing inventory and increases in receivables. Loans
made pursuant to the Revolving Credit Facility may be borrowed, repaid and
reborrowed from time to time until termination of the Revolving Credit Facility
on August 21, 2000. Indebtedness under the Revolving Credit Facility bears
interest at the lender's base rate plus one-half of 1% per annum and is secured
by a first lien on accounts receivable, chattel paper, contract rights,
equipment and fixtures, inventory and general intangibles. The amount available
under the Revolving Credit Facility at June 30, 1998 was $1.3 million, and is
determined based upon a percentage of eligible receivables. At June 30, 1998 the
interest rate was 9% and no amount was outstanding under the Revolving Credit
Facility.

        In addition to the Revolving Credit Facility, the Company maintains a
term facility ("Term Facility") in the amount of $500,000 which also expires
August 21, 2000. This Term Facility is restricted to financing equipment or mold
purchases. Indebtedness under the Term Facility would bear interest at the
lender's base rate plus one-half of 1% per annum and would be secured by
accounts receivable, chattel paper, contract rights, equipment and fixtures,
inventory and general intangibles. At June 30, 1998, no amount had ever been
borrowed under the Term Facility.

        The Revolving Credit Facility and the Term Facility prohibit additional
liens by the Company other than certain permitted liens, liens related to the
acquisition of assets and liens related to borrowings not to exceed $3,000,000.

        At June 30, 1998, the Company had two loans outstanding in the amounts
of $138,000 and $463,000 pursuant to certain loan agreements incurred in
connection with the Company's acquisition in 1996 of the land and building
currently used by the Company. Interest on the first note accrues at a rate of
8.25% and the note matures in May 2011. Interest on the second note accrues at a
fixed rate of 8.75% and matures in May 2001. The notes are collateralized by the
land, building and certain equipment.

        The Revolving Credit Facility, Term Facility and the outstanding loan
agreements require maintenance of specified levels of tangible net worth and
other financial covenants and restrict additional borrowings, the purchase and
disposal of assets, the payment of dividends, the purchase of treasury stock and
other specified changes in the Company's business.

        Prior to the completion of the offering, the Company declared a cash
dividend to its existing shareholders. This cash dividend was in an amount
sufficient to cover the shareholders' estimated federal and state income tax
obligations attributable to the Company's Subchapter S earnings for the period
from July 1, 1997 through consummation of the initial public offering. The
dividend was paid to these shareholders after consummation of the offering. The
Company has no intention of declaring or paying any other dividend or making any
other distribution to its shareholders in the near future.

        In January 1997, the Company entered into an agreement with a third
party to design and produce injection molds to be utilized in the production
process for approximately $400,000. The Company has paid approximately $150,000
for fiscal years ended 1998 and 1997, respectively, and expects to pay the
remaining $100,000 in fiscal year 1999.

        The Company believes that cash flow from operations, together with the
net proceeds from its initial public offering and its unused capacity under the
Revolving Credit Facility should be sufficient to fund its anticipated operating
needs and capital expenditures through fiscal year 1999. However, because the
Company's future operating results will depend on a

                                       15
<PAGE>
number of factors, including the demand for the Company's products, the level of
competition and general economic conditions and other factors beyond the
Company's control, there can be no assurance that the Company's capital
resources will be sufficient to fund the Company's operations beyond such date.

        SEASONALITY. Historically, the Company's business has been subject to
seasonality. Typically, the Company's revenue is greater during the second and
third quarters of the Company's fiscal year. These seasonal fluctuations in
sales are due to customer ordering patterns that emphasize purchases in these
two quarters. The Company's results of operations would be adversely and
disproportionally affected if customer ordering patterns were substantially
lower than those normally expected during these two fiscal quarters.

        IMPACT OF THE YEAR 2000 ISSUES. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Certain of the Company's computer programs have date-sensitive
software which may recognize a date using "00" as the year 1900 rather than the
year 2000. This situation could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. Based on an internal assessment, the Company determined
that it will be required to modify or replace portions of its software
applications so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has identified its Year 2000 risk in three
categories: internal business software; internal non-financial software and
imbedded chip technology; and external compliance by customers and suppliers.

        INTERNAL BUSINESS SOFTWARE. During 1998, the Company purchased upgraded
software which the software vendor has indicated is Year 2000 compliant. The
total estimated software and installation cost is $110,000 of which $40,000 has
been spent to date. The Company is in the implementation phase for this system
and other ancillary financial systems with full implementation scheduled for
December 1998. Based on this schedule, the Company expects to be in full
compliance with its internal financial systems before the year 2000. However, if
due to unforeseen circumstances, the implementation is not completed on a timely
basis, the Year 2000 could have a material impact on the operations of the
Company. Contingency plans have been established in a few areas where the
Company feels there is some risk that the system will not be implemented before
Year 2000. Those plans include adapting some of the Company's currently existing
systems to be Year 2000 compliant. The cost of making those adaptations are not
expected to be material and will be expensed in the period incurred.

        INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The
Company is in the data gathering phase with regard to non-financial software and
imbedded chip technology and is currently gathering data to assess the impact of
the Year 2000 on its non-financial systems such as manufacturing equipment,
security equipment, etc., with Year 2000 compliance scheduled for June 1999. The
Company does not, at this time, have sufficient data to estimate the cost of
achieving Year 2000 compliance for its non-financial systems. Even if the
Company is unable to achieve Year 2000 compliance for its major non-financial
systems, the Year 2000 should not have a material impact on the operations of
the Company. Because the Company is in the information-gathering phase, the
Company does not currently have a contingency plan in place for its internal
non-financial software and imbedded chip technology.

        EXTERNAL COMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the
process of identifying and contacting its critical suppliers, service providers
and contractors to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remedy their own Year 2000
issues. It is expected that full identification will be completed by June 1999.
To the extent that responses to Year 2000 readiness are unsatisfactory, the
Company intends to change suppliers, service providers or contractors to those
who have demonstrated Year 2000 readiness. The Company, however, cannot be
assured that it will be successful in finding such alternative suppliers,
service providers and contractors. The Company does not currently have any
formal information concerning the Year 2000 compliance status of its customers
but has received indications that most of its customers are working on Year 2000
compliance. In the event that any of the Company's significant customers and
suppliers do not successfully and timely achieve Year 2000 compliance, and the
Company is unable to replace them with new customers or alternate suppliers, the
Company's business or operations could be adversely affected.

        EXPENSES. To date, the Company has incurred expenses of approximately
$40,000 related to the assessment of, and preliminary efforts in connection
with, its Year 2000 project and the development of a remediation plan. The total
remaining cost of the Year 2000 project is estimated at $70,000 and is being
funded through operating cash flows. Of the total project cost, approximately
$100,000 is attributable to the purchase and installation of new software which
will be capitalized. The costs of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on 

                                       16
<PAGE>
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could differ
materially from those plans for the reasons mentioned above.

        NEW ACCOUNTING STANDARDS. In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS 128, Earnings per Share, which was required
to be adopted for fiscal years ending after December 15, 1997. Upon adoption,
the Company restated all prior periods. The impact of SFAS 128 on the
calculation of basic earnings per share and fully diluted earnings per share for
fiscal years 1998 and 1997 was not material.

        In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
and SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Both standards became effective for fiscal years beginning after
December 15, 1997. Early adoption of SFAS 130 is permitted, and early adoption
of SFAS 131 is encouraged. The reporting changes resulting from both of these
standards on the Company will be immaterial.

ITEM 7.        FINANCIAL STATEMENTS

        The information required by this item is set forth in a separate section
of this Report on Form 10-KSB and is incorporated herein by reference. See the
accompanying "Index of Financial Statements" at Page F-1.

ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
               FINANCIAL DISCLOSURE

        None.

                                       17
<PAGE>
                                    PART III

ITEM 9.        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
               COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

        The information set forth under the caption "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement, which is to be filed with the Commission within 120 days of June 30,
1998 pursuant to Regulation 14A under the Exchange Act is incorporated herein by
reference.

EXECUTIVE OFFICERS OF THE REGISTRANT

         The names of the executive officers of the Company are as follows:

       NAME                     AGE      POSITION
       ----                     ---      --------
       Rebecca E. Boenigk       34       Chairman of the Board, Chief Executive 
                                         Officer and Director

       David W. Campbell        56       President and Director

       Jaye E. Congleton        54       Executive Vice President - Product 
                                         Development, Secretary and Director

       Mark E. Benden           31       Vice President - Engineering

       David W. Ebner           37       Vice President - Operations

       Gregory A. Katt          40       Vice President, Chief Financial Officer
                                         and Treasurer

       Danny D. Skeen           52       Vice President - Sales

        REBECCA E. BOENIGK co-founded the Company in 1990 with Jaye E. Congleton
and has served as Chairman of the Board since 1990 and Chief Executive Officer
since 1996 and served as President from 1990 to 1996. She currently serves in
the class of directors whose term expires at the 2000 annual meeting of
shareholders. Mrs. Boenigk also serves on the Industry Advisory Board of the
National Science Foundation Industry/University Cooperative Research Center in
Ergonomics at Texas A&M University. Mrs. Boenigk is a member of the Human Factor
and Ergonomic Society. In 1997, Mrs. Boenigk was awarded, along with her mother,
Mrs. Congleton, Ernst and Young's Entrepreneur of the Year award in
manufacturing in the Houston region. Mrs. Boenigk is the daughter of Mrs.
Congleton, a director and officer of the Company, and Dr. Jerome Congleton, a
consultant to the Company.

        DAVID W. CAMPBELL has served as President and a director of the Company
since April 1, 1996, and serves in the class of directors whose term expires at
the 1998 annual meeting of the shareholders. Prior to assuming these positions,
from 1994 to 1996, Mr. Campbell was a principal with Pate, Winters and Stone,
Management Consultants. From 1989 to 1994, Mr. Campbell served as a Division
President of Scotsman Industries, Inc., a publicly held manufacturer and
marketer of refrigeration products primarily for the food service industry.

        JAYE E. CONGLETON co-founded the Company in 1990 with Rebecca E. Boenigk
and has served as a director, Executive Vice President and Secretary of the
Company since April 1998 and also served as a director, Executive Vice President
and Secretary from 1990 to August 1997. Mrs. Congleton currently serves in the
class of directors whose term expires at the 1999 annual meeting of
shareholders. In 1997, Mrs. Congleton was awarded, along with her daughter,
Rebecca E. Boenigk, Ernst and Young's Entrepreneur of the Year award in
manufacturing in the Houston, Texas region. Mrs. Congleton is the mother of Mrs.
Boenigk, the Chairman of the Board and CEO of the Company and the spouse of Dr.
Jerome Congleton, a consultant to the Company.

                                       18
<PAGE>
        MARK E. BENDEN has served as Director of Engineering since January 1998
and Vice President Engineering since September, 1998. Prior to these positions,
from 1992 to 1998, Mr. Benden was a regional ergonomic and safety engineer for
Johnson and Johnson, Inc.

        DAVID W. EBNER has served as Vice President - Operations since 1995.
From 1994 to 1995, Mr. Ebner served as the Company's Plant Manager. From 1982 to
1994, Mr. Ebner was the Manager of Facilities and Operations for CompuAdd, Inc.,
a computer manufacturer and retailer.

        GREGORY A. KATT has served as Vice President and Chief Financial Officer
of the Company since May 1997 and as Treasurer of the Company since August 1997.
Mr. Katt served as Treasurer of American Exploration Company, a publicly traded
oil and gas exploration and production company, from June 1995 to May 1997 and
as its Director of Corporate Reporting, Budgeting and Tax from June 1992 to June
1995.

        DANNY D. SKEEN has served as Vice President-Sales since May 1998. Prior
to assuming this position, from 1997 to 1998, Mr. Skeen was Vice President of
Sales for High Point Industries and from 1992 to 1998, he was Vice
President-Sales for Harvard Industries, Inc. From 1987 to 1992, Mr. Skeen served
as Director of Sales for Globe Business Furniture, a manufacturer of office
seating, panel systems, wood laminate casegoods and banquet tables.

ITEM 10.       EXECUTIVE COMPENSATION

        The information set forth under the caption "Executive Compensation" in
the Company's Proxy Statement, which is to be filed with the Commission within
120 days of June 30, 1998 pursuant to Regulation 14A under the Exchange Act, is
incorporated herein by reference.

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information set forth under the captions "Principal Security
Holders" and "Security Ownership of Management" in the Company's Proxy
Statement, which is to be filed with the Commission within 120 days of June 30,
1998 pursuant to Regulation 14A under the Exchange Act, is incorporated herein
by reference.

ITEM 12.       CERTAIN  TRANSACTIONS

        The information set forth under the caption "Certain Transactions" in
the Company's Proxy Statement, which is to be filed with the Commission within
120 days of June 30, 1998 pursuant to Regulation 14A under the Exchange Act, is
incorporated herein by reference.

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K

        (a) The following documents are filed as part of this report:

               1.     Financial Statements

                      See the accompanying "Index to Financial Statements" at
                      Page F-1.

               2.     Exhibits

                      See the accompanying "Index to Exhibits" at Page X-1.

        (b)    Reports on Form 8-K

               None.

                                       19
<PAGE>
                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 25th day of
September, 1998.

                                                NEUTRAL POSTURE ERGONOMICS, INC.


                                                By: /s/ Rebecca E. Boenigk
                                                        Rebecca E. Boenigk
                                                     CHAIRMAN OF THE BOARD
                                                  AND CHIEF EXECUTIVE OFFICER

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 25th day of September, 1998.

       SIGNATURE                              TITLE
       ---------                              -----
/s/ Rebecca E. Boenigk            Chairman of the Board, Chief Executive Officer
    Rebecca E. Boenigk            and Director (Principal Executive Officer)

/s/ David W. Campbell             President and Director
    David W. Campbell

/s/ Jaye E. Congleton             Executive Vice President-Product Development,
    Jaye E. Congleton             Secretary and Director

/s/ Gregory A. Katt               Vice President, Chief Financial Officer and
    Gregory A. Katt               Treasurer (Principal Financial 
                                  and Accounting Officer)

/s/ Maryla Fitch                  Director
    Maryla Fitch

/s/ Ronald L. Jones               Director
    Ronald L. Jones

/s/ Cynthia Pladziewicz           Director
    Cynthia Pladziewicz

/s/ James W. Thompson             Director
    James W. Thompson

                                    20
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                          INDEX TO FINANCIAL STATEMENTS

                                                                            PAGE

INDEPENDENT AUDITORS' REPORT .............................................   F-2

FINANCIAL STATEMENTS AND NOTES:

     Balance Sheet as of June 30, 1998 ...................................   F-3

     Statements of Income for the Years Ended June 30, 1998 and 1997 .....   F-4

     Statements of Shareholders' Equity for the Years Ended June 30,
       1998 and 1997 .....................................................   F-5

     Statements of Cash Flows for the Years Ended June 30, 1998 and 1997 .   F-6

     Notes to Financial Statements .......................................   F-7

                                      F-1
<PAGE>
                                 INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
   Neutral Posture Ergonomics, Inc.:

        We have audited the accompanying balance sheet of Neutral Posture
Ergonomics, Inc. as of June 30, 1998, and the related statements of income,
shareholders' equity and cash flows for each of the two years in the period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

        In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1998,
and the results of its operations and its cash flows for each of the two years
in the period then ended in conformity with generally accepted accounting
principles.

/s/   DELOITTE & TOUCHE LLP

Dallas, Texas
July 31, 1998

                                      F-2
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                                  BALANCE SHEET
<TABLE>
<CAPTION>
                                                                             JUNE 30,
                                                                              1998
                                                                           -----------
<S>                                                                        <C>        
ASSETS

Current Assets:
     Cash and cash equivalents .........................................   $ 3,370,278
     Accounts receivable less allowance for doubtful accounts of $68,000     1,991,105
     Inventories .......................................................     1,061,212
     Deferred income tax benefit .......................................       144,000
     Prepaid expenses and other ........................................       228,062
                                                                           -----------
          Total current assets .........................................     6,794,657
Property and Equipment - net ...........................................     1,849,910
Notes Receivable - shareholders ........................................       118,175
Intangibles - net ......................................................       222,253
Deposits and Other .....................................................       137,851
                                                                           -----------
          Total ........................................................   $ 9,122,846
                                                                           ===========
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
     Current portion of long-term debt .................................   $    28,649
     Accounts payable ..................................................       956,341
     Accrued liabilities ...............................................       341,294
     Income taxes payable ..............................................       169,294
                                                                           -----------
          Total current liabilities ....................................     1,495,578
Long-Term Debt - Less current portion ..................................       576,237
Deferred Income Tax Liability ..........................................       162,000
Commitments and Contingencies
Shareholders' Equity:
     Preferred stock, $.01 par value, 1,000,000 shares
       authorized; no shares issued ....................................          --
     Common stock: $.01 par value, 14,000,000 shares
       authorized; 3,200,000 shares issued and outstanding .............        32,000
     Common stock warrants .............................................        75,000
     Additional paid-in capital ........................................     5,524,986
     Retained earnings .................................................     1,339,545
     Accounts and notes receivable - shareholders ......................       (52,500)
     Deferred compensation - stock options granted .....................       (30,000)
                                                                           -----------
          Total shareholders' equity ...................................     6,889,031
                                                                           -----------
          Total ........................................................   $ 9,122,846
                                                                           ===========
</TABLE>
                       See notes to financial statements.
                                       F-3
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                              STATEMENTS OF INCOME

                                                         YEARS ENDED JUNE 30,
                                                   ----------------------------
                                                       1998            1997
                                                   ------------    ------------
Net Sales ......................................   $ 12,181,383    $ 12,089,262
Cost of Sales ..................................       7,582,02       7,594,322
                                                   ------------    ------------
Gross Profit ...................................      4,599,360       4,494,940
Operating Expenses:
     Selling ...................................      1,320,420       1,232,346
     General and administrative ................      2,187,002       2,181,314
                                                   ------------    ------------
          Total ................................      3,507,422       3,413,660
                                                   ------------    ------------
Operating Income ...............................      1,091,938       1,081,280
Other Income (Expense):
     Interest expense ..........................        (63,076)       (138,869)
     Interest income ...........................        141,852          13,764
     Other .....................................         74,037          46,893
                                                   ------------    ------------
          Total ................................        152,813         (78,212)
                                                   ------------    ------------
Income Before Income Taxes .....................      1,244,751       1,003,068
Income Tax Expense (A) .........................        460,101         292,693
                                                   ------------    ------------
Net Income (A) .................................   $    784,650    $    710,375
                                                   ============    ============
Earnings Per Share: (A)
     Basic .....................................   $        .27    $        .31
                                                   ============    ============
     Diluted ...................................   $        .26    $        .28
                                                   ============    ============
Weighted Average Common Shares Outstanding:
     Basic .....................................      2,923,836       2,300,000
                                                   ============    ============
     Diluted ...................................      3,065,606       2,500,000
                                                   ============    ============

(A) Pro Forma prior to October 1997: see Note 9.

                       See notes to financial statements.
                                       F-4
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                       
                                       PREFERRED                    COMMON              COMMON        ADDITIONAL   
                                        SHARES       PREFERRED      SHARES     COMMON    STOCK         PAID-IN     
                                        ISSUED         STOCK        ISSUED      STOCK   WARRANTS       CAPITAL     
                                     ------------   ------------   ---------   -------  --------     -----------   
<S>                                  <C>            <C>            <C>         <C>                   <C>           
BALANCE AT JUNE 30, 1996 .........           --     $       --     2,200,000   $22,000   $ --        $   360,500   
  Exercise of stock options ......           --             --       100,000     1,000     --             21,500   
   Amortization of deferred                                                                       
      compensation ...............           --             --          --        --       --               --     
   Shareholder distributions                                                                      
      declared ...................           --             --          --        --       --               --     
   Pro forma net income ..........           --             --          --        --       --               --     
   Pro forma income tax                                                                           
      adjustment .................           --             --          --        --       --               --     
                                     ------------   ------------   ---------   -------   -------     -----------   
BALANCE AT JUNE 30, 1997 .........           --             --     2,300,000    23,000     --            382,000   
   Stock options granted to                                                                       
      employees ..................           --             --          --        --       --             69,609   
   Amortization of deferred                                                                       
      compensation ...............           --             --          --        --       --               --     
   Issuance of common stock ......           --             --       900,000     9,000     --          5,391,000   
   Issuance of warrants ..........           --             --          --        --       75,000        (75,000)
   Offering costs ................           --             --          --        --       --         (1,030,775)  
   Reclass undistributed Sub                                                                      
      S earnings .................           --             --          --        --       --            788,152   
   Payments on accounts receivable                                                                
      from shareholders ..........           --             --          --        --       --               --     
   Shareholder distributions                                                                      
      declared ...................           --             --          --        --       --               --     
   Pro forma net income ..........           --             --          --        --       --               --     
   Pro forma income tax                                                                           
      adjustment .................           --             --          --        --       --               --     
                                     ------------   ------------   ---------   -------   -------     -----------   
BALANCE AT JUNE 30, 1998 .........           --     $       --     3,200,000   $32,000  $ 75,000     $ 5,524,986   
                                     ============   ============   =========   =======  ========     ===========   
<CAPTION>                                                                                
                                                     ACCOUNTS
                                                     AND NOTES                        TOTAL
                                      RETAINED      RECEIVABLE -      DEFERRED      SHAREHOLDERS'
                                      EARNINGS      SHAREHOLDERS    COMPENSATION      EQUITY
                                     -----------    ------------    ------------    ------------
<S>                                  <C>            <C>             <C>             <C>         
BALANCE AT JUNE 30, 1996 .........   $   659,386    $    (78,345)   $   (130,625)   $    832,916
  Exercise of stock options ......          --           (17,500)           --             5,000
   Amortization of deferred
      compensation ...............          --              --            47,500          47,500
   Shareholder distributions
      declared ...................      (323,000)           --              --          (323,000)
   Pro forma net income ..........       710,375            --              --           710,375
   Pro forma income tax
      adjustment .................       326,477            --              --           326,477
                                     -----------    ------------    ------------    ------------
BALANCE AT JUNE 30, 1997 .........     1,373,238         (95,845)        (83,125)      1,599,268
   Stock options granted to
      employees ..................          --              --           (69,609)           --
   Amortization of deferred
      compensation ...............          --              --           122,734         122,734
   Issuance of common stock.......          --              --              --         5,400,000
   Issuance of warrants ..........          --              --              --              --
   Offering costs ................          --              --              --        (1,030,775)
   Reclass undistributed Sub
      S earnings .................      (788,152)           --              --              --
   Payments on accounts receivable
      from shareholders ..........          --            43,345            --            43,345
   Shareholder distributions
      declared ...................      (135,000)           --              --          (135,000)
   Pro forma net income ..........       784,650            --              --           784,650
   Pro forma income tax
      adjustment .................       104,809            --              --           104,809
                                     -----------    ------------    ------------    ------------
BALANCE AT JUNE 30, 1998 .........   $ 1,339,545    $    (52,500)   $    (30,000)   $  6,889,031
                                     ===========    ============    ============    ============
</TABLE>
                       See notes to financial statements.
                                       F-5
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                          YEARS ENDED JUNE 30,
                                                                      --------------------------
                                                                          1998          1997
                                                                      -----------    -----------
<S>                                                                   <C>            <C>        
Operating Activities:
   Net income (A) .................................................   $   784,650    $   710,375
   Noncash items in net income:
      Depreciation and amortization ...............................       349,716        210,880
      Gain on disposal of property and equipment ..................          (849)        (1,610)
      Deferred income tax expense .................................        18,000           --
   Changes in operating working capital:
      Accounts receivable .........................................      (866,878)        (7,522)
      Notes receivable ............................................       (81,667)          --
      Inventories .................................................      (157,324)       (64,863)
      Prepaid expenses and other ..................................        10,551        (92,301)
      Accounts payable ............................................       201,076        362,025
      Accrued liabilities .........................................      (286,841)       268,601
      Income taxes payable ........................................       121,588         40,658
      Notes receivable - shareholders .............................          --          (88,725)
      Deposits and other ..........................................       (97,572)        26,871
                                                                      -----------    -----------
           Net cash provided by (used for) operating activities (A)        (5,550)     1,364,389
   Income tax expense (A) .........................................       104,809        326,477
                                                                      -----------    -----------
           Historical net cash provided by operating activities ...        99,259      1,690,866
                                                                      -----------    -----------
Investing Activities:
   Additions to property and equipment ............................      (444,449)      (431,717)
   Proceeds from sale of property and equipment ...................         2,500         17,590
   Acquisition of patent and licensing agreement ..................          --          (50,000)
   Acquisition of furniture line assets ...........................      (730,834)          --
                                                                      -----------    -----------
           Net cash used for investing activities .................    (1,172,783)      (464,127)
                                                                      -----------    -----------
Financing Activities:
   Payments on debt ...............................................       (27,782)      (754,348)
   Payments on accounts receivable from shareholders ..............        43,345           --
   Contributions on exercise of stock options .....................          --            5,000
   Distributions to S Corp shareholders ...........................      (235,000)      (223,000)
   Proceeds from issuance of common stock .........................     5,400,000           --
   Stock offering costs ...........................................    (1,030,775)          --
                                                                      -----------    -----------
           Net cash provided by (used for) financing activities ...     4,149,788       (972,348)
                                                                      -----------    -----------
Increase in Cash and Cash Equivalents .............................   $ 3,076,264    $   254,391
Cash and Cash Equivalents:
   Beginning of year ..............................................       294,014         39,623
                                                                      -----------    -----------
   End of year ....................................................   $ 3,370,278    $   294,014
                                                                      ===========    ===========
Supplemental Information:
   Interest paid ..................................................   $    63,076    $   145,472
                                                                      ===========    ===========
   Income taxes paid ..............................................   $   215,704    $     4,000
                                                                      ===========    ===========
Noncash investing and financing:
   Property and equipment additions for long-term debt ............   $      --      $     8,833
                                                                      ===========    ===========
   Note receivable for stock issued on exercise of options ........   $      --      $    17,500
                                                                      ===========    ===========
</TABLE>
(A) Pro Forma prior to October 1997: see Note 9.

                       See notes to financial statements.
                                       F-6
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        BUSINESS - Neutral Posture Ergonomics, Inc. (the "Company") designs and
manufactures ergonomic chairs and sells to wholesale and retail customers
nationwide. The Company's manufacturing facility is located in Bryan, Texas, and
its primary product showroom is located at the Merchandise Mart in Chicago,
Illinois. The Company has been operating under an exclusive license, along with
one other licensee, until February 1997, when the Company became the sole
licensee, for use of a specified patent in applications to industrial,
laboratory and office chair use; this license may not be assigned or
transferred. In March 1997, the Company acquired the patent.

        FINANCIAL STATEMENT PREPARATION requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses for the periods. Differences from
those estimates are recognized in the period they become known.

        REVENUES are recognized as sales when products are shipped and title
passes. As revenues are recognized, estimated warranty expenses are provided.

        CASH EQUIVALENTS are highly liquid investments with maturities of three
months or less at acquisition.

        INVENTORIES, consisting primarily of raw materials, are stated at the
lower of cost (on the first-in, first-out method) or market.

        PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over estimated useful lives ranging from two to seven
years, or the related lease term if shorter. Management periodically reviews for
impairment of fixed assets whenever events or changes in circumstances have
indicated that the carrying amount of its fixed assets might not be recoverable.

        INTANGIBLES are stated at cost less accumulated amortization.
Amortization is provided using the straight-line method over estimated useful
lives ranging from three to six years. Management periodically reviews for
impairment of intangibles whenever events or changes in circumstances have
indicated that the carrying amount of its intangibles might not be recoverable.

        FINANCIAL INSTRUMENTS consists of cash, accounts and notes receivable,
payables and debt, the carrying values of which are a reasonable estimate of
their fair values due to their short maturities or current interest rates.

        RESEARCH AND DEVELOPMENT COSTS are expensed as incurred and were
approximately $311,000 and $224,000 in fiscal 1998 and 1997, respectively.

        INCOME TAXES were not recorded by the Company for a portion of fiscal
1998 and all of fiscal 1997 because, effective April 1, 1996, the Company
elected taxation status as an S Corporation under the Internal Revenue Code,
with profits and losses reportable by the shareholders in their individual
income tax returns. Deferred income taxes were provided prior to April 1, 1996,
under the asset and liability method for temporary differences in the
recognition of income and expense for tax and financial reporting purposes. Upon
completion of the public offering in October 1997, the Company terminated its
status as an S Corporation and is subject to such income taxes. Since
termination of S Corporation status, current and deferred income taxes have been
provided for as appropriate (Note 9).

        PRO FORMA INCOME TAXES include the applicable pro forma adjustments for
federal and state income taxes as if the Company had not been treated as an S
Corporation for a portion of fiscal 1998 and all of fiscal 1997.

                                       F-7
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Upon completion of the public offering in October 1997, the Company terminated
its status as an S Corporation and is subject to such income taxes.

        NET INCOME PER COMMON SHARE is based on the weighted average number of
shares outstanding for basic earnings per share ("EPS"). Diluted EPS also
includes the dilutive effect of common stock options outstanding. For fiscal
1998, both calculations include the effects of the additional 900,000 shares
issued in the initial public offering in October 1997. During fiscal 1998, the
Company adopted SFAS No. 128, "Earnings per Share". As a result of the adoption
of SFAS No. 128, all EPS amounts have to be restated to the basic and diluted
presentations required by this pronouncement.

        STOCK-BASED COMPENSATION arising from stock option grants is accounted
for by the intrinsic value method under Accounting Principles Board Opinion No.
25 ("APB No. 25"). Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. As permitted by SFAS No. 123, the
Company continues to apply APB No. 25 to its stock-based compensation awards to
employees and discloses the required pro forma effect on net income and earnings
per share (Note 7).

2.  INITIAL PUBLIC OFFERING

        On October 20, 1997, the Company completed an initial public offering of
common stock and the private placement of common stock warrants. Proceeds of the
offering, less underwriter's commissions and fees and other offering expenses,
were approximately $4.4 million for the 900,000 shares of common stock issued by
the Company. In addition to the common stock issued, warrants to purchase
133,400 shares of common stock at an exercise price of $7.20 per share were
granted to the underwriter. These warrants are exercisable over a period of four
years commencing one year from consummation of the offering.

3.  ASSET ACQUISITION

        On March 19, 1998, the Company acquired certain assets of the furniture
business of Harvard Industries, Inc. ("Harvard") for $760,000 in cash and has
incurred approximately $100,000 of related costs and expenses. The acquisition
included inventory, equipment and use of the Harvard name for a period of three
years. The Company has recorded intangibles totaling $222,253, net of
amortization of $12,272 in fiscal 1998, as part of the acquisition. Subsequent
to the acquisition, the Company sold inventory and equipment of one of the chair
lines to a third party which reduced the costs of the Harvard acquisition by
$140,000.

4.  PROPERTY AND EQUIPMENT

        Property and equipment consist of the following:               JUNE 30,
                                                                        1998
                                                                      ----------
Land ........................................................         $   90,250
Building ....................................................            534,750
Building improvements .......................................            217,101
Machinery and equipment .....................................            712,304
Furniture and  fixtures .....................................            420,874
Automobiles  and trucks .....................................            111,362
Other  equipment ............................................             43,282
                                                                      ----------
     Subtotal ...............................................          2,129,923
Less accumulated depreciation ...............................            548,213
                                                                      ----------
     Total ..................................................          1,581,710
Deposits on machinery, equipment and other ..................            268,200
                                                                      ----------
     Property and equipment - net ...........................         $1,849,910
                                                                      ==========

                                       F-8
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                  NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

5.  DEBT AND CREDIT FACILITIES

        Long-term debt consists of the following:                       JUNE 30,
                                                                          1998
                                                                        --------
 Revolving line of credit, up to $2,000,000;
    interest at prime plus .5% (9% at June 30, 1998)
    payable  monthly;  principal due August 21, 2000 ..............     $   --
Note payable to bank in monthly  installments of $5,300,
    including interest at 8.75%,  maturing in May 2001 ............      462,620
Term loan  payable in  monthly  installments  of $1,456,
    including interest at 8.25%,  maturing in May 2011 ............      138,001
Capital lease obligation,  payable in variable monthly
    installments through  October 1999, net of $308 discount
    based on interest at 10%,  collateralized by the leased
    equipment .....................................................        4,265
                                                                        --------
 Total long-term debt .............................................      604,886
 Less current portion .............................................       28,649
                                                                        --------
 Long-term debt - less current portion ............................     $576,237
                                                                        ========

        Annual maturities of long-term debt - less current portion at June 30,
1998, are as follows:

               Year ending June 30:
                2000 .............................                 $ 29,093
                2001 .............................                  429,748
                2002 .............................                    8,087
                2003 .............................                    8,780
                2004..............................                    9,511
                Thereafter .......................                   91,018
                                                                   --------
                     Total .......................                 $576,237
                                                                   ========

        Borrowings under the revolving line of credit are subject to borrowing
base requirements and are collateralized by accounts receivable, chattel paper,
contract rights, equipment and fixtures, general intangibles and inventories.
The line of credit is subject to a quarterly commitment fee of .25% per annum on
the difference between the commitment amount and the aggregate principal
balance. The current credit facility terminates on August 21, 2000. At June 30,
1998, no amount was borrowed under this facility.

        Under the same facility, the Company has available a term line of credit
up to $500,000 with interest payable monthly at prime plus .5%, with a maturity
not in excess of five years, to finance the acquisition of additional machinery,
equipment and molds to be used in the Company's operations. At June 30, 1998, no
such loan was outstanding.

        In May 1996, the Company purchased an office, warehouse and
manufacturing facility for $626,431. The Company issued a $500,000 note payable
and a term note of $150,000 for capital improvements on the building with
outstanding balances at June 30, 1998, of $462,620 and $138,001, respectively.
The notes are collateralized by the building and certain equipment.

        The revolving line of credit and the notes require maintenance of
specified levels of tangible net worth and other financial covenants and
restrict additional borrowings, the purchase and disposal of assets, the payment
of dividends, the purchase of treasury stock and other specified changes in the
Company's business.

                                       F-9
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

6.  CAPITAL STOCK

         At June 30, 1998, the Company has authorized 14,000,000 shares of
commons stock, $0.01 par value of which 3,200,00 shares were issued and
outstanding. Of the 3,200,000 shares of common stock, 900,000 shares were issued
in October 1997 upon completion of the initial public offering and provided new
proceeds of approximately $4.4 million.

         The Company also has authorized 1,000,000 shares of preferred stock,
par value $0.01 per share. The Board of Directors has authority to divide such
preferred stock into one or more series and has authority to fix and determine
the relative rights and preferences of each such series. No preferred stock was
issued and outstanding at June 30, 1998.

         At June 30, 1998, the Company has outstanding warrants to purchase
133,400 shares of common stock at an exercise price $7.20 which were granted to
the underwriter as part of the initial public offering and are exercisable over
a period of four years commencing one year from consummation of the offering.
These warrants, included in shareholders' equity, had a total estimated fair
value of $75,000 ($0.56 per warrant) on the date of grant using the
Black-scholes option - pricing model with the following assumptions: risk-free
interest of 5.7%, no dividend yield, expected life of five years and no
volatility.

7.   STOCK OPTION PLAN

        In April 1996, the Company adopted a Nonqualified Stock Option Plan (the
"Plan") to remain in effect for ten years or expiration of the latest stock
option period, whichever is later. The Plan authorizes the board of directors to
grant up to 700,000 option shares. The Plan contains provisions upon
dissolution, liquidation or merger of the Company to allow for immediate
exercise of all issued and outstanding options. Upon adoption of the Plan in
April 1996, the Company granted 500,000 options at $0.225 exercise price per
share of which 200,000 options vested when granted and were exercised in June
1996, and the remaining 300,000 options vest in equal amounts over a period of
three years. An additional 100,000 options were exercised on April 30, 1997. As
of June 30, 1998, the Company had outstanding options representing the right to
purchase an aggregate of 200,000 shares of Common Stock, representing all of the
shares available under the Stock Option Plan. Upon completion of the initial
public offering, all 200,000 shares of Common Stock became fully vested and
exercisable.

        The Company applies the provisions of APB No. 25 and related
Interpretations in accounting for its stock option plan. Under the Nonqualified
Stock Option Plan, deferred compensation of $237,500 was recorded for the
500,000 options granted in 1996, based on the $0.475 per share excess of the
estimated fair value of the common stock of $0.70 per share over the exercise
price, and is amortized over the vesting period of one to three years.
Amortization of deferred compensation of $83,125 and $47,500 for fiscal 1998 and
1997, respectively, is included in selling, general and administrative expenses.

        In August 1997, prior to completion of the initial public offering, the
board of directors and the shareholders approved the Company's Amended and
Restated 1996 Nonqualified Stock Option Plan (the "Stock Option Plan") which
reduced the number of shares to be granted under all Stock Option Plans to
500,000.

        Under the terms of the option grants, at the election of the optionees,
the Company loaned to the optionees amounts to cover a portion of the exercise
price of the options and the related income tax effects, and received from the
optionees notes receivable. As of June 30, 1998, the notes receivable totaled
$170,675, consisting of $52,500 for the exercise of options (included in
shareholders' equity) and $118,175 to cover income taxes of the optionees
(included in total assets). These recourse notes bear interest at 7.5%, payable
annually, and mature in 2001.

        In August 1997, the board of directors and the shareholders of the
Company also approved the Company's 1997 Omnibus Securities Plan ("the Plan")
for the employees, directors and consultants of the Company. The number of
shares of Common Stock reserved for issuance under the Plan is 200,000 shares.
The Plan allows the issuance of nonqualified stock options, incentive stock
options within the meaning of Section 422 of the Internal 

                                      F-10
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Revenue Code, stock appreciation rights and restricted stock. In fiscal 1998,
the Company granted 87,375 options and terminated 3,810 options with a weighted
average exercise price per share of $4.963 and $4.707, respectively. As of June
30, 1998, the Company has outstanding options representing the right to purchase
an aggregate of 83,565 shares of common stock, with a weighted average exercise
price per share of $4.974. No options are exercisable and 112,625 options are
reserved for future grants at June 30, 1998.

        The following table summarizes additional information about stock
options outstanding at June 30, 1998:

                                                      Options Outstanding
                                                 -------------------------------
                                                             Weighted
                                                              Average   Weighted
     Range of                                     Number     Remaining   Average
     Exercise                                       Of      Contractual Exercise
      Prices                                      Shares       Life       Price
-----------------------                           ------   ------------   ------
$2.000 - $3.500 ...............................   26,065    0.999 years   $2.460
$6.000 - $6.125 ...............................   57,500    2.717         $6.114
                                                  ------   ------------   ------
$2.000 - $6.125 ...............................   83,565    2.181         $4.974
                                                  ======   ============   ======


        The exercise price, term and other conditions applicable to each option
granted under the Plan are determined at the time of the grant of each option
and may vary with each option granted. Options granted generally vest ratably
over a four-year period and have a maximum term of ten years.

        Under the 1997 Omnibus Securities Plan, deferred compensation of $69,609
was recorded for 16,875 options granted in 1998, based on the $4.125 per share
excess of the market value of the common stock of $6.125 per share over the
exercise price of $2 per share, and is amortized over the vesting period of one
year. Amortization of $39,609 for fiscal 1998 is included in selling, general
and administrative expenses.

        Had compensation cost for the Company's stock option plans been
determined based on the fair value of the options at the grant date consistent
with the method prescribed by SFAS No. 123, the Company's pro forma net income
and EPS would have been as follows:

                                                     1998                1997
                                                   --------          -----------
Pro forma net income ....................          $739,000          $   704,000
                                                   ========          ===========
Pro forma EPS:
     Basic ..............................          $    .25          $       .31
                                                   ========          ===========
     Diluted ............................          $    .24          $       .28
                                                   ========          ===========

        In the pro forma calculations, the weighted average fair value of
options granted in fiscal 1998 and 1996 was estimated at $3.647 and $0.535 per
share, respectively, on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: risk-free interest rate
of 5.75% and 6.32%, no dividend yield, expected lives of five years and
volatility of 60% in 1998 and no expected volatility in 1996 (because the
Company's stock was not publicly traded).

8.  DIVIDENDS

        On October 9, 1997, prior to completion of the Company's initial public
offering, the Company declared a cash dividend to its S Corporation shareholders
of record on that date in the amount of $.0587 per share, for a total
distribution of $135,000, to provide for those shareholders' estimated federal
income tax obligations attributable to the Company's S Corporation earnings for
the period from July 1, 1997 through the consummation of the offering.

                                      F-11
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

        In addition, the remaining undistributed S Corporation earnings of
$788,152 at the closing date of the initial public offering have been
reclassified from retained earnings to additional paid-in capital.

9.  INCOME TAXES

        Beginning April 1, 1996, the Company elected taxation status as an S
Corporation under the Internal Revenue Code, with profits and losses reportable
by the shareholders in their individual income tax returns. Upon completion of
the public offering, the Company terminated its status as an S Corporation.
Accordingly, there is no provision for federal income taxes in fiscal 1997 and a
portion of 1998.

        The tax effects of significant items comprising the Company's net
deferred tax assets and liabilities as of June 30, 1998, are as follows:

   Current asset:
     Accrued expenses not currently deductible                         $ 73,000
     Valuation allowances for receivables and inventories not 
       currently deductible                                              40,000
     Inventory costs capitalized for tax purposes                        31,000
                                                                      --------- 
   Total                                                                144,000

   Noncurrent asset (liability):
     Research and development costs expensed for tax purposes          (154,000)
     Accelerated depreciation for tax purposes                          (16,000)
     Other                                                                8,000
                                                                      --------- 
                                                                       (162,000)
                                                                      --------- 
   Net deferred tax asset                                             $ (18,000)
                                                                      ========= 

        Deferred tax assets are believed to be realizable. No valuation
allowance has been set up at this time.

         Pro forma income tax adjustments represent the additional provision
necessary for federal and state income taxes to be at the statutory rate in
effect (at an effective rate of 37% before tax credits) as if the Company had
not been treated as an S Corporation in fiscal 1998 and 1997.

        Income tax expense consists of the following:

                                                            1998         1997
                                                          --------    ---------
Historical current (federal and state) tax expense ...    $337,292    $  44,658
Deferred tax expense .................................      18,000         --
Pro forma federal income tax adjustment ..............     104,809      326,477
Historical current federal tax refunds from
   research and development tax credits related
   to prior years development tax credits related
   to prior years ....................................        --        (78,442)
                                                          --------    ---------
                                                          $460,101    $ 292,693
                                                          ========    =========

        Reconciliations of income tax expense and the expected tax computed by
applying the U.S. federal income tax rate of 34% to pretax accounting income
follow:

                                                          1998           1997
                                                        --------      ---------
Computed tax at statutory rate ...................      $294,516      $    --
Income-based state taxes, net of federal
 income tax benefit ..............................        26,312         44,658
Pro forma federal income tax adjustment ..........       104,809        326,477
Research and development tax credits
 from prior years ................................          --          (78,442)
Nondeductible expenses ...........................         9,994           --
Other ............................................        24,470           --
                                                        --------      ---------
   Income tax expense ............................      $460,101      $ 292,693
                                                        ========      =========

                                      F-12
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

10.  CONCENTRATION OF RISKS

        The Company's revenues are derived principally from uncollateralized
sales of chairs to customers. Revenues and accounts receivable from significant
customers represent the following percentages of the Company's net sales and
accounts receivable:
                                        1998                    1997
                                  -------------------    -------------------
                                            ACCOUNTS               ACCOUNTS
                                  SALES    RECEIVABLE    SALES    RECEIVABLE
                                  -----    ----------    -----    ----------
Relax the Back ................      15%           15%       5%            9%
General Services Administration      15%           13%      16%           15%
United Parcel Service .........       9%           19%      10%            5%

        Because of the availability of other customers, management does not
believe that the loss of any single customer would adversely affect the
Company's operations.

        The Company currently buys all of its mechanisms, an important component
of its products, from one supplier. Although there are a limited number of
manufacturers of the particular mechanisms, management believes that other
suppliers could provide similar mechanisms on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales which would affect operating results adversely.

11.  COMMITMENTS AND CONTINGENCIES

        OPERATING LEASES - The Company leases one showroom facility under an
agreement classified as an operating lease. This agreement requires the Company
to pay all executory costs (such as utilities and maintenance) incurred by the
landlord. The Company also has entered into operating leases for some of its
office equipment.

Future minimum payments under all noncancelable operating lease obligations,
including an estimated pro rata share of operating expenses, as of June 30,
1998, are as follows:

       YEAR ENDING
         JUNE 30:
       --------------
         1999 ....................................................      $ 59,857
         2000 ....................................................        59,857
         2001 ....................................................        54,472
         2002 ....................................................        39,577
                                                                        --------
         Total minimum lease payments ............................      $213,763
                                                                        ========

        Rent expense for fiscal 1998 and 1997, totaled $79,619, and $26,007,
respectively, which includes the Company's share of executory costs associated
with its office leases.

        TOOLING AND LICENSES - In January 1997, the Company entered into an
agreement with a third party to design and develop the molds to be utilized in
the production process for approximately $400,000. The Company has paid
approximately $150,000 for fiscal years 1998 and 1997, respectively, and expects
to pay the remaining $100,000 in 1999.

        ROYALTIES - In March 1997, the Company acquired the patent (Note 1) from
a related party for $30,000 and future royalties and now holds all rights to the
patent. Royalties are based on 25% of net royalties collected by the Company
from third parties for products manufactured, used or sold under license or
sublicense of the patent. In addition, the Company has entered into a written
agreement from the related party to pay a perpetual 3% royalty of the net sales
of every computERGO(TM) sold by the Company. The Company did not pay royalties
during fiscal years 1998 and 1997.


                                      F-13
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


        LEGAL PROCEEDINGS - The Company is a party to certain legal proceedings
related to patents and other matters arising in the ordinary course of business.
Although the Company cannot predict the outcome of such proceedings with
certainty, the Company does not expect the outcome of these proceedings, either
individually or in the aggregate, to have a material adverse impact on its
financial position, results of operations and cash flows.

        One such lawsuit relates to computERGO(TM). In May, 1998, the Company
was served with a suit filed by Destech, L.L.C. ("Destech") in United States
District Court, Eastern District of Michigan. In general, the lawsuit alleges
that the Company breached a contract for the development, design and tooling
cost of computERGO(TM), a portable laptop workstation and for the cost of
establishing a manufacturing assembly line. The Company intends to vigorously
defend Destech's claims and in June 1998 filed a response with the Court denying
such allegations. In May 1998, the Company also filed suit against J&J
Automotive Group, Inc. ("AGI"), the parent company of Destech, in the county
court of Brazos County, Texas alleging breach of contract and warranty to the
Company. Although uncertainties associated with jury trials and other litigation
risks make it impossible for the Company to predict the outcome of this
proceeding with certainty, the Company does not expect the outcome to have a
material effect upon the Company's financial condition or results of operations.

                                      F-14
<PAGE>
                                INDEX TO EXHIBITS

EXHIBIT NO.                                        EXHIBIT

  3.1*    -   Amended and Restated Articles of Incorporation of the Company
              (Form SB-1, October 20, 1997, Registration No. 333-33675, Exhibit
              2.1)

  3.2*    -   Amended and Restated Bylaws of the Company (Form SB-1, October 20,
              1997, Registration No. 333-33675, Exhibit 2.2)

  4.1*    -   Specimen Common Stock Certificate (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 3.1)

 10.1*    -   Employment Agreement, dated as of July 1, 1997, between the
              Company and Rebecca E. Boenigk (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.1)

 10.2*    -   Employment Agreement, dated as of July 1, 1997, between the
              Company and David W. Campbell (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.2)

 10.3*    -   Employment Agreement, dated as of July 1, 1997, between the
              Company and David W. Ebner (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.3)

 10.4*    -   Employment Agreement, dated as of July 1, 1997, between the
              Company and Gregory A. Katt (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.4)

 10.5*    -   Consulting Agreement, dated as of July 1, 1997, between the
              Company and Dr. Jerome Congleton (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.5)

 10.6*    -   Letter Agreement, dated as of December 20, 1996, between the
              Company and Shepherd Products, Inc. (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.6)

 10.7*    -   Amendment to Letter Agreement, dates as of June 17, 1997, between
              the Company and Shepherd Products, Inc. (Form SB-1, October 20,
              1997, Registration No. 333-33675, Exhibit 6.7)

 10.8*    -   Agreement, dates as of February 21, 1995, between the Company and
              the General Services Administration (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.8)

 10.9*    -   Trademark License, dated as of January 12, 1997, between the
              Company and Relax the Back Franchising Company (Form SB-1, October
              20, 1997, Registration No. 333-33675, Exhibit 6.9)

10.10*    -   Promissory Note, dated as of June 30, 1996, issued by David W.
              Campbell in favor of the Company (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.10)

10.11*    -   Promissory Note, dated as of December 30, 1996, issued by David W.
              Campbell in favor of the Company (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.11)

10.12*    -   Promissory Note, dated as of June 30, 1996, issued by David W.
              Ebner in favor of the Company. (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.12)

10.13*    -   Loan Agreement, dated as of December 30, 1996, between the Company
              and Comerica Bank-Texas (Form SB-1, October 20, 1997, Registration
              No. 333-33675, Exhibit 6.13)

10.14*    -   Amendment to Secured Loan Agreement, dated as of August 12,1997,
              between the Company and Comerica Bank-Texas (Form SB-1, October
              20, 1997, Registration No. 333-33675, Exhibit 6.14)

10.15*    -   Split Dollar Insurance Agreement, dated as of April 28, 1997,
              between the Company and Rebecca E. Boenigk (Form SB-1, October 20,
              1997, Registration No. 333-33675, Exhibit 6.15)

10.16*    -   Life Insurance Agreement, dated as of February 20, 1997, between
              the Company and David W. Campbell (Form SB-1, October 20, 1997,
              Registration No. 333-33675, Exhibit 6.16)

10.17*    -   Split Dollar Insurance Agreement, dated as of June 26, 1995,
              between the Company and Jaye E. Congleton (Form SB-1, October 20,
              1997, Registration No. 333-33675, Exhibit 6.17)

10.18*    -   Split Dollar Insurance Agreement, dated as of January 21, 1997,
              between the Company and David W. Ebner (Form SB-1, October 20,
              1997, Registration No. 333-33675, Exhibit 6.18)

10.19*    -   Key Man Insurance Agreement, dated as of April 28, 1997, between
              the Company and Rebecca Boenigk (Form SB-1, October 20, 1997,
              Registration No. 333-33675, 6.19)

10.20*    -   Key Man Insurance Agreement, dated as of February 20, 1997, 
              between the Company and David W. Campbell (Form SB-1, October 20, 
              1997, Registration No. 333-33675, Exhibit 6.20)

10.21*    -   Key Man Insurance Agreement, dated as of March 3, 1997, between
              the Company and Dr. Jerome J. Congleton (Form SB-1, October 20,
              1997, Registration No. 333-33675, Exhibit 6.21)

                                             X-1
<PAGE>
EXHIBIT NO.                         EXHIBIT


10.22*    -    Neutral Posture Ergonomics, Inc. Amended and Restated 1996 
               Nonqualified Stock Option Plan, dated as of October 9, 1997 
               (Form SB-1, October 20, 1997, Registration No. 333-33675, Exhibit
               6.22)

10.23*    -    Neutral Posture Ergonomics, Inc. 1997 Omnibus Securities Plan, 
               dated as of July 1, 1997 (Form SB-1, October 20, 1997, 
               Registration No. 333-33675, Exhibit 6.23)

10.24*    -    Form of Warrant Agreement, dated as of October 24, 1997 between 
               the Company and the Underwriter (Form SB-1, October 20, 1997, 
               Registration No. 333-33675, Exhibit 6.24)

10.25*    -    Agreement, dated as of March 5, 1997, between the Company and 
               Jerome J. Congleton  (Form SB-1, October 20, 1997, Registration 
               No. 333-33675, Exhibit 6.25)

10.26*    -    Royalty Agreement, dated as of July 1, 1997, between the Company 
               and Jerome J. Congleton (Form SB-1, October 20, 1997, 
               Registration No. 333-33675, Exhibit 6.26)

10.27*    -    Assignment, dated as of August 27, 1997, executed by the Company 
               (Form SB-1, October 20, 1997, Registration No. 333-33675, Exhibit
               6.27)

10.28*    -    Assignment, dated as of September 15, 1997, between the Company 
               and Texas A&M University System (Form SB-1, October 20, 1997, 
               Registration No. 333-33675, Exhibit 6.28)

10.29*    -    Assignment, dated as of August 27, 1997, executed by Jerome J. 
               Congleton (Form SB-1, October 20, 1997, Registration No. 
               333-33675, Exhibit 6.29)

10.30*    -    Loan Agreement, dated as of April 30, 1996 between the Company 
               and Commerce National Bank (Form SB-1, October 20, 1997, 
               Registration No. 333-33675, Exhibit 6.30)

10.31*    -    Loan Agreement, dated as of April 30, 1996, between the Company 
               and Commerce National Bank (Form SB-1, October 20, 1997, 
               Registration No. 333-33675, Exhibit 6.31)

10.32*    -    First Amendment to Loan Agreement, dated as of October 10, 1997, 
               between the Company and Compass Bank (Form SB-1, October 20, 
               1997, Registration No. 333-33675, Exhibit 6.32)

10.33*    -    Second Amendment to Loan Agreement, dated as of October 14, 1997,
               between the Company and Comerica Bank-Texas (Form SB-1, October 
               20, 1997, Registration No. 333-33675, Exhibit 6.33)

10.34     -    Third Amendment to Loan Agreement, dated as of October 14, 1997
               between the Company and Comerica Bank-Texas

27.1      -    Financial Data Schedule
--------
*     Incorporated herein by reference

                                       X-2