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, 1999

[ ] 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        (IRS Employer Identification No.)
       incorporation or organization)

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

   SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:  NONE
   SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:

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

      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 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
$17,090,420.

      ON SEPTEMBER 15, 1999, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $3,046,906. (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, 1999, THERE WERE 3,308,800 OUTSTANDING SHARES OF COMMON
STOCK, PAR VALUE $0.01 PER SHARE.

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

                      DOCUMENTS INCORPORATED BY REFERENCE:

 PART III - PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE ISSUED
 IN CONJUNCTION WITH THE REGISTRANT'S 1999 ANNUAL MEETING OF SHAREHOLDERS OF THE
                    COMPANY TO BE HELD ON NOVEMBER 10, 1999.
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                        1999 ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
                                     PART 1

Item   1.    Description of Business.................................       1
Item   2.    Description of 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............................................      14
Item   7.    Financial Statements....................................      18
Item   8.    Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure...................      18

                                    PART III
Item   9.    Directors, Executive Officers, Promoters and Control
               Persons; Compliance with Section 16(a) of the
               Exchange Act..........................................      19
Item   10.   Executive Compensation..................................      20
Item   11.   Security Ownership of Certain Beneficial Owners and
               Management............................................      20
Item   12.   Certain Relationships and Related Transactions..........      20
Item   13.   Exhibits and Reports on Form 8-K........................      20

<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 Harvard chair line
enables the Company to offer lower-priced chair lines to complement its existing
Neutral Posture(R) chair line.

      During fiscal year 1999, the Company further expanded its product lines
with the development of the two products marketed under the Neutral Posture(R)
chair line, including the "big and tall" chair and the "prop stool". In
addition, ancillary products such as the "Fring(TM) Footrest" and "Cloud 9
fabric" were made available to the Neutral Posture(R) chair line. The Company
also introduced a new "height adjustable electric table" to the market.

      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 products 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.

                                       1

<PAGE>
      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, 1999, the Company had 87 employees which are full-time employees.

INDUSTRY OVERVIEW

      The Company's chairs compete in the seating segment of the office
furniture market. This segment represented approximately 24.5% of industry sales
in the United States or $3.0 billion in calendar year 1998 and is the second
largest office furniture industry segment. The Company's share of the U.S.
seating market segment was approximately one-half of 1% on a dollar basis in
calendar year 1998. According to the Business and Institutional Furniture
Manufacturer's Association ("BIFMA"), the U.S. office furniture market had
estimated sales of $12.3 billion in calendar year 1998. 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 9.4% over the three year period ended
December 31, 1998.

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. Prior to June 1998, all frame parts, mechanisms, bases,
casters, cylinders, seat pans, backrests, armrests, foam and J-shaped back
uprights of the Neutral Posture(R) chair line were 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.

      HARVARD CHAIRS. In March 1998, the Company purchased certain assets of the
furniture division from Harvard. 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.

      NEW PRODUCTS. New products developed during fiscal 1999 included the "big
and tall" chair , the "prop stool" and ancillary products such as the "Fring(TM)
Footrest" and "Cloud 9 fabric." These products began production near the end of
fiscal year 1999 and therefore did not have a significant impact on fiscal 1999
earnings. In addition, the Company introduced a "height adjustable electric
table" to the product line, allowing individuals the flexibility to work from
either a sitting or standing position. The table is primarily targeted for
industrial use.

                                       2

<PAGE>
      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 tradename 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 decided to reevaluate computERGO(TM) and
hired an external engineering firm to study the marketability and design of the
product. At this time alternative designs are being evaluated to determine if
there is any future viability for this product line.

      PRODUCT RETURNS. 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 and 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.

RESEARCH AND DEVELOPMENT

      During fiscal years 1999 and 1998, the Company spent approximately
$420,000 and $311,000, respectively, on research and development. The Company
intends to continue to incur research and development expenses by creating
innovative new products, broadening existing product lines and enhancing 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 line from Harvard increased the
Company's dealer network to approximately 1,000 dealers, not all of which will
sell the Neutral Posture(R) chair line or the Company's other new products. The
Company believes that using independent sales representatives and dealers
provides 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 3% of the Company's
fiscal year 1999 sales.

      In fiscal year 1998, the Company formed the Neutral Posture Ergonomics
Engineering Team ("NEET"), which included two professional ergonomists, and two
certified professional ergonomists, Mr. Benden, the Company's Vice President
Total Customer Experience and Dr. Jerome Congleton, a consultant to the Company.
NEET works 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"). 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 75% of the Relax the Back stores
are independently

                                       3

<PAGE>
owned and operated and may elect on a store-by-store basis whether to sell the
Company's chairs. As of June 30, 1999, the Company believes that almost all 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, Corporate Express and National Business Furniture. The
Company believes that catalogs provide a convenient and cost-effective way for
businesses and individuals to purchase ergonomic products.

      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 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
improves product quality.

      Unlike its other products, the new height adjustable electric tables are
manufactured by a third party and shipped directly to the end user.

      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 1999. The Company manufactures or obtains Neutral Posture(R)
chairs, Harvard chairs, height adjustable tables, and other ancillary products
primarily to meet customer orders placed with the Company.

      The Company is also working to obtain its ISO 9001 certification, an
internationally developed set of manufacturing facility quality criteria
established by the International Organization for Standardization ("ISO"). The
Company currently estimates the process of obtaining ISO 9001 certification will
take through the end of the second quarter of fiscal year 2000 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 9001 status. The Company believes that
becoming ISO 9001 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 an adequate 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

                                       4

<PAGE>
third party manufacturers to the Company's specifications. In addition, the
Company's new height adjustable electric tables are manufactured by a third
party which is the sole source for this product. 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 began manufacturing a majority of the Company's seats and backs for the
Neutral Posture(R) chair line. While the Company has not had any adverse
experience with these suppliers, the Company does not have a binding supply
contract with either Leggett & Platt, Inc. or Shepherd.

PROPERTIES

      The Company's corporate offices, manufacturing and assembly operations are
conducted in its approximately 46,000 square-foot facility owned by the Company
in Bryan, Texas. The Company also leases an approximately 1,400 square-foot
showroom in the Chicago Merchandise Mart. The Company's management consider each
of these facilities to be in good condition and is of the opinion that are
adequately covered by insurance.

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 22.9% of the Company's sales for fiscal year 1999. 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, Lockheed Martin,
United Parcel Service ("UPS"), Wrightline and Sykes Enterprises whose individual
sales for fiscal year 1999 represented 13.5%, 8.4%, 6.9%, 3.0% and 2.6%,
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) and Fring(TM) are trademarks of the Company.
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. In addition, the Company was
granted a license to use the "Harvard" name for a period of three years which
expires in March 2001. 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.

COMPETITION

      The Company faces significant competition in the contract furniture
market. The Company's ergonomic products compete on the basis of design, health
benefits, comfort, quality, durability, service and price. Existing and future
competitors for the Company's ergonomic products 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-

                                       5

<PAGE>
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.

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 include Herman Miller Inc., Steelcase, Inc., Knoll Inc. and Haworth,
Inc. These competitors have a substantial volume of furniture and products
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, a series of office chairs
marketed under the Harvard tradename and several new products recently
introduced by the Company, including height adjustable electric tables. 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.

                                       6

<PAGE>
      RELIANCE ON INTELLECTUAL PROPERTY. The Company owns a United States patent
and several trademarks in order to protect certain of its ergonomic products 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.

      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. As of June 30, 1999, the Company was involved in
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. As of June 30, 1999, the
Company has decided to evaluate alternative designs to determine if there is any
future for computERGO(TM).

      PENNY STOCK REGULATION. In the event the Company's Common Stock ("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 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, and 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. Shepherd manufactures 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, Lockheed Martin, UPS, Wrightline and Sykes Enterprises accounted
for approximately 22.9%, 13.5%, 8.4%, 6.9%, 3.0% and 2.6%, respectively, of its
total revenues in fiscal year 1999. 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,
Lockheed Martin, UPS, Wrightline or Sykes Enterprises. 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.

      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 height adjustable electric tables also carry a
limited lifetime warranty. The Company has not experienced

                                       8

<PAGE>
any material loss from warranty claims to date and maintained a reserve at June
30, 1999, of $170,473 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 63.1% 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 first and
second 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 two lawsuits and in an arbitration proceeding. The two lawsuits and the
arbitration proceeding involve the Company's United States Patent No. 4,552,404
(the "Patent") which covers the design of virtually all models in the Neutral
Posture(R) chair line and related business and intellectual property issues.

      On September 23, 1997, the Company was served with a suit filed by
Bodybilt, Inc. ("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 were listed as "Injunctive Respondents." In general, the suit claims
that: (i) Dr. Congleton exceeded the scope of his rights when he assigned the
Patent to the Company; (ii) Dr. Congleton's assigns are prohibited from
contending that Bodybilt's chairs infringe the Patent; and (iii) 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, Inc., the parent company of Bodybilt, sued
the Company in the United States District Court for the Northern District of
Texas, Dallas Division. 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

                                       9

<PAGE>
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; however,
the parties have agreed to arbitrate these claims and these claims are pending
in the arbitration proceeding described in the following paragraph.

      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 trademark. 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. Dr. Congleton has joined in the
arbitration. On October 14, 1998, Bodybilt filed a counter-claim in the
arbitration proceeding against the Company claiming deceptive advertising under
the Lanham Act, unfair competition, breach of contract, tortious interference,
slander and trade libel.

      Regardless of the outcome of the arbitration, the Company will continue to
pay all defense costs of Dr. Congleton associated with the arbitration. 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 alleged 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. In June 1998 the Company 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. On
February 12, 1999, the Company, Destech and AGI settled both lawsuits and
released each other from all claims in exchange for the payment of $3,000 by the
Company to Destech.

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

      None.

                                       10

<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
since the Company's initial public offering on October 20, 1998. Effective
August 20,1999, the Company voluntarily moved from the Nasdaq National Market
System to the Nasdaq Small Cap System and is traded under the symbol "NTRL". On
September 15, 1999, the Company had approximately 110 shareholders of record of
the Company's Common Stock.

      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

            YEAR ENDED JUNE 30, 1999
                First Quarter .............      $4.00      $2.50
                Second Quarter ............      $4.63      $2.50
                Third Quarter .............      $5.38      $2.75
                Fourth Quarter ............      $3.00      $1.88

      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
or paid 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 certain of the Company's debt documents 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. 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. The Company's status as a
Subchapter S Corporation was terminated on the closing of the initial public
offering.

                                       11

<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, 1999, the Company has utilized net offering proceeds for
the following:

      (1)   approximately $144,000 in the development of computERGO(TM) ;

      (2)   approximately $1,064,000 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 $78,000 in the Company's effort to become ISO 9001
            certified;

      (4)   approximately $380,000 in enhancing the Company's marketing efforts
            primarily resulting from salaries and travel-related expenditures
            for the additional sales personnel hired (Danny Skeen as Vice
            President - Sales and the two professional ergonomists);

      (5)   approximately $238,000 related to the hiring of engineering
            personnel, including the vice president - engineering;

      (6)   approximately $1,040,000 of working capital to fund inventory
            purchases and finance receivables; 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, 1999 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 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.

                                       12

<PAGE>
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.

      CAUTIONARY STATEMENT. With the exception of historical information, the
matters discussed under "Liquidity and Capital Resources," including but not
limited to, "Impact of the Year 2000 Issues," contain forward-looking
statements. 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.

      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 usually 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. As such, the integration of the Harvard chair line
had a minor impact on the results of operations in fiscal year 1998.


      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,
                                                         ------------------
                                                          1999        1998
                                                         ------      ------
Net  sales ........................................      100.0%      100.0%
Cost of  sales ....................................       62.8        62.2
                                                         ------      ------
Gross profit ......................................       37.2        37.8
Selling, general and administrative expenses ......       30.0        28.8
                                                         ------      ------
Operating  income .................................        7.2%        9.0%
                                                         ======      ======

      FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30,
      1998.

      NET SALES. Net sales for the fiscal year ended June 30, 1999 were $17.1
million increasing approximately $4.9 million or 40% from net sales of $12.2
million for the fiscal year ended June 30, 1998. Sales for the Neutral
Posture(R) chair line increased approximately $1.8 million or 15% for fiscal
year 1999 as compared to fiscal year ended 1998 resulting primarily from the
Company's heightened marketing efforts. The remaining increase was due to a full
year of sales for fiscal 1999 for the Harvard chair line acquired in March, 1998
totaling $3.7 million compared to $600,000 for fiscal year 1998.

      GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1999 was
$6.4 million, increasing approximately $1.7 million or 38% from gross profit of
$4.6 million for the same period in 1998. The gross profit margin decreased to
37.2% for fiscal year 1999 from 37.8% for fiscal year 1998. 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.
During the fourth quarter of fiscal year 1999, the Company recorded a charge to
earnings for design costs previously capitalized and to increase its reserve for
obsolete inventory related to its computERGO(TM) product line in the amount of
approximately $70,000 which accounts for the


                                       13

<PAGE>
majority of the decrease in gross profit margin percentage. At this time, the
Company is reevaluating computERGO's(TM) design to determine if there is any
future viability for this product line.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $5.1 million for fiscal year 1999, increasing
approximately $1.6 million or 46%, from $3.5 million for fiscal year 1998. As a
percentage of sales, the Company's selling, general and administrative expenses
increased to 30% for fiscal year 1999 from 29% for fiscal year 1998. 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 added late in fiscal 1998 and a
one-time charge in the amount of $260,000 related to the resignation of David
Campbell, former president.

      OPERATING INCOME. Operating income for the fiscal year ended June 30, 1999
was $1.2 million, increasing approximately $130,000 or 12% from operating income
of $1.1 million for the same period in 1998. The increase in 1999 resulted from
higher gross profit due to increased sales levels partially offset by higher
selling and general and administrative costs as discussed above.

      LIQUIDITY AND CAPITAL RESOURCES. The Company's principal sources of
capital are net cash provided by operating activities, together with unexpended
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, fixed assets,
research and development activities and product improvements.

      Cash provided by operating activities totaled $1,030,025 for fiscal year
1999 increased as compared to cash provided by operating activities of
approximately $100,000 for fiscal year 1998. The increase in cash flow for
fiscal year 1999 was primarily the result of changes in working capital
including increases in accounts payable and accrued liabilities partially offset
by increases in accounts receivable related to increased sales and slight
increases in inventory levels being maintained.

      Cash used for investing activities totaled approximately $866,000 for
fiscal year 1999 and was primarily comprised of building improvements, machinery
and equipment. Cash used for investing activities totaled approximately $1.2
million for fiscal year 1998 and was comprised of approximately $700,000
incurred to purchase certain assets of the furniture business of Harvard and
$500,000 for miscellaneous capital expenditures for building improvements,
machinery and equipment. During fiscal year 2000, the Company expects to
continue to make capital expenditures in connection with manufacturing
equipment, computer hardware and software improvements and to seek potential
acquisitions or joint ventures with third parties to provide ergonomic products
and services.

      Financing activities used funds totaling approximately $220,000 for fiscal
year 1999 and provided funds of approximately $4.1 million for fiscal year 1998.
In fiscal year 1999, the Company used cash flow from operations to purchase
treasury stock in the amount of approximately $291,000 partially offset by the
repayment of notes receivable from an officer of the Company, and proceeds from
exercise of stock options by an officer of the Company. 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 to be a Subchapter S Corporation for
federal income tax purposes.

      The Company manages its inventory to maintain a level which meets its
short-term manufacturing needs. Inventory turned 8.5 times in fiscal year 1999
and 9.2 times in fiscal year 1998. The reduction in turnover is primarily due to
the increased inventory levels associated with the Harvard chair line
acquisition and increased levels maintained to meet customer demands. With this
turnover, the Company had approximately 43 days and 40 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, 1999 was

                                       14

<PAGE>
$1.7 million, and is determined based upon a percentage of eligible receivables.
At June 30, 1999 the interest rate was 8.25% 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, 1999, 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, 1999, the Company had two loans outstanding in the amounts of
$131,000 and $438,000 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
8.25% and matures in May 2003. The notes are collateralized by the land,
building and certain equipment. In addition, the Company had outstanding notes
totaling $25,238 pursuant to the purchase of two Company vehicles. These notes
bear interest at 8.25% and mature in December 2001.

      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 had paid approximately $300,000 as of
the fiscal year ended 1998 and paid the remaining $100,000 in fiscal year 1999.

      The Company believes that cash flow from operations, together with the
unexpended 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 2000. However,
because the Company's future operating results will depend on a 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.

      Historically, the Company's business has been subject to seasonality.
Typically, the Company's revenue is greater during the first and second 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 complete five phases so that its computer systems
will properly utilize dates beyond December 31, 1999. The five phases are (i)
awareness, (ii) assessment, (iii) analysis, design and remediation, (iv) testing
and validation, and (v) creation of contingency plans in the event of year 2000
failures. 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.

                                       15

<PAGE>
      INTERNAL BUSINESS SOFTWARE. During 1998, the Company purchased upgraded
financial systems software which the software vendor has indicated is Year 2000
compliant. The total estimated software and installation cost is $75,000 of
which $70,000 has been spent to date. As a result, the Company has completed the
first four phases which includes the testing and validation phase. The Company's
internal financial systems are Year 2000 compliant as of June 30, 1999.

      INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The Company
completed its assessment with regard to non-financial software and imbedded chip
technology and gathered 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 October 1999. The estimated cost of
achieving Year 2000 compliance for its non-financial software is approximately
$12,000 of which $10,000 has been spent to date. 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 and 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 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. The
Company has received written responses from 75% of such third parties and a vast
majority of such third parties have assured the Company that their software,
hardware and data is, or on a timely basis will be, Year 2000 compliant. To the
extent that responses to Year 2000 readiness inquiries 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. 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
$80,000 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 $7,000 and is being
funded through operating cash flows. Of the total project cost of $87,000
attributable to the purchase and installation of new software, approximately
$77,000 will be capitalized. The costs of the project and the dates on which the
Company plans to complete the various Year 2000 modifications are based on
management's best estimates, which estimates 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 estimated for the reasons mentioned above.

      RECENT 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. The impact of
SFAS 128 on the calculation of basic earnings per share and fully diluted
earnings per share for fiscal years 1999 and 1998 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 were not material.

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.

                                       16

<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 Director" 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,
1999 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     35    Chairman of the Board, Chief Executive
                                      Officer and Director

         Jaye E. Congleton      55    Executive Vice President - Product
                                      Development, Secretary and Director

         Mark E. Benden         32    Vice President - Total Customer Experience

         David W. Ebner         38    Vice President - Operations

         Gregory A. Katt        41    Vice President, Chief Financial Officer
                                      and Treasurer

         Danny D. Skeen         53    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.

      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.

      MARK E. BENDEN served as Director of Engineering from January 1998 to
September 1998, Vice President - Engineering from September, 1998 to September
1999 and currently serves as Vice President - Total Customer Experience. Prior
to these positions, from 1992 to 1998, he was a regional ergonomic and safety
engineer for Johnson and Johnson, Inc., a publicly traded manufacturer and
retailer of a broad range of products in the health care field.

      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.

                                       17

<PAGE>
      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, he was Vice President of Sales for
High Point Industries, a manufacturer of office seating and products, and from
1992 to 1997, he was Vice President-Sales for Harvard Industries, Inc., a
manufacturer of office seating. 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, 1999 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 caption "Security Ownership of
Beneficial Owners and Management" in the Company's Proxy Statement, which is to
be filed with the Commission within 120 days of June 30, 1999 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, 1999 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

            Form 8-K filed on September 8, 1999.

                                       18
<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 28th day of
September, 1999.

                                          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 28th day of September, 1999.

           SIGNATURE                                  TITLE


   /s/ REBECCA E. BOENIGK              Chairman of the Board, Chief Executive
       Rebecca E. Boenigk              Officer and Director (Principal Executive
                                       Officer)

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


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

      /s/ MARYLA FITCH
          Maryla Fitch                 Director

    /s/ RONALD L. JONES
        Ronald L. Jones                Director

  /s/ CYNTHIA PLADZIEWICZ
      Cynthia Pladziewicz              Director

   /S/ JAMES W. THOMPSON
       James W. Thompson               Director

                                       19
<PAGE>
                       NEUTRAL POSTURE ERGONOMICS, INC.

                        INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                      PAGE
                                                                                      ----
<S>                                                                                   <C>
INDEPENDENT AUDITORS' REPORT ......................................................    F-2

FINANCIAL STATEMENTS AND NOTES:
     Balance Sheet as of June 30, 1999 ............................................    F-3
     Statements of Income for the Years Ended June 30, 1999 and 1998 ..............    F-4
     Statements of Shareholders' Equity for the Years Ended June 30, 1999 and 1998     F-5
     Statements of Cash Flows for the Years Ended June 30, 1999 and 1998 ..........    F-6
     Notes to Financial Statements ................................................    F-7
</TABLE>
<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, 1999, 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, 1999, 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
August 9, 1999

                                      F-2
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                                  BALANCE SHEET


                                     ASSETS
<TABLE>
<CAPTION>
                                                                                    JUNE 30,
                                                                                     1999
                                                                                 ------------
<S>                                                                              <C>
Current Assets:
       Cash and cash equivalents .............................................   $  3,316,257
       Accounts receivable less allowance for
         doubtful accounts of $91,000 ........................................      2,667,461
       Inventories ...........................................................      1,195,158
       Deferred income tax benefits ..........................................        164,000
       Prepaid expenses and other ............................................        336,083
       Income tax receivable .................................................         98,058
                                                                                 ------------
            Total current assets .............................................      7,777,017
Property and Equipment - net .................................................      2,277,482
Notes Receivable - shareholders ..............................................         14,725
Intangibles - net ............................................................        226,791
Deposits and Other ...........................................................        198,007
                                                                                 ------------
            Total ............................................................   $ 10,494,022
                                                                                 ============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
       Current portion of long-term debt .....................................   $     43,632
       Accounts payable ......................................................      1,576,141
       Accrued liabilities ...................................................        544,308
                                                                                 ------------
            Total current liabilities ........................................      2,164,081
Long-Term Debt - Less current portion ........................................        550,554
Deferred Income Tax Liability ................................................        131,000
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;
            3,308,800 shares issued ..........................................         33,088
       Common stock warrants .................................................         75,000
       Additional paid-in capital ............................................      5,671,138
       Retained earnings .....................................................      2,177,786
       Accounts and notes receivable - shareholders ..........................        (17,500)
       Treasury stock - at cost, 137,000 shares ..............................       (291,125)
                                                                                 ------------
            Total stockholders' equity .......................................      7,648,387
                                                                                 ------------
            Total ............................................................   $ 10,494,022
                                                                                 ============
</TABLE>
                       See notes to financial statements.

                                      F-3
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                              STATEMENTS OF INCOME


                                                       YEARS ENDED JUNE 30,
                                                   ----------------------------
                                                       1999            1998
                                                   ------------    ------------

Net Sales ......................................   $ 17,090,420    $ 12,181,383
Cost of Sales ..................................     10,737,423       7,582,023
                                                   ------------    ------------
Gross Profit ...................................      6,352,997       4,599,360
Operating Expenses:
       Selling .................................      1,633,772       1,320,420
       General and administrative ..............      3,499,232       2,187,002
                                                   ------------    ------------
            Total ..............................      5,133,004       3,507,422
                                                   ------------    ------------
Operating Income ...............................      1,219,993       1,091,938
Other Income (Expense):
       Interest expense ........................        (49,366)        (63,076)
       Interest income .........................        147,960         141,852
       Other ...................................          9,448          74,037
                                                   ------------    ------------
            Total ..............................        108,042         152,813
                                                   ------------    ------------
Income Before Income Taxes .....................      1,328,035       1,244,751
Income Tax Expense (A) .........................        489,794         460,101
                                                   ------------    ------------
Net Income (A) .................................   $    838,241    $    784,650
                                                   ============    ============
Earnings Per Share: (A)
       Basic ...................................   $       0.26    $       0.27
                                                   ============    ============
       Diluted .................................   $       0.25    $       0.26
                                                   ============    ============
Weighted Average Common Shares Outstanding:
       Basic ...................................      3,253,431       2,923,836
                                                   ============    ============
       Diluted .................................      3,343,747       3,065,606
                                                   ============    ============


(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>

                                            COMMON              COMMON   ADDITIONAL
                                            SHARES     COMMON   STOCK     PAID-IN        RETAINED
                                            ISSUED     STOCK   WARRANTS   CAPITAL        EARNINGS
                                           ---------  -------  --------  -----------   -----------
<S>                                        <C>        <C>      <C>       <C>           <C>
BALANCE AT JULY 1, 1997 .................  2,300,000  $23,000  $   --    $   382,000   $ 1,373,238

    Stock options granted to employees ..       --       --        --         69,609          --

    Amortization of deferred compensation       --       --        --           --            --

    Issuance of common stock (IPO) ......    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      (788,152)

    Payments on accounts receivable
             from shareholders ..........       --       --        --           --            --

    Shareholder distributions declared ..       --       --        --           --        (135,000)

    Pro forma net income ................       --       --        --           --         784,650

    Pro forma income tax adjustment .....       --       --        --           --         104,809
                                           ---------  -------  --------  -----------   -----------
BALANCE AT JUNE 30, 1998 ................  3,200,000  $32,000  $ 75,000  $ 5,524,986   $ 1,339,545
                                           ---------  -------  --------  -----------   -----------
    Amortization of deferred compensation       --       --        --           --            --

    Issuance of common stock ............    108,800    1,088      --         47,812          --

    Tax benefit derived from exercise of
             stock options ..............       --       --        --         98,340          --

    Payment of shareholder note .........       --       --        --           --            --

    Purchase of Treasury stock ..........       --       --        --           --            --

    Net income ..........................       --       --        --           --         838,241
                                           ---------  -------  --------  -----------   -----------
BALANCE AT JUNE 30, 1999 ................  3,308,800  $33,088  $ 75,000  $ 5,671,138   $ 2,177,786
                                           =========  =======  ========  ===========   ===========
<CAPTION>
                                            ACCOUNTS
                                            AND NOTES                                   TOTAL
                                           RECEIVABLE -     DEFERRED     TREASURY    SHAREHOLDERS'
                                           SHAREHOLDERS   COMPENSATION    STOCK         EQUITY
                                           ------------   ------------   ---------   -------------
<S>                                        <C>            <C>            <C>         <C>
BALANCE AT JULY 1, 1997 .................  $    (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 (IPO) ......          --             --          --         5,400,000

    Issuance of warrants ................          --             --          --              --

    Offering costs ......................          --             --          --        (1,030,775)

    Reclass undistributed Sub S earnings           --             --          --              --

    Payments on accounts receivable
             from shareholders ..........        43,345           --          --            43,345

    Shareholder distributions declared ..          --             --          --          (135,000)

    Pro forma net income ................          --             --          --           784,650

    Pro forma income tax adjustment .....          --             --          --           104,809
                                           ------------   ------------   ---------   -------------
BALANCE AT JUNE 30, 1998 ................  $    (52,500)  $    (30,000)  $    --     $   6,889,031
                                           ------------   ------------   ---------   -------------
    Amortization of deferred compensation          --           30,000        --            30,000

    Issuance of common stock ............          --             --          --            48,900

    Tax benefit derived from exercise of
             stock options ..............          --             --          --            98,340

    Payment of shareholder note .........        35,000           --          --            35,000

    Purchase of Treasury stock ..........          --             --      (291,125)       (291,125)

    Net income ..........................          --             --          --           838,241
                                           ------------   ------------   ---------   -------------
BALANCE AT JUNE 30, 1999 ................  $    (17,500)  $       --     $(291,125)  $   7,648,387
                                           ============   ============   =========   =============
</TABLE>
                       See notes to financial statements.

                                      F-5
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                     YEARS ENDED JUNE 30,
                                                                   --------------------------
                                                                       1999           1998
                                                                   -----------    -----------
<S>                                                                <C>            <C>
Operating Activities:
     Net income ................................................   $   838,241    $   784,650
     Noncash items in net income:
        Depreciation and amortization ..........................       469,229        349,716
        Gain on disposal of property and equipment .............          --             (849)
        Deferred income tax expense (benefit) ..................       (51,000)        18,000
     Changes in operating working capital:
        Accounts receivable ....................................      (676,356)      (866,878)
        Notes receivable .......................................       157,311        (81,667)
        Inventories ............................................      (133,946)      (157,324)
        Prepaid expenses and other .............................      (161,882)        10,551
        Income taxes payable/receivable ........................      (169,012)       121,588
        Accounts payable .......................................       619,800        201,076
        Accrued liabilities ....................................       203,014       (286,841)
        Deposits and other .....................................       (65,374)       (97,572)
                                                                   -----------    -----------
            Net cash provided by (used for) operating activities     1,030,025         (5,550)
     Income tax expense  (A) ...................................          --          104,809
                                                                   -----------    -----------
            Historical net cash provided by operating activities     1,030,025         99,259
                                                                   -----------    -----------

Investing Activities:
     Additions to property and equipment .......................      (811,020)      (444,449)
     Proceeds from sale of property and equipment ..............          --            2,500
     Acquisition - Harvard furniture line ......................       (55,101)      (730,834)
                                                                   -----------    -----------
            Net cash used for investing activities .............      (866,121)    (1,172,783)
                                                                   -----------    -----------
Financing Activities:
     Issuance of debt ..........................................        25,239           --
     Payments on debt ..........................................       (35,939)       (27,782)
     Repayment of shareholder note .............................        35,000         43,345
     Distributions to S Corp shareholders ......................          --         (235,000)
     Purchase treasury stock ...................................      (291,125)          --
     Proceeds from issuance of common stock ....................        48,900      5,400,000
     Stock offering costs ......................................          --       (1,030,775)
                                                                   -----------    -----------
            Net cash provided by (used for) financing activities      (217,925)     4,149,788
                                                                   -----------    -----------
Increase (Decrease) in Cash and Cash Equivalents ...............       (54,021)     3,076,264

Cash and Cash Equivalents:
     Beginning of period .......................................     3,370,278        294,014
                                                                   -----------    -----------
     End of period .............................................   $ 3,316,257    $ 3,370,278
                                                                   ===========    ===========
Supplemental Information:
     Interest paid .............................................   $    49,366    $    63,076
                                                                   ===========    ===========
     Income taxes paid .........................................   $   725,541    $   215,704
                                                                   ===========    ===========
</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 $420,190 and $311,000 in fiscal 1999 and 1998, respectively.

      INCOME TAXES were not recorded by the Company for a portion of fiscal 1998
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.

                                       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 both
fiscal 1999 and 1998, both calculations include the effects of the additional
900,000 shares issued in the initial public offering in October 1997 and
excluded common stock warrants which were anti-dilutive.

      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"). 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 and expire
October 24, 2002.

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 $226,791, net of
amortization of $62,835 as of June 30, 1999, 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,
                                                                      1999
                                                                   ----------
     Land......................................................      $ 90,250
     Building..................................................       534,750
     Building improvements.....................................       400,160
     Machinery and equipment...................................     1,357,845
     Furniture and fixtures....................................       543,727
     Automobiles and trucks....................................        79,499
                                                                   ----------
       Subtotal................................................     3,006,231
     Less accumulated depreciation.............................       799,414
                                                                   ----------
       Total...................................................     2,206,817
     Deposits on machinery, equipment and other................        70,665
                                                                   ----------
       Property and equipment - net............................    $2,277,482
                                                                   ==========

                                       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,
                                                                         1999
                                                                      ----------
      Revolving line of credit, up to $2,000,000; interest at
        prime plus .5% (8.25% at June 30, 1999) payable monthly;
        principal due August 21, 2000............................     $     --
      Note payable to bank in monthly installments of $5,300,
        including interest at 8.25%,  maturing in May 2003.......        437,657
      Term loan payable in monthly installments of $1,456,
        including interest at 8.25%, maturing in May 2011........        131,291
      Note payable to GMAC in monthly  installments of $1,061,
        including interest at 8.25%, maturing in December 2001...         25,238
                                                                      ----------
      Total long-term debt.......................................        594,186
      Less current  portion......................................         43,632
                                                                      ----------
      Long-term debt - less current portion......................     $  550,554
                                                                      ==========

      Annual maturities of long-term debt - less current portion at June 30,
1999, are as follows:

        Year ending June 30:
               2001................................    $ 47,372
               2002................................      41,273
               2003................................     361,971
               2004................................       9,586
               2005................................      10,437
               Thereafter..........................      79,915
                                                       --------
                    Total..........................    $550,554
                                                       ========

      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,
1999, 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, 1999, 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, 1999, of $437,657 and $131,291, 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, 1999, the Company has authorized 14,000,000 shares of common
stock, $0.01 par value, of which 3,308,800 shares were issued. Of the 3,308,800
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 has also 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 at June 30, 1999.

      At June 30, 1999, 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 and
expire October 24, 2002. 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.

      In May 1999, the Company acquired 137,000 shares of common stock to be
held in treasury for $291,125. The stock was acquired from Mr. Campbell, former
President, in conjunction with his resignation from the Company. In addition,
four officers of the Company purchased an additional 63,000 shares of common
stock from Mr. Campbell.

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, and
on October 12, 1998. In May, 1999, in conjunction with the resignation of Mr.
Campbell as discussed in footnote 6 above, the Company repurchased the remaining
100,000 options from Mr. Campbell for $190,000. As such, the Company had no
outstanding options under the Plan remaining as of June 30, 1999.

      The Company applies the provisions of APB No. 25 and related
Interpretations in accounting for its stock option plan. Under the 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
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 for fiscal 1998 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 the Plan 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, 1999, the notes receivable totaled
$32,225, consisting of $17,500 for



                                      F-10
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

the exercise of options (included in shareholders' equity) and $14,725 to cover
income taxes of the optionees (included in total assets). In May, 1999, Mr.
Campbell repaid in full notes owed to the Company in the amount of $138,450 plus
accrued interest of $23,214 in conjunction with his resignation. 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 "1997 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 Revenue Code, stock
appreciation rights and restricted stock.

      The following information summarizes the shares subject to options, under
the 1997 Plan:

<TABLE>
<CAPTION>
                                                                      WEIGHTED AVERAGE
                                                                       EXCERCISE PRICE
                                             NUMBER OF SHARES            PER SHARE
                                           --------------------     --------------------
                                             1999         1998         1999        1998
                                           -------       ------     ----------    ------
<S>                                         <C>                     <C>           <C>
Options outstanding, beginning of year      83,565         --       $    4.974    $  --
Granted ..............................       4,000       87,375          2.969     4.963
Terminated ...........................     (16,710)      (3,810)         3.342     4.707
                                           -------       ------
Options outstanding, end of year .....      70,855       83,565          5.251     4.974
                                           =======       ======
Options exercisable, end of year .....      37,230         --            4.918       --
                                           =======
Reserved for future options
  at June 30, 1999 ...................     108,625
                                           =======
</TABLE>
      The following table summarizes additional information about stock options
outstanding and exercisable under the 1997 Plan at June 30, 1999:

                               OPTIONS OUSTANDING            OPTIONS EXERCISABLE
                    ---------------------------------------  -------------------
                                   WEIGHTED       WEIGHTED              WEIGHTED
                                    AVERAGE        AVERAGE               AVERAGE
RANGE OF EXERCISE   NUMBER OF      REMAINING      EXCERCISE   NUMBER OF EXERCISE
     PRICES          SHARES     CONTRACTUAL LIFE    PRICE       SHARES    PRICE
-----------------   ---------   ----------------  ---------  ---------- --------
 $1.937 - $3.500       16,355        0.825 years     $2.634      12,855   $2.642
 $4.000 - $6.125       54,500        1.830           $6.036      24,375   $6.119
                     --------                                   -------
 $1.937 - $6.125       70,855        1.598           $5.251      37,230   $4.918
                     ========                                   =======

      The exercise price, term and other conditions applicable to each option
granted under the 1997 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 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 stock of $6.125 per share over the exercise price of $2 per
share, and is amortized over the vesting period of one year. For fiscal year
1999 and 1998, amortization of $30,000 and $39,609, respectively, is included in
selling, general and administrative expenses.

                                      F-11
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      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:


                                        1999         1998
                                      ---------   ----------
               Pro forma net income   $ 791,000   $  739,000
                                      =========   ==========
               Pro forma EPS:
                    Basic             $     .24   $      .24
                                      =========   ==========
                    Diluted           $     .24   $      .24
                                      =========   ==========

      In the pro forma calculations, the weighted average fair value of options
granted in fiscal 1999 and 1998 was estimated at $1.668 and $3.647 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
5.20% and 5.75%, no dividend yield, expected lives of five years and volatility
of 60%.

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.

      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 for a portion of
1998. The tax effects of significant items comprising the Company's net deferred
tax assets and liabilities as of June 30, 1999, are as follows:

Current asset:

  Accrued expenses not currently deductible                          $   89,000
  Valuation allowances for receivables and inventories not
    currently deductible                                                 45,000
  Inventory costs capitalized for tax purposes                           30,000
                                                                     -----------
Total                                                                   164,000
Noncurrent asset (liability):
  Research and development costs expensed for tax purposes           $ (205,000)
  Depreciation for tax purposes                                          74,000
                                                                     -----------
Net deferred tax asset                                                 (131,000)
                                                                     -----------
                                                                     $   33,000
                                                                     ===========
      Deferred tax assets are believed to be realizable. No valuation allowance
has been set up at this time.

                                      F-12
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                      NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      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.

      Income tax expense consists of the following:

                                                   1999          1998
                                                -----------   ----------
      Historical  current (federal and state)   $   540,794   $  337,292
      Deferred tax expense (benefit)                (51,000)      18,000
      Pro forma federal income tax adjustment           --       104,809
                                                -----------   ----------
                                                $   489,794   $  460,101
                                                ===========   ==========

      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:

                                                      1999           1998
                                                   ----------     -----------
 Computed tax at statutory rate                    $  451,532     $   294,516
 Income-based  state taxes,  net of federal income     30,801          26,312
 Pro forma federal income tax adjustment                  --          104,809
 Nondeductible expenses                                 6,297           9,994
 Other                                                  1,164          24,470
                                                   ----------     -----------
    Income tax expense                             $  489,794     $   460,101
                                                   ==========     ===========

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:

                                             1999                   1998
                                      --------------------  --------------------
                                                 ACCOUNTS              ACCOUNTS
                                      SALES     RECEIVABLE  SALES     RECEIVABLE
                                      -----     ----------  -----     ----------
   General Services Administration     23%          25%      15%          13%
   Relax the Back                      14%          14%      15%          15%
   United Parcel Service                7%           5%       9%          19%

      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 mechanism, 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.

                                      F-13
<PAGE>
                        NEUTRAL POSTURE ERGONOMICS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      Future minimum payments under all noncancelable operating lease
obligations, including an estimated pro rata share of operating expenses, as of
June 30, 1999, are as follows:

       YEAR ENDING
         JUNE 30:
       -----------
           2000.......................................     $ 58,872
           2001.......................................       58,872
           2002.......................................       51,516
           2003.......................................        3,980
                                                           --------
           Total minimum lease  payments..............     $173,240
                                                           ========

      Rent expense for fiscal 1999 and 1998, totaled $110,449 and $79,619,
respectively, which includes the Company's share of executory costs associated
with its office leases.

      ROYALTIES - In March 1997, the Company acquired the patent (Note 1) from
the 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 1999 and 1998.

      RELATED PARTY TRANSACTIONS - The Company paid Dr. Congleton, spouse of a
major shareholder, approximately $32,000 to provide ergonomic consulting to or
for the Company.

      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. In June 1998 the Company filed a response with the
Court denying such allegations. In May 1998, the Company also filed a 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. On February 12, 1999, the Company, Destech and AGI
settled both lawsuits and released each other from all claims in exchange for
the payment of $3,000 by the Company to Destech.

                                      *****

                                      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*(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*(1)   -  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*(1)   -  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*(1)   -  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*(1)   -  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*(1)  -  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*(1)  -  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*(1)  -  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*(1)  -  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*(1)  -  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*(1)  -  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*(1)  -  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*(1)  -  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*(1)  -  Neutral Posture Ergonomics, Inc. 1997 Omnibus Securities Plan,
              dated as of September 22, 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 (Form 10-KSB, June 30,
              1998, Exhibit 10.34)

10.35      -  Bill of Sale and Release Agreement, dated as of May 17, 1999,
              between the Company and David W. Campbell.

27.1       -  Financial Data Schedule

--------

     *  Incorporated herein by reference
    (1) This exhibit is a management contract or compensatory plan or agreement.

                                       X-2