AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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ADVANCED NUTRACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 2834
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)

76-0581202
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

---------------
BARRY C. LODER
PRESIDENT
500 METUCHEN ROAD
SOUTH PLAINFIELD, NEW JERSEY 07080
(908) 668-0088
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)

---------------
COPIES TO:

PAUL, HASTINGS, JANOFSKY & WALKER LLP LATHAM & WATKINS
555 SOUTH FLOWER STREET, 23RD FLOOR 633 WEST FIFTH STREET
LOS ANGELES, CALIFORNIA 90071-2371 LOS ANGELES, CALIFORNIA 90071-2007
ATTENTION: DAVID L. GERSH, ESQ. ATTENTION: GARY OLSON, ESQ.

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE

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- ------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF REGISTRATION
TITLE OF EACHCLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) FEE
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Common Stock, $.001 par
value..................... $69,000,000 $20,355
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 1998

PROSPECTUS
5,000,000 SHARES

[LOGO]

ADVANCED NUTRACEUTICALS, INC.

COMMON STOCK

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All of the 5,000,000 shares of Common Stock offered hereby are being offered
by Advanced Nutraceuticals, Inc. ("Advanced Nutraceuticals" or "ANI"). Prior to
the Offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price for
the Common Stock will be between $ and $ per share. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The Company intends to apply for listing on the Nasdaq National
Market under the reserved symbol "ANUI," subject to official notice of
issuance.

-----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 10 HEREOF.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share................................. $ $ $
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Total(2).................................. $ $ $
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(1) Excludes the value of warrants to purchase up to 200,000 shares of Common
Stock (230,000 shares of Common Stock if the Underwriters exercise their
over-allotment option in full) at an exercise price equal to 120% of the
initial public offering price per share to be issued to Sutro & Co.
Incorporated upon the closing of the Offering. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."

(2) Before deducting expenses of the Offering payable by the Company, estimated
at $ . See "Use of Proceeds."

(3) The Company has granted the Underwriters a 45-day option to purchase up to
750,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $ , $
and $ , respectively. See "Underwriting."

-----------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Sutro & Co. Incorporated, San Francisco, California on or about
, 1998.

SUTRO & CO. INCORPORATED

The Date Of This Prospectus Is , 1998.

(inside front cover)

Advanced Nutraceuticals has entered into agreements to acquire four
companies (the "Founding Companies") simultaneously with the closing of the
Offering. The Founding Companies, which have been in business an average of
approximately eighteen years, had pro forma combined revenues of $50.8 million
for the year ended December 31, 1997 and $33.7 million for the six months
ended June 30, 1998.

[PICTURES AND GRAPHICS--GATEFOLD, SHOWING MAP OF UNITED STATES WITH FOUNDING
COMPANY HEADQUARTERS]

Picture: Echinacea purpurea Picture: Ginkgo biloba
Caption: "Maintains Healthy Immune Caption: "Enhances Memory Function"*
Function"*
Picture: St. John's wort Picture: Saw palmetto
Caption: "Positive Mood Caption: "Enhances Prostate Health"*
Enhancement"*
Picture: Ginseng Picture: Goldenseal
Caption: "Enhances Physical Caption: "Enhances Immune Function"*
Endurance"*
Picture: Cranberry Picture: Kava kava
Caption: "Maintains Healthy Urinary Caption: "Enhances Relaxation"*
Tract"*
Picture: Granulation Drying Ovens Picture: Tablet Press
Picture: Powdered Herbs Picture: Bottling
Picture: Blending Picture: Coating
Picture: Encapsulation Picture: In-House Laboratories
Picture: Cryogenic Processing

* Statements are based on commonly accepted uses. When sold, products
incorporating these ingredients and bearing these statements are normally
accompanied by a disclaimer to the following effect: This statement has not
been evaluated by the FDA and this product is not intended to diagnose,
treat, cure or prevent disease.

Advanced Nutraceuticals was formed to create a full-service, vertically
integrated manufacturing and supplier of quality nutritional supplements,
herbs and extracts. Following consummation of the Mergers, the Company will
continue to provide contract manufacturing of tablets, capsules and powders,
and will source, process and supply powdered herbs and extracts.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent auditors and with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.

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

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

PROSPECTUS SUMMARY

ANI HAS ENTERED INTO SEPARATE AGREEMENTS PROVIDING FOR TRANSACTIONS (THE
"MERGERS") TO ACQUIRE, SIMULTANEOUSLY WITH, AND AS A CONDITION TO, THE CLOSING
OF THE OFFERING MADE BY THIS PROSPECTUS (THE "OFFERING"), FOUR COMPANIES
ENGAGED IN THE NUTRITIONAL INDUSTRY (EACH A "FOUNDING COMPANY" AND
COLLECTIVELY, THE "FOUNDING COMPANIES") IN EXCHANGE FOR CASH, PURCHASE NOTES
AND ANI'S COMMON STOCK. THE FOUNDING COMPANIES ARE: ACTA PRODUCTS
INTERNATIONAL, INC. (DBA ACTA INTERNATIONAL) AND ACTA PRODUCTS CORPORATION (DBA
ACTA PHARMACAL CO.) FOUNDED IN 1995 AND 1972, RESPECTIVELY, (COLLECTIVELY,
"ACTA"); QUALITY BOTANICAL INGREDIENTS, INC. FOUNDED IN 1983 ("QBI");
NORTHRIDGE LABORATORIES, INC. FOUNDED IN 1967 ("NORTHRIDGE"); AND BACTOLAC
PHARMACEUTICALS, INC. FOUNDED IN 1995 ("BACTOLAC"). UNLESS OTHERWISE INDICATED,
ALL REFERENCES TO THE "COMPANY" HEREIN INCLUDE ANI AND THE FOUNDING COMPANIES,
AND REFERENCES HEREIN TO "ADVANCED NUTRACEUTICALS" MEAN ADVANCED
NUTRACEUTICALS, INC. PRIOR TO THE CONSUMMATION OF THE MERGERS.

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE PRO FORMA COMBINED FINANCIAL
STATEMENTS, THE INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS OF EACH FOUNDING
COMPANY AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. UNLESS OTHERWISE
INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN
(a) HAVE BEEN ADJUSTED TO GIVE EFFECT TO CONSUMMATION OF ALL OF THE MERGERS;
(b) ASSUME AN INITIAL PUBLIC OFFERING PRICE OF $ PER SHARE; (c) GIVE EFFECT
TO THE MERGER OF A PREDECESSOR COMPANY WITH ANI EFFECTED IN SEPTEMBER, 1998
(THE "ORGANIZATIONAL MERGER") (SEE "DESCRIPTION OF CAPITAL STOCK") AND (d)
ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

THE COMPANY

Advanced Nutraceuticals, Inc. was formed to create a full-service, vertically
integrated manufacturer and supplier of quality nutritional supplements, herbs
and extracts. Following consummation of the Mergers, the Company will continue
to provide contract manufacturing of tablets, capsules and powders, and will
source, process and supply powdered herbs and extracts. See "Business--Products
and Services."

The principal strength of the Company is its ability to provide a diversified
line of products and services to its customers. With Northridge, ACTA, QBI and
Bactolac having conducted business in the nutritional industry for 31, 26, 15
and 3 years, respectively, the Founding Companies have 75 years of combined
operating history. The Company works closely with customers to create
innovative solutions ranging from research and development through consumer-
level branding initiatives. The Company believes it will benefit from the
collective strengths of ACTA, QBI, Northridge and Bactolac in sourcing and
processing herbs and extracts, and contract manufacturing of custom
formulations. The Company's manufacturing services are tailored to customer
specifications and quality requirements and often include additional value-
added services such as custom packaging and design.

The Founding Companies presently derive revenues from contract manufacturing,
and processing and supplying herbs and extracts. Manufacturing services are
provided by ACTA, Northridge and Bactolac. For the

six months ended June 1998, these services generated $18.2 million or a 16.3%
increase over the same period in 1997 and comprised approximately 54.2% of the
Company's combined net sales. In 1997, contract manufacturing generated $28.2
million or approximately a 46.2% increase in such net sales over 1996. ACTA and
QBI source, process and supply herbs and extracts used in nutritional
supplements and related products. For the six months ended June 30, 1998, these
activities generated $15.4 million or a 40.7% increase over the same period in
1997 and comprised approximately 45.8% of the Company's net sales. In 1997,
herbal powders and extract activities generated $22.6 million or a 45.6%
increase in such net sales over 1996. In 1997, the Company sold over 1.0
million kilograms representing over 500 herbal products and extracts.

Over the past three years, the Company has experienced rapid growth in net
sales and gross profit. From 1995 to 1997, net sales and gross profit have
grown at compound annual growth rates of 44.8% and 33.1%, respectively. Net
sales were $50.8 million and $33.7 million and gross profit was $15.2 million
and $10.9 million in 1997 and for the six months ended June 30, 1998,
respectively.

A 1997 market report, "The U.S. Market for Vitamins, Supplements and
Minerals," prepared by the independent consumer marketing research firm of
Packaged Facts (the "Packaged Facts Report"), reported that the retail market
for vitamins, minerals and other dietary and nutritional supplements (excluding
sports nutrition and diet products) grew at a compound annual rate of 15% from
$3.7 billion in 1992 to $6.5 billion in 1996. A large portion of this growth is
attributable to an increase in sales of such other supplements (primarily
herbal products), which grew from $570 million in 1992 to $2.3 billion in 1996.
This growth has been fueled by the popularity of such herbs as echinacea,
garlic, ginseng, ginkgo biloba and, more recently, saw palmetto, St. John's
wort and kava kava. The Packaged Facts Report forecasts 13.6% compound annual
growth in the retail market for vitamins, minerals and other supplements
(excluding sports nutrition and diet products), including 25% compound annual
growth in the market for other supplements, through 2001. According to the
Packaged Facts Report, compound annual growth rates from 1992 through 1996 for
vitamins, minerals and other supplements were 8.0%, 5.2% and 41.7%,
respectively.

The Nutrition Business Journal reported in July 1997 that there are nearly
5,000 privately held companies with under $25 million in annual sales in the
retail and manufacturing segments of the nutritional industry. These businesses
typically are owner-operated and often have limited access to the capital
necessary to develop and maintain inventory of large volume and wide
selections, expand product offerings, implement advanced management information
systems, incorporate the use of sophisticated technological equipment, conduct
research and development and service national and regional accounts.

THE COMPANY'S COMPETITIVE STRENGTHS

Wide Range of Products and Manufacturing Services--Enables the Company to
offer services ranging from a single step in the production process to a
complete, "turn-key" manufacturing solution.

Experienced Management--Six senior managers of the Company with a combined 67
years of industry experience and relationships.

Technical Expertise--Allows manufacturing of complex and difficult products
and, through the Company's patent pending cryogenic milling, unique processing
of products.

Strong Vendor Relationships--Allows greater access to herbs and extracts
including some that are in scarce supply.

Quality Control Procedures--Designed to promote uniform product quality and
potency to customer specifications.

STRATEGY

The Company was formed to capitalize on opportunities to integrate and
consolidate the highly fragmented nutritional industry. The Company's strategy
is to (i) support and expand the operations of the Founding Companies, (ii)
capitalize on operating synergies and cost savings available through
consolidation and (iii) pursue an acquisition program designed to further
vertical integration and to expand existing operations. The Mergers involving
the Founding Companies are intended to be the first step in this process.

Support and Expand Operations of the Founding Companies. Management intends
to support each Founding Company's efforts to pursue its existing internal
growth plan. The Company also intends to foster growth through the following
initiatives:

. Enhance management strengths through sharing of core competencies and
existing expertise.

. Expand and coordinate marketing opportunities among the Founding
Companies.

. Develop customized solutions that utilize expertise and experience of
each of the Founding Companies.

. Encourage entrepreneurial initiatives.

. Achieve consistently high quality products and services by implementing
a company-wide quality program.

Capitalize on Operating and Cost Synergies Available Through
Consolidation. The Company's strategy includes exploiting opportunities created
by the Merger:

. Implementing a focused company-wide marketing program.

. Cross-selling opportunities to existing customers.

. Capitalizing on its increased national presence.

. Marketing to new and existing customers through an expanded sales force.

. Improving operating efficiencies by promoting core-competencies.

. Providing a company-wide management information system designed to
enhance sales and management.

. Maximizing increased purchasing power to gain volume discounts.

Growth through Acquisitions. The Company intends to pursue an acquisition
program designed both to further its vertical integration and to expand the
existing operations of the Founding Companies. The Company believes that there
are many attractive acquisition candidates in the nutritional industry. This is
due principally to the highly fragmented nature of the industry and the large
number of smaller companies in the industry having under $25 million in annual
sales. In many cases, these companies have needs that are difficult for small
businesses to meet, such as capital for growth and expansion, owners' desires
for liquidity, the ability to attract high caliber management talent and other
factors which motivate these owners to consider strategic alternatives.

THE OFFERING

Common Stock offered by the
Company.................... 5,000,000 shares

Common Stock to be
outstanding after the
Offering................... [ ] shares(1)(2)

Use of Proceeds............. To pay the cash portion of the purchase price for
the Founding Companies, to repay certain
outstanding indebtedness of the Founding
Companies, to pay transaction expenses related to
the Mergers and the Offering and for general
corporate purposes, including potential future
acquisitions. See "Use of Proceeds."

Nasdaq National Market
symbol..................... [ANUI]
- --------
(1) Includes [ ] shares of Common Stock to be issued in connection with the
Mergers, but excludes 558,800 shares of Common Stock subject to options to
be granted upon consummation of the Offering at an exercise price equal to
the initial public offering price. See "Management--1998 Stock Option Plan"
and "--Non-Discretionary Stock Option Plan."

(2) Includes 2,388,000 shares of Common Stock sold in a private offering in
June 1998 and shares issued to founders of and certain consultants to
Advanced Nutraceuticals, Inc. during December 1997.

SUMMARY PRO FORMA COMBINED FINANCIAL DATA

Advanced Nutraceuticals has entered into definitive agreements to acquire the
Founding Companies simultaneously with and as a condition to consummation of
the Offering. For financial statement presentation purposes, ACTA has been
identified as the "accounting acquirer." The historical combined net sales,
cost of goods sold and gross profit presented below for the periods indicated
do not represent combined results of operations presented in accordance with
generally accepted accounting principles, but are only a summation of the
actual historical results, including the acquisition (the "BPI Acquisition") by
QBI of Botanical Products International, Inc. ("BPI") in August 1998. The
unaudited pro forma combined financial data for the Company as presented below
has been adjusted to give effect to (i) the Mergers, (ii) certain pro forma
adjustments to the historical financial statements described below, including
the BPI Acquisition and (iii) the consummation of the Offering and the
application of the net proceeds therefrom. See "Selected Financial Data," the
Unaudited Pro Forma Combined Financial Statements and the Notes thereto and the
historical Financial Statements of Advanced Nutraceuticals and certain of the
Founding Companies and the Notes thereto included elsewhere in this prospectus.

HISTORICAL COMBINED DATA
(IN THOUSANDS)

SIX MONTHS ENDED
FISCAL YEARS ENDED(1) JUNE 30,(2)
----------------------------------- -----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------- --- ------- --- ------- --- ------- --- ------- ---

Net sales............... $24,257 100 $34,826 100 $50,825 100 $24,090 100 $33,651 100
Cost of goods sold...... 15,703 65 23,468 67 35,671 70 16,340 68 22,717 68
------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............ 8,554 35 11,358 33 15,154 30 7,750 32 10,934 32

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(1) The fiscal years presented are as follows: ACTA, QBI and Bactolac--the
years ended December 31 for all periods presented; Northridge--the years
ended September 30 for all periods presented.

(2) Includes Northridge's results for the second and third quarters of its
fiscal year.

PRO FORMA COMBINED

TWELVE MONTHS
ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
1997 30, 1998
------------- ----------
(IN THOUSANDS EXCEPT
SHARE AND PER SHARE
DATA)

INCOME STATEMENT DATA(1)
Net sales........................................... $50,825 $33,651
Gross profit........................................ 15,154 10,934
Selling, general and administrative(2).............. 8,267 4,942
Goodwill amortization(3)............................ 1,826 913
Earnings from operations............................ 5,061 5,079
Interest and other income (expense), net ........... (1,460) (390)
Earnings before income taxes........................ 3,601 4,688
Net earnings(4)..................................... 1,430 2,447
Net earnings per share basic and diluted............ [ ] [ ]
Shares used in computing pro forma net earnings per
share basic and diluted(5)......................... [ ] [ ]

JUNE 30, 1998
----------------------
PRO FORMA AS
COMBINED ADJUSTED(7)
--------- -----------

BALANCE SHEET DATA(6)
Working capital (deficit)(8)........................... $(35,293) [ ]
Total assets........................................... 102,097 [ ]
Long-term debt, net of current maturities(9)........... 2,873 2,873
Stockholders' equity(10)............................... 40,855 [ ]

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(1) The pro forma combined income statement data assume that each of the
Mergers and the BPI Acquisition were consummated on January 1, 1997 and
are not necessarily indicative of the results the Company would have
obtained had these events actually then occurred or of the Company's
future results.

(2) The pro forma combined income statement data reflect an aggregate of $5.9
million for the twelve months ended December 31, 1997 and $1.2 million for
the six months ended June 30, 1998 in pro forma reductions in salaries,
bonuses and benefits to the owners of the Founding Companies to which they
have agreed prospectively (the "Compensation Differential") and includes
the non-recurring, non-cash compensation charge of $3.0 million recorded
in 1997 relative to 1,800,000 shares issued to founders of and consultants
to ANI at $.008 per share in December 1997.

(3) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.

(4) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.

(5) Includes (i) [ ] shares to be issued to owners of the Founding Companies
and (ii) [ ] of the 5,000,000 shares sold in the Offering necessary to
pay the cash portion of the Merger consideration and expenses of the
Offering.

(6) The pro forma combined balance sheet data assume that the Mergers were
consummated on June 30, 1998.

(7) Adjusted for the sale of the 5,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."

(8) Pro forma combined includes $37.6 million in notes payable to owners of
the Founding Companies representing the cash portion of the Merger
consideration to be paid from a portion of the net proceeds of the
Offering.

(9) Includes $1.3 of the $2.5 million in notes to be issued to selling
stockholders of Northridge and Bactolac as a portion of the consideration
paid for the acquisitions.

(10) In connection with the Mergers, certain of the Founding Companies will
make distributions to their stockholders totaling $1.8 million.

SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA

The following table presents summary income statement data for the Founding
Companies for each of their three most recent fiscal years. Earnings from
operations has not been adjusted for the Compensation Differential or to take
into account increased costs associated with the Company's new corporate
management and with being a public company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Introduction."

SIX MONTHS
ENDED
FISCAL YEARS ENDED(1) JUNE 30,(2)
------------------------ --------------
1995 1996 1997 1997 1998
------ ------- ------- ------ -------
(IN THOUSANDS)

ACTA:
Net sales............................. $9,531 $14,391 $18,723 $9,305 $11,592
Earnings from operations.............. 986 438 1,534 1,973 2,220
QBI:(3)
Net sales............................. 7,349 11,406 15,568 7,658 10,941
Earnings from operations.............. 962 820 406 141 1,057
Northridge:
Net sales............................. 7,148 7,622 11,532 5,104 7,476
Earnings (loss) from operations....... 443 (74) 1,069 414 602
Bactolac:(4)
Net sales............................. 229 1,406 5,002 2,023 3,642
Earnings (loss) from operations....... (2) 196 954 413 942

- --------
(1) The fiscal years presented are as follows: ACTA, QBI and Bactolac the years
ended December 31 for all periods presented; Northridge the years ended
September 30 for all periods presented.

(2) Includes Northridge's results for the second and third quarters of its
fiscal year.

(3) Includes QBI's wholly owned subsidiary BPI which began operations in late
1995 and was acquired by QBI in August 1998. The pro forma combined results
presented for QBI and BPI are not necessarily indicative of the combined
results had QBI owned BPI for the periods presented.

(4) Bactolac began operations in October 1995.

RISK FACTORS

An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other information in this
Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock.

ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING COMPANIES

ANI was founded in September 1997 (and reincorporated in Delaware in
September 1998) but has conducted no operations and generated no revenues to
date. ANI has entered into definitive agreements to acquire the Founding
Companies simultaneously with, and as a condition to, the closing of the
Offering. The Founding Companies have been operated as separate independent
entities, and there can be no assurance that the Company will be able to
integrate the operations of these businesses successfully or to institute the
necessary systems and procedures, including accounting and financial reporting
systems, to manage the combined enterprise on a profitable basis and to report
the results of the operations of the combined entities on a timely basis. The
Company's management team has been assembled only recently, and there can be
no assurance that the management team will be able to manage the combined
entity or to effectively implement the Company's internal growth and
acquisition strategies. The pro forma combined historical financial results of
the Founding Companies cover periods when the Founding Companies and ANI were
not under common control or management and may not be indicative of the
Company's future financial or operating results. The inability of the Company
to integrate the Founding Companies successfully would have a material adverse
effect on the Company's business, financial condition and results of
operations and would make it unlikely that the Company's acquisition strategy
will be successful. See "Business--Strategy" and "Management."

RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY

Key components of the Company's strategy are to increase the profitability
and to continue the internal growth of the Founding Companies and subsequently
acquired businesses. The Company intends to operate on a decentralized basis
and attract and retain quality labor and supervisory personnel. Without proper
overall business controls, the Company's decentralized operating strategy
could result in inconsistent operating and financial practices at the Founding
Companies and subsequently acquired businesses. This could adversely affect
the Company's business, financial condition and results of operations, as
could the Company's failure to attract and retain a sufficient number of
hourly and supervisory personnel to meet its staffing needs. The continued
internal growth of the Founding Companies and subsequently acquired businesses
will be affected by various factors, including the demand for nutritional
supplements and related products as well as the Company's ability to continue
and expand existing relationships and establish new relationships with
manufacturers and sellers of these products, expand the range of products and
services offered to meet its customers' requirements. Customer dissatisfaction
or performance problems at a single acquired company could have an adverse
effect on the reputation of the Company and hinder the Company's sales and
marketing initiatives. Some of these factors are beyond the Company's control,
and there can be no assurance that the Company's operating and internal growth
strategies will be successful or that the Company will be able to generate
sufficient cash flow to support both its operations and its continued internal
growth. See "Business--Strategy."

RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY

The Company intends to seek to acquire additional companies or business
units in the nutritional industry. The Company expects to face competition for
these acquisition candidates, particularly from a few relatively large public
or private companies that have begun or may begin to pursue the acquisition of
such companies. Many potential competitors for acquisition candidates have
greater financial resources and name recognition in the industry than the
Company. This competition may limit the number of acquisitions that the
Company is able to consummate and may lead to higher acquisition prices. There
can be no assurance that the Company will be able to identify, acquire or
manage profitably additional businesses or to integrate successfully any
acquired businesses into the Company without substantial costs, delays or
other operational or financial problems. Furthermore, acquisitions involve a
number of special risks, including failure to integrate effectively acquired

operations with existing operations, failure of the acquired business to
achieve expected results, diversion of management's attention, failure to
retain key personnel of acquired business and risks associated with
unanticipated events or liabilities, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if the Company were to acquire competitors
of significant customers, such customers could reduce the level of business
such entities do with the Company or cease such business altogether. There can
be no assurance that the Founding Companies or other businesses acquired in
the future will achieve anticipated revenues and earnings. See "Business--
Strategy."

RISKS RELATED TO ACQUISITION FINANCING

The timing, size and success of the Company's acquisition efforts and the
associated capital requirements cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its Common
Stock, which may comprise a significant portion of the acquisition
consideration. If the Common Stock does not maintain a sufficient market
value, if potential acquisition candidates are unwilling to accept Common
Stock as part of the consideration for the sale of their businesses or if the
Company's competitors offer acquisition candidates substantially more cash
than equity or debt securities, the Company may be required to utilize more of
its cash resources, if available, in order to initiate and maintain its
acquisition strategy. Upon completion of the Offering, the Company will have
$[ ] million of net proceeds from the Offering ($[ ] million if the
Underwriters' over-allotment option is exercised in full) remaining for
working capital, including future acquisitions, after payment of expenses
related to the Mergers and the Offering, the cash portion of the purchase
price for the Founding Companies and repayment of Founding Company debt. See
"Use of Proceeds." If the Company's cash resources after the Offering are
insufficient to effect its acquisition strategy, its growth will be limited
unless it is able to obtain additional capital through debt or equity
financings. While as of the date hereof the Company is in discussions with
several financing sources to obtain a credit facility, there can be no
assurance that the Company will be able to obtain the line of credit or
additional financing it will need to finance potential acquisition on terms
that the Company deems acceptable. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Combined Liquidity and
Capital Resources."

NEED FOR EFFECTIVE CONTROLS ON COMPANY'S EXPANSION

In addition to internal growth, the Company intends to expand its business
through the acquisition of other companies. Management expects to expend
significant time and effort in evaluating, completing and integrating
acquisitions. To manage its expansion, promptly after the Offering the Company
must establish accounting, financial reporting, financial control and other
operating systems and procedures. Thereafter, management must continually
evaluate the adequacy of those systems, procedures and controls and its
management structure. There can be no assurance that the Company's systems,
procedures and controls or its management structure will be adequate to
support the Company's operations as they expand. Failure to manage its growth
efficiently and effectively would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Strategy."

RISK OF AVAILABILITY AND COST OF SUPPLY SOURCES; DEPENDENCE ON FOREIGN
SUPPLIERS

The Company believes that its continued success will depend upon the
availability of raw materials that permit the Company to meet its quality
control standards and demand for required ingredients. The supply of herbal
products is subject to the same risks normally associated with agricultural
production, such as climactic conditions, insect infestations and availability
of manual labor or equipment for harvesting. There can be no assurance that
suppliers will provide the raw materials needed by the Company in the
quantities and of the quality requested or at a price the Company is willing
to pay. Any significant delay in or disruption of the supply of raw materials
could substantially increase the cost of such materials, require product
reformulations, require the qualification of new suppliers, require
repackaging and result in a substantial reduction or termination by the
Company of its sales of certain products. Any of these circumstances could
have a material adverse effect upon the Company.

The Company acquires greater than 50% of its raw materials from supply
sources outside of the United States. Consequently, the Company's business is
subject to the risks generally associated with doing business outside the
United States, such as delays in shipments, embargoes, changes in economic and
political conditions, tariffs, foreign exchange rates and trade disputes. The
Company's business is also subject to the risks associated with the enactment
of United States and foreign legislation and regulations relating to imports
and exports, including quotas, duties, taxes or other charges or restrictions
that could be imposed upon the importation of products into the United States.
These factors could result in a delay in or disruption of the supply of
certain raw materials and could have the consequences described in the
preceding paragraph, any of which could have a material adverse effect on the
Company. See "Business--Materials and Sources of Supply."

TRENDS IN THE NUTRITIONAL INDUSTRY; NEW PRODUCT SUPPORT

The nutritional industry is subject to rapidly changing consumer demands and
preferences. There can be no assurance that customers will continue to favor
the products provided and manufactured by the Company. A significant shift in
customer preferences could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, products
that gain wide acceptance with consumers may result in a greater number of
competitors entering the market which could result in downward price pressure
which could adversely impact the Company's gross profit margins. In addition,
many of the ingredients for the Company's products require long lead times for
growth and production for which the Company must buy or commit to buy long
before ultimate sale to its customers. There can be no assurance that
sufficient consumer demand will still exist at the time the final product is
available for sale or that gross profit margins will be maintained.

The Company believes its growth will be materially dependent upon its
ability to develop new techniques, processes and technical capabilities
necessary to meet the needs of its customers and potential customers. The
inability of the Company to anticipate and respond to these rapidly changing
demands could have an adverse effect on the Company. See "Business--Strategy."

GOVERNMENT REGULATION

The manufacture, packaging, labeling, advertising, promotion, distribution
and sale of the Company's products are subject to regulation by numerous
governmental agencies. The most active of these is the U.S. Food and Drug
Administration (the "FDA"). Through regulations promulgated, the FDA regulates
the Company's products under the Federal Food, Drug and Cosmetic Act (the
"FDCA") and the Dietary Supplement Health and Education Act (the "DSHEA"). The
Company's products are also subject to regulation by, among other regulatory
entities, the Consumer Product Safety Commission (the "CPSC"), and the U.S.
Department of Agriculture (the "USDA"). In addition, the Company's
manufacturing facilities are regulated by the Environmental Protection Agency
(the "EPA") and the Occupational Safety and Health Administration (the
"OSHA"). Advertising and other forms of promotion and methods of marketing of
the Company's products are subject to regulation by the U.S. Federal Trade
Commission (the "FTC"), which regulates these activities under the Federal
Trade Commission Act (the "FTCA"). The manufacturing, labeling and advertising
of the Company's products are also regulated by various states and local
agencies as well as those of each foreign country to which the Company
distributes its products. In particular, California's Safe Drinking Water and
Toxic Enforcement Act of 1986 ("Proposition 65") requires warnings on labels
of dietary supplements that contain chemicals listed by the state which are
known to cause cancer or reproductive toxicity.

The Company's manufactured products are generally regulated as dietary
supplements under the FDCA and DSHEA. Unless a claim is made that a dietary
supplement may be used to treat, mitigate, cure, prevent or diagnose a
specific disease, the Company's manufactured products are not subject to pre-
market approval by the FDA. However, these products are nonetheless subject to
extensive regulation by the FDA relating to adulteration and misbranding. For
instance, the Company is responsible for ensuring that all dietary ingredients
in a supplement are safe, must notify the FDA in advance of putting a product
containing a new dietary ingredient (i.e., an ingredient not marketed for use
as a supplement before October 15, 1994) on the market and furnish

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

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

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

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

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

unable to predict the nature of such future laws, regulations, interpretations
or applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
its business in the future. Such laws or regulations could, however, require
the Company to reformulate certain products to meet new standards or recall or
discontinuance of certain products that cannot be reformulated, impose
additional recordkeeping requirements, require expanded documentation of the
properties of certain products or expand or change requirements as to labeling
or scientific substantiation. Any or all of these requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Governmental Regulation."

DEPENDENCE ON SIGNIFICANT CUSTOMERS

As of June 30, 1998, no customer constituted more than 10% of the Company's
net sales. Since the Company generally does not produce products pursuant to
long-term contracts, there can be no assurance that the Company's larger
customers will continue as major customers of the Company. The loss of a major
customer, the loss of a significant number of customers, or a significant
reduction in purchase volume by, or financial difficulty of, such companies,
for any reason, could have a material adverse effect on the Company's
business, financial condition and results of operations.

COMPETITION

The nutritional industry is highly competitive. Numerous companies, many of
which are significantly larger than the Company, have greater financial,
personnel, distribution and other resources than the Company and may be better
able to withstand volatile market conditions, compete with the Company in
supplying herbs and extracts and in the development, manufacture and marketing
of nutritional supplements. The Company's principal competition comes from
domestic and foreign suppliers of raw materials, manufacturers and other
companies. With generally low barriers to entry, additional competitors could
enter the market. There can be no assurance that national or international
companies will not seek to enter, or increase their presence in, the industry
or that existing or potential customers will not expand, whether horizontally
or vertically and whether by acquisition or otherwise. In addition, large
nationally known companies (such as Weider Nutritional International, Inc.,
Twinlab Corporation, Solgar Vitamin and Holding Company, Rexall Sundown, Inc.,
Nature's Way Products, Botanicals International, Inc., Pure World, Inc. and
Triarco Industries, Inc.) and, on a limited basis, pharmaceutical and packaged
food and beverage companies, compete with the Company in this industry.
Competition from any of these companies could have a material adverse effect
on the Company. See "Business--Competition."

PRODUCT LIABILITY; POTENTIAL ADVERSE PRODUCT PUBLICITY

The Company, like any other wholesaler, retailer, distributor or
manufacturer of products that are designed to be ingested, faces an inherent
risk of exposure to product liability claims in the event that the use of its
products results in injury. The Company faces the risk that materials used in
the manufacture of final products may be contaminated with substances that may
cause sickness or injury to persons who have used the products, or that
sickness or injury to persons may occur if products manufactured by the
Company are ingested in dosages which exceed the dosage recommended on the
product label. In the event that insurance coverage or contractual
indemnification is not adequate, product liability claims could have a
material adverse effect on the Company. The successful assertion or settlement
of any uninsured claim, a significant number of insured claims, or a claim
exceeding the Company's insurance coverage could have a material adverse
effect on the Company.

The Company is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies. Thus, the mere publication of reports asserting that such products
may be harmful could have a material adverse effect on the Company, regardless
of whether such reports are scientifically supported and regardless of whether
the harmful effects would be present at the dosages recommended for such
products.

Management believes the nutritional industry is affected by national media
attention regarding the consumption of supplements. There can be no assurance
that future scientific research or publicity will be favorable to the
nutritional industry or any particular product. Future reports of research
that are perceived as

unfavorable could have a material adverse effect on the Company. Because of
the Company's dependence upon consumer perceptions, adverse publicity
associated with illness or other adverse effects of consumption of the
Company's products, or any similar products distributed by other companies
could have a material adverse impact on the Company. Such adverse publicity
could arise even if the adverse effects associated with such products resulted
from consumers' failure to consume such products as directed. The Company may
not be able to counter the effects of negative publicity concerning its
products or raw materials.

LIMITED AVAILABILITY OF CONCLUSIVE CLINICAL STUDIES

Although many of the ingredients in the Company's products are vitamins,
minerals, herbs and other substances for which there is a long history of
human consumption, some of the Company's products contain innovative
ingredients or combinations of ingredients. Although the Company believes all
of its products to be safe when used as directed, there is little long-term
experience with human consumption of certain of these product ingredients or
combinations thereof. Accordingly, no assurance can be given that the
Company's products, even when used as directed, will have the effects
intended. Although the Company tests the formulation and production of its
products, it has not sponsored or conducted clinical studies on the effects of
human consumption. See "--Product Liability; Potential Adverse Product
Publicity."

RISKS ASSOCIATED WITH MANUFACTURING AND PROCESSING

The Company's results of operations are dependent upon the continued
operation of its manufacturing and processing facilities in New Jersey, New
York and California at their current levels. The operation of nutritional
supplement manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural and other disasters,
and the need to comply with the requirements of government agencies, including
the FDA. Two of the Company's manufacturing facilities are located in
California in geographic areas that historically have been prone to
earthquakes, which in some cases have been catastrophic. Certain of the
Company's products and ingredients are processed by outside contractors. The
Company's profit margins on these products and its ability to deliver these
products on a timely basis are dependent on the ability of the outside
contractors to continue to supply products that meet the Company's quality
standards in a timely and cost-efficient manner. The occurrence of significant
operational problems at the facilities of the Company or its outside suppliers
could have a material adverse effect on the Company's business, financial
condition and results of operations during the period of such operational
difficulties. See "Business--Quality Control."

INTELLECTUAL PROPERTY PROTECTION

The Company relies on common law trademark rights to protect its
unregistered trademarks as well as its trade dress rights. Common law
trademark rights generally are limited to the geographic area in which the
trademark is actually used, while a United States federal registration of a
trademark enables the registrant to stop the unauthorized use of the trademark
by any third party anywhere in the United States. The protection available, if
any, in jurisdictions other than the United States may not be as extensive as
the protection available to the Company in the United States.

Although the Company seeks to avoid infringement on the intellectual
property rights of others, there can be no assurance that third parties will
not assert intellectual property infringement claims against the Company. Any
infringement claims by third parties against the Company may have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Intellectual Property Protection."

DEPENDENCE ON KEY PERSONNEL

The success of the Company will be largely dependent on the continuing
efforts of the persons who, following the consummation of the Mergers and the
Offering, will constitute its executive management and the senior management
of the Founding Companies, particularly Joseph Schortz, its President, David
Chang, its

Executive Vice President, Greg Pusey, its Chairman of the Board, Barry Loder,
its Senior Vice President--Finance and Brett Richman and Pailla Reddy,
Presidents of Northridge and Bactolac, respectively. The Company has entered
into employment and non-competition agreements with each of these individuals.
See "Management--Executive Compensation." Additionally, the Company likely
will depend on the senior management of any significant business it acquires
in the future. The business or prospects of the Company could be adversely
affected if any of these people, current or future, do not continue in their
management role until the Company is able to attract and retain qualified
replacements. The success of the Company will also depend on its ability to
attract and retain other qualified personnel. See "Management."

NO ASSURANCE OF FUTURE INDUSTRY GROWTH

There is limited reliable, comprehensive data available regarding the size
of the nutritional industry and the historic and future expected growth of
such industry. Industry data and projections are inherently uncertain and
subject to change. There can be no assurance that the industry is as large as
some publicly available reports indicate or that projected growth will occur
or continue. In addition, underlying market conditions are subject to change
based on economic conditions, consumer preferences and other factors that are
beyond the Company's control. There can be no assurance that an adverse change
in the size or growth rate of the nutritional product market will not have a
material adverse effect on the Company.

CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS

Following the completion of the Mergers and the Offering, the Company's
executive officers and directors, former stockholders of the Founding
Companies and entities and individuals affiliated with or related to them will
beneficially own approximately [ ]% of the outstanding shares of Common Stock
([ ]% if the Underwriters' over-allotment option is exercised in full). These
persons, if acting in concert, will be able to exercise control over the
Company's affairs, to elect the entire Board of Directors and to control the
outcome of any matter submitted to a vote of stockholders. See "Principal
Stockholders."

SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO STOCKHOLDERS OF FOUNDING COMPANIES

Of the net proceeds of the Offering, $37.6 million, or [ ]%, will be paid as
the cash portion of the purchase price for the Founding Companies. Some of the
recipients of these funds will become directors of the Company or holders of
more than 5% of the Common Stock. See "Use of Proceeds" and "Certain
Transactions."

NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE

Prior to the Offering, there has been no public market for the Common Stock.
Therefore, the initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives of the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after the Offering. See "Underwriting" for the factors to be
considered in determining the initial public offering price. There can be no
assurance that an active trading market will develop subsequent to the
Offering or, if developed, that it will be sustained. After the Offering, the
market price of the Common Stock may be subject to significant fluctuations in
response to numerous factors, including the timing of any acquisitions by the
Company, variations in the Company's annual or quarterly financial results or
those of its competitors, changes by financial research analysts in their
estimates of the future earnings of the Company, conditions in the economy in
general or in the Company's industry in particular, unfavorable publicity or
changes in applicable laws and regulations (or judicial or administrative
interpretations thereof) affecting the Company or the nutritional supplements
industry generally. From time to time, the stock market experiences
significant price and volume volatility, which may affect the market price of
the Common Stock for reasons unrelated to the Company's performance.

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK

Upon consummation of the Mergers and the Offering, [ ] shares of Common
Stock will be outstanding. The 5,000,000 shares sold in the Offering (other
than shares that may be purchased by affiliates of the Company) will be freely
tradable. The remaining outstanding shares may be resold publicly only
following their registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption from registration
(such as provided by Rule 144 following a one year holding period for
previously unregistered shares). The holders of these remaining shares have
certain rights to have their shares registered in the future under the
Securities Act, but may not exercise such registration rights, and have agreed
with the Company that they will not sell, transfer or otherwise dispose of any
of their shares, for twelve months following the consummation of the Offering,
at which time such holders will have piggyback registration rights with
respect to such shares and will have demand registration rights with respect
to such shares after eighteen months following the consummation of the
Offering. See "Shares Eligible for Future Sale." Upon consummation of the
Offering, the Company also will have outstanding options to purchase up to a
total of 558,800 shares of Common Stock at an exercise price equal to the
initial public offering price. The Company has also adopted the 1998 Stock
Option Plan and the Non-Discretionary Stock Option Plan. See "Management--1998
Stock Option Plan" and "Management--Non-Discretionary Stock Option Plan." The
Company intends to register all the shares subject to these options under the
Securities Act for public resale.

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

ANI's Certificate of Incorporation (the "Certificate of Incorporation"),
authorizes the Board of Directors to issue, without stockholder approval, one
or more series of preferred stock having such voting powers, if any,
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof
(including preferences over the Common Stock respecting dividends,
distributions and voting rights) as the Board of Directors may from time to
time determine. The existence of this "blank-check" preferred stock could
render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise. In
addition, the Certificate of Incorporation provides for a classified Board of
Directors, which may also have the effect of inhibiting or delaying a change
in control of the Company. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."

COMPUTER SYSTEMS AND YEAR 2000 ISSUES

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock may fluctuate significantly. These
fluctuations could result from, among other things, variations in the
Company's results of operations, which could be adversely affected by a number
of factors (some of which are beyond the Company's control), including
economic downturns, variations in demand for nutritional supplements, changes
in the mix of products sold, price changes in response to competition,
increases in the cost of raw materials and possible supply shortages. In
particular, the market price of the Common Stock could be materially adversely
affected by reports by health and medical authorities or the

general media regarding the potential health benefits or detriments of
products sold by the Company or of similar products distributed by other
companies regardless of whether such reports are scientifically supported and
regardless of whether the Company's operating results are likely to be
affected by such reports, as well as by consumer perceptions regarding the
safety and efficacy of nutritional supplements, changing of government
regulations and consumer preferences generally. In addition, the stock market
in general has experienced wide price and volume fluctuations in recent
periods, and these fluctuations are often unrelated to the operating
performance of the specific issuers whose stock is affected.

THE COMPANY

Advanced Nutraceuticals, Inc. was founded in September 1997 and
reincorporated in Delaware in September 1998. The Company's principal
executive offices are located at 500 Metuchen Rd, South Plainfield, New
Jersey, 07080 and the telephone number is (908) 668-0088. The Company also has
facilities located in Sunnyvale, California, Chatsworth, California, Westbury,
New York, North Las Vegas, Nevada and Hakalau, Hawaii.

USE OF PROCEEDS

The net proceeds from the sale of the 5,000,000 shares of Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated Offering and Merger expenses, are estimated to be $[ ] million ($[ ]
million if the Underwriters' over-allotment option is exercised in full) at an
assumed initial offering price of $[ ] per share.

The proceeds to the Company will be used as follows: (i) $37.6 million to
pay the cash portion of the purchase price for the Founding Companies, some of
which will be paid to persons who will become directors or holders of more
than 5% of the Common Stock, (ii) $1.0 million to pay the balance of a
promissory note issued by QBI in settlement of certain litigation (see
"Certain Transactions"), (iii) to repay outstanding indebtedness to certain
stockholders of the Founding Companies in the aggregate amount of $1.3
million, (iv) to pay approximately $[ ] million in expenses incurred in
connection with the Mergers and the Offering, including approximately $2.9
million in finder's fees and (v) to pay $1.35 million owed by QBI to the
former stockholders of BPI. The remaining net proceeds of approximately $[ ]
million will be used for working capital and other general corporate purposes,
which are expected to include future acquisitions and capital expenditures for
expansion, including the acquisition or construction of an herbal extraction
facility. The Company currently has no binding agreements to effect any future
acquisitions. Pending such uses, the net proceeds will be invested in short-
term, interest-bearing, investment grade securities.

As of the date hereof, the Company is in discussions with several financing
sources regarding the Company obtaining a senior credit facility. There can be
no assurance that the Company will be able to obtain, on terms that the
Company deems acceptable, a line of credit or additional financing it may need
to finance potential acquisitions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Combined Liquidity and
Capital Resources."

DIVIDEND POLICY

The Company intends to retain all of its future earnings, if any, to finance
the expansion of its business and for general corporate purposes, including
future acquisitions, and does not anticipate paying any cash dividends on its
Common Stock for the foreseeable future. In addition, if the Company is
successful in obtaining a credit facility, it is likely that such facility
will include restrictions on the ability of the Company to pay dividends
without the consent of the lender.

CAPITALIZATION

The following table sets forth the current maturities of long-term
obligations and capitalization at June 30, 1998 (i) on a pro forma combined
basis to give effect to the Mergers and the BPI Acquisition and (ii) on a pro
forma combined basis, as adjusted to give further effect to the Offering and
the application of a portion of the estimated net proceeds therefrom as set
forth below. This table should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.

JUNE 30, 1998
--------------------
PRO FORMA AS
COMBINED ADJUSTED
--------- --------
(IN THOUSANDS EXCEPT
SHARE DATA)

Current maturities of long-term debt
obligations(1).................................... $46,222(2) $4,940
======= ======
Long-term obligations, less current maturities(1).. 2,873 2,873
Stockholders' equity
Preferred stock, $0.001 par value, 5,000,000
shares authorized; no shares outstanding........
Common stock, $0.001 par value, 30,000,000 shares
authorized; shares outstanding
[ ] pro forma combined;
[ ] as adjusted(3)............................. [ ] [ ]
Additional paid-in capital......................... [ ] [ ]
Retained earnings.................................. 2,481 2,481
------- ------
Total stockholders' equity................... 40,855 [ ]
------- ------
Total capitalization......................... $43,728 $ [ ]
======= ======

- --------
(1) For a description of the Company's debt, see the Notes to Unaudited Pro
Forma Combined Financial Statements and Notes to the Founding Companies'
Financial Statements.

(2) Includes a $37.6 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration to be paid from
a portion of the net proceeds of the Offering.

(3) Excludes 558,800 shares of Common Stock subject to options to be granted
upon consummation of the Offering at an exercise price equal to the
initial public offering price. See "Management 1998 Stock Option Plan" and
"--Non-Discretionary Stock Option Plan."

DILUTION

The deficit in pro forma combined net tangible book value of the Company at
June 30, 1998 was $32.2 million or $[ ] per share of Common Stock. The deficit
in pro forma combined net tangible book value per share represents the amount
by which the Company's pro forma combined total liabilities exceeds the
Company's pro forma combined net tangible assets, divided by the number of
shares of Common Stock to be outstanding after giving effect to the Mergers.
After giving effect to the sale of the 5,000,000 shares of Common Stock in the
Offering and after deduction of the underwriting discounts and commissions and
estimated Offering expense and expenses of the Mergers, the pro forma combined
net tangible book value of the Company at June 30, 1998 would have been
approximately $[ ] million or $[ ] per share. This represents an immediate
increase in pro forma combined net tangible book value of $[ ] per share to
existing stockholders and an immediate dilution of $[ ] per share to
purchasers of Common Stock in the Offering. The following table illustrates
this pro forma dilution:

Assumed initial public offering price per share............... $[ ]
Pro forma combined deficit in net tangible book value per
share before the Offering.................................. ($[ ])
Increase in pro forma combined net tangible book value per
share attributable to new investors........................ [ ]
----- -----
Pro forma combined net tangible book value per share after the
Offering..................................................... [ ]
----- -----
Dilution per share............................................ $[ ]
===== =====

The following table sets forth, on a pro forma combined basis giving effect
to the Mergers at June 30, 1998, the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and the new investors purchasing
shares of Common Stock from the Company in the Offering, before deducting
underwriting discounts and commissions and estimated Offering and Merger
expenses:

SHARES PURCHASED PRICE
----------------- TOTAL PER
NUMBER PERCENT CONSIDERATION SHARE
--------- ------- ------------- -----

Existing stockholders.................. [ ] [ ] $[ ](1) $[ ]
New investors.......................... 5,000,000 [ ] [ ] [ ]
--------- ----- ----- -----
Total................................ [ ] 100.0 $[ ] $
========= ===== ===== =====

- --------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity before the Offering, adjusted to reflect: (i) the
cash portion of the consideration payable to the stockholders of the
Founding Companies in connection with the Mergers, (ii) the S Corporation
and other distributions to stockholders by the Founding Companies and
(iii) assumes no exercise of outstanding options and warrants.

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Advanced Nutraceuticals will acquire the Founding Companies simultaneously
with and as a condition to the consummation of the Offering. For financial
statement presentation purposes, ACTA has been identified as the "accounting
acquiror." The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto of
the Founding Companies as well as other financial and statistical information
included elsewhere in the prospectus. The selected financial data for ACTA as
of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996
and 1997 are derived from audited financial statements contained elsewhere in
this Prospectus. The selected financial data for ACTA as of June 30, 1997 and
December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993 and
1994 are derived from unaudited financial statements not included herein. The
selected financial data for ACTA as of June 30, 1998 and for the six month
periods ended June 30, 1997 and 1998 are derived from unaudited financial
statements included herein. In the opinion of management of ACTA, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position of ACTA and the results of operations for the indicated
periods. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for fiscal 1998.

SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ --------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------ -------

ACTA
Income statement data
Net sales................ $4,065 $5,793 $9,531 $14,391 $18,723 $9,305 $11,592
Gross profit............. 1,880 2,270 3,615 5,848 6,461 3,605 4,627
Earnings from operations. 34 94 986 438 1,534 1,973 2,220
Balance sheet data
Total assets............. 1,047 1,488 2,906 4,939 6,273 6,573 8,332
Long-term obligations.... 277 404 813 1,124 1,072 1,076 1,188
Stockholders' equity..... 163 137 768 1,210 1,348 2,296 2,809

The historical combined net sales, cost of goods sold and gross profit
presented below for the periods indicated do not represent combined results of
operations presented in accordance with generally accepted accounting
principles, but are only a summation of the actual historical results of the
Founding Companies, including those of BPI. The historical combined data for
the years ended December 31, 1996 and 1997 (and the year ended December 31,
1995 for ACTA) are derived from audited financial statements contained
elsewhere in the Prospectus. The historical combined data for the six month
periods ended June 30, 1997 and 1998 are derived from the unaudited financial
statements included herein. The historical combined data for the year ended
December 31, 1995 (except for ACTA) is derived from unaudited financial
statements not included herein. In the opinion of management such unaudited
financial statements have been prepared on the same basis as the audited
financial statements referred to above and include all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the results
of operations for the indicated periods and data. See the Unaudited Pro Forma
Combined Financial Statements and the Notes thereto included elsewhere in this
Prospectus.

HISTORICAL COMBINED DATA
(IN THOUSANDS)

(2) Includes Northridge's results for the second and third quarters of its
fiscal year.

The selected unaudited pro forma combined financial data set forth below
present data for the Company, adjusted for (i) the effects of the Mergers,
(ii) the effects of certain pro forma adjustments to the historical financial
statements described below and (iii) the consummation of the Offering and the
application of the net proceeds therefrom.

PRO FORMA COMBINED

TWELVE MONTHS
ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
1997 30, 1998
------------- ----------

Income statement data(1)
Net sales........................................... $50,825 $33,651
Gross profit........................................ 15,154 10,934
Selling, general and administrative(2).............. 8,267 4,942
Goodwill amortization(3)............................ 1,826 913
Earnings from operations............................ 5,061 5,079
Interest and other income (expense), net ........... (1,460) (390)
Earnings before income taxes........................ 3,601 4,688
Net earnings(4)..................................... 1,430 2,447
Net earnings per share basic and diluted............ [ ] [ ]
Shares used in computing pro forma net earnings per
share basic and diluted(5)......................... [ ] [ ]

JUNE 30, 1998
----------------------
PRO FORMA AS
COMBINED ADJUSTED(7)
--------- -----------

Balance sheet data(6)
Working capital, (deficit)(8).......................... $(35,293) [ ]
Total assets........................................... 102,097 [ ]
Long-term debt, net of current maturities(9)........... 2,873 2,873
Stockholders' equity(10)............................... 40,855 [ ]

(2) The pro forma combined income statement data reflect an aggregate of $5.9
million for the twelve months ended December 31, 1997 and $1.2 million
for the six months ended June 30, 1998 in pro forma reductions in
salaries, bonuses and benefits to the owners of the Founding Companies to
which they have agreed to prospectively (the "Compensation Differential")
and includes the non-recurring, non-cash compensation charge of $3.0
million recorded in 1997 relative to 1,800,000 shares issued to founders
of and consultants to Advanced Nutraceuticals at $.008 per share in
December 1997.

(4) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.

(6) The pro forma combined balance sheet data assume that the Mergers were
consummated on June 30, 1998.

(7) Adjusted for the sale of the 5,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."

(8) Pro forma combined includes $37.6 million in notes payable to owners of
the Founding Companies, representing the cash portion of the Merger
consideration to be paid from a portion of the net proceeds of the
Offering.

(9) Includes $1.3 of the $2.5 million in notes to be issued to selling
stockholders of Northridge and Bactolac, as a portion of the
consideration paid for the acquisitions.

(10) In connection with the Mergers, certain of the Founding Companies will
make distributions to their stockholders totaling $1.8 million.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with "Selected
Financial Data" and the Founding Companies' respective Financial Statements
and related Notes thereto appearing elsewhere in this Prospectus.

INTRODUCTION

The Company operates in the nutritional industry. Revenues are derived from
the contract manufacturing of products and from processing and supplying herbs
and extracts. Approximately 55.6% of the Company's pro forma combined revenues
of $50.8 million for 1997 were derived from contract manufacturing and
approximately 44.4% from processing and supplying herbs and extracts.

The Founding Companies have operated throughout the periods presented as
independent, privately-owned entities, and their results of operations reflect
varying tax structures (S Corporations or C Corporations) which have
influenced the historical level of owners' compensation. Gross profit margins
and selling, general and administrative expenses as a percentage of revenues
may not be comparable among the individual Founding Companies. The owners of
the Founding Companies have agreed to certain reductions in their compensation
and benefits in connection with the organization of the Company. The
Compensation Differential for 1997 of $5.9 million has been reflected as a pro
forma adjustment in the Unaudited Pro Forma Combined Statements of Operations.

The Company anticipates that following the Mergers it will be able to reduce
costs and expenses as a result of (i) lower material costs as a result of
consolidation of purchase orders from suppliers; (ii) consolidation of
insurance programs and general and administrative functions such as a company-
wide computer system and advertising; and (iii) the Company's ability to
obtain working capital and acquisition financing at lower interest rates than
would be available to most of the Founding Companies. These savings will be
offset to some degree by costs related to the Company's corporate-level
management, by increased capital expenditures and by the costs associated with
being a public company. The Company believes that neither these savings nor
the costs associated therewith can be quantified because the Mergers have not
occurred, and there have been no combined operating results upon which to base
any assumptions. As a result, they have not been included in the pro forma
financial information included herein nor have any of the potential benefits
of cross-selling between the Founding Companies following the Mergers.

The Company recorded a non-recurring, non-cash compensation charge of $3.0
million during the fourth quarter of 1997 relating to 1,800,000 shares of
Common Stock sold to founders and certain consultants to Advanced
Nutraceuticals, representing the difference between the amount paid for the
shares and the deemed value of those shares for accounting purposes only. This
non-recurring compensation charge is adjusted out as part of the compensation
differential in the Pro Forma Combined Financial Statements.

In July 1996, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 97 ("SAB 97") relating to business combinations immediately prior
to an initial public offering. SAB 97 requires that such combinations be
accounted for using the purchase method of acquisition accounting. Under the
purchase method, one of the companies must be designated as the accounting
acquirer. For the remaining companies, $69.3 million, representing the excess
of the fair value of the Merger consideration received over the fair value of
the net assets to be acquired, will be recorded as "goodwill" on the Company's
balance sheet. Goodwill will be amortized as a non-cash expense over a 40-year
period. The amount of this amortization expense, which is non-deductible for
tax purposes, is $1.7 million per year on an after-tax basis. Prior to the
issuance of SAB 97, goodwill and related amortization expense were not
required to be recorded for most business combinations similar to the Mergers.
The amount of goodwill to be recorded and the related amortization expense
will depend in part on the actual Offering price. See "Certain Transactions--
Organization of the Company."

COMBINED RESULTS OF OPERATIONS

The combined results of operations of the Founding Companies for the periods
presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the net sales, cost of goods and gross profit, general and
administrative expenses of the individual Founding Companies on a historical
basis. The combined results also exclude the effect of pro forma adjustments
and may not be comparable to, and may not be indicative of, the Company's
post-combination results of operations because (i) the Founding Companies were
not under common control or management during the periods presented; (ii) the
Founding Companies used different tax structures (S Corporations or
C Corporations) during the periods presented; (iii) the Company will incur
incremental costs related to its new corporate management and the costs of
being a public company; (iv) the Company will use the purchase method to
record the Mergers, resulting in the recording of goodwill which will be
amortized over 40 years; (v) the results of QBI are combined to reflect the
BPI Acquisition and the contribution to QBI of certain farming assets by QBI's
stockholders; and (vi) the combined data does not reflect the Compensation
Differential and potential benefits and cost savings the Company expects to
realize when operating as a combined entity.

The following table sets forth the combined results of operations of the
Founding Companies on a historical basis and such results as a percentage of
revenues. See "ACTA's Results of Operations," "QBI's Results of Operations,"
"Northridge's Results of Operations" and "Bactolac's Results of Operations."

SIX MONTHS ENDED
FISCAL YEARS ENDED(1) JUNE 30, (2)
----------------------------------- -----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------- --- ------- --- ------- --- ------- --- ------- ---
(IN THOUSANDS)

(2) Includes Northridge's results for the second and third quarters of its
fiscal year.

COMBINED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997

Net Sales. Combined net sales increased approximately $9.6 million, or
39.6%, from $24.1 million for the six months ended June 30, 1997 to $33.7
million for the six months ended June 30, 1998. The growth in net sales
resulted from a $5.1 million increase in net sales of contract manufacturing
and a $4.5 million increase in processing and supplying herbs and extracts. As
further detailed with each Founding Company's discussion, the increase in net
sales resulted from a combination of, (i) a new customer relationship with a
national mass-retailer which accounted for approximately $1.9 million in net
sales in the 1998 period, (ii) the conversion of certain sales from the 1997
period from sales where the customer had supplied its own materials to produce
the product, to sales where the Company supplied the materials in the 1998
period accounting for approximately $1.0 million in additional net sales,
(iii) a $0.9 million increase in net sales generated by BPI in the 1998 period
and (iv) the addition of several new customers as well as expanded sales
levels to existing customers.

Gross Profit. Combined gross profit increased $3.1 million, or 41.0%, from
$7.8 million for the six months ended June 30, 1997 to $10.9 million for the
six months ended June 30, 1998. Combined gross profit as a percentage of net
sales increased from 32.1% in the 1997 period to 32.4% in the 1998 period. The
change in gross profit resulted from overall higher net sales levels for the
Company, offset by higher overhead costs in 1998 due to facilities expansion,
additional production and quality control personnel and an increase in
production costs and equipment to expand capacity.

COMBINED RESULTS FOR 1997 COMPARED TO 1996

Net Sales. Combined net sales increased approximately $16.0 million, or
45.9%, from $34.8 million in 1996 to $50.8 million in 1997. The increase in
combined net sales occurred from a $8.9 million increase in net sales of
contract manufacturing and a $7.1 million increase in processing and supplying
herbs and extracts.

Gross Profit. Combined gross profit increased $3.8 million, or 33.4%, from
$11.4 million in 1996 to $15.2 million in 1997, due principally to higher net
sales. Combined gross profit as a percentage of net sales decreased from 32.6%
in 1996 to 29.8% in 1997. The decrease in the gross profit percentage resulted
from higher overhead costs in 1997 due to facilities expansion, additional
production and quality control personnel, and an increase in fixed production
costs and equipment to expand capacity.

COMBINED RESULTS FOR 1996 COMPARED TO 1995

Net Sales. Combined net sales increased approximately $10.6 million, or
43.5%, from $24.3 million in 1995 to $34.8 million in 1996, primarily due to a
$7.5 million increase in contract manufacturing net sales and approximately a
$3.1 million increase in processing and supplying herbs and extracts.

Gross Profit. Combined gross profit increased $2.8 million, or 32.7%, from
$8.6 million in 1995 to $11.4 million in 1996. Combined gross profit as a
percentage of net sales decreased from 35.2% in 1995 to 32.6% in 1996. The
change in gross profit resulted from overall higher net sales levels for the
Company, off-set by increases in fixed production costs as the Company
expanded its production capacities to enable it to handle increased volume of
business.

COMBINED LIQUIDITY AND CAPITAL RESOURCES

On a combined basis, the Founding Companies generated $2.3 million of net
cash from operating activities for the six months ended June 30, 1998. Net
cash used in investing activities was $0.7 million, primarily for equipment
purchases. Net cash generated by financing activities was $1.1 million and
consisted of net decreases in long-term debt of $0.3 million, the sale of
stock at $1.1 million offset by distributions to stockholders of the Founding
Companies of $0.2 million. At June 30, 1998, the Founding Companies had
combined working capital of $7.2 million and total long-term debt of $3.3
million, including $.9 million of debt to stockholders.

On a combined basis, the Founding Companies used $1.4 million of net cash in
operating activities during fiscal 1997. Net cash used in investing activities
was $0.8 million on a combined basis, primarily for equipment purchases. Net
cash provided by financing activities was $1.3 million on a combined basis,
consisting of net additions to long-term debt of $2.5 million and
distributions to stockholders of $1.2 million. At December 31, 1997, the
combined Founding Companies had working capital of $3.5 million and total
long-term debt of $3.2 million, including $1.1 million in debt to
stockholders.

The Company is in discussions with various credit sources regarding
obtaining a senior line of credit to be used for acquisitions, capital
expenditures, refinancing of debt not paid out of the proceeds of the Offering
and for general corporate purposes. The terms of any such facility may require
the Company to comply with various loan covenants including (i) maintenance of
certain financial ratios, (ii) restrictions on additional indebtedness, and
(iii) restrictions on liens, guarantees, advances and dividends. There can be
no assurances the Company will be able to obtain a line of credit on
acceptable terms. If the Company does not obtain an acceptable line of credit
or additional financing, the Company's liquidity and capital resources could
be adversely affected.

The Company intends to pursue acquisition opportunities. The Company expects
to fund future acquisitions through the issuance of additional Common Stock,
borrowings including seller financing, use of amounts available under a credit
facility if obtained and cash flow from operations. If cash generated from
operations is insufficient to meet the Company's needs for working capital and
acquisition financing, the Company will need to obtain additional funding
through new borrowings or the issuance of additional debt or equity
securities. There

can be no assurance that such financing will be available to the Company or,
if available, will be available on commercially reasonable terms. The issuance
of additional equity securities (or debt securities convertible or
exchangeable therefor) may result in the dilution of existing stockholders.

SEASONALITY

Management believes the nutritional industry experiences lower product net
sales during the months of June, July and August. Accordingly, as a supplier
to such industry, the Company expects its operations generally will be lower
in the months of June, July and August resulting in lower revenues and
operating results in the second and third fiscal quarters.

INFLATION

Inflation did not have a significant effect on the results of operations of
the combined Founding Companies for 1995, 1996 or 1997 or the six months ended
June 30, 1998.

COMPUTER SYSTEMS AND YEAR 2000 ISSUES

The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant and is currently developing a
plan to ensure that its computer systems are modified to be compliant on a
timely basis. The Company intends to upgrade its information systems and
install new software in connection with the consolidation of the operations of
the Founding Companies. The Company anticipates expenditures of up to $500,000
to effectuate such upgrade which will include, in part, costs of Year 2000
compliance. Failure of the Company or its software providers to adequately
address the Year 2000 issue could result in misstatement of reported financial
information or otherwise adversely affect the Company's business operations.
The extent to which the Company's customers and suppliers may be affected by
Year 2000 issues that may cause disruptions in their business is uncertain. If
any significant customers or suppliers of the Company do not timely and
successfully achieve Year 2000 compliance, the Company's business or
operations could be adversely affected. The costs to the Company to become
Year 2000 compliant or as a result of non-compliance of its customers or
suppliers cannot be quantified as of the date hereof.

ACTA'S RESULTS OF OPERATIONS

ACTA is a manufacturer of nutritional supplements and a supplier of raw
materials. Through its constituent companies, Acta Pharmacal and Acta
International, founded in 1972 and 1995, respectively, ACTA operates from a
37,000 square foot facility in Sunnyvale, California. ACTA provides products
and services including herbal extracts, full-service manufacturing and product
development services.

The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ --- ------- --- ------- --- ------ --- ------- ---
(IN THOUSANDS)

Net sales............... $9,531 100 $14,391 100 $18,723 100 $9,305 100 $11,592 100
Cost of goods sold...... 5,916 62 8,543 59 12,262 66 5,700 61 6,965 60
------ --- ------- --- ------- --- ------ --- ------- ---
Gross profit............ 3,615 38 5,848 41 6,461 34 3,605 39 4,627 40
Selling, general and
administrative
expenses............... 2,629 28 5,410 38 4,927 26 1,632 18 2,407 21
------ --- ------- --- ------- --- ------ --- ------- ---
Earnings from
operations............. 986 10 438 3 1,534 8 1,973 21 2,220 19

ACTA'S RESULTS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997

Net Sales. Net sales increased $2.3 million, or 24.5%, from $9.3 million for
the six months ended June 30, 1997 to $11.6 million for the six months ended
June 30, 1998 due to a combination of increased net sales levels to existing
customers and a new customer relationship with a national mass-retailer which
accounted for approximately $1.9 million in net sales in the 1998 period.

Gross Profit. Gross profit increased $1.0 million, or 28.3%, from $3.6
million for the six months ended June 30, 1997 to $4.6 million for the six
months ended June 30, 1998. As a percentage of net sales, gross profit
increased from 38.7% to 39.9%.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.8 million, or 47.4%, from $1.6 million
for the six months ended June 30, 1997 to $2.4 million for the six months
ended June 30, 1998. The increase in selling, general and administrative
expenses resulted from an increase in net sales commissions for the six months
ended June 30, 1998 as a result of the higher net sales levels and a higher
percentage commission structure on net sales to a certain national mass-
retailer. As a percentage of net sales, selling, general and administrative
expenses increased from 17.5% to 20.7%. ACTA's historical practice has been
that significant bonus expenses have been recorded in the second half of its
fiscal year as year end results are being finalized. Accordingly, the
historical results for the first six months of ACTA's fiscal year have
generally been more profitable on a relative basis than the last six months of
its fiscal year.

ACTA'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996

Net Sales. Net sales increased $4.3 million, or 30.1%, from $14.4 million
for the year ended December 31, 1996 to $18.7 million for the year ended
December 31, 1997 due to the addition of two new customers which accounted for
approximately $3.0 million in additional net sales during 1997 combined with
general increased level of net sales to existing customers.

Gross Profit. Gross profit increased $0.6 million, or 10.4%, from $5.8
million for the year ended December 31, 1996 to $6.5 million for the year
ended December 31, 1997. As a percentage of net sales, gross profit decreased
from 40.6% to 34.5% due to reduced pricing on several net sales orders to
larger customers as well as increase in fixed overhead production costs to
increase capacity.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.5 million, or 8.9%, from $5.4 million for
the year ended December 31, 1996 to $4.9 million for the year ended December
31, 1997. As a percentage of net sales, these expenses decreased from 37.5% to
26.3% due primarily to a decrease in officer/stockholder compensation of $0.8
million from $3.5 million in 1996 to $2.7 million in 1997, off-set by general
increases in administrative overhead costs and higher net sales commission
expenses due to the higher net sales levels.

ACTA'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995

Net Sales. Net sales increased $4.9 million, or 50.9%, from $9.5 million for
the year ended December 31, 1995 to $14.4 million for the year ended December
31, 1996 due to the addition of several new customers as well as expanded net
sales levels to existing customers.

Gross Profit. Gross profit increased $2.2 million, or 61.7%, from $3.6
million for the year ended December 31, 1995 to $5.8 million for the year
ended December 31, 1996. As a percentage of net sales, gross profit increased
from 37.9% to 40.6%. The improvement in gross profit resulted from
significantly higher net sales levels for ACTA in 1996 over 1995 combined with
higher utilization of the fixed production costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.8 million, or 106%, from $2.6 million for
the year ended December 31, 1995 to $5.4 million for the year ended December
31, 1996. As a percentage of net sales, these expenses increased from 27.5% to
37.5% due to higher net sales commissions, additions to administrative staff
to handle the increased level of business and a $2.4 million increase in
officer/stockholder compensation from $1.1 million in 1995 to $3.5 million in
1996.

ACTA'S LIQUIDITY AND CAPITAL RESOURCES

ACTA generated $0.2 million in net cash from operating activities for the
six months ended June 30, 1998. Net cash used in investing activities,
principally for equipment purchases, was insignificant. Net cash used by
financing activities was $0.3 million, representing net payments on long-term
debt.

At December 31, 1997, ACTA had working capital of $1.9 million and $1.0
million of total long-term debt outstanding payable to its stockholders.

ACTA provided $0.5 million in net cash from operating activities for the
year ended December 31, 1997. Net cash used in investing activities was
approximately $0.4 million, principally for equipment purchases. Net cash used
in financing activities was $1.1 million, primarily in distributions to
stockholders.

QBI'S RESULTS OF OPERATIONS

QBI is a processor and supplier of raw materials to manufacturers of
nutritional products. Founded in 1983 and headquartered in its 74,000 square
foot facility in South Plainfield, New Jersey, QBI sells to the vitamin, food,
herbal tea, pharmaceutical, diet and sports supplement, health and beauty
care, and pet and equine products industries. QBI also has a 9,000 square foot
facility in North Las Vegas, Nevada from which it distributes products to its
Western regional customers. The information presented does not reflect the
results of operations of BPI.

The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:

Net sales............... $7,349 100 $10,894 100 $15,495 100 $7,621 100 $10,009 100
Cost of goods sold...... 4,960 67 7,592 70 11,155 72 5,390 71 7,034 70
------ --- ------- --- ------- --- ------ --- ------- ---
Gross profit............ 2,389 33 3,302 30 4,340 28 2,231 29 2,975 30
Selling, general and
administrative
expenses............... 1,979 27 2,595 24 3,514 23 1,880 24 1,991 20
------ --- ------- --- ------- --- ------ --- ------- ---
Earnings from
operations............. 410 6 707 6 826 5 351 5 984 10

QBI'S RESULTS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997

Net Sales. Net sales increased $2.4 million, or 31.3%, from $7.6 million for
the six months ended June 30, 1997 to $10.0 million for the six months ended
June 30, 1998. The growth in the 1998 period resulted from increased net sales
to existing customers as well as net sales generated from new customers. The
growth was facilitated by additional warehouse facilities and equipment
improvements completed in 1997 that increased production capacity.

Gross Profit. Gross profit increased $0.7 million, or 33.3%, from $2.2
million for the six months ended June 30, 1997 to $3.0 million for the six
months ended June 30, 1998. As a percentage of revenues, gross profit
increased slightly from 29.2% to 29.7%. The increase in gross profit resulted
from the higher net sales level and production efficiency in the 1998 period.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were substantially unchanged from the six months ended
June 30, 1997 to the six months ended June 30, 1998. As a percentage of net
sales, selling, general and administrative expenses decreased from 24.6% to
19.8% as QBI was able to increase its net sales volume without a commensurate
increase in overhead expenses.

QBI'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996

Net Sales. Net sales increased $4.6 million, or 42.2%, from $10.9 million
for the year ended December 31, 1996 to $15.5 million for the year ended
December 31, 1997. The growth in 1997 resulted from increased net sales to
existing customers as well as net sales generated from new customers. The
growth was facilitated by a production capacity expansion plan, which was
completed in 1997, and the addition of warehouse facilities and equipment.

Gross Profit. Gross profit increased $1.0 million, or 31.4%, from $3.3
million for the year ended December 31, 1996 to $4.3 million for the year
ended December 31, 1997. As a percentage of net sales, gross profit decreased
from 30.3% to 28.0%. The increase in gross profit resulted from the higher net
sales level in 1997 offset by costs of the implementation of additional
quality control initiatives and capabilities. As a result of the cost of the
additional warehouse facilities, equipment and associated costs, in addition
to additional costs incurred as a result of the implementation of additional
quality control staff and procedures, gross profit as a percentage of net
sales decreased slightly in 1997 from the 1996 level.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.9 million, or 35.4%, from $2.6 million
for the year ended December 31, 1996 to $3.5 million for the year ended
December 31, 1997. As a percentage of net sales, these expenses decreased from
23.8% to 22.6%. The increase in selling, general and administrative costs in
1997 was a result of QBI's efforts to expand and upgrade its marketing
program, management information systems and administrative functions to better
support QBI's growth.

QBI'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995

Net Sales. Net sales increased $3.5 million, or 48.2%, from $7.3 million for
the year ended December 31, 1995 to $10.9 million for the year ended December
31, 1996 due to increased net sales to existing customers as well as net sales
generated from new customers.

Gross Profit. Gross profit increased $0.9 million, or 38.2%, from $2.4
million for the year ended December 31, 1995 to $3.3 million for the year
ended December 31, 1996. As a percentage of net sales, gross profit decreased
from 32.5% to 30.3%.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million, or 31.1%, from $2.0 million
for the year ended December 31, 1995 to $2.6 million for the year ended
December 31, 1996. As a percentage of net sales, these expenses decreased from
26.9% to 23.8% as QBI was able to increase its net sales volume without a
commensurate increase in overhead expenses.

QBI'S LIQUIDITY AND CAPITAL RESOURCES

QBI generated $0.3 million in net cash from operating activities for the six
months ended June 30, 1998. Net cash used in investing activities was
approximately $0.2 million, principally for equipment purchases. Net cash used
in financing activities was $0.1 million, representing net repayment of long-
term debt.

QBI has a revolving line of credit and term loan facility providing for
approximately $7.8 million in available borrowings. Borrowings thereunder are
collateralized by all of QBI's assets as well as personal guarantees of QBI's
stockholders and certain affiliates and contain specified financial and
operating covenants. As of June 30, 1998 there was approximately $4.5 million
outstanding under the facility, which matures in May 1999.

At December 31, 1997, QBI had a working capital deficit of $0.3 million and
$2.2 million of total long-term debt outstanding.

QBI used $2.1 million in net cash in operating activities for the year ended
December 31, 1997. Net cash used in investing activities was approximately
$0.3 million, principally for equipment purchases. Net cash provided by
financing activities was $2.4 million, of which $2.7 million net, was borrowed
on long-term debt and $0.3 million was distributed to stockholders.

NORTHRIDGE'S RESULTS OF OPERATIONS

Northridge is a full service manufacturing, formulating, encapsulating,
tableting and product development services company. Northridge, headquartered
in Chatsworth, California, was founded in 1967 and has facilities consisting
of two buildings totaling 25,000 square feet.

The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:

NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------- ----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ --- ------ --- ------- --- ------ --- ------- ---
(IN THOUSANDS)

Net sales............... $7,148 100 $7,622 100 $11,532 100 $7,656 100 $11,233 100
Cost of goods sold...... 5,223 73 6,088 80 8,393 73 5,540 72 8,315 74
------ --- ------ --- ------- --- ------ --- ------- ---
Gross profit............ 1,925 27 1,534 20 3,139 27 2,116 28 2,918 26
Selling, general and
administrative
expenses............... 1,482 21 1,608 21 2,070 18 1,495 20 1,991 18
------ --- ------ --- ------- --- ------ --- ------- ---
Earnings (loss) from
operations............. 443 6 (74) (1) 1,069 9 621 8 927 8

NORTHRIDGE'S RESULTS FOR NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE
MONTHS ENDED JUNE 30, 1997

Net Sales. Net sales increased $3.6 million, or 46.7%, from $7.7 million for
the nine months ended June 30, 1997 to $11.2 million for the nine months ended
June 30, 1998 due to approximately $2.5 million in net sales which during the
1997 period the customer supplied the materials to produce the finished
product and Northridge invoiced for processing and finishing the product
("Tolling Service"). This arrangement was replaced in the 1998 period with net
sales where Northridge supplied the materials resulting in additional net
sales of approximately $1.0 million. The additional net sales growth was due
to increased net sales to existing customers as well as net sales generated
from new customers.

Gross Profit. Gross profit increased $0.8 million, or 37.9%, from $2.1
million for the nine months ended June 30, 1997 to $2.9 million for the nine
months ended June 30, 1998. As a percentage of net sales, gross profit
decreased from 27.6% to 25.9%. The increase in gross profit resulted from the
higher net sales level in the 1998 period and gross profit percentage
decreased in the 1998 period as a result of the material purchases discussed
above, additional direct labor costs and a return to normal levels in repairs
and maintenance expenses, following the equipment replacement which occurred
in 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.5 million in 1998 period. As a
percentage of net sales, selling, general and administrative expenses
decreased from 19.5% to 17.7% as Northridge was able to increase its net sales
volume without a commensurate increase in overhead expenses.

NORTHRIDGE'S RESULTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE
YEAR ENDED SEPTEMBER 30, 1996

Net Sales. Net sales increased $3.9 million, or 51.2%, from $7.6 million for
the year ended September 30, 1996 to $11.5 million for the year ended
September 30, 1997 due to increased net sales to existing customers as well as
net sales generated from new customers.

Gross Profit. Gross profit increased $1.6 million, or 104.6%, from $1.5
million for the year ended September 30, 1996 to $3.1 million for the year
ended September 30, 1997. As a percentage of net sales, gross profit increased
from 20.1% to 27.2%. During a significant portion of 1996, Northridge was
forced to contract with other manufacturers to produce its products as a
result of a gas explosion that occurred late in fiscal 1995 and damaged
Northridge's production facilities resulting in additional costs in that year.
The increase in gross profit percentage occurred as a result of resuming
normal operations

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.5 million, or 28.7%, from $1.6 million
for the year ended September 30, 1996 to $2.1 million for the year ended
September 30, 1997. As a percentage of net sales, these expenses decreased
from 21.0% to 17.9%. The increase in selling, general and administrative
expenses resulted primarily from an increase in officer/stockholder and
general employee bonuses in 1997.

NORTHRIDGE'S RESULTS FOR THE YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE
YEAR ENDED SEPTEMBER 30, 1995

Net Sales. Net sales increased slightly from $7.1 million for the year ended
September 30, 1995 to $7.6 million for the year ended September 30, 1996.

Gross Profit. Gross profit decreased $0.4 million, or 20.3%, from $1.9
million for the year ended September 30, 1995 to $1.5 million for the year
ended September 30, 1996. As a percentage of net sales, gross profit decreased
from 26.9% to 20.1%. The decrease in gross profit percentage in 1996 was a
result of contract manufacturing costs incurred in 1996 as a result of a gas
explosion that occurred in late fiscal 1995, damaging Northridge's production
facility.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.1 million, or 8.5%, from $1.5 million for
the year ended September 30, 1995 to $1.6 million for the year ended September
30, 1996. As a percentage of net sales, these expenses increased from 20.7% to
21.0%.

NORTHRIDGE'S LIQUIDITY AND CAPITAL RESOURCES

Northridge generated $1.8 million in net cash from operating activities for
the nine months ended June 30, 1998. Net cash used in investing activities was
approximately $0.4 million, principally for equipment purchases. Net cash
generated by financing activities was insignificant.

At September 30, 1997, Northridge had working capital of $1.9 million with
no long-term debt outstanding.

Northridge generated $0.3 million in net cash from operating activities for
the year ended September 30, 1997. Net cash used in investing and financing
activities was insignificant.

BACTOLAC'S RESULTS OF OPERATIONS

Bactolac manufactures nutritional supplements for private label customers.
Bactolac, headquartered in Westbury, New York, began operations in late 1995
and has facilities consisting of one building of 15,000 square feet. Bactolac
is a full-service manufacturer, providing formulation, encapsulation,
tableting and packaging services.

The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ---------------------
1996 % 1997 % 1997 % 1998 %
------ --- ------ --- ------ --- ------ ---
(IN THOUSANDS)

Net sales.......................... $1,406 100 $5,002 100 $2,023 100 $3,642 100
Cost of goods sold................. 1,135 81 3,802 76 1,528 76 2,566 70
------ --- ------ --- ------ --- ------ ---
271 19 1,200 24 495 24 1,076 30
Selling, general and administrative
expenses.......................... 75 5 246 5 82 4 134 4
------ --- ------ --- ------ --- ------ ---
Earnings from operations........... 196 14 954 19 413 20 942 26

BACTOLAC'S RESULTS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997

Net Sales. Net sales increased $1.6 million, or 80%, from $2.0 million for
the six months ended June 30, 1997 to $3.6 million for the six months ended
June 30, 1998 due primarily to expansion in Bactolac's customer base.

Gross Profit. Gross profit increased $ 0.6 million, or 117%, from $0.5
million for the six months ended June 30, 1997 to $1.1 million for the six
months ended June 30, 1998. As a percentage of net sales, gross profit
increased from 24.4% to 29.5%. The change in gross profit resulted from
significantly higher net sales levels for Bactolac from the 1997 period to
1998 combined with higher utilization of fixed production costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly during the six months ended June
30, 1998. The increase in selling, general and administrative expenses was
primarily attributable to an increase in administrative costs associated with
the higher net sales volume. As a percentage of net sales, selling, general
and administrative expenses decreased from 4.0% to 3.6% as Bactolac was able
to increase its net sales volume without a commensurate increase in overhead
expenses.

BACTOLAC'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996

Net Sales. Net sales increased $3.6 million, or 256%, from $1.4 million for
the year ended December 31, 1996 to $5.0 million for the year ended December
31, 1997. The increase is primarily attributable to the fact that 1996 was
Bactolac's first full year of operations and Bactolac moving into expanded
facilities and adding new production equipment during the first quarter of
1997.

Gross Profit. Gross profit increased $0.9 million, or 343%, from $0.3
million for the year ended December 31, 1996 to $1.2 million for the year
ended December 31, 1997. As a percentage of net sales, gross profit increased
from 19.2% to 23.9%. The change in gross profit resulted from significantly
higher net sales levels for Bactolac from 1996 to 1997 combined with higher
utilization of the fixed production costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly during the year ended December 31,
1997. As a percentage of net sales, these expenses decreased from 5.3% to 4.9%
as a result of the increase in its net sales volume without a commensurate
increase in overall expense.

BACTOLAC'S LIQUIDITY AND CAPITAL RESOURCES

Bactolac generated $0.3 million in net cash from operating activities for
the six months ended June 30, 1998. Net cash used in investing activities was
insignificant. Net cash used in financing activities was $0.3 million,
representing dividends paid to stockholders.

At December 31, 1997, Bactolac had working capital of $1.1 million with no
long-term debt outstanding.

Bactolac generated $0.1 million in net cash from operating activities for
the year ended December 31, 1997. Net cash used in investing and financing
activities was insignificant.

BUSINESS

Advanced Nutraceuticals was formed to create a full-service, vertically
integrated manufacturer and supplier of quality nutritional supplements, herbs
and extracts. Following consummation of the Mergers, the Company will continue
to provide contract manufacturing of tablets, capsules and powders, and will
source, process and supply powdered herbs and extracts. See "--Products and
Services."

The principal strength of the Company is its ability to provide a
diversified line of products and services to its customers. With Northridge,
ACTA, QBI and Bactolac having conducted business in the nutritional industry
for 31, 26, 15 and 3 years, respectively, the Founding Companies have 75 years
of combined operating history. The Company works closely with customers to
create innovative solutions ranging from research and development through
consumer-level branding initiatives. The Company believes it will benefit from
the collective strengths of ACTA, QBI, Northridge and Bactolac in sourcing and
processing herbs and extracts, and contract manufacturing of custom
formulations. The Company's manufacturing services are tailored to customer
specifications and quality requirements and often include additional value-
added services such as custom product and packaging design. In 1997, the
Company sold over 1.0 million kilograms of powdered herbs and extracts and
over 1.5 billion tablets and capsules.

INDUSTRY OVERVIEW

A 1997 market report, "The U.S. Market For Vitamins, Supplements and
Minerals," prepared by the independent consumer marketing research firm of
Packaged Facts (the "Packaged Facts Report"), reported that the retail market
for vitamins, minerals and other dietary and nutritional supplements
(excluding sports nutrition and diet products) grew at a compound annual rate
of 15% from $3.7 billion in 1992 to $6.5 billion in 1996. A large portion of
this growth is attributable to an increase in sales of such other supplements
(primarily herbal products), which grew from $570 million in 1992 to $2.3
billion in 1996. This growth has been fueled by the popularity of such herbs
as echinacea, garlic, ginseng, ginkgo biloba and, more recently, saw palmetto,
St. John's wort and kava kava. The Packaged Facts Report forecasts 13.6%
compound annual growth in the retail market for vitamins, minerals and other
supplements (excluding sports nutrition and diet products), including 25%
compound annual growth in the market for other supplements, through 2001.
According to the Packaged Facts Report, compound annual growth rates from 1992
through 1996 for vitamins, minerals and other supplements were 8.0%, 5.2% and
41.7%, respectively.

The Company believes that growth in the nutritional supplement industry will
continue for the foreseeable future due to, among other things, the aging of
the American population combined with the tendency of consumers to purchase
more nutritional supplements as they mature, liberalized labeling laws under
the Dietary Supplements and Health Education Act of 1994 (DSHEA), academic
studies supporting the positive correlation between health and nutritional
supplementation, increased focus on preventative healthcare in general and as
a contributing factor in controlling healthcare costs and increasing media
attention and acceptance of alternative medicine, which often includes
nutritional supplementation as part of an overall treatment plan. Growth may
also result from potential new products and increasing awareness of existing
products.

Although there are several large participants in the nutritional supplement
industry such as Weider Nutritional International, Inc., Twinlab Corporation,
Solgar Vitamin and Holding Company, Rexall Sundown, Inc., Nature's Way
Products, Botanicals International, Inc., Pure World, Inc. and Triarco
Industries, Inc., the industry continues to include numerous small companies.
The Nutrition Business Journal reported in July 1997 that there are nearly
5,000 privately held companies with under $25 million in annual sales in the
retail and manufacturing segments of the nutritional industry. These
businesses typically are owner-operated and have similar profiles, including
limited access to the capital necessary to develop and maintain inventory of
large volume and wide selections, expand product offerings, implement advanced
management information systems, incorporate the use of sophisticated
technological equipment, conduct research and development and service national
and regional accounts.

COMPETITIVE STRENGTHS

Wide Range of Products and Manufacturing Services--Enables the Company to
offer services ranging from a single step in the production process to a
complete, "turn-key" manufacturing solution.

Experienced Management--Six senior managers of the Company with a combined
67 years of industry experience and relationships.

Technical Expertise--Allows manufacturing of complex and difficult products
and, through the Company's patent pending cryogenic milling, unique processing
of products.

Strong Vendor Relationships--Allows greater access to herbs and extracts
including some that are in scarce supply.

Quality Control Procedures--Designed to promote uniform product quality and
potency to customer specifications.

STRATEGY

The Company was formed to capitalize on opportunities to integrate and
consolidate the highly fragmented nutritional industry. The Company's strategy
is to (i) support and expand the operations of the Founding Companies, (ii)
capitalize on operating synergies and cost savings available through
consolidation, and (iii) pursue an acquisition program designed to further
vertical integration and to expand existing operations. The Mergers involving
the Founding Companies are intended to be the first step in this process.

The Founding Companies were identified and pursued based on a variety of
factors including profitable operating history, entrepreneurial management, a
pattern of sales growth and industry reputation. In order to preserve the
entrepreneurial culture of the Founding Companies, the Founding Companies will
be operated as separate subsidiaries of the Company following the Mergers,
each continuing to be led by current management. Certain common administrative
and developmental functions will be integrated at the parent company level.
The Company intends to grow the businesses of each operating subsidiary
through cross-selling opportunities, sharing of technical expertise, research
and development and the other initiatives described below.

. Enhance management strengths through sharing of core competencies and
existing expertise.

. Expand and coordinate marketing opportunities among the Founding
Companies.

. Develop customized solutions that utilize expertise and experience of each
of the Founding Companies.

. Encourage entrepreneurial initiatives.

. Achieve consistently high quality products and services by implementing
a company-wide quality program.

Capitalize on Operating and Cost Synergies Available Through
Consolidation. The Company's strategy includes exploiting opportunities
created by the Merger:

. Implementing a focused company-wide marketing program.

. Cross-selling opportunities to existing customers.

. Capitalizing on its increased national presence.

. Marketing to new and existing customers through an expanded sales force.

. Improving operating efficiencies by promoting core-competencies.

. Providing a company-wide management information system designed to
enhance sales and management.

. Maximizing increased purchasing power to gain volume discounts

Growth through Acquisitions. The Company intends to pursue an acquisition
program designed both to further its vertical integration and to expand the
existing operations of the Founding Companies. The Company believes that there
are many attractive acquisition candidates in the nutritional industry. This
is due principally to the highly fragmented nature of the industry and the
large number of smaller companies in the industry having under $25 million in
annual sales. In many cases, these companies have needs that are difficult for
small businesses to meet, such as capital for growth and expansion, owners'
desires for liquidity, the ability to attract high caliber management talent
and other factors that motivate these owners to consider alternatives. The
Company intends to pursue additional vertical integration through acquisition
or construction of an herbal extraction facility and the addition of
distribution capabilities. The Company will seek to consolidate and enhance
its position in its current markets through strategic acquisitions.

The Company believes it will be regarded by acquisition candidates as an
attractive acquirer because of (i) the Company's strategy of retaining the
operational integrity of businesses that it acquires and its progressive
philosophy of fostering entrepreneurial initiative, (ii) the potential for
acquisition candidates' increased visibility and access to the Company's
financial resources as a public company, (iii) the potential for the owners of
the businesses acquired to achieve liquidity, an exit strategy and potential
equity appreciation, (iv) the Company's ability to provide centralized
administrative functions, enhanced systems capabilities and access to
increased marketing resources, (v) potential cross-selling opportunities, and
(vi) the Company's experience in and commitment to quality control and
assurance.

PRODUCTS AND SERVICES

The nutritional industry generally consists of (i) growers that cultivate
and harvest herbs, (ii) raw material processors who produce powdered herbs and
extractors that concentrate herbs into extracts, (iii) suppliers of herbs,
extracts and vitamins, (iv) manufacturers that produce tablets and capsules
and (v) distributors, direct marketers and retailers. The Founding Companies
presently derive revenues from contract manufacturing and from processing and
supplying herbs and extracts.

Contract Manufacturing. Manufacturing services are provided by ACTA,
Northridge and Bactolac. For the six months ended June 1998, these services
generated $18.2 million of combined net sales or a 16.3% increase over the
same period in 1997 and comprised approximately 54.2% of the Company's
combined net sales. In 1997, contract manufacturing generated $28.2 million of
combined net sales or approximately a 46.2% increase in such net sales over
1996. The Company's manufacturing processes generally consist of the following
operations: (i) formulating and blending measured ingredients into a mixture
with a homogeneous consistency, (ii) encapsulating or tableting blended
mixtures, (iii) tablet coating and (iv) bottling, labeling and packaging the
encapsulated or tableted product with tamper-evident features. Additionally,
on occasion the Company manufactures products incorporating raw materials
provided by the customer.

The Company formulates products consisting of vitamins, herbs, minerals,
amino acids and other ingredients. In 1997, the Company sold over 1.5 billion
tablets and capsules.

The Company works closely with customers to create innovative product
solutions ranging from research and development through consumer-level
branding initiatives. These services can be marketed as a package or
individually depending on the customer's requirements. The Company's customers
include multi-level marketers, specialty health product retailers and mass-
market retailers, among others.

Process and Supply Herbs and Extracts. ACTA and QBI offer a broad range of
powdered herbs and extracts used in nutritional supplements and related
products. These activities generally consist of the following: (i) sourcing
herbs and extracts from around the world, (ii) processing herbs into powders
or granules and (iii) supplying herbs and extracts to a diverse customer base
in the nutritional industry and, to a lesser extent, the pharmaceutical, food,
beverage, pet, equine and cosmetics industries. For the six months ended June
30, 1998, these activities generated $15.4 million in combined net sales or a
40.7% increase over the same period in 1997 and comprised approximately 45.8%
of the Company's net sales. In 1997, herbal powders and extract activities
generated $22.6 million in combined net sales or a 45.6% increase in such net
sales over 1996. In 1997, the Company sold over 1.0 million kilograms
representing over 500 herbal products and extracts.

Herbs are raw and processed nutritional ingredients derived from plants that
are cultivated or collected and processed. Examples of herbs sold by the
Company include bilberry, black cohosh, cranberry, dong quai, echinacea,
feverfew, ginkgo biloba, ginseng, goldenseal, green tea, guarana, kava kava,
milk thistle, St. John's wort, saw palmetto, valerian and yohimbe bark. The
Company sells herbs as milled raw powders and as extracts in which the
constituents of the herb have been concentrated. The extraction process
produces a concentrated liquid or paste. Concentrated extracted material may
be further processed in order to make it useable in the manufacture of
tablets, capsules and "soft-gel" capsules.

Mineral ingredients are compounds that seek to increase the effectiveness of
elemental minerals by binding them to other organic materials. Mineral
products sold by the Company include calcium, copper, iron, magnesium,
manganese and zinc. The Company also sources other ingredients which include
among others, chlorella, melatonin and spirulina algae.

The Company ships the majority of its products through commercial carriers.
Shipments are made directly to customers from the individual warehouse
facilities of the Founding Companies.

CUSTOMERS

Presently, the Company markets its products and services to companies
primarily in the nutritional industry and, to a lesser extent, the
pharmaceutical, food, beverage, pet, equine and cosmetic industries. The
Company's customers vary in size, complexity, product sophistication, price
sensitivity and manufacturing requirements. The Company provides contract
manufacturing service to specialty food retailers, mass market drug stores,
multi-level marketers, catalog marketers, retail distributors, direct mail
sellers, infomercial marketers, and international distributors. In addition,
the Company supplies herbs and extracts to other manufacturers, marketers with
manufacturing capabilities and wholesale brokers. No single customer accounted
for more than 10% of the Company's pro forma combined 1997 revenues.

SALES AND MARKETING

The Founding Companies use a variety of methods to market their products and
services, including sales personnel, referrals, trade show participation,
trade journal advertising and press publicity as well as reliance on name
recognition and reputation in the industry. The Company intends to expand its
sales force and activities to capitalize on untapped cross-selling
opportunities.

QUALITY CONTROL

The Company's quality assurance program is designed to promote uniform
product quality and potency to meet customer demand. Management believes the
Company's standards and procedures meet or exceed Good Manufacturing Practices
("GMP") promulgated by the FDA. The Company has implemented additional quality
assurance procedures that surpass current GMP requirements for its herbal
processing and extraction operations, by utilizing sophisticated testing
methods and equipment, including thin layer chromatography ("TLC"), gas
chromatography ("GC") and high performance liquid chromatography ("HPLC"). TLC
is used to produce a specific constituent compound model of the material being
tested which identifies it in terms of genus and species. HPLC procedures are
used to quantify the presence and concentration of specific constituent

compounds identified by the model. Although no standardization of testing
procedures exists in the nutritional industry, the Company's testing
procedures are designed to give the Company's customers confidence in
receiving an accurate analysis of the products delivered.

The Company currently conducts inspections and detailed record keeping
throughout the manufacturing process, including, when and as applicable,
quantity verification, label validation, hardness, weight, friability and
disintegration measurements and package quality sampling.

MATERIALS AND SOURCES OF SUPPLY

The Company has established numerous sources of supply and attempts to
cultivate strong relationships with its suppliers. The Company will seek to
employ centralized purchasing where cost efficiencies can be obtained without
compromising existing supply relationships; in other cases, each Founding
Company will source materials independently. Each of the Founding Companies
has staff with extensive knowledge and experience related to sourcing of raw
materials and other product ingredients. More than 50% of the Company's raw
materials currently come from outside the U.S.

RESEARCH AND DEVELOPMENT

Management believes it must analyze and anticipate trends in the nutritional
industry and incorporate appropriate developments into its product and service
offerings and technical capabilities. In this regard, the Company has
established its Technical Advisory Council (the "TAC") consisting of several
esteemed nutritional industry and science experts and authors. The Company
contracts with the members of the TAC on a non-exclusive basis to advise the
Company with respect to developments in the field and, in certain cases, to
provide insights and research affecting the future of the nutritional
industry. The members of the TAC are: Dr. Rudolf Bauer, a pharmacist and
University Professor at the Institute of Pharmaceutical Biology, University of
Dusseldorf, with over 80 published papers on herbs and natural products; Mr.
Stephen Foster, who for over 22 years has served as a medicinal and aromatic
plant specialist, commercial consultant, writer, lecturer and photographer and
has published over 500 photo-illustrated articles in popular, trade and
scientific journals and authored nine books on herbs and natural ingredients;
Dr. James Simon, a Professor at Purdue University and a specialist in aromatic
and medicinal plants whose work focuses on seed quality, genetics and
production systems, and phytochemistry, the development of analytical
protocols for the quantification of natural plant products and in the
improvement of raw botanical quality; and Dr. Wolfgang Danspeckgruber, a
lecturer at Princeton University's Woodrow Wilson School of Public and
International Affairs.

The Company believes that product quality and innovation will be important
to its long-term growth and success. It sponsors several limited scientific
research projects at prestigious universities in the U.S. to study the
cultivation of popular wild herbs. Approximately 100 acres are under
cultivation under these programs. The purpose of these studies is to determine
planting, harvesting and drying practices that will optimize quality, biomass
yield and bioactivity levels.

RISK MANAGEMENT

The sales of the Company's products include an inherent risk that product
liability claims may be asserted against the Company. See "Risk Factors--
Product Liability; Potential Adverse Product Publicity." The Company intends
to maintain product liability insurance coverage in the minimum amount of $2.0
million per occurrence and $5.0 million in the aggregate. There can be no
assurance that the Company will be able to maintain product liability
insurance on acceptable terms or that its insurance will provide adequate
coverage against potential claims. While the Company has not experienced any
product liability claims, if such claims should arise in the future, they
could have a material adverse effect on the Company's business, financial
condition and results of operations.

COMPETITION

The nutritional industry is highly competitive. Numerous companies, many of
which are significantly larger than the Company, have greater financial,
personnel, distribution and other resources than the Company. The Company's
principal competitors are domestic and foreign suppliers of herbs and extracts
and other contract manufacturers. To date the nutritional industry has
included many relatively small participants and, with generally low barriers
to entry, additional competitors could enter the market, at any level, at any
time. There can be no assurance that national or international companies will
not seek to enter, or increase their presence, in the industry or that
existing, or potential customers will not expand, whether horizontally or
vertically and whether by acquisition or otherwise. In addition, large
nationally known companies (such as Weider Nutritional International, Inc.,
Twinlab Corporation, Solgar Vitamin and Holding Company, Rexall Sundown, Inc.,
Nature's Way Products, Botanicals International, Inc., Pure World, Inc. and
Triarco Industries, Inc.) and, on a limited basis, pharmaceutical and packaged
food and beverage companies, compete with the Company in this industry.
Increased competition from any of these companies could have a material
adverse effect on the Company.

The Company competes principally on the basis of: customer service, product
quality, and price. See "--Competitive Strengths."

GOVERNMENTAL REGULATION

The Company's business is subject to comprehensive regulation by numerous
federal governmental agencies, including the FDA, CPSC, and the USDA. In
addition, the Company's manufacturing facilities are regulated by the EPA and
OSHA. Advertising and other forms of promotion and methods of marketing of the
Company's products are subject to regulation by the FTC. The manufacture,
labeling and advertising of the Company's products are also regulated by
various state and local agencies as well as those of each foreign country in
which the Company distributes its products.

The FDA has promulgated regulations under the FDCA and DSHEA with respect to
the manufacture of pharmaceuticals, foods, flavors and dietary supplements and
has established GMPs for, among other things, foods and pharmaceuticals. The
Company's products generally fit within the category of "dietary supplements"
and must be manufactured in compliance with "food" GMPs. Recently, however,
the FDA has announced that it is considering promulgating GMPs specific to
"dietary supplements." If promulgated, these dietary supplement specific GMPs
may be significantly more rigorous than those currently applicable to the
Company's products and may require quality assurance requirements similar to
pharmaceutical GMPs. Therefore, the Company may be required to expend
additional capital and resources in the future to comply with new FDA
regulations. In addition, a product can be removed from the market if it is
shown to pose a significant or unreasonable risk of illness or injury.
Moreover, if the manufacturer makes claims, or the FDA determines, that the
"intended use" of any of the Company's products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the product would meet the
definition of a drug and would require pre-market approval by the FDA of
safety and effectiveness prior to its manufacture and distribution. The
failure of the Company to comply with applicable FDA regulatory requirements
could result in, among other things, injunctions, product withdrawals,
recalls, product seizures, fines and criminal prosecutions.

The safety of the Company's manufacturing operations to personnel and
visitors is regulated by OSHA. The Company's facilities are currently
classified as low risk by OSHA. In addition, the Company's operations are
subject to laws and regulations governing, among other things, air emissions,
waste water discharge, solid and hazardous waste treatment, and storage,
disposal and remediation of releases of hazardous materials administered by
the EPA and other state and local authorities. In particular, California's
Proposition 65 requires warnings on premises and on labels of products that
contain chemicals listed by the state which are known to cause cancer or
reproductive toxicity (such as certain amounts of lead connected to calcium.)
The Company has made and intends to continue to make the necessary
expenditures for environmental compliance. Health and safety and/or
environmental laws and regulations may become more stringent in the future
which would increase the costs of compliance.

The Company supplies natural products, ingredients and nutritional
supplement products that are further processed, packaged, labeled, distributed
and sold by third party manufacturers, marketers and/or retailers that, along
with other similar participants in the nutritional industry, are subject to
governmental regulations with respect to their businesses. Though not directly
applicable to the Company, the enactment of DSHEA has had a significant effect
on the nutritional industry, which effect the Company believes to be
favorable. DSHEA revised the provisions of the FDCA concerning the regulation
of dietary supplements. The legislation for the first time defined "dietary
supplement" as a product intended to supplement the diet that contains one or
more of certain dietary ingredients, such as a vitamin, a mineral, an herb or
botanical, an amino acid, a dietary substance for use by humans to supplement
the diet by increasing the total dietary intake, or a concentrate, metabolite,
constituent, extract, or combination of the preceding ingredients. A
substantial portion of the products sold by the Company are ingredients for
dietary supplements.

Under the current provisions of the FDCA, there are four categories of
claims that pertain to the regulation of dietary supplements. Health claims
are claims that describe the relationship between a nutrient or dietary
ingredient and a disease or health related condition and can be made on the
labeling of dietary supplements if supported by significant scientific
consensus and authorized by the FDA in advance through notice and comment
rulemaking. Nutrient content claims describe the nutritional value of the
product and may be made if defined by the FDA through notice and comment
rulemaking and if one serving of the product meets the definition. Health
claims and nutrient content claims may also be made if a scientific body of
the U.S. government with official responsibility for the public health has
made an authoritative statement regarding the claim, the claim accurately
reflects that statement and the manufacturer, among other things, provides the
FDA with notice of and basis for the claim at least 120 days before the
introduction of the supplement with a label containing the claim into
interstate commerce. Statements of nutritional support or product performance,
which are permitted on labeling of dietary supplements without FDA pre-
approval, are defined to include statements that (i) claim a benefit related
to a classical nutrient deficiency disease and discloses the prevalence of
such disease in the United States, (ii) describe the role of a nutrient or
dietary ingredient intended to affect the structure or function in humans,
(iii) characterize the documented mechanism by which a dietary ingredient acts
to maintain such structure or function or (iv) describe general well-being
from consumption of a nutrient or dietary ingredient. In order to make a
nutritional support claim the marketer must possess substantiation to
demonstrate that the claim is not false or misleading and, if the claim is for
a dietary ingredient that does not provide traditional nutritional value,
prominent disclosure of the lack of FDA review of the relevant statement, and
notification to the FDA of using the claim is required. Drug claims are
representations that a product is intended to diagnose, mitigate, treat, cure
or prevent a disease. Drug claims are prohibited from use in the labeling of
dietary supplements without pre-market approval by regulatory agencies of the
safety and effectiveness prior to its manufacture and distribution.

The advertising of nutritional supplements is subject to regulation by the
Federal Trade Commission (the "FTC") under the Federal Trade Commission Act
(the "FTCA"). The FTCA prohibits unfair methods of competition and unfair or
deceptive acts or practices in or affecting commerce. In addition, the FTCA
provides that the dissemination, or the causing to be disseminated, of any
false advertisement pertaining to drugs or foods, which would include
nutritional supplements, is an unfair or deceptive act or practice. Under the
FTC's substantiation doctrine, an advertiser is required to have a "reasonable
basis" for all objective product claims before the claims are made. Failure to
adequately substantiate claims may be considered either deceptive or unfair
practices. Pursuant to this FTC requirement, the Company or its customers are
required to have adequate substantiation for all material advertising claims
made for their products. The type of substantiation will be dependent upon the
product claims made. For example, a health claim normally would require
competent and reliable scientific evidence, while a taste claim would require
only survey evidence.

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

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

The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, or more stringent
interpretations of current laws or regulations, from time to time in the
future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require, among other things, the reformulation of certain products to meet new
standards, the discontinuance of certain products not able to be reformulated,
the imposition of additional quality assurance procedures, or expanded or
different scientific substantiation.

INTELLECTUAL PROPERTY PROTECTION

The Company relies on common law trademark rights to protect its
unregistered trademarks. Common law trademark rights generally are limited to
the geographic area in which the trademark is actually used, while a United
States federal registration of a trademark enables the registrant to stop the
unauthorized use of the trademark by any third party anywhere in the United
States.

The Company operates in certain lines of business where innovation,
investment in new ideas and protection of proprietary information are
important to success. The Company relies on a variety of intellectual property
protections for its products and services. The Company has applied for a
patent on its method and apparatus for cryogenic ingredient processing which
increases milling capacity. Although the Company has no other patents, pending
or otherwise, relating to any of its products or other proprietary right, the
Company relies on other intellectual property protections (including statutory
and common law protections relating to trade secrets and unfair competition)
to protect its proprietary formulas, processes, techniques and know-how.

Although the Company seeks to ensure that it does not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Any infringement claims by third parties against the Company may have
a material adverse effect on the Company's business, financial condition and
results of operations

EMPLOYEES

As of June 30, 1998, the Founding Companies collectively had 196 employees,
including 19 management personnel, 12 laboratory personnel, 6 sales personnel,
131 production personnel and 28 administrative personnel. Management does not
anticipate reductions in staff as a result of the consolidation of the
Founding Companies. Rather, as the Company's internal growth and acquisition
strategies are implemented, Management expects that the number of employees
will increase.

FACILITIES

It is the current intention of Management that all of the Company's
facilities will be leased. Prior to the Mergers, certain stockholders of QBI
and ACTA owned the buildings used for their respective offices and operations.
As part of the agreements pursuant to which QBI and ACTA are being acquired,
the owners of these buildings have agreed to long-term leases at valuations
not to exceed fair market value. See "Certain Transactions." The following is
a list of all facilities utilized by the Founding Companies:

FOUNDING COMPANY LOCATION SQUARE FOOTAGE
- ---------------- -------- --------------

ACTA............................ Sunnyvale, California(1) 37,000
QBI............................. South Plainfield, New Jersey(1) 74,000
North Las Vegas, Nevada(2) 9,000
Hakalau, Hawaii(1) 3,200
Northridge...................... Chatsworth, California(2)(3) 25,000
Bactolac........................ Westbury, New York(2)(4) 15,000

- --------
(1) This facility is leased from an affiliate of the Company. See "Certain
Transactions."
(2) This facility is leased from an independent third party.
(3) Consists of two facilities comprising an aggregate of 25,000 sq. feet.
(4) Management anticipates this location will be expanded from 9,000 sq. feet
to 15,000 sq. feet effective October 1998.

LEGAL PROCEEDINGS

There are no lawsuits currently pending or, to the knowledge of the Company,
threatened, either individually or in the aggregate, the outcome of which, if
adverse, is expected to have a material adverse affect on the financial
condition or results of operations of the Company.

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth information concerning the Company's
directors, executive officers and key employees upon completion of the
Offering.

NAME AGE POSITION
---- --- --------

Gregory Pusey(1)..................... 46 Chairman of the Board, Director
Joseph R. Schortz.................... 48 President, Chief Executive Officer,
Director
David Chang.......................... 46 Executive Vice President, Director
Barry C. Loder(2).................... 40 Senior Vice President-Finance,
Director

- --------
(1) Prior to the Offering, Mr. Pusey was also a Vice President and the
Secretary of Advanced Nutraceuticals.

(2) Prior to the Offering, Mr. Loder was also the President and Chief
Financial Officer of Advanced Nutraceuticals.

Gregory Pusey has served as an officer and director of Advanced
Nutraceuticals since December 1997. He has served both as President of
Livingston Capital, Ltd. and President of the General Partner of Graystone
Capital, Ltd., venture capital firms, since 1987. From June 1994 to August
1998, he served as a director and consultant to Nutrition For Life
International, Inc., a publicly held company that markets nutritional
supplements and other consumer products. Since 1988, Mr. Pusey has been the
President and a director of Cambridge Holdings, Ltd., a publicly held real
estate development firm. Mr. Pusey graduated summa cum laude from Boston
College with a B.S. degree in Finance in 1974.

Joseph R. Schortz has provided services to QBI since 1988. In addition to
financial statement and tax return preparation, from 1988 through 1995, the
services included consulting in areas including human resources, management
information systems, feasibility, capital formation, financing, litigation
support and strategic business and financial planning. Since 1996 Mr. Schortz
has served as President of QBI. He has been highly involved in implementation
of QBI's business plan, including securing the funding necessary for QBI's
cryogenic processing equipment; farming as an aggressive domestic grower of
specialty crops; acquisition of supplier Botanical Products International,
Inc.; internal growth; extraction processing alternatives, etc. Mr. Schortz
earned a Certified Public Accountants license in 1975, and practiced public
accountancy from 1971 through 1996. Organizations in which he is currently
active include the American Institute of Certified Public Accountants (AICPA),
the New Jersey Society of Certified Public Accountant's (NJSCPA) and the LCM
Foundation International, Inc. Mr. Schortz graduated from Pfeiffer College
with a B.S. degree in Accounting in 1971.

David Chang has served as President of Acta International, Inc. since 1995.
Mr. Chang has served as Vice President for Acta Pharmacal Co. since 1990. From
1989 to 1990, Mr. Chang was the regional director for NMC Homecare, a division
of W.R. Grace. Mr. Chang served as area director for InfusionCare, Inc., a
division of AVON, from 1988 to 1989, general manager of CliniShare, Inc. from
1983 to 1987 and Director of Pharmacy of the San Fernando Community Hospital
from 1979 to 1983. From 1977 to 1979, Mr. Chang was staff pharmacist for the
University of California at Los Angeles. Mr. Chang holds a Doctor of Pharmacy
degree from the University of California, San Francisco, and has practiced as
a California pharmacist.

Barry C. Loder has served as an officer and director of Advanced
Nutraceuticals since September 1997. He serves as President of BCL Partners,
Inc. since January 1998. BCL is an investment banking firm that specializes in
mergers and acquisitions. From March 1995 to January 1998, Mr. Loder served as
Chief Financial Officer and later also as Chief Operating Officer of Nutrition
For Life International, Inc. From October 1993 through March 1995, Mr. Loder
was a financial consultant, performing corporate finance, merger and
acquisition and other financing activities. Mr. Loder was the Manager of
Mergers and Acquisitions for Allwaste, Inc. from 1992 to 1994. Mr. Loder was
co-founder of Republic Waste Industries and served as Senior Vice President of
Finance

during 1990 and 1991. Mr. Loder has a Masters Degree in Business
Administration from Houston Baptist University, a B.A. in accounting from
Walsh University and is a Certified Public Accountant, and holds a Part II
Chartered Financial Analyst designation.

Within 90 days after the consummation of the Offering, the Company
anticipates it will name up to four additional directors, at least two of whom
will be independent directors. Following the consummation of the Offering, the
Company will establish an Audit Committee consisting of at least two
independent directors and a Compensation Committee consisting of at least two
independent directors.

OTHER KEY PERSONNEL

Brett Richman (46) has served as President of Northridge for 12 years. At
Northridge, Mr. Richman is in charge of all marketing, domestic and
international sales, launching and developing new territories, lecturing
world-wide, formulation and product development. Mr. Richman also lectures and
writes for Multi-Marketing News, a leading direct marketing periodical. Mr.
Richman graduated from the University of California magna cum laude with a
Bachelors degree in Eastern Religion and Philosophy. Mr. Richman is not a
director or officer of the Company.

Pailla Reddy (40) is President and founder of Bactolac Pharmaceuticals,
Inc., located in Westbury, New York since late 1995. At Bactolac, Mr. Reddy
manages and organizes operations, develops formulations and manages the
selection and procurement of all received raw materials. From 1991 to 1995,
Mr. Reddy served as production manager for Maxus Pharmaceutical, Inc. where he
managed daily operations and production. From 1983 to 1991, Mr. Reddy served
as a research chemist, production manager and ultimately the director of
operations to Wellcome Pharmaceuticals, Ltd. located in Lagos, Nigeria. Mr.
Reddy has a Bachelors in chemistry with genetics and botany, a Masters in
organic chemistry and Ph.D. in organic chemistry from Kanpur University,
India. Mr. Reddy is not a director or officer of the Company.

DIRECTORS' COMPENSATION

Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each
director who is not an employee of the Company or one of its subsidiaries will
receive a fee of $2,000 for attendance at each Board of Directors' meeting and
$1,000 for each committee meeting.

EXECUTIVE COMPENSATION

ANI was incorporated in September 1997, has conducted limited operations and
generated no revenue to date and did not pay any of its executive officers
compensation during 1997. The Company anticipates that during 1998 its five
most highly compensated executive officers will be Joseph R. Schortz, David
Chang, Greg Pusey and Barry Loder and on the subsidiary level, Brett Richman.

Employment Agreements and Termination of Employment and Change in Control
Arrangements

Each of Joseph R. Schortz, David Chang, Greg Pusey, Barry Loder, Brett
Richman and Pailla Reddy have agreed to enter into employment agreements upon
consummation of the Offering with the Company providing for annual base
salaries of $250,000, $150,000, $135,000, $135,000, $250,000 and $200,000,
respectively, and bonuses payable at the discretion of the Company's Board of
Directors. Each employment agreement will be for a term of three years, except
Mr. Richman's and Mr. Reddy's which will each be for two years. Each of these
agreements will provide that, in the event of a termination of employment by
the Company without cause, the employee will be entitled to receive severance
from the Company an amount equal to one year's salary, payable in one lump sum
on the effective date of termination or termination in connection with a
"Change in Control" of the Company (as defined in the employment agreements).

1998 STOCK OPTION PLAN

No stock options were granted to, or exercised by or held by any executive
officer in 1997. The Company's Board of Directors adopted and in September
1998 the Company's stockholders approved the Company's 1998 Stock Option (the
"Plan"). The purpose of the Plan is to provide employees, consultants and
other service providers with additional incentives by increasing their
ownership interests in the Company. Individual awards under the Plan may take
the form of either incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs").

The Compensation Committee will administer the Plan and select the
individuals who will receive awards and establish the terms and conditions of
those awards. The maximum number of shares of Common Stock that may be subject
to outstanding awards is 1,300,000 shares. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.

The Plan will remain in effect until September 2008. The Plan may be amended
by the Board of Directors without the consent of the stockholders of the
Company, except that any amendment, although effective when made, will be
subject to stockholder approval if required by any Federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted. Under the Plan, no
person may be granted options to purchase in excess of 200,000 shares of
Common Stock in any calendar year.

At the closing of the Offering, NQSOs to purchase a total of 558,800 shares
of Common Stock will be granted as follows: options to purchase 200,000 shares
will be granted to Mr. Schortz and options to purchase an aggregate of 358,800
shares will be granted to certain non-stockholder employees and consultants of
the Founding Companies. Each of the foregoing options will have an exercise
price equal to the initial public offering price per share. The Company
expects that these options will vest at the rate of 25% per year, commencing
on the first anniversary of the Offering and will expire at the earlier of
seven years from the date of grant or three months following termination of
employment.

NON-DISCRETIONARY STOCK OPTION PLAN

The Company's Non-Discretionary Stock Option Plan (the "Directors' Plan"),
which was adopted by the Board of Directors in August 1998 and approved by the
Company's stockholders in September 1998, provides for (i) the automatic grant
to each non-employee director serving at the commencement of the Offering of
an option to purchase 10,000 shares, or (ii) the automatic grant to each non-
employee director of an option to purchase 10,000 shares upon such person's
initial election as a director and (iii) an automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders thereafter at which time the director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial election as a director. All options will have an
exercise price per share equal to the fair market value of the Common Stock on
the date of grant, are exercisable six months after the date of grant as to
all shares subject thereto and expire on the earlier of seven years from the
date of grant or 30 days after termination of service as a director.

CERTAIN TRANSACTIONS

ORGANIZATION OF THE COMPANY

In connection with the formation of Advanced Nutraceuticals, in December
1997, Advanced Nutraceuticals sold 672,000 shares of Common Stock at $.008 per
share to Mr. Pusey, 817,200 shares of Common Stock at $.008 per share to Mr.
Loder and an additional 310,800 shares at $.008 per share to various
unaffiliated purchasers. In June 1998 Advanced Nutraceuticals sold 588,000
additional shares of Common Stock at $1.67 per share in a private placement,
of which 18,000 shares were purchased by certain family members of Mr. Pusey.

Simultaneously with the consummation of the Offering, Advanced
Nutraceuticals will acquire by merger all of the issued and outstanding stock
of the Founding Companies, at which time each Founding Company will become a
wholly-owned subsidiary of the Company. The aggregate consideration to be paid
by Advanced Nutraceuticals in the Mergers consists of $37.55 million in cash,
$2.5 million in promissory notes issued by the Company ("Purchase Notes") and
[ ] shares of Common Stock. The Company has also agreed to pay $2.9 million
in finders fees for Bactolac and ACTA to nonaffiliated parties.

The consummation of each Merger is subject to customary conditions. These
conditions include, among others, the continuing accuracy on the closing date
of the Mergers of the representations and warranties of the Founding Companies
and the principal stockholders thereof and of Advanced Nutraceuticals, the
performance by each of them of all covenants included in the agreements
providing for and relating to the Mergers and the nonexistence of a material
adverse change in the results of operations, financial condition or business
of each Founding Company.

There can be no assurance that the conditions to closing of the Mergers will
be satisfied or waived or that the acquisition agreements will not be
terminated prior to consummation. If any of the Mergers is terminated for any
reason, the Company does not intend to consummate the Offering on the terms
described herein.

Each merger agreement executed in connection with the Mergers contains
certain representations and warranties regarding the business, assets,
liabilities and financial condition of the respective Founding Companies.
These representations and warranties will survive the closing of the Mergers
for a period of at least 12 months following the consummation of the Offering.

The following table sets forth the pro forma consideration to be paid in
cash, shares of the Company's common stock and purchase notes by Advanced
Nutraceuticals as of June 30, 1998 for each of the Founding Companies:

SHARES OF
COMMON PURCHASE
CASH STOCK * NOTES
------- --------- --------
(DOLLARS IN THOUSANDS)

QBI............................................... $ 8,050 [ ] $ --
ACTA.............................................. 19,000 [ ] --
Northridge........................................ 7,500 [ ] 2,000
Bactolac.......................................... 3,000 [ ] 500
------- --- ------
Total............................................. $37,550 [ ] $2,500
======= === ======

- --------
*Assuming an offering price of $[ ] per share.

In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain officers, directors, key employees and holders
of more than 5% of the outstanding shares of the Company, together with their
spouses and trusts for which they act as trustees, will receive cash and
shares of Common Stock and Purchase Notes of the Company as follows:

SHARES
OF
COMMON PURCHASE % OF STOCK
NAME CASH(1) STOCK NOTES OWNERSHIP(2)
- ---- ------- ------ -------- ------------
(DOLLARS IN THOUSANDS)

David Chang................................ $11,750 [ ] $ -0- [ ]%
Botanical Trust............................ 4,428 [ ] -0- [ ]%
Joseph R. Schortz(2)....................... 2,254 [ ] -0- [ ]%
Pailla Sadhana Reddy....................... 3,000 [ ] 500 [ ]%
Lawrence J. Katz........................... 1,368 [ ] -0- [ ]%
Brett Richman.............................. 3,375 [ ] 900 [ ]%
Jane Richman............................... 3,375 [ ] 900 [ ]%
Holmby Ave. LLC............................ 750 [ ] 200 [ ]%
Kuang Yu Chang............................. 3,880 [ ] -0- [ ]%
Robert C. Chiang........................... 150 [ ] -0- [ ]%
------- ---- ------ ----
Total...................................... $34,330 [ ] $2,500
======= ==== ====== ====

- --------
(1) Excludes $3.22 million of costs, $2.9 million of which are finder's fees.

(2) After giving effect to 558,800 shares subject to options, including
200,000 shares subject to options granted to Mr. Schortz.

Pursuant to the agreements to be entered into in connection with the
Mergers, certain stockholders of the Founding Companies have agreed not to
compete with the Company for three years, commencing on the date of
consummation of the Offering.

Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by their
stockholders. At June 30, 1998, the aggregate amount of indebtedness of these
Founding Companies that was subject to personal guarantees was approximately
$6.2 million. The Company intends to use its best efforts to have the personal
guarantees of this indebtedness released within 60 days after the closing of
the Offering and, in the event that certain of the guarantees cannot be
released, to repay such indebtedness. See "Use of Proceeds."

LEASES OF REAL PROPERTY BY FOUNDING COMPANIES

Following the Mergers, QBI will continue to lease its facilities in South
Plainfield, New Jersey. One of the properties is owned by MRA Associates, LLC,
of which Nathan Belkowitz, Mr. Schortz and Lawrence J. Katz own 66 2/3%, 16
2/3% and 16 2/3%, respectively. The existing lease with MRA Associates will be
replaced upon consummation of the Offering and will provide for a base monthly
rental payment of $17,667 or $212,000 per year, with an adjustment increase of
3% per year during the term of the lease. The new lease will initially expire
ten years from the consummation of the Offering. QBI will have two options to
extend the lease for five years each and a right to purchase the property
covered by the lease at the fair market value anytime during the lease term.
The Company believes that the rent for this property does not exceed fair
market value.

Following the Mergers, Acta Pharmacal will continue to lease its facilities
in Sunnyvale, California. These properties are owned by Chang & Chang
Partnership, a company wholly-owned by Kuang Yu Chang and David T. Chang (the
"Chang Partnership"). David T. Chang is President of Acta International and
will serve as Executive Vice President of the Company after the consummation
of the Offering. Kuang Yu Chang, the father of David T. Chang, is President of
Acta Pharmacal and will serve as a consultant to the Company after the
consummation of the Offering. The lease expires on October 31, 2000 and
provides for a monthly rental payment

of $32,000 or $384,000 per year. The Company believes that the rent for this
property does not exceed fair market value. Following the Mergers, Acta
International will continue to lease its existing facilities in Sunnyvale,
California. These properties are owned by Chang Partnership. The lease expires
on October 31, 2000 and provides for a monthly rental payment of $20,000 or
$240,000 per year. The Company believes that the rent for this property does
not exceed fair market value.

OTHER TRANSACTIONS

Consulting Contract with Belkowitz Botanicals, Inc.

QBI has entered into an agreement with Belkowitz Botanicals, Inc., a New
Jersey corporation of which Mr. Belkowitz is the sole stockholder, pursuant to
which Belkowitz Botanicals, Inc. has agreed to provide the full time
consulting services of Mr. Belkowitz to undertake research and development
services for QBI and to provide services to QBI concerning specific aspects of
manufacturing operations, including specialty equipment use and
implementation. Such agreement has a three year term and will terminate upon
consummation of QBI's merger with the Company. Upon the consummation of the
merger with QBI, Belkowitz Botanicals, Inc. has agreed to enter into a three
year consulting agreement with the Company for a fee of approximately $21,000
per month to continue providing such services to QBI. In addition, Mr.
Belkowitz will enter into an agreement not to compete with the Company for at
least one year after the termination of the new consulting agreement. In 1997
Mr. Belkowitz pleaded guilty to a charge of interstate commercial bribery in
the amount of $2,000. Mr. Belkowitz is not, and will not be, after
consummation of the Offering, an officer, director or employee of the Company.
All of Mr. Belkowitz's interest in QBI, consisting of 55% of the shares of QBI
outstanding prior to the Offering, is held in Trust (the "Botanical Trust") of
which Joseph R. Schortz is the sole trustee and all of the interest of Mr.
Belkowitz as beneficiary of the Botanical Trust has been assigned to an escrow
agent. See "Principal Stockholders." The entire corpus of the Botanical Trust
has been pledged as collateral to secure payment of a $1,200,000 note of QBI
pursuant to a litigation settlement. See "--QBI Promissory Note."

Upon consummation of the Offering, the outstanding principal balance of the
note delivered by QBI in its litigation settlement will be paid in full with a
portion of the proceeds of the Offering (see "Use of Proceeds"). Upon payment
of the QBI note, the Botanical Trust will terminate, and the escrow agent has
agreed to deliver the cash portion of the acquisition consideration by the
Company of QBI to Mr. Belkowitz and the shares of ANI to an irrevocable trust
(the "New Botanical Trust" and such shares, the "New Botanical Trust Shares")
of which Mr. Belkowitz is the beneficiary and Mr. Schortz is the sole trustee.
Until termination of the New Botanical Trust, ten years from the date of
consummation of the Offering, Mr. Schortz, in his capacity as trustee, will
have sole voting power and disposition power over the New Botanical Trust
Shares.

QBI Promissory Note

In December 1997, in connection with the settlement of certain litigation
against QBI and certain of its officers, QBI issued a non-interest bearing
promissory note in the principal amount of $1,200,000 payable in sixty monthly
installments of $20,000. The note is personally guaranteed by Mr. Belkowitz
and is collateralized by, among other things, a pledge of shares of QBI held
by Mr. Belkowitz equal to two-thirds of the outstanding shares of QBI (of
which shares equal to 11 2/3% of the outstanding shares of QBI were
subsequently transferred to Mr. Schortz subject to such pledge), a second
mortgage on certain property leased to QBI and owned by MRA Associates, LLC,
an affiliate of QBI in which Mr. Belkowitz, Mr. Schortz and Mr. Katz are
principals. As of June 30, 1998, there was $1,040,000 principal amount
remaining on the note. A portion of the net proceeds to the Company from the
Offering will be used to pay the balance of the note immediately upon
consummation of the Offering.

Notes Receivable and Advances Due from Stockholders of the Founding Companies

During 1997 ACTA advanced $300,000 to K.Y. Chang, father of David Chang, on
a non-interest bearing basis. The balance of the advance outstanding on June
30, 1998, was $100,000, all of which has subsequently been paid.

As of January 1, 1997, QBI had advanced $127,597 to three farming operations
which are 81% owned by the stockholders of QBI. During 1997 an additional
$489,993 was advanced with respect to such farming operations. As of June 30,
1998, the advances outstanding had increased to $809,427. The advances are
non-interest bearing and are scheduled for repayment as the crops are
harvested. The 81% interest in the three farming operations will be
contributed to QBI upon consummation of the merger with QBI.

Notes Payable to Stockholders of the Founding Companies

As of January 1, 1997, ACTA owed $1,614,534 to the Chang Partnership, with
interest rates ranging from 7% to 8%. The notes have no stated maturity terms
and as of December 31, 1997, the outstanding balance was $1,396,476 and as of
June 30, 1998 the outstanding balance was $1,363,950.

As of January 1, 1997, QBI owed $172,099 to two of its officers at an
interest rate of 8%. During 1997, $22,328 was repaid and the remaining
$149,771 was contributed to additional paid in capital of QBI by the holders.

As of October 1, 1996, Northridge owed $88,000 to Jane Richman and Brett
Richman under 7% demand notes. As of September 30, 1997, $20,000 had been
repaid on the notes, with and additional $12,500 repaid during the six months
ended June 30, 1998.

Transactions with Affiliate of a Founding Company Stockholder

Bactolac sells products to, and purchases products from, an entity in which
the stockholder of Bactolac holds a 20% ownership interest. During 1997,
Bactolac had sales of $1,213,121 and purchases of $459,790 with this entity.
As of December 31, 1997, $452,231 was due from the entity for sales and
$44,509 was payable to the entity for purchases. During the six months ended
June 30, 1998, Bactolac had sales of $561,343 and purchases of $245,947 with
this entity. As of June 30, 1998, $332,882 was due from the entity for sales
and $98,367 was payable to the entity for purchases.

COMPANY CONFLICT OF INTEREST POLICY

Any future transactions with affiliated parties of the Company or its
subsidiaries will be subject to the approval in advance by a majority of
disinterested members of the Board of Directors.

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of the Common Stock, after giving effect to the Mergers and the
Offering, by (i) each person known to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each Company director; (iii) the
person expected to be named Chief Executive Officer and those persons expected
to be the next four most highly compensated executive officers of the Company
following consummation of Mergers and the Offering; and (iv) all executive
officers and directors as a group. All persons listed have an address c/o the
Company's principal executive offices and have sole voting and investment
power with respect to their shares unless otherwise indicated.

SHARES
BENEFICIALLY
OWNED AFTER
OFFERING(3)
-----------------
NAME NUMBER PERCENT(3)
---- ------ ----------

David Chang............................................... [ ] [ ]%
Joseph R. Schortz(1)(2)................................... [ ] [ ]%
Barry C. Loder............................................ [ ] [ ]%
Gregory Pusey............................................. [ ] [ ]%
Brett Richman(4).......................................... [ ] [ ]%
All executive officers and directors as a group (6
persons)................................................. [ ] [ ]

- --------
(1) Includes [ ] shares that are owned by the New Botanical Trust of which
Mr. Schortz is the sole trustee and holds voting and disposition power.

(2) Does not include 200,000 shares subject to options expected to be issued
that will become exercisable in four equal annual installments commencing
on the first anniversary of the consummation of the Offering.

(3) Does not include 558,800 shares subject to options expected to be issued
that will become exercisable in four equal annual installments commencing
on the first anniversary of the consummation of the Offering.

(4) An officer of a subsidiary of the Company, not an officer or director of
the Company.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 30,000,000 shares of
capital stock and 5,000,000 shares of Preferred Stock. Upon completion of the
Mergers and the Offering, the Company will have outstanding [ ] shares of
Common Stock and no shares of Preferred Stock. In September 1998, the
shareholders of Advanced Nutraceuticals approved the Organizational Merger.
The following discussion is qualified in its entirety by reference to the
Certificate of Incorporation of Advanced Nutraceuticals, Inc. (the "ANI
Certificate"), which is included as an exhibit to the Registration Statement
of which this prospectus is a part.

COMMON STOCK

The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. Upon consummation of the Offering, the Board of Directors will
be classified into three classes as nearly equal in number as possible, with
the term of each class expiring on a staggered basis. The classification of
the Board of Directors may make it more difficult to change the composition of
the Board of Directors and thereby may discourage or make more difficult an
attempt by a person or group to obtain control of the Company. Cumulative
voting for the election of directors is not permitted. Any director, or the
entire Board of Directors, may be removed at any time, with cause, by a
majority of the aggregate number of votes which may be cast by the holders of
all of the outstanding shares of capital stock entitled to vote for the
election of directors. The provisions of the ANI Certificate that provide for
a classified board may not be amended or repealed without the approval of 60%
of the vote entitled to be counted in an election of directors.

Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock are entitled to participate pro rata in such dividends
as may be declared in the discretion of the Board of Directors out of funds
legally available therefor. Holders of Common Stock are entitled to share
ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. Holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any
other securities of the Company. All outstanding shares of Common Stock are to
be issued pursuant to the Offering and the Mergers will be, upon payment
therefor, fully paid and non-assessable.

The Company has applied for the inclusion of the Common Stock on the Nasdaq
National Market under the symbol "ANUI," subject to official notice of
issuance.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or, if no shares of the series have been issued, to
change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations
or restrictions thereof, including dividend rights (including whether
dividends are cumulative), dividend rates, terms of redemption (including
sinking fund provisions), redemption prices, conversion rights and liquidation
preferences of the shares constituting any series of the Preferred Stock, in
each case without any further action or vote by the stockholders. The Company
has no current plans to issue any shares of Preferred Stock.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.

STATUTORY BUSINESS COMBINATION PROVISION

The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the time that such stockholder became an interested
stockholder, unless: (i) prior to such time, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) at or after such
time, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. An "interested stockholder" is defined as any
person that is (a) the owner of 15% or more of the outstanding voting stock of
the corporation or (b) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested
stockholder.

CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS

Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for dividend payments or stock repurchases illegal
under Delaware law or any transaction in which a director has derived an
improper personal benefit.

Additionally, the Bylaws of the Company provide that directors, officers and
non-officer employees and agents shall be, indemnified by the Company to the
fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities actually and
reasonably incurred in connection with service for or on behalf of the
Company, and further provide for the advancing of expenses incurred in defense
of claims following delivery of an undertaking by the director, officer,
employee or agent to repay any amounts advanced if it is ultimately determined
that indemnification is not permitted under Delaware Law or the Bylaws.

The Company's Bylaws provide that a special meeting of stockholders may be
called only by the Company's President or by a majority of the Board of
Directors. The Bylaws provide that notices of special meeting must include a
statement of purpose of the special meeting.

The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or
a committee thereof, of candidates for election as directors (the "Nomination
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company generally not less than 53 nor more
than 90 days prior to the meeting at which directors are to be elected. The
requirements as to the form and timing of that notice are specified in the
Company's Bylaws. If the Chairman of the Board of Directors determines that a
person was not nominated in accordance with the Nomination Procedure, such
person will not be eligible for election as a director.

Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of
directors, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors at a particular meeting if the proper
procedures are not followed or (ii) may discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
stockholders.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Corporate Stock
Transfer, Inc.

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Mergers and completion of the Offering, the Company
will have outstanding [ ] shares of Common Stock. The 5,000,000 shares sold
in the Offering (plus any additional shares sold upon exercise of the
Underwriters' over-allotment option) will be freely tradable without
restriction unless acquired by affiliates of the Company. None of the
remaining outstanding shares of Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.

In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired
from the Company or the date on which they were acquired from an affiliate,
the holder of such restricted securities (including an affiliate) is entitled
to sell a number of shares within

any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of the Common Stock (approximately [ ] shares
upon completion of the Offering) or (ii) the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements pertaining
to the manner of such sales, notices of such sales and the availability of
current public information concerning the Company. Affiliates may sell shares
not constituting restricted securities in accordance with the foregoing volume
limitations and other requirements but without regard to the one year holding
period. Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date on which restricted securities were acquired
from the Company and the date on which they were acquired from an affiliate, a
holder of such restricted securities who is not an affiliate at the time of
the sale and has not been an affiliate for a least three months prior to the
sale is entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.

The Company and its officers, directors and certain stockholders, who
beneficially own [ ] shares in the aggregate, have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Sutro & Co.
Incorporated except that the Company may issue Common Stock in connection with
acquisitions. In addition, all of the stockholders of the Founding Companies,
the Company's officers and directors and certain stockholders, holding in the
aggregate [ ] shares of Common Stock, have agreed with the Company that they
will not sell any of their shares for a period of twelve months after the
closing of the Offering. These stockholders, however, have the right, in the
event the Company proposes to register under the Securities Act any Common
Stock for its own account or for the account of others, subject to certain
exceptions, to require the Company to include their shares in the
registration, subject to the right of the Company to exclude some or all of
the shares in the Offering upon the advice of the managing underwriter.

Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price
for the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the
public market could adversely affect prevailing market prices and the future
ability of the Company to raise equity capital and complete any additional
acquisitions for Common Stock.

UNDERWRITING

The Underwriters named below, acting through their representatives, Sutro &
Co. Incorporated and [Other Underwriters Representatives] (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement with the Company, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective
names. The Underwriters are committed to purchase and pay for all such shares
if any are purchased.

NUMBER OF
UNDERWRITERS SHARES
------------ ---------

Sutro & Co. Incorporated..........................................
---------
Total........................................................... 5,000,000
=========

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the initial public
offering, the price and concessions and reallowances to dealers may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.

The Underwriters have been granted an option exercisable for 45 days after
the date of the Underwriting Agreement to purchase up to a maximum of 750,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the foregoing table.

The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities relating to the offering contemplated by
this Prospectus, including liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in
respect thereof.

The Company's directors, officers and stockholders have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock of the Company for
a period of 180 days after the date of this Prospectus without the prior
written consent of Sutro & Co. Incorporated except for a bona fide gift to a
third party or as a distribution to the partners or stockholders of a Company
stockholder, provided that the recipient(s) thereof agree in writing to be
bound by the terms of the lock-up agreement to which such stockholder is
bound.

The Underwriters may engage in stabilizing bids, cover syndicate short
positions or impose penalty bids. If the Underwriters create a short position
in the Common Stock in connection with the Offering (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus), the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.

The Representatives also may impose a penalty bid on certain Underwriters.
This means that if the Representatives purchase shares of Common Stock in the
open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling
concession from the Underwriters who sold those shares as part of the
Offering. In general, purchases of a security for the purpose of stabilization
or to reduce a syndicate short position could cause the price of the security
to be higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid may have an effect of the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude or, or any effect that the
transactions described above may have on, the price of the Common Stock.

In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or,
once commenced, will not discontinue such transactions at any time without
notice.

The Company has agreed to sell to Sutro & Co. Incorporated warrants to
purchase from the Company up to 200,000 shares of Common Stock (230,000 shares
of Common Stock if the over-allotment option is exercised in full) at an
exercise price per share equal to 120% of the initial public offering price
per share (the "Representatives' Warrants"). Sutro & Co. Incorporated shall
pay $.01 per warrant to the Company for its Representatives' Warrants. The
Representatives' Warrants may not be sold, transferred, assigned, pledged or
hypothecated for a period of twelve months from the effective date of the
Registration Statement of which this Prospectus is a part, except to officers
and partners (but not directors) of the Representatives and other members of
the underwriting or selling group and officers or partners (but not directors)
thereof in compliance with the applicable provisions of the Corporate
Financing Rules of the National Association of Securities Dealers, Inc. The
Representatives' Warrants will be exercisable for a four year period beginning
one year from the effective date of the Registration Statement of which this
Prospectus is a part. In addition, the Company has granted certain demand and
piggyback registration rights to the holders of the Representatives' Warrants,
which enable them to register the Common Stock underlying the Representatives'
Warrants under the Securities Act.

Prior to the Offering, there has been no public market for the Common Stock.
Accordingly, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Founding Companies in recent periods, the
market capitalization and stages of development of other companies which the
Company and the Representatives believed to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant by the Company and the
Representatives. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

A principal of Sutro & Co. Incorporated owns beneficially and of record
shares of Common Stock constituting less than 2% of the outstanding shares of
the Company.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed on for the
Company by Paul, Hastings, Janofsky & Walker LLP, Los Angeles, California, a
principal of which owns beneficially and of record shares of Common Stock
constituting less than 1% of the outstanding shares of Common Stock of the
Company. Certain legal matters related to the Offering will be passed on for
the Underwriters by Latham & Watkins, Los Angeles, California.

EXPERTS

The audited financial statements of Advanced Nutraceuticals as of December
31, 1997 and for the period then ended, ACTA as of December 31, 1997 and 1996
and each of the three years ended December 31, 1997, QBI as of December 31,
1997 and for the year then ended, Northridge as of September 30, 1997 and 1996
and for the two years ended September 30, 1997 and Bactolac as of December 31,
1997 and 1996 and for the two years ended December 31, 1997, appearing in this
Prospectus and the registration statement of which this Prospectus is a part
have been audited by Grant Thornton LLP, independent certified public
accountants, as stated in their reports appearing herein and elsewhere in the
registration statement of which this Prospectus is a part, and are included in
reliance upon the Reports of said firm and given upon their authority as
experts in accounting and auditing.

The financial statement of QBI as of December 31, 1996 and for the year then
ended appearing in this Prospectus and the registration statement of which
this Prospectus is a part have been audited by Amper, Politziner & Mattia
P.A., independent certified public accountants, as stated in their report
appearing herein and elsewhere in the registration statement of which this
Prospectus is a part and are included in reliance upon the reports of said
firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain items of which are omitted in accordance with the rules and
regulations of the SEC. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is hereby made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
For further information with respect to the Company, reference is hereby made
to the Registration Statement and such exhibits and schedules filed as a part
thereof, which may be inspected, without charge, at the Public Reference
Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC
maintains a web site that contains reports, proxy and information statements
regarding registrants that file electronically with the SEC. The address of
this web site is (http://www.sec.gov). Copies of all or any portion of the
Registration Statement may be obtained from the Public Reference Section of
the SEC, upon payment of the prescribed fees.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Summary Financial Data," Selected Financial Data," Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," including without limitation those concerning (i) the Company's
strategies, (ii) the Company's plans for expansion and growth and (iii) the
Company's capital expenditures, contain certain forward-looking statements (as
such term is defined in the private Securities Litigation Reform Act of 1995)
and information relating to the Company that are based on the beliefs of the
management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used herein, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. The risk factors set forth herein the Company's constitute
important cautionary statements identifying important factors that could cause
actual results to differ from those in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company does not
undertake any obligation to release publicly any revisions to these forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.

INDEX TO FINANCIAL STATEMENTS

PAGE
----

ADVANCED NUTRACEUTICALS, INC. (UNAUDITED)
PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation................................................... F-3
Unaudited Pro Forma Combined Balance Sheet.............................. F-4
Unaudited Pro Forma Combined Statements of Operations................... F-5
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-7
ADVANCED NUTRACEUTICALS, INC.
Report of Independent Certified Public Accountants...................... F-14
Balance Sheets.......................................................... F-15
Statements of Operations................................................ F-16
Statements of Stockholders' Equity...................................... F-17
Statements of Cash Flows................................................ F-18
Notes to Financial Statements........................................... F-19
FOUNDING COMPANIES
ACTA PRODUCTS INTERNATIONAL, INC. & ACTA PRODUCTS CORPORATION (THE ACTA
GROUP)
Report of Independent Certified Public Accountants...................... F-23
Combined Balance Sheets................................................. F-24
Combined Statements of Earnings......................................... F-25
Combined Statements of Stockholders' Equity............................. F-26
Combined Statements of Cash Flows....................................... F-27
Notes to Combined Financial Statements.................................. F-28
QUALITY BOTANICAL INGREDIENTS, INC.
Report of Independent Certified Public Accountants...................... F-36
Report of Independent Certified Public Accountants...................... F-37
Balance Sheets.......................................................... F-38
Statements of Operations................................................ F-39
Statements of Stockholders' Equity...................................... F-40
Statements of Cash Flows................................................ F-41
Notes to Financial Statements........................................... F-42
NORTHRIDGE LABORATORIES, INC.
Report of Independent Certified Public Accountants...................... F-51
Balance Sheets.......................................................... F-52
Statements of Earnings.................................................. F-53
Statements of Stockholders' Equity...................................... F-54
Statements of Cash Flows................................................ F-55
Notes to Financial Statements........................................... F-56

F-1

INDEX TO FINANCIAL STATEMENTS--(CONTINUED)

PAGE
----

BACTOLAC PHARMACEUTICALS, INC.
Report of Independent Certified Public Accountants....................... F-62
Balance Sheets........................................................... F-63
Statements of Earnings................................................... F-64
Statements of Stockholder's Equity....................................... F-65
Statements of Cash Flows................................................. F-66
Notes to Financial Statements............................................ F-67

F-2

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The following unaudited pro forma combined financial statements give effect
to the acquisitions by ADVANCED NUTRACEUTICALS, INC. ("ADVANCED
NUTRACEUTICALS") of the outstanding capital stock of each of Acta Products
International, Inc. and Acta Products Corporation (collectively "ACTA" or
"Acta Group"), Quality Botanical Ingredients, Inc., Northridge Laboratories,
Inc., and Bactolac Pharmaceuticals, Inc. (together, the "Founding Companies").
These acquisitions (the "Mergers") will occur simultaneously with the closing
of ADVANCED NUTRACEUTICALS' initial public offering (the "Offering") and will
be accounted for using the purchase method of accounting. ACTA has been
identified as the accounting acquiror in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 97. The unaudited pro forma
combined financial statements also give effect to the issuance of common stock
in connection with the Offering and as partial consideration for the Mergers
to the stockholders of the Founding Companies. These pro forma combined
financial statements are based on the historical financial statements of the
Founding Companies and ADVANCED NUTRACEUTICALS included elsewhere in this
Prospectus and the estimates and assumptions set forth below and in the notes
to the unaudited pro forma combined financial statements. The unaudited pro
forma combined balance sheet gives effect to the Mergers and the Offering as
if they had occurred on June 30, 1998. The unaudited pro forma combined
statements of operations give effect to these transactions as if they had
occurred on January 1, 1997.

ADVANCED NUTRACEUTICALS has preliminarily analyzed the benefits that it
expects will be realized from reductions in salaries, bonuses and certain
benefits to the owners. To the extent the stockholders of the Founding
Companies have agreed prospectively to reductions in salary, bonuses and
benefits, these reductions have been reflected in the unaudited pro forma
combined statements of operations. Additionally, reductions in interest
expense as the result of the planned repayment of the preponderance of the
Founding Companies' existing debt have been reflected in the unaudited pro
forma combined statements of operations. With respect to other potential
benefits, ADVANCED NUTRACEUTICALS has not and cannot quantify these benefits
until completion of the combination of the Founding Companies. It is
anticipated that these benefits will be offset by costs related to ADVANCED
NUTRACEUTICALS's new corporate management, increased capital expenditures and
by the costs associated with being a public company. However, because these
costs cannot be accurately quantified at this time, they have not been
included in the unaudited pro forma financial information of ADVANCED
NUTRACEUTICALS.

The purchase price of the Founding Companies (except ACTA, which is the
accounting acquiror) and ADVANCED NUTRACEUTICALS has been allocated based on
the estimated fair value of assets acquired and liabilities assumed. The pro
forma adjustments are based on estimates, available information and certain
assumptions and may be revised as additional information becomes available. In
the opinion of management, the final allocation of the purchase price will not
materially differ from these preliminary estimates. The unaudited pro forma
combined financial data presented herein does not purport to represent what
the Company's financial position or results of operations would have actually
been had such events occurred on the assumed dates or to project the Company's
financial position or results of operations for any future period. The
unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus. Also see "Risk Factors" included
elsewhere herein.

F-3

ADVANCED NUTRACEUTICALS, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

JUNE 30, 1998
(IN THOUSANDS)

PRO FORMA PRO FORMA OFFERING AS
ACTA QBI(F) NORTHRIDGE BACTOLAC ANI COMBINED ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------ ------- ---------- -------- ------- -------- ----------- --------- ----------- --------

ASSETS
------
Current assets
Cash and cash
equivalents.......... $ 360 $ 454 $2,036 $ 75 $ 598 $ 3,523 $(3,123) $ 400 $ $
Accounts receivables,
net.................. 4,730 2,851 1,464 1,868 -- 10,913 10,913 10,913
Accounts receivable,
related parties...... 100 -- -- -- -- 100 (100) -- --
Inventory............ 2,518 5,679 1,070 713 -- 9,980 9,980 9,980
Prepaid expenses..... 84 709 222 -- 106 1,121 1,121 1,121
Deferred tax asset... -- 239 74 -- -- 313 313 313
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total current
assets............. 7,792 9,932 4,866 2,656 704 25,950 (3,223) 22,727 22,327
Property and
equipment--net........ 537 2,599 1,525 90 2 4,753 4,753 4,753
Deferred tax asset.... -- 28 -- -- -- 28 28 28
Goodwill, net......... -- 3,725 -- -- -- 3,725 69,319 73,044 73,044
Other assets.......... 3 1,204 41 21 276 1,545 1,545 1,545
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total assets....... $8,332 $17,488 $6,432 $2,767 $ 982 $36,001 $66,096 $102,097 $ $
====== ======= ====== ====== ======= ======= ======= ======== ======== =======
LIABILITIES &
STOCKHOLDERS' EQUITY
--------------------
Current liabilities
Note payable--Bank... $ -- $ 3,335 $ 58 $ -- $ -- $ 3,393 $ -- $ 3,393 $ $ 3,393
Current maturities:
Long-term debt....... 22 2,502 -- -- -- 2,524 (1,152) 1,372 (1,350) 22
Capital lease
obligations.......... -- 265 -- -- -- 265 -- 265 265
Note payable--
litigation
settlement........... -- 176 -- -- -- 176 (176) -- --
Account payable...... 1,824 3,617 1,028 916 -- 7,385 -- 7,385 7,385
Accrued expenses &
other................ 2,056 1,078 1,268 11 -- 4,413 -- 4,413 4,413
Payable to
shareholders/affiliates. 433 9 56 -- 58 556 (489) 67 (58) 9
Payable to Founding
Company stockholders. -- -- -- -- -- -- 39,875 39,875 (39,875) --
Purchase notes
payable.............. -- -- -- -- -- -- 1,250 1,250 1,250
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total current
liabilities........ 4,335 10,982 2,410 927 58 18,712 39,308 58,020 16,737
Long-term debt, net of
current maturities.... 257 595 -- -- -- 852 -- 852 852
Capital leases
obligation net of
current maturities.... -- 768 -- -- -- 768 -- 768 768
Note payable--
litigation settlement
net of current
maturities............ -- 700 -- -- -- 700 (700) -- --
Loan payable
shareholders.......... 931 -- -- 3 -- 934 (931) 3 3
Purchase notes
payable............... -- -- -- -- -- -- 1,250 1,250 1,250
Deferred income taxes. -- -- 349 -- -- 349 -- 349 349
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total liabilities.. 5,523 13,045 2,759 930 58 22,315 38,927 61,242 19,959
Stockholders' Equity
Preferred stock...... 50 -- -- -- -- 50 (50)
Common stock......... 78 38 50 -- 2 168 --
Additional paid-in
capital.............. -- 3,508 -- 5 3,945 7,458 --
Retained earnings
(deficit)............ 2,681 897 3,623 1,832 (3,023) 6,010 (3,528) 2,481 2,481
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total stockholders'
equity............. 2,809 4,443 3,673 1,837 924 13,686 27,169 40,855
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total liabilities
and stockholders'
equity............. $8,332 $17,488 $6,432 $2,767 $ 982 $36,001 $66,096 $102,097 $ $
====== ======= ====== ====== ======= ======= ======= ======== ======== =======

F-4

ADVANCED NUTRACEUTICALS, INC.

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997
(ALL AMOUNTS EXCEPT PER SHARE AMOUNTS IN THOUSANDS)

PRO FORMA PRO FORMA
ACTA QBI(F) NORTHRIDGE BACTOLAC ANI COMBINED ADJUSTMENTS COMBINED
------- ------- ---------- -------- ------- -------- ----------- ---------

Net sales............... $18,723 $15,568 $11,532 $5,002 $ -- $50,825 $ -- $50,825
Cost of goods sold...... 12,262 11,214 8,393 3,802 -- 35,671 35,671
------- ------- ------- ------ ------- ------- ------- -------
6,461 4,354 3,139 1,200 -- 15,154 -- 15,154
Selling, general and
administrative
expenses............... 4,926 3,949 2,070 246 2,997 14,188 (a) (5,921) 8,267
Goodwill amortization... -- 93 -- -- -- 93 (b) 1,733 1,826
------- ------- ------- ------ ------- ------- ------- -------
Earnings (loss) from
operations............. 1,535 312 1,069 954 (2,997) 873 4,188 5,061
Other income (expense)
Interest income........ 33 5 -- -- 1 39 39
Interest expense....... (110) (601) -- -- -- (711)(c) 58 (653)
Other.................. 18 (894) 25 5 -- (846) (846)
------- ------- ------- ------ ------- ------- ------- -------
(59) (1,490) 25 5 1 (1,518) 58 (1,460)
------- ------- ------- ------ ------- ------- ------- -------
Earnings (loss) before
income taxes........... 1,476 (1,178) 1,094 959 (2,996) (645) 4,246 3,601
Income tax expense
(benefit).............. 462 (325) 441 -- -- 578 (d) 1,593 2,171
------- ------- ------- ------ ------- ------- ------- -------
Net earnings (loss)..... $ 1,014 $ (853) $ 653 $ 959 $(2,996) $(1,223) $ 2,653 $ 1,430
======= ======= ======= ====== ======= ======= ======= =======
Net earnings per share
basic and diluted...... $
Shares used in computing
pro forma net earnings
per share basic and
diluted(1).............

- --------
(1) Includes (i) 1,800,000 shares issued to founders of and certain
consultants to ADVANCED NUTRACEUTICALS, (ii) 588,000 shares issued in a
private placement by ADVANCED NUTRACEUTICALS, (iii) [ ] shares issued
to owners of the Founding Companies and (iv) [ ] of the 5,000,000
shares sold in the Offering necessary to pay the cash portion of the
Merger consideration and expenses of this Offering. The [ ] shares
excluded reflect the net cash proceeds to ADVANCED NUTRACEUTICALS.

F-5

ADVANCED NUTRACEUTICALS, INC.

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS--(CONTINUED)

SIX MONTHS ENDED JUNE 30, 1998
(ALL AMOUNTS EXCEPT PER SHARE AMOUNTS IN THOUSANDS)

PRO FORMA PRO FORMA
ACTA QBI (F) NORTHRIDGE BACTOLAC ANI COMBINED ADJUSTMENTS COMBINED
------- ------- ---------- -------- ----- -------- ----------- ---------

Net sales............... $11,592 $10,941 $7,476 $3,642 $ -- $33,651 $ -- $33,651
Cost of goods sold...... 6,965 7,653 5,533 2,566 -- 22,717 22,717
------- ------- ------ ------ ----- ------- ------- -------
4,627 3,288 1,943 1,076 -- 10,934 -- 10,934
Selling, general and
administrative
expenses............... 2,407 2,230 1,340 134 28 6,139 (a) (1,197) 4,942
Goodwill amortization... -- 47 -- -- -- 47 (b) 866 913
------- ------- ------ ------ ----- ------- ------- -------
Earning (loss) from
operations............. 2,220 1,011 603 942 (28) 4,748 331 5,079
Other income (expense)
Interest income........ 86 -- -- -- -- 86 86
Interest expense....... (73) (392) -- -- -- (465)(c) 29 (436)
Other.................. -- (74) 30 3 -- (41) (41)
------- ------- ------ ------ ----- ------- ------- -------
13 (466) 30 3 -- (420) 29 (391)
------- ------- ------ ------ ----- ------- ------- -------
Earnings (loss) before
income taxes........... 2,233 545 633 945 (28) 4,328 360 4,688
Income tax expense
(benefit).............. 772 229 266 -- -- 1,267 (d) 974 2,241
------- ------- ------ ------ ----- ------- ------- -------
Net earnings (loss)..... $ 1,461 $ 316 $ 367 $ 945 $ (28) $ 3,061 $ (614) $ 2,447
======= ======= ====== ====== ===== ======= ======= =======
Net earnings per share
basic and diluted...... $
Shares used in computing
pro forma net earnings
per share basic and
diluted (1)............

- --------
(1) Includes (i) 1,800,000 shares issued to founders of and certain
consultants to ADVANCED NUTRACEUTICALS, (ii) 588,000 shares issued in a
private placement by ADVANCED NUTRACEUTICALS, (iii) [ ] shares issued
to owners of the Founding Companies and (iv) [ ] of the
5,000,000 shares sold in the Offering necessary to pay the cash portion of
the Merger consideration and expenses of this Offering. The [ ]
shares excluded reflect the net cash proceeds to ADVANCED NUTRACEUTICALS.

F-6

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

1. GENERAL:

ADVANCED NUTRACEUTICALS, INC. was formed to create a full service vertically
integrated manufacturer and supplier of quality nutritional supplements and
botanical ingredients. ADVANCED NUTRACEUTICALS has conducted no operations to
date and will acquire the Founding Companies concurrently with and as a
condition to the closing of this Offering.

The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The
periods included in these financial statements for the individual Founding
Companies are as of and for the six months ended June 30, 1998 and for the
year ended December 31, 1997, with the exception of Northridge for which the
period is as of and for the six months ended June 30, 1998 and for the fiscal
year ended September 30, 1997. The audited historical financial statements
included elsewhere herein have been included in accordance with Securities and
Exchange Commission ("SEC") Regulation S-X, Rule 3-05.

2. ACQUISITION OF FOUNDING COMPANIES:

Concurrently with and as a condition to the closing of this Offering,
ADVANCED NUTRACEUTICALS will acquire all of the outstanding capital stock of
the Founding Companies. The acquisitions will be accounted for using the
purchase method of accounting with ACTA being treated as the accounting
acquirer.

The following table sets forth the consideration to be paid (a) in cash, (b)
in shares of Common Stock to the common stockholders of each of the Founding
Companies and (c) in purchase notes. For purposes of computing the estimated
purchase price for accounting purposes, the value of the shares is determined
using an estimated fair value of $[ ] per share, which represents a discount
of ten percent from the assumed initial public offering price of $[ ] per
share (the mid point of the range of estimated initial public offering prices
set forth on the cover page of the Prospectus) due to the restrictions on the
sale and transferability of the shares issued as well as the effect of sales
of such large quantities of shares would have on the market value of the
stock. The estimated purchase price for the Mergers is based upon preliminary
estimates and is subject to certain purchase price adjustments at and
following closing. In the opinion of management, the final allocation of the
purchase price will not materially differ from these preliminary estimates.

SHARE PURCHASE
CASH SHARES VALUE NOTES
------- ------ ------- --------
(DOLLARS IN THOUSANDS)

ACTA....................................... $19,000 $23,400 $ --
QBI........................................ 8,050 21,105 --
Northridge................................. 7,500 6,300 2,000
Bactolac................................... 3,000 4,050 500
------- --- ------- ------
Total.................................... $37,550 $54,855 $2,500
======= === ======= ======

F-7

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)

3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:

(a) Records the purchase of the Founding Companies for a total purchase
price of $94.9 million, including $42.4 million (cash of $19.0 million and
ADVANCED NUTRACEUTICALS Common Stock with an aggregate value of $23.4 million
determined using an estimated fair value of $[ ] per share) attributed to
ACTA as accounting acquiror. The entry includes the liability of $37.6 million
for the cash portion of the consideration to be paid to the stockholders of
the Founding Companies in connection with the Acquisitions, the issuance of
[ ] shares of ADVANCED NUTRACEUTICALS Common Stock to the Founding
Companies and the issuance of $2.5 million of purchase notes payable,
resulting in the creation of $44.5 million of goodwill after allocating the
purchase price to the aggregate assets acquired and liabilities assumed,
excluding ACTA, as shown below. In addition, goodwill of $24.9 million,
determined using an estimated fair value of $[ ] per share, has been
recorded attributable to the shares of ADVANCED NUTRACEUTICALS Common Stock
issued and outstanding. Based on its initial assessment, management believes
that the historical carrying value of the Founding Companies' assets and
liabilities will approximate fair value and that there are no other
identifiable intangible assets to which any material purchase price can be
allocated.

The following reconciles the combined historical net assets of the Founding
Companies and ADVANCED NUTRACEUTICALS to the net assets acquired by ACTA (in
thousands):

TOTAL LESS ACQUIRED
COMBINED ACTA COMPANIES
-------- ------- ---------

Historical net assets.......................... $13,696 $(2,809) $10,887
Corporate distributions........................ 1,836 (200) 1,636
------- ------- -------
$11,860 $(2,609) $ 9,251
======= ======= =======

(b) Records the S Corporation and other distributions provided for under the
terms of the acquisition agreements.

(c) Records liquidation of notes payable and related early retirement costs
required to be repaid based upon the terms of the debt agreements or based
upon the terms of the acquisition agreements.

F-8

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes the unaudited pro forma acquisition
adjustments to the pro forma combined balance sheet (in thousands):

ADJUSTMENTS TOTAL
------------------------ ACQUISITION
(A) (B) (C) ADJUSTMENT
------- ------ ------- -----------

ASSETS
------
Current assets
Cash and cash equivalents.............. $ -- $ -- $(3,123) $(3,123)
Accounts receivable, related party..... -- -- (100) (100)
------- ------ ------- -------
Total current assets................. -- -- (3,223) (3,223)
Goodwill, net.......................... 69,319 -- -- 69,319
------- ------ ------- -------
Total assets......................... $69,319 $ -- $(3,223) $66,096
======= ====== ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities
Current maturities
Long-term debt......................... $ -- $ -- $(1,152) $(1,152)
Note payable-litigation settlement..... -- -- (176) (176)
Stockholders loans..................... -- -- (489) (489)
Payable to founding company
stockholders.......................... 37,550 1,836 489 39,875
Purchase notes payable................. 1,250 -- -- 1,250
------- ------ ------- -------
Total current liabilities............ 38,800 1,836 (1,328) 39,308
Note payable--litigation settlement net
of current maturities................. -- -- (700) (700)
Loan payable shareholders.............. -- -- (931) (931)
Purchase notes payable................. 1,250 -- -- 1,250
------- ------ ------- -------
Total liabilities.................... 40,050 1,836 (2,959) 38,927
Stockholders' Equity
Preferred stock........................ (50) -- -- (50)
Common stock
Additional paid in capital
Retained earnings...................... (1,428) (1,836) (264) (3,528)
------- ------ ------- -------
Total stockholders' equity........... 29,269 (1,836) (264) 27,169
------- ------ ------- -------
Total liabilities and stockholders'
equity.............................. $69,319 $ -- $(3,223) $66,096
======= ====== ======= =======

(d) Records the cash proceeds of $[ ] million from the issuance of shares
of ADVANCED NUTRACEUTICALS Common Stock net of estimated offering costs of
$[ ] million (based on an assumed initial public offering price of $[ ] per
share and includes the payment of deferred offering costs of $0.3 million
incurred through June 30, 1998). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses.

(e) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the Mergers.

F-9

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes the unaudited pro forma offering adjustments
to the pro forma combined balance sheet adjustments (in thousands):

ADJUSTMENTS TOTAL
---------------- OFFERING
(D) (E) ADJUSTMENT
------- -------- ----------

ASSETS
------
Cash and cash equivalents.......................... $ $ $
Total current assets...........................
------- -------- --------
Other assets.......................................
------- -------- --------
Total assets................................... $ $ $
======= ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current maturities
Long-term debt................................... $ $ (1,350) $ (1,350)
Stockholders loans............................... (58) (58)
Payable to Founding Company stockholders......... (39,875) (39,875)
------- -------- --------
Total current liabilities...................... (41,283) (41,283)
Stockholders' Equity
Common stock.....................................
Additional paid in capital.......................
------- -------- --------
Total stockholders' equity.....................
------- -------- --------
Total liabilities and stockholders' equity..... $ $(41,283) $(41,283)
======= ======== ========

(f) For Pro forma Financial Statement purposes the historical financial
statements of QBI as of June 30, 1998 and for the six months then ended as
well as, the year ended December 31, 1997 have been adjusted. The adjustments
are to reflect the subsequent acquisition by QBI of Botanical Products
International, Inc. ("BPI") and the contribution of certain farming assets
("Farms") to QBI by certain of QBI's stockholders, at closing of the Merger
transaction.

BPI was acquired by QBI subsequent to June 30, 1998 for the total
consideration of $4.5 million, consisting of a note payable of $1.35 million,
an equity right of $3.0 million and the balance in cash. The acquisition
resulted in goodwill of approximately $3.7 million, which is being amortized
over a 40-year life. For Pro Forma Financial Statement purposes, the
acquisition adjustments have been recorded under the purchase method of
accounting and have been pushed down to BPI. Farms, to be acquired at closing
by QBI, consist of three farming operations whose activities to June 30, 1998
have consisted of planting and growing of natural product crops.

F-10

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The following summarizes the pro forma affect of the above transactions on
the historical financial statements of QBI.

QBI QBI AS
HISTORICAL BPI FARMS ADJUSTED
---------- --- ----- --------

ASSETS
------
Cash and cash equivalents..................... $ 115 $ 339 $ -- $ 454
Accounts receivables, net..................... 2,580 271 -- 2,851
Inventory..................................... 5,576 103 -- 5,679
Prepaid expenses.............................. 538 171 -- 709
Deferred tax asset............................ 239 -- -- 239
------- ------ ---- -------
Total current assets.................... 9,048 884 -- 9,932
Property and equipment-net.................... 2,471 128 -- 2,599
Deferred tax asset............................ 28 -- -- 28
Due from affiliates........................... 809 -- (809) --
Goodwill, net................................. -- 3,725 -- 3,725
Other assets.................................. 518 (123) 809 1,204
------- ------ ---- -------
Total assets............................ $12,874 $4,614 $ -- $17,488
======= ====== ==== =======
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities:
Note payable--Bank............................ $ 3,335 $ -- $ -- $ 3,335
Current maturities
Long-term debt.............................. 1,152 1,350 -- 2,502
Capital lease obligations................... 265 -- -- 265
Note payable-litigation settlement.......... 176 -- -- 176
Account payable............................... 3,547 70 -- 3,617
Accrued expenses & other...................... 1,043 35 -- 1,078
Payable to shareholders/affiliates............ -- 9 -- 9
------- ------ ---- -------
Total current liabilities............... 9,518 1,464 -- 10,982
Long-term debt, net of current maturities..... 595 -- -- 595
Capital leases obligation net of current
maturities................................... 768 -- -- 768
Note payable--litigation settlement net of
current maturities........................... 700 -- -- 700
------- ------ ---- -------
Total liabilities....................... 11,581 1,464 -- 13,045
Stockholders' Equity
Common stock................................ 38 -- -- 38
Additional paid-in capital.................. 358 3,150 -- 3,508
Retained earnings .......................... 897 -- -- 897
------- ------ ---- -------
Total stockholders' equity.............. 1,293 3,150 -- 4,443
------- ------ ---- -------
Total liabilities and stockholders'
equity................................. $12,874 $4,614 $ -- $17,488
======= ====== ==== =======

F-11

ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------------- -------------------------
QBI QBI AS QBI QBI AS
HISTORICAL BPI ADJUSTED HISTORICAL BPI ADJUSTED
---------- ----- -------- ---------- ---- --------

Net sales................. $15,495 $ 73 $15,568 $10,009 $932 $10,941
Cost of goods sold........ 11,155 59 11,214 7,034 619 7,653
------- ----- ------- ------- ---- -------
4,340 14 4,354 2,975 313 3,288
Selling, general and
administrative expenses.. 3,514 435 3,949 1,991 239 2,230
Goodwill amortization..... -- 93 93 -- 47 47
------- ----- ------- ------- ---- -------
Earning (loss) from
operations............... 826 (514) 312 984 27 1,011
Other income (expense)
Interest income......... -- 5 5 -- -- --
Interest expense........ (493) (108) (601) (338) (54) (392)
Other................... (1,144) 250 (894) (75) 1 (74)
------- ----- ------- ------- ---- -------
(1,637) 147 (1,490) (413) (53) (466)
------- ----- ------- ------- ---- -------
Earnings (loss) before
income taxes............. (811) (367) (1,178) 571 (26) 545
Income tax expense
(benefit)................ (300) (25) (325) 229 -- 229
------- ----- ------- ------- ---- -------
Net earnings (loss)....... $ (511) $(342) $ (853) $ 342 $(26) $ 316
======= ===== ======= ======= ==== =======

4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE
YEAR ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998

(a) Reflects the reduction in salaries, bonuses and benefits to the owners
of the Founding Companies following the Merger to which they have agreed
prospectively. These reductions in salaries, bonuses and benefits are in
accordance with the terms of the employment agreements. Such employment
agreements are primarily for 3 years, contain restrictions related to
competition and provide severance for termination of employment in certain
circumstances.

Also reflects the reduction in compensation expense related to the non-
recurring, non-cash compensation charge of $3.0 million recorded by Advanced
Nutraceuticals in the fourth quarter of 1997 related to Common Stock issued to
founders of and certain consultants to the Company. The issuance of Common
Stock were made in contemplation of the Mergers and the Offering, and no
future issuances of this nature are anticipated.

(b) Reflects the amortization of goodwill to be recorded as a result of
these Mergers over a 40-year estimated life.

(c) Reflects the additional interest expense to be incurred on seller notes
issued in the acquisition of certain Founding Companies net of reductions in
interest expense from debts required to be paid off at closing using available
cash.

(d) Reflects the incremental provision for federal and state income taxes
relating to other statement of operations adjustments and for income taxes on
S Corporation income.

F-12

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

ADVANCED NUTRACEUTICALS, INC.

F-13

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Advanced Nutraceuticals, Inc.
Houston, Texas

We have audited the accompanying balance sheet of Advanced Nutraceuticals,
Inc. (formerly Naturally Direct, Inc.) as of December 31, 1997, and the
related statements of operations, stockholders' equity, and cash flows for the
period from inception (September 9, 1997) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Advanced Nutraceuticals,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the period from inception (September 9, 1997) to December 31, 1997,
in conformity with generally accepted accounting principles.

GRANT THORNTON LLP

Houston, Texas
August 17, 1998 (except for the
second paragraph of Note B,
as to which the date is
September 14, 1998)

F-14

ADVANCED NUTRACEUTICALS, INC.

BALANCE SHEETS

DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
ASSETS
------ (UNAUDITED)

CURRENT ASSETS
Cash and cash equivalents.......................... $ 24,862 $ 598,002
Prepaid expenses and other current assets.......... 500 1,100
Subscriptions receivable........................... -- 105,000
----------- -----------
Total current assets............................. 25,362 704,102
PROPERTY AND EQUIPMENT, NET.......................... 2,292 1,875
DEFERRED OFFERING COSTS.............................. 1,847 276,199
----------- -----------
$ 29,501 $ 982,176
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES
Due to affiliates.................................. $ 25,000 $ 58,003
Accounts payable................................... 500 500
----------- -----------
Total current liabilities........................ 25,500 58,503
COMMITMENTS AND CONTINGENCIES........................ -- --
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 30,000,000 shares
authorized, 1,800,000 and 2,388,000 issued and
outstanding....................................... 1,800 2,388
Additional paid-in capital......................... 2,998,200 3,944,718
Retained deficit................................... (2,995,999) (3,023,433)
----------- -----------
Total stockholders' equity....................... 4,001 923,673
----------- -----------
$ 29,501 $ 982,176
=========== ===========

The accompanying notes are an integral part of these statements.

F-15

ADVANCED NUTRACEUTICALS, INC.

STATEMENTS OF OPERATIONS

PERIOD FROM INCEPTION
(SEPTEMBER 9, 1997) SIX MONTHS ENDED
TO JUNE 30,
DECEMBER 31, 1997 1998
--------------------- ----------------
(UNAUDITED)

Compensation expense relating to
issuance of common stock to
founders and certain consultants....... $ 2,985,000 $ --
Selling, general and administrative
expenses............................... 11,892 27,875
----------- --------
Loss from operations................ (2,996,892) (27,875)
Other income (expense)
Interest income....................... 589 496
Other................................. 304 (55)
----------- --------
893 441
----------- --------
Loss before income taxes................ (2,995,999) (27,434)
Income taxes............................ -- --
----------- --------
NET LOSS............................ $(2,995,999) $(27,434)
=========== ========

The accompanying notes are an integral part of these statements.

F-16

ADVANCED NUTRACEUTICALS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------

Issuance of common stock
to founders and certain
consultants............ 1,800,000 $1,800 $2,998,200 $ -- $ 3,000,000
Net loss................ -- -- -- (2,995,999) (2,995,999)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1997................... 1,800,000 1,800 2,998,200 (2,995,999) 4,001
Stock issued under
subscription agreements
(unaudited)............ 588,000 588 946,518 -- 947,106
Net loss (unaudited).... -- -- -- (27,434) (27,434)
--------- ------ ---------- ----------- -----------
Balance at June 30, 1998
(unaudited)............ 2,388,000 $2,388 $3,944,718 $(3,023,433) $ 923,673
========= ====== ========== =========== ===========

The accompanying notes are an integral part of these statements.

F-17

ADVANCED NUTRACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

PERIOD FROM
INCEPTION
(SEPTEMBER 9, SIX MONTHS
1997) TO ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- -----------
(UNAUDITED)

Cash flows from operating activities
Net loss........................................... $(2,995,999) $ (27,434)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
Depreciation and amortization...................... 208 417
Compensation expense related to issuance of common
stock to management and consultants............... 2,985,000 --
Change in assets and liabilities
Increase in prepaid expenses and other current
assets........................................... (500) (600)
Increase in deferred offering costs............... (1,847) (307,246)
Increase in due to affiliates..................... 22,500 33,003
Increase in accounts payable...................... 500 --
----------- ---------
Net cash provided (used) by operating activities. 9,862 (301,860)
Cash flows from financing activities
Issuance of common stock........................... 15,000 875,000
----------- ---------
Net increase in cash................................. 24,862 573,140
Cash and cash equivalents at beginning of period..... -- 24,862
----------- ---------
Cash and cash equivalents at end of period........... $ 24,862 $ 598,002
=========== =========

The accompanying notes are an integral part of these statements.

F-18

ADVANCED NUTRACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements included herein are of Naturally Direct, Inc.
(NDI), a Texas corporation and predecessor of Advanced Nutraceuticals, Inc.
(ANI), a Delaware corporation. In September 1998, NDI reorganized in Delaware
by merging into ANI, a newly formed company (see Note C). References to the
Company herein refer to ANI and its predecessor, NDI.

1. Nature of Operations

NDI was incorporated on September 9, 1997 for the purpose of creating a full
service vertically integrated manufacturer and supplier of quality nutritional
supplements, herbs and extracts. The Company intends to acquire four
businesses, complete an initial public offering of its common stock and,
subsequent to the offering, continue to acquire, through merger or purchase,
similar companies.

The Company has not conducted any operations, and all activities to date
have related to the offering and the mergers. Substantially, all expenditures
to date have been funded by the proceeds received in connection with a private
placement in the second quarter of 1998 (see Note B). As of June 30, 1998,
costs of approximately $276,000 (unaudited) have been incurred by the Company
in connection with the anticipated initial public offering and the private
placement, which have been accounted for as deferred offering costs. The
Company is dependent upon the offering to execute the pending mergers. There
is no assurance that the pending mergers discussed below will be completed or
that the Company will be able to generate future operating revenues.

The Company has an absence of a combined operating history, and the
Company's future success is dependent upon a number of factors which include,
among others, the ability to integrate operations, reliance on the
identification and integration of satisfactory acquisition candidates,
reliance on acquisition financing and the ability to manage growth and attract
and retain qualified management and sales personnel as well as the need for
additional capital.

2. Cash and Cash Equivalents

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

3. Concentration of Credit Risk

Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits. The Company
maintains cash balances at financial institutions which may at times be in
excess of federally insured levels. The Company has not experienced any losses
in such accounts and does not believe it is exposed to any significant credit
risks on cash maintained in bank deposit accounts.

4. Commitments

The Company is currently utilizing office space under a lease agreement
which requires monthly rentals of $1,100 through April 30, 1999.

5. Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis. The useful lives of property and equipment for

F-19

ADVANCED NUTRACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

purposes of computing depreciation is three years. Property and equipment at
December 31, 1997, with a cost and accumulated depreciation of $2,500 and
$208, respectively, consists of furniture and fixtures and a computer system.

Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.

6. Deferred Offering Costs

The costs related to filing a registration statement on Form S-1 for the
sale of Common Stock are capitalized when incurred and will be offset against
additional paid-in capital. Included in deferred offering cost at June 30,
1998, are legal fees of $250,000 paid as a retainer.

7. Income Taxes

Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.

8. Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts payable and notes payable. The Company believes that the carrying
value of these instruments on the accompanying balance sheets approximates
their fair value.

9. Use of Estimates

In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.

10. New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.

11. Unaudited Interim Information

The financial information for the six months ended June 30, 1998 has not
been audited by independent certified public accountants. Certain information
and footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from the unaudited interim financial information. In the
opinion of management of the Company, the unaudited interim financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary

F-20

ADVANCED NUTRACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

for a fair presentation. Results of operations for the interim period are not
necessarily indicative of the results of operations for the full year.

NOTE B--STOCKHOLDERS' EQUITY

In December 1997, the Company issued a total of 1,800,000 shares of Common
Stock to founders and directors of and certain consultants to the Company at a
price of $.008 per share. As a result of these transactions, the Company
recorded a nonrecurring, noncash compensation charge of $2,985,000
representing the difference between the amount paid for the shares and an
estimated fair market value of the shares on the date of sale.

In September 1998, the incorporation of NDI was changed from Texas to
Delaware by the merger of NDI with and into ANI. At the time of the merger,
each share of NDI common stock outstanding was converted into one and two
tenths shares of ANI's common stock. The effects of this merger on common
stock has been retroactively reflected on the balance sheet, statement of
stockholders' equity and in the accompanying notes. In addition to its
authorized common stock, ANI has authorized 5,000,000 shares of preferred
stock having a par value of $.001.

NOTE C--EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)

The Company has signed definitive agreements to acquire four businesses (the
Founding Companies) to be effective contemporaneously with the initial public
offering. The businesses to be acquired are The Acta Group, Quality Botanical
Ingredients, Inc., Bactolac Pharmaceuticals, Inc. and Northridge Laboratories,
Inc. The Company will acquire the Founding Companies for total consideration
of approximately $98.5 million in cash and shares of Common Stock.

During the second quarter of 1998, the Company issued under subscription
agreements in a private placement a total of 588,000 shares of common stock to
investors at a price of $1.67 per share. As a result, the Company recorded
additional paid-in capital of $946,518, net of costs of $32,894, representing
the difference between the amount paid for the shares and the par value of the
shares on the date of sale. Additionally, the Company recorded subscriptions
receivable of $105,000, which were subsequently received in July 1998.

In September 1998, the Board of Directors and the Company's stockholders
approved the Company's 1998 Stock Option Plan (the Plan), which provides for
the granting of incentive to employees and consultants of the Company of up to
1,300,000 shares of common stock. Additionally approved, was the 1998 Non-
Discretionary Stock Option Plan under which 300,000 shares of its common stock
are reserved for issuance to non-employee directors of the Company. The
Company will account for options issued to employees and nonemployee directors
under the Plan in accordance with APB Opinion No. 25 and, accordingly, no
compensation cost will be recognized to the extent that shares are issued at
the fair market value as of the date of grant. The Company will provide the
pro forma disclosure of net earnings per share in the notes to the financial
statements as if the fair value-based method of accounting has been applied to
awards as required by Statement of Financial Standard No. 123, Accounting for
Stock-Based Compensation.

In September 1998, the Company filed a registration statement on Form S-1
for the sale of 5,000,000 shares of its Common Stock.

F-21

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

THE ACTA GROUP

F-22

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Boards of Directors
Acta Products International, Inc.
and Acta Products Corporation
Sunnyvale, California

We have audited the accompanying combined balance sheets of The Acta Group
(see note A1) as of December 31, 1997 and 1996, and the related combined
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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, the financial statements referred to above, present fairly,
in all material respects, the financial position of The Acta Group as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

GRANT THORNTON LLP

Houston, Texas
August 14, 1998

F-23

THE ACTA GROUP

COMBINED BALANCE SHEETS

DECEMBER 31,
--------------------- JUNE 30,
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
ASSETS
------

CURRENT ASSETS
Cash and cash equivalents.................. $1,483,417 $ 483,371 $ 359,816
Accounts receivable, less allowance for
doubtful accounts of $44,268, $37,032 and
$32,432 (unaudited)....................... 1,126,489 2,447,825 4,730,386
Accounts receivable, related parties....... -- 300,000 100,000
Inventory.................................. 1,639,347 2,375,956 2,518,427
Prepaid expenses and other current assets.. 460,676 106,047 83,907
---------- ---------- ----------
Total current assets..................... 4,709,929 5,713,199 7,792,536
PROPERTY AND EQUIPMENT, NET.................. 217,192 551,349 537,211
OTHER ASSETS................................. 12,305 8,226 2,677
---------- ---------- ----------
$4,939,426 $6,272,774 $8,332,424
========== ========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES
Line of credit--bank....................... $ 351,160 $ 400,000 $ --
Current maturities of long-term debt,
other..................................... 37,689 78,082 22,252
Current maturities of long-term debt,
related parties........................... 603,827 379,556 432,911
Accounts payable........................... 667,200 1,300,811 1,824,534
Accrued expenses and other current
liabilities............................... 944,823 1,694,335 2,055,871
---------- ---------- ----------
Total current liabilities................ 2,604,699 3,852,784 4,335,568
LONG-TERM DEBT--OTHER, net of current
maturities.................................. 18,056 55,375 257,114
LONG-TERM DEBT--RELATED PARTIES, net of
current maturities.......................... 1,106,476 1,016,920 931,040
COMMITMENTS AND CONTINGENCIES................ -- -- --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 50,000
shares authorized and outstanding......... 50,000 50,000 50,000
Common stock, $1.00 par value, 78,000
shares authorized and outstanding......... 78,000 78,000 78,000
Retained earnings.......................... 1,082,195 1,219,695 2,680,702
---------- ---------- ----------
Total stockholders' equity............... 1,210,195 1,347,695 2,808,702
---------- ---------- ----------
$4,939,426 $6,272,774 $8,332,424
========== ========== ==========

The accompanying notes are an integral part of these statements.

F-24

THE ACTA GROUP

COMBINED STATEMENTS OF EARNINGS

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- -----------
(UNAUDITED)

Net sales............... $9,531,209 $14,391,647 $18,722,758 $9,304,551 $11,592,133
Cost of goods sold...... 5,915,778 8,543,425 12,261,964 5,699,497 6,965,472
---------- ----------- ----------- ---------- -----------
3,615,431 5,848,222 6,460,794 3,605,054 4,626,661
Selling, general and
administrative
expenses............... 2,629,360 5,410,582 4,926,476 1,632,084 2,406,809
---------- ----------- ----------- ---------- -----------
Earnings from
operations......... 986,071 437,640 1,534,318 1,972,970 2,219,852
Other income (expense)
Interest expense...... (54,492) (126,654) (110,251) (61,922) (72,812)
Interest income....... 586 22,293 33,453 10,862 86,172
Other................. 1,446 1,832 18,031 718 --
---------- ----------- ----------- ---------- -----------
(52,460) (102,529) (58,767) (50,342) 13,360
---------- ----------- ----------- ---------- -----------
Earnings before
income taxes....... 933,611 335,111 1,475,551 1,922,628 2,233,212
Income tax (expense)
benefit................ (360,430) 155,630 (462,056) (837,083) (772,205)
---------- ----------- ----------- ---------- -----------
NET EARNINGS.......... $ 573,181 $ 490,741 $ 1,013,495 $1,085,545 $ 1,461,007
========== =========== =========== ========== ===========

The accompanying notes are an integral part of these statements.

F-25

THE ACTA GROUP

COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY

NUMBER OF NUMBER OF TOTAL
PREFERRED COMMON RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
--------- ------- --------- ------- ---------- -------------

Balance at January 1,
1995................... -- $ -- 28,000 $28,000 $ 108,671 $ 136,671
Net earnings............ -- -- -- -- 573,181 573,181
Preferred stock issued.. 50,000 50,000 -- -- -- 50,000
Common stock issued..... -- -- 50,000 50,000 -- 50,000
Dividends-preferred
stock.................. -- -- -- -- (2,000) (2,000)
Dividends-common stock.. -- -- -- -- (40,000) (40,000)
------ ------- ------ ------- ---------- ----------
Balance at December 31,
1995................... 50,000 50,000 78,000 78,000 639,852 767,852
Net earnings............ -- -- -- -- 490,741 490,741
Dividends-preferred
stock.................. -- -- -- -- (4,000) (4,000)
Dividends-common stock.. -- -- -- -- (44,398) (44,398)
------ ------- ------ ------- ---------- ----------
Balance at December 31,
1996................... 50,000 50,000 78,000 78,000 1,082,195 1,210,195
Net earnings............ -- -- -- -- 1,013,495 1,013,495
Dividends-preferred
stock.................. -- -- -- -- (4,000) (4,000)
Dividends-common stock.. -- -- -- -- (871,995) (871,995)
------ ------- ------ ------- ---------- ----------
Balance at December 31,
1997................... 50,000 50,000 78,000 78,000 1,219,695 1,347,695
Net earnings
(unaudited)............ -- -- -- -- 1,461,007 1,461,007
------ ------- ------ ------- ---------- ----------
Balance at June 30, 1998
(unaudited)............ 50,000 $50,000 78,000 $78,000 $2,680,702 $2,808,702
====== ======= ====== ======= ========== ==========

The accompanying notes are an integral part of these statements.

F-26

THE ACTA GROUP

COMBINED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- ---------- ----------- ----------- -----------
(UNAUDITED)

Cash flows from
operating activities
Net earnings.......... $ 573,181 $ 490,741 $ 1,013,495 $ 1,085,545 $ 1,461,007
Adjustments to
reconcile net
earnings to net cash
provided (used) by
operating activities
Loss on sale of
property and
equipment........... 1,029 -- 14,000 -- --
Bad debt expense..... -- 32,432 4,600 -- 7,236
Depreciation......... 36,567 32,298 74,598 22,219 56,348
Change in assets and
liabilities
(Increase) decrease
in accounts
receivable.......... (712,946) 172,113 (1,625,936) (1,484,945) (2,089,797)
(Increase) decrease
in inventory........ (530,596) (629,817) (736,609) 59,971 (142,471)
(Increase) decrease
prepaid expenses and
other current
assets.............. (161,903) (298,773) 354,629 113,201 22,140
(Increase) decrease
in other assets..... (5,464) 1,160 4,079 (48,924) 5,549
Increase (decrease)
in accounts payable. 405,579 (242,238) 633,611 477,238 523,723
Increase in accrued
expenses and other
current liabilities. 433,728 337,546 745,512 416,102 361,535
--------- ---------- ----------- ----------- -----------
Net cash provided
(used) by operating
activities......... 39,175 (104,538) 481,979 640,407 205,270
Cash flows from
investing activities
Payments for purchase
of property and
equipment............ (83,063) (73,951) (422,755) (163,125) (42,210)
Proceeds from sale of
property and
equipment............ 10,000 849 -- -- --
--------- ---------- ----------- ----------- -----------
Net cash used by
investing
activities......... (73,063) (73,102) (422,755) (163,125) (42,210)
Cash flows from
financing activities
Repayment of long-term
obligations.......... (268,078) (116,022) (651,515) -- --
Proceeds from new
borrowings........... 630,089 1,052,027 415,400 6,283 113,385
Net (repayments)
borrowings under line
of credit............ (150,000) 351,159 48,840 (351,160) (400,000)
Issuance of preferred
stock................ 50,000 -- -- -- --
Issuance of common
stock................ 50,000 -- -- -- --
Dividends paid on
preferred stock...... (2,000) -- -- -- --
Dividends paid on
common stock......... (40,000) (44,398) (871,995) -- --
--------- ---------- ----------- ----------- -----------
Net cash provided
(used) by financing
activities......... 270,011 1,242,766 (1,059,270) (344,877) (286,615)
--------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash............... 236,123 1,065,126 (1,000,046) 132,405 (123,555)
Cash and cash
equivalents at
beginning of period... 182,168 418,291 1,483,417 1,483,417 483,371
--------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 418,291 $1,483,417 $ 483,371 $ 1,615,822 $ 359,816
========= ========== =========== =========== ===========

The accompanying notes are an integral part of these statements.

F-27

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Organization and Nature of Earnings

The financial statements of The Acta Group (the Group) combine the financial
statements of Acta Products International, Inc. (International), a California
corporation incorporated in 1975 and Acta Products Corporation, dba Acta
Pharmacal Company (Pharmacal), a California corporation incorporated in 1995,
which are companies under common control and ownership. All significant
intercompany transactions have been eliminated in combination.

The Group provides products and services including herbal extracts, full
contract manufacturing and product development services to customers
throughout the United States.

2. Cash and Cash Equivalents

The Group considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.

3. Concentration of Credit Risk

Financial instruments which potentially subject the Group to a concentration
of credit risk consist principally of cash deposits, accounts receivable, and
long-term debt--other. The Group maintains cash balances at financial
institutions which may at times be in excess of federally insured levels. The
Group has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risks on cash maintained in bank deposit
accounts.

4. Allowance for Doubtful Accounts

The Group maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable. Bad debt expense was
$32,432 and $4,600 for 1996 and 1997, respectively. Charge-offs were not
material.

5. Inventory

Inventory consists of herbs and vitamin supplements in the raw material and
processed stages and is stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. Pharmaceutical equipment is stated
at lower of cost or market, with cost determined on a specific identification
basis.

6. Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis.

Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to earnings
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in other income.

7. Revenue Recognition

The Group recognizes revenue when products are shipped to customers.

F-28

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

8. Income Taxes

Pharmacal has elected to be taxed under the Subchapter S provisions of the
Internal Revenue Code. As a result of this election, income of Pharmacal is
taxable to the stockholders individually and no provision for Federal income
taxes in the accompanying financial statements has been made for Pharmacal's
income.

Deferred tax assets and liabilities relate to International and are
determined based on the differences between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences are expected to reverse. Deferred tax
expense (benefit) is the result of changes in deferred tax assets and
liabilities.

9. Financial Instruments

The Group's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit and long-term debt. The
Group believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value, except as disclosed
for long-term debt at Note G.

10. Use of Estimates

11. New Accounting Pronouncements

12. Unaudited Interim Information

The financial information for the six months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
earnings for the interim periods are not necessarily indicative of the results
of earnings for the respective full years.

NOTE B--STOCKHOLDERS' EQUITY

The equity structure of the Group is as follows at both December 31, 1996
and 1997:

AUTHORIZED PREFERRED SHARES PREFERRED AUTHORIZED COMMON SHARES COMMON
PREFERRED ISSUED AND STOCK PAR COMMON ISSUED AND STOCK
SHARES OUTSTANDING VALUE SHARES OUTSTANDING PAR VALUE
---------- ---------------- --------- ---------- ------------- ---------

International........... 50,000 50,000 $1.00 50,000 50,000 $1.00
Pharmacal............... -- -- -- 28,000 28,000 $1.00

F-29

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

NOTE C--INVENTORY

Inventory consists of the following at December 31:

1996 1997
---------- ----------

Raw materials...................................... $1,202,667 $1,734,205
Work in process.................................... -- --
Finished goods..................................... 194,280 235,136
Pharmaceutical equipment........................... 242,400 406,615
---------- ----------
$1,639,347 $2,375,956
========== ==========

NOTE D--PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ -------- --------

Leasehold improvements.................... 5 $ 35,881 $149,874
Machinery and equipment................... 5 268,638 375,980
Furniture and fixtures.................... 7 51,252 72,053
Vehicles.................................. 5 134,839 173,375
-------- --------
490,610 771,282
Accumulated depreciation................ 273,418 219,933
-------- --------
$217,192 $551,349
======== ========

NOTE E--LINE OF CREDIT--BANK

At December 31, 1997, International had a $1,000,000 line of credit with a
financial institution. Advances were limited to specified percentages of
eligible inventory and accounts receivable. Borrowings under this agreement
accrued interest at prime plus 1%.

In March, 1998, International entered into a new line of credit. Under the
new agreement, the overall borrowing limit is $3,000,000, limited to 80% of
eligible accounts receivable, plus 20% of eligible inventory. Advances against
eligible inventory are limited to $300,000. Borrowings under the new line of
credit agreement bear interest at prime (8.5% at December 31, 1997) plus 1%.
The line of credit agreement expires in March 1999, and is collateralized by
substantially all assets and contract rights of International. Under the line
of credit agreement, International has restrictive covenants relating to
various financial ratios.

F-30

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

NOTE F--LONG-TERM DEBT--OTHER

Long-term debt consists of the following at December 31:

1996 1997
------- -------

Various notes payable to bank, payable in 24-60 monthly
installments aggregating $2,400 and $2,800 respectively, plus
interest; interest from 8 3/4% to 10 1/2%; secured by vehicles
and equipment................................................. $55,745 $72,790
Note payable to bank, payable in monthly principal installments
of $4,167 plus interest at prime (8.5% at December 31, 1997)
plus 1.5%; remainder due to September 2002; collateralized by
accounts receivable, inventory and equipment.................. -- 60,667
------- -------
55,745 133,457
Less current maturities...................................... 37,689 78,082
------- -------
$18,056 $55,375
======= =======

The approximate aggregate amount of all long-term debt maturities for the
five years following December 31, 1997 are as follows:

YEAR ENDED DECEMBER 31, AMOUNT
----------------------- -------

1998............................................................. $78,082
1999............................................................. 27,089
2000............................................................. 13,036
2001............................................................. 10,569
2002............................................................. 4,681

NOTE G--LONG-TERM DEBT--RELATED PARTIES

Long-term debt to related parties consists of the following at December 31:

1996 1997
---------- ----------

Notes payable to stockholders............................ $ 68,769 $ --
Notes payable to an affiliated partnership of
stockholders, amount and frequency of repayment to be
mutually agreed upon, interest rates ranging from 7% to
8%...................................................... 1,641,534 1,396,476
---------- ----------
1,710,303 1,396,476
Less current maturities................................ 603,827 379,556
---------- ----------
$1,106,476 $1,016,920
========== ==========

The approximate aggregate amount of all long-term debt maturities for the
five years following December 31, 1997 are as follows:

YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------

1998............................................................ $379,556
1999............................................................ 99,880
2000............................................................ 108,169
2001............................................................ 117,151
2002............................................................ 126,871

Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of total long-term
debt, related parties is $1,550,230 and $1,217,063 at December 31, 1996 and
1997.

F-31

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

NOTE H--RELATED PARTY TRANSACTIONS

The Group had a $300,000 receivable from an officer at December 31, 1997.
Additionally, the Group had outstanding notes payable to stockholders and a
general partnership of stockholders as detailed at Note G and outstanding
obligations under building and equipment leases with related parties as
detailed at Note I.

NOTE I--INCOME TAXES

The provision for income taxes for the year ended December 31, consists of
the following:

1995 1996 1997
-------- --------- --------

Current tax expense......................... $264,268 $ 114,009 $ 66,894
Deferred tax expense (benefit).............. 96,162 (269,639) 395,162
-------- --------- --------
$360,430 $(155,630) $462,056
======== ========= ========

The reconciliation between the Group's effective income tax rate and the
statutory federal income tax rate at December 31, is as follows:

1995 1996 1997
----- ------ -----

Statutory federal income
tax rate............... 34.00% 34.00% 34.00%
S Corporation income.... (2.18)% (73.88)% (8.53)%
State taxes, net of fed-
eral effect............ 6.10% (6.10)% 6.10%
Other................... .68% (.46)% (.26)%
----- ------ -----
Effective income tax
rate................... 38.60% (46.44)% 31.31%
===== ====== =====

Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities are as follows as
of December 31:

1996 1997
------- ---------

Current asset/(liability)
Difference in year end for book and tax purposes.... $13,208 $(374,070)
======= =========
Noncurrent liability
Depreciation........................................ $(7,837) $ (15,721)
======= =========

NOTE J--DEFINED BENEFIT PENSION PLAN

The group has a defined benefit pension plan which covers substantially all
employees. A benefit is paid to employees based upon length of service and
annual salary. Subsequent to December 31, 1997, the Company made an election
to terminate the pension plan, effective December 31, 1997. The Internal
Revenue Service has not yet approved the termination of the plan.

Pension expense for the year ended December 31, includes the following:

1995 1996 1997
-------- --------- --------

Service cost--benefits earned during the current
period......................................... $207,297 $ 113,003 $151,009
Interest cost on projected benefit obligation... 51,874 65,670 68,882
Actual return on plan assets.................... (94,352) (139,908) (88,818)
Net amortization and deferral................... 91,919 128,224 56,129
-------- --------- --------
Net pension cost.............................. $256,738 $ 166,989 $187,202
======== ========= ========

F-32

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet as of December 31:

1996 1997
----------- -----------

Actuarial present value of benefit obligations:
Vested benefits.............................. $ (947,934) $(1,135,800)
Nonvested benefits........................... (16,875) --
----------- -----------
Accumulated benefit obligation............. (964,809) (1,135,800)
Provision for future compensation increases.. (199,208) (20,090)
----------- -----------
Projected benefit obligation............... (1,164,017) (1,155,890)
Plan assets at fair value.................... 749,655 943,250
----------- -----------
Projected benefit obligation in excess of
plan assets............................... (414,362) (212,640)
Unrecognized net gain........................ (257,445) (488,303)
Unrecognized prior service cost.............. 426,213 404,902
----------- -----------
Accrued pension cost included in other
liabilities............................... $ (245,594) $ (296,041)
=========== ===========

The following assumptions were used to develop net periodic pension expense
and the actuarial present value of projected benefit obligations:

1995 1996 1997
---- ---- ----

Expected long-term rate of return on plan assets........ 6.00% 6.00% 6.00%
Weighted average discount rate.......................... 6.00% 6.00% 6.00%
Rate of increase in compensation levels................. 4.00% 4.00% 4.00%

NOTE K--COMMITMENTS AND CONTINGENCIES

The Group leases office and warehouse space in California from an affiliated
partnership. The lease is for 5 years, expiring October 2000 with monthly
payments of $54,000. The Group is required to pay utilities, insurance,
maintenance costs and property taxes.

The Group leases certain machinery and equipment under varying operating
lease agreements from a related party. The leases require monthly payments of
$2,385.

The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining lease
terms in excess of one year as of December 31, 1997:

YEAR ENDED DECEMBER 31, AMOUNT
----------------------- ----------

1998.......................................................... $ 686,724
1999.......................................................... 686,724
2000.......................................................... 578,724
2001.......................................................... 25,936
2002.......................................................... 8,420
----------
$1,986,528
==========

F-33

THE ACTA GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

NOTE L--MAJOR CUSTOMERS

Sales to principal customers, which were in excess of 10% of total net sales,
are shown below:

YEAR ENDED
DECEMBER 31,
---------------
CUSTOMER 1995 1996 1997
-------- ---- ---- ----

A.......................................................... (a) 20% (a)
B.......................................................... (a) 15% (a)

- --------
(a) less than 10%

NOTE M--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

The preferred stock is cumulative and pays dividends at the rate of 8%. At
December 31, 1996 and 1997, there were approximately $4,000 and $8,000 of
dividends in arrears.

Cash paid for interest expense and income taxes for the years ended December
31, was as follows:

1995 1996 1997
------- -------- --------

Interest paid................................... $10,371 $ 86,476 $176,605
Income taxes paid............................... 96,162 152,800 110,800

F-34

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

QUALITY BOTANICAL INGREDIENTS, INC.

F-35

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Quality Botanical Ingredients, Inc.
South Plainfield, New Jersey

We have audited the accompanying balance sheet of Quality Botanical
Ingredients, Inc. (formerly Island Organics, Inc.) (a New Jersey corporation)
as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year 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 audit.

In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Quality Botanical
Ingredients, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.

GRANT THORNTON LLP

Houston, Texas
July 16, 1998

F-36

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Quality Botanical Ingredients, Inc.
South Plainfield, New Jersey

We have audited the accompanying balance sheet of Quality Botanical
Ingredients, Inc. (formerly Island Organics, Inc.) (a New Jersey corporation)
as of December 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the year 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 audit.

In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Quality Botanical
Ingredients, Inc. as of December 31, 1996, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.

AMPER, POLITZINER & MATTIA P.A.

Edison, New Jersey
April 15, 1997

F-37

QUALITY BOTANICAL INGREDIENTS, INC.

BALANCE SHEETS

DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)

ASSETS
------
CURRENT ASSETS
Cash and cash equivalents................. $ 90,100 $ 54,386 $ 115,156
Accounts receivable, less allowance for
doubtful accounts of $101,000, $121,000
and $63,000 (unaudited).................. 1,886,345 2,109,898 2,579,869
Inventory................................. 2,850,597 5,421,632 5,575,959
Prepaid expenses and other current assets. 79,721 66,918 538,352
Deferred tax asset........................ -- 272,000 239,000
---------- ----------- -----------
Total current assets.................... 4,906,763 7,924,834 9,048,336
PROPERTY AND EQUIPMENT--NET................. 1,648,312 2,417,953 2,471,058
DEFERRED TAX ASSET.......................... -- 28,000 28,000
OTHER ASSETS................................ 184,684 372,065 517,490
DUE FROM AFFILIATES......................... 127,597 617,590 809,427
---------- ----------- -----------
$6,867,356 $11,360,442 $12,874,311
========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable--bank........................ $1,668,423 $ 4,166,282 $ 3,334,894
Current maturities of long-term debt...... 53,356 257,779 1,152,133
Current maturities of capital lease
obligations.............................. 143,639 261,599 265,076
Current maturities of note payable--
litigation settlement.................... -- 169,366 176,255
Accounts payable.......................... 1,796,812 2,934,759 3,547,302
Accrued expenses and other current
liabilities.............................. 689,623 456,206 846,308
Income taxes payable...................... -- -- 196,000
---------- ----------- -----------
Total current liabilities............... 4,351,853 8,245,991 9,517,968
LONG-TERM DEBT, net of current maturities... 190,472 496,805 595,200
CAPITAL LEASE OBLIGATIONS, net of current
maturities................................. 556,822 876,203 768,096
LOANS PAYABLE--officers, subordinated....... 172,099 -- --
NOTE PAYABLE--litigation settlement net of
current maturities......................... -- 790,061 700,182
COMMITMENTS AND CONTINGENCIES............... -- -- --
STOCKHOLDERS' EQUITY
Common stock, no par value, 300 shares
authorized, 150 outstanding.............. 38,400 38,400 38,400
Additional paid-in capital................ 207,967 357,738 357,738
Retained earnings......................... 1,349,743 555,244 896,727
---------- ----------- -----------
Total stockholders' equity.............. 1,596,110 951,382 1,292,865
---------- ----------- -----------
$6,867,356 $11,360,442 $12,874,311
========== =========== ===========

The accompanying notes are an integral part of these statements.

F-38

QUALITY BOTANICAL INGREDIENTS, INC.

STATEMENTS OF OPERATIONS

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------------
1996 1997 1997 1998
----------- ----------- ---------- -----------
(UNAUDITED)

Net sales................... $10,894,053 $15,494,503 $7,620,770 $10,008,951
Cost of goods sold.......... 7,592,328 11,155,121 5,389,718 7,034,031
----------- ----------- ---------- -----------
3,301,725 4,339,382 2,231,052 2,974,920
Selling, general and
administrative expenses.... 2,594,589 3,513,690 1,880,315 1,991,085
----------- ----------- ---------- -----------
Earnings from
operations............. 707,136 825,692 350,737 983,835
Other income (expense)
Interest expense.......... (230,569) (493,168) (159,288) (338,182)
Litigation settlements.... -- (1,144,370) (68,964) --
Other..................... -- -- -- (75,170)
----------- ----------- ---------- -----------
(230,569) (1,637,538) (228,252) (413,352)
----------- ----------- ---------- -----------
Earnings (loss) before
income taxes........... 476,567 (811,846) 122,485 570,483
Income tax benefit (ex-
pense)..................... -- 300,000 (17,800) (229,000)
----------- ----------- ---------- -----------
NET EARNINGS (LOSS)..... $ 476,567 $ (511,846) $ 104,685 $ 341,483
=========== =========== ========== ===========

The accompanying notes are an integral part of these statements.

F-39

QUALITY BOTANICAL INGREDIENTS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ---------- ---------- -------------

Balance at January 1,
1996................... 100 $38,000 $157,967 $1,170,061 $1,366,028
Net earnings............ -- -- -- 476,567 476,567
Common stock issued..... 50 400 -- -- 400
Capital contributions... -- -- 50,000 -- 50,000
Distributions........... -- -- -- (296,885) (296,885)
--- ------- -------- ---------- ----------
Balance at December 31,
1996................... 150 38,400 207,967 1,349,743 1,596,110
Net loss................ -- -- -- (511,846) (511,846)
Capital contributions... -- -- 149,771 -- 149,771
Distributions........... -- -- -- (282,653) (282,653)
--- ------- -------- ---------- ----------
Balance at December 31,
1997................... 150 38,400 357,738 555,244 951,382
Net earnings (unau-
dited)................. -- -- -- 341,483 341,483
--- ------- -------- ---------- ----------
Balance at June 30, 1998
(unaudited)............ 150 $38,400 $357,738 $ 896,727 $1,292,865
=== ======= ======== ========== ==========

The accompanying notes are an integral part of these statements.

F-40

QUALITY BOTANICAL INGREDIENTS, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ---------
(UNAUDITED)

Cash flows from operating activ-
ities
Net earnings (loss)........... $ 476,567 $ (511,846) $ 104,685 $ 341,483
Adjustments to reconcile net
earnings (loss) to net cash
(used) provided by operating
activities
Litigation settlements...... -- 986,370 -- --
Bad debt expense............ 33,000 60,000 -- --
Deferred tax (benefit)
expense.................... -- (300,000) 17,800 33,000
Depreciation and
amortization............... 171,882 316,167 140,506 205,781
Loss on abandonment of
property and equipment..... -- -- -- --
Stock compensation to
officers................... 400 -- -- --
Change in assets and
liabilities
Increase in accounts
receivable............... (298,751) (283,553) (181,593) (469,971)
Increase in inventory..... (1,567,881) (2,571,035) (524,809) (154,327)
(Increase) decrease
prepaid expenses and
other current assets..... (183,992) 12,803 (89,773) (471,434)
Increase due from
affiliates............... -- (489,993) -- (191,837)
Increase in other assets.. (93,761) (237,772) (195,514) (195,894)
Increase (decrease) in
trade accounts payable... 542,997 1,137,847 (159,128) 612,543
Increase (decrease) in
accrued expenses and
other current
liabilities.............. 252,955 (233,417) (138,630) 390,102
Increase in income taxes
payable.................. -- -- -- 196,000
---------- ---------- ---------- ---------
Net cash (used) provided
by operating
activities............. (666,584) (2,114,429) (1,026,456) 295,446
Cash flows from investing
activities
Payments for purchase of
property and equipment....... (463,566) (305,417) (45,021) (179,698)
Cash flows from financing
activities
Net proceeds (payments) from
note payable--bank........... 1,156,688 2,497,859 827,692 (831,388)
Proceeds from long-term debt.. 310,725 899,300 850,000 1,760,000
Principal payments of long-
term debt.................... -- (388,544) (265,681) (767,251)
Principal payments of
obligations under capitalized
leases....................... (88,309) (292,559) (136,475) (133,349)
Decrease in loans payable--
officers..................... (5,636) (22,328) (5,480) --
Distributions to stockholders. (296,885) (282,653) (213,168) --
Payments on note payable--
litigation settlement........ -- (26,943) -- (82,990)
---------- ---------- ---------- ---------
Net cash provided (used) by
financing activities....... 1,076,583 2,384,132 1,056,888 (54,978)
---------- ---------- ---------- ---------
Net (decrease) increase in cash. (53,567) (35,714) (14,589) 60,770
Cash and cash equivalents at
beginning of period............ 143,667 90,100 90,100 54,386
---------- ---------- ---------- ---------
Cash and cash equivalents at end
of period...................... $ 90,100 $ 54,386 $ 75,511 $ 115,156
========== ========== ========== =========

The accompanying notes are an integral part of these statements.

F-41

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations

Quality Botanical Ingredients, Inc. (a New Jersey corporation) (the
Company), originally incorporated in 1983 in New York and reincorporated in
New Jersey in 1993, is primarily in the business of processing domestic and
imported herbs into powdered herbs and extracts useable in vitamin supplements
and other products which are sold to manufacturers. Prior to May 1, 1997, the
Company's name was Island Organics, Inc.

2. Cash and Cash Equivalents

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

3. Concentration of Credit Risk

Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions
which may at times be in excess of federally insured levels. The Company has
not experienced any losses in such accounts and does not believe it is exposed
to any significant credit risks on cash maintained in bank deposit accounts.

4. Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.

5. Inventory

Inventory consists of bulk herbs in the raw material, blended and processed
stages and extracts and is stated at the lower of cost or market, with cost
being determined on a first-in, first-out basis.

6. Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis.

7. Revenue Recognition

The Company recognizes revenue when products are shipped to customers.

8. Income Taxes

Prior to 1997, the Company had elected to be taxed under the Subchapter S
provisions of the Internal Revenue Code. As a result of this election, income
of the Company was taxable to the stockholders individually and no provision
was made for Federal income taxes in the accompanying financial statements. As
of January 1, 1997, the Company revoked its S-corporation election for federal
and state tax purposes.

F-42

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

9. Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.

10. Use of Estimates

11. Reclassifications

Certain reclassifications have been made to conform to the 1997
presentation.

12. New Accounting Pronouncements

13. Unaudited Interim Information

The financial information for the six months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.

NOTE B--INVENTORY

Inventory consists of the following at December 31:

1996 1997
---------- ----------

Raw materials....................................... $ 426,659 $ 991,810
Work in process..................................... -- 122,923
Finished goods...................................... 2,423,938 4,306,899
---------- ----------
$2,850,597 $5,421,632
========== ==========

F-43

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE C--PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ ---------- ----------

Leasehold improvements............... 25 $ 497,749 $ 640,533
Machinery and equipment.............. 5-10 1,185,138 2,091,365
Furniture and fixtures............... 10 77,016 144,796
Computer system...................... 5-10 142,480 256,400
Vehicles............................. 5 34,437 34,437
Construction in progress............. -- 194,283 --
---------- ----------
2,131,103 3,167,531
Accumulated depreciation........... (482,791) (749,578)
---------- ----------
$1,648,312 $2,417,953
========== ==========

NOTE D--OTHER ASSETS

Other assets consist of the following at December 31:

1996 1997
-------- --------

Security deposits...................................... $ 88,775 $131,574
Loan acquisition costs, net............................ -- 114,570
Employee advances...................................... 85,450 87,985
Other.................................................. 10,459 37,936
-------- --------
$184,684 $372,065
======== ========

Loan acquisition costs are amortized over the term of the loans.

NOTE E--DUE FROM AFFILIATES

Due from affiliates represents advances to three farming operations in the
United States in which certain Company stockholders have significant ownership
interests. These farms have approximately 100 acres presently in development
of various crops which commenced in 1996 and expect to harvest over the next
three to four years. In addition to the $617,590 already advanced, the Company
anticipates funding an additional $400,000 to $900,000 over the next twelve
months.

NOTE F--NOTE PAYABLE--BANK

The Company had an agreement with a lending institution to finance up to 70%
of eligible accounts receivable to a maximum of $1,000,000 and up to 50% of
eligible inventory to a maximum of an additional $1,000,000. Borrowings under
this agreement accrued interest at prime plus 4.5%.

On May 9, 1997, the Company entered into a financing agreement with a new
lending institution. Under the new agreement, the overall borrowing limit is
$4,250,000, limited to 80% of eligible accounts receivable, 40% of eligible
raw material inventory, and 60% of eligible finished goods inventory. Advances
against eligible inventory are limited to $2,000,000, with a sublimit on raw
material inventory of $750,000. Borrowings under the new line of credit
agreement bear interest at prime (8.5% at December 31, 1997) plus 2%. The line
of credit

F-44

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

agreement expires in May 1999, and is collateralized by accounts receivable
and inventory, and is personally guaranteed by a principal of the Company.
Under the new line of credit agreement, the Company has restrictive covenants
relating to dividends, capital expenditures, tangible capital funds, and debt
service coverage.

NOTE G--LONG-TERM DEBT

Long-term debt consists of the following at December 31:

1996 1997
-------- --------

Note payable to bank, payable in 60 monthly installments of
$7,083 plus interest at prime (8.5% at December 31, 1997)
plus 2%, through May 2002, guaranteed by a principal
stockholder (a)............................................. $ -- $375,419
Note payable to bank, payable in 36 monthly installments of
$11,805 plus interest at prime (8.5%at December 31, 1997)
plus 2.5%, through May 2000, guaranteed by a principal
stockholder (a)............................................. -- 342,365
Note payable to bank, payable in 36 monthly installments of
$2,500 plus interest at prime (8.5% at December 31, 1997)
plus 2%, through March 1999, guaranteed by a principal
stockholder (a)............................................. -- 36,800
Note payable to bank, repaid May 1997........................ 243,828 --
-------- --------
243,828 754,584
Less current maturities.................................... 53,356 257,779
-------- --------
$190,472 $496,805
======== ========

- --------
(a) These notes have restrictive covenants as described in the second
paragraph of Note F.

The approximate aggregate amount of all long-term debt maturities for the
five years following December 31, 1997 are as follows:

YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------

1998........................................................... $258,000
1999........................................................... 233,000
2000........................................................... 144,000
2001........................................................... 85,000
2002........................................................... 35,000

On May 12, 1998, the Company closed on new financing arrangements with
another financial institution. The financing arrangements replaced all
previous financing and consists of the following:

$6 million revolving line of credit up to: 1) 85% of eligible accounts
receivable (including a limitation on a certain account); 2) 55% of
eligible inventory with inventory sublimit of $3 million; 3) this line
requires certain unused line fees; and 4) interest rate 1 1/2% over prime.

Term loan: 1) $760,000 to be paid in 59 installments of $12,667 to May
2003; and 2) interest rate 1 1/2% over prime.

Bridge term loan: 1) $1 million to be repaid, with interest, by May 11,
1999; 2) if not paid by May 11, 1999, must pay a fee of $50,000 and then 36
installments of $27,778 to May 2002; and 3) interest is 3 1/2% over prime.

Letters of credit: 1) Up to $250,000, reserved against line of credit
limits.

F-45

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The lender has a first security interest in all of the Company's existing
and future assets as well as unlimited personal guarantees of certain
shareholder, principal, trust and related entities who lease office and
warehouse space to the Company. This new agreement provides for prepayment
penalties and certain warrants if the bridge loan is not paid in eighteen
months.

The agreement contains covenants restricting officer loans or related party
loans, and dividends and limiting capital expenditures. There are also
requirements to attain certain net income levels by quarter and to maintain
certain leverage ratios.

NOTE H--CAPITAL LEASE OBLIGATIONS

The Company has entered into various capital leases for equipment expiring
through 2001, with aggregate monthly payments of $38,755.

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

YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------

1998.......................................................... $ 375,000
1999.......................................................... 360,000
2000.......................................................... 326,000
2001.......................................................... 240,000
2002.......................................................... 113,000
----------
1,414,000
Less amount representing interest........................... 276,000
----------
1,138,000
Less current maturities..................................... 262,000
----------
$ 876,000
==========

The present value of minimum future obligations shown above is calculated
based on interest rates ranging from 8% to 16%, with a weighted average of 10%
determined to be applicable at the inception of the lease.

Property and equipment include $570,000 and $1,300,000 at December 31, 1996
and 1997, respectively, capitalized under such leases. Related accumulated
depreciation was $112,000 and $230,000 at December 31, 1996 and 1997,
respectively.

NOTE I--LITIGATION SETTLEMENTS

On December 11, 1997, the Company and certain individuals settled a lawsuit
regarding misappropriation of customers and trade secrets. The settlement
resulted in the Company issuing a $1,200,000 promissory note, payable in sixty
monthly installments of $20,000 commencing on November 1, 1997. For the year
ended December 31, 1997, the Company recorded the present value ($986,370) of
the entire amount as an expense. The remaining amount of $213,630 will be
recorded as interest expense as the payments are made. The note may be prepaid
at any time without premium or penalty. This note is collateralized by a
mortgage on the property leased to the Company from an affiliate for its
office and warehouse facilities (see Note M), the personal guarantee of a
principal of the Company and a first security interest in 66-2/3% of the
Company's common stock. In addition, the Company incurred $116,000 of
professional fees.

F-46

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The approximate amount of long-term maturities for the five years following
December 31, 1997 are as follows:

YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------

1998........................................................... $170,000
1999........................................................... 183,000
2000........................................................... 199,000
2001........................................................... 215,000
2002........................................................... 193,000

In 1997, the Company settled a rent dispute with a former landlord and
incurred additional rent and legal expenses amounting to $42,000.

NOTE J--RELATED PARTY TRANSACTIONS

The Company had loans payable to two officers including accrued interest at
8%, which were subordinated to bank financing. Interest expense incurred on
the above for 1996 and 1997 was $10,005 and $10,445, respectively. Loans
payable--officers, subordinated of $149,771, was capitalized to additional
paid-in capital on the authority of the officer.

NOTE K--INCOME TAXES

Due to the Company's status as a Subchapter S Corporation, no tax expense or
deferred taxes were recorded prior to 1997.

The provision for income taxes for the year ended December 31, 1997 consists
of the following:

Current tax expense........................................... $ --
Deferred tax expense (benefit)................................ (323,000)
Effect of change in tax status................................ 23,000
---------
$(300,000)
=========

The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate for the year ended December 31, 1997, is as
follows:

Statutory federal income tax rate.................................. 34.00%
State taxes........................................................ 5.94
Meals and entertainment............................................ (1.25)
Key man life insurance............................................. (4.90)
Other.............................................................. 3.16
-----
Effective income tax rate.......................................... 36.95%
=====

F-47

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities are as follows as
of December 31, 1997:

Current assets and liabilities
Bonus accrual................................................ $ 26,000
Allowance for doubtful accounts.............................. 48,000
Inventory overhead capitalization............................ 130,000
Litigation settlement........................................ 68,000
---------
Net deferred tax asset..................................... $ 272,000
=========
Noncurrent assets and liabilities
Litigation settlement........................................ $ 150,000
Depreciation................................................. (122,000)
---------
Net noncurrent deferred tax asset.......................... $ 28,000
=========

NOTE L--PROFIT SHARING PLAN

The Company maintains a defined contribution profit sharing plan covering
all employees meeting certain age and service requirements. Contributions to
the plan are at the discretion of management. Company contributions for the
years ended December 31, 1996 and 1997 were $120,000 and $33,000,
respectively.

NOTE M--COMMITMENTS AND CONTINGENCIES

Real Estate Rental

The Company leases office and warehouse space in New Jersey from an
affiliated entity, under common ownership. The lease is for 25 years, expiring
April 2022 with monthly payments of $16,250. The Company is required to pay
utilities, insurance, maintenance costs and property taxes.

In January 1997, the Company entered into a ten year lease agreement for
additional office and warehouse space in New Jersey. The lease requires
monthly base rent of $6,125 and the payment of certain operating and building
maintenance costs.

The Company leases warehouse space in Nevada under a seven year agreement
expiring in January 2004. The lease requires monthly base rent of $3,822 and
the payment of certain operating costs with an escalating clause of 4% per
year for five years.

Facility rent expense was $147,000 and $284,000 for the years ended December
31, 1996 and 1997, respectively, including rent paid to related parties of
$165,000 in 1997.

YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------

1998......................................................... $ 316,000
1999......................................................... 323,000
2000......................................................... 331,000
2001......................................................... 333,000
2002......................................................... 340,000
Thereafter................................................... 4,211,000
----------
$5,854,000
==========

F-48

QUALITY BOTANICAL INGREDIENTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Employment and Consulting Agreements

The Company has agreements with its executive officers, which expire on
December 31, 1999. Such agreements provide for minimum salary levels as well
as incentive bonuses which are based on company revenue and pre-tax income
levels. Approximately $250,000 and $500,000 was expensed for the years ended
December 31, 1996 and 1997, respectively, under these agreements.

University Grant

The Company provides annual grants to Purdue University for researching
specified herbal crop improvements. Approximately $21,000 and $41,000 was
expensed for 1996 and 1997, respectively.

NOTE N--MAJOR CUSTOMERS

Customer concentrations are as follows at December 31:

CUSTOMER 1996 1997
-------- ---- ----

A............................................................... 32% 16%
B............................................................... (a) 16%

- --------
(a) less than 10%.

As of December 31, 1996 and 1997, respectively, the one major customer
totaled 51% of accounts receivable, and the two major customers totaled 66% of
accounts receivable.

NOTE O--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

During December 1997, the Company transferred $149,771 of a note payable due
to an officer to additional paid-in capital. During 1996 and 1997, the Company
recorded $331,035 and $730,000, respectively, in addition to property and
equipment as a result of noncash capital lease financing activities.

Cash paid for interest expense and income taxes for the years ended December
31, was as follows:

1996 1997
-------- --------

Interest paid........................................... $226,000 $450,000
Income taxes paid....................................... 6,000 1,200

NOTE P--SUBSEQUENT EVENTS (UNAUDITED)

In August, 1998, the Company and its shareholders entered into a definitive
agreement providing for the merger of the Company with Advanced
Nutraceuticals, Inc.

In August 1998, the Company acquired all the outstanding common stock of
Botanical Products, Inc. (BPI) in exchange for cash of $150,000, subordinated
term notes of $1,350,000, and equity notes with an approximate value of
$3,000,000.

F-49

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

NORTHRIDGE LABORATORIES, INC.

F-50

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Northridge Laboratories, Inc.
Chatsworth, California

We have audited the accompanying balance sheets of Northridge Laboratories,
Inc. (a California corporation) as of September 30, 1997 and 1996, and the
related statements of earnings, stockholders' equity and cash flows for each
of the two years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 the management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northridge Laboratories,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the two years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.

GRANT THORNTON LLP

Houston, Texas
July 9, 1998

F-51

NORTHRIDGE LABORATORIES, INC.

BALANCE SHEETS

SEPTEMBER 30,
--------------------- JUNE 30,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
ASSETS
------

CURRENT ASSETS
Cash and cash equivalents.................. $ 452,281 $ 665,781 $2,035,961
Accounts receivable, less allowance for
doubtful accounts of $38,909, $50,813 and
$49,630 (unaudited)....................... 625,636 1,414,683 1,464,325
Inventory.................................. 900,470 1,216,836 1,069,756
Prepaid expenses........................... 6,060 9,220 222,462
Deferred income taxes...................... 150,820 74,416 74,416
---------- ---------- ----------
Total current assets..................... 2,135,267 3,380,936 4,866,920
PROPERTY, PLANT AND EQUIPMENT--NET........... 2,065,752 1,549,647 1,524,762
DEPOSITS..................................... 40,572 40,727 40,557
---------- ---------- ----------
$4,241,591 $4,971,310 $6,432,239
========== ========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES
Accounts payable........................... $ 665,049 $ 771,731 $1,027,603
Income taxes payable....................... 171,471 347,132 --
Accrued payroll............................ 280,341 66,896 1,097,586
Note payable--bank......................... -- -- 58,308
Accrued profit sharing contribution........ 175,635 183,061 150,000
Accrued expenses........................... 93,663 73,900 21,062
Notes payable to stockholders.............. 88,000 68,000 55,500
---------- ---------- ----------
Total current liabilities................ 1,474,159 1,510,720 2,410,059
DEFERRED INCOME TAXES........................ 495,769 349,641 349,641
---------- ---------- ----------
1,969,928 1,860,361 2,759,700
COMMITMENTS AND CONTINGENCIES................ -- -- --
STOCKHOLDERS' EQUITY
Capital stock, no par value, 10,000 shares
authorized; 100 shares issued and
outstanding............................... 50,000 50,000 50,000
Retained earnings.......................... 2,221,663 3,060,949 3,622,539
---------- ---------- ----------
2,271,663 3,110,949 3,672,539
---------- ---------- ----------
$4,241,591 $4,971,310 $6,432,239
========== ========== ==========

The accompanying notes are an integral part of these statements.

F-52

NORTHRIDGE LABORATORIES, INC.

STATEMENTS OF EARNINGS

YEAR ENDED SEPTEMBER NINE MONTHS ENDED JUNE
30, 30,
----------------------- ----------------------
1996 1997 1997 1998
---------- ----------- ---------- -----------
(UNAUDITED)

Net sales....................... $7,621,788 $11,532,389 $7,656,570 $11,233,164
Cost of goods sold.............. 6,087,685 8,393,451 5,540,313 8,314,856
---------- ----------- ---------- -----------
Gross profit................ 1,534,103 3,138,938 2,116,257 2,918,308
Selling, general and
administrative expenses........ 1,608,429 2,069,510 1,495,341 1,991,438
---------- ----------- ---------- -----------
Earnings (loss) from
operations................. (74,326) 1,069,428 620,916 926,870
Other income, net............... 43,032 25,266 14,804 41,389
---------- ----------- ---------- -----------
Earnings (loss) before income
tax expense and extraordinary
gain......................... (31,294) 1,094,694 635,720 968,259
Income tax expense (benefit).... (13,580) 440,710 276,534 406,669
---------- ----------- ---------- -----------
Earnings (loss) before
extraordinary gain......... (17,714) 653,984 359,186 561,590
Extraordinary gain from
involuntary conversion due to
gas explosion (net of
applicable income taxes of
$383,954, $124,698 and $124,698
as of September 30, 1996 and
1997, and June 30, 1997,
respectively).................. 519,468 185,302 185,302 --
---------- ----------- ---------- -----------
NET EARNINGS................ $ 501,754 $ 839,286 $ 544,488 $ 561,590
========== =========== ========== ===========

The accompanying notes are an integral part of these statements.

F-53

NORTHRIDGE LABORATORIES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

TOTAL
NUMBER OF CAPITAL RETAINED STOCKHOLDERS'
SHARES STOCK EARNINGS EQUITY
--------- ------- ---------- -------------

Balance at October 1, 1995.......... 100 $50,000 $1,719,909 $1,769,909
Net earnings........................ -- -- 501,754 501,754
--- ------- ---------- ----------
Balance at September 30, 1996....... 100 50,000 2,221,663 2,271,663
Net earnings........................ -- -- 839,286 839,286
--- ------- ---------- ----------
Balance at September 30, 1997....... 100 50,000 3,060,949 3,110,949
Net earnings (unaudited)............ -- -- 561,590 561,590
--- ------- ---------- ----------
Balance at June 30, 1998
(unaudited)........................ 100 $50,000 $3,622,539 $3,672,539
=== ======= ========== ==========

The accompanying notes are an integral part of these statements.

F-54

NORTHRIDGE LABORATORIES, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER NINE MONTHS ENDED JUNE
30, 30,
---------------------- -----------------------
1996 1997 1997 1998
----------- --------- ----------- ----------
(UNAUDITED)

Cash flows from operating
activities
Net earnings................. $ 501,754 $ 839,286 $ 544,488 $ 561,590
Adjustments to reconcile net
earnings to net cash
provided (used) by operating
activities
Depreciation and
amortization............... 456,540 562,626 421,970 462,365
Gain from involuntary
conversion of property,
plant and equipment........ (763,887) (30,000) -- --
Provision for doubtful
accounts................... 34,789 34,666 34,666 --
Changes in assets and
liabilities
(Increase) decrease in
accounts receivable....... (85,795) (823,713) (1,498,647) (49,643)
(Increase) decrease in
inventory................. (191,876) (316,366) (859,719) 147,080
Decrease (increase) in
prepaid expenses.......... 6,636 (3,160) (5,124) (213,242)
(Increase) decrease in
deposits.................. (26,478) (155) (130) 170
(Decrease) increase in
accounts payable.......... (73,519) 106,682 820,240 255,872
Increase (decrease) in
accrued payroll........... 15,943 (213,445) 393,031 1,030,690
(Decrease) increase in
accrued profit sharing
contribution.............. (7,450) 7,426 (38,635) (33,061)
Decrease in accrued
expenses.................. (177,295) (19,763) (24,199) (52,838)
Increase (decrease) in
income taxes payable...... 181,530 175,661 13,759 (347,132)
Increase (decrease) in
deferred income taxes..... 82,654 (69,724) -- --
----------- --------- ----------- ----------
Net cash (used) provided
by operating activities.. (46,454) 250,021 (198,300) 1,761,851
Cash flows from investing
activities
Purchase of property, plant
and equipment............... (1,264,680) (46,521) (78,161) (437,479)
Insurance proceeds from
involuntary conversion of
property, plant and
equipment................... 763,887 30,000 -- --
----------- --------- ----------- ----------
Net cash used in investing
activities............... (500,793) (16,521) (78,161) (437,479)
Cash flows from financing
activities
Proceeds from notes payable.. 88,000 -- -- 58,308
Repayments of notes payable.. -- (20,000) (20,000) (12,500)
----------- --------- ----------- ----------
Net cash provided (used)
by financing activities.. 88,000 (20,000) (20,000) 45,808
----------- --------- ----------- ----------
Net (decrease) increase in
cash..................... (459,247) 213,500 (296,461) 1,370,180
Cash at beginning of period... 911,528 452,281 452,281 665,781
----------- --------- ----------- ----------
Cash at end of period......... $ 452,281 $ 655,781 $ 155,820 $2,035,961
----------- --------- ----------- ----------
Supplemental disclosures
Cash paid during the period
for:
Interest.................... $ 3,900 $ 8,181 $ 8,133 $ 6,178
Income taxes................ 106,000 459,474 387,474 967,132

The accompanying notes are an integral part of these statements.

F-55

NORTHRIDGE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Description of Business

Northridge Laboratories, Inc., (a California corporation) (the "Company")
incorporated in 1967, which provides full service contract manufacturing and
product development services to the nutritional supplement and vitamin
industry.

2. Cash and Cash Equivalents

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

3. Concentration of Credit Risk

4. Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.

5. Inventory

Inventory consists of herbs and vitamin supplements in the raw material,
blended and processed stages and is stated at the lower of cost or market,
with cost being determined on a first-in, first-out basis.

6. Property, Plant and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis.

7. Revenue Recognition

The Company recognizes revenue when products are shipped to customers.

8. Income Taxes

Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse. Deferred tax expense (benefit) is the result of changes
in deferred tax assets and liabilities.

F-56

NORTHRIDGE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

9. Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The Company believes
that the carrying value of these instruments on the accompanying balance
sheets approximates their fair value.

10. Use of Estimates

11. New Accounting Pronouncements

12. Unaudited Interim Information

The financial information for the nine months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.

NOTE B--INVENTORY

Inventories consist of the following at September 30:

1996 1997
-------- ----------

Raw materials......................................... $603,495 $ 665,001
Work-in-process....................................... 190,629 404,233
Finished goods........................................ 106,346 147,602
-------- ----------
$900,470 $1,216,836
======== ==========

NOTE C--PROPERTY, PLANT AND EQUIPMENT

Property and equipment are summarized as follows:

ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ ---------- -----------

Leasehold improvements.............. 5 $ 497,979 $ 505,328
Furniture and equipment............. 3-7 2,177,469 2,213,774
Automobiles and trucks.............. 5 144,593 144,593
---------- -----------
2,820,041 2,863,695
Accumulated depreciation............ (754,289) (1,314,048)
---------- -----------
$2,065,752 $ 1,549,647
========== ===========

F-57

NORTHRIDGE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE D--NOTES PAYABLE

Notes payable consist of 7% demand notes due to a stockholder.

Total interest cost incurred and charged to expense was $6,573 and $5,510
for the years ended September 30, 1996 and 1997, respectively.

NOTE E--COMMITMENTS

The Company leases its facilities under lease agreements classified as
operating leases. The leases contain provisions for adjustment of the minimum
payments based on changes in the Consumer Price Index. The following is a
schedule of the future minimum rental payments for the leases which expire
from September 30, 1999 to August 31, 2001.

YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- --------

1998............................................................ $161,856
1999............................................................ 161,856
2000............................................................ 80,676
2001............................................................ 73,953
--------
$478,341
========

Rent expense was approximately $135,000 and $159,000 for the years ended
September 30, 1996 and 1997, respectively.

NOTE F--PROFIT SHARING PLAN

The Company has a profit sharing plan covering all employees with a minimum
of one year of continuous service and at least twenty one years of age. Annual
contributions to the plan are at the sole discretion of management and are
limited to fifteen percent of total participants' compensation for the fiscal
year. The Company's contribution for the years ended September 30, 1996 and
1997 was approximately $176,000 and $183,000, respectively.

NOTE G--INCOME TAXES

Income tax expense (benefit) consists of the following at September 30:

1996 1997
--------- ---------

Current............................................. $ 287,720 $ 635,132
Deferred............................................ 82,654 (69,724)
Less amount applicable to extraordinary gain........ (383,954) (124,698)
--------- ---------
Income tax expense (benefit)...................... $ (13,580) $ 440,710
========= =========

F-58

NORTHRIDGE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and deferred tax liability at September
30 are as follows:

1996 1997
-------- --------

Deferred tax assets:
Accumulated depreciation............................. $138,035 $296,096
Insurance reimbursement receivable................... 121,240 --
State tax provision.................................. 9,516 48,144
Allowance for doubtful accounts...................... 16,848 22,002
Other................................................ 3,216 4,270
-------- --------
Total deferred tax assets.......................... 288,855 370,512
Deferred tax liability:
Deferred gain from involuntary conversion of
property, plant and equipment....................... 633,804 645,737
-------- --------
Net deferred tax liability......................... $344,949 $275,225
======== ========

The net deferred tax liability is comprised of the following at September
30:

1996 1997
--------- ---------

Current deferred income tax assets.................. $ 150,820 $ 74,416
Noncurrent deferred income taxes:
Assets............................................ 138,035 296,096
Liabilities....................................... (633,804) (645,737)
--------- ---------
Noncurrent deferred tax liability............... (495,769) (349,641)
--------- ---------
Net deferred tax liability...................... $ 344,949 $ 275,225
========= =========

As a result of the following items, the total tax expense differs from the
amount computed by applying the statutory U.S. federal income tax rate to
earnings before income taxes for the years ended September 30:

1996 1997
---- ----

Expense at statutory rate.................................... 34.0% 34.0%
Change resulting from state franchise tax, net of federal
benefit..................................................... 5.2 6.2
Other........................................................ 4.2 .1
---- ----
43.4% 40.3%
==== ====

F-59

NORTHRIDGE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE H--MAJOR CUSTOMERS

The Company's major customers are located throughout California and Utah.
Sales to customers accounting for 10% or more of sales were as follows:

YEAR ENDED
SEPTEMBER 30,
---------------
CUSTOMER 1996 1997
- -------- ------ ------

A............................................................. (a) 35%
B............................................................. 40% 18%
C............................................................. (a) 18%
D............................................................. 10% (a)

- --------
(a) less than 10%.

NOTE I--EXTRAORDINARY GAIN

In June 1995, the Company's manufacturing facility was totally destroyed by
a gas explosion. The extraordinary gain of $519,468 and $185,302 (net of
applicable income taxes of $383,954 and $124,698 as of September 30, 1996 and
1997, respectively) represents the insurance proceeds received in excess of
the net book value of the destroyed assets and other related expenses of the
gas explosion as of September 30, 1996 and 1997, respectively.

NOTE J--SUBSEQUENT EVENT (UNAUDITED)

In August, 1998, the Company and its shareholders entered into a definitive
agreement providing for the merger of the Company with Advanced
Nutraceuticals, Inc.

F-60

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BACTOLAC PHARMACEUTICALS, INC.

F-61

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Bactolac Pharmaceuticals, Inc.
Westbury, New York

We have audited the accompanying balance sheets of Bactolac Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of earnings,
stockholder's equity, and cash flows for the years 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.

In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Bactolac Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.

GRANT THORNTON LLP

Houston, Texas
July 30, 1998

F-62

BACTOLAC PHARMACEUTICALS, INC.

BALANCE SHEETS

DECEMBER 31,
------------------- JUNE 30,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
ASSETS
------

CURRENT ASSETS
Cash......................................... $ 464 $ 90,902 $ 74,924
Accounts receivable--trade, less allowance
for doubtful accounts of $75,000 in 1997 and
$100,000 (unaudited) in 1998................ 226,291 1,204,040 1,867,909
Inventory.................................... 188,024 657,450 712,674
-------- ---------- ----------
Total current assets....................... 414,779 1,952,392 2,655,507
PROPERTY AND EQUIPMENT-NET..................... 84,970 73,094 89,911
OTHER ASSETS................................... 587 8,341 21,897
-------- ---------- ----------
$500,336 $2,033,827 $2,767,315
======== ========== ==========

LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------

CURRENT LIABILITIES
Accounts payable............................. $285,679 $ 858,859 $ 916,337
Accrued expenses............................. 8,204 22,708 11,315
-------- ---------- ----------
Total current liabilities.................. 293,883 881,567 927,652
LOAN PAYABLE TO STOCKHOLDER.................... 2,800 2,800 2,800
-------- ---------- ----------
Total liabilities.......................... 296,683 884,367 930,452
COMMITMENTS AND CONTINGENCIES.................. -- -- --
STOCKHOLDER'S EQUITY
Common stock, par value $1 per share;
authorized, issued and outstanding 100
shares...................................... 100 100 100
Additional paid-in capital................... 4,852 4,852 4,852
Retained earnings............................ 198,701 1,144,508 1,831,911
-------- ---------- ----------
203,653 1,149,460 1,836,863
-------- ---------- ----------
$500,336 $2,033,827 $2,767,315
======== ========== ==========

The accompanying notes are an integral part of these statements.

F-63

BACTOLAC PHARMACEUTICALS, INC.

STATEMENTS OF EARNINGS

YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30,
--------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)

Net sales.......................... $1,406,339 $5,002,113 $2,022,793 $3,642,245
Cost of goods sold................. 1,135,492 3,802,153 1,527,490 2,566,100
---------- ---------- ---------- ----------
270,847 1,199,960 495,303 1,076,145
Selling, general and administrative
expenses.......................... 74,621 246,224 82,106 134,214
---------- ---------- ---------- ----------
Earnings from operations......... 196,226 953,736 413,197 941,931
Other income, net.................. 4,902 4,913 360 3,344
---------- ---------- ---------- ----------
NET EARNINGS..................... $ 201,128 $ 958,649 $ 413,557 $ 945,275
========== ========== ========== ==========

The accompanying notes are an integral part of these statements.

F-64

BACTOLAC PHARMACEUTICALS, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY

ADDITIONAL RETAINED TOTAL
NUMBER PAID-IN EARNINGS STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- ---------- -------------

Balance at January 1,
1996.................... 100 $100 $4,852 $ (2,427) $ 2,525
Net earnings............. -- -- -- 201,128 201,128
--- ---- ------ ---------- ----------
Balance at December 31,
1996.................... 100 100 4,852 198,701 203,653
Net earnings............. -- -- -- 958,649 958,649
Distributions............ -- -- -- (12,842) (12,842)
--- ---- ------ ---------- ----------
Balance at December 31,
1997.................... 100 100 4,852 1,144,508 1,149,460
Net earnings (unaudited). -- -- -- 945,275 945,275
Distributions
(unaudited)............. -- -- -- (257,872) (257,872)
--- ---- ------ ---------- ----------
Balance at June 30, 1998
(unaudited)............. 100 $100 $4,852 $1,831,911 $1,836,863
=== ==== ====== ========== ==========

The accompanying notes are an integral part of these statements.

F-65

BACTOLAC PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- --------------------
1996 1997 1997 1998
--------- ----------- --------- ---------
(UNAUDITED)

Cash flows from operating
activities
Net earnings.................... $ 201,128 $ 958,649 $ 413,557 $ 945,275
Adjustments to reconcile net
earnings to net cash provided
by operating activities
Depreciation................... 45,564 44,344 30,715 10,997
Provision for doubtful
accounts...................... -- 75,000 40,000 25,000
Changes in assets and
liabilities
Increase in accounts
receivable................... (219,024) (1,052,749) (720,627) (688,869)
(Increase) decrease in
inventory.................... (188,024) (469,426) 29,598 (55,224)
Decrease (increase) in other
assets....................... 160 (7,754) (3,255) (13,556)
Increase in accounts payable.. 280,382 573,180 317,485 57,478
Increase (decrease) in accrued
expenses..................... 3,747 14,504 (2,474) (11,393)
--------- ----------- --------- ---------
Net cash provided by
operating activities........ 123,933 135,748 104,999 269,708
Cash flows from investing
activities
Acquisition of property and
equipment...................... (130,534) (32,468) (25,503) (27,814)
Cash flows from financing
activities
Dividends paid to stockholders.. -- (12,842) (2,961) (257,872)
--------- ----------- --------- ---------
Net (decrease) increase in
cash........................ (6,601) 90,438 76,535 (15,978)
Cash at beginning of period...... 7,065 464 464 90,902
--------- ----------- --------- ---------
Cash at end of period............ $ 464 $ 90,902 $ 76,999 $ 74,924
========= =========== ========= =========

The accompanying notes are an integral part of these statements.

F-66

BACTOLAC PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Description of Business

Bactolac Pharmaceuticals, Inc. (a New York Corporation) (the "Company"),
incorporated 1995, and provides services including full service contract
manufacturing and product development services of nutritional supplements and
vitamins to customers throughout the United States.

2. Revenue Recognition

The Company recognizes revenues when products are shipped to customers.

3. Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration
of credit risk consist of trade receivables. The Company's business activities
are conducted with customers in the United States.

4. Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.

5. Inventory

6. Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets,
generally seven years, using primarily accelerated methods.

Management evaluates these costs for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable.
Impairment would be recognized if the carrying amounts of such costs cannot be
recovered by the net cash flows they will generate.

7. Income Taxes

The Company, with the stockholder's consent, has elected to be taxed as an S
corporation since it began operations. Accordingly, taxable results of the
Company are passed through and taxed to the stockholder. The accompanying
financial statements do not contain any provision for, nor any current or
deferred liability relating to income taxes. The difference between the
financial statement and income tax bases of assets and liabilities consist
primarily of the allowance for doubtful accounts receivable.

F-67

BACTOLAC PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

8. Financial Instruments

The Company's financial instruments consist of cash, accounts receivable and
accounts payable. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.

9. Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.

10. New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.

11. Unaudited Interim Information

The financial information for the six months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.

NOTE B--INVENTORY

Inventory consists of the following as at December 31:

1996 1997
-------- --------

Finished products....................................... $ 35,933 $125,643
Work-in-process......................................... 38,034 132,991
Raw materials........................................... 114,057 398,816
-------- --------
$188,024 $657,450
======== ========

F-68

BACTOLAC PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE C--PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ -------- --------

Machinery and equipment.................. 7 $127,821 $150,161
Furniture and fixtures................... 7 2,713 12,841
-------- --------
130,534 163,002
Accumulated depreciation................. (45,564) (89,908)
-------- --------
$ 84,970 $ 73,094
======== ========

NOTE D--LEASE COMMITMENTS

The Company leases its manufacturing facility as well as various equipment.
The equipment leases are generally short-term (six month) agreements with
month-to-month provisions at maturity. The facility lease was originally
effective June 1, 1996 for a three year term and covered approximately 42% of
the building occupied by the Company. As of May 8, 1998, the Company signed a
letter agreement to be effective on or about July 15, 1998 to occupy 100% of
the building for a five year term. The new facility agreement requires the
following minimum rental commitments as of December 31, 1997:

YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------

1998............................................................ $ 62,750
1999............................................................ 95,100
2000............................................................ 99,400
2001............................................................ 103,800
2002............................................................ 108,500
--------
$469,550
========

The Company incurred rent expense in the amount of $47,562 and $45,373
during each of the years ended December 31, 1996 and 1997.

NOTE E--MAJOR CUSTOMERS

Sales to principal customers accounting for 10% or more of revenues were as
follows:

YEAR
ENDED
DECEMBER
31,
----------
1996 1997
---- ----

A............................................................... 20% 24%
B............................................................... (a) 16%
C............................................................... 20% (a)
D............................................................... (a) 17%
E............................................................... 11% (a)
F............................................................... 10% (a)

- --------
(a) less than 10%.

F-69

BACTOLAC PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1996 and 1997, respectively, the three major customers
totaled 64% of accounts receivable, and the four major customers totaled 32%
of accounts receivable.

NOTE F--RELATED PARTY TRANSACTIONS

The Company sells products to, and purchases products from, an entity in
which the stockholder of the Company holds a 20% ownership interest.
Transactions between the Company and this entity are summarized as follows as
of December 31,:

1996 1997
------- ----------

Products sales to related party....................... $84,246 $1,213,121
Product purchases from related party.................. -- 459,790
Period ending balance in:
Accounts receivable from related party.............. 54,749 452,231
Account payable to related party.................... -- 44,509

As of December 31, 1996 and 1997, the Company had a loan payable to its
stockholder in the amount of $2,800.

NOTE G--SUBSEQUENT EVENT (UNAUDITED)

In August, 1998, the Company and its stockholder entered into a definitive
agreement providing for the merger of the Company with Advanced
Nutraceuticals, Inc.

F-70

(Mission Statement) Advanced Nutraceuticals, Inc. was formed to create a
full-service, vertically integrated manufacturer and supplier of quality
nutritional supplements, herbs and extracts.

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary........................................................ 3
The Company............................................................... 3
The Offering.............................................................. 6
Summary Pro Forma Combined Financial Data................................. 7
Summary Individual Founding Company Financial Data........................ 9
Risk Factors.............................................................. 10
The Company............................................................... 19
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 36
Management................................................................ 45
Certain Transactions...................................................... 48
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 58
Special Note Regarding Forward-Looking Statements......................... 58

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

5,000,000 SHARES

ADVANCED NUTRACEUTICALS, INC.

COMMON STOCK
(PAR VALUE $0.001 PER SHARE)

[LOGO]

SUTRO & CO. INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)

The following table sets forth the estimated expenses payable by the Company
in connection with the Offering (excluding underwriting discounts and
commissions):

NATURE OF EXPENSE AMOUNT
----------------- --------

SEC Registration Fee............................................... $ 20,355
NASD Filing Fee.................................................... $ 7,400
Nasdaq Listing Fee................................................. $ 25,000
Accounting Fees and Expenses....................................... $325,000
Legal Fees and Expenses............................................ $250,000
Printing Expenses.................................................. $125,000
Blue Sky Qualification Fees and Expenses........................... $ 5,000
Transfer Agent's Fee............................................... $ 2,000
Miscellaneous...................................................... $ 50,000
--------
Total............................................................ $809,755
========

- --------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

In accordance with Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL"), Article VIII of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") provides that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases, or
(iv) for any transaction from which the director derived an improper personal
benefit. In addition, the Certificate provides that if the DGCL is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended.

Article VI of the Company's By-laws provides for indemnification by the
Company of its officers and certain non-officer employees under certain
circumstances against expenses (including attorneys fees, judgments, fines and
amounts paid in settlement) reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in
which any such person is involved by reason of the fact that such person is or
was an officer or employee of the Company if such person acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to criminal actions or
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.

The Company has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of its By-laws and requiring the
advancement of expenses in proceedings involving such directors in most
circumstances.

The Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act against certain liabilities.

II-1

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Company since its inception in 1997.
Further included is the consideration, if any, received by the Company for
such shares, and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.

In December 1997, Naturally Direct, Inc., ("NDI") predecessor of the Company
by merger (the "Organizational Merger"), issued and sold shares of its common
stock to the following parties in the amounts and for the consideration
indicated These sales were exempt from registration pursuant to Section 4(2)
of the Securities Act, no public offer being involved:

NAME SHARES CONSIDERATION
---- ------- -------------

Barry C. Loder......................................... 817,200 $6,810
Gregory Pusey.......................................... 672,000 5,600
Thomas R. Weinberger................................... 180,000 1,500
Jeffrey G. McGonegal................................... 36,000 300
Patrick O. Cox......................................... 60,000 500
Robert Bearman......................................... 30,000 250
Martha Nachman......................................... 2,400 20
Alan Talesnick......................................... 2,400 20

In June 1998, NDI issued and sold shares of its Common Stock to the
following parties in the amounts and for the consideration indicated.

NAME: SHARES CONSIDERATION
----- ------ -------------

Joseph E. Lo Conti...................................... 60,000 $100,000
Lo Conti Family Trust................................... 60,000 100,000
Katherine Halliday O'Neil............................... 60,000 100,000
Joseph A. Lo Conti...................................... 45,000 75,000
Gary J. McAdam.......................................... 36,000 60,000
Kenneth Lanci........................................... 30,000 50,000
E. Jeffrey Peierls...................................... 27,000 45,000
Dayle K. Maloney........................................ 21,000 35,000
Ernest Mathis........................................... 21,000 35,000
Brian E. Peierls........................................ 18,000 30,000
Sherman B. Kelly........................................ 18,000 30,000
Warren Ehrlich.......................................... 16,500 27,500
James Cruce............................................. 15,000 25,000
Ehrlichco............................................... 15,000 25,000
Theresa S. Ehrlich...................................... 13,500 22,500
Eugene L. Neidiger...................................... 10,800 18,000
Anthony B. Petrelli..................................... 9,600 16,000
Charles C. Bruner....................................... 9,600 16,000
Thomas J. Hughes........................................ 9,000 15,000
Allan K. Lager.......................................... 9,000 15,000
Robert M. Nieder........................................ 9,000 15,000
David L. Gersh.......................................... 9,000 15,000
Richard Rosdal.......................................... 9,000 15,000
John P. Hadfield........................................ 9,000 15,000
Robert M. Bearman....................................... 9,000 15,000
Edward C. Larkin........................................ 6,000 10,000

II-2

SHARES
NAME: ISSUED CONSIDERATION
----- ------ -------------

Alan L. Talesnick....................................... 6,000 10,000
David P. White.......................................... 6,000 10,000
Jill J. Pusey........................................... 6,000 10,000
Jacqueline A. Pusey..................................... 4,500 7,500
Christopher S. Pusey.................................... 4,500 7,500
John H. Altshuler....................................... 3,000 5,000
Donald E. Yager......................................... 3,000 5,000
--------
$980,000
========

These shares were exempt from registration pursuant to Section 4(2) of the
Securities Act, no public offer being involved.

On September , 1998, NDI was merged with and into the Registrant in the
Organizational Merger. As a result of the Organizational Merger, each issued
and outstanding share of common stock of NDI automatically was converted into
the right to receive 1.2 share of Common Stock of the Registrant. The sale of
the shares of the Registrant's Common Stock in the Organizational Merger was
exempt from registration pursuant to Section 4.2 of the Securities Act, no
public offer being involved.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

1.1+ Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant
4.1+ Specimen certificate for shares of Common Stock
5.1 Form of Opinion of Paul, Hastings, Janofsky & Walker LLP
10.1 Agreement and Plan of Merger dated as of August 31, 1998, by and among
the Registrant, AC Acquisition Co., Inc., Acta Products Corporation,
Acta Products International, Inc. and the Shareholders named therein.
The Registrant agrees to furnish supplementally any omitted exhibit
or schedule to the Securities and Exchange Commission upon request.
10.2 Form of Agreement and Plan of Merger to be entered by and among the
Registrant, QBI Acquisitions Co., Inc., Quality Botanical
Ingredients, Inc. and the Shareholders named therein. The Registrant
agrees to furnish supplementally any omitted exhibit or schedule to
the Securities and Exchange Commission upon request.
10.3 Agreement and Plan of Merger dated as of August 31, 1998, by and among
the Registrant, BP Acquisition Co., Inc., Bactolac Pharmaceuticals,
Inc. and the Shareholder named therein. The Registrant agrees to
furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
10.4 Agreement and Plan of Merger dated as of August 31, 1998, by and among
the Registrant, NL Acquisition Co., Inc., Northridge Laboratories,
Inc. and the Shareholders named therein. The Registrant agrees to
furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
10.5 Form of Employment Agreement between the Registrant and Joseph R.
Schortz
10.6 Form of Employment Agreement between the Registrant and David Chang
10.7+ Form of Employment Agreement between the Registrant and Gregory Pusey

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EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.8+ Form of Employment Agreement between the Registrant and Barry Loder
10.9 Form of Employment Agreement between the Registrant and Brett Richman
10.10 Form of Employment Agreement between the Registrant and Pailla Reddy
10.11 Form of Registrant's 1998 Stock Option Plan
10.12 Form of Registrant's Non Discretionary Stock Option Plan
10.13+ Form of Consulting Agreement between the Registrant and Belkowitz
Botanicals, Inc.
10.14+ Lease Agreement dated between QBI and MRA Associates, LLC
10.15+ Lease Agreement dated June 14, 1997 between Island Organics, Inc., the
predecessor in interest of QBI, and Metuchen Road Realty
10.16+ Lease Agreement dated November 1, 1995, as amended January 1, 1995,
between Acta Products Corp. and Kuang Yu Chang & David T. Chang, a
California partnership
10.17+ Lease Agreement dated , between Acta Products Corp. and
Kuang Yu Chang & David T. Chang, a California partnership
10.18 Lease Agreement dated May 8, 1998, between Bactolac Pharmaceuticals,
Inc. and Harlo Associates, a partnership
21.1 List of Subsidiaries of Registrant
23.1 Consent of Grant Thornton LLP
23.2 Consent of Amper, Politzner & Mattia P.A.
23.3 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule

- --------
+ to be filed by amendment

(B) FINANCIAL STATEMENT SCHEDULES

Schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

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The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on September 15, 1998.

ADVANCED NUTRACEUTICALS, INC.

By: /s/ Barry C. Loder
---------------------------------
Name: Barry C. Loder
Title: President (Principal
Executive, Accounting and
Financial Officer)

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Gregory Pusey, Barry C. Loder, Joseph Schortz
and David Chang, and each of them, his true and lawful attorney-in-fact and
agent, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
this Registration Statement and any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

SIGNATURE DATE
--------- ----

/s/ Gregory S. Pusey September 11,
_________________________________ 1998
Gregory S. Pusey

/s/ Joseph R. Schortz September 14,
_________________________________ 1998
Joseph R. Schortz

/s/ David T. Chang September 11,
_________________________________ 1998
David T. Chang

/s/ Barry C. Loder September 11,
_________________________________ 1998
Barry C. Loder

II-6