RELIV INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997

Commission File Number
1-11768

RELIV' INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

Illinois 371172197
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63006
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(Address of principal executive offices) (Zip Code)

(314) 537-9715
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Registrant's telephone number, including area code

Securities registered pursuant to Sections 12(b) and 12(g) of the Act:

Name of each exchange
Title of Class on which registered:
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Common Stock, without par value NASDAQ National Market tier
of The NASDAQ Stock Market

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ___X___ Yes _______ No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated in Part III of the Form 10-K or any amendment to the
Form 10-K. [ ]

Based upon the closing price of $4.25 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
February 25, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was then approximately $25,248,000.
(Determination of stock ownership by non-affiliates was made solely for the
purpose of responding to the requirements of the Form and the Registrant is not
bound by this determination for any other purpose.)

The number of shares outstanding of the Registrant's Common Stock as of
February 25, 1998, was 9,617,307 (excluding treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission within 120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.

PART I

Item No. 1 - Business
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General
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Reliv' International, Inc. (the "Company") was incorporated in Illinois
on February 11, 1985, under the name American Life Investors, Inc. The name of
the Company was changed to its current name on January 20, 1992. The Company
maintains its principal executive offices at 136 Chesterfield Industrial
Boulevard, Chesterfield, Missouri 63006.

The Company produces a line of food products including nutritional
supplements, diet management products, functional foods, a line of granola bars
and a sports drink mix. Functional foods are products designed to influence
specific functions of the body. The Company also distributes a line of premium
skin care products. These products are sold by subsidiaries of the Company to a
sales force of independent distributors who sell products directly to consumers.
The Company and its subsidiaries sell products to distributors throughout the
United States and in Australia, Canada, New Zealand, Mexico and the United
Kingdom.

The Company has two wholly-owned subsidiaries, Reliv', Inc. ("Reliv'")
and Reliv' World Corporation ("Reliv' World"). Reliv' World has five
subsidiaries - Reliv' Australia, Reliv' Canada, Reliv' New Zealand, Reliv'
Mexico and Reliv' Europe.

Reliv' was organized as an Illinois corporation on May 24, 1988, as a
wholly-owned subsidiary of the Company, and began selling nutritional supplement
products in October, 1988, in the United States.

In Australia, Canada, New Zealand, Mexico and the United Kingdom, the
Company's products are sold through Reliv' World and its subsidiaries in each of
such countries. Reliv' World was organized as an Illinois corporation on March
30, 1992, as a wholly-owned subsidiary of Reliv'. Reliv' World was organized to
conduct the foreign sales operations of the Company and to own foreign sales
operations and subsidiaries. On July 1, 1992, Reliv' declared a dividend of all
of the stock of Reliv' World and distributed all of such stock to its sole
shareholder, the Company.

In February, 1991, Reliv' entered into a joint venture agreement with
an Australian corporation and the joint venture began to market, sell and
distribute Reliv' products in Australia in May, 1991. Reliv' Australia Pty, Ltd.
("Reliv' Australia"), a wholly-owned subsidiary of Reliv' World, entered into an
agreement to purchase the joint venture interest of the Australian corporation.
Reliv' Australia also entered into an agreement with the three shareholders of
the Australian corporation under which a partnership of such persons, as a
distributor of Reliv' Australia, is to receive, for a period of 10 years from
March 1, 1992, 2 percent of sales in Australia and New Zealand (defined as the
designated retail selling price of all products, on which commissions are
payable to distributors), up to approximately $10 million (AUS) in 1992, and $12
million (AUS) in all subsequent years during the term, and 3 percent of sales

2

that exceed those figures. Since March 1, 1992, the business of the Company in
Australia and sales of the Company's products there has been conducted by Reliv'
Australia.

During April, 1992, Reliv' New Zealand Limited ("Reliv' New Zealand")
was organized as a New Zealand company and as a wholly-owned subsidiary of
Reliv' World (except for nominal shares held by an officer). In June, 1992,
Reliv' New Zealand began selling the Company's products through independent
distributors in New Zealand.

On June 9, 1992, Reliv' Canada, Ltd. ("Reliv' Canada") was organized as
an Ontario, Canada corporation and as a wholly-owned subsidiary of Reliv' World.
Reliv' Canada commenced operations during October, 1992, and began selling the
Company's products to distributors in Canada in November, 1992. On December 31,
1995, Reliv' Canada was converted to a Nova Scotia, Canada unlimited liability
company, wholly-owned by Reliv' World (except for one percent owned by the
Company), under the name Reliv' Canada Company.

On June 28, 1993, Reliv' Mexico S.A. de C.V. ("Reliv' Mexico") was
organized as a Mexican corporation and as a wholly-owned subsidiary of Reliv'
World (except for one share owned by the Company). Reliv' Mexico commenced
operations in June, 1993, and began selling the Company's products to
distributors in Mexico in August, 1993. On December 20, 1994, Reliv' Mexico was
converted to a Mexican limited liability company under the name Reliv' Mexico,
S. de R.L. de C.V.

On July 1, 1995, Reliv' UK began the marketing and sale of the
Company's products in the United Kingdom in accordance with the Reliv' system
under a license and distributor arrangement with the Company. Pursuant to the
terms of the arrangement, Reliv' UK purchased all of its requirements for
products from the Company and paid Reliv' World a royalty on products sold. On
February 1, 1998, Reliv' Europe, Inc., an Illinois corporation and wholly-owned
subsidiary of Reliv' World, assumed ownership and control of the United Kingdom
operation, and is currently negotiating a formal purchase of all of Reliv'
U.K.'s capital stock.

Principal Products
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Through its subsidiaries, the Company markets and sells a line of
related products including nutritional supplements, weight control products,
functional foods, granola bars, sports drink mixes and a premium skin care line.

The nutritional supplements include Reliv' NOW(R) and Reliv'
Classic(R). Both products are designed to provide a balanced nutritional
supplement for an individual's diet and contain a variety of vitamins and
minerals, soy and other protein sources and various herbs. The products are in
powdered form to be mixed with juice or other beverages. The Reliv' Classic
formula has a U.S. patent and the Reliv' NOW formula is a no-yeast derivative of
the Reliv' Classic formula. Reliv' NOW is available with all natural flavoring
or in the original formula.

3

Reliv' Ultrim-Plus(R) is designed as a meal replacement (for a maximum
of two meals per day) in a weight loss program. The product incorporates the
core formulation of Reliv' NOW, including vitamins, minerals, proteins and
herbs, as well as additional protein and nutrient sources. Reliv' Ultrim-Plus is
available in three flavors - vanilla, chocolate and strawberry. It is also
available in aspartame-free vanilla. The product is in powdered form for mixture
with water or milk.

Reliv' Cellebrate(R) is a patented weight loss aid designed to suppress
appetite, curb the storage of body fat, and facilitate the body's fat burning
process. Reliv' Cellebrate is in powdered form and is recommended to be used
alone or with Reliv' Ultrim Plus meal replacement.

Reliv' Celleboost(R) is also a weight loss aid designed to suppress
appetite and reduce body fat. Reliv' Celleboost is in capsule form and is
recommended to supplement Reliv' Cellebrate, Reliv' Ultrim-Plus or to be used
alone. Reliv' Celleboost was introduced in January, 1996.

Reliv' Ultra Bar(R) is a line of granola bars containing a mixture of
grains and nuts which use the core formulation of Reliv' NOW vitamins, minerals,
proteins and herbs. Flavors include yogurt, chocolate and raspberry carob. The
bars are a snack food and nutritional supplement and are used with Reliv'
Ultrim-Plus as a meal replacement in a weight loss program.

Reliv' Innergize!(R) is a patented powdered sports drink containing a
mixture of vitamins and minerals. Reliv' Innergize is available in lemon, orange
and cool punch flavors.

Reliv' Fibrestore(R) is a patented nutritional supplement containing
fiber, vitamins, minerals and herbs. The product is in powdered form for mixture
with water or juice. A modified version of the Reliv' Fibrestore formula is
marketed in Canada under the name Herbal Harmony in compliance with that
country's nutritional regulations.

Reliv' Arthaffect(R) is a nutritional supplement and functional food
containing Arthred(TM), a patented form of hydrolyzed collagen protein, which is
clinically reported to nutritionally support healthy joint function. The product
is in powdered form for mixture with water, milk or juice. Reliv' Arthaffect was
introduced in October, 1996.

Reliv' Getabetterbody(TM) Weight Loss System is a weight loss system
kit containing Reliv' Ultrim Plus, Reliv' Cellebrate and Reliv' Celleboost
together with product information and other tools to be used in a weight loss
program.

Reliv' ProVantage(TM) is a nutritional supplement containing soy,
designed to enhance athletic performance. The product is also of benefit to
dieters and others wanting to increase their soy intake. The product is in
powdered form for mixture with water or juice. Reliv' ProVantage was introduced
in October, 1997.

In May, 1997, the Company introduced Reliv' Healthy Pantry(TM) premium
entrees, a line of soy-based functional foods. The meals are designed to offer
the advantages of soy in low fat, easy to prepare meals. The line includes Pasta
Prima Vera, Hearty Chili, Hearty Burger and Ala King dinner. The meals are in
dried form and can be prepared quickly with a minimum of additional ingredients.

4

The Company also markets a line of skin care products which is based on
compounds found only in the avocado. The products are designed to be used
individually or in combination with each other. The product line includes: (i)
Reliv' Face and Body Bar, a mild face and body soap; (ii) Reliv' Pathway(R), a
skin cleanser and primer which contains a variety of avocado based ingredients;
(iii) Reliv' Reavo(R), a skin care cream designed to reduce the appearance of
aging in the skin caused by natural and environmental causes; and (iv) Reliv'
R.P. 1.5(R), a skin care cream having the active ingredient retinyl palmitate is
designed to reduce the appearance of aging caused by environmental causes such
as exposure to the sun. The Company's skin care line also includes toners,
moisturizers, sunless tanning lotions and related items.

The Company conducts ongoing research and development on its product
line and intends to introduce additional product items. See "Research and
Development."

Patents and Trademarks
- ----------------------

The Company has obtained U.S. patents on the formulations of Reliv'
Innergize!, Reliv' Fibrestore and Reliv' Cellebrate.

The Reliv' Classic formula has a U.S. Patent. Reliv' NOW is a trade
secret formulation which is a derivative of the Reliv' Classic formulation. The
core mixture of Reliv' NOW is incorporated in Reliv' Ultrim-Plus and the Reliv'
Ultra Bars. These products are manufactured and sold by the Company under an
Exclusive License Agreement dated December 1, 1991 ("License Agreement"). The
License Agreement is worldwide in scope and continues through the life of the
patent. Pursuant to the License Agreement, the Company is obligated to pay the
owner of the patent and the developer of the formulations, Dr. Theodore P.
Kalogris, a royalty of 5 percent of the revenues from the sale of products
containing the licensed formulas, with a minimum $10,000 and maximum $22,000
monthly royalty. The Company's obligation to pay the royalty payments will
terminate on the later of (i) 10 years from the date of the License Agreement or
(ii) the death of Dr. Kalogris, and the License Agreement will be deemed to be
paid in full at that time.

The principal ingredient of Reliv' Arthaffect is the subject of an
issued U.S. patent. Under an agreement dated November 6, 1996, Traco Labs, Inc.
("Traco"), exclusive licensee of the patent rights, sublicensed the rights to
sell the product to the Company ("Traco Agreement"). The license is exclusive
for direct sales in certain sales areas and is for a term ending upon the later
of (i) the termination of Traco's rights to market the product or (ii) December
31, 2014. The Traco Agreement provides that the Company will purchase its
requirements of the product from Traco, and the exclusivity of the license is
contingent on minimum purchases of the product being made by the Company.

5

The principal ingredient of Reliv' Reavo is the subject of an issued
U.S. patent. On July 1, 1995, Avogen, Inc. ("Avogen") granted to the Company a
license under such patent and other proprietary rights relating to the skin care
line of products, to purchase such products from or through Avogen and to sell
and distribute the products (the "Avogen Agreement"). On April 25, 1997, the
Avogen Agreement was amended. The Avogen Agreement is worldwide in scope and
continues through the later of the last to expire of the patents subject to the
Avogen Agreement or December 31, 2014. Pursuant to the Avogen Agreement, as
amended, the Company was granted an exclusive license to market its current line
of skin care products subject to the Agreement, and is obligated to pay Avogen
royalties which vary depending on the product sold.

Trademark registrations for "Reliv'" and for the many of the Company's
product names are either issued or pending in the U.S. Patent and Trademark
Office. Trademark registrations for selected marks have been issued or applied
for in Australia, New Zealand, Canada, Mexico, the United Kingdom and several
other foreign countries. The Company considers its trademarks and tradenames to
be an important asset of its business.

Sales and Marketing
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The Company sells its products to a network of independent contractors,
designated as "distributors", who in turn sell the products directly to
consumers. The Company's products are marketed and sold to distributors in the
United States, Australia, Canada, New Zealand, Mexico and the United Kingdom
through a subsidiary in each country. The marketing efforts of the Company and
these subsidiaries are focused on the development, training and support of this
network of independent distributors. The Company, through these subsidiaries,
supports an active training program for distributors in which Company
representatives and experienced distributors lead group training sessions. The
Company and these subsidiaries also create and provide distributors with
manuals, brochures and other promotional, training and informational
publications. Periodically, each subsidiary sponsors distributor meetings at
which Company representatives provide training and information concerning the
Company's products. Company subsidiaries also sponsor group telephone conference
calls for training and promotional activities.

Distributors consist principally of individuals, although a limited
number of distributors are corporations or partnerships. New distributors are
sponsored by existing distributors. A new distributor is required to complete a
distributor application and, in most areas, to purchase a package of distributor
materials (for $39.95 in the United States) consisting of a distributor manual,
business forms and promotional materials. Distributors purchase products from
Company subsidiaries or from other distributors for resale or consumption by the
distributor or his or her family.

In each country in which the Company conducts business, distributors
operate under a uniform distributor system which compensates distributors at
varying levels based on sales volumes. Initially, a distributor is designated a
Retail Distributor and is entitled to purchase products from a Company
subsidiary or other distributors at a discount of 25 percent from the Company's
suggested retail price. A distributor is promoted to higher levels in the system
by increasing his or her sales of the Company's products, directly or through
other distributors sponsored in the distributor's sales group, and by achieving
designated sales volumes. These higher ranks of distributor are designated in
order as Affiliate, Key Affiliate, Senior Affiliate and Master Affiliate. At
each higher level, a distributor is entitled to purchase products at an
increasingly higher discount; a Master Affiliate receives a 45 percent discount.

6

Distributors receive retail profits equal to the difference between the
price at which they sell the product to customers and the discounted price they
paid for the product. Distributors also earn wholesale commissions on products
purchased by other distributors in the distributor's sponsored group equal to
the difference between the price at which the distributor is entitled to
purchase product at and the price at which downline distributors purchase
product. The Company pays a Master Affiliate a commission with respect to
products purchased directly from the Company by Retail Distributors, Affiliates,
Key Affiliates or Senior Affiliates directly sponsored by them or who are in
their personally sponsored group (i.e., individuals sponsored by the Master
Affiliate's distributors, directly or indirectly). The commission is equal to
the difference between the prices at which such distributors were entitled to
purchase products and the 45 percent discounted price available to Master
Affiliates. Senior Affiliates, Key Affiliates and Affiliates are entitled to
receive from their Master Affiliate a portion of the commission paid to the
Master Affiliate, based upon the purchases of products from Company subsidiaries
by distributors sponsored by them or by distributors in their personal group.

Master Affiliates are also entitled to receive additional compensation
payments of two percent to five percent of the retail sales volume of product
purchased from Company subsidiaries by Master Affiliates (and their personal
groups) whom they have sponsored, and for up to five levels of sponsorship. To
qualify for these additional compensation payments, Master Affiliates are
required to maintain certain monthly sales volumes and document specified levels
of retail sales. Master Affiliates who sponsor other distributors to the level
of Master Affiliate are entitled to become part of the Director Program, and
attain higher positions in the program based on the size of their additional
compensation payments. The levels of Director, in order, are Director, Key
Director, Senior Director, Master Director and Presidential Director.
Distributors reaching these levels receive pins and/or rings recognizing their
achievement and recognition in Company publications and at Company sponsored
activities.

In mid-1996, the Company introduced the Star Director Program, which
allows Directors to receive increased additional compensation payments based on
the number of Master Affiliates they have sponsored since the program commenced.
Directors are entitled to receive an additional one percent to three percent of
additional compensation on the retail sales volume of Master Affiliates in their
sponsorship.

The Company also sponsors an Ambassador Program. To qualify as an
Ambassador a distributor must hold the level of Master Director and must assist
personally sponsored Master Affiliates in meeting specified levels of additional
compensation payments. The levels of Ambassador are, in order, Ambassador,
Bronze Ambassador, Silver Ambassador, Gold Ambassador and Platinum Ambassador.

7

As higher levels are reached, Ambassadors are entitled to increased percentages
of the retail sales volume of Master Affiliates below them through five levels
of sponsorship, and at the two highest levels, a percentage of the sixth level
of sponsorship below their personally sponsored Master Affiliates. Ambassadors
are also entitled, depending on the level, to additional benefits, such as
participation in Company sponsored events, paid hotel rooms at conventions,
health insurance and car allowances. Once a month, a group of high level
Ambassadors meet with Company executives in the "Reliv Inner Circle" to exchange
ideas on new programs, products and marketing opportunities.

The Company's Direct Selectsm program is available in the United States
whereby distributors and their retail customers may order product in less than
case lots directly from the Company by phone. An automatic monthly reorder
program is also available. Product is shipped directly to the customer and
distributors earn a commission on Direct Select sales made to their customers.

Company subsidiaries also provide a variety of additional incentives or
bonuses to the most productive distributors.

As of December 31, 1997, 37,826 persons or entities were registered as
distributors of Company subsidiaries of which 4,374 were Master Affiliates. This
is an increase from March, 1997 totals of 36,465 distributors of which 3,325
were Master Affiliates. The number of registered distributors and Master
Affiliates in each country in which Company subsidiaries operate is as follows:

Master
Distributors Affiliates
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United States 29,616 3,631

Australia 3,118 221

New Zealand 1,083 83

Canada 2,130 244

Mexico 867 158

United Kingdom 1,012 37

Not all persons registered as distributors of Company subsidiaries are
active. Reliv' requires that persons wishing to continue as distributors renew
their distributorship annually by the payment of a fee ($20 in the United
States); the number of distributors shown in the preceding table reflects
persons who have become distributors within the past 12 months and those who
renewed their distributorship during 1997.

8

The Company recognizes that its sales growth is based upon the
continued development of its independent distributor force and strives to
maintain an active and motivated distributor network through a combination of
quality products, discounts, commissions and bonus payments, sales conventions
and training, personal recognition and a variety of publications and promotional
materials.

The Company recognizes that businesses in the network marketing
industry risk the possibility that a portion of sales made to distributors may
not be consumed or sold to consumers and instead, may remain as inventory in the
distributors' possession. The Company's distributor organization and
compensation system is designed and intended to promote the sale of the
Company's products to consumers by distributors. Sales training and promotional
efforts emphasize that intention. To that end, and to comply with applicable
governmental regulations of multilevel selling organizations, the Company and
each subsidiary have established specific programs and requirements for
distributors including (i) monitoring by the Company of purchases by
distributors to identify potentially excessive individual purchases, (ii)
requiring that distributors certify to a specified amount of retail sales to
receive commissions, and (iii) requiring that distributors certify the sale of
at least 70 percent of previous purchases prior to the purchase of additional
amounts of product. The Direct Select program, as described above, further
promotes sales of the Company's products to consumers. Distributors are not
required at any time to purchase product, although Master Affiliates are
required to maintain certain minimum sales levels in their personal groups to
continue receiving royalty compensation payments.

Each subsidiary maintains a policy that unused product may be returned
by customers to the selling distributor or the subsidiary or licensee for a full
refund within 30 days after purchase. Each subsidiary also maintains a policy
that any distributor who terminates his distributorship may return resalable
product for a refund of 90 percent of the purchase price less any discounts or
commissions received relating to the purchase of the products.

The Company has established a suggested retail price for each of the
Company's products in each country in which the Company conducts business, but
distributors are free to determine the price at which they will sell the
Company's products. Distributors are not assigned territories and there are no
restrictions on marketing areas for distributors.

In the United States, the Company's products are warehoused and shipped
by common carrier to distributors. A facility in Chesterfield, Missouri serves
the east and central parts of the country and the Company utilizes a public
warehouse facility in Las Vegas, Nevada to supply the West Coast. See "Item No.
2 - Properties". Products are also warehoused in, and shipped to local
distributors from: Sydney, Australia; Auckland, New Zealand; Toronto, Canada;
Mexico City, Mexico; and London, England. Each subsidiary of the Company
maintains an office and personnel to receive, record and fill orders from
distributors. Distributors order product from Company subsidiaries in case lots
and pay for the goods prior to shipment. In general, state or local governmental
sales taxes are collected by Company subsidiaries for taxing authorities.

9

Manufacturing and Product Sources
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The Company established a manufacturing line at its facility in
Chesterfield, Missouri and had begun manufacture of its nutritional products in
early 1993. Shortly after manufacturing commenced, the facility was flooded in
July 1993, as a result of a break in a levee on the Missouri River. The Company
initiated the return of manufacturing to its Chesterfield facility in mid-1995
and currently manufactures all of its products (except granola bars and skin
care products) at this facility. The Company expanded its Chesterfield facility
in 1997. See "Item No. 2 - Properties".

In 1996, the Company received approval from the Australian Therapeutic
Goods Authority ("TGA") to manufacture products sold in Australia at its
Chesterfield plant. The Company is in the process of reducing its use of
contract manufacturers in Australia and intends to manufacture the majority of
Australia's requirements of nutritional products at its Chesterfield facility.
The certification of the Company's Chesterfield site by the Australian TGA, also
satisfied Canadian manufacturing requirements and the Company manufactures
substantially all of the nutritional products sold in Canada. The Company has
not experienced any difficulty in obtaining supplies of raw materials for its
nutritional products and does not believe it will encounter any such difficulty
in the future.

The Company's granola bars are manufactured by contract manufacturers,
predominantly located in the United States, who produce the products in
accordance with formulas provided by the Company, subject to quality control
requirements and inspections by representatives of the Company. During 1997, the
Company's line of skin care products was supplied to it pursuant to the Avogen
Agreement and was purchased from Avogen and various contract manufacturers.
Arthred(TM), the principal ingredient of Reliv' Arthaffect, is supplied to the
Company by Traco. The Company has had no difficulty in obtaining contract
manufacturing and there has been no material effect on the timely supply of
goods.

Research and Development
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At its Chesterfield facility, the Company conducts research, product
development and formulation, testing and quality control, all relating to food
products. Research and development costs were $286,000 in 1997, $289,000 in 1996
and $294,000 in 1995.

Employees
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As of December 31, 1997, the Company and all subsidiaries had
approximately 162 full-time employees compared with 202 such employees at the
end of 1996. This resulted from an increase in sales, marketing and distribution
personnel to support increased network maketing sales and a decrease in
manufacturing and warehouse employees as a result of a decrease in the contract
manufacturing business segment. The Company believes that its relationship with
its employees is satisfactory. In June of 1996, the Company's manufacturing and
warehouse employees certified representation by the local Teamsters Union. The
Union and the Company are currently negotiating a collective bargaining
agreement.

10

Product Regulation
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The formulation, labeling and advertising or promotion of the Company's
products are subject to regulation by the Federal Food and Drug Administration
(FDA) which regulates the Company's products under the Federal Food, Drug and
Cosmetic Act (the "FDCA"), the Federal Trade Commission (FTC) and various
agencies of the states or countries into which the Company's products are
shipped or sold. FDA regulations include requirements and limitations with
respect to the labeling of the Company's food products and also with respect to
the formulation of those products. The skin care products sold by the Company
are also subject to FDA regulations with respect to formulation and marketing of
cosmetics. FDA regulations also limit and control the extent to which health or
other claims can be made with respect to the efficacy of any food or cosmetic.
The FDCA has been amended several times with respect to nutritional supplements,
most recently by the Nutrition Labeling and Education Act of 1990 (the "NLEA")
and the Dietary Supplement Health and Education Act of 1994 (the "DSHEA") and
related regulations. Such legislation governs the marketing and sale of
nutritional supplements, including the content and presentation of health
related information included on the labels or labeling of nutritional
supplements. The Company does not believe these laws or regulations will have a
material effect on its products or operations. Nutritional and dietary
supplements such as those manufactured and sold by the Company, for which no
therapeutic claim is made, are not subject to FDA approval prior to their sale.
The Company presently does not anticipate marketing new products which would
require FDA approval. However, these products can be removed from the market if
shown to be unsafe, and if the FDA determines, based on the labeling of
products, that the intended use of the product is for the diagnosis, cure,
mitigation treatment or prevention of disease, it can regulate those products as
drugs and require pre-market clearance. In addition, if the FDA determines that
the claims concerning a product's affect on the "structure or function" of the
body do not meet the requirements of DSHEA, such claims could result in such
product being subject to regulation as a drug.

The Company's advertising of its nutritional supplement products is
also subject to regulation by the FTC under the Federal Trade Commission Act,
which prohibits unfair or deceptive trade practices, including false or
misleading advertising. The FTC in recent years has brought a number of actions
challenging claims by companies (other than the Company) for weight loss and
"fat burning" dietary supplement products and plans.

Governmental regulations in foreign countries where the Company plans
to commence or expand sales may prevent or delay entry into the market or
prevent or delay the introduction, or require the reformulation, of certain of
the Company's products. Such regulations have caused delays in introducing
certain of the Company's products in the past and such delays have had negative
affects on sales.

The Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, 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.

11

Sales Program Regulation
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The Company's distribution and sales program is subject to regulation
by the FTC and other federal and state regulation. Various state agencies
regulate multi-level distribution activities. The Company is required to
register with, and submit information to, certain of such agencies and has
complied fully. The Company actively strives to comply with all applicable state
and federal laws and regulations affecting its products and its sales and
distribution programs. The Attorney Generals of several states have taken an
active role in investigating and prosecuting companies whose compensation plans
they feel violate local anti-pyramid and/or consumer protection statutes. The
Company is unable to predict the effect such increased activity will have on its
business in the future nor is the Company able to predict the probability of
future laws, regulations or interpretations which may be passed by state or
federal regulatory authorities.

Under current law, the Company's distributors are treated for federal
income tax purposes as independent contractors and compensation paid to them is
not subject to withholding by the Company. Several bills have been introduced in
Congress which would restrict the definition of independent contractor and
possibly jeopardize the exempt status enjoyed by direct sellers. Such a change
would negatively impact the Company's recruiting efforts. The direct selling
industry is strongly opposing such bills as they relate to direct sellers. The
Company is unable to assess the likelihood of these or similar bills being
enacted. In several states, legislation has been introduced which would narrow
the definition of independent contractor for purposes of income tax withholding
as well as unemployment compensation, worker's compensation and other employee
benefits. To date, the status of direct sellers as independent contractors has
not been affected. States are becoming increasingly active in this area,
however, and there is no assurance that future legislation at the state level
affecting direct sellers will not be enacted.

Competition
- -----------

The Company's products are sold in highly competitive markets against
companies with substantially greater sales volume and financial resources than
the Company and with brands that are, through advertising and other methods,
better known to consumers. The Company competes against other direct selling
companies and against companies which sell heavily advertised and promoted
products through retail stores, including supermarkets, drug stores and health
food stores. The Reliv' Ultrim-Plus, Cellebrate and Celleboost products compete
with numerous other products in the weight loss market, including nationally
advertised products such as SlimFast(tm). Many companies have entered, or have
plans to enter, the sports drink market in which Reliv' Innergize! and
ProVantage compete, a market long dominated by Gatorade(tm). Reliv' NOW, Reliv'
Classic and Reliv' Fibrestore compete with numerous mineral and vitamin
supplement products. The Company's skin care line competes with products sold by
numerous, well-established cosmetic companies, including several direct selling
companies such as Mary Kay and Avon. With Arthaffect, the Company has entered
the relatively new "functional foods" market, which is expected to be extremely
competitive and led by the major food companies.

12

International Operations
- ------------------------

Prior to 1991, the Company marketed and sold its products solely within
the United States. In February, 1991, Reliv' entered into a joint venture with
an Australian corporation and the joint venture began marketing and selling the
Company's products in Australia in May, 1991. As of March, 1992, the Company
organized Reliv' World to conduct international operations, acquired the
business of the Australian joint venture and began conducting business in
Australia through Reliv' Australia. In June, 1992, the Company began marketing
and selling its products in New Zealand through Reliv' New Zealand, in November,
1992, began marketing and selling its products in Canada through Reliv' Canada,
and in August, 1993, began marketing and selling its products in Mexico through
Reliv' Mexico. In July, 1995, the Company began marketing and selling its
products in the United Kingdom through Reliv' UK, a licensee. In February, 1998,
Reliv' Europe assumed the operations of Reliv' U.K.

Each foreign subsidiary markets, sells and uses substantially the same
line of products, labeling and method of distribution as Reliv' in the United
States, although not all of the Company's products are available in each country
and the formulation of some of the products vary to comply with local
governmental regulations or requirements.

Reference is made to Note 18 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical segments.

Contract Manufacturing
- ----------------------

In the last quarter of 1995, the Company commenced providing contract
processing and packaging services at its Chesterfield manufacturing facility.
These services include blending, processing and packaging food products in
accordance with specifications or materials provided by the customer. Revenues
from these services during 1996 were $3,310,000, but decreased to $1,525,000 in
1997, as a result of the loss of a major customer. The Company is actively
seeking additional contract manufacturing business.

Reference is made to Note 17 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on business segments.

Item No. 2 - Properties
- -----------------------

The Company owns approximately six acres of land and a building
containing approximately 136,000 square feet of office, manufacturing and
warehouse space located at 136 Chesterfield Industrial Boulevard, Chesterfield,
Missouri, 63006, where it currently maintains its corporate headquarters. The
Company recently completed an expansion to the Chesterfield facility on land
owned by the Company adjacent to existing building. Approximately 90,000 square
feet of manufacturing, warehouse and office space was added to the existing
46,000 square foot facility. The Company obtained a construction loan of
$4,430,000 to finance the expansion.

The original property was purchased in July, 1991, and, as part of the
purchase price for the premises, the Company assumed the remaining principal
balance of $850,108 of a 1984 industrial revenue bond with an original principal
sum of $975,000. In addition, the Company executed a promissory note to the
seller in the amount of $250,000. The principal balances of the bond and

13

promissory note at December 31, 1997, are $598,000 and $205,000, respectively.
The promissory note is secured by a deed of trust on the premises. The Company
intends to fund its payments under the industrial revenue bond and promissory
note from working capital. In 1992, the Company completed an addition to its
building of approximately 12,000 square feet used for manufacturing of its
products. In May, 1993, the Company purchased 3.4 acres of land adjacent to the
original facility for $400,000.

The main facility and surrounding land was severely damaged by a flood
in July, 1993. The Company began repairs and improvements to its main facility,
and finalized relocation of its corporate offices to the facility in February,
1995. The Company's decision to return to the facility was based on its ability
to obtain adequate flood insurance to offset future losses if incurred and the
government's direction toward upgrading the levee that protects the facility.

During 1997, the Company leased approximately 20,800 square feet of
warehouse space at a separate site in Chesterfield, Missouri, at a rental rate
of $8,700 per month, for shipping and finished goods storage. The lease
terminated in December, 1997, and the Company anticipates that its newly
expanded facility will meet its local shipping and warehouse needs for the
foreseeable future.

The Company leases office space in Parramatta, Australia, Mississauga,
Ontario, Canada and in Mexico City, Mexico to support its operations in those
areas, and has a contract warehouse arrangement in Auckland, New Zealand.

Item No. 3 - Legal Proceedings
- ------------------------------

On May 21, 1997, Timothy Tobin, a former director and officer of the
Company, filed a Demand for Arbitration with the American Arbitration
Association in St. Louis, Missouri. The Demand claimed damages resulting from
alleged misrepresentations made by the Company in connection with a Stock
Purchase Agreement and Consulting Agreement entered into with Mr. Tobin in
October 1992. The Company has filed an Answer and Counterclaim denying Mr.
Tobin's allegations and claiming damages resulting from Mr. Tobin's breach of
warranties contained in the October 1992 agreements.

Item No. 4 - Submission of Matters to a Vote of Security Holders
- ----------------------------------------------------------------

N/A

14

PART II

Item No. 5 - Market for Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
- -------

The Company's Common Stock was admitted to trading on the Emerging
Company Market Place at the American Stock Exchange on March 8, 1993 and
subsequently was approved for listing on the American Stock Exchange Main Board.
Prior to that time, there was no established public trading market for the
Company's Common Stock. On September 6, 1996, the Company moved the listing of
its Common Stock to the NASDAQ National Market Tier of the NASDAQ Stock Market
under the symbol: RELV.

1997 and 1996 Quarterly Stock Price Data
----------------------------------------

HI LO
-- --

1997
- ----
First Quarter 7.625 5.341
Second Quarter 8.625 6.00
Third Quarter 7.00 5.25
Fourth Quarter 5.75 2.75

1996
- ----
First Quarter 2.273 1.477
Second Quarter 3.864 1.818
Third Quarter 7.727 2.727
Fourth Quarter 11.136 5.227

All 1996 stock price data has been retroactively adjusted for the
Company's 10% stock dividend issued in February 1997.

As of February 25, 1998, there were approximately 1,641 holders of
record of the Company's Common Stock.

On May 15, 1996, a dividend of $.005 per share was paid to shareholders
of record. On December 6, 1996, a dividend of $.015 per share was paid to
shareholders of record. On February 28, 1997, a 10% stock dividend and a cash
dividend of $.01 per share was paid to shareholders of record. The cash dividend
on such date was paid on all shares after giving effect to the stock dividend.
On June 13, 1997, a cash dividend of $.02 per share was paid to shareholders of
record. On January 29, 1998, a cash dividend of $.01 per share was paid to
shareholders of record. The amount and timing of future dividends will be
subject to declaration of the Board of Directors consistent with results of
operation of the Company and its financial condition at the time.

In March, 1995, the Company instituted an automatic dividend
reinvestment plan for its shareholders of record. Participation in the plan,
which is voluntary, provides for dividends paid by the Company to be reinvested
in shares of common stock at the then current market price. The plan also allows
participants to make additional voluntary purchases of common stock on a
quarterly basis at the market price.

15

Item No. 6 - Selected Financial Data

The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.

Year ended December 31
1997 1996 1995 1994 1993
-----------------------------------------------------------------
(1)

Net Sales $46,836,270 $40,729,993 $28,913,873 $32,190,444 $43,553,022

Income from continuing operations, before
extraordinary loss $ 2,028,988 $ 1,507,014 $ 569,823 $ 893,766 $ 3,062,398

Net Income $ 2,028,988 $ 1,507,014 $ 569,823 $ 893,766 $ 1,649,398

Earnings (loss) per common share(2):

Basic:

Income before extraordinary loss .21 .15 .06 .09 .29

Extraordinary loss --- -- --- --- (.13)
-----------------------------------------------------------------
Net Income .21 .15 .06 .09 .16

Diluted:

Income before extraordinary loss .20 .15 .06 .09 .29

Extraordinary loss --- --- --- --- (.14)
----------------------------------------------------------------
Net Income .20 .15 .06 .09 .15

Cash Dividends per share of Common Stock .03 .02 .01 .015 --

Total Assets $15,969,948 $11,401,665 $10,276,234 $ 9,660,013 $10,525,380

Long-term debt and capital lease obligations,
less current maturities $ 5,148,625 $ 1,478,079 $ 1,416,764 $ 1,000,024 $ 1,072,070

(1) In July, 1993, during the Midwestern floods, a levee broke and flooded
300 area businesses, including the Company's headquarters and
manufacturing facility. The effects of this event have been accounted
for as an extraordinary loss.

(2) All earnings per share data has been retroactively adjusted for the pro
forma effect of the Company's 10% stock dividend issued in February
1997.

16

Item No. 7 - Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------

Results of Operations
- ---------------------

Net Income

1997 vs. 1996

The Company's 1997 net income was $2,029,000 or $.21 per share ($.20
per share diluted). This compares with net income of $1,507,000, or $.15 per
share in 1996. Net income in the United States was $2,177,000 in 1997, compared
to $1,686,000 in 1996. Net income from international operations was a loss of
$148,000 in 1997, compared with a loss of $179,000 in 1996.

Net sales increased in 1997 to $46.8 million, as compared to $40.7
million in 1996, as a result of the 21 percent increase in net sales in the
United States from $34.4 million in 1996 to $41.7 million in 1997. Net sales in
the United States, which accounts for 89 percent of total net sales, is
comprised of network marketing sales and contract packaging services. In 1997
network marketing sales in the United States increased by 29 percent to $40.2
million compared to $31.1 million in 1996, while net sales from contract
services declined to $1.5 million from $3.3 million in 1996. Net sales in the
foreign operations declined to $5.1 million in 1997 from $6.3 million in 1996.

Net sales for the fourth quarter of 1997 were $10.9 million, a decrease
from fourth quarter 1996 net sales of $12.0 million. During the period network
marketing sales in the United States increased to $9.6 million from $9.1 million
in the fourth quarter 1996. The decrease in net sales was due to declines in net
sales in the foreign operations from $1.8 million for the quarter in 1996 to
$1.2 million, and in contract packaging services from $1.1 million to $150,000.

The Company provides contract packaging services, including blending,
processing and packaging food products in accordance with specifications
provided by its customers. Net sales declined in 1997 to $1.5 from $3.3 million
in 1996. The decrease was due to the loss of a substantial customer whose
business has not been replaced. To address this the Company has established a
management team charged with increasing sales of contract services, and is
increasing its sales and marketing efforts in this area. In addition to another
source of income, providing contract services allows the Company to better
utilize the manufacturing and product development infrastructure, thus spreading
overhead costs.

The increase in network marketing sales during 1997 was a result of a
larger and more productive network of distributors, primarily in the United
States. In the United States, the Company's largest market, the number of active
distributors increased 12 percent to 29,616. The retention rate of distributors
who renew their annual agreement continued to remain high at 49 percent. Master
Affiliates, distributors who have attained the highest level of discount and are
eligible for generation royalties, increased to 3,631 in the United States in
1997 from 2,487 in 1996. In 1997 the Company processed 73,136 orders at an
average retail price of $695, compared to 53,391 orders at an average of $733 in
1996.

17

The positive changes in the sales organization was a result of several
sales and marketing programs coordinated to motivate and train distributors at
all levels of the distributor organization. One element was the continued focus
on the Road to Presidential, designed to encourage distributors to reach the
highest level of earnings potential by building their downline organizations.
This program was initially introduced in the United States in 1995 and then in
the foreign subsidiaries throughout 1996. The Company believes the training and
rewards of this program have contributed to the increase in sales. The Star
Director Program, which reinforces the Road to Presidential, was introduced in
June 1996. This program compensates distributors who reach certain levels of
sales organization growth with bonuses based on the retail sales of their
distributor network. In 1997, $1,329,000 was paid through this program compared
to $420,000 in 1996. Another ingredient in the sales growth is the success of
the Ambassador Program, which compensates distributors at the highest levels for
their leadership and development of sales. At year end 1997 there were fifty-two
Ambassadors who shared in bonuses totaling $838,000.

The Company's Direct Select Program makes products available to
consumers by ordering directly through the Company. In 1997, the program in the
United States, produced $5.9 million, or nearly 10 percent of total product
sales at retail value, compared to $4.3 million in 1996. The Company introduced
the Direct Select Program in Canada in October 1997 and plans an introduction in
Australia in early 1998.

The United States 1997 net sales were affected by the introductions of
two new products, Healthy Pantry Premium Entrees, a line of four hot meal
products based on the use of soy protein, and Provantage, a sports nutrition
product targeted for the fitness market. Both products expand the Company's
product line in the growing functional foods category.

1997 network marketing sales strengthened throughout the United States.
Sales remained strong in the top ten states, which account for 64 percent of
total sales, with an increase of 20 percent in these states when compared to
1996 sales. Sales in the other states increased 44 percent over 1996 levels
indicating the Company is developing strong markets outside its primary states.
Illinois, Michigan and California were the Company's primary markets in 1997
contributing 31 percent of total sales, a decrease of 4 percent when compared to
the top three markets in 1996. The above trends indicate a more diverse base of
sales growth.

In Australia and New Zealand net sales declined to $3,449,000 in 1997
from $4,723,000 in 1996. Fourth quarter 1997 sales decreased to $753,000 from
$1,260,000 in 1996. New distributor enrollments declined in Australia and New
Zealand to 1,820 from 3,108 in 1996. Distributor renewals in Australia were 48%
and in New Zealand 37% in 1997 as compared to 41% and 36% in 1996, respectively.
Reported net sales in Australia and New Zealand were also affected by the
decline in the value of their currency as compared to the United States dollar.
During the year, both the Australian and New Zealand dollars declined 18% from
their rates as of December 31, 1996.

The Company has taken several steps to reverse the decline in sales in
Australia and New Zealand, as well as all its foreign operations. A management
team has been put in place with sole responsibilities for developing growth in
the foreign operations. Previously, the responsibilities for the foreign
operations fell under the management team responsible for the United States and

18

the holding company, Reliv International. The Company believes establishing a
management team with direct responsibility will improve the efforts towards
building successful sales operations.

One element of this has been to replace the Australian and New Zealand
sales manager with the Company's International Marketing Manager, who has been
employed with the Company for seven years and served as sales manger of
Australia and New Zealand from 1991 through 1994. During that period the market
grew in net sales from a start-up to $9,353,000 in 1994. In late 1994 he was
promoted to International Marketing Director and relocated to the United States
and contributed to the growth in the United States.

Sales in Australia and New Zealand have been affected by continued
delays in the introduction of several new products due to regulatory policies,
plus increased levels of competition. The Company has received approval in
Australia and New Zealand to sell Reliv' Classic and plans to introduce it in
April 1998. Reliv' Classic is the number one selling product in the United
States accounting for approximately 25% of total retail sales. Fibrestore, a
product which averages in excess of 10% of sales in the United States, was
introduced in Australia in September, 1997. Both are strong additions to the
product line. The Company plans to continue building the product lines in these
countries during 1998.

Net sales in Canada increased in 1997 to $1,338,000 from $1,247,000 in
1996. Fourth quarter sales decreased to $334,000 in 1997 compared to $416,000 in
1996. Fourth quarter net sales in 1996 were impacted by a sales promotion that
created a large one time sales increase. New distributor enrollments declined to
991 from 1,165 in 1996. The 1996 net sales in Canada were affected by the
introductions of Reliv A-Affect, a product similar to the United States
Arthaffect that's designed to nutritionally support bone and joint conditions
and Direct Select. A-Affect currently represents 7 percent of total product
sales. The Company believes Canadian sales will be positively affected in 1998
with the addition of Classic in March 1998 and future product introductions
throughout 1998. Direct Select, introduced in October 1997, accounts for
approximately 7.5 percent of total retail sales at year end.

In Mexico net sales declined slightly as the economy continued to
contribute to Reliv Mexico's inability to increase net sales and reach
profitability. Net sales in Mexico in 1997 were $330,000, compared to $352,000
in 1996. Net sales in the fourth quarter 1997 were $74,000 compared to $103,000
in 1996. New distributor enrollment declined in 1997 to 360 compared to 487 in
1996. In response, the Company introduced a revision to the distributor
compensation plan in August 1997 to adjust for the devaluation of the peso. The
Company believes the change will make the plan competitive with other network
marketing companies in Mexico.

The Company began marketing its products in the United Kingdom in July,
1995, through a licensee. Revenues under the license agreement in 1996 and 1997
were minimal and in February, 1998, the Company through its subsidiaries assumed
ownership and control of the United Kingdom operations. The Company believes its
direct management will improve sales efforts in this region.

The Company believes that its computer hardware and software will meet
is administrative needs in the United States and in its foreign subsidiaries in
the foreseeable future. The Company does not anticipate significant changes to
its computer system or material expenses to comply with year 2000.

19

1996 vs. 1995

The Company's 1996 net income was $1,507,000 or $ .15 per share ($.15
per share diluted). This compares with net income of $570,000, or $.06 per share
in 1995. Net income in the United States was $1,686,000 in 1996, compared to
$430,000 in 1995. Net income from international operations was a loss of
$179,000 in 1996, compared with gain of $140,000 in 1995.

The increase in net income as compared to 1995 is a result of a 41
percent increase in net sales in 1996 to $40.7 million, as compared to $28.9
million in 1995. Net sales in the United States increased to $34.4 million from
$22.2 million in 1995, while net sales in the foreign operations declined
slightly to $6.3 million in 1996 from $6.7 million in 1995. Net sales in the
United States in 1996 were comprised of $31.1 million in network marketing sales
and $3.3 million in contract packaging services. Net sales in the United States
in 1995 consisted of $21.9 million in network marketing sales and $279,000 in
contract packaging sales.

In the fourth quarter of 1995, the Company began providing contract
packaging services, including blending, processing and packaging food products
in accordance with specifications provided by its customers. Direct costs of
contract packaging services were 93 percent of revenue. Direct costs as a
percent of revenue improved throughout the year from 108 percent in the first
quarter, to 84 percent in the fourth quarter.

In 1996 network marketing activity in the United States 16,622 new
distributors enrolled and 10,305 distributors renewed their distributorship,
compared to 14,653 new distributors and 5,470 renewals in 1995. The average
wholesale order size in the U.S. (at retail) increased in 1996 to $733 compared
to $670 in 1995.

The United States 1996 net sales were affected by product introductions
of Reliv' Celleboost and the Getabetterbody weight loss system, in January 1996,
Cool Punch Innergize, in June 1996 and Arthaffect, in October 1996. In 1996, the
Direct Select program produced sales at retail value of $4.3 million, compared
to retail sales of $2.6 million in 1995.

In Australia and New Zealand net sales declined to $4,723,000 in 1996
from $5,760,000 in 1995. Sales in Australia and New Zealand during 1996 have
been affected by continued delays in the introduction of several new products
due to regulatory policies, plus increased levels of competition. New
distributor enrollments declined in Australia and New Zealand to 3,108 from
4,373 in 1995. Distributor renewals in Australia were 41% and in New Zealand 36%
in 1996 as compared to 38% and 29% in 1995, respectively.

Net sales in Canada increased in 1996 to $1,247,000 from $494,000 in
1995. New distributor enrollments increased to 1,165 from 376 in 1995. The 1996
net sales in Canada were affected by the introductions of Reliv Optain, an
isotonic drink similar to the Innergize sold in the United States, and
Celleboost, in January 1996.

In Mexico net sales declined as the economy contributed to Reliv
Mexico's inability to increase net sales and reach profitability. Net sales in
Mexico in 1996 were $352,000, compared to $436,000 in 1995 and $1,008,000 in

20

1994. The Company offset the currency devaluation with a price increase of its
products that hindered the ability to sell the product and therefore contributed
to the reduction in sales. New distributor enrollment declined in 1996 to 487
compared to 1,001 in 1995

Cost of Sales:

During 1997, cost of network marketing products sold improved to 18
percent of net sales compared with 19 percent in 1996, and 21 percent in 1995.
The improvement in gross profit margins is a result of lower raw materials
costs, improved manufacturing controls and utilization of the facility in
providing contract manufacturing services. Cost of network marketing products
sold was constant at 17 percent in the fourth quarter of 1997 and in the same
period in 1996. Cost of goods for contract services improved for the year to 89%
from 93% in 1996. The Company expanded its facility in 1997 adding approximately
60,000 square feet of warehouse and manufacturing space. The expansion space
will be put into full operation during the first half of 1998.

Distributor Royalties and Discounts:

Distributor royalties and discounts as a percentage of network
marketing sales increased to 37 percent in 1997 from 36 percent in 1996. Fourth
quarter 1997 distributor royalties and discounts also increased to 37 percent
from 36 percent in 1996. These expenses are governed by the distributor
agreements and are directly related to the level of sales. The Company pays a
percentage of sales up to 18 percent in royalties and as much as 45 percent in
commissions. The 1997 increase compared to 1996 is partly due to an increase in
net sales from the Company's Direct Select program. Sales in the Direct Select
Program increased to $5.9 million from $4.3 million in 1996. In this program,
customers purchase directly from the Company at full retail price and the
Company distributes to the distributor force 45 percent of the purchase price as
a commission earned. This is higher than the average commission paid by the
Company to distributors for purchases made at wholesale price. In addition, in
1997, the Company paid royalties of $838,000 through the Ambassador Program as
compared to $631,000 in 1996.

Selling, General and Administrative:

Selling, general and administrative expenses increased to 37% as a
percentage of net sales for 1997, from 36 percent in 1996, but less than the 39
percent in 1995. The change in 1997 is primarily a result of increases in
selling expenses, professional services and staff compensation.

In 1997, sales meetings and convention expenses were $1,200,000 and
sales promotion incentives were $489,000, compared to $845,000 and $342,000 in
1996, respectively. The Star Director program, which rewards eligible
distributors with a bonus based on the retail sales of their distributor
network, paid $1,329,000 in 1997 compared to $420,000 in 1996. The program was
introduced in June 1996 and has a limit of 3% of total product retail sales. In
1997 2.2 percent was paid.

21

Consulting and professional services increased $357,000 to $642,000 in
1997 as the Company increased its use of marketing and public relations
companies. The Company does not anticipate the level of these expenses to
continue at 1997 levels. Staff compensation increased by 15 percent, primarily
in the sales, marketing and distribution departments. These departments
increased 50 percent in order to service the sales growth in the United States
and contribute additional support to the foreign operations.

Selling, general and administrative expenses as a percentage of net
sales were higher in the fourth quarter 1997 as expenses were 39 percent of net
sales compared to 35 percent during the fourth quarter 1996. The decrease in net
revenues from $12,044,000 in 1996 to $10,915,000 is the primary reason, as well
the items mentioned above.

Interest Expense:

Interest expense in 1997 was $210,000 compared to $213,000 in 1996 and
$146,000 in 1995. Interest expense in 1998 will increase due to a loan package
secured for the expansion of the Company's office and manufacturing facility,
plus the lease of furnishings and equipment. Short-term debt, capital lease
obligations and long-term debt increased to $5,507,000 from $1,761,000 in 1996.

Other Income/Expense:

Other income decreased to $113,000 in 1997 from $147,000 in 1996 and
$226,000 in 1995. This is due to a decrease in interest earned from cash
investments made by the Company in interest-bearing accounts or financial
instruments and foreign exchange gains in 1995.

Income Taxes:

The provision for income taxes increased to $1,385,000, or 3.0 percent
of net sales in 1997, from 2.3 percent of net sales or $950,000 in 1996, and .6
percent of net sales, or $187,000 in 1995. The effective tax rate for 1997 was
41 percent. Effective tax rates for 1996 and 1995 were 39 percent and 25
percent, respectively. The effective rate for 1995 was lower than the United
States statutory rates as a result of the conversion of Reliv' Canada to an
unlimited liability company in 1995. The 1997 effective rate was slightly higher
than 1996 as the result of the settlement of an audit by the Internal Revenue
Service for the fiscal years 1992 through 1994.

Financial Condition
- -------------------

The Company generated cash flow of $2,491,000 from operating activities
during 1997 and $3,959,000 through long-term financing. This compares to
$2,122,000 generated from operating activities and $364,000 through long-term
financing in 1996. Cash and cash equivalents increased $318,000 to $2,426,000 by
year-end 1997. The Company invested $5,055,000 in its facility, with the
construction of approximately 90,000 square feet of office and manufacturing
space, and the acquisition of office furnishings and plant equipment. The
Company used $337,000 to repurchase shares of its common stock and $293,000 to
pay dividends.

22

Current assets increased to $6,745,000 at December 31, 1997 from
$6,553,000 as of December 31, 1996. Cash and cash equivalents increased $318,000
as described above. Accounts receivable decreased by $190,000 to $866,000 from
the December 31, 1996 balance of $1,056,000 as a result of the decrease in
contract packaging services, which are generally paid on 30 day terms.
Inventories declined slightly to $2,642,000 from $2,762,000 at year end 1996.

Property, plant and equipment, after dispositions, increased $4,926,000
to $11,922,000 at December 31, 1997, as a result of the expansion of its
facility. The Company does not anticipate significant purchases of plant,
property and equipment in 1998.

Current liabilities decreased to $3,653,000 at December 31, 1997 from
$3,866,000 at December 31, 1996. Trade accounts payable decreased to $1,433,000
from $1,689,000 at December 31, 1996 primarily due to the decrease in
inventories. Distributor commissions payable increased $263,000 as a result of
improved net sales as compared to December 31, 1996. Accrued payroll and payroll
taxes decreased to $174,000 at December 31, 1997 from $392,000 for the prior
year end, primarily due to $240,000 in accrued incentive compensation that was
included at December 31, 1996.

Long-term debt increased to $5,149,000 from $1,478,000 at December 31,
1996. The Company entered into a loan agreement of $4,430,000 in September 1997
to provide financing for the expansion of its facility. The term of the
agreement is three years with a 20 year payment amortization schedule. The
Company has a term loan with a principal balance of $662,000 as of December 31,
1997, as well as long-term debt totalling $803,000, relating to the purchase of
its original building and land. The Company also has two operating lines of
credit in the amounts of $800,000 and $500,000. At December 31, 1997, the
Company was not utilizing the lines of credit. As a result of the increased long
term debt, the Company's ratio of total liabilities to total assets increased to
55% from 47% at December 31, 1996.

Stockholders' equity increased to $7.2 million compared with $6.1
million in 1996. The improvement is due to the 1997 net income of the Company.
On January 31, 1997, the Company declared a 10% stock dividend and a cash
dividend of $0.01 per share paid on February 28, 1997 to recordholders as of
February 14, 1997. The stock dividend resulted in a transfer from retained
earnings to the common stock account in the amount of $5,848,000, which was
based on the closing price of $6.50 per share of Common Stock on the declaration
date. Average shares outstanding and all per share amounts included in the
accompanying consolidated financial statements and notes reflect the increased
number of shares as a result of the stock dividend. During 1997, the Company
paid cash dividends of $293,000.

The Company's working capital balance has improved by $405,000 since
December 31, 1996. The current ratio at December 31, 1997 improved to 1.85 from
1.7. Management believes that the Company's internally generated funds together
with the loan agreement will be sufficient to meet working capital requirements
in 1998.

Forward-looking statements made in this filing involve material risks
and uncertainties that could cause actual results and events to differ
materially from those set forth, or implied, including the Company's ability to

23

continue to attract, maintain and motivate its distributors, changes in the
regulatory environment affecting network marketing sales and sales of food and
dietary supplements and other risks and uncertainties detailed in the Company's
other SEC filings.

Item No. 8 - Financial Statements and Supplementary Data
- --------------------------------------------------------

Reference is made to the Consolidated Financial Statements contained in
Part IV hereof.

Item No. 9 - Changes in and Disagreements with Accountants on Accounting and
- ----------------------------------------------------------------------------
Financial Disclosure
--------------------

None.

PART III

Item No. 10 - Directors and Executive Officers of the Registrant
- ----------------------------------------------------------------

Information called for by Item 10 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be
held on May 21, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.

Item No. 11 - Executive Compensation
- ------------------------------------

Information called for by Item 11 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be
held on May 21, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.

Item No. 12 - Security Ownership of Certain Beneficial Owners and Management
- ----------------------------------------------------------------------------

Information called for by Item 12 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be
held on May 21, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.

Item No. 13 - Certain Relationships and Related Transactions
- ------------------------------------------------------------

Information called for by Item 13 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be
held on May 21, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.

24

PART IV
- -------

Item No. 14 - Exhibits, Financial Statement Schedules and Reports on Form 8K
- ----------------------------------------------------------------------------

(a) 1. The Consolidated Financial Statements filed as part
of this report on Form 10-K are listed on the
accompanying Index to Consolidated Financial
Statements and Consolidated Financial Statement
Schedules.

2. The Consolidated Financial Statement Schedules filed
as part of this report on Form 10-K are listed on the
accompanying Index to Consolidated Financial
Statements and Consolidated Financial Statement
Schedules.

3. Exhibits:

Exhibit
Document Number
-------- ------

Articles of Incorporation, as amended
(incorporate by reference Exhibit 3.1 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 3.1

By-laws, as amended
(incorporate by reference Exhibit 3.2
to the Form 10-K of the Registrant for
year ended December 31, 1992) 3.2

Amended Exclusive License Agreement
(incorporate by reference Exhibit 10.1
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.1

Asset Purchase Agreement
(Australian Joint Venture)
(incorporate by reference Exhibit 10.2
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.2

Master Agent Agreement
(re: Australia)
(incorporate by reference Exhibit 10.3
to the Form 10-K of the Registrant for year
ended December 31, 1992) 10.3

Tobin Stock Purchase Agreement
(incorporate by reference Exhibit 10.6
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.4

25

Exhibit
Document Number
-------- ------

Tobin Consulting Agreement
(incorporate by reference Exhibit 10.7
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.5

1995 Stock Option Plan (incorporate by
reference Exhibit 10.7 to the
Form 10-K of the Registrant for year
ended December 31, 1995) 10.6

Montgomery Employment Agreement
dated June 1, 1997 10.7

Hastings Employment Agreement
dated June 1, 1997 10.8

Kreher Employment Agreement dated
April 13, 1994 (incorporate by
reference Exhibit 10.14 to the
Registrant's Form 10-Q for
quarter ended June 30, 1994). 10.9

1994 Annual Incentive Compensation Plan
(incorporate by reference Exhibit 10.11
to the Form 10-K of the Registrant for
year ended December 31, 1995) 10.10

1994 Long-Term Incentive Compensation Plan
(incorporate by reference Exhibit 10.12 to
the Form 10-K of the Registrant for
year ended December 31, 1995) 10.11

Agreement with Avogen, Inc. dated July 1, 1995
(incorporate by reference Exhibit 10.13 to the
Form 10-K of the Registrant for year ended
December 31, 1995) 10.12

Agreement with Conkle & Olesten and Avogen, Inc.
dated July 1, 1995 (incorporate by reference
Exhibit 10.14 to the Form 10-K of the Registrant
for year ended December 31, 1995) 10.13

26

Exhibit
Document Number
-------- ------

Agreement with Traco Labs, Inc.
(incorporated by reference Exhibit 10.14
to the Form 10-K of the Registrant for
year ended December 31, 1996) 10.14

Amendment to Avogen and Conkle & Oleston
Agreements dated April 25, 1997 10.15

Statement re: computation of per
share earnings (incorporated by reference
to Note 7 of the Consolidated Financial
Statements contained in Part IV) 11

Subsidiaries of the Registrant
(incorporate by reference the
the Registrants's Response to
Item 1 of Part I of this Form 10-K) 22

Consent of Ernst & Young L.L.P.,
Independent Auditors 23

(b) N/A

(c) The Exhibits listed in subparagraph (a)(3) of this Item 14 are
attached hereto. Unless incorporated by reference to a
previous filing.

(d) The Schedules listed in subparagraph (a)(2) of this Item 14
are attached hereto.

27

SIGNATURES

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

RELIV' INTERNATIONAL, INC.
--------------------------

By: /s/Robert L. Montgomery
----------------------------------------------------------------------
Robert L. Montgomery, Chairman of the Board of Directors, President and
Chief Executive Officer, Treasurer

Date: March 27, 1998

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

By: /s/Robert L. Montgomery
----------------------------------------------------------------------
Robert L. Montgomery, Chairman of the Board of Directors, President and
Chief Executive Officer, Treasurer

Date: March 27, 1998

By: /s/ David G. Kreher
----------------------------------------------------------------------
David G. Kreher, Senior Vice President, Chief Operating Officer,
Assistant Secretary
(principal financial and accounting officer)

Date: March 27, 1998

By: /s/ Carl W. Hastings
----------------------------------------------------------------------
Carl W. Hastings, Executive Vice President, Assistant Secretary,
Director

Date: March 27, 1998

By: /s/ Thomas W. Pinnock
----------------------------------------------------------------------
Thomas W. Pinnock III, Director

Date: March 27, 1998

By: /s/ Stephen M. Merrick
----------------------------------------------------------------------
Stephen M. Merrick, Secretary, Director

Date: March 27, 1998

28

By: /s/ Donald L. McCain
----------------------------------------------------------------------
Donald L. McCain, Director

Date: March 27, 1998

By: /s/ John Akin
----------------------------------------------------------------------
John Akin, Director

Date: March 27, 1998

By: /s/ Sandra S. Montgomery
----------------------------------------------------------------------
Sandra S. Montgomery, Director

Date: March 27, 1998

By: /s/ Thomas T. Moody
----------------------------------------------------------------------
Thomas T. Moody, Director

Date: March 27, 1998

By: /s/ Marvin W. Solomonson
----------------------------------------------------------------------
Marvin W. Solomonson, Director

Date: March 27, 1998

29

Reliv' International, Inc.
and Subsidiaries

Consolidated Financial Statements

Years ended December 31, 1997, 1996 and 1995

Contents

Consolidated Financial Statements:
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-2
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995...................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................................... F-6
Notes to Consolidated Financial Statements - December 31, 1997........... F-8

Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995....................................... F-29

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.

[LETTERHEAD OF ERNST & YOUNG L.L.P.]

Report of Independent Auditors

Board of Directors and Stockholders
Reliv' International, Inc.

We have audited the accompanying consolidated balance sheets of Reliv'
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Reliv'
International, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ Ernst & Young L.L.P.

March 17, 1998
St. Louis, Missouri

F-1

Reliv' International, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31
1997 1996
------------------------------

Assets
Current assets:
Cash and cash equivalents $ 2,426,426 $ 2,108,770
Accounts and notes receivable,
less allowances of $7,600
in 1997 and $13,000 in 1996 865,701 1,056,360
Inventories:
Finished goods 1,453,282 1,219,295
Raw materials 785,706 1,136,897
Sales aids and promotional materials 403,830 405,768
------------------------------
2,642,818 2,761,960

Refundable income taxes 31,303 48,949
Prepaid expenses and other current assets 688,539 512,031
Deferred income taxes 90,065 65,000
------------------------------
Total current assets 6,744,852 6,553,070

Deferred costs 4,232 79,223

Property, plant and equipment:
Land 790,677 790,677
Building 2,854,548 2,863,457
Machinery and equipment 1,723,482 1,693,849
Office equipment 303,235 328,780
Computer equipment and software 1,452,577 1,245,137
Construction in progress 4,797,090 74,423
------------------------------
11,921,609 6,996,323
Less accumulated depreciation and amortization (2,700,745) (2,226,951)
------------------------------
9,220,864 4,769,372
------------------------------
$ 15,969,948 $ 11,401,665
==============================

See accompanying notes.

F-2

Reliv' International, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31
1997 1996
------------------------------

Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 3,290,131 $ 3,496,058
Income taxes payable -- 65,102
Current maturities of long-term debt and
capital lease obligations 358,124 282,502
Unearned income 5,003 22,602
------------------------------
Total current liabilities 3,653,258 3,866,264

Capital lease obligations, less current maturities 39,105 13,211
Long-term debt, less current maturities 5,109,520 1,464,868

Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized,
9,617,307 shares issued and outstanding in 1997 and
9,900,529 shares issued and outstanding in 1996 9,135,764 9,211,826
Notes receivable - officers and directors (4,633) (4,633)
Retained earnings (deficit) (1,673,164) (2,516,181)
Foreign currency translation adjustment (289,902) 10,970
Less cost of treasury stock - 250,580 shares in 1996 -- (644,660)
------------------------------
7,168,065 6,057,322

------------------------------
$ 15,969,948 $ 11,401,665
==============================

See accompanying notes.

F-3

Reliv' International, Inc. and Subsidiaries

Consolidated Statements of Income

Year ended December 31
1997 1996 1995
--------------------------------------------

Sales at suggested retail $ 71,066,845 $ 60,840,620 $ 46,466,287
Less distributor allowances on
product purchases 24,230,575 20,110,627 17,552,414
--------------------------------------------
Net sales 46,836,270 40,729,993 28,913,873

Costs and expenses:
Cost of products sold 9,404,283 10,193,418 6,386,806
Distributor royalties and commissions 16,837,084 13,429,386 10,678,500
Selling, general and administrative 17,083,792 14,585,127 11,171,344
--------------------------------------------
43,325,159 38,207,931 28,236,650
--------------------------------------------
Income from operations 3,511,111 2,522,062 677,223

Other income (expense):
Interest expense (210,268) (212,819) (146,476)
Other income 113,145 147,771 226,076
--------------------------------------------
Income before income taxes 3,413,988 2,457,014 756,823
Provision for income taxes 1,385,000 950,000 187,000
--------------------------------------------
Net income $ 2,028,988 $ 1,507,014 $ 569,823
============================================

Basic earnings per share (1) $ .21 $ .15 $ .06

Diluted earnings per share (1) $ .20 $ .15 $ .06

(1) Per share data for 1996 and 1995 reflects the pro forma effect of the
Company's 10 percent stock dividend declared on January 31, 1997 and distributed
on February 28, 1997.

See accompanying notes.

F-4

Reliv' International, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

Notes Foreign
Common Stock Receivable - Retained Currency Treasury Stock
---------------------- Officers and Earnings Translation ------------------
Shares Amount Directors (Deficit) Adjustment Shares Amount
----------------------------------------------------------------------------------

Balance at December 31, 1994 9,472,913 $3,460,308 $(10,523) $ 2,739,422 $ 60,202 266,252 $(623,380)
Common stock purchased for treasury -- -- -- -- -- 109,726 (365,544)
Repayment of loans by officers and director -- -- 5,890 -- -- -- --
Foreign currency translation adjustment -- -- -- -- (139,836) -- --
Cancellation of treasury stock (161,612) (47,322) -- (500,776) -- (161,612) 453,098
Dividends paid ($.01 per share) -- -- -- (93,746) -- -- --
Net income -- -- -- 569,823 -- -- --
----------------------------------------------------------------------------------
Balance at December 31, 1995 9,311,301 3,412,986 (4,633) 2,714,723 (79,634) 214,366 (535,826)
----------------------------------------------------------------------------------
Common stock purchased for treasury -- -- -- -- -- 309,189 (823,808)
Options exercised 8,113 10,266 -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- 90,604 -- --
Cancellation of treasury stock (295,755) (59,154) -- (710,820) -- (295,755) 714,974
Dividends paid ($.02 per share) -- -- -- (179,370) -- -- --
Stock dividend declared January 31, 1997 876,870 5,847,728 -- (5,847,728) -- 22,780 --
Net income -- -- -- 1,507,014 -- -- --
----------------------------------------------------------------------------------
Balance at December 31, 1996 9,900,529 9,211,826 (4,633) (2,516,181) 10,970 250,580 (644,660)
----------------------------------------------------------------------------------
Common stock purchased for treasury -- -- -- -- -- 86,306 (337,127)
Options exercised 10,438 13,125 -- -- -- -- --
Warrants exercised 29,140 -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- (300,872) -- --
Cancellation of treasury stock (314,106) (89,187) -- (892,600) -- (314,106) 981,787
Adjustment to stock dividend (8,694) -- -- -- -- (22,780) --
Dividends paid ($.03 per share) -- -- -- (293,371) -- -- --
Net income -- -- -- 2,028,988 -- -- --
----------------------------------------------------------------------------------

Balance at December 31, 1997 9,617,307 $9,135,764 $ (4,633) $(1,673,164) $(289,902) -- $ --
==================================================================================

See accompanying notes.

F-5

Reliv' International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Year ended December 31
1997 1996 1995
------------------------------------------

Operating activities
Net income $ 2,028,988 $ 1,507,014 $ 569,823
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 607,281 629,157 452,141
Provision for losses on accounts receivable -- 78,699 --
Provision for deferred income taxes (31,096) (1,974) 13,017
Foreign currency translation loss (23,019) 3,169 27,315
(Increase) decrease in accounts and notes
receivable 185,115 (480,365) (470,654)
(Increase) decrease in inventories 30,553 (216,431) 262,765
(Increase) decrease in
refundable income taxes 21,496 183,454 41,199
(Increase) decrease in prepaid expenses and
other current assets (183,098) (61,861) (187,073)
(Increase) decrease in deferred costs 69,657 69,753 (122,689)
Increase (decrease) in accounts payable and
accrued expenses (128,082) 480,944 324,388
Increase (decrease) in income taxes payable (68,940) (77,890) (102,824)
Increase (decrease) in unearned income (17,594) 7,839 (4,264)
------------------------------------------
Net cash provided by operating activities 2,491,261 2,121,508 803,144

Investing activities
Proceeds from the sale of property, plant and
equipment 73,010 837 --
Purchase of property, plant and equipment (5,054,726) (765,386) (1,330,083)
Proceeds from the sale of investments -- 81,969 --
Repayment of loans to officers and directors -- -- 5,890
------------------------------------------
Net cash used in investing activities (4,981,716) (682,580) (1,324,193)

Financing activities
Proceeds from long-term borrowings and line of
credit 3,958,514 363,887 662,297
Principal payments on long-term borrowings and
line of credit (220,144) (171,097) (112,236)
Principal payments under capital lease obligations (84,723) (59,230) (61,774)
Proceeds from stock options exercised 13,125 10,266 --
Dividends paid (293,371) (179,370) (93,745)
Purchase of treasury stock (337,127) (878,808) (460,543)
------------------------------------------
Net cash provided (used) by financing activities 3,036,274 (914,352) (66,001)
Effect of exchange rate changes on cash and cash
equivalents (228,163) 77,018 (74,531)
------------------------------------------
Increase (decrease) in cash and cash equivalents 317,656 601,594 (661,581)
Cash and cash equivalents at beginning of year 2,108,770 1,507,176 2,168,757
------------------------------------------
Cash and cash equivalents at end of year $ 2,426,426 $ 2,108,770 $ 1,507,176
=========================================

F-6

Reliv' International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Year ended December 31
1997 1996 1995
------------------------------------------

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (includes capitalized interest of
$71,425) $ 219,997 $ 217,698 $ 138,404
==========================================

Income taxes $ 1,396,476 $ 845,632 $ 346,931
==========================================

Non cash investing and financing transactions:
Capital lease obligations entered into $ 92,519 $ -- $ 35,230
===========================================

See accompanying notes.

F-7

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 1997

1. Nature of Business and Significant Accounting Policies

Nature of Business

Reliv' International, Inc. (the Company) produces a line of food products
including nutritional supplements, diet management products, granola bars and
sports drink mixes. The Company also distributes a line of premium skin care
products. These products are sold by subsidiaries of the Company to a sales
force of independent distributors who sell products directly to consumers. The
Company and its subsidiaries sell products to distributors throughout the United
States and in Australia, Canada, New Zealand, Mexico and the United Kingdom. In
addition, in the fourth quarter of 1995, the Company began providing contract
processing and packaging services.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its foreign and domestic subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Inventories

Inventories are valued at the lower of cost or market. Product cost is
determined using standard costs, which approximate the first-in, first-out
basis. Other inventory cost is determined using the first-in, first-out basis.

Property, Plant and Equipment

Property, plant and equipment are stated on the cost basis. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed using the straight-line or accelerated method over the
useful life of the related assets.

Deferred Costs

The costs of brochures, design fees for product labels and organization costs
are capitalized and amortized on a straight-line basis over the respective
assets' useful lives, typically three to five years.

F-8

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Nature of Business and Significant Accounting Policies (continued)

Revenue Recognition

The Company generally receives its sales price in cash accompanying orders from
independent distributors and makes related commission payments in the following
month. The net sales price is the suggested retail price less the distributor
discount of 25 percent to 45 percent of such suggested retail price. Sales
revenue and commission expense are recorded when the merchandise is shipped.
Unearned income represents prepaid orders for which the Company has not shipped
the merchandise.

Foreign Currency Translation

Each foreign subsidiary's assets and liability accounts, which are originally
recorded in the appropriate local currencies, are translated into United States
dollar amounts at the year-end exchange rates. Revenue and expense accounts are
translated at the average rates for the year. Transaction gains and losses, the
amounts of which are immaterial, are included in selling, general and
administrative expenses. Foreign exchange translation adjustments are
accumulated in a separate component of stockholders' equity.

The foreign exchange translation adjustment for 1995 reflects the consolidated
effect on the Company resulting from the decline in the value of the Mexican
peso relative to the U.S. dollar of approximately 36 percent in 1995. In 1996,
the Mexican peso remained relatively stable, while the Australian and New
Zealand dollars improved from their 1995 levels. In 1997, the Australian and New
Zealand dollars declined substantially in the latter half of the year. The
magnitude of the effect on the foreign exchange translation adjustment is
mitigated by the fact that the U.S. dollar denominated intercompany financing of
the Mexican subsidiary is considered of a long-term investment nature.
Accordingly, the effect of exchange rate fluctuations on the intercompany
financing is accumulated as a separate component of stockholders' equity.

Income Taxes

The provision for income taxes is computed using the liability method. The
primary difference between financial statement and taxable income results from
financial statement accruals and reserves.

F-9

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Nature of Business and Significant Accounting Policies (continued)

Stock-Based Compensation

The Company accounts for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Since the Company grants stock
options at an exercise price not less than the fair value of the shares at the
date of grant, no compensation expense is recognized. The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting and Disclosure of Stock-Based Compensation," effective for
years beginning after December 1995. The Company has elected to disclose the
effects of this pronouncement in a footnote to these financial statements (see
Note 8).

Basic and Diluted Earnings per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.

Basic earnings per common share is computed using the weighted average number of
common shares outstanding during the year. Diluted earnings per common share is
computed using the weighted average number of common shares and potential
dilutive common shares that were outstanding during the period. Potential
dilutive common shares consist of outstanding stock options and warrants. See
Note 7 for additional information regarding earnings per share. On January 31,
1997, the Company declared a 10 percent stock dividend on the Company's common
stock which was distributed on February 28, 1997 to shareholders of record on
February 14, 1997. The dividend was transferred from retained earnings to common
stock in the amount of $5,848,000, which was based on the closing price of $6.50
per share on the declaration date. Average shares outstanding and all per share
amounts included in the accompanying consolidated financial statements and notes
are based on the increased number of shares giving retroactive recognition to
the stock dividend.

F-10

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Nature of Business and Significant Accounting Policies (continued)

Advertising

Costs of sales aids and promotional materials are capitalized as inventories.
All other advertising and promotional costs are expensed when incurred.

Cash Equivalents

The Company's policy is to consider demand deposits and short-term investments
with a maturity of three months or less when purchased as cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Long-Lived Assets

In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted SFAS 121 effective January 1, 1996 and
determined that no impairment exists.

Reclassifications

Certain reclassifications have been made to prior years' financial statements to
conform to the current presentation.

2. Subsequent Event

In February 1998, the Company entered into a preliminary agreement to purchase
the stock of its licensee in the United Kingdom in exchange for the debt owed to
the Company. A formal agreement is pending and should be consummated in the near
future.

F-11

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

3. Research and Development Expenses

Research and development expenses of $286,000, $289,000 and $294,000 in 1997,
1996 and 1995, respectively, were charged to selling, general and administrative
expenses as incurred.

4. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 1997 and 1996, consist of
the following:

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

Trade payables $1,432,901 $1,688,777
Distributors commissions 1,326,579 1,064,023
Sales taxes 192,130 225,509
Payroll and payroll taxes 173,689 391,905
Other 164,832 125,844
----------------------------------
$3,290,131 $3,496,058
==================================

5. Short-Term Borrowings

In January 1996, the Company obtained two separate lines of credit amounting to
$500,000 and $800,000, respectively. Borrowings under the $500,000 line of
credit are due January 1998 and bear interest, payable monthly, at the prime
rate. Borrowings under the $800,000 line of credit are due February 2001 and
bear interest, payable monthly, at the prime rate. A portion of the Company's
inventory and property, plant and equipment with a net book value of $2,747,000
as of December 31, 1997 are pledged as security under the terms of the
agreements. The agreements include restrictive covenants, including a
requirement that the Company maintain a current ratio of 1.5 to 1.0 and a
minimum net worth of $5,500,000. As of December 31, 1997, the Company had no
borrowings against these lines of credit.

F-12

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

6. Long-Term Debt

Long-term debt at December 31, 1997 and 1996, consists of the following:

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

Industrial revenue bonds payable in monthly installments (including interest at
85% of prime) not to exceed $9,611, commencing August 1, 1991; secured by
land and building (net book value $2,789,000 at December 31, 1997); balance
due on March 1, 2005 $ 597,907 $ 649,476

Note payable in monthly installments (including interest at prime and additional
interest at 15% of prime on the balance of the industrial revenue bonds)
equal to $9,611 less installment applied to industrial revenue bond,
commencing August 1, 1991; unsecured; balance due on March 1, 2005 204,755 204,755

Term loan payable in monthly installments of $19,550, including interest at 8.5%
through April 2001; secured by equipment and inventory (net book value of
$2,747,000 at December 31, 1997) 662,133 830,705

Construction loan payable in interest only at 8.5% through March 1998.
Thereafter payable in monthly installments of $38,802 , with the balance due
March 2001; secured by land and building (net book value of $5,157,000 at
December 31, 1997) 3,958,514 --
-------------------------------
5,423,309 1,684,936
Less current maturities (313,789) (220,068)
-------------------------------
$5,109,520 $1,464,868
===============================

F-13

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

6. Long-Term Debt (continued)

Principal maturities of long-term debt at December 31, 1997 are as follows:

1998 $ 313,789
1999 358,210
2000 391,508
2001 3,829,270
2002 83,393
Thereafter 447,139
-------------
$ 5,423,309
=============

7. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per
share:

Year ended December 31
1997 1996 1995
----------------------------------------

Numerator:
Numerator for basic and diluted earnings per
share - net income $ 2,028,988 $ 1,507,014 $ 569,823
Denominator:
Denominator for basic earnings per share -
weighted average shares 9,600,000 9,854,000 10,280,000
Effect of dilutive securities:
Employee stock options and other warrants 707,000 471,000 24,000
----------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares 10,307,000 10,325,000 10,304,000
========================================

Basic earnings per share $ 0.21 $ 0.15 $ 0.06
========================================
Diluted earnings per share $ 0.20 $ 0.15 $ 0.06
========================================

F-14

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements

Stock Options

The Company had an incentive stock option plan for key employees which expired
in January 1995. Accordingly, no additional options can be granted under this
plan as of that date. At December 31, 1995, options for 189,200 shares and
250,800 shares were outstanding at an option price of $2.045 and $2.25 per
share, respectively. The options are exercisable at various dates through
December 1999.

In May 1995, the Company adopted a stock option plan which provides for the
grant of incentive stock options and nonqualified stock options for employees
(including officers) and other consultants and advisors to the Company. A
maximum of 1,100,000 shares can be purchased at an option price not less than
the fair market value of the stock at the time the options are granted.

As the result of the Company's 10% stock dividend in February 1997, all
outstanding options and warrants were adjusted to reflect for the stock
dividend.

The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB 25) and related interpretations in accounting for its
employee and nonemployee director stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock-Based Compensation," requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee and nonemployee director stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates ranging from 5.15% to 5.30% for 1995, 5.15% to 6.10% for 1996,
and 5.70% to 5.97% for 1997; dividend yield of .50%; volatility factor of the
expected price of the Company's stock of .658 for 1995 and 1996, .624 for 1997;
and a weighted average expected life of the options of 3.54 years.

F-15

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)

Stock Options (continued)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and nonemployee director stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee and
nonemployee director stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
and warrants is amortized to expense over the vesting period. The effects of
applying the pro forma disclosure provisions of SFAS 123 are not likely to be
representative of the effects on reported net income for future years. The
Company's pro forma information follows:

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

Pro forma net income $1,861,748 $1,385,941 $537,842

Pro forma earnings per share:
Basic $.19 $.14 $.05
Diluted $.18 $.13 $.05

F-16

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)

Stock Options (continued)

A summary of the Company's stock option activity and related information for the
years ended December 31 follows:

1997 1996 1995
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------

Outstanding beginning of
the year 1,076,900 $1.841 883,850 $1.712 440,000 $2.162
Granted:
Price = fair value 100,000 3.125 206,250 2.355 385,550 1.250
Price > fair value -- -- -- -- 58,300 1.375
Exercised (1) (11,000) 1.506 (10,450) 1.250 -- --
Forfeited -- -- (2,750) 1.250 -- --
----------- ----------- -----------
Outstanding at
end of year 1,165,900 $1.954 1,076,900 $1.841 883,850 $1.712
=========== =========== ===========

Exercisable at end of
year 723,332 -- 496,828 -- 271,514 --
=========== =========== ===========

As of December 31, 1997

Options Outstanding Options Exercisable
------------------------------------- ----------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------- ----------------- ------------------- ------------------- ---------------- -----------------

$1.25 - $2.00 482,900 2.95 $1.325 274,999 $1.331
$2.01 - $2.875 583,000 2.31 2.273 348,333 2.233
$3.125 100,000 4.96 3.125 100,000 3.125
---------- -----------

$1.25 - $3.125 1,165,900 2.80 $1.954 723,332 $2.014
=========== ===========

(1) Shares issued were less than options exercised due to cashless exercise
provision.

F-17

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)

Warrants

In 1995, the Company, as part of a consulting agreement, issued warrants to
purchase 3,364 shares of common stock. The exercise prices of these warrants
ranged from $.045 per share to $1.932 per share and had a term of two years. In
1996, as part of this same agreement, the Company issued warrants to purchase
38,035 shares with the same range of exercise prices and terms of the warrants
issued in the previous year. In 1997, as a renewal of this agreement, the
Company issued warrants to purchase 9,600 shares at an exercise price of $6.25
per share with a term of two years.

In July 1996, as part of another consulting agreement, the Company issued a
warrant to purchase 101,948 shares of common stock at an exercise price of
$4.182 per share. This warrant has a term of three years.

A summary of the Company's warrant activity and related information for the
years ended December 31 follows:

1997 1996 1995
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
------------------------------------------------------------------------------------

Outstanding beginning of
the year 143,347 $3.430 3,364 $1.496 -- $ --
Granted:
Price < fair value -- -- 6,989 0.045 777 0.045
Price = fair value 9,600 6.250 31,046 1.932 2,587 1.932
Price > fair value -- -- 101,948 4.182 -- --
Exercised (1) (41,400) 1.578 -- -- -- --
Forfeited -- -- -- -- -- --
----------- ----------- -----------
Outstanding at
end of year 111,547 $4.360 143,347 $3.430 3,364 $1.496
=========== =========== ===========

Exercisable at end of
year 111,547 -- 143,347 -- 3,364 --
=========== =========== ===========

(1) Shares issued were less than warrants exercised due to cashless exercise
provision.

F-18

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)

Warrants (continued)

As of December 31, 1997

Warrants Outstanding Warrants Exercisable
------------------------------------ ------------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------- ---------------- ------------------- ------------------ ----------------- ------------------

$4.182 101,947 1.496 $4.182 101,947 $4.182
$6.250 9,600 1.456 6.250 9,600 6.250
--------- -----------

$4.182 - $6.25 111,547 1.492 $4.360 111,547 $4.360
========= ===========

Treasury Stock and Repurchase Agreements

In October 1992, the Company entered into a stock repurchase agreement with a
former officer/director of the Company. Under the agreement, which was
retroactive to July 1992, the Company was obligated to purchase 259,686 of the
individual's shares of Company common stock. The mandatory purchase occurred in
six quarterly installments of 43,281 shares beginning in July 1992 and
concluding in December 1993. As of December 31, 1993, the Company had redeemed
all 259,686 shares required by the agreement for $657,683.

Under the same agreement, the Company also had the option to purchase an
additional 432,814 of the individual's shares on the basis of 43,281 shares each
quarter beginning in January 1995 and concluding in April 1996. Through December
31, 1996, the Company had exercised all options under the agreement and redeemed
an additional 432,814 shares for $870,218. As of December 31, 1997, all treasury
shares had been retired.

In May 1997, a former officer/director filed a demand for arbitration with
respect to the stock purchase agreement and consulting agreement entered into in
October 1992. The demand claims damages resulting from alleged
misrepresentations made by the Company regarding these agreements. The Company
believes the claim is without merit and intends to vigorously defend itself. At
this time, the outcome of this matter is uncertain and a range of loss cannot be
reasonably estimated. However, management believes that the final outcome will
not have a material adverse effect on the financial position of the Company.

F-19

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

9. Leases

The Company leases certain manufacturing, storage and office facilities and
certain equipment and automobiles. These leases have varying terms, and certain
leases have renewal and/or purchase options. Future minimum payments under
noncancelable leases with initial or remaining terms in excess of one year
consist of the following at December 31, 1997:

Capital Operating Leases
Leases
-----------------------------

1998 $50,443 $239,442
1999 35,527 216,164
2000 6,040 136,736
2001 - 83,256
2002 - 70,004
Thereafter - -
-----------------------------
Total minimum lease payments 92,010 $745,602
===============
Less amount representing interest 8,570
-----------
Present value of minimum lease payments
(including current portion of $44,335) $83,440
===========

Machinery, office and computer equipment at December 31, 1997 and 1996, include
approximately $246,333 and $410,662 of equipment under leases that have been
capitalized. Accumulated depreciation and amortization for such equipment
approximated $154,978 and $344,539 at December 31, 1997 and 1996, respectively.

Rent expense for all operating leases was $311,554, $289,979 and $167,985 for
the years ended December 31, 1997, 1996 and 1995, respectively.

10. License Agreement

The Company has a license agreement with the individual who developed many of
the Company's products. This agreement provides the Company with the exclusive
worldwide license to manufacture and sell all products created by the licensor
and requires monthly royalty payments of 5 percent of net sales, with a minimum
payment of $10,000 and a maximum payment of $22,000. The agreement terminates
the earlier of December 2001 or on the death of licensor. The amount of expense
under this agreement was $264,000 for each of the years ended December 31, 1997,
1996 and 1995, respectively.

F-20

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

11. Income Taxes

The components of income before income taxes are as follows:

Year ended December 31
1997 1996 1995
-----------------------------------------------------

Domestic $ 3,625,708 $ 2,710,323 $646,978
Foreign (211,720) (253,309) 109,845
-----------------------------------------------------
$ 3,413,988 $ 2,457,014 $756,823
=====================================================

The components of the provision for income taxes are as follows:

Year ended December 31
1997 1996 1995
-----------------------------------------------------
Current:
Federal $ 1,239,000 $ 758,000 $ 31,000
Foreign 38,000 88,000 124,000
State 134,000 108,000 18,000
-----------------------------------------------------
Total current 1,411,000 954,000 173,000

Deferred:
Federal (24,000) (3,000) (1,000)
Foreign - (1,000) 15,000
State (2,000) - -
-----------------------------------------------------
Total deferred (26,000) (4,000) 14,000
-----------------------------------------------------

$ 1,385,000 $ 950,000 $ 187,000
=====================================================

F-21

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

11. Income Taxes (continued)

The provision for income taxes is different from the amounts computed by
applying the United States federal statutory income tax rate of 34 percent. The
reasons for these differences are as follows:

Year ended December 31
1997 1996 1995
----------------------------------------

Income taxes at statutory rate $ 1,161,000 $ 835,000 $ 257,000
Difference between financial
statement and federal
income tax recognition
of foreign losses -- -- (101,000)
Differences between U.S.
and foreign tax rates on
foreign income 27,000 12,000 --
State income taxes,
net of federal benefit 88,000 71,000 12,000
Provision for IRS audit settlement 75,000 -- --
Other 34,000 32,000 19,000
---------------------------------------
$ 1,385,000 $ 950,000 $ 187,000
=======================================

Effective December 31, 1995, the Company hybridized its Canadian subsidiary for
federal income tax purposes. During 1995, the Company recognized an income tax
benefit in excess of the foreign loss recognized for financial statement
purposes as a result of this hybridization.

The components of the deferred tax asset and the related tax effects of each
temporary difference at December 31, 1997 and 1996, are as follows:

1997 1996
---------------------------
Deferred tax asset:
Product refund reserve $ 18,000 $ 29,000
Obsolescence reserve 40,000 --
Bad debt reserve 3,000 6,000
Miscellaneous accrued expenses 29,065 30,000
---------------------------
$ 90,065 $ 65,000
===========================

Federal income taxes have not been provided on the undistributed earnings of the
Company's Australian and New Zealand subsidiaries since the Company has foreign
tax credits available to offset any related federal income taxes.

F-22

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

11. Income Taxes (continued)

The Internal Revenue Service (IRS) examinations of the Company's U.S. federal
income tax returns for fiscal years 1992 through 1994 resulted in a proposed
assessment against the Company. In early 1998, this examination was resolved
with no material adverse effect on the Company's financial position or results
of operation.

12. Employee Benefit Plans

In 1995, the Company established a 401(k) employee savings plan which covers
substantially all employees. During 1995 and 1996, employees could contribute up
to 5 percent of their gross income to the plan, and the Company matched 50
percent of the employee's contribution. Company contributions totaled $23,000
and $11,000 in 1996 and 1995, respectively. For 1997, employees could contribute
up to 7.5 percent of their gross income to the plan and the Company matched 100
percent of the employee's contribution. Company contributions under the 401(k)
plan totaled $115,000 in 1997. In 1997, the Company merged a pre-existing profit
sharing plan into the 401(k) plan. Company contributions totaled $0 and $35,000
in 1996 and 1995, respectively for discretionary contributions for the former
profit sharing plan.

13. Incentive Compensation Plans

Effective January 1, 1994, the Company adopted an annual incentive compensation
plan and a long-term incentive plan. These plans include three
officers/directors and are effective until termination of their employment.
Participants in the plan are entitled to receive additional compensation based
on the attainment of defined annual and long-term performance measures.
Incentive compensation under each of the plans cannot exceed the participant's
base salary rate. The base salary rates and the performance measures specified
by both plans are established annually by the Board of Directors.

The Company paid approximately $240,000, $525,000 and $0 in 1997, 1996 and 1995,
respectively, under its incentive compensation plans.

F-23

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

14. Employment Agreements

In November 1992, the Company entered into a services agreement with a former
officer for a term retroactively commencing in July 1992 and expiring in
December 1999. The agreement provides for a minimum monthly salary and incentive
compensation based upon the profits (defined as "income before income taxes and
incentive compensation expense") of the foreign subsidiaries. The Company paid
approximately $50,000, $50,000 and $120,000 in 1997, 1996 and 1995,
respectively, under the terms of the agreement.

Effective January 1, 1994, the Company entered into employment agreements with
three officers/directors and in June, 1997, entered into new employment
agreements with two of these officers/directors. The employment agreements
provide for base salary rates established annually by the Board of Directors.
The Company paid base salaries of $960,000, $960,000 and $768,750 in 1997, 1996
and 1995, respectively, under the terms of the agreements.

15. Related Party Transactions

An officer/director of the Company is a principal in a law firm which provides
legal services to the Company. During the years ended December 31, 1997, 1996
and 1995, the Company incurred fees to the officer/director and his firm of
approximately $332,000, $231,000 and $305,000, respectively.

Accounts and notes receivable include accounts receivable from
officers/directors of $4,633, $4,633 and $219,082 at December 31, 1997, 1996 and
1995, respectively.

During 1996, the Company paid $121,000 for goods and services to a company
wholly owned by three officers/directors and one director of the company in
connection with promotional activities.

F-24

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

16. Consulting Agreements

In October 1992, the Company entered into a consulting agreement with a former
officer/director of the Company. Under the agreement, which retroactively
commenced in July 1992 and expired in June 1996, (1) the officer/director's
employment agreement was terminated, (2) the individual provided consulting
services and advice to the Company for the term of the agreement and (3) the
individual agreed not to compete with the Company anywhere within the United
States from July 1992 through December 1995. The individual's compensation for
providing consulting services and not competing was approximately $134,000 at
the time the agreement was executed, plus $4,500 per month from July 1992
through December 1992 and 1 percent of the suggested retail value of the
Company's United States sales from July 1992 through June 1996. Total expense
under this agreement approximated $203,000 and $342,000 in 1996 and 1995,
respectively.

In conjunction with an acquisition, the Company entered into a consulting
agreement with a partnership consisting of three individuals. Under the
agreement, which commenced in March 1992 and expires in February 2002, the
Company will pay annual consulting fees to the partnership equal to 2 percent of
the new company's retail sales (defined as "the gross sales amount of all
products sold by the Company in Australia and New Zealand determined by the
suggested retail price") up to approximately $A10,000,000 in 1992 and
$A12,000,000 in all subsequent years during the term and 3 percent of retail
sales that exceed those figures. Total expense under this agreement approximated
$96,000, $133,000 and $185,000 in 1997, 1996 and 1995, respectively.

17. Segment Information

In 1995, substantially all of the Company's assets, sales and operating results
were employed in or derived from the manufacture and direct sale of nutritional,
diet and skin care products to a sales force of independent distributors who
sell products directly to customers (network marketing). In late 1995, the
Company began performing contract processing and packaging services for
unrelated customers.

F-25

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

17. Segment Information (continued)

Segment data provided is for the 1997 and 1996 fiscal years only, as the Company
began contract manufacturing in late 1995 and the results for 1995 were not
material.

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

Net sales
Network marketing $ 45,311,467 $ 37,419,875
Contract manufacturing 1,524,803 3,310,118
--------------------------------
$ 46,836,270 $ 40,729,993
================================

Operating income
Network marketing $ 5,116,625 $ 4,055,671
Contract manufacturing (16,140) (200,532)
Corporate expenses (1,589,374) (1,333,077)
--------------------------------
Operating income 3,511,111 2,522,062
Nonoperating income (net) 113,145 147,771
Interest expense (210,268) (212,819)
Income tax expense (1,385,000) (950,000)
--------------------------------
Net income $ 2,028,988 $ 1,507,014
================================

Identifiable assets
Network marketing $ 12,740,414 $ 7,772,109
Contract manufacturing 803,108 1,420,786
Corporate 2,426,426 2,208,770
--------------------------------
$ 15,969,948 $ 11,401,665
================================

Depreciation and amortization
Network marketing $ 457,194 $ 452,483
Contract manufacturing 150,087 176,674
--------------------------------
$ 607,281 $ 629,157
================================

Capital expenditures
Network marketing $ 5,012,770 $ 384,818
Contract manufacturing 41,956 380,568
--------------------------------
$ 5,054,726 $ 765,386
================================

Operating profit is total revenue less operating expenses, excluding interest,
corporate expenses and income tax expense. Identifiable assets by business
segment include both assets directly identified with those operations and an
allocable share of jointly used assets. Corporate assets consist primarily of
cash and nonoperating accounts receivable.

F-26

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

18. Geographic Segment Data

Financial information, summarized by geographic area, is as follows:

United States inter-area transfers represent shipments of nutritional, diet and
skin care products to the foreign subsidiaries.

United New
States Australia Zealand Canada (1) Mexico (2) Eliminations Consolidated
------------------------------------------------------------------------------------------------

Year ended
December 31, 1997
Net sales:
Unaffiliated
customers $41,718,773 $2,560,714 $888,710 $1,338,425 $329,648 $ -- $46,836,270
Inter-area
transfers 751,555 48,570 -- -- -- (800,125) --
-----------------------------------------------------------------------------------------------
Total $42,470,328 $2,609,284 $888,710 $1,338,425 $329,648 $(800,125) $46,836,270
===============================================================================================

Net income (loss) $ 2,177,300 $ 49,910 $ (1,989) $ (109,750) $(86,483) $ -- $ 2,028,988
===============================================================================================

Identifiable assets $13,202,451 $1,488,667 $534,465 $ 467,467 $276,898 $ -- $15,969,948
===============================================================================================

(1) The Canadian subsidiary's loss from operations of $166,750 is offset by a
United Stated federal tax benefit of approximately $57,000 related to the
Canadian subsidiary's losses.

(2) The Mexican subsidiary's loss from operations of $130,483 is offset by a
United States federal tax benefit of approximately $44,000 related to the
Mexican subsidiary's losses.

United New
States Australia Zealand Canada (3) Mexico (4) Eliminations Consolidated
------------------------------------------------------------------------------------------------

Year ended
December 31, 1996
Net sales:
Unaffiliated
customers $34,408,349 $3,550,213 $1,172,743 $1,246,624 $ 352,063 $ -- $40,729,992
Inter-area
transfers 910,402 83,307 -- -- -- (993,709) --
-----------------------------------------------------------------------------------------------
Total $35,318,751 $3,663,520 $1,172,743 $1,246,624 $352,063 $(993,709) $40,729,992
===============================================================================================

Net income (loss) $ 1,685,771 $ 115,033 $ 19,717 $ (164,066) $(149,441) $ -- $ 1,507,014
===============================================================================================

Identifiable assets $ 8,340,211 $1,472,565 $ 668,501 $ 692,905 $ 227,483 $ -- $11,401,665
===============================================================================================

(3) Canadian subsidiary's loss from operations of $249,066 is offset by a
United Stated federal tax benefit of approximately $85,000 related to the
Canadian subsidiary's losses.

(4) The Mexican subsidiary's loss from operations of $226,441 is offset by a
United States federal tax benefit of approximately $77,000 related to the
Mexican subsidiary's losses.

F-27

Reliv' International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

18. Geographic Segment Data (continued)

United New
States Australia Zealand Canada (5) Mexico (6) Eliminations Consolidated
----------------------------------------------------------------------------------------------

Year ended
December 31, 1995
Net sales:
Unaffiliated
customers $22,223,817 $4,311,351 $1,448,785 $494,167 $ 435,753 $ -- $28,913,873
Inter-area
transfers 92,976 197,620 -- -- -- (290,596) --
----------------------------------------------------------------------------------------------
Total $22,316,793 $4,508,971 $1,448,785 $494,167 $ 435,753 $(290,596) $28,913,873
==============================================================================================

Net income (loss) $ 430,262 $ 232,536 $ 38,153 $ (185) $(130,943) $ -- $ 569,823
==============================================================================================

Identifiable assets $ 7,893,171 $1,473,242 $ 433,683 $342,990 $ 133,148 $ -- $10,276,234
==============================================================================================

(5) The Canadian subsidiary's loss from operations of $101,185 is offset by a
United States federal tax benefit of approximately $101,000 related to the
Canadian subsidiary's losses.

(6) The Mexican subsidiary's loss from operations of $198,943 is offset by a
United States federal tax benefit of approximately $68,000 related to the
Mexican subsidiary's losses.

19. Quarterly Financial Data (Unaudited)

First Second Third Fourth
----------------------------------------------------
(In thousands, except per share amounts)

1997
Net sales $ 12,670 $ 11,771 $ 11,480 $ 10,915
Cost of products sold $ 2,532 $ 2,337 $ 2,521 $ 2,015
Net income $ 819 $ 595 $ 282 $ 333
Earnings per share (1):
Basic $ .09 $ .06 $ .03 $ .03
Diluted $ .08 $ .06 $ .03 $ .03

1996
Net sales $ 9,304 $ 9,448 $ 9,934 $ 12,044
Cost of products sold $ 2,568 $ 2,415 $ 2,348 $ 2,862
Net income $ 278 $ 302 $ 338 $ 589
Earnings per share (1):
Basic $ .03 $ .03 $ .03 $ .06
Diluted $ .03 $ .03 $ .03 $ .06

(1) Per share data for 1996 reflects the pro forma effect of the Company's 10
percent stock dividend declared on January 31, 1997 and distributed on
February 28, 1997.

F-28

Reliv' International, Inc. and Subsidiaries

Schedule II - Valuation and Qualifying Accounts

For the years ended December 31, 1997, 1996 and 1995

Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end
Classification of year expenses accounts describe of year
- ----------------------------------------------------------------------------------------------------------

Year ended December 31, 1997
- ----------------------------

Deducted from asset accounts:
Allowance for doubtful
accounts $ 13,000 $ -- $ -- $ 5,400(1) $ 7,600
Reserve for obsolete
inventory 125,000 -- -- 16,000(2) 109,000
Supporting liability
accounts:
Reserve for refunds 78,800 186,000 -- 214,800(3) 50,000
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Year ended December 31, 1996
- ----------------------------

Deducted from asset accounts:
Allowance for doubtful
accounts $ 7,000 $ 78,700 $ -- $ 72,700(1) $ 13,000
Reserve for obsolete
inventory -- 125,000 -- -- 125,000
Supporting liability
accounts:
Reserve for refunds 78,800 92,000 -- 92,000(3) 78,800

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Year ended December 31, 1995
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful
accounts $ 29,000 $ -- 22,000(1) 7,000
Supporting liability
accounts:
Reserve for refunds 54,800 195,000 -- 171,000(3) 78,800

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(1) Uncollectible accounts written off, net of recoveries.
(2) Disposal of obsolete inventory.
(3) Amounts refunded, net of salable amounts returned.

F-29