Results of Operations

Net Income

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.

The positive changes in the sales organization were 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 Entrées, a line of four hot meal products based on the use of soy protein, and Relìv Provantage, a sports nutrition product targeted for the fitness market. Both products expand the Company's 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 the holding company, Relìv 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 manager 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 Relìv Classic and plans to introduce it in April 1998. Relìv Classic is the number one selling product in the United States accounting for approximately 25% of total retail sales. Relìv 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 Relìv A-Affect, a product similar to the United States Relìv Arthaffect that's designed to nutritionally support bone and joint conditions and Direct Select. Relìv 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 Relìv 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 Relìv 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 its 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.

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 Relìv Celleboost and the Relìv Getabetterbody weight loss system, in January 1996, Relìv Cool Punch Innergize, in June 1996 and Relìv 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 Relìv Optain,® an isotonic drink similar to the Relìv Innergize sold in the United States, and Relìv Celleboost, in January 1996.

In Mexico net sales declined as the economy contributed to Relìv 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 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.

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 Relìv 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

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 shareholders 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 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.

Five-Year Financial Summary

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

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

Stock Price and Dividend Summary

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