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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 OCTOBER 31, 1998        COMMISSION FILE NUMBER 0-22011
 
                             [BIONUTRICS INC. LOGO]
 
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                      NEVADA                                            86-0760991
          (STATE OR OTHER JURISDICTION OF                            (I.R.S. EMPLOYER
          INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)
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           2425 E. CAMELBACK ROAD, SUITE 650, PHOENIX, ARIZONA 85016
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 508-0112
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                      NONE
                             (TITLE OF EACH CLASS)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                    COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (TITLE OF CLASS)
 
     Indicate by check mark whether 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]     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 by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
 
     As of January 15, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the closing sales
price of such stock as of such date on the Nasdaq SmallCap Market, was
$27,989,132. No other capital stock is outstanding. Shares of Common Stock held
by each officer and director and by each person who owned 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily
conclusive and may not apply for other purposes.
 
     As of January 15, 1999, there were 20,355,732 shares of the registrant's
Common Stock outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders are incorporated by reference in Part III hereof.
 
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                               TABLE OF CONTENTS
 
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PART I......................................................    2
  ITEM 1.   BUSINESS........................................    2
  ITEM 2.   PROPERTIES......................................   20
  ITEM 3.   LEGAL PROCEEDINGS...............................   20
  ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY
     HOLDERS................................................   21
 
PART II.....................................................   21
  ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS.....................   21
  ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA............   22
  ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS...   22
  ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....   26
  ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE.............   26
 
PART III....................................................   26
  ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF
     REGISTRANT.............................................   26
  ITEM 11.  EXECUTIVE COMPENSATION..........................   26
  ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT..................................   27
  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED
     TRANSACTIONS...........................................   27
 
PART IV.....................................................   27
  ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
            REPORTS ON FORM 8-K.............................   27
SIGNATURES..................................................   29
FINANCIAL STATEMENTS........................................  F-1
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                                     PART I
 
ITEM 1.  BUSINESS
 
INTRODUCTION
 
     Bionutrics, Inc. ("Bionutrics" or the "Company"), is a biopharmaceutical
company founded to discover and develop novel, biologically active compounds
from natural sources. The Company's strategic focus is to promote its discovered
active compounds initially as proprietary ingredients for functional nutrition,
that is, dietary supplements and functional foods, and subsequently to develop
these compounds as ethical drug candidates. Bionutrics sources these active
compounds from food commodity processing by-product streams. These sources are
available in large quantities and contain potentially high value nutritional
ingredients. Bionutrics has developed specific capabilities in engineering of
processing technologies for the separation of active ingredients from natural
sources. This technology provides Bionutrics the advantage of access to
proprietary active ingredients at relatively low cost. The launch of functional
nutrition ingredients is expected to allow the Company to generate early revenue
and reduce the need to raise new capital while it pursues the development and
regulatory approval of drug candidates. The Company intends to execute its plan
through strategic manufacturing and marketing partnerships.
 
     The specific combination of composition discovery, clinical research,
process engineering, equipment design, and consumer marketing research skills
positions Bionutrics to leverage these competencies into partnerships with
larger companies and exploit raw material sources and market opportunities. To
this end, in 1998 the Company entered into strategic partnerships with Novartis
Nutrition to explore functional food market opportunities and with ABF to
manufacture and supply the Company with rice milling by-products. The Company
intends to extend this business model to other food commodity processing
by-product streams where its core competency and strategic partners provide
product access, processing and marketing advantages.
 
     The Company's three primary subsidiaries are: LipoGenics, Inc.
("LipoGenics"), InCon Technologies Inc. ("InCon"), and Bionutrics Health
Products, Inc. ("Health Products"). LipoGenics serves as the product research
arm of the Company with a focus on the discovery and development of active
compounds for both drugs and functional nutrition. InCon, acquired by the
Company in October 1997, provides engineering and design for compound recovery
systems and ingredient processing. Health Products is the market research and
product positioning company charged to deliver new functional nutrition
ingredients to marketing partners. In addition, the Company has three inactive
subsidiaries, InCon International, Ltd., Nutrition Technology Corporation, and
Cosmedics, Inc.
 
     The Company has developed its first functional nutrition product,
Clearesterol(TM), a patented all-natural ingredient for cardiovascular health
extracted from rice bran oil. Clearesterol(TM) belongs to a new class of vitamin
E compounds called tocotrienols. Clearesterol(TM) is the active ingredient in
evolvE(R), the Company's first dietary supplement. The Company intends to
develop other functional nutrition products utilizing its core competency and
patent protected positions to market these applications through its marketing
partners.
 
     Bionutrics was incorporated in Nevada in 1990. All its subsidiaries are
organized in Delaware except InCon International, which is organized in the
British Virgin Islands, and Nutrition Technology Corporation, which is organized
in Nevada. References herein to Bionutrics or the Company are to the parent
corporation and its subsidiaries except where otherwise indicated. The Company
maintains its principal offices at 2425 East Camelback Road, Suite 650, Phoenix;
its telephone number is (602) 508-0112.
 
STRATEGY
 
     The Company's goal is to become a recognized leader in the provision of
medicines and other health products based on natural, biologically active
compounds. To accomplish this goal the Company intends to exploit and build on
its present core competency, that is, the combination of composition discovery,
clinical
 
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research, process engineering, equipment design and consumer research skills, to
deliver new products to the market. To achieve its goal the Company intends to
employ the following strategies:
 
     - Target raw material sources for new compounds from food commodity
       processing by-products. Commodity food processing facilities worldwide
       produce vast quantities of potentially highly valuable by-product streams
       that contain both active micronutrient compounds and macronutrient
       commodities. Certain of these low cost by-products can be processed with
       the Company's proprietary technology to render functional nutrition
       ingredients and ethical drug candidates.
 
     - Execute this strategy through the marriage of global food processing and
       marketing partners. Bionutrics intends to leverage its core competency by
       partnering with companies possessing key resources including capital,
       by-product access, marketing infrastructure and a compatible technical
       base of operations.
 
     - Focus initially on the launch of functional nutrition ingredients to
       generate early revenue, reduce risk and limit the need for new
       capital.  Research of biologically active compounds is expected to result
       in the development of additional products appropriate for multiple
       applications. Ingredients for dietary supplements with nutritional
       support claims can be brought to market in the United States without the
       costly and time-consuming regulatory approval process required for drugs.
       As a consequence, the Company has the opportunity to develop and market
       biologically active products within the rules regulating dietary
       supplements, while drug and disease claim products are being developed
       and submitted for regulatory approval. LipoGenics will pursue drug and
       functional food applications, while Health Products will market dietary
       supplement applications through marketing partners.
 
     - Obtain regulatory approval for and market acceptance of ethical and
       over-the-counter drugs.  LipoGenics is expected with strategic partners
       to be identified to conduct research and development of proprietary
       pharmaceuticals -- both ethical and over-the-counter -- with the
       objective of seeking and obtaining regulatory approval and commercial
       acceptance for cardiovascular and other health-related products under
       consideration. LipoGenics expects to file its first investigational new
       drug (IND) application in fiscal 1999. FDA approvals and clinical studies
       along with marketing efforts for approved drug products will be carried
       out with strategic joint venture partners to be identified.
 
STRATEGIC ALLIANCES WITH NOVARTIS NUTRITION AND ABF
 
     To best utilize its core competency and leverage and exploit its
proprietary science and related patents, Bionutrics entered into strategic
partnerships with Novartis Nutrition and ABF North America ("ABF") in 1998.
Novartis Nutrition and ABF's subsidiary AC Humko have each made a significant
capital investment in the Company. Bionutrics intends to pursue the expansion of
these and to pursue additional partnerships as it attempts to develop its
business model and grow the Company.
 
  Novartis Alliance
 
     In February 1998, Bionutrics and Novartis Nutrition entered into an
alliance to test the feasibility of using Bionutrics's proprietary
Clearesterol(TM) as a functional food ingredient. Novartis Nutrition acquired
exclusive worldwide rights to evaluate the Company's Clearesterol(TM) complex
for potential application as a functional food ingredient. The evaluation right
was acquired as part of a $3 million stock investment in Bionutrics. Novartis
Nutrition is a division of Novartis AG, Bern, Switzerland, a world leader in
life sciences with core businesses in healthcare, agribusiness and nutrition.
Novartis Group sales for 1997 were $21.6 billion of which $4.1 billion were
achieved in the nutrition sector. Novartis AG research in 1997 accounted for
$2.1 billion.
 
     Evaluation by Novartis of Clearesterol(TM) is ongoing. Future additional
funding from Novartis will depend on an assessment by Novartis of the market
potential of Clearesterol(TM) or other potential Bionutrics's functional
nutrition products.
 
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  ABF Alliance
 
     In 1998, Bionutrics and ABF entered into an alliance to produce and market
certain rice bran based food and functional nutrition products. AC Humko
acquired for $2 million Bionutrics's rice bran processing technology for use in
North America. AC Humko is the former edible oil processing division of Kraft
Foods and today is a subsidiary of ABF North America, the U.S. subsidiary of
Associated British Foods Plc, with 1997 revenues of $8.5 billion. The technology
acquisition was part of a contemporaneous $4 million stock investment in
Bionutrics and a subsequent purchase for approximately $2.5 million of certain
oil processing assets from Bionutrics subsidiary Nutrition Technology
Corporation plant in West Monroe, Louisiana, which closed on October 1, 1998.
Although this transaction related specifically to the exploitation of rice bran
and derivative products, Bionutrics and ABF are exploring additional food
processing by-product streams for potential future joint development efforts.
 
     The technology transfer of the rice bran transaction gives AC Humko the
exclusive right to use and practice Bionutrics's proprietary rice bran
processing technology in North America, with Bionutrics retaining the right to
use and practice the technology worldwide other than in North America.
Bionutrics retains under the AC Humko agreement the right to use and practice
certain related technology within North America, but only in its reserved field
of use. The Bionutrics reserved field of use is comprised of all use and
practice of the technology (a) within North America for composition of matter,
methods for treating or preventing disease and all processes not included in the
AC Humko field of use for North America and (b) for any purpose worldwide other
than in North America.
 
     The AC Humko assigned field of use refers to the processing in North
America of rice, rice bran, rice bran protein, rice bran oil and other rice bran
processing, but excludes processing steps subsequent to oil refining. Bionutrics
has also assigned to AC Humko its intellectual property relating to
stabilization developed, conceived or reduced to practice by it during the
ten-year period following the agreement. For intellectual property within AC
Humko's field of use other than stabilization technology, it has an option to
obtain Bionutrics's intellectual property developed, conceived or reduced to
practice by it during the ten-year period following the agreement on terms to be
agreed by Bionutrics and AC Humko. As with the initial transfer, such
subsequently transferred intellectual property would be restricted to use and
practice by AC Humko in North America solely with respect to its assigned field
of use.
 
     The technology agreement term is for the life of the covered patents
currently or hereafter acquired for use by AC Humko. During the term of the
agreement Bionutrics has agreed not to control or participate in any business
competitive with the business practiced by AC Humko pursuant to the agreement.
For its part, AC Humko has agreed not to control or participate in any business
that markets or sells Clearesterol(TM) in North America.
 
     As part of the asset purchase agreement, Bionutrics acquired a perpetual
profit-sharing interest in AC Humko's rice bran business. The profit
participation would range from 50% of AC Humko's 1999 earnings (subject to no
earnings hurdle) before interest, taxes, depreciation and amortization (EBITDA)
from the commercialization, manufacturing, sale and distribution of rice bran
derivative products, co-products and by-products, with reducing participation to
Bionutrics and increasing earnings hurdles to the point where Bionutrics would
receive 10% of such EBITDA over $3.15 million for 2003 and thereafter.
 
     As an additional part of the technology transfer, Bionutrics and AC Humko
entered into a supply agreement pursuant to which AC Humko will function as the
exclusive supplier to Bionutrics of its distillate products including distillate
streams from rice bran oil processing. AC Humko is required under the supply
agreement to supply the patented rice bran-derived Clearesterol(TM) ingredient
used in Bionutrics's evolvE(R) product. Bionutrics distillate products also
include all products produced, marketed or sold by or for Bionutrics to the
extent they include any tocotrienol or tocopherol if such products are produced
using certain technology of Bionutrics transferred pursuant to the technology
agreement. Bionutrics has agreed to purchase from AC Humko for 24 months its
output of rice bran oil distillate at a fixed price. AC Humko may upon nine
months' notice terminate its supply obligations with respect to
Clearesterol(TM), and is not required to maintain any level of output of other
distillate products.
 
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DIETARY SUPPLEMENTS AND FUNCTIONAL FOODS
 
  Industry Overview
 
     The Company competes within the health and natural food market in the
United States. This market increased from an estimated $11.5 billion in sales in
1996 to $14.8 billion in 1997, a growth rate of 29%. The growth of this market
is largely the result of the rapidly growing portion of the population over 40
years old, who are concerned with aging and disease, combined with favorable
consumer attitude shifts toward natural health care. Within the health and
natural food market, vitamin and nutritional supplement sales were $9.3 billion
in 1997. Recent estimates indicate that 54% of the U.S. population uses
nutritional supplements at least occasionally in some form. By 2001, retail
sales in this category alone are expected to exceed $12 billion. Nutritional
awareness and market size are also growing in other parts of the world.
Bionutrics intends to access these global opportunities for product sales of
both dietary supplements and functional foods, in each case through strategic
partners.
 
     The growth of sales of vitamins and nutritional supplements has resulted
largely from recent studies indicating a correlation between the regular
consumption of selected vitamins and nutritional supplements and reduced
incidences of conditions such as cancer, heart disease and osteoporosis. Within
the vitamin and nutritional supplement category, antioxidants remain the growth
leader. One antioxidant, vitamin E, has shown particularly strong growth,
resulting in estimated retail sales in excess of $700 million in mass market
sales alone in 1997. Dietary supplements, including both vitamins and
nutritional supplements, are consumed specifically to enhance bodily structure
or functions, such as thinking or athletic performance or cholesterol reduction.
Under current law a dietary supplement may not claim to prevent, treat or cure a
disease (see below under "Government Regulation"), which restricts the manner in
which it may be marketed and the claims that can lawfully be made.
 
     Functional foods began with a National Cancer Institute initiative to find
ways of supplementing foods to enhance their cancer fighting potential.
Functional foods now include numerous specialized foods fortified with
additional nutrients including dietary supplements.
 
  Tocotrienols
 
     Tocotrienol vitamin E -- as opposed to the standard tocopherol vitamin
E -- and its use form a portion of the basis for the Company's proprietary
technology and patent protection.
 
     Standard vitamin E (a-tocopherol) was discovered in 1922 and identified as
essential for normal spermatogenesis. Since then numerous physiologic
associations have been identified with vitamin E deficiency, such as muscular
dystrophy, pulmonary degeneration, nephritis and liver necrosis. Vitamin E is
the general term used for eight naturally-occurring, essential fat-soluble
nutrients. The series is composed of four compounds (a-, b-, g-, d-tocopherol)
with a tocopherol structure bearing a saturated phytyl C(16) side chain and four
compounds (a-, b-, g-, d-tocotrienol) with a tocotrienol structure having an
unsaturated phytyl C(16) side chain bearing three double bonds. All tocols, to
varying degrees, are antioxidants. Many, but not all tocotrienols, have been
shown to lower cholesterol. Tocopherols have not been shown to exhibit this
effect.
 
     The Wisconsin Alumni Research Foundation, University of Wisconsin, Madison,
Wisconsin, led research that demonstrated the cholesterol-lowering capability of
a-tocotrienol. A patent was issued in 1986 to the Foundation for the use of
a-tocotrienol in lowering cholesterol and is now owned by LipoGenics. LipoGenics
acquired this patent in 1995. Subsequent work performed with animal models in
support of LipoGenics's own 1997 patent (see "Patents and Trademarks") has shown
several tocotrienols to be of varying degrees of effectiveness in reducing the
activity of the key enzyme in cholesterol synthesis. The tocotrienol rich
fraction (TRF(25)(TM)) comprising Bionutrics's Clearesterol(TM) has been shown
in these same studies to be effective in eliciting a reduction of serum
cholesterol levels. The tocotrienol and tocotrienol-like compounds in
TRF(25)(TM) are found in rice bran oil. TRF(25)(TM) is extracted from rice bran
oil by a proprietary process for which Bionutrics has submitted a patent
application.
 
     Initial research with TRF(25)(TM) was conducted on the modification of
blood lipid chemistry, including lowering serum cholesterol, and resulted in
identification of the proprietary compounds that demonstrate
 
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significant blood hypocholesterolemic (cholesterol-lowering) efficacy. A variety
of industry and academic studies have shown a correlation between a decrease in
blood serum cholesterol levels and good cardiovascular health. A
physician-controlled and independently-administered human trial with a reduced
fat diet has demonstrated the effectiveness of TRF(25)(TM).
 
     Tocol antioxidants (including vitamin-E and the Clearesterol(TM)
ingredient) in blood appear to reduce damage to blood vessel wall cells caused
by oxidizing or "free radical" agents. Research indicates that the
Clearesterol(TM) constituents are a far more effective antioxidant than standard
vitamin-E (a-tocopherol) and, unlike the antioxidants found in standard vitamin
E or beta-carotene, the Clearesterol(TM) ingredient helps to reduce blood
cholesterol levels. The significance of Clearesterol(TM) with respect to
cardiovascular health has been demonstrated in clinical trials that show
tocotrienols may promote normal cardiovascular health three ways by helping to
lower cholesterol levels, providing cardiovascular antioxidant protection and
promoting normal circulation. For these reasons, the Company believes the
Clearesterol(TM) ingredient represents an important advancement in dietary
supplement technology that promotes cardiovascular health and that also
significantly outperforms vitamin E as an antioxidant.
 
     Clearesterol(TM) is an all-natural complex extracted from rice bran oil
through a proprietary (patent pending) processing method. The rice bran is
converted to rice bran oil and through molecular distillation the oil is
converted into Clearesterol(TM) and encapsulated in a soft gel. The proprietary
process involves stabilization of the rice bran and selective extraction and
concentration of the rice bran oil.
 
     The Company's experience in extracting rice bran is that the observed
composition of its extract is dependent upon the rice cultivar and processing
methods employed. Selection of specific cultivars and methods is determined by
practical, efficiency and cost considerations. The Clearesterol(TM) product
presently being produced and sold by the Company is composed of various isomers
or forms of tocotrienols, plant sterols and other naturally occurring compounds
extracted from the bran of specific rice cultivars selected by the Company
according to the considerations noted above, and it may contain little or none
of a particular tocotrienol isomer previously described by the Company as P(25).
The Company believes the functionality of its current Clearesterol(TM) product
and the associated claims -- may help lower cholesterol, is a powerful
antioxidant and promotes normal circulation as a part of an overall low fat and
low cholesterol diet -- are, however, accurate based on scientific and clinical
research. The Company further believes Clearesterol(TM) has proprietary
protections, including protection for the specific claim of lowering
cholesterol. Because of this noted variation in composition with reference to
the P(25) isomer, the Company is adjusting its marketing to eliminate such
specific references. The Company may, in the future, modify the composition of
Clearesterol(TM) for considerations noted above or because of a desire to change
or improve its functionality or based upon findings of new relevant scientific
and clinical research. Accordingly, the Company would further adjust its
marketing to accurately reflect the changed product in functionality and
composition and would also undertake to fully comply with all regulatory
requirements including notification of appropriate regulatory authorities as
required by law.
 
  Product Development
 
     The Company intends to develop proprietary ingredients for further
functional nutrition products. These ingredients may include tocotrienols or
other compounds that can be marketed with statements of nutritional support
authorized by the 1994 DSHEA legislation (see below under "Government
Regulation"). The intent of the ingredients development program will be to
generate future proprietary products with a point-of-difference and wide
marketability. Such products would reflect the Company's business model of
focusing on new ingredients that exploit its core competency. This business
model contemplates strategic partner alliances (see above under "Strategic
Alliances with Novartis Nutrition and ABF").
 
  Marketing Plan
 
     The Company intends to market its ingredients for functional nutrition
worldwide via marketing agreements with strategic partners. This design is
intended to allow the Company to invest its resources in
 
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product development and rely on its partners to address the advertising, public
relations and other promotional costs for their respective markets.
 
     Health Products, according to this strategy, will promote sales of the
Clearesterol(TM) ingredient through marketing partners. The Company has applied
for trademarks throughout the world for evolvE(R), the Company's first dietary
supplement, and the Clearesterol(TM) ingredient in countries significant to its
marketing plan. The evolvE(R) brand name was registered as a U.S. trademark on
October 21, 1997. The Company intends to acquire trademarks on all its products.
The trademarks will be used to identify the Company's proprietary tocotrienol
complex and other ingredients, and build brand recognition for each. Marketing
efforts will initially focus on the United States. Health Products commenced its
marketing and sales of evolvE(R) in May 1997. It does not have a significant
share of the dietary supplement market for hypocholesterolemic or antioxident
applications.
 
     The Company believes that the end users of its products are and will
continue to be principally consumers concerned about nutrition and health.
Individuals with higher than normal cholesterol, but without disease conditions,
or who seek antioxidant protection or who otherwise wish to maintain
cardiovascular health, are the prime marketing target. It is estimated that over
58 million people in the United States suffer from cholesterol levels higher
than normal or the level recommended for good cardiovascular health, but below
the hypercholesterolemic level where physician attention and drug intervention
may be indicated.
 
     The primary channels of distribution in the dietary supplements industry
are (a) mass merchandise retailers, which include drug stores, supermarkets, and
mass merchandisers, (b) health food stores, (c) direct sales organizations, and
(d) mail order. evolvE(TM) is sold in over 36,000 mass merchandise retailers and
health food stores. Health Products intends to expand the sale of dietary
supplement products through multi-level and internet marketing companies.
 
  Competition
 
     The dietary supplement market has witnessed 20% annual growth for a number
of years and had been led by the health food stores. In recent years the mass
merchandising retailers have moved ahead of health food stores in market share
and rate of growth. The market has witnessed the arrival of pharmaceutical
consumer product marketing companies introducing full lines of dietary
supplements. These companies include American Home Products (Centrum), Bayer
(One-A-Day) and Warner-Lambert (Quanterra); Smith Kline Beecham is expected to
introduce a line shortly. This evolution of the market will place great strain
on traditional dietary supplement marketing companies such as Rexall Sundown,
Weider Nutrition and Twinlab Corporation to create new products and maintain
market share.
 
     Bionutrics believes its best strategy is to develop proprietary branded
ingredients and to market through national marketing companies. This will allow
the Company to focus its resources on its strengths and transfer the cost and
risks of building retail market share to the large, cash-strong marketing
companies.
 
     The Company believes that its first tocotrienol product evolvE(TM) competes
with three other types of compounds: (1) standard vitamin E (a-tocopherol), (2)
other non-patented tocotrienols and (3) non-tocotrienol products claiming to
demonstrate benefits similar to or of the sort provided by the Company's
supplement.
 
     Standard tocopherol vitamin E is established in the market and has
accelerating sales. It is manufactured from both natural and chemically
synthesized sources. Several multi-billion dollar manufacturers, including
Hoffmann LaRoche, ADM, Henkel and BASF, market tocopherol vitamin E. The least
expensive forms of vitamin E tend to be synthetic and have a substantial price
advantage over the tocotrienol form of vitamin E (Clearesterol(TM)) used in the
Company's product. However, the Clearesterol(TM) ingredient has been shown to be
a far more powerful antioxidant than standard vitamin E. Moreover,
Clearesterol(TM) has also been shown to lower cholesterol, whereas standard
vitamin E does not. Informing the consumer of the evolvE(R) dietary supplement
difference, and the importance of that difference, is expected to directly
impact evolvE(R)'s potential success.
 
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     Introduction of other tocotrienol products by competitors has recently
occurred and further tocotrienol competitor products are expected. The Company
believes the evolvE(R) dietary supplement has advantages over these other
expected products. For example, two such competitors, Solgar and Tree of Life,
market a generic tocotrienol product with no statements of nutritional support
on the label.
 
     Other dietary supplement products including Cholestin (from red yeast
rice), deodorized garlic and recent hybrids such as One-A-Day(R)'s Cholesterol
Health, Celestial Seasonings Heart Health and Centrum herbal cholesten all have
customer overlap with the evolvE(R) dietary supplement. The Company believes
that these products do not have the same benefit profile of evolvE(R), which,
judging from product claims, is the only dietary supplement that helps maintain
cardiovascular health three ways. The Company intends to develop other
cholesterol technology with dietary supplement and functional food applications.
 
     With respect to competition for evolvE(R), hypocholesterolemic
(cholesterol-lowering) prescription drugs could switch to over-the-counter and
market to the hypercholersterolemic population. The Company cannot predict
whether or for how long past-generation hypocholesterolemic drugs will remain
available by prescription only. The Company believes that evolvE(R)'s natural,
more complete cardiovascular positioning should help to set it apart from
past-generation hypocholesterolemic drugs. The Company does not believe it
competes directly with current cholesterol-lowering drugs such as lovastatin
(Mevacor) and simvastatin (Zocor) by Merck & Co. as these products require a
prescription and do not provide antioxidant protection, which recent research
indicates may be more important than lowering cholesterol in maintaining
cardiovascular health. The Company believes that current prescription drugs are
considered to address hypercholesterolemia or what health care practitioners may
view as a disease state requiring drug intervention and medical care. The
Company believes that such drugs constitute a separate market and the evolvE(R)
dietary supplement will therefore not compete in this market.
 
DRUGS
 
     The Company's first drug candidates are intended to relate to compounds
that address the incidence of heart disease and stroke, the cause of
approximately one out of every two adult deaths. Cholesterol-lowering or
hypocholesterolemic drugs, in particular "statin" drugs, represent a
multi-billion dollar category. The Company does not intend to compete with the
successful statin hypocholesterolemic market, but to direct its technology to
other elements associated with good cardiovascular health. The Company intends
to develop drug candidates for diseases other than cardiovascular, and to this
end has applied for Federal Small Business Innovation Research grants.
 
     The Company intends to pursue FDA approvals and conduct clinical studies
for approval of portions of its technology as drugs. Because the pharmaceutical
market is highly competitive and requires extensive resources to enter, the
Company intends to pursue joint venture arrangements or strategic corporate
partnerships for this purpose. No arrangements have yet been entered into and no
assurance can be given that partners can be found or that terms acceptable to
the Company can be negotiated. The Company does not have any products that have
been submitted for regulatory approval. Its research is expected to focus on
compounds in the preclinical stage of development.
 
PROCESS ENGINEERING AND DESIGN
 
     A critical aspect of the core competency of the Company is the ability to
engineer and design equipment necessary to convert raw material sources into
value-added active compounds and nutritional products. This is important because
the nature of active compounds renders them difficult to process, isolate, and
recover. Producers of raw material by-product streams generally do not have this
requisite equipment. The Company believes that InCon's technology in combination
with the Company's compound discovery, clinical research and product market
capabilities give it distinct competitive advantages.
 
     InCon was acquired by Bionutrics in October 1997 to perform this process
development role for the Company. InCon has developed significant skill in
applying molecular distillation technology to engineering and designing
molecular separation equipment. Other methods of separation including dry
fractionation, chromatigraphic isolation, solvent extraction, membrane
separation and enzymatic fermentation are employed
                                        8
<PAGE>   10
 
in its designed systems. The two principal raw material sources that InCon has
exploited are rice bran and palm oil, both in the United States and South East
Asia.
 
     InCon operates a specialized development and chemical manufacturing
facility located in Batavia, Illinois, approximately 45 miles due west of
Chicago. The 30,000 square foot facility contains uniquely fabricated molecular
distillation and other molecular separation equipment.
 
     InCon operates one of the few facilities in the country that offers
contract manufacturing tolling services. It attracts a wide variety of customers
interested in purifying or concentrating their compounds without the normal
thermal degradation incurred with alternative methods. InCon provides molecular
separation services for Eastman Chemical, General Electric and Monsanto among
others. This tolling business generates revenues for the Company and helps
funding of development and marketing costs related to equipment design and
sales. InCon markets its engineering and design skills independently of the
Company's raw material sourcing and sells equipment to unrelated third parties
as part of oil processing plant design and construction oversight.
 
     InCon faces competition for its services from a number of companies as well
as from expanding in-house capabilities of several of its customers and
potential customers. However, the Company believes that InCon enjoys an
excellent reputation in the field, has long-standing relationships with its
customers and, particularly with the advantage of its state-of-the-art
equipment, believes it is well-positioned to retain and expand its customer
base.
 
PATENTS AND TRADEMARKS
 
     As of December 1998, Bionutrics has three issued U.S. patents and 11
pending U.S. patent applications (with numerous foreign counterparts) covering
novel tocotrienols and tocotrienol-like compounds, methods for their use,
compositions containing those compounds and production processes in the area of
tocotrienols. Notices of Allowance for two of the 11 pending U.S. patent
applications have recently been received (see below).
 
     Bionutrics's first U.S. patent, obtained through its R&D subsidiary
LipoGenics, Inc. (U.S. patent 5,591,772) issued in January 1997. This patent,
through composition of matter claims, secures protection for several novel
vitamin-E like compounds discovered by Bionutrics and through method and process
claims, protects methods for using and processes for producing those compounds.
The patent may also serve to protect the Clearesterol(TM) ingredient contained
in Bionutrics's evolvE(R) brand dietary supplement. A second U.S. patent issued
in October 1998 (U.S. patent 5,821,264) with claims that parallel those of the
January 1997 patent but refer to a broader and more generic class of compounds.
In December 1998, Bionutrics received Notices of Allowance in two pending U.S.
patent applications: one directed to tocotrienol/tocopherol production processes
and the other directed to the use of tocotrienols to treat and prevent cancer.
These patents are expected to issue in the first half of fiscal year 1999.
Bionutrics also obtained U.S. trademark protection for the evolvE(R) brand name
and associated logo in fiscal year 1997. U.S. and foreign trademark applications
are currently pending for the Clearesterol(TM) trademark and related logo.
 
     Bionutrics is actively pursuing additional patent protection for
compositions, processes and methods that lend themselves to new products being
developed by the Company. In fiscal year 1998, Bionutrics filed a number of new
and continuing patent applications that refer to novel combinations of
tocotrienols with other substances, as well as novel methods for treating
diseases using tocotrienols. These new patent filings focus on the areas of
cardiovascular diseases, inflammation, diabetes, cancer, osteoporosis and benign
prostatic hyperplasia. Additional patent filings are planned in fiscal year 1999
that focus on other novel tocotrienol combinations and different disease
targets.
 
     Bionutrics is also active in acquiring additional patents and other
intellectual property to augment its patent holdings. In late 1995, Bionutrics
acquired a U.S. patent from the Wisconsin Alumni Research Foundation (U.S.
patent 4,603,142) covering the use of a-tocotrienol for lowering cholesterol.
This patent serves to protect Bionutrics's dietary supplement, evolvE(R), which
contains a significant amount of a-tocotrienol. In 1997, Bionutrics acquired a
U.S. patent from Dr. Tung-Ching Lee (U.S. patent 5,047,254)
 
                                        9
<PAGE>   11
 
covering a process for recovering edible oil from rice bran. This patent has
since been assigned to AC Humko as part of a strategic alliance formed in 1998
between Bionutrics and ABF (see above under "Strategic Alliances with Novartis
Nutrition and ABF"). In addition, Bionutrics executed option agreements in
October 1998 (which expire in February 1999 unless an extension is negotiated)
to acquire rights in certain proprietary technology owned by Lipoprotein
Technologies, Inc., Lipoprotein Diagnostics, Inc. and Hauser-Kuhrts, Inc.,
located in California. This technology relates to three main areas: (1)
niacin/aspirin compositions for lowering cholesterol, (2) niacin/fiber
compositions having cardiovascular applications and (3) oxidative stress kits
that can be used to measure the positive effects of dietary antioxidants, as
well as the negative impact of environmental factors (such as smoking) and
disease states (such as cardiovascular disorders and Alzheimer's disease).
Bionutrics envisions numerous opportunities for commercializing these
technologies independently, as well as integrating them with Bionutrics's
existing proprietary technology. No assurance however can be given that such
options will be exercised or that the Company will determine it is in its best
interest to acquire such technology. Negotiations are ongoing for acquisition of
rights in several additional patents relating to technology of interest to the
Company.
 
     Bionutrics formed a strategic alliance with ABF in 1998. As a part of the
August 1998 agreement, Bionutrics transferred certain rights in Bionutrics's
rice bran processing technology to AC Humko. Most notably, Bionutrics assigned
to AC Humko its rights in U.S. patent 5,047,254 and in the process claims of
future Bionutrics patents in North America as they pertain to rice bran. All
rights in product claims, product-by-process claims and method claims that may
issue from those patent applications (as well as all rights outside the U.S.,
Canada and Mexico) will continue to belong exclusively to Bionutrics.
 
GOVERNMENT REGULATION
 
  Dietary Supplements
 
     The Federal Food and Drug Administration ("FDA") is the most active
regulatory authority exercising jurisdiction over vitamins, minerals and other
dietary supplements. It regulates the Company's products under the Food, Drug
and Cosmetic Act ("FDCA") and regulations promulgated by FDA to implement this
statute. In 1976, FDA's ability to regulate the composition of dietary
supplements was restricted in several material respects by the Proxmire
Amendment to the FDCA. Under this amendment, FDA is precluded from establishing
maximum limits on the potency of vitamins, minerals and other dietary
supplements, from limiting the combination or number of any vitamins, minerals
or other food ingredients in dietary supplements and from classifying a vitamin,
mineral or combination of vitamins and minerals as a drug solely because of its
potency. However, the Proxmire Amendment did not affect FDA's authority to
determine that a vitamin, mineral or other dietary supplement is a new drug on
the basis of disease or drug claims made in the product's labeling. Such a
determination would require deletion of such claims, or the Company's submission
and FDA's approval of a new drug application, which entails costly and
time-consuming clinical studies over successive phases.
 
     In 1990, FDA's authority over dietary supplement labeling was expanded in
several respects by the Nutrition Labeling and Education Act ("NLEA"). This
statute amended the FDCA by establishing a requirement for the nutrition
labeling of most foods including dietary supplements. In addition, the NLEA
prohibits the use of any health claim (as opposed to a statement of nutritional
support; see below) in dietary supplement labeling unless the claim is supported
by significant scientific agreement and is pre-approved by the FDA. Interested
companies may petition the FDA for the approval of health claims. To date, the
FDA has approved health claims for dietary supplements seldomly, including in
connection with the use of calcium for prevention of osteoporosis and the use of
folic acid for prevention of neural tube defects and, it is understood,
applications therefor have been few. NLEA also allows nutrient content claims
characterizing the level of a particular nutrient in a dietary supplement (e.g.,
"high in," "low in," "source of") if they are in compliance with definitions
issued by FDA. Significantly, NLEA precludes any state from mandating
nutritional labeling, nutrient content claim or health claim requirements that
differ from those established under NLEA, thereby eliminating the risk that the
Company's products might be subject to inconsistent labeling requirements.
 
     In October 1994, the FDCA was amended by enactment of the Dietary
Supplement and Health Education Act ("DSHEA"), which introduced a new statutory
framework governing the composition and
                                       10
<PAGE>   12
 
labeling of dietary supplements. In the Company's judgment, DSHEA is in some
parts favorable to the dietary supplement industry while imposing additional
burdens in other parts. With respect to composition, DSHEA creates a new class
of "dietary supplements," dietary ingredients consisting of vitamins, minerals,
herbs, amino acids and other dietary substances for human use to supplement the
diet, as well as concentrates, metabolites, extracts or combinations of such
dietary ingredients.
 
     As for labeling, DSHEA permits "statements of nutritional support," also
known as structure/function claims, for dietary supplements without FDA
pre-approval. Such statements may describe how particular dietary ingredients
affect the structure, function or general well-being of the body, or the
mechanism of action by which a dietary ingredient may affect body structure,
function or well-being, but may not state that a dietary supplement will
diagnose, mitigate, treat, cure or prevent a disease. Nor can a claim be made
that would be interpreted as a health claim under NLEA, that is, generally a
claim that the dietary supplement will lower the risk of a disease. A company
making a statement of nutritional support must possess adequate substantiating
scientific evidence for the statement, disclose on the label that FDA has not
reviewed the statement and that the product is not intended to mitigate, treat,
cure or prevent disease, and notify FDA of the statement within 30 days after
its initial use. There can be no assurance that FDA will, if it makes a demand
therefor, accept as adequate in support of the Company's product
structure/function claims substantiating scientific evidence possessed by the
Company. There can be no assurance that FDA will not determine that a given
statement of nutritional support the Company decides to make is a disease claim
rather than an acceptable nutritional support statement relating to body
function or structure. Such a determination would require (a) deletion of the
disease claim or (b) if it is to be used at all, submission by the Company and
the approval by FDA of a new drug application (which would entail costly and
time-consuming clinical studies) or (c) revision from a disease claim to a
health claim, which would, as noted above, require demonstration of significant
scientific agreement and prior FDA approval or (d) revision to a structure/
function claim. There can be no assurance that FDA will accept as adequate for a
health claim such substantiation as has been amassed by the Company for
nutritional support (structure/function) claims and thus, the Company, if the
health claim is to be used at all, may be required to document or await
significant scientific agreement on the claim's basis.
 
     The Company's chief structure/function claims for evolvE(R) are that it
works to help lower cholesterol when taken as part of an overall program
including a low-fat, low-cholesterol diet and exercise, acts as a powerful
antioxidant and promotes normal circulation.
 
     DSHEA allows dissemination of "third party literature," such as reprints of
scientific articles that link particular dietary ingredients with health
benefits. Third party literature may be used in connection with the sale of
dietary supplements to consumers under certain conditions. Such a publication
may be so distributed if it is not false or misleading, if no particular
manufacturer or brand of dietary supplement is mentioned, if the publication is
presented in such manner so as to offer a balanced view of available scientific
information on the subject matter, if it is physically separated from products
when used in a retail establishment and if it does not have any other
information appended to it. There can no assurance, however, that all pieces of
third party literature that may be disseminated in connection with the Company's
products will be determined by FDA to satisfy each of these requirements, and
any such failure to comply could subject the product involved to regulation as a
new drug.
 
     On December 24, 1996, the Company filed its notification letter for the
evolvE(R) dietary supplement with FDA with respect to the product's statements
of nutritional support. Although DSHEA only requires companies to notify FDA,
the agency has adopted an unofficial policy of responding with a letter, which
has become known as a "courtesy letter," when it believes that there may be a
question with respect to any statement of nutritional support. On January 29,
1997, FDA responded with a courtesy letter raising questions concerning one of
Bionutrics's statements of nutritional support. In its March 10, 1998,
notification to FDA, the Company announced labeling changes -- to add a
statement on the importance to cholesterol-lowering of a low-fat diet and
exercise -- in deference to FDA's courtesy letter, and although no further
courtesy letter has issued there is no assurance that FDA will be or remain
satisfied with the Company's revised claim.
 
                                       11
<PAGE>   13
 
     In September 1997, FDA published final regulations to implement certain
DSHEA labeling provisions, which become effective in March 1999. These new
regulations are being reviewed by the Company, and will require material changes
in the labeling of all dietary supplement products, including products sold by
the Company. DSHEA also requires that dietary supplements be prepared, packed
and held under conditions that meet the good manufacturing practice ("GMP")
regulations to be promulgated but not yet proposed by FDA with respect to
dietary supplements. Therefore, there can be no assurance that the Company's
manufacturing partner ABF's production facilities will meet all GMP regulations
when issued by FDA with respect to dietary supplements, and the Company may be
required to expend resources to take appropriate action to ensure compliance
with such regulations.
 
     On April 29, 1998, FDA proposed regulations to limit statements that may be
placed on product labels and labeling concerning the effect that a dietary
supplement has on the structure or function of the human body. If the proposals
are finalized in their present form, FDA would prohibit as disease claims
requiring agency pre-approval all cholesterol lowering statements such as those
which currently appear on the evolvE(R) label and in labeling. The Company, as
did numerous other affected parties and organizations, wrote to oppose such FDA
rules. Under its proposal, FDA would however permit without agency pre-approval
a statement such as "helps maintain a healthy cholesterol level," if the context
does not suggest treatment or prevention of a disease and that the substance
merely helps maintain normal function. The comment period has expired, and it is
not known when final regulations will issue, or their content.
 
     FTC, which exercises jurisdiction over the advertising of dietary
supplements, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees, agency cease and desist orders, injunctions and the payment of
fines by the companies involved. In addition, FTC has increased its scrutiny of
infomercials. There can be no assurance that FTC will not question the Company's
advertising in the future. FTC has been very active in enforcing its
requirements that companies possess adequate substantiation in their files for
claims in product advertising.
 
     The Company intends to market certain products pursuant to contracts with
customers who will distribute the products under their own or other trademarks.
Such customers are subject to the governmental regulations discussed in this
section in connection with their marketing, distribution and sale of such
products, and the Company will be subject to such regulations in connection with
the manufacture of such products. However, the Company's manufacturing
contractors are independent companies, and their labeling, marketing and
distribution of such products are beyond the Company's control except by
contract. Failure of these customers to comply with applicable laws or
regulations could have a material adverse effect on the Company. Governmental
regulations in foreign countries where the Company or a strategic partner may
determine to sell products may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations
generally will be the responsibility of the Company's customers in those
countries. Those customers are expected to be independent companies over which
the Company will have no control except by contract.
 
     FDA has broad authority to enforce the provisions of the laws and
regulations applicable to dietary supplements, including the power to seize
adulterated or misbranded products or unapproved new drugs, to request their
recall from the market, to enjoin their further manufacture or sale, to
publicize information about a hazardous product, to issue warning letters and to
institute criminal proceedings. The Company may be subject to additional laws or
regulations administered by FDA, FTC or other regulatory authorities, such as
the individual state attorneys general who have authority under individual state
consumer protection acts to impose injunctions within their states and fines.
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, may
have on its business. They could require the reformulation of certain products
to meet new standards, the recall or discontinuance of certain products not able
to be reformulated, imposition of additional recordkeeping requirements,
expanded documentation of the properties of certain products, expanded or
different labeling and additional scientific substantiation. Any of or all such
requirements could have a material adverse effect on the Company's results of
operations and financial condition.
                                       12
<PAGE>   14
 
  Food Additive/New Dietary Ingredient
 
     If the Company decides to market any new ingredient for use in conventional
foods or for a technical effect (e.g., as a colorant, preservative, etc.) in
dietary supplements, the ingredient may be subject to the FDA food additive
provisions. Such an ingredient must be shown to be generally recognized, among
experts qualified by scientific training and experience to evaluate its safety,
as having been adequately shown through scientific procedures to be safe under
the conditions of its intended use. This is known as generally recognized as
safe or "GRAS" status and can be accomplished by submitting what is known as a
GRAS affirmation to FDA.
 
     In the alternative, if the ingredient is not generally known among
scientists as set forth above, the Company may submit a food additive petition
to FDA setting forth how the ingredient is to be used in food and all scientific
data that establishes safety for such use. This can include costly and time
consuming clinical studies over successive phases.
 
     FDA can accept or reject the Company's GRAS affirmation or food additive
petition. There can be no assurance that FDA will accept as adequate the
scientific data presented with either the GRAS affirmation or as part of the
food additive petition. The Company can seek judicial review if it disagrees
with the FDA determination.
 
     For dietary ingredients in dietary supplements, under DSHEA, a "new dietary
ingredient" is a dietary ingredient that was not marketed in the United States
before October 15, 1994 and does not include any dietary ingredient marketed in
the United States before that date.
 
     DSHEA requires notification to be submitted to the FDA at least 75 days
before a company may introduce or deliver for introduction into interstate
commerce a dietary supplement that contains a new dietary ingredient that has
not been present in the food supply as an article used for food in a form in
which the food has not been chemically altered. Information that provides the
basis for concluding the ingredient is safe is also required by the statute to
be included in the notification.
 
     The FDA may not disclose the existence of, or the information contained in,
the new dietary ingredient notification for 90 days after the filing date of the
notification. After the 90th day, all information that is not trade secret or
otherwise confidential commercial information will be placed on public display.
 
     Failure of FDA to respond does not constitute a finding that the new
dietary ingredient (or the dietary supplement containing the new dietary
ingredient) is safe or is not adulterated. FDA has stated that the process is
intended to identify those new dietary ingredients that present a concern. With
respect to dietary supplements that contain a new dietary ingredient, if FDA
determines that there is inadequate information to provide reasonable assurance
that such new dietary ingredient does not present a significant or unreasonable
risk of harm, the FDA could initiate civil or criminal proceedings.
 
     With respect to its mission to promote newly discovered active compounds
for functional nutrition as ingredients in dietary supplements and functional
foods, the Company or its strategic partners will be subject to the foregoing
regulatory schemes.
 
  Drugs
 
     Products that are intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in humans are subject to extensive
governmental regulation. All such products must undergo extensive
characterization, and are subject to regulation for quality assurance,
toxicology and safety. Products containing such agents must undergo thorough
preclinical and clinical evaluations of performance as to safety and efficacy
under approved protocols.
 
     The Company intends to pursue regulatory approval for the pharmaceutical
and related uses of drug products. Such pharmaceutical products will be subject
to the regulatory approval processes for new drugs. To take a pharmaceutical
product from the discovery stage through research and preclinical development to
the point where the Company and its partners can make the necessary filings (to
FDA and governmental agencies outside the U.S.) to conduct human clinical trials
may take several years. Regulatory requirements for human
                                       13
<PAGE>   15
 
clinical trials are substantial, depend upon a variety of factors, vary by
country and will further add to the time necessary to determine whether a
product candidate can be approved for human use. The Company does not have any
pharmaceutical products that have commenced this trial process. There can be no
assurance that the Company will be able to demonstrate that its proposed drug
products are safe and will be efficacious under these regulatory procedures.
 
EMPLOYEES
 
     The Company currently employs 43 people, including three with consulting
agreements. Of the current employees and consultants, seven are involved in
marketing and sales at Health Products, 24 in operations at InCon, 10 in
corporate and general administration, and two in research and development at
LipoGenics.
 
EXECUTIVE OFFICERS
 
     The executive officers of Bionutrics are as follows:
 
<TABLE>
<CAPTION>
NAME                                              AGE                      POSITION
----                                              ---                      --------
<S>                                               <C>    <C>
Ronald H. Lane, Ph.D............................  54     Chairman of the Board, Chief Executive
                                                         Officer and President
George E. Duck, Jr..............................  41     Vice President of Finance, Secretary and
                                                         Treasurer
John R. Palmer..................................  56     Chairman and Chief Executive Officer, InCon
                                                         Technologies Inc. and InCon International,
                                                         Ltd.
Howard Schneider, Ph.D..........................  60     President, LipoGenics, Inc.
Stephen H. Friedman.............................  53     Executive Vice President, Marketing and
                                                         Sales, Bionutrics Health Products, Inc.
</TABLE>
 
     RONALD HOWARD LANE, PH.D., has served as Chairman of the Board, Chief
Executive Officer and President of the Company since December 1994 and its
predecessor, NutraGenics (Delaware), since April 1994 and served as Chief
Executive Officer and President of LipoGenics from July 1992 to October 1997.
Dr. Lane is responsible for directing Bionutrics's corporate development and
growth. He received a Ph.D. and post-doctorate NIH fellowship from the
University of Wisconsin (Madison) in Neurophysiology. Dr. Lane spearheaded
development of the technology at LipoGenics. He was employed previously with
Norcap Financial Corporation, The National Western Group, Inc. (an investment
company), and Taylor Pearson Corporation.
 
     GEORGE E. DUCK, JR., has served as Vice President, Finance, and Secretary
and Treasurer since October 1996 and has served as Vice President, Secretary and
Treasurer of LipoGenics since November 1996. Mr. Duck, who is a CPA, was Vice
President and Chief Financial Officer of Custom Foot Corporation from March 1996
to October 1996. He was Vice President and Chief Financial Officer of the Coca
Cola Bottling Company of New York, Inc., from March 1992 to March 1996 and its
Treasurer from 1986 to 1992. Previously he had been Controller for Joyce
Beverages, a 7-Up/Royal Crown Cola Bottler and Distributor, as well as Manager
of Accounting for Pepsico, Inc. Mr. Duck began his career at the firm of Coopers
& Lybrand upon graduation from Pace University.
 
     JOHN R. PALMER has served as Chairman and Chief Executive Officer of InCon
since March 1998 and as Chief Executive Officer and President from its
acquisition by Bionutrics in October 1997 until February 1998. Mr. Palmer was
Chief Executive Officer and an owner of InCon Technologies at the time of the
acquisition. Prior to organizing InCon Technologies in 1990 he was employed at
E.I. DuPont for 22 years in various technical and management jobs. Mr. Palmer
was graduated from Cornell University in 1966 with a masters degree in chemical
engineering and marketing.
 
     HOWARD SCHNEIDER, PH.D., has served as President of LipoGenics since
November 1997. Before joining LipoGenics, Dr. Schneider served from 1991 to 1997
as Senior Vice President, Technology at DynaGen, Inc., a Cambridge,
Massachusetts, firm that develops proprietary therapeutic and medical device
products. Prior experience includes positions as Senior Vice President,
Technology (and partner) at McCann Healthcare-
 
                                       14
<PAGE>   16
 
Bogart Delafield Ferrier, co-founder and President of Bioassay Systems Research
Corporation and research chemist at Merck Sharp and Dohme. Dr. Schneider has
authored over 60 scientific articles and holds several patents relating to
therapeutic uses of natural products. He earned his Ph.D. from the Department of
Pharmacology at Yale University School of Medicine and served as a National
Science Foundation Postdoctoral Fellow at Oxford University, Department of
Pharmacology.
 
     STEPHEN FRIEDMAN has served as Executive Vice President, Marketing and
Sales, of Bionutrics Health Products since November 1996. Mr. Friedman is a
graduate of Syracuse University and holds an MBA from Suffolk University in
Boston. He served as Vice President, Marketing and Sales Services, and Group
Vice President, Personal and Diagnostic Products, at Carter Wallace from 1977 to
1996 with responsibility for leading healthcare and health and beauty aid
products. Prior to Carter Wallace he held officer positions in consumer
marketing and sales at Lever Brothers.
 
SCIENTIFIC ADVISOR
 
     Dr. Winston A. Salser, a member of the Company's Board of Directors and a
Professor of Molecular Biology at the University of California, serves as
scientific advisor to the Company.
 
SPECIAL CONSIDERATIONS
 
     Limited Operating History; Accumulated Deficit.  The Company commenced
sales of its first product late in the second quarter of fiscal 1997. Additional
revenue sources have only recently been acquired or developed. Accordingly,
there is limited historical financial information about the Company upon which
to base an evaluation of the Company's performance or to make a decision
regarding an investment in shares of the Company's Common Stock. The Company has
generated an accumulated deficit of approximately $26.7 million through its
fiscal year ended October 31, 1998. The Company's operations to date have
progressed from research and development activities to the marketing and sale of
its first product evolvE(R). There can be no assurance that sales of evolvE(R)
or such other products if any it may introduce will achieve significant levels
of market acceptance. As a result, the Company's business will be subject to all
the problems, expenses, delays and risks inherent in the establishment of a new
business enterprise including limited capital, delays in product development,
possible cost overruns due to price increases in raw product and unforeseen
difficulties in its manufacturing processes, uncertain market acceptance and the
absence of an operating history. Therefore, there can be no assurance that the
Company will be able to achieve or maintain profitable operations. No assurance
can be given that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated.
 
     Need for Additional Capital.  To become and remain competitive, the Company
will be required to make significant investments in research and development on
an ongoing basis. The Company from time to time, including in the near term,
will be required to seek additional equity or debt financing to provide the
capital required to maintain or expand the Company's marketing and production
capabilities. This may require the Company to sell additional common stock or
preferred stock or issue warrants for common stock to obtain the capital. The
timing and amount of any such capital requirements cannot be predicted at this
time except that the Company will require additional financing in the second
quarter of fiscal 1999. There can be no assurance that any such financing will
be available on acceptable terms. If such financing is not available on
satisfactory terms, the Company may be unable to operate at its present level or
develop and expand its business, develop new products or develop new markets at
the rate desired and its operating results may be adversely affected. Debt
financing increases expenses and must be repaid regardless of operating results.
Equity financing could result in additional dilution to existing shareholders.
 
     Market Risks of a New Business.  The Company has formulated its business
plans and strategies based on certain assumptions regarding opportunities in the
ethical drug market based on the Company's technology, the depth and nature of
edible oil and derivative products markets, the size of the dietary supplement
market, the Company's anticipated share of these markets and the estimated price
and acceptance of the Company's projected products. There can be no assurance
that the Company's assessments regarding these or a variety of other factors
will prove to be correct. Any future success that the Company might enjoy will
depend upon
 
                                       15
<PAGE>   17
 
many factors including factors that may be beyond the control of the Company or
that cannot be predicted at this time. Factors beyond the Company's control may
include changes in the pharmaceutical, edible oil (and processing derivatives)
and dietary supplement industry, governmental regulation, increased levels of
competition including the entry of additional competitors and increased success
by existing competitors, changes in general economic conditions, increases in
operating costs including costs of production, supplies, personnel, equipment
and reduced margins caused by competitive pressures and other factors.
 
     Competition.  Competition in the dietary supplement industry is vigorous
with a large number of businesses present including the recent introduction of
health supplement lines such as Bayer, American Home Products, Warner-Lambert,
and Celestial Seasonings. Competition is based principally upon price, quality
of products, customer service and marketing support. In addition, other
companies have recently announced tocotrienol supplement products, including
Eastman Chemical Company, whose new product is also derived from rice bran oil
and claims antioxidant properties. The Company markets to mass merchandise and
high volume health-food retailers and faces competition from vitamin and other
health related products that compete for the same shelf space and in some cases
for the same customers. Many of the competitors have established reputations for
successfully developing and marketing dietary supplement products. Many of such
companies have greater financial, managerial and technical resources than the
Company, which may put it at a competitive disadvantage. For example, such
channels of distribution also often require the expenditure of significant
up-front capital to capture shelf space, which may put the Company at a
competitive disadvantage to better capitalized firms. In addition, the Company's
retail customers are not generally bound to purchase products from the Company
for any significant length of time. Although the Company has entered into
agreements with certain of its retail customers, these agreements can generally
be canceled on short notice without cause and with minimal or no liability by
such customers and include the right on behalf of the retail customers to return
unsold product. The loss of a large customer or a number of customers, or a
significant reduction in purchase volume by or financial difficulty of such
customers, for any reason, could have a material adverse effect on the Company.
Even though the Company intends to license its dietary supplement to marketing
partners and this would eliminate certain elements of risk, there is no
assurance that the Company will be successful in its licensing efforts or that
its potential marketing partners will be successful in marketing and selling the
Company's products. If the Company is not successful in competing in the dietary
supplement market, it may not be able to recognize its business objectives.
 
     Competition in the pharmaceutical area is intense and competitors have
substantially greater resources than the Company. The Company will be required
to obtain development and/or marketing partners to effectively enter the drug
market.
 
     InCon's current competition is primarily from specialized local and
regional processing facilities. However, many of its toll processing customers
have the capacity to perform toll processing and molecular separation in-house.
No assurance can be given that its customers will continue to outsource toll
processing to InCon, or that they will continue to utilize InCon's facility over
that of a local processor.
 
     Strategic Partnerships.  The Company has stated its intent to develop its
business model and build its business through strategic partnerships. There is
no assurance the Company will be able to successfully form or manage such
partnerships, and if not, the Company's ability to execute its business plan
will be at risk. If these partnerships do not succeed and therefore no further
capital is provided to the Company from these sources, there is no assurance
that the Company will be able to identify other sources of capital sufficient
for its needs in the time required to execute its business plan.
 
     The Company has formed an alliance with Novartis Nutrition to evaluate its
Clearesterol(TM) as a functional food ingredient. No assurance can be given that
Novartis will determine that Clearesterol(TM) or any other potential functional
nutrition product being developed by Bionutrics will meet its criteria for a
food ingredient or, even if it does, that Novartis will decide to continue the
partnership. Any future funding of capital by Novartis Nutrition to the Company
will depend upon this ongoing evaluation.
 
     The Company has formed an alliance with ABF to pursue the exploitation of
certain food processing by-product streams. As part of this alliance AC Humko is
considering the exploitation of rice bran derivative products. The rice bran,
rice bran oil and other derivative products business is highly competitive and
no
                                       16
<PAGE>   18
 
assurance can be given that AC Humko will succeed or produce sufficient profits
in subsequent years to reach the $3.15 million profit hurdle after 2002 at which
point the Company's profit participation drops to 10% for 2003 and thereafter,
or that AC Humko will determine to stay in the business even if profitable.
 
     Governmental Regulation.  The processing, formulation, packaging, labeling
and advertising of the Company's products are primarily subject to regulation by
FDA and FTC. In addition, individual state attorneys general have authority to
enforce individual state consumer protection acts within their own states.
Although Congress has recently recognized by enacting DSHEA the potential impact
of dietary supplements in promoting the health of U.S. citizens, there are a
number of new provisions not yet subject to judicial interpretation with respect
to FDA's regulation of dietary supplements and the ultimate effect of DSHEA
cannot be predicted. Further, because of the technical requirements imposed by
DSHEA, it may be difficult for any company manufacturing or marketing dietary
supplements to remain in strict compliance. FDA has recently promulgated
regulations effective in March 1999 in part to implement DSHEA and proposals
have been made to modify or change the provisions of DSHEA. It is impossible to
predict whether those proposed changes will become law or the full effect that
such regulations will have on the business and operations of the Company. The
regulations are still being reviewed by the Company. Among other changes they
will require material changes in the labeling of all dietary supplement
products, including products sold by the Company. In addition, on April 29,
1998, FDA proposed regulations to limit statements that may be placed on dietary
supplement labels and labeling. If the regulations are issued by FDA in their
present form, the Company will be required to significantly modify cholesterol
claims presently being made for the Company's evolvE(R) product. Finally, if the
Company decides to market any new ingredient for use in conventional foods or
for a technical effect (e.g., as a colorant, preservative, etc.) in dietary
supplements, the ingredient may be subject to FDA food additive provisions.
 
     Pending FDA Regulatory Action Against Competitive Product.  In May 1997,
FDA took regulatory action against a competitor of the Company with regard to
its cholesterol-lowering product introduced in November 1996. The pending action
involves the regulatory classification of a dietary supplement containing an
ingredient promoted as being the same as or similar to an ingredient contained
in a prescription drug product used to lower cholesterol, and raises issues that
do not affect the Bionutrics evolvE(R) product. However, the respondent
competitor also combined its claim to lower cholesterol with other claims that
suggest that cholesterol reduction will both reduce formation and facilitate
regression of plaque, which, according to FDA, are claims to mitigate or prevent
disease not permitted for a dietary supplement under DSHEA. While Bionutrics
does not make such claims and would not be bound by a regulatory determination
involving its competitor's product, nonetheless a negative determination on the
competition's labeling could have a bearing on "lowering cholesterol" claims in
general, and thereby have an adverse effect on the marketing programs currently
being used for the evolvE(R) product.
 
     Reliance on Limited Number of Products and Customers.  To date the
Company's only product is the evolvE(R) dietary supplement, containing a
patented tocotrienol vitamin E ingredient, Clearesterol(TM), derived from rice
bran. The dependence on one product increases risk since a decline in the market
demand for the Company's product or the products of other companies that may
utilize Clearesterol(TM) could have a significant adverse impact on the Company.
 
     One Fortune 500 company accounted for 72% of InCon's revenue related to its
core business of toll processing and molecular distillation for the 12 months
ended October 31, 1998. During fiscal 1999, that customer is projected to
account for approximately the same percentage of InCon's business. The loss or
reduction of business from this customer could have a material adverse effect on
InCon's cash flow and thereby its contribution to the consolidated results of
the Company. The Company's participation in AC Humko's efforts to market
derivative products is just beginning and no assurance can be given that AC
Humko can capture a share of the market for such products. A limited number of
customers could adversely affect the Company's operations.
 
     Product Liability Claims.  As a marketer of dietary supplements that are
ingested by consumers, the Company may be subject to various product liability
claims, including, among others, that its products contain contaminants or
include inadequate instructions as to use or inadequate warnings concerning side
effects and
 
                                       17
<PAGE>   19
 
interactions with other substances. While no such claims have been made to date
and the Company maintains product liability insurance, there can be no assurance
that product liability claims and the resulting adverse publicity will not have
a material adverse effect on the Company.
 
     Dependence on Marketing Efforts.  The Company is dependent on its ability
to market directly or through marketing partners its products to large mass
merchandise and health food retailers and to other companies for use in their
products. The Company does not anticipate that long-term contractual
relationships will be entered into with any of its customers. The Company and
its marketing partners must increase the level of awareness of dietary
supplements in general and the Company's products in particular. If the Company
continues to market directly, it will be required to devote substantial
management and financial resources to a marketing and advertising effort and
there can be no assurance that funding therefor will be available at the level
required or that these efforts will be successful. The Company has stated its
intent to rely in the future on strategic partnerships with marketing companies
to market and sell its current and to-be-developed functional nutrition
products. There can be no assurance that the Company will be successful in
finalizing such strategic partnerships, or if finalized that the selected
strategic partner(s) will successfully market and sell the Company's products.
 
     Science and Technology.  The Company has invested nine years in research
and development to demonstrate the value of its technology and secure patents
and make patent applications. The Company has chosen to apply for and secure and
acquire by acquisition patent protection of strategic elements of this
technology. There is no assurance that the science upon which the technology is
based will not be refuted or otherwise drawn into question by further research
conducted by the Company or independent laboratories or its strategic partners.
 
     Effect of Unfavorable Publicity.  The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of dietary supplements. There can be no assurance that future
scientific research or publicity will not be unfavorable to the dietary
supplement market or any particular product, or inconsistent with earlier
favorable research or publicity. Future reports of research that are perceived
as less favorable or that question such earlier research could have a material
adverse effect on the Company. Because of the Company's dependence upon consumer
perceptions, adverse publicity associated with adverse effects resulting from
the consumption of the Company's products or any similar products distributed by
other companies could have a material adverse impact on the Company. Such
adverse publicity could arise even if the adverse effects associated with such
products resulted from consumers' failure to consume such products as directed.
In addition, the Company may not be able to counter the effects of negative
publicity concerning the efficacy of its products.
 
     Dependence on Management.  The Company is dependent on its management,
particularly Dr. Ronald Lane, a founder and the chief executive officer, for all
its business activities. The Company is dependent on its ability to attract,
retain and motivate additional qualified personnel. There are no long-term
employment or other agreements with any executive officer except for Messrs.
Friedman and Palmer. The loss of the services of Dr. Lane or other executive
officers and key employees could have a material adverse effect on the business
of the Company.
 
     Dependence on Suppliers and Manufacturers.  The Company has agreed to
acquire the Clearesterol(TM) ingredient from AC Humko. If AC Humko encounters
difficulties in obtaining on commercially reasonable terms quality rice bran for
use in its manufacturing process, the Company could experience production delays
or the inability to fulfill orders on a timely basis. Since the Company has
agreed to purchase Clearesterol(TM) from AC Humko on a cost-plus basis, any
material increase in projected costs of manufacture could materially affect the
Company's or any strategic marketing partner's ability to compete with evolvE(R)
or any other dietary supplement or functional food containing such ingredient.
The Company also relies on outside sources for evolvE(R) encapsulation. In the
event its contract manufacturers cannot meet the Company's manufacturing and
delivery requirements, the Company may suffer interruptions of delivery while it
arranges for alternative manufacturing sources. Access to replacement sources
could be delayed if the Company must first complete a review of the
manufacturer's quality control and capabilities.
 
                                       18
<PAGE>   20
 
     Risks Associated with International Markets.  The Company may experience
difficulty entering international markets due to greater regulatory barriers,
the necessity of adapting to new regulatory systems and problems related to
entering new markets with different cultural bases and political systems.
Operating in international markets exposes the Company to certain risks,
including, among other things: (i) changes in or interpretations of foreign
regulations that may limit the Company's ability to sell certain products or
repatriate profits to the United States; (ii) exposure to currency fluctuations;
(iii) the potential imposition of trade or foreign exchange restrictions or
increased tariffs; and (iv) political instability. If the Company expands into
international operations, these and other risks associated with international
operations are likely to be encountered.
 
     Patents, Licenses and Intellectual Property Claims.  The Company's success
depends in part on its ability to obtain patents, licenses and other
intellectual property rights covering its products. The Company's patent rights
are held by its subsidiary LipoGenics. There can be no assurance that the
Company's patents and patent applications are sufficiently comprehensive to
protect evolvE(R) or other Company products intended. The process of seeking
further patent protection can be long and expensive, and there can be no
assurance that all patents will issue from the eight currently pending or future
patent applications or that any of the patents when issued will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. While the Company believes the basis on which it has made
further patent applications correspond to the patent that has been issued for
composition and method of production and use and is reasonable given the
issuance of the latter patent, there can be no assurance that the patents for
which it has applied will be issued. The Company may be subject to or may be
required to initiate interference proceedings in the U.S. Patent and Trademark
Office. Such proceedings could demand significant financial and management
resources. The Company may receive communications alleging possible infringement
of patents or other intellectual property rights of others. The Company believes
that in most cases it could obtain necessary licenses or other rights on
commercially reasonable terms, but no assurance can be given on this point or
that litigation would not ensue or that damages for any past infringements would
not be assessed. Litigation, which could result in substantial cost to and
diversion of effort by the Company, may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claimed infringement of the rights of others. The failure to obtain necessary
licenses or other rights or litigation arising out of infringement claims could
have a material adverse effect on the Company.
 
     Thin Market; Possible Volatility of Stock Price.  There has been and may
continue to be, at least for the immediate future, a limited public market for
the Common Stock of the Company. Despite its listing on Nasdaq SmallCap in
November 1997, there can be no assurance that an active public market will be
developed or sustained for the Company's Common Stock. The stock markets have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors may adversely affect the market
price of the Common Stock and the Company's ability to raise necessary capital
and finance possible acquisitions including of technology.
 
     Rights to Acquire Shares; Potential Issuance of Additional Shares.  As of
October 31, 1998, options to acquire a total of 2,152,756 shares were
outstanding under the Company's 1996 Stock Option Plan. An additional 688,911
shares of Common Stock are reserved for issuance pursuant to the exercise of
options that may be granted in the future under the Company's 1996 Stock Option
Plan. The Company also has outstanding options and warrants not issued under the
1996 Plan to purchase up to 2,810,144 shares of Common Stock. During the terms
of such options and warrants, the holders thereof will have the opportunity to
profit from an increase in the market price of the Common Stock with resulting
dilution in the interests of holders of Common Stock. The existence of such
stock options and warrants could adversely affect the terms on which the Company
can obtain additional financing, and the holders of such options and warrants
can be expected to exercise such options and warrants at a time when the
Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such options and warrants. The Company also
has the authority to issue additional shares of Common Stock and shares of one
or more series of convertible preferred stock. The issuance of such shares could
result in the dilution of the voting power of outstanding shares of Common Stock
and could have a dilutive effect on earnings per share. See "Shares Eligible for
Sale."
 
                                       19
<PAGE>   21
 
     Shares Eligible for Sale.  Of the 20,355,732 shares outstanding as of
October 31, 1998, 17,822,538 are eligible for resale in the public markets. Of
these eligible shares, 7,469,994 shares are eligible for resale in the public
markets subject to compliance with the volume and manner of sale rules of Rule
144 under the Securities Act of 1933, as amended, and 10,352,544 are eligible
for resale in the public markets either as unrestricted shares or pursuant to
Rule 144(k). In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated for purposes of Rule 144) who beneficially
owns restricted securities with respect to which at least one year has elapsed
since the later of the date the shares were acquired from the Company, or from
an affiliate of the Company, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock of the Company and the average weekly trading volume in
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner-of-sale provisions and notice
requirements and to the availability of current public information about the
Company. A person who is not an affiliate, who has not been an affiliate within
three months prior to sale and who beneficially owns restricted securities with
respect to which at least two years have elapsed since the later of the date the
shares were acquired from the Company, or from an affiliate of the Company, is
entitled to sell such shares under Rule 144(k) without regard to any of the
volume limitations or other requirements described above. Sales of substantial
amounts of Common Stock in the public market could adversely affect prevailing
market prices.
 
     The Company has registered for offer and sale up to 2,850,000 shares of
Common Stock that are reserved for issuance pursuant to the Company's 1996 Stock
Option Plan. Shares issued after the effective date of such registration
statement upon the exercise of stock options generally will be eligible for sale
in the public market, except that affiliates will continue to be subject to
volume limitations and other requirements of Rule 144. The issuance of such
shares could depress the market price of the Company's Common Stock.
 
     Statutory and Charter Provisions.  The Company's Restated Articles of
Incorporation and the Nevada General Corporation Law contain provisions that may
have the effect of making more difficult or delaying attempts by others to
obtain control of the Company, even when those attempts may be in the best
interest of stockholders. The Nevada Law also imposes conditions on certain
business combination transactions with "interested stockholders" (as defined
therein). The Restated Articles provides for a staggered board and also
authorizes the Board of Directors, without stockholder approval, to issue one or
more series of preferred stock, which could have voting and conversion rights
that adversely affect the voting power of the holders of the Company's Common
Stock.
 
ITEM 2.  PROPERTIES
 
FACILITIES AND EQUIPMENT
 
     The total rental expense for fiscal 1998 was $794,000.
 
     The Company leases its principal executive offices in Phoenix, Arizona. The
office contains approximately 6,155 square feet. The term of the lease is for 60
months commencing January 27, 1998 and monthly lease payments are approximately
$12,600. The Company subleases a portion of the office space in Phoenix for
which it receives $2,125 a month. The sublease continues until February 28,
1999. After March 1, 1999, the Company intends to sublease approximately
one-third of its total leased space at its principal executive offices.
 
     The Company leases two production locations. The first location is in West
Monroe, Louisiana. Notice was given to terminate this lease effective February
28, 1999. Monthly rental payments are $50,000. The second production location,
for InCon, is in Batavia, Illinois, and contains approximately 24,000 square
feet. The lease term is for 10 years, commencing August 1, 1997, and requires
monthly payments of approximately $13,000.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company is not a party to any legal proceeding.
 
                                       20
<PAGE>   22
 
ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
     None.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock traded on the Nasdaq OTC Bulletin Board under
the symbol BNRX until November 1997. The high and low closing bid information
for the Company's Common Stock during the year ended October 31, 1997 is based
on OTC Bulletin Board information. The Company began trading on the Nasdaq
SmallCap Market on November 19, 1997.
 
<TABLE>
<CAPTION>
                                                                   HIGH      LOW
                                                                  ------    -----
    <S>                                                           <C>       <C>
    YEAR ENDED OCTOBER 31, 1997
         First Quarter..........................................  11            8
         Second Quarter.........................................  14.625        6.625
         Third Quarter..........................................  10.625        8.25
         Fourth Quarter.........................................   9.75         7.125
    YEAR ENDED OCTOBER 31, 1998
         First Quarter..........................................   8.375        6.75
         Second Quarter.........................................   7.625        5.875
         Third Quarter..........................................   6.125        1.75
         Fourth Quarter.........................................   3            1.063
</TABLE>
 
     Such quotations reflect inter-dealer bids, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
 
     On January 15, 1999, the closing price of the Common Stock on the Nasdaq
SmallCap Market was 1.375. As of January 15, 1999, there were 172 holders of
record of the Company's Common Stock.
 
DIVIDEND POLICY
 
     The Company has not declared or paid any cash dividends on its Common Stock
and does not intend to declare or pay any cash dividend in the foreseeable
future. The payment of dividends, if any, is within the discretion of the Board
of Directors and will depend on the Company's earnings, if any, its capital
requirements, and financial condition and such other factors as the Board of
Directors may consider.
 
RECENT SALES OF UNREGISTERED SECURITIES
 
     In August 1998, the Company issued to a director in recognition of his
prior purchases of stock 5-year warrants for the purchase of 100,000 shares of
Common Stock exercisable at $4.00 per share and 10-year warrants for the
purchase of 600,000 shares of Common Stock exercisable at $3.25 per share.
Payment for the warrants was $50,000.
 
     Sales of shares of Common Stock to Novartis and sales of shares and
warrants to AC Humko and the issuance of other shares of Common Stock are
reported in the Company's 10-Qs for the quarter in which they occurred.
 
     The sales and issuances of the securities in the transaction above was
deemed to be exempt from registration under the 1933 Act by virtue of Section
4(2). Appropriate legends have been placed on the documents evidencing the
securities and investment representations were obtained from the purchasers. All
purchasers of securities either received adequate information about the Company
or had access, through employment or other relationships, to such information
and were sophisticated investors. All such securities
 
                                       21
<PAGE>   23
 
issued pursuant to such exemption are restricted securities as defined in Rule
144(a)(3) promulgated under the 1933 Act.
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and the related notes and with
the Company's management's discussion and analysis of financial condition and
results of operations, provided elsewhere herein. See Item 14, "Exhibits,
Financial Schedules and Reports on Form 8-K," for the historical financial
statements of, and other financial information regarding, the Company.
 
<TABLE>
<CAPTION>
                                                                          TEN-MONTH
                                       YEAR ENDED OCTOBER 31,            PERIOD ENDED    YEAR ENDED
                              ----------------------------------------   OCTOBER 31,    DECEMBER 31,
                                 1998           1997          1996           1995           1994
                              -----------   ------------   -----------   ------------   ------------
<S>                           <C>           <C>            <C>           <C>            <C>
STATEMENT OF EARNINGS DATA:
Gross Revenues..............  $ 6,653,904   $  2,862,843   $    20,000    $   50,000     $        0
Operating Expenses..........   10,760,959     10,022,163     2,996,880       341,900        249,351
Other Income (Expense)......    2,426,291        266,929       (30,667)      (39,585)       (44,843)
Net Loss....................   (9,242,405)   (12,341,866)   (3,007,547)     (331,485)      (294,194)
Basic Loss Per Share(1).....         (.49)          (.77)         (.26)         (.03)          (.13)
Weighted Average Shares
  Outstanding(1)............   18,716,757     16,042,785    11,564,327     9,853,970      2,214,743
BALANCE SHEET DATA:
Working capital (Deficit)...  $ 1,328,931   $  1,237,642   $ 4,739,882    $  184,546     $ (460,069)
Total Assets................   10,894,259     14,155,335     6,217,348     1,099,521        630,280
Total Liabilities...........    3,318,530      5,119,016       936,478       544,654      1,452,160
Stockholders Equity
  (Deficiency)..............    7,575,729      9,036,319     5,280,870       554,867       (821,880)
</TABLE>
 
---------------
(1) These shares do not include 5,146,311 shares of Common Stock as of October
    31, 1998, or 2,749,577 as of October 31, 1997, or 2,128,144 shares as of
    October 31, 1996, or 566,955 shares as of October 31, 1995, or 220,288
    shares for the year ended December 31, 1994, that may be issued upon
    exercise of outstanding stock options and warrants.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The following discussion of the Company's financial condition and results
of operations as well as certain statements and information under Item 1
"Business" include certain forward looking statements. When used in this report,
the words "expects," "intends," "plans" and "anticipates" and similar terms are
intended to identify forward looking statements that relate to the Company's
future performance. Such statements involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed here.
Factors that might cause such a difference include, but are not limited to,
those discussed under "Business -- Special Considerations."
 
INTRODUCTION
 
     Results of operations for fiscal 1998 reflects Bionutrics, Inc., having
national distribution of evolvE(R) and various services through three
subsidiaries. Prior to 1997, management's efforts have been primarily directed
toward conducting research and development, applying for patent approvals,
developing manufacturing and distribution arrangements for its dietary
supplement product and obtaining initial capital and financing to fund these
activities.
 
     Bionutrics's history began in 1990 with a predecessor to LipoGenics, Inc.,
a Delaware corporation ("LipoGenics") formed in July 1992. LipoGenics formed
NutraGenics, Inc., a Delaware corporation
 
                                       22
<PAGE>   24
 
("NutraGenics (Delaware)"), in April 1994 pursuant to a rights offering to all
LipoGenics shareholders, to engage in manufacturing and marketing pursuant to a
licensing agreement of certain of the technology developed by LipoGenics.
NutraGenics (Delaware) merged in December 1994 into Nutrition Technology
Corporation ("Nutrition Technology"), a Nevada corporation and wholly-owned
subsidiary of ERBA Corporation ("ERBA"), a publicly traded Nevada corporation
incorporated in 1990. Although Nutrition Technology survived the merger, the
merger was accounted for as a reverse acquisition and the historical financials
of NutraGenics (Delaware) became the financials for the surviving corporation.
ERBA had minimal historical operations and as such the merger of its subsidiary
with NutraGenics (Delaware) had no impact on operations and operating results of
NutraGenics (Delaware). ERBA changed its name to NutraGenics, Inc., at the time
of the merger. NutraGenics, Inc., subsequently changed its name to Bionutrics,
Inc., on December 26, 1996.
 
     Bionutrics completed a merger with LipoGenics on October 31, 1996, and
LipoGenics became a wholly-owned subsidiary of the Company. The merger with
LipoGenics was accounted for in a manner similar to a pooling-of-interest and as
such Bionutrics's accounts reflect the historic operations of LipoGenics.
Bionutrics issued 2,092,743 shares in connection with the merger. Pursuant to
the merger, Bionutrics obtained ownership of certain proprietary rights related
to dietary supplements previously licensed to it by LipoGenics and acquired
ethical drug, functional food and other dietary supplement rights owned by
LipoGenics.
 
     On October 31, 1997, Nutrition Technology Corporation, a subsidiary of
Bionutrics, completed a forward triangular merger of a subsidiary of Nutrition
Technology with InCon Technologies Inc. ("InCon"), and InCon became a
wholly-owned subsidiary of Nutrition Technology. The merger with InCon was
accounted for as a purchase and Bionutrics issued 1,400,000 shares in connection
with the merger. In connection with the merger, the edible oil plant sales and
consulting business formerly conducted by an InCon affiliate was transferred to
Bionutrics International Ltd., a wholly-owned subsidiary of Bionutrics, and
specialty vitamin E technology relating to soluble and powder vitamin E owned by
another affiliate was transferred to InCon.
 
RESULTS OF OPERATIONS
 
  Year ended October 31, 1998, compared to Year Ended October 31, 1997
 
     Consolidated gross revenues for the 12 months ended October 31, 1998 were
$6,654,000 versus $2,863,000 for the same 12 months in 1997, summarized by
subsidiary as follows (intercompany sales excluded):
 
<TABLE>
<CAPTION>
                                                      FOR THE 12 MONTHS ENDED
                                                      ------------------------
SUBSIDIARY                                               1998          1997
----------                                            ----------    ----------
<S>                                                   <C>           <C>
InCon Technologies..................................  $4,104,000    $       --
Bionutrics Health Products..........................   2,190,000     2,092,000
Nutrition Technology................................     360,000       771,000
                                                      ----------    ----------
Total Consolidated Gross Revenues...................  $6,654,000    $2,863,000
                                                      ==========    ==========
</TABLE>
 
     InCon Technologies' gross revenues are primarily attributed to molecular
distillation toll processing of materials from a variety of customers. InCon was
acquired by Bionutrics on October 31, 1997 and accordingly no revenues are shown
for the same 12 months of the prior year.
 
     Bionutrics Health Products continued to rollout nationally its first
product, evolvE(R), during the 12 months ended October 31, 1998. The revenues
for the prior year reflect the initial launch of evolvE(R). As of the 12 months
ended October 31, 1998, evolvE(R), offered in three packages, was distributed by
over 36,000 stores including many leading drug and food chains throughout the
United States. Nonetheless, sales of evolvE(R) have been less than anticipated
and declining because the Company was forced to cut back on budgeted advertising
and promotions for the product due to delays in raising capital during this and
prior periods. In addition, some accounts have returned the product due to low
volume activity. Unrelated to the impact of reduced advertising activity, Health
Products has terminated the relationship with Aspen Benefits Group. Aspen
Benefits Group marketed evolvE(R) to healthcare practitioners under the trade
name Cardiem
 
                                       23
<PAGE>   25
 
and has decided to pursue other business interests. The Company recognizes that
a substantial advertising program is necessary to achieve growth in the
evolvE(R) product line, and that failure to show positive sales results will
have a negative impact on obtaining and maintaining distribution store accounts.
The Company is seeking a marketing partner to provide the resources needed to
properly market and promote the evolvE(R) brand and other anticipated dietary
supplements and functional food products. The Company is engaged in discussions
with several potential marketing partners involving the present and future brand
products.
 
     Nutrition Technology's processing in West Monroe, Louisiana was idle during
the 12 months ended October 31, 1998 in preparation for full scale production of
edible rice bran oil. This delay in production is chiefly attributable to the
delay in raising capital. Gross revenues reflected in this period represent
byproducts sold out of inventory. Revenues reflected for the prior year
represent sale of byproducts from manufacturing operations, which had commenced
during last year for the production of evolvE(R). In August of 1998, the Company
entered into a contract with AC Humko which provided: (i) for the sale of
certain rice bran oil and processing assets to AC Humko; (ii) for the
development of rice bran oil and other derivative products whereby Bionutrics
will receive a perpetual profit sharing interest; and (iii) for a supply
agreement where AC Humko will provide rice bran-derived Clearesterol(TM)
ingredient used in evolvE(R). All elements of the alliance with AC Humko were
executed on or before year end. After the sale of the assets to AC Humko,
Nutrition Technology is substantially inactive.
 
     Cost of revenues for the 12 months ended October 31, 1998, was $7,259,000
versus $5,014,000 for the same 12 months in 1997. Cost of revenues for the 12
months ended October 31, 1998 and 1997 resulted in negative margins as the
Company had not achieved operating level efficiency primarily due to low volume
activity at the West Monroe production location and start-up costs associated
with product rollout of evolvE(R). As noted above, the Company's manufacturing
operations in West Monroe, Louisiana were idle during fiscal 1998 to allow for
installation of new, more efficient processing equipment and prepare for
commodity production of edible rice bran oil, originally planned to commence in
the third quarter of 1998. With the sale of assets to AC Humko as noted
previously, the Company will close the West Monroe, Louisiana facility. As a
result of the agreements with AC Humko, the Company anticipates margins to
improve due to the lower cost of evolvE(R) product ingredients.
 
     Operating expenses for the 12 months ended October 31, 1998 of $10,761,000
were $739,000 higher than that recognized for the same 12 months in 1997 of
$10,022,000. Although activities associated with InCon Technologies' molecular
distillation processing business substantially increased costs, they were
somewhat offset by reduction in promotion and advertising expenditures for the
evolvE(R) product due to financial constraints.
 
     Other income for the 12 months ended October 31, 1998 was $2,426,000 versus
$267,000 for the same period for the prior year. The increase is essentially
attributable to the recognition of gain on the sale of assets to AC Humko.
 
     Net loss decreased to $9,242,000, or $0.49 per share for the 12 months
ended October 31, 1998 from $12,342,000, or $0.77 per share for the 12 months
ended October 31, 1997 due primarily to higher revenues as outlined above.
 
  Year ended October 31, 1997, compared to Year Ended October 31, 1996
 
     The Company rolled out nationally its first product, evolvE(R) dietary
supplement, during the second quarter of the year and also recognized revenues
from production by-products. Consolidated gross revenues for the 12 months ended
October 31, 1997, were $2,863,000 versus $20,000 for the same 12 months in 1996.
Of the $2,863,000 in gross revenues, $2,092,318 was attributable to the sale of
evolvE(R) dietary supplement. As of the end of the year, the evolvE(R) dietary
supplement was distributed by many leading drug and food chains and mass
merchandisers throughout the United States. The $20,000 in revenues for the
prior year was derived from a short-term agreement licensing certain proprietary
technology and does not pertain to the sale of a consumer product.
 
                                       24
<PAGE>   26
 
     Cost of revenues for the 12 months ended October 31, 1997, was $5,014,000
versus $0 for the same 12 months in 1996. Cost of revenues for the year ended
October 31, 1997, resulted in negative margins as the Company has not achieved
operating level efficiency due to low volume activity and start-up cost
associated with initial product introduction.
 
     Operating expenses for the 12 months ended October 31, 1997, of $10,022,000
were $7,025,000 higher than that recognized for the same 12 months in 1996 of
$2,997,000. This increase in expenses directly reflects preparation for product
launch and infrastructure development chiefly during 1997. Significant increases
were incurred for salaries, advertising and marketing, legal and consulting
fees.
 
     Other income net for the 12 months ended October 31, 1997, was $267,000
versus other expense of $31,000 for the prior year. The increased income is
attributable to increased interest earnings from higher balances of cash.
 
     Net loss increased to $12,342,000 or $0.77 per share for the 12 months
ended October 31, 1997, from a net loss of $3,008,000 or $0.26 per share for the
12 months ended October 31, 1996, due primarily to the increased levels of
expenses as outlined above offset in part by revenues from sales.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Net cash used in operating activities during the 12 month period ended
October 31, 1998, was $11,514,000 as compared to $10,703,000 during the same
period in 1997. Although net losses for the 12 month period ended October 31,
1998 were lower than the prior year, higher expenditures were incurred during
1998 for operating assets and liabilities, primarily repayment of higher levels
of accounts payable.
 
     Net cash provided from investing activities during the 12 months ended
October 31, 1998, was $2,957,000 as compared to a use of $1,461,000 during the
same period in 1997. Of the $2,957,000 provided in 1998, $4,544,000 pertained to
the sale of assets to AC Humko and the balance was investment activities related
to capital expenditures, primarily manufacturing operations. The majority of the
$1,461,000 used in 1997 was for capital expenditures in manufacturing
operations. The Company anticipates that additional investment in manufacturing
operations will be required at InCon. In 1997, investing activities also
reflected $400,000 invested in a former joint venture with InCon.
 
     Net cash provided by financing activities totaled $8,081,000 for the
12-month period ended October 31, 1998, versus $8,669,000 for the same period in
1997. This cash was provided primarily by the sale of common stock for both
years as well as the issuance of short-term debt in 1998. The sale of stock in
1998 is primarily attributable to Novartis who purchased $3 million in February
1998 and ABF who purchased $4 million in August 1998. In 1998, a total of
$3,225,000 of short-term debt was issued to two directors and an institution. In
October of 1998, the institution was repaid in full and a portion of the debt
from one director was repaid. There were no notes issued in 1997.
 
     In connection with the aforementioned stock sale to Novartis, the Company
entered into a strategic alliance with Novartis to enable it to evaluate the
Company's technology and rice bran-derived products for potential application as
functional food ingredients. Following this evaluation Novartis is expected to
determine whether to increase its $3 million equity investment in the Company
and pay fees to the Company in connection with entering into long-term research
and license agreements. No assurance can be given that results of the initial
evaluation will satisfy Novartis regarding use of the Company's evolvE(R)
product as a functional food ingredient, or that Novartis will determine to
proceed and extend or expand its relationship with the Company.
 
     The Company's current cash resources and expected cash flow from operations
will not be sufficient to fund its operational needs for the next 12 months. The
need for additional capital cannot be predicted at this time except that the
Company will require additional financing in the second quarter of fiscal 1999.
Therefore, the Company continues to seek additional capital through private
equity and asset based financing. There can be no assurance that such additional
financing will be attainable, or attainable on terms acceptable to the Company.
Access by the Company to additional capital will depend substantially upon
prevailing market conditions, and the financial condition of and prospects for
the Company at the time.
 
                                       25
<PAGE>   27
 
IMPACT OF THE YEAR 2000 ISSUE
 
     The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000.
 
     Essentially all of the Company's critical systems include new hardware and
packaged software recently purchased from large vendors who have represented
that these systems are already year 2000 compliant. In addition, the Company has
engaged an outside firm to test its systems to independently determine year 2000
readiness.
 
     The Company is presently surveying its major vendors to determine if the
year 2000 will pose a disruption in service from them. The Company has received
no notice that the year 2000 will be a problem for its vendors and will complete
its survey in early 1999. The costs associated with year 2000 readiness are
anticipated to be minimal.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Reference is made to the Consolidated Financial Statements, the Notes
thereto and Report of Independent Public Accountants thereon commencing at Page
F-1 of this Report, which Consolidated Financial Statements, Notes and Report
are included herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     In November 1996, the Company's predecessor auditors, LeMaster & Daniels
PLLC, were dismissed and Deloitte & Touche LLP was engaged as the Company's
independent public accountants. The change in accountants was recommended by the
Audit Committee and approved by the Board of Directors. Prior reports of the
predecessor auditors did not contain an adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles except for a modification that describes substantial doubt
surrounding NutraGenics' ability to continue as a going concern. During the two
most recent fiscal years and the subsequent interim period, there have not been
any disagreements with the predecessor auditors on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. The Company has authorized the predecessor auditors to respond to any
inquiries of Deloitte & Touche LLP.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
 
     The information required by Item 10 is incorporated by reference to the
information to be contained under the heading "Proposal to Elect
Directors -- Nominees" to be set forth in the Company's definitive Proxy
Statement for its 1999 Annual Meetings of Stockholders. The information required
by this Item relating to executive officers of the Company is included in
"Business-Executive Officers" contained in Item 1 of this Report.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information required by Item 11 relating to directors of the Company is
incorporated herein by reference to the information to be contained under the
heading "Proposal to Elect Directors -- Director Compensation and Other
Information" to be set forth in the Company's definitive Proxy Statement for its
1999 Annual Meetings of Stockholders. The information required by this Item
relating to executive officers of the Company is to be included in "Executive
Compensation" to be set forth in the Company's definitive proxy statement for
its 1999 Annual Meeting of Stockholders.
 
                                       26
<PAGE>   28
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by Item 12 is incorporated by reference to the
information to be contained under the heading "Security Ownership of Principal
Stockholders, Directors and Named Executive Officers" to be set forth in the
Company's definitive Proxy Statement for its 1999 Annual Meetings of
Stockholders.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by Item 13 is incorporated by reference to the
information to be contained under the heading "Certain Relationships and Related
Transactions" to be set forth in the Company's definitive Proxy Statement for
its 1999 Annual Meetings of Stockholders.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) Exhibits:
 
<TABLE>
<C>          <S>
       3.1   Restated Articles of Incorporation(1)
       3.2   Articles of Amendment to the Articles of Incorporation(1)
       3.3   Bylaws(1)
       4.1   Form of Certificate evidencing shares of Common Stock(1)
      10.1   Option granted to Hunt-Wesson, Inc. by LipoGenics, Inc.,
             dated July 1992(1)
      10.2   Agreement dated October 1995 between the Company and Milton
             Okin, Kenneth Okin, Robert Okin and Nicki Closset and
             Amendment to Agreement dated October 1995(1)
      10.3   Agreement between the Company and C. Everett Koop for the
             purchase of 20,000 shares of Common Stock and the issuance
             of 180,000 options dated October 1995(1)
      10.4   Additional Secured Loan Agreement dated March 1996 between
             the Company and Milton Okin(1)
      10.6   Stock Purchase Agreements dated September 16, 1996 and
             October 31, 1996 between the Company and Spanswick
             Limited(1)
      10.7   1996 Stock Option Plan, as amended through March 26, 1998
      10.8   Form of Stock Purchase Agreement and Subscription
             Application entered into between the Company and certain
             European investors in January and March 1997 pursuant to
             Regulation S(4)
      10.9   Form of Stock Purchase Agreement entered into between the
             Company and an institutional investor in September 1997(4)
      10.10  Form of Stock Purchase Agreement and Note between the
             Company and two overseas investors in October 1997(4)
      10.11  Employment Agreement between the Registrant and John R.
             Palmer(4)
      10.12  Employment Agreement between Bionutrics Health Products Inc.
             and Stephen H. Friedman(4)
      10.13  Agreement and Plan of Merger by and among InCon
             Technologies, Inc., InCon Holdings, L.L.C., Bionutrics, Inc.
             and BNRX, Inc.(3)
      10.14  Stock Purchase Agreement dated as of August 14, 1998,
             between the Registrant and AC Humko Corp.(5)
      10.15  Warrant Agreement dated as of August 14, 1998, between the
             Registrant and AC Humko Corp.(5)
      10.16  Technology Agreement dated as of August 14, 1998, between AC
             Humko Corp. and Bionutrics Entities (filed in redacted
             format pursuant to a confidential treatment request)(6)
      10.17  Exclusive Supply Agreement dated as of August 14, 1998,
             between AC Humko Corp. and Bionutrics Entities (filed in
             redacted format pursuant to a confidential treatment
             request)(6)
      10.19  Form of Asset Purchase Agreement dated as of October 1998
             between AC Humko Corp. and Bionutrics Entities(7)
</TABLE>
 
                                       27
<PAGE>   29
<TABLE>
<C>          <S>
      10.20  Warrant Agreement for the purchase of 100,000 shares of
             Common Stock between the Company and William M. McCormick
             dated August 7, 1998.
      10.21  Warrant Agreement for the purchase of 600,000 shares of
             Common Stock between the Company and William M. McCormick
             dated August 7, 1998.
      16     Letter for change in certifying accountant(2)
      21     Subsidiaries of the Company
      23.1   Consent of Deloitte & Touche
      27     Financial Data Schedule
</TABLE>
 
---------------
     (1) Incorporated by reference to Registrant's Form 10 filed with the
         Commission on or about January 21, 1997.
 
     (2) Incorporated by reference to Registrant's Amendment No. 1 to Form 10/A
         filed with the Commission on or about March 20, 1997.
 
     (3) Incorporated by reference to Registrant's Form 8-K filed with the
         Commission on or about November 7, 1997, as amended by Registrant's
         Form 8-K/A filed with the Commission on or about January 30, 1998.
 
     (4) Incorporated by reference to Registrant's Form 10-K filed with the
         Commission on or about January 15, 1998, as amended by Registrant's
         Form 10-K/A filed with the Commission on or about January 30, 1998.
 
     (5) Incorporated by reference to Registrant's Form 8-K filed with the
         Commission on or about August 31, 1998.
 
     (6) Incorporated by reference to Registrant's Form 8-K/A filed with the
         Commission on or about October 13, 1998.
 
     (7) Incorporated by reference to Registrant's Form 8-K filed with the
         Commission on or about October 21, 1998.
 
(b) Financial Statements filed as part of this Report:
 
          Consolidated Financial Statements and Supplemental Schedules as listed
     in the Index to Consolidated Financial Statements on Page F-1 of this
     Report.
 
(c) Reports on Form 8-K:
 
          (i) The Registrant filed a Current Report on Form 8-K on August 31,
     1998 with respect to the sale to AC Humko of the Registrant's Common Stock
     and certain rice bran processing technology, as amended by Form 8-K/A filed
     on October 13, 1998.
 
          (ii) The Registrant filed a Current Report on Form 8-K on October 21,
     1998 with respect to the sale of certain rice bran oil processing and
     related assets held by Registrant's subsidiary, Nutrition Technology
     Corporation, to AC Humko.
 
(d) Financial Statement Schedules:
 
          None.
 
                                       28
<PAGE>   30
 
                                   SIGNATURES
 
     Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          BIONUTRICS, INC.
 
Date: January 27, 1999                    By: /s/ RONALD H. LANE
                                            ------------------------------------
                                            Ronald H. Lane
                                            President and Chief Executive
                                              Officer
 
     Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                     SIGNATURE                                    TITLE                      DATE
                     ---------                                    -----                      ----
<S>                                                  <C>                               <C>
 
By /s/ RONALD H. LANE                                Chairman of the Board, Chief      January 27, 1999
                                                     Executive Officer and President
-------------------------------------------------    (Principal Executive Officer)
   Ronald H. Lane
 
By /s/ GEORGE E. DUCK, JR.                           Vice President of Finance,        January 27, 1999
                                                     Secretary and Treasurer
-------------------------------------------------    (Principal Financial and
   George E. Duck, Jr.                               Accounting Officer)
 
By /s/ DANIEL ANTONELLI                              Director                          January 27, 1999
-------------------------------------------------
   Daniel Antonelli
 
By /s/ RICHARD M. FELDHEIM                           Director                          January 27, 1999
-------------------------------------------------
   Richard M. Feldheim
 
By /s/ STEVE HENIG                                   Director                          January 27, 1999
-------------------------------------------------
   Steve Henig
 
By /s/ C. EVERETT KOOP                               Director                          January 27, 1999
-------------------------------------------------
   C. Everett Koop
 
By /s/ WILLIAM M. MCCORMICK                          Director                          January 27, 1999
-------------------------------------------------
   William M. McCormick
 
By /s/ MILTON OKIN                                   Director                          January 27, 1999
-------------------------------------------------
   Milton Okin
 
By /s/ FREDERICK RENTSCHLER                          Director                          January 27, 1999
-------------------------------------------------
   Frederick Rentschler
 
By /s/ WINSTON A. SALSER                             Director                          January 27, 1999
-------------------------------------------------
   Winston A. Salser
</TABLE>
 
                                       29
<PAGE>   31
 
                          INDEPENDENT AUDITORS' REPORT
 
Board of Directors
Bionutrics, Inc.
Phoenix, Arizona
 
     We have audited the consolidated balance sheets of Bionutrics, Inc. and
subsidiaries (the "Company") as of October 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended October 31, 1998, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
 
     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at October 31, 1998
and 1997, and the results of its operations and its cash flows for the years
ended October 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's operating losses since
inception raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
 
                                          /s/ DELOITTE & TOUCHE LLP
 
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 8, 1999
 
                                       F-1
<PAGE>   32
 
                           OCTOBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                  1998            1997
                                                              ------------    ------------
<S>                                                           <C>             <C>
                                          ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  1,704,400    $  2,181,121
  Trade receivables -- net of allowance for bad debts of
     $72,086 and $26,699, respectively......................     1,992,060       2,308,020
  Inventory (Note 3)........................................       763,654       1,300,058
  Prepaids and other current assets.........................       169,822         554,052
                                                              ------------    ------------
          Total current assets..............................     4,629,936       6,343,251
                                                              ------------    ------------
PROPERTY -- Net of accumulated depreciation of $1,345,751
  and $258,357, respectively (Notes 4 and 8)................     5,401,259       6,806,513
                                                              ------------    ------------
OTHER ASSETS:
  Goodwill -- net of accumulated amortization of $28,200 at
     October 31, 1998 (Note 1)..............................       535,678         563,878
  Patent applications and other related costs -- net of
     accumulated amortization of $143,005 and $141,896,
     respectively...........................................       327,386         441,693
                                                              ------------    ------------
          Total other assets................................       863,064       1,005,571
                                                              ------------    ------------
TOTAL.......................................................  $ 10,894,259    $ 14,155,335
                                                              ============    ============
                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  1,090,845    $  2,769,440
  Accrued liabilities.......................................     1,102,070       2,006,868
  Current portion of notes payable and capital leases (Notes
     5 and 8)...............................................     1,108,090         329,301
                                                              ------------    ------------
          Total current liabilities.........................     3,301,005       5,105,609
                                                              ------------    ------------
NOTES PAYABLE AND CAPITAL LEASES -- Net of current portion
  (Notes 5 and 8)...........................................        17,525          13,407
                                                              ------------    ------------
          Total liabilities.................................     3,318,530       5,119,016
                                                              ------------    ------------
COMMITMENTS AND CONTINGENCIES
  (Notes 1, 6 and 8)........................................
STOCKHOLDERS' EQUITY (Note 6):
  Common stock, $.001 par value -- authorized, 45,000,000
     shares.................................................        20,352          17,812
  Preferred stock, $.001 par value -- authorized, 5,000,000
     shares; no issued and outstanding shares...............
  Additional paid-in capital................................    31,483,706      26,501,567
  Warrants..................................................     2,797,136
  Accumulated deficit.......................................   (26,724,262)    (17,481,857)
  Common stock in treasury, at cost.........................        (1,203)         (1,203)
                                                              ------------    ------------
          Total stockholders' equity........................     7,575,729       9,036,319
                                                              ------------    ------------
TOTAL.......................................................  $ 10,894,259    $ 14,155,335
                                                              ============    ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-2
<PAGE>   33
 
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                        1998            1997           1996
                                                    ------------    ------------    -----------
<S>                                                 <C>             <C>             <C>
REVENUES (Note 1):
  Revenue from services...........................  $  3,999,408                    $    20,000
  Revenue from product sales......................     2,654,496    $  2,862,843
                                                    ------------    ------------    -----------
          Total gross revenues....................     6,653,904       2,862,843         20,000
DISCOUNTS AND ALLOWANCES..........................       302,626         435,724
                                                    ------------    ------------    -----------
  Net revenues....................................     6,351,278       2,427,119         20,000
COST OF REVENUES..................................     7,259,015       5,013,751
                                                    ------------    ------------    -----------
  Gross (loss) profit.............................      (907,737)     (2,586,632)        20,000
                                                    ------------    ------------    -----------
OPERATING EXPENSES:
  Selling, general and administrative (Note 9)....    10,328,653       9,763,224      2,370,145
  Research and development........................       432,306         258,939        626,735
                                                    ------------    ------------    -----------
          Total operating expenses................    10,760,959      10,022,163      2,996,880
                                                    ------------    ------------    -----------
OPERATING LOSS....................................   (11,668,696)    (12,608,795)    (2,976,880)
                                                    ------------    ------------    -----------
OTHER (EXPENSE) INCOME:
  Net interest (expense) income (Notes 5, 8 and
     9)...........................................      (127,225)        267,166        (30,667)
  Net gain (loss) on disposal of assets (Note
     6)...........................................     2,553,516            (237)
                                                    ------------    ------------    -----------
          Total other income (expense)............     2,426,291         266,929        (30,667)
                                                    ------------    ------------    -----------
NET LOSS..........................................  $ (9,242,405)   $(12,341,866)   $(3,007,547)
                                                    ============    ============    ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
  COMMON SHARE EQUIVALENTS OUTSTANDING............    18,716,757      16,042,785     11,564,327
                                                    ============    ============    ===========
BASIC NET LOSS PER COMMON SHARE AND SHARE
  EQUIVALENT......................................  $      (0.49)   $      (0.77)   $     (0.26)
                                                    ============    ============    ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-3
<PAGE>   34
 
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                          COMMON STOCK       ADDITIONAL                      TREASURY STOCK      WARRANTS
                                      --------------------     PAID-IN     ACCUMULATED    --------------------   ---------
                                        SHARES     AMOUNT      CAPITAL       DEFICIT        SHARES     AMOUNT     SHARES
                                      ----------   -------   -----------   ------------   ----------   -------   ---------
<S>                                   <C>          <C>       <C>           <C>            <C>          <C>       <C>
BALANCE, NOVEMBER 1, 1995...........  10,956,269   $10,956   $ 2,677,558   $ (2,132,444)  (1,202,886)  $(1,203)
  Warrants granted for services, May
    1996 (Note 7)...................                              87,500
  Issuance of common shares for
    services at $1 per share, May
    1996 -- August 1996.............      65,425        65        65,360
  Issuance of common shares for cash
    at $1.50 per share, June 25,
    1996............................      66,667        67        99,933
  Issuance of common shares for cash
    at $1.75 per share, June 25,
    1996............................      60,000        60       104,940
  Issuance of common shares for cash
    at $2 per share, June 1996 --
    October 1996....................     255,000       255       509,745
  Notes payable converted to stock
    at $1.50 per share, October 31,
    1996 (Note 6)...................     400,000       400       599,600
  Issuance of common shares for cash
    at $3 per share, October 31,
    1996............................     371,875       372     1,115,253
  Issuance of common shares for cash
    at $5 per share, October 31,
    1996............................   1,000,000     1,000     4,999,000
  Issuance of common shares for cash
    at $1.36 per share (converted
    rate) under option agreement,
    October 31, 1996 (Note 1).......      11,111        11       149,989
  Issuance of common shares in
    merger with LipoGenics (Note
    1)..............................   1,881,632     1,882        (1,882)
  Net loss -- year ended October 31,
    1996............................                                         (3,007,547)
                                      ----------   -------   -----------   ------------   ----------   -------   ---------
BALANCE, NOVEMBER 1, 1996...........  15,067,979    15,068    10,406,996     (5,139,991)  (1,202,886)   (1,203)
  Issuance of common shares for
    services at $1 per share,
    December 1996...................      25,000        25        24,975
  Issuance of common shares for cash
    at $5 per share, January 1997...      63,818        64       319,026
  Issuance of common shares for cash
    at $7 per share, November
    1996 -- June 1997...............   1,073,480     1,073     7,085,980
  Issuance of common shares for
    services at $7 per share, June
    1997............................      21,428        20       149,975
  Issuance of common shares for cash
    at $8 per share, September
    1997 -- October 1997............     162,500       162     1,299,838
  Stock-based compensation expense,
    November 1996 -- October 1997
    (Note 7)........................                             253,808
  Cash paid for stock-related
    expenses........................                             (37,631)
  Issuance of common shares for
    purchase of InCon Technologies,
    Inc., October 1997 (Note 1).....   1,400,000     1,400     6,998,600
  Net loss -- year ended October 31,
    1997............................                                        (12,341,866)
                                      ----------   -------   -----------   ------------   ----------   -------   ---------
BALANCE, OCTOBER 31, 1997...........  17,814,205   $17,812   $26,501,567   $(17,481,857)  (1,202,886)  $(1,203)
 
<CAPTION>
                                       WARRANTS        TOTAL
                                      ----------   STOCKHOLDERS'
                                        AMOUNT        EQUITY
                                      ----------   -------------
<S>                                   <C>          <C>
BALANCE, NOVEMBER 1, 1995...........               $    554,867
  Warrants granted for services, May
    1996 (Note 7)...................                     87,500
  Issuance of common shares for
    services at $1 per share, May
    1996 -- August 1996.............                     65,425
  Issuance of common shares for cash
    at $1.50 per share, June 25,
    1996............................                    100,000
  Issuance of common shares for cash
    at $1.75 per share, June 25,
    1996............................                    105,000
  Issuance of common shares for cash
    at $2 per share, June 1996 --
    October 1996....................                    510,000
  Notes payable converted to stock
    at $1.50 per share, October 31,
    1996 (Note 6)...................                    600,000
  Issuance of common shares for cash
    at $3 per share, October 31,
    1996............................                  1,115,625
  Issuance of common shares for cash
    at $5 per share, October 31,
    1996............................                  5,000,000
  Issuance of common shares for cash
    at $1.36 per share (converted
    rate) under option agreement,
    October 31, 1996 (Note 1).......                    150,000
  Issuance of common shares in
    merger with LipoGenics (Note
    1)..............................
  Net loss -- year ended October 31,
    1996............................                 (3,007,547)
                                      ----------   ------------
BALANCE, NOVEMBER 1, 1996...........                  5,280,870
  Issuance of common shares for
    services at $1 per share,
    December 1996...................                     25,000
  Issuance of common shares for cash
    at $5 per share, January 1997...                    319,090
  Issuance of common shares for cash
    at $7 per share, November
    1996 -- June 1997...............                  7,087,053
  Issuance of common shares for
    services at $7 per share, June
    1997............................                    149,995
  Issuance of common shares for cash
    at $8 per share, September
    1997 -- October 1997............                  1,300,000
  Stock-based compensation expense,
    November 1996 -- October 1997
    (Note 7)........................                    253,808
  Cash paid for stock-related
    expenses........................                    (37,631)
  Issuance of common shares for
    purchase of InCon Technologies,
    Inc., October 1997 (Note 1).....                  7,000,000
  Net loss -- year ended October 31,
    1997............................                (12,341,866)
                                      ----------   ------------
BALANCE, OCTOBER 31, 1997...........               $  9,036,319
</TABLE>
 
                                       F-4
<PAGE>   35
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
                                          COMMON STOCK       ADDITIONAL                      TREASURY STOCK      WARRANTS
                                      --------------------     PAID-IN     ACCUMULATED    --------------------   ---------
                                        SHARES     AMOUNT      CAPITAL       DEFICIT        SHARES     AMOUNT     SHARES
                                      ----------   -------   -----------   ------------   ----------   -------   ---------
<S>                                   <C>          <C>       <C>           <C>            <C>          <C>       <C>
  Issuance of common shares for cash
    at $5 per share (converted rate)
    under option agreement, December
    1997............................       8,333         8        41,647
  Issuance of common shares for cash
    at $8 per share, December
    1997............................      83,050        82       664,318
  Issuance of common shares for cash
    at $7.25 per share, February
    1998............................     413,793       414     2,999,586
  Cash paid for stock related
    expenses........................                            (284,135)
  Issuance of common shares for
    services at $6.375 per share,
    April 1998......................      10,000        10        63,740
  Issuance of common shares for
    incentive compensation at $6.75
    per share, June 1998............       4,922         5        33,218
  Issuance of common stock
    warrants........................                              50,000
  Issuance of common shares for cash
    at $2 per share, August 1998....   2,000,000     2,000     1,200,864                                         2,000,000
  Issuance of common shares for
    incentive compensation at $1.75
    per share, October 1998.........      21,429        21        37,479
  Stock-based compensation expense,
    November 1997 -- October 1998
    (Note 7)........................                             175,422
  Net loss -- year ended October 31,
    1998............................                                         (9,242,405)
                                      ----------   -------   -----------   ------------   ----------   -------   ---------
BALANCE, OCTOBER 31, 1998...........  20,355,732   $20,352   $31,483,706   $(26,724,262)  (1,202,886)  $(1,203)  2,000,000
                                      ==========   =======   ===========   ============   ==========   =======   =========
 
<CAPTION>
                                       WARRANTS        TOTAL
                                      ----------   STOCKHOLDERS'
                                        AMOUNT        EQUITY
                                      ----------   -------------
<S>                                   <C>          <C>
  Issuance of common shares for cash
    at $5 per share (converted rate)
    under option agreement, December
    1997............................                     41,655
  Issuance of common shares for cash
    at $8 per share, December
    1997............................                    664,400
  Issuance of common shares for cash
    at $7.25 per share, February
    1998............................                  3,000,000
  Cash paid for stock related
    expenses........................                   (284,135)
  Issuance of common shares for
    services at $6.375 per share,
    April 1998......................                     63,750
  Issuance of common shares for
    incentive compensation at $6.75
    per share, June 1998............                     33,223
  Issuance of common stock
    warrants........................                     50,000
  Issuance of common shares for cash
    at $2 per share, August 1998....  $2,797,136      4,000,000
  Issuance of common shares for
    incentive compensation at $1.75
    per share, October 1998.........                     37,500
  Stock-based compensation expense,
    November 1997 -- October 1998
    (Note 7)........................                    175,422
  Net loss -- year ended October 31,
    1998............................                 (9,242,405)
                                      ----------   ------------
BALANCE, OCTOBER 31, 1998...........  $2,797,136   $  7,575,729
                                      ==========   ============
</TABLE>
 
                See notes to consolidated financial statements.
                                       F-5
<PAGE>   36
 
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                            1998           1997          1996
                                                        ------------   ------------   -----------
<S>                                                     <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss............................................  $ (9,242,405)  $(12,341,866)  $(3,007,547)
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation and amortization....................     1,318,359        248,943        27,531
     (Gain) loss on disposal of assets................    (2,553,516)           237
     Stock based compensation expense.................       175,422        253,808        87,500
     Expenses satisfied with issuance of common
       stock..........................................       134,474        174,996        65,425
     Changes in operating assets and liabilities:
       Trade receivables..............................       315,960       (571,655)
       Inventory......................................       536,404     (1,223,414)
       Prepaids and other current assets..............       384,230       (446,035)
       Accounts payable...............................    (1,678,595)     1,807,602       279,137
       Accrued liabilities............................      (904,798)     1,394,485       362,687
                                                        ------------   ------------   -----------
          Net cash used in operating activities.......   (11,514,465)   (10,702,899)   (2,185,267)
                                                        ------------   ------------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures................................    (1,462,129)    (1,510,550)      (91,900)
  Net decrease in notes receivable....................                       16,665       195,702
  Patent acquisition..................................      (125,000)
  Proceeds from disposal of fixed assets and
     patents..........................................     4,543,855          5,706
  Investment in joint venture.........................                     (403,739)
  Cash received from acquisition of InCon
     Technologies, Inc................................                      431,067
                                                        ------------   ------------   -----------
     Net cash provided by (used in) investing
       activities.....................................     2,956,726     (1,460,851)      103,802
                                                        ------------   ------------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from debt..................................     3,225,000                      350,000
  Proceeds from issuance of stock.....................     7,756,055      8,668,511     6,980,625
  Expenses for capital raising........................      (284,135)
  Repayments of debt and capital leases...............    (2,615,902)
                                                        ------------   ------------   -----------
     Net cash provided by financing activities........     8,081,018      8,668,511     7,330,625
                                                        ------------   ------------   -----------
NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS.........................................      (476,721)    (3,495,239)    5,249,160
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..........     2,181,121      5,676,360       427,200
                                                        ------------   ------------   -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................  $  1,704,400   $  2,181,121   $ 5,676,360
                                                        ============   ============   ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION -- Cash paid during the year for
  interest............................................  $    149,253   $              $    39,813
                                                        ============   ============   ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
  FINANCING ACTIVITIES:
  Acquisition of equipment under capital leases.......  $    173,808
                                                        ============
  Issuance of 1,400,000 shares of common stock in
     connection with the acquisition of InCon
     Technologies, Inc................................                 $  7,000,000
                                                                       ============
  Assumption of liabilities in connection with the
     acquisition of InCon Technologies, Inc...........                 $  1,606,849
                                                                       ============
  Fair value of receivables ($2,006,288), inventory
     ($184,346), fixed assets ($5,361,850) and other
     assets ($59,420).................................                 $  7,611,904
                                                                       ============
</TABLE>
 
                See notes to consolidated financial statements.
                                       F-6
<PAGE>   37
 
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
 
1.  ORGANIZATION AND BASIS OF PRESENTATION
 
     BIONUTRICS, INC. ("BIONUTRICS") -- Subsequent to October 31, 1996,
NutraGenics, Inc. ("NutraGenics") changed its name to Bionutrics. Bionutrics
consists of its wholly-owned subsidiaries, LipoGenics, Inc. ("LipoGenics"),
Bionutrics Health Products, Inc. ("BHP"), Nutrition Technologies Corporation
("Nutrition Technologies"), Bionutrics International Ltd. ("BIN") and InCon
Technologies, Inc. ("InCon") (collectively referred to as the "Company").
 
     The Company was in the development stage at October 31, 1996; during the
year ended October 31, 1997, the Company completed its development activities
and commenced its planned principal operations. The planned principal operations
are the development, manufacturing, marketing and selling of dietary supplements
using proprietary technology (the "Technology"). Revenues for the year ended
October 31, 1998 are derived primarily from two sources: revenues from services
and revenues from product sales. Revenues from services are primarily attributed
to molecular distillation toll processing of materials from a variety of
customers. Revenues from product sales are primarily attributed to the sale of
evolvE(R), the Company's dietary supplement product. For the year ended October
31, 1997, all revenues were generated from product sales as the acquisition of
InCon occurred on October 31, 1997. Revenues as of October 31, 1996 represented
amounts derived from a short-term agreement licensing certain proprietary
technology, which expired in 1996.
 
     The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred operating losses of $26,724,262 through October 31, 1998 which have
been funded through the issuance of stock and debt. The losses incurred to date,
the uncertainty regarding the ability to raise additional capital and the
Company's inability to generate gross profits and positive cash flows from
operations may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
 
     The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, maintaining adequate financing, and
ultimately to attain successful operations.
 
     The Company's current cash resources and expected cash flow from operations
will not be sufficient to fund its operation needs for the next 12 months.
Therefore, the Company continues to seek additional capital through private
equity and asset-based financing. There can be no assurance that such additional
financing will be attainable, or attainable on terms acceptable to the Company.
Access by the Company to additional capital will depend substantially upon
prevailing market conditions and the financial condition of and prospects for
the Company at the time.
 
     Management is continuing its efforts to obtain additional funds through the
issuance of common stock in private nonregistered transactions and management is
also continuing its efforts to increase sales and reduce cost of sales in order
to generate gross profits so that the Company can meet its obligations and
sustain operations.
 
     On October 31, 1996, NutraGenics acquired LipoGenics, a company controlled
by the controlling stockholders of NutraGenics, through the exchange of
2,092,743 shares of its common stock for all 211,111 shares of outstanding
common stock of LipoGenics. LipoGenics developed the technology regarding
processing of propriety compounds having applications as ethical drugs,
functional foods and dietary supplements and was the owner of patent
applications underlying such technology. The business combination was accounted
for in a manner similar to a pooling-of-interests. In October 1994, NutraGenics
issued 1,202,886 shares of its common stock to LipoGenics in consideration for a
license agreement under which
                                       F-7
<PAGE>   38
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NutraGenics was given the right to produce and market products. As a result of
the pooling, the common stock of NutraGenics owned by LipoGenics, now a
wholly-owned subsidiary, has been classified as treasury stock. LipoGenics and
its predecessors effectively commenced operations in 1990 and NutraGenics
effectively commenced operations in 1994. Accordingly, the financial statements
reflect the accumulated losses of both NutraGenics and LipoGenics.
 
     On October 31, 1997, the Company merged with InCon. InCon provides
molecular distillation and toll processing services for Nutrition Technologies
and other food and industrial companies. The merger involved the issuance of 1.4
million shares of the Company's restricted common stock, with a fair value of $7
million on the date of the merger, in exchange for all of the issued and
outstanding stock of InCon, as well as all rights and interests pursuant to a
purchase agreement between Rye Investments, Ltd., a British Virgin Island
limited liability corporation ("Rye") which shared common owners with InCon, and
a customer of Rye. The merger was accounted for using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed have been
recorded at their fair value as of October 31, 1997. Goodwill of $563,878 was
recorded as a result of the merger and is being amortized over 20 years.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Bionutrics and its wholly-owned subsidiaries,
LipoGenics, Inc., Bionutrics Health Products, Inc. and Nutrition Technologies
Corporation, as well as the assets acquired and liabilities assumed in the
October 31, 1997 merger with InCon. All significant intercompany balances and
transactions have been eliminated.
 
     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 reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
     CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash and cash equivalents.
 
     INVENTORY is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
 
     PROPERTY AND DEPRECIATION -- Property is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
individual assets. The estimated useful lives of depreciable assets are:
 
<TABLE>
<CAPTION>
ASSET TYPE                                                  ESTIMATED USEFUL LIFE
----------                                                  ---------------------
<S>                                                         <C>
Equipment, furniture and fixtures.........................       3-10 years
Leasehold improvements....................................         10 years
Capitalized software......................................          3 years
Leased equipment..........................................          3 years
</TABLE>
 
Leasehold improvements are amortized over the lessor of the lease life or the
useful life of the asset. Expenditures of a repair and maintenance nature are
expensed when incurred.
 
     REVENUE -- The Company had two customers which accounted for approximately
52 percent and 24 percent of total revenues for the years ended October 31, 1998
and 1997, respectively.
 
     PATENTS -- Legal and other costs related to patent applications are
capitalized as incurred and amortized using a straight-line basis over 17 years
commencing at the date patent approval is obtained. Patents currently
capitalized and unamortized relate to both the processes and products associated
with the Company's business.
                                       F-8
<PAGE>   39
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     INCOME TAXES are accounted for under the asset and liability approach,
which can result in recording tax provisions or benefits in periods different
from the periods in which such taxes are paid or benefits realized. Deferred
federal income taxes result principally from certain tax carryforwards that are
recognized for financial reporting purposes in different years than for income
tax reporting purposes. Any deferred tax assets were fully offset by a valuation
allowance in 1998, 1997 and 1996.
 
     RESEARCH AND DEVELOPMENT -- The cost of research and development is charged
to expense as incurred.
 
     FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair values of cash, trade and
notes receivable, accounts payable, accrued liabilities and notes payable
approximate the carrying value due to the short-term nature of these
instruments.
 
     STOCK OPTIONS AND WARRANTS granted to consultants or independent
contractors have been accounted for in accordance with the fair value method of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. In accordance with Accounting Principles Board Opinion
("APB") No. 25, options granted to employees of the Company are recorded as
expense, based on the difference, if any, between the fair market value of the
stock, on the date of grant and the option's exercise price.
 
     LOSS PER SHARE -- In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings per Share. This statement requires
dual presentation of earnings per share ("EPS") whereby basic EPS excludes
potential dilution from stock options, warrants and other securities or
contracts to issue common stock. Diluted EPS takes into account the potential
issuance of these shares in the calculation of EPS. Due to losses from
continuing operations for the years ended October 31, 1998, 1997 and 1996, the
Company has concluded that issuance of any additional shares would be
antidilutive and, therefore, a dual presentation is not required.
 
     RECLASSIFICATIONS -- Certain amounts previously reported in the 1997
financial statements have been reclassified to conform with the 1998
presentation.
 
     NEW ACCOUNTING PRONOUNCEMENTS -- In June 1997, the FASB issued SFAS No.
131, Disclosure about Segments of an Enterprise and Related Information, which
is effective for fiscal years beginning after December 15, 1997 and establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company has not yet completed evaluating the impact of
implementing the provisions of SFAS No. 131.
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that an enterprise
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The statement is
effective for the Company's fiscal year ending October 31, 2000. The Company has
not yet completed evaluating the impact of implementing the provisions of SFAS
No. 133.
 
                                       F-9
<PAGE>   40
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  INVENTORY
 
     As of October 31, inventory consisted of the following:
 
<TABLE>
<CAPTION>
                                                         1998         1997
                                                       --------    ----------
<S>                                                    <C>         <C>
Raw materials........................................  $219,569    $  855,958
Work in process......................................   201,600       432,785
Finished goods.......................................   342,485        11,315
                                                       --------    ----------
Total................................................  $763,654    $1,300,058
                                                       ========    ==========
</TABLE>
 
4.  PROPERTY AND EQUIPMENT
 
     As of October 31, the components of property and equipment consisted of the
following:
 
<TABLE>
<CAPTION>
                                                        1998           1997
                                                     -----------    ----------
<S>                                                  <C>            <C>
Equipment, furniture and fixtures..................  $ 5,774,147    $6,526,807
Leasehold improvements.............................      540,122       507,882
Capitalized software...............................       33,332        30,181
Leased equipment under capital lease (Note 8)......       24,354
Construction in progress...........................      375,055
                                                     -----------    ----------
                                                       6,747,010     7,064,870
Less accumulated depreciation and amortization.....   (1,345,751)     (258,357)
                                                     -----------    ----------
Property and equipment -- net......................  $ 5,401,259    $6,806,513
                                                     ===========    ==========
</TABLE>
 
5.  NOTES PAYABLE
 
     At October 31, 1998, the Company had $1,106,767 outstanding as notes
payable. These notes payable were composed of $770,476 to Directors, $322,883 to
Rye, a related party through stock ownership, and $13,408 for equipment
financing. The notes to Directors bear interest at 9.50 percent per annum and
are payable upon demand. The equipment note bears interest at 5.90 percent, is
due in August 2000, and requires monthly payments of $617.99. The note to Rye is
interest free and payable upon demand. At October 31, 1997, the Company had a
demand note payable to Rye for $322,883.
 
6.  STOCKHOLDERS' EQUITY
 
     In August 1998, AC Humko acquired 2,000,000 shares of the Company's common
stock for $2.00 per share. AC Humko also acquired Bionutrics' rice bran
processing technology for $2,000,000. The technology transfer gives AC Humko the
exclusive right to use and practice Bionutrics' proprietary rice bran processing
technology in North America, with Bionutrics retaining the right to use and
practice the technology worldwide, other than in North America. Bionutrics
acquired a perpetual profit-sharing interest in AC Humko's rice bran business.
Additionally, Bionutrics has agreed to purchase from AC Humko its output of rice
bran oil distillate at a fixed price for 24 months.
 
     In February 1998, Novartis Nutrition acquired exclusive worldwide rights to
evaluate the Company's Clearesterol(TM) complex for potential application as a
functional food ingredient. The evaluation right was acquired as part of a
$3,000,000 stock investment in Bionutrics.
 
     In October 1997, the Company issued 500,000 shares of restricted common
stock at $8 per share pursuant to two stock purchase agreements with two
overseas investors, both of whom are related to an existing shareholder. Payment
of the $4 million purchase price is evidenced by promissory notes requiring
 
                                      F-10
<PAGE>   41
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
payment no later than May 1, 1998. The share issuance is void under Nevada law
if payment is not received, and for accounting purposes the shares so issued
against promissory notes are not considered issued and outstanding until the
notes are paid. During 1998, the promissory notes were not paid and as such the
shares were canceled.
 
     At October 31, 1996, the Company authorized 1,900,000 shares of common
stock for issuance under its Nonqualified 1996 Stock Option Plan (the "1996
Plan") to key personnel, consultants and independent contractors. On December
12, 1997 an additional 950,000 shares of common stock were authorized for
issuance under the "1996 Plan", for a total of 2,850,000 authorized as of
October 31, 1998. The incentive stock options are granted to purchase common
stock at 100 percent (110% for an optionee who is a 10% stockholder) of the fair
market value of the stock on the date of grant. Stock options are granted to
purchase common stock at a price determined by the plan administrator and can be
exercisable for a period of up to ten years from the date of grant (five years
for an option granted to a 10% stockholder). All participants are eligible to
receive stock awards and stock appreciation rights, as to be determined by the
Company's Board of Directors. No stock awards or stock appreciation rights have
been granted under the plan.
 
     During fiscal year 1998, 8,333 options under the 1996 Plan were exercised.
No options under the Plan were exercised as of October 31, 1997.
 
     DIVIDEND POLICY -- The Company has not declared or paid any cash dividends
on its common stock and does not intend to declare or pay any cash dividend in
the foreseeable future. The payment of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition and such other factors
as the Board of Directors may consider.
 
     EMPLOYEE STOCK-BASED COMPENSATION -- At July 21, 1992, the Company granted
to a stockholder and board member 11,111 options to purchase LipoGenics stock
which converted, on October 31, 1996, to 110,144 options to purchase shares of
the Company's unregistered common stock at a total exercise price of $150,000
expiring on the earlier of July 21, 2002, or a public offering of the Company's
shares of common stock, none of which were exercised at October 31, 1997. At
October 31, 1995, the Company granted 180,000 options to a stockholder and board
member to purchase shares of the Company's unregistered common stock at an
exercise price of $1.50 per share for a period of three years commencing October
31, 1995. No options under this agreement have been exercised at October 31,
1997. The 180,000 options issued October 31, 1995 expired October 31, 1998
unexercised. At October 31, 1996, 1,163,000 options with a five year exercise
period and an option price of $5 were granted to employees under the 1996 Plan.
These options vest equally over a three year period from the date of grant.
During 1997, 573,100 options were granted to employees under the 1996 Plan.
During 1998, 382,000 options were granted to employees under the 1996 Plan and
233,600 were cancelled or expired.
 
     On September 17, 1998, the compensation committee of the Board of Directors
reduced the exercise price for options held by employees who were not Directors
to $4.00. None of the other terms were modified.
 
                                      F-11
<PAGE>   42
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of transactions for employee stock options and warrants for the
years ended October 31, 1998, 1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                                               WEIGHTED AVERAGE
                                                NUMBER         OPTION        ---------------------
                                                  OF            PRICE        REMAINING    EXERCISE
                                                SHARES          RANGE          LIFE        PRICE
                                               ---------    -------------    ---------    --------
<S>                                            <C>          <C>              <C>          <C>
Options outstanding at October 31, 1995......    290,144    $1.36 - $1.50      2.1         $1.45
  Options granted............................  1,163,000        $5.00
                                               ---------
Options outstanding at October 31, 1996......  1,453,144    $1.36 - $5.00      3.6         $4.29
  Options granted............................    573,100    $7.36 - $9.13
                                               ---------
Options outstanding at October 31, 1997......  2,026,244    $1.36 - $9.13      3.9         $5.59
  Options granted............................    382,000    $4.00 - $5.00
  Warrants granted...........................    700,000    $3.25 - $4.00
  Options cancelled..........................   (233,600)       $5.00
                                               ---------
Options outstanding at October 31, 1998......  2,874,644    $1.36 - $5.00      4.84        $4.08
Options available for future grant under the
  1996 Plan..................................    688,911
                                               =========
</TABLE>
 
     The Company applies APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock options granted to
employees. Accordingly, compensation cost for stock options and warrants is
recorded as the excess, if any, of the fair value of the Company's common stock
at the date of grant over the exercise price of the option or warrant. No
compensation cost was recognized in the Company's consolidated statements of
operations, for employee based options and warrants for 1998, 1997 or 1996.
 
     In accordance with the methodology prescribed under SFAS No. 123,
Accounting for Stock Based Compensation, compensation cost for 1998, 1997 and
1996 was estimated to be $3,807,706, $1,641,517 and $87,500, respectively. The
fair value of options granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
 
<TABLE>
<CAPTION>
                                                RISK FREE    VOLATILITY    OPTION    DIVIDEND
                                                INTEREST        RATE       LIVES      YIELD
                                                ---------    ----------    ------    --------
<S>                                             <C>          <C>           <C>       <C>
1998..........................................    4.83%         117%         3          0
1997..........................................    6.18%          99%         3          0
1996..........................................    6.00%          60%         3          0
</TABLE>
 
     Had the Company elected to recognize the above-mentioned compensation cost
in 1998, 1997 and 1996, loss from continuing operations would be $13,050,111,
$13,983,383 and $3,095,407, respectively, and the basic net loss per share would
be $.70, $.87 and $.27, respectively.
 
     NONEMPLOYEE STOCK-BASED COMPENSATION -- In May 1996, the Company granted
600,000 warrants to a stockholder to purchase shares of common stock at an
exercise price of $2.50 per share for the first 300,000 shares and $4 per share
for the remaining 300,000 shares in exchange for consulting services rendered,
or to be rendered, to the Company. Of the 600,000 warrants granted, 200,000
became exercisable at the date of grant and the remaining warrants become
exercisable at a rate of 50,000 per quarter commencing August 1996 through May
1998. All warrants have ten year exercise periods. The 600,000 warrants issued
in May 1996 were returned by the holder and subsequently cancelled by the
Company. On August 14, 1998, 2,000,000 warrants were issued as part of the sale
of stock to AC Humko. These warrants have a two year life and are exercisable at
$2.00. None of the warrants granted under this agreement have been exercised at
October 31, 1998. At October 31, 1996, 58,333 options with a five year exercise
period and an option price of $5.00 were granted to nonemployees under the 1996
Plan. During 1998, 33,334 options were issued to a former employee in
recognition of options cancelled.
 
                                      F-12
<PAGE>   43
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of transactions for nonemployee stock options and warrants for
the years ended October 31, 1998, 1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                                               WEIGHTED AVERAGE
                                                NUMBER         OPTION        ---------------------
                                                  OF            PRICE        REMAINING    EXERCISE
                                                SHARES          RANGE          LIFE        PRICE
                                               ---------    -------------    ---------    --------
<S>                                            <C>          <C>              <C>          <C>
Options and warrants outstanding at October
  31, 1995
  Options issued.............................    658,333    $2.50 - $5.00       8.0        $3.40
                                               ---------
Options and warrants outstanding at October
  31, 1996 and 1997..........................    658,333    $2.50 - $5.00       8.0        $3.40
  Warrants cancelled.........................   (600,000)   $2.50 - $4.00        --        $3.25
  Warrants issued............................  2,000,000        $2.00           1.8        $2.00
  Options issued.............................     33,334        $4.00           1.7        $4.00
  Options exercised..........................     (8,333)       $5.00            --        $5.00
                                               ---------
Options and warrants outstanding at October
  31, 1998...................................  2,083,334    $2.00 - $5.00       1.9        $2.10
                                               =========
As of October 31, 1998:
  Exercisable options........................     66,667                                   $4.50
                                               =========
  Exercisable warrants.......................  2,000,000                                   $2.00
                                               =========
</TABLE>
 
     In accordance with the methodology prescribed under SFAS No. 123, the
Company recognized $175,422, $253,808 and $87,500 of compensation expense in the
1998, 1997 and 1996 consolidated statements of operations, respectively. The
fair value of each nonemployee option and warrant was calculated on the date of
grant using the Black-Scholes pricing model with the following weighted average
assumptions shown on the previous page.
 
     WARRANTS -- In August 1998, the Company issued to a Director, in
recognition of his prior purchases of stock, 5-year warrants for the purchase of
100,000 shares of common stock exercisable at $4.00 per share and 10-year
warrants for the purchase of 600,000 shares of common stock exercisable at $3.25
per share. Payment for the warrants was $50,000. As part of the August 1998 AC
Humko transaction, the Company issued two-year warrants for the purchase of
2,000,000 shares of common stock exercisable at $2.00 per share.
 
7.  INCOME TAXES
 
     At October 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $24,556,000 which expire on various
dates through 2018.
 
     At October 31, 1998, 1997 and 1996, deferred tax assets of approximately
$10,258,000, $5,994,529 and $1,748,000, respectively, relating to such potential
tax benefits were fully offset by a valuation allowance.
 
8.  LEASES
 
     The Company has operating leases for office space, vehicles and equipment,
which expire on various dates through July 31, 2007. Total rental expense was
approximately $794,000, $242,000 and $96,000 for fiscal
 
                                      F-13
<PAGE>   44
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
years 1998, 1997 and 1996, respectively. Future minimum lease payments under
noncancelable operating leases at October 31, 1998 are as follows:
 
<TABLE>
<S>                                                             <C>
1999........................................................    $  543,060
2000........................................................       330,556
2001........................................................       321,744
2002........................................................       323,836
2003........................................................       194,581
Thereafter..................................................       568,110
                                                                ----------
Total.......................................................    $2,281,887
                                                                ==========
</TABLE>
 
     The Company leases a copier under a noncancelable capital lease. The future
minimum lease payments under this noncancelable capital lease at October 31,
1998 are as follows:
 
<TABLE>
<S>                                                             <C>
1999........................................................    $ 9,260
2000........................................................      9,260
2001........................................................      2,315
                                                                -------
Total future minimum lease payments.........................     20,835
Less amount representing interest at 8.75% per annum........      1,987
                                                                -------
Present value of net minimum lease payments.................     18,848
Less present value of current net minimum lease payments....      7,924
                                                                -------
Present value of long-term net minimum lease payments.......    $10,924
                                                                =======
</TABLE>
 
9.  RELATED PARTY
 
     Various stockholders have provided consulting and other administrative
services to the Company. Expense for the years ended October 31, 1998, 1997 and
1996 was approximately $510,000, $358,000, $469,000, respectively, and is
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
 
     Interest paid to stockholders in connection with outstanding notes was
approximately $45,475 and $35,457 for the year ended October 31, 1998 and 1996,
respectively. No interest was paid to stockholders during 1997.
 
10.  ACQUISITION OF INCON TECHNOLOGIES, INC. (UNAUDITED)
 
     The pro forma information presented below includes InCon's operations for
the year ended October 31, 1997 and is presented as if the InCon acquisition had
been made at the beginning of the period presented. The unaudited pro forma
consolidated financial information is not necessarily indicative of the results
of operations that actually would have occurred had the merger occurred on that
date or the future results of the combined operations.
 
<TABLE>
<CAPTION>
                                                          PRO FORMA
                                                         CONSOLIDATED
                                                         ------------
<S>                                                      <C>
Net revenues.........................................    $  6,551,135
                                                         ============
Net loss.............................................    $(11,204,344)
                                                         ============
Net loss per share...................................    $      (0.70)
                                                         ============
</TABLE>
 
                                      F-14
<PAGE>   45
                       BIONUTRICS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11.  REGULATORY MATTERS
 
     In May 1997, the FDA took regulatory action against a competitor of the
Company with regard to its cholesterol-lowering product introduced in November
1996. The pending action involves the regulatory classification of a dietary
supplement containing an ingredient promoted as being the same as or similar to
an ingredient contained in a prescription drug product used to lower
cholesterol, and raises issues that do not affect the Bionutrics evolvE(R)
product. However, the respondent competitor also combines its claim to lower
cholesterol with other claims that suggest that cholesterol reduction will both
reduce formation and facilitate regression of plaque, which, according to the
FDA, are claims to mitigate or prevent disease not permitted for a dietary
supplement under DSHEA. While Bionutrics does not make such claims and would not
be bound by a regulatory determination involving its competitor's product,
nonetheless a negative determination on the competition's labeling could have a
bearing on "lowering cholesterol" claims in general, and thereby have an adverse
effect on the marketing and advertising programs currently being used for the
evolvE(R) product.
 
                                  * * * * * *
 
                                      F-15
<PAGE>   46
 
                                 EXHIBIT INDEX
 
<TABLE>
<C>          <S>
       3.1   Restated Articles of Incorporation(1)
       3.2   Articles of Amendment to the Articles of Incorporation(1)
       3.3   Bylaws(1)
       4.1   Form of Certificate evidencing shares of Common Stock(1)
      10.1   Option granted to Hunt-Wesson, Inc. by LipoGenics, Inc.,
             dated July 1992(1)
      10.2   Agreement dated October 1995 between the Company and Milton
             Okin, Kenneth Okin, Robert Okin and Nicki Closset and
             Amendment to Agreement dated October 1995(1)
      10.3   Agreement between the Company and C. Everett Koop for the
             purchase of 20,000 shares of Common Stock and the issuance
             of 180,000 options dated October 1995(1)
      10.4   Additional Secured Loan Agreement dated March 1996 between
             the Company and Milton Okin(1)
      10.6   Stock Purchase Agreements dated September 16, 1996 and
             October 31, 1996 between the Company and Spanswick
             Limited(1)
      10.7   1996 Stock Option Plan, as amended through March 26, 1998
      10.8   Form of Stock Purchase Agreement and Subscription
             Application entered into between the Company and certain
             European investors in January and March 1997 pursuant to
             Regulation S(4)
      10.9   Form of Stock Purchase Agreement entered into between the
             Company and an institutional investor in September 1997(4)
      10.10  Form of Stock Purchase Agreement and Note between the
             Company and two overseas investors in October 1997(4)
      10.11  Employment Agreement between the Registrant and John R.
             Palmer(4)
      10.12  Employment Agreement between Bionutrics Health Products Inc.
             and Stephen H. Friedman(4)
      10.13  Agreement and Plan of Merger by and among InCon
             Technologies, Inc., InCon Holdings, L.L.C., Bionutrics, Inc.
             and BNRX, Inc.(3)
      10.14  Stock Purchase Agreement dated as of August 14, 1998,
             between the Registrant and AC Humko Corp.(5)
      10.15  Warrant Agreement dated as of August 14, 1998, between the
             Registrant and AC Humko Corp.(5)
      10.16  Technology Agreement dated as of August 14, 1998, between AC
             Humko Corp. and Bionutrics Entities (filed in redacted
             format pursuant to a confidential treatment request)(6)
      10.17  Exclusive Supply Agreement dated as of August 14, 1998,
             between AC Humko Corp. and Bionutrics Entities (filed in
             redacted format pursuant to a confidential treatment
             request)(6)
      10.19  Form of Asset Purchase Agreement dated as of October 1998
             between AC Humko Corp. and Bionutrics Entities(7)
      10.20  Warrant Agreement for the purchase of 100,000 shares of
             Common Stock between the Company and William M. McCormick
             dated August 7, 1998.
      10.21  Warrant Agreement for the purchase of 600,000 shares of
             Common Stock between the Company and William M. McCormick
             dated August 7, 1998.
      16     Letter for change in certifying accountant(2)
      21     Subsidiaries of the Company
      23.1   Consent of Deloitte & Touche
      27     Financial Data Schedule
</TABLE>
 
---------------
     (1) Incorporated by reference to Registrant's Form 10 filed with the
         Commission on or about January 21, 1997.
 
     (2) Incorporated by reference to Registrant's Amendment No. 1 to Form 10/A
         filed with the Commission on or about March 20, 1997.
<PAGE>   47
 
     (3) Incorporated by reference to Registrant's Form 8-K filed with the
         Commission on or about November 7, 1997, as amended by Registrant's
         Form 8-K/A filed with the Commission on or about January 30, 1998.
 
     (4) Incorporated by reference to Registrant's Form 10-K filed with the
         Commission on or about January 15, 1998, as amended by Registrant's
         Form 10-K/A filed with the Commission on or about January 30, 1998.
 
     (5) Incorporated by reference to Registrant's Form 8-K filed with the
         Commission on or about August 31, 1998.
 
     (6) Incorporated by reference to Registrant's Form 8-K/A filed with the
         Commission on or about October 13, 1998.
 
     (7) Incorporated by reference to Registrant's Form 8-K filed with the
         Commission on or about October 21, 1998.
<PAGE>   48
 
                             [BIONUTRICS INC. LOGO]
 
          2425 E. Camelback Road, Suite 650 -- Phoenix, Arizona 85016
                                 (602) 508-0112