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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                  FORM 10-KSB
                            ------------------------

      [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

      [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

       FOR THE TRANSITION PERIOD FROM                TO                .

                        COMMISSION FILE NUMBER 000-24693

                               NUTRACEUTIX, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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                  DELAWARE                                      91-1689591
          (STATE OF INCORPORATION)                   (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>

                8340 154TH AVENUE NE, REDMOND, WASHINGTON 98052
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                   ISSUER'S TELEPHONE NUMBER: (425) 883-9518

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             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
        COMMON STOCK, $.001 PAR VALUE                              NONE
</TABLE>

      SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
  Yes [X]  No [ ]

     Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB.  [ ]

     The issuer's revenues for the fiscal year ended December 31, 1999 were
$10,272,417.

     The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask price of such stock, as of March 21, 2000 was approximately
$9,084,232.

     As of March 15, 1999, there were 17,486,812 shares outstanding of the
issuer's common stock.
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant has incorporated into Part III of this Form 10-KSB by
reference portions of its Proxy Statement for the 2000 Annual Meeting of
Shareholders.
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                               TABLE OF CONTENTS

                               NUTRACEUTIX, INC.

                                  FORM 10-KSB

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                                                                        PAGE
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Item 1.   Description of Business.....................................    3
Item 2.   Description of Property.....................................   10
Item 3.   Legal Proceedings...........................................   11
Item 4.   Submission of Matters to a Vote of Security Holders.........   11
Item 5.   Market for Common Equity and Related Stockholder Matters....   12
Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   13
Item 7.   Financial Statements........................................   18
Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   18
Item 9.   Directors, Executive Officers, Promoters and Control
          Persons; Compliance with Section 16 (a) of the Exchange
          Act.........................................................   19
Item 10.  Executive Compensation......................................   19
Item 11.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   19
Item 12.  Certain Relationships and Related Transactions..............   19
Item 13.  Exhibits and Reports on Form 8-K............................   19
</TABLE>

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

     The following discussion includes certain forward-looking statements.
Actual results could differ materially. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements and Associated Risks" contained in Item 6.

BUSINESS DEVELOPMENT

     Nutraceutix, Inc. (the "Company") was incorporated on October 12, 1994 in
Delaware as Caddy Systems, Inc. ("CSI") to engage in the sports equipment
business. From its inception however, CSI had no material assets and did not
actively engage in business. CSI and Bio Techniques Laboratories, Inc., an
unaffiliated Washington corporation ("BTL"), entered into an Agreement and Plan
of Share Exchange, dated as of February 28, 1995, (the "Agreement") pursuant to
which the shareholders of BTL were issued one share of common stock of CSI for
each share of BTL, and BTL became a wholly-owned subsidiary of CSI. The
corporate name of CSI was changed to Nutraceutix, Inc. in April 1995.

     BTL was incorporated on May 11, 1983 as "Biotechnics, Inc.," and conducted
business under that name until October 29, 1984, when its name was changed to
"Bio Techniques Laboratories, Inc." Since its inception, BTL has been a
biotechnology company in the business of developing and producing
nutraceuticals, which are natural, nutritional, biologically active materials
formulated to provide specific health and productivity benefits to humans and
animals.

     Prior to 1995, the Company focused solely on the manufacture and sale of
nutraceutical based products for the agricultural market. Since 1995, the
Company added nutraceutical based health supplements for the human health
market. In 1997, the Company installed a fully automated production line at its
encapsulating, tableting, bottling and labeling facility in Lafayette, Colorado
for the private label manufacture of health supplements. The Company also
developed LIVEBAC caplet technology for the manufacture of probiotic health
supplements and acquired licenses from BioChemix, Inc. for the United States
patent pertaining to the use of glucarate salts and Calcium D-glucarate for
lung, breast and prostate health supplement formulas. In 1998, the Company
licensed additional formulas for colon and liver health, and in 1998, BioChemix
expanded the license to allow sales of glucarate beyond the designated uses
listed above. Additionally in 1998, the Company acquired from Temple University,
an exclusive worldwide license for a patent pending tableting and compression
technology for the controlled delivery of health supplements.

     Unless the context indicates otherwise, references hereinafter to "the
Company" includes both Nutraceutix, Inc. and Bio Techniques Laboratories, Inc.
The Company's principal place of business is 8340 154th Avenue N.E., Redmond,
Washington, 98052, and its telephone number at that address is (425) 883-9518.

BUSINESS OF THE COMPANY

     Nutraceutix, Inc. is a developer and manufacturer of nutraceutical based
health supplements for both the animal and human markets. The Company provides
private label manufacturing of health supplements for other health supplement
product companies and manufactures and markets probiotics, as well as,
manufactures food ingredient pre-mixes. Its branded products for the animal feed
industry are COBACTIN microbial feed additives and BIOPOWER silage inoculant.
Its branded human health supplement products are BIOPOWER health supplements.

     Nutraceuticals are biologically active materials, either derived from
plant, microbial or animal sources or synthesized, which are formulated to
provide specific health and productivity benefits for humans and animals.
Nutraceuticals include, but are not limited to, pharma foods, functional foods,
fermented foods, phytochemicals, microbial feed additives, probiotics, herbal
products, vitamins and health supplements.

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PRINCIPAL PRODUCTS AND SERVICES

  Calcium D-Glucarate

     In July of 1997, the Company and BioChemix, Inc. ("BioChemix") an
unaffiliated privately held company, entered into a definitive agreement for the
exclusive licensing to Nutraceutix of certain patent rights pertaining to the
use of glucarate salts and their derivatives in a sustained release form
specifically for the nutritional support of one of the body's major mechanisms
for ridding itself of carcinogens, a process referred to as glucuronidation. The
agreement provided for the exclusive licensing of certain formulas, which
contain vitamins, minerals, herbal extracts and antioxidants that incorporate
the glucarate salt, Calcium D-glucarate for lung, breast and prostate health. In
August of 1998, the Company and BioChemix entered into agreements for the
exclusive licensing to the Company of certain formulas which incorporate Calcium
D-glucarate for colon and liver health. BioChemix is a technology transfer
company whose principals developed and patented the applications of glucarate
salts at the Science Park of the University of Texas, MD Anderson Cancer Center.
These principals are now at the AMC Cancer Center in Denver, Colorado.

     Conjugation, which is the combining of carcinogens with an inert molecule,
is one of the body's most important and natural protective mechanisms for
dealing with carcinogens. Glucuronidation is the conjugation of carcinogens with
glucuronic acid. Glucuronic acid is a derivative of glucarate salts, Calcium
D-glucarate. The resulting conjugates can be readily excreted in the bile and
urine. The reverse reaction is referred to as de-glucuronidation and is mediated
by the enzyme Beta glucuronidase. Glucarate salt derivatives are potent
inhibitors of Beta glucuronidase and the de-glucuronidation reaction. An
appropriate concentration of glucarate salts has been shown to inhibit this
reverse reaction, thus preventing the reactivation of conjugated carcinogens.
The inhibition of de-glucuronidation with glucarate salts has been shown to
significantly reduce cancer in animal models exposed to chemical carcinogens.
The specific glucarate salt which has been developed into a lung, breast, colon,
liver and prostate health product is Calcium D-glucarate. There have been no
definitive clinical human trials proving the efficacy of Calcium D-glucarate in
cancer prevention in humans.

     Glucuronic acid, a derivative, is found in low concentrations in humans and
animals and is a natural constituent of certain fruits and vegetables. At this
time, no toxic effects have been demonstrated with Calcium D-glucarate and the
FDA requires no extended approval for its use as a nutritional supplement.

     As of December 31, 1999, the Company has sublicensed Calcium D-glucarate to
30 companies for products marketed as preventative supplements, some of them
with antioxidants. To date, sales histories for these companies are limited with
the exception of Rexall Showcase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 6.

  Nutraceutical Based Health Supplements for the Agricultural Market

     The Company has two primary agricultural product lines which it
manufactures and sells: (1) Lactobacillus sp. products which, independent field
trials demonstrate, enhance feed efficiency in feedlot cattle and (2) silage
inoculum which, independent field trials demonstrate, preserves the nutritional
value of stored forages.

     The Company's silage inoculant, which is offered on an original equipment
manufacturer ("OEM") basis and under the BIOPOWER silage inoculant brand, aid in
the natural fermentation of cut forages for storage in silos and bunkers,
preserving nutrients by decreasing the occurrence of unwanted spoilage
organisms.

     The Company's Lactobacillus sp. based microbial feed additive products are
marketed under the following trademarks:

     COBACTIN, COBACTIN II, COBACTIN PLUS microbial feed additives for
commercial feedlot cattle. These products have been demonstrated in independent
field trials to increase feed efficiency in feedlot cattle.

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     COBACTIN, COBACTIN II microbial feed additive for dairy cows have been
demonstrated in independent field trials to increase milk production.

     COBACTIN microbial feed additive for poultry has been demonstrated in
independent field trials to increase feed efficiency in poultry.

     These COBACTIN products are the result of ten years of research by the
Company aimed at the development of proprietary microbial feed supplements
designed to enhance animal feed efficiency. This product line is based on the
premise that animal nutrition, particularly in ruminant animals, requires the
presence of positive bacteria in the animal's digestive tract.

     COBACTIN microbial feed additive is a living Lactobacillus acidophilus
culture, preserved to provide a stable blend of genetically selected lactic acid
bacteria for feedlot and dairy cattle and poultry. Over the past ten years,
COBACTIN for cattle has undergone approximately 22 independent university and
research institute field tests to determine its efficacy in cattle. These field
trials have repeatedly shown that COBACTIN microbial feed additive increases
feed efficiency. Comparable results have been demonstrated for dairy cows and
poultry.

     The Company holds two patents on the bacterial strain BT1389 of
Lactobacillus acidophilus used in COBACTIN II microbial feed additive. The
Company formulated COBACTIN PLUS, which the Company believes offers numerous
product stabilization advantages. COBACTIN PLUS is composed of BT1389
Lactobacillus acidophilus, with a stabilizer designed for extended shelf life.
COBACTIN PLUS accounts for the majority of the Company's animal health sales.
Use of the product has been historically limited to large cattle feedlots and
large dairies, which blend their own feed and have the equipment and expertise
to deliver COBACTIN into the feed daily. Even though COBACTIN has been shown
effective in poultry, difficulties with the daily blending of the product have
curtailed sales in the poultry industry.

     In September 1999, Nutraceutix and Biotal, Inc. announced the formation of
an alliance to offer microbial feed additives to cattle feedlots. Prior to this
agreement, Nutraceutix and Biotal were competitors. Biotal has marketed their
MICRO-CELL direct feed microbials since 1994, and recently successfully
introduced a phase-feeding microbial program. As part of the agreement, Biotal
will conduct the marketing, sales and technical support for MICRO-CELL and
COBACTIN beef products and Nutraceutix will continue to manufacture COBACTIN and
a portion of Biotal's MICRO-CELL products. Nutraceutix, in addition to the
revenues generated from the manufacture of MICRO-CELL and COBACTIN, will receive
royalties on both of these products. This collaboration is expected to produce
technologically superior products, extended customer service and market
leadership.

     In the cattle feedlot market, the Company has one primary competitor,
Nutrition Physiology. The Company believes that it derives a competitive
advantage from its proprietary technology not available from other suppliers,
and its alliance with Biotal.

  Nutraceutical Based Health Supplements for the Human Health Market

     Specific nutraceuticals have been shown to affect bodily functions in
targeted ways, such as by reducing anxiety (St. John's Wort) or by lowering
cholesterol (soy extracts) and assisting in sleep (Valerian). The active
ingredients in nutraceuticals may include complex mixtures of organic molecules,
small molecules, oligosaccharides, lactic acid bacteria, fungi, minerals and
other microbial secondary metabolites. Lactobacillus acidophilus cultures are
classic nutraceuticals which have long been components of yogurt and fermented
food. Published literature has shown lactic acid bacteria to exert positive
gastrointestinal health benefits beyond their nutritional value. The Company has
developed a proprietary tableting technology for the delivery of lactic acid
bacteria in a health supplement form trademarked, LIVE-BAC(R) probiotic caplets.

     The Company believes that the market for nutraceuticals will continue to
grow because of the continued identification of diseases coupled with a
longer-lived aging population. The development and identification of new
nutraceutical products and markets may require combining interdisciplinary
technologies, including plant science, microbiology, biochemistry and nutrition.
Among the non-proprietary health supplement products manufactured by the Company
are capsules, tablets and pre-mixes containing multi-vitamins and single
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vitamins, (such as Vitamin C and Vitamin E), herbs (such as Ginseng, Ginkgo,
Echinacea and St. John's Wort), antioxidants, enzymes and positive lactic acid
bacteria.

CONTROLLED DELIVERY TECHNOLOGY

     In December 1998, the Company and Temple University signed a definitive
agreement for the exclusive licensing to Nutraceutix of a patent pending
technology pertaining to the manufacture of controlled delivery health
supplement tablets and capsules. Subsequent to the acquisition of this license,
Nutraceutix trademarked the technology as CDT controlled delivery technology.
The Company considers the technology to be unique for its ability to program
individual release patterns for each health supplement contained in a single
tablet or capsule at a relatively low cost of manufacture and its applicability
to a wide range of health supplements. Through use of the technology, health
supplement ingredients can be individually programmed to release in either a
continuous or pulsed delivery.

     Controlled delivery technologies are common in the pharmaceutical industry,
while relatively rare in the health supplement industry. In the pharmaceutical
industry, controlled delivery technologies have been shown to optimize the
therapeutic performance of drugs, improve compliance with dosing schedules,
minimize side effects and offer added convenience by reducing the frequency of
dosing. The Company believes the technology will offer similar benefits for
health supplements.

     The controlled delivery technology was developed at Temple University for
chronic drug administration of calcium-channel blockers nifedipine, diltiazem
and verapamil in the management of angina and hypertension. The physiochemical
properties and intrinsic characteristics of these drugs, such as high or low
solubility, limited absorption, or presystemic metabolism, necessitated the
development of a highly controlled delivery technology to provide continuous
active ingredient release with zero-order linear kinetics and precise and
consistent performance. This technology is based on hydrophilic swellable
polymeric matrices, which allow the controlled diffusion of health supplements
from the matrix through the tablets progressive swelling, dissolution and/or
erosion. The controlled delivery tablets or capsules employ combinations of
hydrophilic polymers specific to each health supplement. Depending on the matrix
composition, various release rates and patterns can be accomplished.

     One of the most difficult challenges for a controlled delivery technology
is to produce a continuous release with linear zero-order kinetics of a highly
soluble material for up to twenty-four hours. Linear zero-order kinetics means
that a precise quantity is released in each limit of time over the entire course
of the release pattern until one hundred percent of the material is released.
There are no burst or lag phases of release. After obtaining the license for the
technology from Temple University, the Company, in collaboration with Temple
University, successfully developed continuous, linear, zero-order kinetics
release Vitamin C tablets. Vitamin C was considered a substantial technological
challenge due to its high water solubility. Following the Vitamin C project, the
Company and Temple University developed individual continuous release, linear,
zero-order kinetic tablets of HMB, glucosamine, Calcium D-glucarate, and several
Androstenes and diet formulas. Based on the joint research and development by
the Company and Temple University, the Company has developed several tableted
products containing multiple health supplements for the sports industry with
individual release patterns for each supplement. The Company believes that the
health supplement industry offers a variety of opportunities to apply this
technology.

     In December 1998, the Company entered into an exclusive marketing agreement
with MET-Rx USA, Inc. (MET-Rx) of Irvine, California granting MET-Rx exclusive
marketing rights for sports supplement products incorporating controlled
delivery technology, excluding multilevel sales. The Company contracted with
Temple University to develop controlled delivery technology tablets and capsules
for the programmed release of prohormones androstenedione, androstenediol,
norandrostenedione and norandrostenediol. The application of the technology to
these prohormones necessitated the development of MDT molecular dispersion
technology which was also licensed to MET-Rx and incorporated into these
products. MET-Rx sells products primarily for bodybuilding. On a non-exclusive
basis, a controlled delivery technology weight loss product was developed for
the MET-Rx brand. The MET-Rx sports supplements and weight loss products were
released in April 1999. Initial sales of these products through year end 1999
were promising.

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See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6.

     In 1999, the Company licensed the right from Temple University to apply the
controlled delivery technology in the manufacture of OTC (over-the counter)
pharmaceuticals. No products were manufactured using this license during 1999.

     Nutraceutix manufactures all controlled delivery technology products in its
Colorado facility. As the manufacturing technology is further developed and
refined, other companies may be licensed by Nutraceutix to manufacture
controlled delivery products.

MANUFACTURING

  Animal Health Products

     In addition to its own COBACTIN and BIOPOWER brand products, the Company
manufactures microbial products for several companies on a private label and OEM
basis at its fermentation plant located at its corporate headquarters in
Redmond, Washington. These products include microbial inoculum, feed and food
additives and microbial based supplements. The Company has over 12 years of
experience in microbial fermentation, and holds patents relating to a
proprietary strain of Lactobacillus acidophilus and preservation technologies.

     In December 1999, the Company announced the opening of a second
fermentation facility in Redmond, Washington in response to increased demand for
probiotic products. The two facilities will produce over twenty six (26) species
of beneficial bacteria regularly used in inoculum, feed, food additives, health
supplements and the proprietary LIVEBAC probiotic. The new facility will
increase manufacturing capacity by 100%.

  Private Label Health Supplement Manufacturing

     The Company manufactures private label health supplements at its
encapsulating, tableting, bottling and labeling facility in Lafayette, Colorado.
The Company manufactures capsules, tablets, powdered drink mixes and blended
products for companies that market these products under their own brand names.
The majority of these products incorporate one of the Company's proprietary
technologies. This includes health supplements that incorporate Calcium
D-glucarate, Lactobacillus acidophilus strains developed by the Company or
Lactobacillus acidophilus products manufactured employing the Company's
proprietary LIVEBAC caplet process and products incorporating CDT controlled
delivery technology.

     The LIVEBAC process is a tableting technology that results in extended
shelf life of tablets or caplets containing lactic acid bacteria. Caplets of
Lactobacillus acidophilus made using the LIVEBAC process have demonstrated
superior viability and shelf life over conventional capsules.

MARKETING, SALES AND DISTRIBUTION

     The Company relies on a sales manager, Biotal, Inc. and independent sales
representatives to sell and service customers of its animal health products. The
Company also markets and sells OEM and private label silage inoculum directly to
branded companies in agriculture. Biotal, Inc. markets, sells and provides
technical support of COBACTIN microbial beef additives for feedlot cattle. The
Company's sales manager and sales representatives are responsible for all other
sales related to the agricultural industry including OEM and private label
silage inoculums, BIOPOWER silage inoculum, private label feed additives and
COBACTIN microbial dairy feed additives.

     In the human supplement market, the Company relies on a Vice President of
Sales and support sales and marketing staff. In 1999, the Company expanded its
marketing efforts in public relations and customer service through the addition
of personnel.

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     The Company sells its own branded health supplements exclusively via the
internet under the BIOPOWER health supplement brand. The Company provides these
products primarily as a service to shareholders and employees. Other than the
website posting of BIOPOWER health supplements, the Company does not actively
promote internet sales.

     To date, the Company has limited sales history of its health supplement
products and therefore has not fully identified the effect of seasonality. In
agricultural sales, seasonality is primarily related to the number of cattle in
production which is usually reduced in the winter months.

COMPETITION

     The principal markets which the Company services are competitive and
fragmented. There are competitors in manufacturing and product development in
both the human and animal health supplement markets. Increased competition could
have a material adverse effect on the Company, as competitors may have far
greater financial and other resources available to them and may possess
manufacturing, distribution and marketing capabilities more extensive than those
of the Company. The Company's competitors in the microbial products market who
manufacture lactic acid bacteria for inclusion in animal and human supplements
include Chris Hansen, Rhodia, Lallemand and Roselle.

     The Company believes that its primary competitive advantage results from
its proprietary technologies which is not available from other suppliers,
including LIVEBAC caplets, Calcium D-glucarate, CDT controlled delivery and
COBACTIN microbial feed additive technology. In the feed additive market, the
formation of an alliance with Biotal, Inc. in September, 1999 has diminished one
of the competitors in the direct feed microbial feed additive market for beef
cattle. The Company believes this alliance will help maintain sales in the beef
market. Additionally, the Company believes that other principal competitive
factors in the sale of health supplements are quality, technology,
manufacturing, timely delivery of product and service. In the private label
business, the Company has competitors with more resources than the Company.
However, the Company believes its proprietary technologies offer some
competitive advantage with regards to these competitors.

SOURCES AND AVAILABILITY OF RAW MATERIALS AND PRINCIPAL SUPPLIERS

     The Company obtains all its raw materials for the manufacture of its
products from outside sources. The Company generally does not have contracts
with any entities or persons committing such suppliers to provide the materials
required for the production of its products, with the exception of the glucarate
salt, Calcium D-glucarate. The Company has an agreement with BioChemix for the
supply of Calcium D-glucarate. Management expects BioChemix to be able to supply
sufficient glucarate for the health supplement market. However, Nutraceutix has
no direct control over BioChemix and any interruption in supply of glucarate
could adversely effect the revenue of the Company.

DEPENDENCE ON SIGNIFICANT CUSTOMERS

     In 1999, the Company received approximately 62% of its revenues from four
customers: MET-Rx, (40%), Rexall Showcase (10%), Rexall Sundown (7%) and Odwalla
(5%). Rexall Showcase is a wholly-owned subsidiary of Rexall Sundown. In the
fourth quarter of 1999, Rexall Sundown acquired MET-Rx. With the acquisition of
MET-Rx, the Company's three largest customers accounting for approximately 57%
percent of the total revenues in 1999 are owned by a single entity, Rexall
Sundown. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Outlook -- Issues and Uncertainties", both contained
in Item 6.

INTELLECTUAL PROPERTY

     The Company currently holds two U.S. and one Canadian patent pertaining to
COBACTIN feed additives, two U.S. patents related to the dispensing of microbial
cultures, one licensed patent pertaining to Calcium D-glucarate and one licensed
patent pending pertaining to the CDT controlled delivery technology.

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The licensed Calcium D-glucarate patent expires in 2006; the Canadian patent
expires in 2009 and the other U.S. patents pertaining to COBACTIN feed additive
expire in 2010 and 2011.

     As of December 31, 1999, the Company had approximately eight federal
trademark registrations and seven trademark applications pending with the United
States Patent and Trademark Office. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products.
Following is a list of the Company's registered and pending trademarks:
COBACTIN, COBACTIN PLUS, COBACTIN II, BIO TECHNIQUES, BIO POWER, LIVEBAC,
NUTRACEUTIX, BT1386, NU-TRAX, CDT, MOLECULAR STRENGTH, BACCINE, S.E.T., COOL-TAB
and BIOTRACT.

     The Company has a license agreement with BioChemix for delivery of
glucarate in certain health supplements which required the Company to purchase
all Calcium D-glucarate from BioChemix, Inc. The Company paid a 5.25% royalty on
the net revenue received from the use of certain formulas developed by BioChemix
for the delivery of glucarate in health supplements for breast, prostate, lung,
colon and liver health until 1998, when the agreement between the Company and
BioChemix was amended to eliminate royalty payments on the sale of products
containing Calcium D-glucarate.

     The Company pays certain royalties to the original developers of certain of
its agricultural products. See "Note J of Notes to Financial Statements"
contained in Item 7.

     The Company has a license agreement with Temple University for the
controlled delivery technology (CDT). In December of 1998, the Company paid a
non-refundable license fee of $25,000 to Temple University pursuant to the terms
of the license agreement. The Company is obligated to pay a royalty of $0.30 per
1000 tablets or capsules produced using the technology. The Company is obligated
to pay an annual non-refundable license maintenance fee of $10,000, which
license maintenance fee payment may be credited against royalties due during the
same calendar year. The agreement does not provide for carry-over of unused
credit to subsequent years. During 1999, royalty payments totaled $9,629 which
was applied against the maintenance fee.

     In June 1999, the Company and Temple University signed a definitive
agreement for the exclusive licensing of controlled delivery technology
pertaining to the manufacture of OTC (over-the-counter) pharmaceuticals. The
Company is obligated to pay a royalty of $0.40 per 1000 tablets or capsules
produced using the technology. The Company is also obligated to pay an annual
non-refundable license maintenance fee of $10,000, which license maintenance fee
payment may be credited against royalties due during the same calendar year. The
agreement does not provide for carry-over of unused credit to subsequent years.
The Company has developed no OTC products to date with the technology, but the
Company continues to seek partners in this area.

GOVERNMENTAL REGULATION

     Many of the Company's products are either G.R.A.S. (Generally Regarded As
Safe) listed by the FDA or do not currently require extended regulatory
approval. Recent legislation has resulted in a regulatory environment which sets
what the Company considers to be reasonable limitations and guidelines on health
claims and labeling for natural products. Thus the Company believes that current
and reasonably foreseeable governmental regulation will have minimal impact on
its business.

     Statements of the Company and its customers regarding dietary supplement
products are subject to regulation by the FTC under the Federal Trade Commission
Act, which prohibits unfair or deceptive trade practices, including false or
misleading advertising. The FTC in recent years has brought a number of actions
challenging claims by companies.

     The Company manufactures products for customers that the customer
distributes under their own or other trademarks. Such private label customers
are subject to governmental regulations in connection with their purchase,
marketing, distribution and sale of such products, and the Company is subject to
such regulations in connection with the manufacture of such products and its
delivery of services to such customers. However, the Company's private label
customers are independent companies, and their labeling, marketing

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and distribution of such products are beyond the Company's control.
Nevertheless, the failure of these customers to comply with applicable laws or
regulations could have a material adverse effect on the Company.

RESEARCH AND DEVELOPMENT

     In 1999 and 1998, the Company spent $295,979 (approximately 3% of revenues)
and $224,785 (approximately 4% of revenues), respectively, on product research
and development. The Company funds research and development internally.

MICROBIAL PRODUCT DEVELOPMENT

     The Company has conducted research into the role of resident bacteria that
are normally found in the gastrointestinal tract with human health and the
delivery of live lactic acid bacteria in supplemental form. This research has
also resulted in development of the LIVEBAC Process for tableting lactic acid
bacteria. The LIVEBAC Process has been shown to yield a tablet with a superior
shelf life. Shelf life of lactic acid bacteria in supplement form has
historically been problematic. The Company is continuing research to extend the
shelf life of lactic acid bacteria and develop new applications. The Company has
also developed proprietary strains of bacteria which, in laboratory conditions,
are inhibitory to certain pathogens. BACCINE , a proprietary strain of
Lactococcus lactis, is inhibitory to the organisms responsible for listeria food
poisoning. The Company intends to continue microbial product development
research in 2000.

HEALTH SUPPLEMENT DEVELOPMENT

     The Company develops products requested by customers, and/or develops new
product concepts which it licenses to customers. The Company also actively seeks
and reviews new nutraceutical materials (such as Calcium D-glucarate) and
delivery technologies (such as controlled delivery) developed by independent
researchers. The Company sublicenses these technologies to customers. The
Company intends to continue to emphasize development of delivery technology in
year 2000.

COMPLIANCE WITH ENVIRONMENT LAWS

     The Company believes that it is in compliance with all relevant
environmental laws. Due to the nature of the Company's operations, to date, the
cost of complying with environmental laws has not had a significant effect on
the Company's operations.

EMPLOYEES

     As of December 31, 1999, the Company employed 58 full time employees,
consisting of four executives, 33 production personnel, four sales and marketing
personnel, two research and development personnel, eight quality control
personnel and seven administrative personnel. None of the Company's employees
are represented by labor unions. The Company believes its relationship with
employees is good.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company's corporate headquarters, including administrative offices,
production and research and development facilities are located approximately
fifteen miles northeast of Seattle at 8340 154th Avenue Northeast, Redmond,
Washington 98052. The property, consisting of 15,893 square feet, is leased for
a term of sixty (60) months with a lease termination date of November 30, 2003.
The production facility includes equipment for fermentation, formulation,
packaging and storage. The Company leases an additional building consisting of
1,879 square feet for off-site storage and product blending, located
approximately one-half mile from the corporate headquarters at 14822 NE 95th
Street, Redmond, Washington. The storage space is leased through July 31, 2000.
In November 1999, a third property of 9,620 square feet located at 9625 153rd
Avenue SE, Redmond, Washington was leased for a term of sixty (60) months with a
lease termination date of December 31, 2004. The space will duplicate the
fermentation facility located at 8340 154th Avenue Northeast. The Company
believes the new facility will double production capacity.

                                       10
<PAGE>   11

     The Company's tableting and encapsulating facility is located approximately
25 miles from Denver at 1400 and 1420 Overlook Drive, Lafayette, Colorado 80026.
The premises consist of two stand-alone buildings for a total of 28,800 square
feet. The main building is used primarily for manufacturing and contains
machinery for the blending and finishing of raw materials into tablets or
capsules and also contains some minimal office space. The second building is
warehouse space used for raw material and packaging storage. The premises had
been subject to four (4) separate lease agreements with the same lessor, all of
which had different lease termination dates. The leases were consolidated,
effective August 1, 1998, into one lease for a term of three (3) years. The
initial term of the consolidated lease expires on July 31, 2001. The Company has
an option to extend the lease for an additional term of two (2) years.

     Each lease was negotiated at arm's length and entered into by the Company,
as tenant, with an unaffiliated third party, as the lessor. The Company believes
all leased properties are in good and satisfactory condition, and are suitable
for the Company's business needs for the term of the respective leases.

ITEM 3. LEGAL PROCEEDINGS

     Except as described below, the Company is not presently a party to any
material litigation not in the regular course of its business, nor to the
Company's knowledge is such litigation threatened.

     In February 1996, Bio Universal, Inc. ("Bio Universal") commenced an action
against Bio Techniques Laboratories, Inc. (BTL) in the 251st District Court,
Randall County, Texas, Case No. 42,377-C. The action arises out of a 1993
agreement between BTL and Bio Universal pursuant to which Bio Universal was
marketing and distributing BTL's products. BTL believed that Bio Universal
failed to perform its obligations under that agreement. In this action Bio
Universal alleged that it has been damaged in that BTL (i) failed to pay Bio
Universal money owed to Bio Universal, (ii) wrongfully terminated the marketing
and distribution agreement, (iii) tortuously interfered with Bio Universal's
customer contracts, (iv) slandered and disparaged Bio Universal and (v) breached
the marketing and distribution agreement. Bio Universal was seeking compensatory
and punitive damages in unspecified amounts, exculpation from money owed BTL,
termination of collateral agreements and reimbursement of fees and costs
associated with the litigation.

     The Company and Bio Universal, Inc. negotiated a settlement whereby the
Company agreed to pay Bio Universal, Inc. the amount of $180,000 in thirty six
(36) monthly installments of $5,000 beginning in April 2000. See "Note L of
Notes to Financial Statements" contained in item 7.

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

     No matters were submitted to the Company's shareholders during the quarter
ended December 31, 1999.

                                       11
<PAGE>   12

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock, $.001 par value, is traded in the
over-the-counter market (OTC Bulletin Board Symbol: "NUTX"). The following table
sets forth the range of high ask and low bid prices for the Company's Common
Stock on a quarterly basis for the past two full years, as reported by the
National Quotation Bureau (which reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions). The foregoing and following information should not be taken as an
indication of the existence of an established public trading market for the
Company's Common Stock.

                                  COMMON STOCK

<TABLE>
<CAPTION>
               PERIOD -- FISCAL YEAR 1999                  HIGH ASK    LOW BID
               --------------------------                  --------    -------
<S>                                                        <C>         <C>
First Quarter ending March 31, 1999......................  29/32       14/32
Second Quarter ending June 30, 1999......................   5/8        3/8
Third Quarter ending September 30, 1999..................  29/32       3/8
Fourth Quarter ending December 31, 1999..................  19/32       7/32
</TABLE>

<TABLE>
<CAPTION>
               PERIOD -- FISCAL YEAR 1998                  HIGH ASK    LOW BID
               --------------------------                  --------    -------
<S>                                                        <C>         <C>
First Quarter ending March 31, 1998......................  1 11/32     21/32
Second Quarter ending June 30, 1998......................  1 9/32      8/16
Third Quarter ending September 30, 1998..................  3 1/4       13/16
Fourth Quarter ending December 31, 1998..................  1 5/16      9/16
</TABLE>

     The approximate number of record holders of the Company's Common Stock as
of December 31, 1999 was 1,425 inclusive of those brokerage firms and/or
clearing houses holding the Company's common shares for their clientele (with
each such brokerage house and/or clearing house being considered as one holder).

     The Company has not paid or declared any dividends upon its Common Stock
since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.

                                       12
<PAGE>   13

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

     The following discussion and analysis should be read in conjunction with
the Financial Statements, including the notes thereto, appearing in this Form
10-KSB. Except for the historical information contained herein, the matters
discussed in this report contain forward-looking statements that are based on
management's beliefs and assumptions, current expectations, estimates and
projections. Statements that are not historical facts, including without
limitation, statements which are preceded by, followed by or include the words
"believes," "anticipates," "plans," "expects," "may," "should," or similar
expressions are forward-looking statements. Many of the factors that will
determine the Company's future results are beyond the ability of the Company to
control or predict. These statements are subject to risks and uncertainties and,
therefore, actual results may differ materially. The Company disclaims any
obligation to update any forward-looking statements whether as a result of the
new information, future events or otherwise.

     Important factors that may affect future results include, but are not
limited to, the impact of competitive products and pricing, product development,
changes in law and regulations, customer demand, litigation, availability of
future financing, uncertainty of market acceptance of new products, and other
risks detailed from time to time in the Company's SEC reports, copies of which
are available upon request from the Company's Investor Relations Department. See
"Outlook -- Issues and Uncertainties" below.

RESULTS OF REVENUE GENERATING PROFIT CENTERS

     The Company operates four primary revenue-generating profit centers:

          1. Proprietary Technology -- The Company's proprietary technologies
     include Calcium D-glucarate, LIVEBAC caplets, molecular dispersion
     technology and controlled delivery technology. Revenues are realized from
     the sales of glucarate as a raw material to other manufacturers for
     incorporation into sublicensed customer's private label products,
     manufacturing by the Company for sublicensed customer's private label
     products containing Calcium D-glucarate, sales of LIVEBAC caplets and
     manufacture of health supplements incorporating CDT control delivery
     technology and molecular dispersion technology.

          2. Private Label Manufacturing of Health Supplements -- In Lafayette,
     Colorado, the Company manufactures health supplements for private label
     customers. Revenues are realized from bottling, labeling and manufacture of
     tablets, capsules, herbal pre-blends and health supplement pre-blends for
     inclusion into food products and bulk packaged products.

          3. Fermentation -- The Company manufactures and realizes revenues from
     the sale of viable (live) freeze dried bacteria for companies on a private
     label and OEM basis at its fermentation plant located in Redmond, WA.

          4. COBACTIN microbial feed additive -- COBACTIN for feedlot cattle,
     dairy cows and poultry is a viable (live) Lactobacillus acidophilus that
     provides a stable blend of lactic acid bacteria on a daily basis. Revenues
     are realized from the sale of COBACTIN brand proprietary products and
     royalties resulting from the microbial feed additive alliance with Biotal,
     Inc.

PROPRIETARY TECHNOLOGY

     Revenues from proprietary technology were $4,673,974 for 1999 compared to
$2,764,582 in 1998. The increase is attributed to the sale of controlled
delivery and molecular dispersion products to MET-Rx, Inc. totaling $2,622,124
in 1999. MET-Rx had an exclusive sublicense for products containing controlled
delivery and molecular dispersion technologies in the North American sports
nutrition market through all trade channels excluding multilevel through March
31, 2000. On March 6, 2000, MET-Rx signed an exclusive Product Sales and
Sublicense Agreement for controlled delivery and molecular dispersion technology
products for the term of one year beginning April 1, 2000. MET-Rx was acquired
by Rexall Sundown in the fourth quarter of 1999. The future sales of controlled
delivery and molecular dispersion products to MET-Rx are

                                       13
<PAGE>   14

uncertain due to the transition of MET-Rx to Rexall Sundown ownership. See
"Outlook -- Issues and Uncertainties" set forth on page 14.

     Royalty revenues from Weider Nutrition decreased to $2,166 in 1999 from
$375,782 in 1998. This was a result of the termination of Weider's exclusive
license to sell retail products containing Calcium D-glucarate. As of December
31, 1999, of the thirty (30) health supplement companies who have signed
sublicense agreements for the purchase of Calcium D-glucarate, only Rexall
Showcase had significant sales. In 1999, the Company received revenues of
$275,000 from sales of Calcium D-glucarate to Rexall Showcase.

PRIVATE LABEL MANUFACTURING OF HEALTH SUPPLEMENTS

     Sales of private label manufacturing of health supplements increased in
1999 to $3,021,497 compared to $1,402,223 in 1998. The increase was primarily
due to the sales of non-proprietary products to MET-Rx totaling $1,462,220 in
1999, of which $826,775 were powder fill products produced as an interim service
for MET-Rx. The Company does not expect to continue the powder fill business in
2000.

FERMENTATION

     Sales of fermentation products in 1999 increased to $1,393,235 from
$810,985 in 1998. This increase is due to the addition of new customers and the
alliance with Biotal, Inc. for the manufacture of their MICRO-CELL product. Per
this agreement, Nutraceutix will realize an increase in fermentation sales and a
corresponding decrease in COBACTIN sales, as well as, a decrease in marketing
and sales costs for COBACTIN products. To date, this agreement has resulted in a
slight increase in profit contribution from microbial feed additive sales. In
the year 2000, Nutraceutix, Inc. will double its fermentation capacity by adding
a second manufacturing facility which is expected to be operational by year end
2000. The current facility is operating at 100% capacity.

COBACTIN

     The Company's sales of COBACTIN microbial feed additives decreased to
$1,183,711 in 1999 from $1,351,816 in 1998. This decrease resulted from the
September 1, 1999 alliance with Biotal which reduced COBACTIN'S sales price, and
correspondingly decreased sales and marketing expenses while increasing
fermentation sales through the manufacture of Biotal's MICRO-CELL product.

REVENUES FOR FISCAL 1999 COMPARED TO FISCAL 1998

     Revenues for the fiscal year ended December 31, 1999 were $10,272,417; an
increase of 62% compared to $6,329,606 in the fiscal year ended December 31,
1998. This increase was primarily due to the manufacturing of private label and
proprietary products for MET-Rx and Rexall Sundown.

COST OF REVENUES

     Cost of revenues as a percentage of total revenues in fiscal 1999 was 76%
compared to 61% in fiscal 1998. This increase was a result of the product mix
along with adjustments of inventories in the fourth quarter totaling
approximately $176,000. Sales fluctuations throughout the year also affected the
efficiencies of the Colorado manufacturing facility which adversely affected
margins.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and Development expenses increased to $295,979 in fiscal 1999
compared to $224,785 in 1998.

SELLING EXPENSES

     Selling expenses remained constant at $786,564 in 1999 compared to $786,286
in 1998.

                                       14
<PAGE>   15

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses increased to $1,513,072 or 15% of
revenues in 1999 from $1,282,446 or 20% of revenue in fiscal 1998. The increase
is primarily due to building the infrastructure of the Company to support the
sales growth.

INTEREST EXPENSE

     Interest expense increased in fiscal 1999 to $242,912 in fiscal 1999 from
$157,448 in fiscal 1998. The increase was due to the addition of equipment
leases in 1999 and an increase in borrowing under the line of credit.

NET EARNINGS

     Net earnings decreased in fiscal 1999 to a loss of $584,217 as compared to
earnings of $6,809 in 1998. While the Company experienced a loss of $584,217 in
1999, this is not completely reflective of the overall Company performance. Two
non-recurring expenses accounted for the majority of the loss which includes an
expense of $180,000 related to the settlement of litigation with BioUniversal to
be paid over the next three years, and non-cash inventory adjustments totaling
approximately $176,000.

EARNINGS PER SHARE

     Net loss per share in 1999 was ($0.034), while earnings per share in 1998
were $0.0004.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its operations and capital requirements primarily
through borrowing, raising equity capital and operations. As of December 31,
1999 the Company had working capital of $369,397 as compared to working capital
of $724,657 at December 31, 1998. The decrease is primarily due to the net loss
in fiscal 1999. In May 1999, the Company's bank line credit was increased by
$400,000 to $1,200,000. As of December 31, 1999, the Company had an available
balance of $309,800 to borrow from the Company's bank line of credit which the
Company believes to be adequate capital based on the presumption of a
continuation of the bank line of credit.

     One of the Company's business strategies is to pursue acquisition of
proprietary technologies that complement its existing products and expand its
distribution channels compatible with its business philosophy and strategic
goals. The Company regularly evaluates potential technologies and may hold
discussions regarding such potential acquisitions of technologies. As a general
rule, the Company will publicly announce such acquisitions of technologies only
after a definitive agreement has been signed. Future acquisitions of
technologies and development of new products, if any, could be financed by
current cash on hand, bank borrowings, public offerings or private placements of
equity or debt securities, or a combination of the foregoing. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company or at all. The failure to raise the funds necessary to finance
its future cash requirements or consummate future acquisitions could adversely
affect the Company's ability to pursue its strategy and could negatively affect
its operations in future periods.

YEAR 2000 IMPACT STATEMENT

     In 1999, the Company conducted a comprehensive review of its internal
computer systems and its products to identify the systems that could be affected
by the Y2K issue. While no potential material problems in its infrastructure and
facilities were found, the Company, as a further precaution, updated its
operational software to Windows 98 to ensure Y2K compliance. The incremental
costs of this upgrade were not material.

     Based on responses the Company received to its questionnaires, the Company
determined that current material vendors and suppliers were either compliant or
would be Y2K complaint in a timely manner. To date, the Company has seen no
evidence of the Y2K issue having any adverse consequence on its business.

                                       15
<PAGE>   16

                      OUTLOOK -- ISSUES AND UNCERTAINTIES

POTENTIAL SALES AND EARNING VOLATILITY

     The Company's sales and earnings continue to be subject to potential
volatility based upon, among other things: (i) the adverse effect of
distributors' or the Company's failure, and allegations of their failure, to
comply with applicable regulations, which have in the past and could again in
the future result in the removal of certain products from sale in certain
countries, either temporarily or permanently; (ii) the negative impact of
changes in or interpretations or regulations that may limit or restrict the sale
of certain of the Company's products, the expansion of its operations into new
markets and the introduction of its products into each such market; (iii) the
acquisition, consolidation or sale of key customers (iv) the inability of the
Company to introduce new products or the introduction of more products by the
Company's competitors; (v) general conditions in the nutritional supplement
industry; (vi) consumer perceptions of the Company's products and operations and
(vii) the general condition and viability of key customers' businesses which may
be unrelated to any relationship between the Company and the key customer. In
particular, because consumers ingest the Company's products, the Company is
highly dependent upon consumers' perception of the safety and quality of its
products. As a result, substantial negative publicity concerning one or more of
the Company's products or other nutritional supplements similar to the Company's
products could adversely affect the Company's results of operations or financial
condition.

DEPENDENCE ON CUSTOMERS

     In 1999, the Company received approximately 57% of its total revenues from
three customers: MET-Rx (40%), Rexall Showcase (10%) and Rexall Sundown (7%).
Rexall Showcase is a wholly-owned subsidiary of Rexall Sundown and Rexall
Sundown acquired MET-Rx during the fourth quarter of 1999. On March 6, 2000,
MET-Rx executed an exclusive sublicense agreement with the Company for sports
supplement products incorporating controlled delivery and molecular dispersion
technology, excluding multilevel, effective April 1, 2000 for a one year term.
This sublicense agreement is on an exclusive basis provided MET-Rx maintains
certain minimum purchase amounts. The Company is unable to predict whether
MET-Rx will meet these requirements and is unable to predict the impact of the
consolidation of its three largest customers on its revenues or business in the
future. The consolidation of these three customers under common ownership may
reduce revenues to the Company and could have a material adverse effect on the
results of operations or financial condition.

DEPENDENCE ON KEY PERSONNEL

     The Company believes that its success depends to a significant extent on
the management and other skills of William St. John, its President and Chairman,
Steven Moger, the Vice President of Operations and Patricia St. John, the Vice
President of Administration, Secretary and Treasurer, as well as its ability to
retain or attract other skilled personnel. The loss or unavailability of the
services of Mr. or Mrs. St. John or Mr. Moger could have a material adverse
effect on the Company.

ABSENCE OF CLINICAL STUDIES

     Although many of the ingredients in the Company's products are vitamins,
minerals, herbs and other substances for which there is a long history of human
consumption, some of the Company's products contain innovative ingredients such
as the glucarate salt, Calcium D-glucarate. While the Company believes all of
its products to be safe when taken as directed, there is little long-term
experience with human consumption of certain of these innovative product
ingredients in concentrated form. Accordingly, no assurance can be given that
the Company's products, even when used as directed, will have the effects
intended. Although the Company tests the formulation and production of its
products to ensure that they are safe when consumed as directed, they have not
sponsored clinical studies on the long-term effect of human consumption.

                                       16
<PAGE>   17

REGULATORY RISKS

     In the future, the Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, or more stringent interpretations of current laws
or regulations. The Company is unable to predict the nature of such future laws,
regulations or interpretations, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business. They could, however, 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 record keeping
requirements, expanded documentation of the properties of certain products, or
expanded or different labeling, or scientific substantiation. Any or all of such
requirements could have a material adverse effect on the Company's results of
operations and financial condition.

POTENTIAL EFFECT OF UNFAVORABLE PUBLICITY

     The Company believes the nutritional supplement market is affected by
national media attention regarding the consumption of nutritional supplements.
There can be no assurance that future scientific research or publicity will be
favorable to the nutritional supplement market of any particular product, or
consistent with earlier 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 illness
or other 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 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 NEW PRODUCTS

     The Company believes its ability to grow in its existing markets is
partially dependent upon its ability to introduce new and innovative products
into such markets. Although the Company seeks to introduce additional products
each year in its existing markets, the success of new products is subject to a
number of conditions, including developing products that will appeal to
customers and comply with existing regulations at the time of introduction.
There can be no assurance that the Company's efforts to develop innovative new
products will be successful, that customers will accept new products, or that
the Company will obtain regulatory approvals of such new products, if required.
In addition, no assurance can be given that new products currently experiencing
strong popularity and rapid growth will maintain their sales over time.

DEPENDENCE ON SUPPLIERS

     There can be no assurance that suppliers will provide the raw materials
needed by the Company in the quantities requested or at a price the Company is
willing to pay. Because the Company does not control the actual production of
these raw materials, it is also subject to delays caused by interruption in
production of materials based on conditions not wholly within its control. The
inability of the Company to obtain adequate supplies of raw materials for its
products at favorable prices, or at all, as a result of any of the foregoing
factors or otherwise, could have a material adverse effect on the Company.

DEPENDENCE ON LICENSEES

     The Company believes its ability to grow in its existing market is
partially dependent on the success of the companies which sub-license the
Company's technologies. The Company has no control over the business of
licensees. Adverse events in their businesses could negatively affect the
Company.

                                       17
<PAGE>   18

ITEM 7. FINANCIAL STATEMENTS

     See "Financial Statements and Notes to Financial Statements" set forth on
pages F-1 through F-14 of this Annual Report on Form 10-KSB.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     The Company has had no changes in or disagreements with accountants on
accounting or financial disclosure, which fall within the scope of Item 304 of
Regulation S-B.

                                       18
<PAGE>   19

                                    PART III

ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
       WITH SECTION 16(a) OF THE EXCHANGE ACT

     The Company will file a definitive proxy statement ("Proxy Statement")
relating to its 2000 Annual Meeting of Shareholders pursuant to and in
accordance with section 240.14a-101 within 120 days after the end of the fiscal
year covered by this form. The information required by this item is incorporated
by reference to the Proxy Statement under the headings "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 10. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation" and "Director
Compensation."

ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits: The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <S>       <C>
     3.1      Certificate of Incorporation and Amendment thereto(1)
     3.2      First Amended and Restated Bylaws(1)
     3.3      Amendment to Bylaws
    10.1      Central Soya Company Licensing Voting Agreement(1)
    10.2      Building Lease -- 8340 154th Avenue NE, Redmond, WA
              (Corporate headquarters/ manufacturing facility)(1)
    10.3      Building Lease -- 14810 NE 95th St., Redmond, WA(1)
    10.4      Building Lease -- 1420 Overlook Drive, Lafayette, CO
              (Tableting encapsulating, bottling plant)(1)
    10.5      Building Lease -- 1420 Overlook Drive, Lafayette, CO
              (Remainder of building for additional tableting,
              encapsulating, bottling and warehouse)(1)
    10.6      Building Lease -- 1400 Overlook Drive, Lafayette, CO
              (Warehouse)(1)
    10.7      Employment Agreement with William D. St. John(1)
    10.8      Stock Option Plan(1)
    10.9      Building Lease -- 1400 and 1420 Overlook Drive, Lafayette,
              CO (Tableting, encapsulation, bottling plant and warehouse)
              (Supersedes Exhibits 10.4, 10.5 and 10.6)(2)
    10.10     Employment Agreement with Lyndon Johnson (2)
    10.11     Rexall Showcase Agreement(2)
    10.12     Building Lease -- 9625 153rd Avenue NE, Redmond, WA
              (Manufacturing Facility)
    10.13     MET-Rx Agreement
</TABLE>

                                       19
<PAGE>   20

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <S>       <C>
    23.1      Consent of Grant Thornton LLP, Independent Certified Public
              Accountants
    24.1      Power of Attorney of Herbert L. Lucas
    24.2      Power of Attorney of Arthur S. Pearson
    24.3      Power of Attorney of Carl W. Schafer
    24.4      Power of Attorney of Daniel B. Ward
    27.1      Financial Data Schedule for the Fiscal Year Ended December
              31, 1999
</TABLE>

---------------
(1) Incorporated by reference to the Registration Statement on Form 10-SB (Reg.
    No. 000-24693) filed by the Company on July 27, 1998.

(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
    on Form 10-SB (Reg. No. 000-24693) filed by the Company on March 25, 1999.

     (b) Reports on Form 8-K.

     None.

                                       20
<PAGE>   21

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.

                                          NUTRACEUTIX, INC.

March 30, 2000                            By:    /s/ WILLIAM D. ST. JOHN
                                            ------------------------------------
                                                    William D. St. John
                                              President, Chairman of the Board

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:

<TABLE>
<S>                                                       <C>                            <C>

              By: /s/ WILLIAM D. ST. JOHN                  President, Chairman of the    March 30, 2000
  ----------------------------------------------------     Board (Principal Executive
                  William D. St. John                               Officer)

                By: /s/ STEVEN H. MOGER                   Vice President of Operations   March 30, 2000
  ----------------------------------------------------      (Principal Financial and
                    Steven H. Moger                            Accounting Officer)

               By: /s/ *HERBERT L. LUCAS                            Director             March 30, 2000
  ----------------------------------------------------
                    Herbert L. Lucas

               By: /s/ *ARTHUR S. PEARSON                           Director             March 30, 2000
  ----------------------------------------------------
                   Arthur S. Pearson

                By: /s/ *CARL W. SCHAFER                            Director             March 30, 2000
  ----------------------------------------------------
                    Carl W. Schafer

                By: /s/ *DANIEL B. WARD                             Director             March 30, 2000
  ----------------------------------------------------
                     Daniel B. Ward

              By: /s/ *WILLIAM D. ST. JOHN                                               March 30, 2000
  ----------------------------------------------------
                  William D. St. John,
                    Attorney-in-Fact
</TABLE>

                                       21
<PAGE>   22

                                    CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Certified Public Accountants..........   2
Financial Statements
  Balance Sheets............................................   3
  Statements of Operations..................................   4
  Statement of Stockholders' Equity.........................   5
  Statements of Cash Flows..................................   6
  Notes to Financial Statements.............................   7
</TABLE>

                                       F-1
<PAGE>   23

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Nutraceutix, Inc.

     We have audited the accompanying balance sheets of Nutraceutix, Inc. (a
Delaware Corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

     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 provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Nutraceutix, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.

                                          GRANT THORNTON LLP

Seattle, Washington
February 11, 2000 (except for note L,
as to which the date is February 29, 2000)

                                       F-2
<PAGE>   24

                               NUTRACEUTIX, INC.

                                 BALANCE SHEETS
                                  DECEMBER 31,

                                     ASSETS

<TABLE>
<CAPTION>
                                                                 1999           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
Current assets
  Cash......................................................  $   149,321    $    93,440
  Accounts receivable, less allowance for doubtful accounts
     of $0 and $57,407, respectively........................      936,627        737,916
  Inventories...............................................    1,746,474        824,293
  Prepaid expenses..........................................      112,021        201,188
                                                              -----------    -----------
          Total current assets..............................    2,944,443      1,856,837
Equipment and furniture -- net..............................    1,461,324      1,327,257
Other assets -- net.........................................      795,019        935,005
                                                              -----------    -----------
                                                              $ 5,200,786    $ 4,119,099
                                                              ===========    ===========
                                      LIABILITIES
Current liabilities
  Line of credit............................................  $   839,500    $   411,500
  Current maturities of long-term obligations...............      203,998        194,390
  Current maturities of capital lease obligations...........      217,394        135,794
  Accounts payable -- trade.................................      550,900        281,719
  Accounts payable -- MET-Rx................................      662,841             --
  Accrued liabilities.......................................       84,952         97,259
  Deferred revenue..........................................       15,461         11,518
                                                              -----------    -----------
          Total current liabilities.........................    2,575,046      1,132,180
Long-term obligations, less current maturities..............      533,730        465,892
Capital lease obligations, less current maturities..........      248,148        249,198
Commitments and contingencies...............................           --             --
Stockholders' equity
  Preferred stock authorized, 5,000,000 shares $.01 par
     value..................................................           --             --
  Common stock authorized, 30,000,000 shares $.001 par
     value..................................................       17,489         16,864
  Additional contributed capital............................   11,725,754     11,570,129
  Accumulated deficit.......................................   (9,899,381)    (9,315,164)
                                                              -----------    -----------
          Total stockholders' equity........................    1,843,862      2,271,829
                                                              -----------    -----------
                                                              $ 5,200,786    $ 4,119,099
                                                              ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-3
<PAGE>   25

                               NUTRACEUTIX, INC.

                            STATEMENTS OF OPERATIONS
                            YEAR ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                 1999           1998
                                                              -----------    ----------
<S>                                                           <C>            <C>
Net revenues................................................  $10,272,417    $6,329,606
Cost of revenues............................................    7,805,440     3,880,880
                                                              -----------    ----------
     Gross profit...........................................    2,466,977     2,448,726
Operating expenses
  Marketing and selling.....................................      786,564       786,286
  Research and development..................................      295,979       224,785
  General and administrative................................    1,513,072     1,282,446
                                                              -----------    ----------
                                                                2,595,615     2,293,517
                                                              -----------    ----------
     Operating profit (loss)................................     (128,638)      155,209
Other income (expense)
  Interest expense..........................................     (242,912)     (157,448)
  Settlement expense........................................     (180,000)           --
  Other.....................................................      (32,667)        9,048
                                                              -----------    ----------
                                                                 (455,579)     (148,400)
                                                              -----------    ----------
     Earnings (loss) before income taxes....................     (584,217)        6,809
Income taxes................................................           --            --
                                                              -----------    ----------
       Net earnings (loss)..................................  $  (584,217)   $    6,809
                                                              ===========    ==========
       Net earnings (loss) per share........................  $     (.034)   $   0.0004
                                                              ===========    ==========
       Net earnings (loss) per share assuming dilution......  $     (.034)   $   0.0004
                                                              ===========    ==========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>   26

                               NUTRACEUTIX, INC.

                       STATEMENT OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                 COMMON STOCK       ADDITIONAL
                                             --------------------   CONTRIBUTED   ACCUMULATED
                                               SHARES     AMOUNT      CAPITAL       DEFICIT       TOTAL
                                             ----------   -------   -----------   -----------   ----------
<S>                                          <C>          <C>       <C>           <C>           <C>
Balance at January 1, 1998.................  15,500,981   $15,501   $10,624,992   $(9,321,973)  $1,318,520
Issuance of common stock through 504
  offering, net of expenses of $76,875.....   1,127,500     1,128       767,622            --      768,750
Exercise of stock options..................     101,000       102        25,149            --       25,251
Issuance of common stock for services at
  fair value...............................      46,831        47        33,090            --       33,137
Issuance of common stock to prepay
  royalties................................      35,500        36        29,964            --       30,000
Granted stock options for services at fair
  value....................................          --        --        50,000            --       50,000
Issuance of common stock to board of
  directors for compensation...............      50,000        50        39,312            --       39,362
Net earnings for the year..................          --        --            --         6,809        6,809
                                             ----------   -------   -----------   -----------   ----------
Balance at December 31, 1998...............  16,861,812    16,864    11,570,129    (9,315,164)   2,271,829
Issuance of common stock through
  subscription agreement...................     625,000       625       155,625            --      156,250
Net loss for the year......................          --        --            --      (584,217)    (584,217)
                                             ----------   -------   -----------   -----------   ----------
Balance at December 31, 1999...............  17,486,812   $17,489   $11,725,754   $(9,899,381)  $1,843,862
                                             ==========   =======   ===========   ===========   ==========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       F-5
<PAGE>   27

                               NUTRACEUTIX, INC.

                            STATEMENTS OF CASH FLOWS
                            YEAR ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                1999          1998
                                                              ---------    ----------
<S>                                                           <C>          <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
  Net earnings (loss).......................................  $(584,217)   $    6,809
  Adjustments to reconcile net earnings (loss) to net cash
     used in operating activities
     Depreciation and amortization..........................    379,045       328,154
     Issuance of common stock for finance charges and
      consulting services...................................         --       122,499
     Write-off of start-up costs............................     50,266            --
     Legal settlement entered into under long-term
      obligation............................................    180,000            --
     Changes in assets and liabilities
       Accounts receivable..................................   (198,711)     (193,744)
       Inventories..........................................   (922,181)     (180,442)
       Prepaid expenses.....................................     89,167       (42,679)
       Accounts payable.....................................    932,022      (125,671)
       Accrued liabilities and deferred revenue.............     (8,364)     (156,428)
                                                              ---------    ----------
          Net cash used in operating activities.............    (82,973)     (241,502)
                                                              ---------    ----------
Cash flows from investing activities:
  Purchase of equipment.....................................   (155,785)     (771,226)
  Patent expenditures.......................................    (54,083)      (52,107)
                                                              ---------    ----------
          Net cash used in investing activities.............   (209,868)     (823,333)
                                                              ---------    ----------
Cash flows from financing activities:
  Payments on long-term and capital lease obligations.......   (397,067)     (292,107)
  Proceeds from long-term obligations.......................    161,539       599,903
  Net borrowings (payments) on line of credit...............    428,000       (76,500)
  Net proceeds from issuance of common stock................    156,250       794,001
                                                              ---------    ----------
          Net cash provided by financing activities.........    348,722     1,025,297
                                                              ---------    ----------
Net increase (decrease) in cash.............................     55,881       (39,538)
Cash at beginning of year...................................     93,440       132,978
                                                              ---------    ----------
Cash at end of year.........................................  $ 149,321    $   93,440
                                                              =========    ==========
Cash paid during the year for:
  Interest..................................................  $ 242,912    $  157,448
                                                              =========    ==========
Noncash investing and financing activities:
  Purchase of equipment under capital lease obligations.....  $ 213,524    $  223,079
  Issuance of common stock to prepay royalties..............  $      --    $   30,000
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-6
<PAGE>   28

                               NUTRACEUTIX, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nutraceutix, Inc. (the Company) is a manufacturer of branded and private
label nutritional supplements for human health, animal and food applications.
The Company is also engaged in the research and development of microbial,
nutritional and plant based products.

     A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows.

  1. Accounts Receivable

     In 1999, the Company considered accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts was required.

 2. Inventories

     Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.

 3. Equipment and Furniture

     Equipment and furniture are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lives of
the respective leases or the service lives of the improvements, whichever is
shorter. Leased property under capital leases is amortized over the service
lives of the assets as the leases substantially transfer ownership and have
bargain purchase options. The straight-line method of depreciation is followed
for substantially all assets for financial reporting purposes. The estimated
useful lives in determining depreciation and amortization are as follows:

<TABLE>
<S>                                                           <C>
Furniture and fixtures......................................   3-5 years
Machinery and equipment.....................................  3-10 years
Leasehold improvements......................................     3 years
Machinery and equipment under capital leases................  3-10 years
</TABLE>

  4. Other Assets

     Other assets include capitalized technical and product rights, patents and
trademarks and start-up costs. Technical and product rights and patents and
trademarks are stated at cost and amortized to operations over their estimated
useful lives or statutory lives, whichever is shorter. The Company evaluates its
technical and product rights and patents and trademarks annually to determine
potential impairment by comparing the carrying amount to the undiscounted
estimated future cash flows of the related assets.

 5. Research and Development Costs

     All expenditures for research and development are expensed in the year
incurred.

 6. Use of Estimates

     In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure 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.

                                       F-7
<PAGE>   29
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

 7. Reclassifications

     Certain reclassifications have been made to the 1998 presentation to
conform to the 1999 presentation.

 8. Recently Issued Accounting Standards

     In July 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-5, "Reporting on the costs of Start-Up
Activities." This statement provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The statement is effective
for the Company's financial statements for the year ending December 31, 1999.
The Company implemented SOP 98-5 for the year ending December 31, 1999 by
writing off the remaining balance of start-up costs totaling $50,266 in the
first quarter of 1999.

NOTE B -- INVENTORIES

     Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                          1999         1998
                                                       ----------    --------
<S>                                                    <C>           <C>
Raw materials........................................  $1,122,128    $387,625
Work in progress.....................................     589,720     374,584
Finished goods.......................................      34,626      62,084
                                                       ----------    --------
                                                       $1,746,474    $824,293
                                                       ==========    ========
</TABLE>

NOTE C -- EQUIPMENT AND FURNITURE

     Equipment and furniture consist of the following at December 31:

<TABLE>
<CAPTION>
                                                         1999          1998
                                                      ----------    ----------
<S>                                                   <C>           <C>
Furniture and fixtures..............................  $   74,192    $   74,192
Machinery and equipment.............................   1,613,449     1,483,893
Leasehold improvements..............................      35,267        29,177
Machinery and equipment under capital leases........     967,109       733,448
                                                      ----------    ----------
                                                       2,690,017     2,320,710
Less accumulated depreciation and amortization......     933,864       801,931
Less accumulated amortization of machinery and
  equipment under capital leases....................     294,829       191,522
                                                      ----------    ----------
                                                      $1,461,324    $1,327,257
                                                      ==========    ==========
</TABLE>

NOTE D -- OTHER ASSETS

     Other assets consist of the following at December 31:

<TABLE>
<CAPTION>
                                                         1999          1998
                                                      ----------    ----------
<S>                                                   <C>           <C>
Technical and product rights........................  $2,237,444    $2,237,444
Patents and trademarks..............................     366,906       312,825
Start-up costs......................................          --       124,739
                                                      ----------    ----------
                                                       2,604,350     2,675,008
Less accumulated amortization.......................   1,809,331     1,740,003
                                                      ----------    ----------
                                                      $  795,019    $  935,005
                                                      ==========    ==========
</TABLE>

                                       F-8
<PAGE>   30
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

NOTE E -- LINE OF CREDIT

     The Company has a line of credit with a bank collateralized by accounts
receivable, inventory and equipment which expires April 30, 2000. Under the
terms of the line of credit, the Company can borrow up to $1,200,000 at prime
plus 1% (9.5% at December 31, 1999). The Company complied with all covenants at
December 31, 1999.

NOTE F -- LONG-TERM OBLIGATIONS

     Long-term obligations consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Notes payable for equipment; with monthly installments
  totaling $13,801, including 16.4% interest; collateralized
  by production equipment; due in 2003......................  $445,733    $532,563
Note payable to a third party for payment of legal
  settlement; payable in 36 monthly installments of $5,000
  beginning April 3, 2000; no stated interest rate (note
  L)........................................................   180,000          --
Note payable to a third party; with monthly installments of
  $1,643, including interest at 12.7%; collateralized by
  equipment; due in 2004....................................    67,328          --
Notes payable to a third party; with monthly installments of
  $6,643, including interest at 12.3%; collateralized by
  equipment; due in 2000....................................    25,985      96,297
Notes payable to third parties; no stated interest rate;
  uncollateralized; due on demand...........................    10,000      10,000
Other notes payable.........................................     8,682      21,422
                                                              --------    --------
                                                               737,728     660,282
Less current maturities.....................................   203,998     194,390
                                                              --------    --------
                                                              $533,730    $465,892
                                                              ========    ========
</TABLE>

     Aggregate maturities of long-term obligations are as follows:

<TABLE>
<CAPTION>
                 YEAR ENDING DECEMBER 31,
                 ------------------------
<S>                                                         <C>
     2000.................................................  $203,998
     2001.................................................   190,746
     2002.................................................   212,727
     2003.................................................   122,792
     2004.................................................     7,465
                                                            --------
                                                            $737,728
                                                            ========
</TABLE>

NOTE G -- LEASE OBLIGATIONS

     The Company conducts a substantial portion of its operations utilizing
leased manufacturing and office facilities, expiring in 2004. Some of the
operating leases provide that the Company pay taxes, maintenance, insurance and
other occupancy expense applicable to leased premises. The Company also leases
machinery and equipment under capital leases expiring in 2004.

                                       F-9
<PAGE>   31
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

     The following is a schedule by years of future minimum lease payments
together with the present value of the minimum payments under operating and
capital leases as of December 31, 1999:

<TABLE>
<CAPTION>
                                                              CAPITAL    OPERATING
                  YEAR ENDING DECEMBER 31,                     LEASES      LEASES
                  ------------------------                    --------   ----------
<S>                                                           <C>        <C>
     2000...................................................  $217,394   $  531,300
     2001...................................................   173,965      439,100
     2002...................................................   109,800      330,600
     2003...................................................    73,309      309,600
     2004...................................................    32,607       89,600
                                                              --------   ----------
  Future minimum lease payments.............................   607,075   $1,700,200
                                                                         ==========
  Less amount representing interest.........................   141,533
                                                              --------
  Present value of minimum lease payments...................  $465,542
                                                              ========
  Current maturities........................................  $217,394
  Long-term maturities......................................   248,148
                                                              --------
                                                              $465,542
                                                              ========
</TABLE>

     In January 2000, the Company entered into an operating lease agreement for
a new facility in Redmond, Washington. The future minimum lease payments of such
lease are included in the above schedule.

     Rent expense for leased facilities and equipment was $502,781 and $432,876
for the years ended December 31, 1999 and 1998, respectively.

NOTE H -- INCOME TAXES

     The Company accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".

     The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows at December 31:

<TABLE>
<CAPTION>
                                                       1999           1998
                                                    -----------    -----------
<S>                                                 <C>            <C>
Tax expense (benefit) at statutory rate...........  $  (198,600)   $     2,300
Permanent differences.............................        5,700          6,400
Tax credits.......................................       26,800             --
Change in valuation allowance.....................      166,100         (8,700)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
</TABLE>

                                      F-10
<PAGE>   32
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

     Deferred tax assets and liabilities consist of the following at December
31:

<TABLE>
<CAPTION>
                                                       1999           1998
                                                    -----------    -----------
<S>                                                 <C>            <C>
Current
  Book expenses deductible for tax purposes in
     future periods...............................  $    18,661    $    33,342
  Less valuation allowance........................      (18,661)       (33,342)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
Long-term
  Net operating loss carry forwards...............  $ 2,684,645    $ 2,451,836
  Depreciation and amortization...................     (273,208)      (249,403)
  Other tax credits...............................      134,265        162,509
  Less valuation allowance........................   (2,545,702)    (2,364,942)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
</TABLE>

     The Company has established a valuation allowance of $2,564,363 and
$2,398,284 as of December 31, 1999 and 1998, respectively, due to the
uncertainty of future utilization of net operating loss carryforwards and
realization of other deferred tax assets. The valuation allowance was increased
by approximately $166,100 during the year ended December 31, 1999. If ownership
changes should occur, there may be certain limitations on the use of these
carryforwards, as defined by Internal Revenue Code Section 382.

     At December 31, 1999, an operating loss carryforward of approximately
$7,885,000 expiring through 2018 is available to offset future taxable income.
Investment tax credits and research and experimentation tax credits of $43,443
and $90,822 respectively, expiring in 2000 through 2003, are also available.

NOTE I -- MET-RX LICENSE AGREEMENTS

     The Company has entered into exclusive license agreements with MET-Rx, USA,
Inc. ("MET-Rx") to sell products containing Controlled Delivery Technology
("CDT") and to sell products containing Molecular Dispersion Technology ("MDT")
in the North American sports nutrition market through all trade channels except
multilevel through March 31, 2000. If MET-Rx does not meet the purchase volume
requirements, the licenses will continue on a non-exclusive basis. Both of these
agreements have been extended through March 31, 2001. The agreement also states
that MET-Rx will pay the Company a development fee of $6,000 for each MDT
product developed by the Company.

     In conjunction with the above agreements, the Company purchases raw
materials from MET-Rx to fulfill some of the orders for CDT and MDT products.
For the year ended December 31, 1999, purchases from MET-Rx totaled
approximately $2,580,300. The Company also had accounts payable totaling
approximately $663,000 and accounts receivable totaling approximately $90,600
from MET-Rx.

NOTE J -- TECHNICAL RIGHTS AND ROYALTY AGREEMENTS

     In December 1998, the Company entered into an agreement with Temple
University (Temple) to obtain an exclusive worldwide license of a licensed
product, with the right to sublicense. Under the agreement, the Company is
required to make royalty payments to Temple. During 1999, royalty payments
totaled $9,629.

     Under a technical and product rights agreement, from a limited partnership
which has now been dissolved, the Company has full and exclusive rights, title
and interest to use and market products developed from the Feed Additives
agreement. Under the Feed Additives agreement, the Company is required to make
royalty payments to the former partners of the Feed partnership on sales of Feed
Additives until December 31,

                                      F-11
<PAGE>   33
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

2010. During 1999 and 1998, royalty payments for Feed Additives amounted to
$39,834 and $46,464, respectively.

     The Company has exclusive rights to use D-glucarate salts (Patented
Materials) with BioChemix. In August 1998, the Company and BioChemix entered
into agreements for the exclusive licensing of glucarate for colon and liver
applications, which required the Company to pay royalty payments on sales of
certain licensed products. Sublicense and development agreements do not expire
as long as the Company continues to sell the Patented Materials. As of September
28, 1998, BioChemix and Nutraceutix mutually agreed to terminate the requirement
that Nutraceutix pay BioChemix royalties on Glucarate sales. Royalty expense was
$48,530 for the year ended December 31, 1998.

NOTE K -- RETIREMENT PLAN

     The Company has a defined contribution 401(k) retirement plan (the Plan)
which covers all employees. The Company will match 25% of employee
contributions, up to 4% of employee contributions. The Company contributed
$7,625 and $7,169 to the Plan for 1999 and 1998, respectively.

NOTE L -- CONTINGENCIES

     The Company entered into a ten-year, renewable marketing and distribution
agreement with Bio Universal, Inc. during 1993, for the purpose of marketing and
distributing the Company's COBACTIN products and BIOPOWER. In November 1995, the
Company ended the relationship with Bio Universal and began to sell these
products directly to third party customers. Bio Universal filed suit against the
Company for unspecified damages related to the termination of this agreement. As
of February 29, 2000, the Company reached a settlement with Bio Universal,
whereby the Company agreed to pay Bio Universal the amount of $180,000, in 36
monthly installments of $5,000 with no stated interest.

NOTE M -- STOCK OPTIONS

     Under the terms of the Company's 1995 Stock Option Plan, officers,
directors, employees and others related to the Company may be granted incentive
stock options or nonqualified stock options to purchase up to an authorized
3,000,000 shares of common stock. The options are generally granted at exercise
prices equal to the market value of the Company's common stock on the date of
the grant. The options generally vest over three years and expire ten years from
date of grant.

     The Company has adopted the disclosure only provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its plans and
generally does not recognize compensation expense for its stock-based
compensation plans. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS 123, the Company's net
earnings (loss) would change to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                            1999        1998
                                                          ---------   --------
<S>                                                       <C>         <C>
Net earnings (loss)
  As reported...........................................  $(584,217)  $  6,809
  Pro forma.............................................  $(650,670)  $(56,947)
Net earnings (loss) per share
  As reported...........................................  $  (0.034)  $ 0.0004
  Pro forma.............................................  $  (0.038)  $ (0.004)
</TABLE>

                                      F-12
<PAGE>   34
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

     The fair value of option grants is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the
years ended December 31:

<TABLE>
<CAPTION>
                                                           1999         1998
                                                         ---------    ---------
<S>                                                      <C>          <C>
Expected volatility....................................         69%          50%
Expected dividend yield................................         --           --
Risk-free interest rate................................        6.5%         5.0%
Expected life..........................................  7.0 years    7.0 years
</TABLE>

     A summary of the Company's stock option plan's activity is as follows:

<TABLE>
<CAPTION>
                                                    1999                             1998
                                        -----------------------------    -----------------------------
                                                     WEIGHTED AVERAGE                 WEIGHTED AVERAGE
                                         SHARES       EXERCISE PRICE      SHARES       EXERCISE PRICE
                                        ---------    ----------------    ---------    ----------------
<S>                                     <C>          <C>                 <C>          <C>
Outstanding at beginning of year......  2,314,098         $0.75          1,697,200         $0.67
Granted...............................    270,652          0.53            633,898          0.97
Exercised.............................         --            --             (1,000)         0.25
Forfeited.............................   (148,698)         0.96            (16,000)         0.81
                                        ---------         -----          ---------         -----
Outstanding at end of year............  2,436,052         $0.71          2,314,098         $0.75
                                        =========         =====          =========         =====
Options exercisable at end of year....  1,846,812         $0.72          1,386,413         $0.80
                                        =========         =====          =========         =====
Weighted-average fair value of options
  granted during the year.............                    $0.19                            $0.54
                                                          =====                            =====
</TABLE>

     The following is a summary of stock options outstanding at December 31,
1999:

<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING
                                         ------------------------------------------------------
                                                        WEIGHTED-AVERAGE
                                           NUMBER          REMAINING         NUMBER OF OPTIONS
            EXERCISE PRICE               OUTSTANDING    CONTRACTUAL LIFE        EXERCISABLE
            --------------               -----------    ----------------    -------------------
<S>                                      <C>            <C>                 <C>
$0.25 - $0.78..........................     990,552        6.85 years              650,445
$0.80 - $1.25..........................   1,445,500        5.68 years            1,196,367
</TABLE>

     The Company has issued stock options to consultants outside of the 1995
Stock Option Plan. Shares totaling 66,666 and 133,332 were outstanding and
exercisable at December 31, 1999 and 1998, respectively. The weighted average
exercise price of the shares was $0.50 as of December 31, 1999 and 1998, and the
average remaining contractual life was .25 and .75 years, respectively. The
events effecting these options in 1999 and 1998 are as follows: in 1999, 66,666
shares were forfeited at an exercise price of $.50 and in 1998, 100,000 shares
were exercised at an exercise price of $.25.

NOTE N -- EARNINGS (LOSS) PER SHARE

     Earnings (loss) per share is based on the weighted average number of shares
outstanding during each period and income (loss) available to common
shareholders. Earnings per share assuming dilution is based on the assumption
that outstanding stock options were exercised.

     The table below presents the information used to compute loss per common
share for the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                                  NET LOSS         SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Earnings per shares
  Income available to common stockholders......   $(584,217)     17,335,702       $(0.034)
</TABLE>

                                      F-13
<PAGE>   35
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998

     The computation for loss per share assuming dilution for the year ended
December 31, 1999 was anti-dilutive; and therefore, is not included.

     The table below presents the information used to compute earnings per
common share, with and without dilution for the year ended December 31, 1998:

<TABLE>
<CAPTION>
                                                 NET EARNINGS       SHARES        PER SHARE
                                                 (NUMERATOR)     (DENOMINATOR)     AMOUNT
                                                 ------------    -------------    ---------
<S>                                              <C>             <C>              <C>
Earnings per share
  Income available to common stockholders......     $6,809        16,188,672       $0.0004
Effect of dilutive securities
  Stock options................................         --           644,255            --
                                                    ------        ----------       -------
Earnings per common share assuming dilution
  Earnings available to common stockholders and
     effect of assumed conversions.............     $6,809        16,832,927       $0.0004
                                                    ======        ==========       =======
</TABLE>

NOTE O -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

     In 1999, the Company had sales to two customers which accounted for
approximately 40% and 10% of net revenues. In 1998, sales to two customers
accounted for approximately 14% and 12% of net revenues.

NOTE P -- FOURTH QUARTER ADJUSTMENTS

     In the fourth quarter of 1999, the Company incurred adjustments to
inventory and cost of sales related to the disposal of inventory and allocation
of overhead to inventory and cost of sales. The adjustments resulted in a net
decrease to inventory and earnings of approximately $176,000 and an increase to
cost of sales and a decrease to general and administrative costs of
approximately $336,000.

                                      F-14