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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, 2001

     [ ]   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)

<Table>
<S>                                            <C>
                  DELAWARE                                      91-1689591
          (STATE OF INCORPORATION)                   (IRS EMPLOYER IDENTIFICATION NO.)

 8340 154TH AVENUE N.E., REDMOND, WASHINGTON                       98052
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</Table>

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

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

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                         COMMON STOCK, $.001 PAR VALUE

     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.  [X]

     The issuer's revenues for the fiscal year ended December 31, 2001 were
$8,190,500.

     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 asked price of such stock, as of March 20, 2002 was approximately
$22,704,402.

     As of March 20, 2002, there were 19,852,289 shares outstanding of the
issuer's common stock.
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant has incorporated by reference into Part III of this Form
10-KSB portions of its Proxy Statement for the 2002 Annual Meeting of
Shareholders.
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                               TABLE OF CONTENTS

                               NUTRACEUTIX, INC.

                                  FORM 10-KSB

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                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
Item 1.   Description of Business.....................................    3
Item 2.   Description of Property.....................................   13
Item 3.   Legal Proceedings...........................................   14
Item 4.   Submission of Matters to a Vote of Security Holders.........   14
Item 5.   Market for Common Equity and Related Stockholder Matters....   14
Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   16
Item 7.   Financial Statements........................................   22
Item 8.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure....................................   22
Item 9.   Directors, Executive Officers, Promoters and Control
          Persons; Compliance with Section 16 (a) of the Exchange
          Act.........................................................   22
Item 10.  Executive Compensation......................................   23
Item 11.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   23
Item 12.  Certain Relationships and Related Transactions..............   23
Item 13.  Exhibits and Reports on Form 8-K............................   23
</Table>

                                        2
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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"). However, CSI had no material assets and
did not actively engage in business. In 1995, CSI and Bio Techniques
Laboratories, Inc., an unaffiliated Washington corporation ("BTL"), entered into
a share exchange pursuant to which the shareholders of BTL were issued one share
of common stock of CSI for each share of BTL, and BTL became the 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, formulating, and producing
nutraceuticals, which are natural, nutritional, biologically active materials
formulated to provide specific health benefits to humans and productivity
benefits in animals.

     Prior to 1995, the Company focused solely on the manufacture and sale of
lactic acid microbial-based products for the agriculture market. Since 1995, the
Company added nutraceutical-based health and dietary 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 and dietary supplements.
The Company also developed LIVEBAC caplet technology for the commercial
production of probiotic health supplements and acquired licenses from Biochemix,
Inc. for the United States use patent pertaining to the use of glucarate salts
and Calcium D-glucarate for lung, breast, and prostate health supplement
formulations. In 1998, the Company licensed additional formulas for colon and
liver health, and in 1998, Biochemix expanded the license to allow sales of
glucarate for formulations beyond the designated ones listed above. The Company
discontinued sales of Calcium D-glucarate pursuant to an agreement entered into
with the licensor of Calcium D-glucarate on September 19, 2001. See Note L of
Notes to Financial Statements.

     In 1998, the Company acquired an exclusive worldwide license from Temple
University for a patent pending tableting and compression technology for the
controlled delivery release of health and dietary supplements ("CDT Patent No.
1"). This CDT Patent No. 1 was subsequently issued in 2002. In collaboration
with Temple University, the Company developed several controlled delivery
technology ("CDT") products aimed at the nutraceutical market. However, as of
December 31, 2001, the only CDT formulations which had been introduced
commercially were an ephedra and caffeine thermogenic product for weight loss,
CDT Enzyme CoQ10, CDT sports nutrition pro-hormones and CDT
Glucosamine/Chondroitin. In 1999, the Company acquired the worldwide rights to
use CDT Patent No. 1 for Over-the-Counter ("OTC") products. In September 2001,
the Company acquired the exclusive license for the rights to CDT Patent No. 1 in
prescription drugs. On January 8, 2002, CDT Patent No. 1 was issued by the USPTO
as US Patent 6,337,091.

     In September 2000, the Company obtained the exclusive license to the
worldwide rights to United States patent 6,090,411 from Temple University. This
patent was licensed to the Company on an exclusive basis for all applications in
health and dietary supplements, OTC products, and prescription drugs for the
life of the patent. Patent applications have been filed in Canada, Mexico, the
European Economic Community and Japan. These represent the largest potential
markets in the future for CDT technology as applied to prescription drugs.

                                        3
<PAGE>

     In July 2001, the Company filed a new patent application covering its novel
tableting process, Cryotabletting(TM) for producing its proprietary LiveBac
product thereby enhancing the probiotic viability and shelf-life of LiveBac
products.

     In September 2001, the Company filed additional patent applications
covering the unique formulation of its ReHydraid low-osmolality rehydration
product and in December 2001 for its novel drug delivery system for soy
isoflavones as a nutritional supplement in post menopausal symptoms.

     In September 2001, the Company filed patent applications pertaining to new
delivery technology developed at Nutraceutix for the tableting of controlled
release of biologicals and micro-organisms.

     In November 2001, the Company was assigned the worldwide rights to a patent
pending CDT drug delivery technology invented by Dr. Reza Fassihi and Dr. Thomas
Durig of Temple University, School of Pharmacy.

     Unless the context indicates otherwise, references hereinafter to "the
Company" include both Nutraceutix, Inc. and Bio Techniques Laboratories, Inc.
The Company's principal place of business is 8340 154th Avenue N.E., Redmond,
Washington, 98052-3864 and its telephone number at that address is (425)
883-9518.

BUSINESS OF THE COMPANY

     Nutraceutix, Inc. has two principal businesses: (1) the formulation and
in-vitro development of controlled delivery OTC products, prescription drugs and
nutraceutical products and (2) the formulation and manufacture of
nutraceutical-based health and dietary supplements for both the animal and human
nutrition markets.

     The Company's drug delivery business utilizes the technology embodied in
two issued patents acquired from Temple University to formulate and manufacture
health and dietary supplements for other nutraceutical companies. Also, the
Company formulates controlled-release products by employing the CDT Patents
acquired from Temple University and applying the licensed technology to OTC and
prescription drugs. As a partner with pharmaceutical companies in the
co-development of these products, the Company receives up-front license fees,
research and development payments and, following product approval and
commercialization by the sub-licensee, royalty payments based on net revenues
realized by the sale of patented CDT products. See Item 1. "Description of the
Business-Government Regulation". The Company expects to realize royalty income
from the initial CDT dietary supplement and OTC formulations in 2002. Royalty
income from CDT prescription drugs is anticipated in 2005.

     In the human and agricultural nutraceutical markets, the Company provides
private label manufacturing of health supplements for other dietary supplement
and nutraceutical companies and manufactures and markets probiotics, as well as
food ingredient pre-mixes. Its branded human health supplement products are
marketed under the BIOPOWER trademark. The Company's branded products for the
animal feed industry are COBACTIN microbial feed additives and BIOPOWER silage
inoculant.

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

PRINCIPAL PRODUCTS AND SERVICES

     The Company's principal products and services are (1) the drug delivery
technology unit which includes CDT technology with three novel drug delivery
platforms and (2) the nutraceutical and dietary supplement unit which is
comprised of dietary supplements, lactic acid microbial supplements for human
nutrition, lactic acid fermentation products for productivity supplementation in
agriculture, and dietary supplement raw material and ingredient sales to other
nutraceutical manufacturers.

                                        4
<PAGE>

DRUG DELIVERY TECHNOLOGY UNIT

     In December 1998, the Company and Temple University signed a definitive
agreement for the exclusive licensing to Nutraceutix of a patent pending for
technology pertaining to the controlled delivery of dietary supplement capsules
and tablets. Nutraceutix trademarked this technology as CDT. The Company
considers the technology to be distinctive in its ability to program in-vitro
release patterns for each health supplement contained in a single tablet or
capsule at a relatively low cost of manufacture. The Company believes that the
wide applicability of its technology among the available range of vitamin and
herbal products suitable for once or twice daily dosing or pulsed release
provides a unique commercial opportunity in the $17.7 billion US nutraceutical
market.

     Controlled delivery technologies are already prevalent within the OTC and
pharmaceutical industries, while they are relatively rare within the dietary
supplement industry. In the pharmaceutical industry, sustained-release
technologies have been shown to optimize the therapeutic effectiveness, enhance
the compliance to the dosing schedule, and reduce the frequency and severity of
side effects of a single Active Pharmaceutical Ingredient ("API"). The Company
believes that this unique technology will offer similar benefits within the
health and dietary supplement industry.

     The controlled delivery technology was developed at Temple University,
School of Pharmacy for the chronic administration of calcium channel blockers
such as nifedipine, diltiazem, and verapamil which are prescribed for the
long-term management of chronic angina pectoris and benign essential
hypertension. The physicochemical properties and intrinsic pharmacological
characteristics of these drugs, such as high or low solubility, limited
absorption, or pre-systemic metabolism, necessitated the development of a highly
controllable drug delivery system to provide continuous active ingredient
release with zero-order kinetics typified by precise and reproducible
performance. The first generation of this technology is based on swellable
hydrophilic matrices, which allow for the controlled diffusion of dietary
supplements from the matrix through the tablets progressive swelling and
erosion. The CDT tablets or capsules employ combinations of hydrophilic polymers
and poly-ionics or electrolytes specific to each health supplement or OTC
product and the desired release profile. Depending upon the matrix composition,
the selection and ratio of polymers, ionic substrates, or electrolytes various
release patterns and rates can be achieved.

     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 API for up to 24 hours. Linear, zero-order kinetics means that a precise
quantity of API is released during each unit of time over the entire course of
the release pattern until 100% of the API is released. There are no bursts or
lag phases in the release pattern. After obtaining the exclusive license for the
technology from Temple University, the Company, in collaboration with Temple
University, specifically developed continuous, zero-order kinetics tablets of
Vitamin C. Vitamin C was considered to be a technological challenge due to its
high water solubility and its high permeability. Following the Vitamin C
project, the Company and Temple University developed individual,
controlled-release, linear, zero-order kinetics tablets of glucosamine, Calcium
D-glucarate, several sports nutrition prohormones, and diet formulations
containing ephedra. The Company believes that both the dietary supplement and
sports nutrition industries offer many 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 nutrition products incorporating controlled delivery
technology, excluding multi-level sales. The Company contracted with Temple
University to develop controlled delivery technology tablets and capsules for
the programmed release of the following prohormones: androstenedione,
androstenediol, norandrostenedione, and norandrostenediol. MET-Rx sold these
products primarily to bodybuilders. On a non-exclusive basis, a controlled
delivery weight-loss product was developed for MET-Rx. The MET-Rx sports
supplements and weight-loss products were released in April 1999. However, in
early 2000, Rexall Sundown, Inc. acquired MET-Rx USA, Inc., which in turn was
acquired by Royal Numico of the Netherlands. In early 2000, Royal Numico
discontinued sale of the MET-Rx sports nutrition products and the weight-loss
products due to uncertainties as to whether or not the Federal Drug
Administration ("FDA") would permit continued sales of dietary

                                        5
<PAGE>

supplements containing either prohormones or ephedra alkaloids. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in section 6.

     In 1999, the Company licensed the right from Temple University to apply the
CDT Patent No. 1 technology to the manufacture of OTC products. During 2000 and
2001, no OTC products were manufactured using the technology contained in the
CDT Patent No. 1. In September 2001, the Company acquired the exclusive license
for the rights to CDT Patent No. 1 in prescription drugs. On January 8, 2002,
CDT Patent No. 1 was issued by the USPTO as US Patent 6,337,091.

     In September 2000, the Company acquired the worldwide rights to CDT Patent
No. 6,090,411 for application in dietary and health supplements, OTC products
and prescription drugs. This technology (issued on July 18, 2000) provides for
the controlled and programmable release of the API with zero-order kinetics
through the dry blending and direct compression of a salt, a polymer, and the
Active Pharmaceutical Ingredient ("API"). The Company believes the CDT Patent
No. 6,090,411 technology possesses several critical and unique advantages over
comparable sustained-release technologies currently employed by the drug
delivery industry in manufacturing extended or sustained-release products:

     - The technology does not involve a granulation step at manufacturing;
       thereby, shortening process times and eliminating potentially toxic
       solvents from the manufacturing process. Processes are faster and easily
       validated.

     - The technology involves the development of the desired release pattern
       through the dry blending of a selected salt and polymer in various ratios
       in order to create a dry matrix. The resulting matrix is directly
       compressible on all currently available tableting equipment routinely
       used in the pharmaceutical industry.

     - The technology and its applicability to dietary supplements, OTC products
       or prescription pharmaceuticals are extremely rugged and flexible; the
       in-vitro dissolution results are not affected by drug solubility, pH,
       tablet size or configuration, tablet hardness, or friability.

     - The technology has a patent life of 20 years.

The Company believes that the technology embodied in the CDT Patent No.
6,090,411 demonstrates significant advantages over current sustained-release
technologies that involve multiple polymer systems, coated beads or coated
tablets. The Company's licensed technology is easily manufactured on
conventional pharmaceutical equipment with fewer processing steps. Furthermore,
it is applicable to a wider range of API's, dietary supplements and OTC products
than other technologies. The Company believes that the CDT Patent No. 6,090,411
provides for rapid product formulation and development leading to faster
submissions to the regulatory authorities, faster time to market, and less
expensive manufacturing.

NUTRACEUTICAL-BASED DIETARY SUPPLEMENTS FOR HUMAN HEALTH

     Specific nutraceuticals have been shown to affect bodily functions in
targeted ways, such as joint health (Glucosamine and Chondroitin) or by lowering
cholesterol and menopausal symptoms (soy extracts). The active ingredients in
nutraceuticals may include complex mixtures of organic molecules, small
molecules, oligosaccharides, lactic acid probiotics, 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 trademarked
dietary supplement, LIVE-BAC probiotic caplets.

     The Company believes that the market for nutraceuticals and probiotics, in
particular, will continue to expand due to the on-going identification of
disease processes coupled with an aging population increasingly motivated to
preserve good health through involvement in their healthcare program and self
administered preventative therapies. The development and identification of new
nutraceutical products may require combining interdisciplinary technologies
including plant science, microbiology, biochemistry, and nutrition.

                                        6
<PAGE>

NUTRACEUTICAL-BASED PRODUCTIVITY SUPPLEMENTS FOR THE AGRICULTURE INDUSTRY

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

     The Company's silage inoculant, which is sold on an original equipment
manufacturers ("OEM") basis and under the BIOPOWER silage inoculant brand, aids
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 trademark: COBACTIN PLUS for commercial feedlot and
dairy cattle. 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. Approximately 22 independent,
university, and research institute studies have confirmed the efficacy of
COBACTIN microbial feed additives in increasing feed efficiency. Comparable
results have been seen in dairy cows and poultry. These products have been
demonstrated in independent field trials to increase feed efficiency in feedlot
cattle.

     In August 1999, Nutraceutix and Biotal, Inc. ("Biotal") entered into a
strategic alliance to sell microbial feed additives to cattle feedlots. Prior to
this agreement, Nutraceutix and Biotal were competitors. Biotal has marketed its
MICRO-CELL direct feed microbials since 1994, and recently, Biotal introduced a
successful phase-feeding microbial program. As part of the alliance, Biotal
represents and distributes COBACTIN and MICRO-CELL products. On December 4,
2001, the Company entered into an agreement with Biotal, Inc. and Danstar
Ferment AG (Danstar) whereby the Company assigned to Danstar its rights and
obligations under the Agreement with Biotal dated August 19, 1999. Under the
terms of the agreement, the Company sold its rights to produce Micro-Cell
microbial feed additive. The Company retains the intellectual property rights
and production of its COBACTIN microbial feed additive products, while Biotal
will have the exclusive rights to distribute the Feedlot product (see Note M of
Notes to Financial Statements).

MANUFACTURING

     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 new facility combined with the current facility located
at corporate headquarters will produce over 20 species of beneficial bacteria
used in inoculum, feed additives, dietary supplements, and the Company's
proprietary LIVE-BAC products. The new facility has effectively doubled the
Company's output of bulk microbial raw material.

PRIVATE LABEL HEATH SUPPLEMENT MANUFACTURING

     The Company manufactures private label health supplements incorporating its
patented and proprietary technologies or the probiotics produced in the Redmond,
Washington fermentation facilities. Finished goods production takes place at its
encapsulating, tableting, bottling, and labeling facility in Lafayette,
Colorado. The Company manufactures powdered drink mixes and blended products for
other nutritional companies under their own brand names.

     The LIVE-BAC caplet process is based upon our patent pending Cryotabletting
technology that results in extended shelf life of tablets or caplets containing
lactic acid bacteria. Caplets of probiotics manufactured using the LIVE-BAC
process have demonstrated superior viability and shelf life as compared to
conventional capsules.

ANIMAL HEALTH PRODUCTS

     In addition to its own COBACTIN and BIOPOWER products, the Company
manufactures microbial products for several agriculture companies on a private
label and OEM basis at its fermentation plant located in Redmond, Washington.
These products include microbial inoculum, feed and food additives and
microbial-

                                        7
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based dietary supplements. The Company has over 16 years of experience in
microbial fermentation, and holds two patents relating to a proprietary strain
of Lactobacillus acidophilus.

MARKETING, SALES AND DISTRIBUTION

     In the human dietary supplement market, the Company relies on its sales and
marketing personnel to sell lactic acid bacteria, LIVE-BAC products and
nutraceuticals incorporating the Company's patented and proprietary drug
delivery technologies. In 2001, the Company relied on an internal sales
executive assisted by independent brokers to sell its OEM or private label
products containing probiotics to major nutraceutical companies involved in
marketing these products to the consumer. In addition, the Company's efforts
have been directed at partnering with major nutraceutical and pharmaceutical
companies to co-develop unique and distinctive dietary supplements, OTC
products, and prescription drugs incorporating Nutraceutix patented and
proprietary delivery technology.

     The Company markets and sells OEM and private label silage inoculum
directly to branded companies in agriculture. Biotal, Inc. markets, sells, and
provides technical support for COBACTIN microbial feed additives for beef cattle
in feedlots. Nutraceutix sales personnel are responsible for other sales in the
agriculture industry including OEM and private label silage inoculums, BIOPOWER
silage inoculum, private label feed additives and COBACTIN microbial feed
additives for the dairy industry.

COMPETITION

     The principal markets in which the Company's products are sold are both
competitive and fragmented. There are competitors in manufacturing and product
development in both the human dietary supplement and drug delivery markets.
Increased competition could have a material adverse effect on the Company, as
many competitors have superior financial and manufacturing resources and may
possess development, distribution and marketing capabilities more extensive than
those of the Company.

     The Company's major competitors in the microbial products market and who
manufacture lactic acid bacteria for inclusion in human dietary supplements
include Chris Hansen, Rhodia, Lallemand, Institut Rosell, BioGaia and Harmonium
International, Inc.

     The Company believes that its primary competitive advantage results from
patented and proprietary technologies, which are not available from other
suppliers, including LIVE-BAC caplets, cryotabletting technology, CDT controlled
delivery technology, and lactic acid bacteria technology. Additionally, the
Company believes that other principal competitive factors in the sale of health
supplements are quality, technology, manufacturing, timely delivery of products,
and service. In the private label business, the Company has competitors with
significantly more resources than the Company; however, the Company believes
that its patented and proprietary technologies offset some of the advantages
held by these competitors.

     In the drug delivery field, the Company's major competitors include Alza
Corporation, Biovail, Inc., Skyepharma PLC, Elan, Andrx, Inc., Impax
Laboratories, Inc., Labopharm, and KV Pharmaceuticals, Inc. The successful
development and commercialization of major controlled delivery prescription
drugs can take five to seven years and millions of dollars of research and
clinical trials. The Company believes that these major competitors are better
funded and equipped to fully realize the potential from new and unique patented
drug delivery systems and are in possession of significantly stronger financial
and R&D resources. The Company believes that its two issued CDT patents (US
Patent 6,090,411 and US Patent 6,337,091) provide certain advantages in the drug
delivery industry because of quicker product development, faster to market, and
lower cost of manufacturing.

     The oral controlled release market for OTC products and prescription drugs
has been estimated at $19.9 billion in 2000 and is forecast at $40.0 billion in
the United States in 2010 (Data Monitor). The Company believes that the drug
delivery industry will continue to show strong growth in the future as many
multi-national pharmaceutical companies seek new drug delivery technologies to
"evergreen" their existing pharmaceutical franchises through new drug
introductions involving older molecules incorporating new patented drug delivery
technology. Since revenues from a drug can drop by up to 70% when its patent
expires,

                                        8
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any method of adding new life to an existing product will protect brand sales.
Incorporation of new, patented drug delivery technology is one such strategy.

SOURCES AND AVAILABILITY OF RAW MATERIALS AND PRINCIPAL SUPPLIERS

     With the exception of lactic acid cultures and probiotic blends, the
Company obtains all of its raw materials for the manufacture of its products
from outside sources. The Company, generally, does not have contracts with
entities or persons committing such suppliers to provide the materials required
for the production of its products.

DEPENDENCE ON SIGNIFICANT CUSTOMERS

     In 2001, the Company received approximately 43% of its revenues from three
customers: Rexall Sundown (16%), Experimental and Applied Sciences (EAS) (15%)
and Supplement Sciences (12%). With the uncertainty in the nutraceutical markets
in general, Management expects sales revenue fluctuations due to market
conditions and the performance of its major customers. The Company continued to
expand its customer base in 2001.

     The Company is dependent upon its relationships with strategic
collaborators. Our strategy is to enter into various arrangements with corporate
and academic collaborators, licensors, and licensees for the research,
development, clinical testing, manufacturing, marketing, and commercialization
of our product candidates. To date, we have entered into collaborations for the
potential development and commercialization of our product candidates with
several pharmaceutical/nutraceutical firms and collaborations with a number of
research firms and universities. There can be no assurance that we will be able
to establish additional collaborations on favorable terms; if at all, or that
our current or future collaborations will be successful.

     Should any collaborator fail to successfully develop or commercialize any
of our product candidates to which it has rights, or be precluded from
developing or commercializing any product (through litigation or otherwise) our
business may be adversely affected. In addition, while we believe that our
collaborators will have sufficient economic motivation to continue their
funding, research, development and commercialization activities, there can be no
assurance that any of these collaborations will be continued or result in
successfully commercialized products. Failure of a collaborator to continue
funding any particular program could delay or halt the development or
commercialization of any product candidates arising out of such program. In
addition, there can be no assurance that collaborators will not pursue alternate
technologies or develop alternative products, either on their own or in
collaboration with others, including our competitors, as a means for developing
competitive products.

     The Company currently holds licenses for certain technologies, some of
which are material to our business. We also plan to acquire additional licenses
(or options to obtain licenses) to technologies developed by other companies and
research institutions. If we fail to obtain, retain, or renew necessary licenses
on acceptable terms, our business could be adversely affected. Subject to the
terms of any additional license agreements that are negotiated, we may be
obligated to exercise diligence in bringing product candidates to market, and to
make certain minimum guarantees or milestone payments that, in some instances,
could be substantial. We may also be obligated to make royalty payments on the
net sales; if any, of products resulting from licensed technology and may be
responsible for the costs of filing and prosecuting patent applications.

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, two issued U.S. patents for controlled delivery technologies licensed
exclusively from Temple University (US Patents 6,090,411 and 6,337,091) and one
patent pending for a third controlled delivery patent assigned to Nutraceutix by
the inventors, Dr. Reza Fassihi and Dr. Thomas Durig. Additionally, the Company
filed patent applications in 2001 for Cryotabletting(TM) process for
micro-organisms, ReHyrdraid(TM) Sports Drink and Oral Rehydration System, and a
Controlled Release delivery system for Micro-organisms and Biologicals.

                                        9
<PAGE>

     As of December 2001, the Company had approximately nine federal trademark
registrations and six trademark applications pending with the US Patent and
Trademark Office. The Company's policy is to pursue registrations for all of the
trademarks associated with its key products and technologies. Following is a
list of the Company's registered and pending trademarks: COBACTIN, COBACTIN
PLUS, BIO TECHNIQUES, BIOPOWER, LIVE-BAC, NUTRACEUTIX, CDT, BIO-TRACT, and
COBACTIN E.

     Our success will depend in part on our ability to obtain and maintain
patent protection for our technologies and to preserve our trade secrets. No
assurance can be given that our issued patents will not be challenged or
circumvented by competitors. With respect to already issued patents, there can
be no assurance that any patents issued to us will not be challenged,
invalidated, circumvented or that the patents will provide us proprietary
protection or a commercial advantage.

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

     The Company has two license agreements with Temple University for the two
patents related to controlled delivery technology as applied to dietary
supplements, OTC products, and prescription drugs. The Company is obligated to
pay an annual license maintenance fee, share in some up-front payments from
customers and pay royalties based on product sales.

     In August, 2001, the Company was assigned the rights to a third CDT
Controlled Delivery Technology platform by the inventors: Dr. Reza Fassihi and
Dr. Thomas Durig and Temple University. This third CDT platform has been filed
in the USPTO and in connection with this acquisition, the Company is obligated
to pay an annual license maintenance fee, share in some up-front payments from
customers and royalties based on customer sales.

GOVERNMENT REGULATION

     The Company must receive separate regulatory approval for each of our
product candidates before the Company or its collaborators can sell them in the
United States or internationally. The manufacture and sale of OTC and
prescription drugs in the U.S. and internationally is governed by a variety of
statutes, regulations and policies which require; among other things:

     1. approval of manufacturing facilities and practices;

     2. controlled research and testing of products;

     3. review and approval of submissions containing manufacturing,
        preclinical, and clinical data in order to obtain marketing approval
        based on establishing the safety and efficacy of the product for each
        use sought, including adherence to Good Manufacturing Practices during
        production and storage; and

     4. control of marketing activities, including advertising and labeling.

     The products currently under development will require significant
development, preclinical and clinical testing and investment of significant
funds prior to their commercialization. The process of obtaining such approvals
is likely to take many years and require the expenditure of substantial
resources, and there can be no assurance that the development and clinical
trials performed by the Company or our collaborators will be successful. See
Item 6. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources".

     Even if the Company's product candidates receive regulatory approval, such
products still may face subsequent regulatory difficulties. If we receive
regulatory approval to sell any of our product candidates, regulatory agencies
may, nevertheless, limit the categories of patients who may use them. In
addition, regulatory agencies subject a marketed product, its manufacturer and
the manufacturer's facility to continual review and periodic inspections.
Furthermore, regulatory agencies may require additional, expensive post-
approval studies. If previously unknown problems with a product candidate or the
manufacturing or laboratory facility are discovered or the Company fails to
comply with applicable regulatory requirements, an agency may

                                        10
<PAGE>

impose restrictions on that product or on the Company, including requiring us to
withdraw the product from the market, close the facility, or pay substantial
fines.

     Many of the Company's products are Generally Regarded As Safe ("G.R.A.S.")
by the FDA and, therefore, do not currently require extended approvals. 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 and dietary supplements under the Dietary
Supplement Health Education Act ("DSHEA"). Thus, the Company believes that the
current and foreseeable governmental regulation of dietary supplements,
probiotics, and animal nutrition products will have a minimal impact on the
Company's nutraceutical business.

     The Company believes that a long standing debate within the FDA regarding
the safety and continued commercial availability of ephedra-containing dietary
supplements as well as the non-prescription availability of prohormones presents
some risk to future sales of these diet and sports nutrition products by the
Company. Such regulations have not been promulgated; however, the Company is
taking measures to minimize the future impact of any unfavorable laws or
regulations which may affect its sales of these products. No assurances can be
made that the FDA will continue to permit unrestricted sale and distribution of
either ephedra compounds or sports nutrition prohormones and such restrictions
or changes in the currently favorable regulations could have a material adverse
effect on the Company.

     Statements of the Company and its customers regarding dietary supplement
products are subject to regulation by the Federal Trade Commission ("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 nutraceutical companies.

     The Company manufactures products for nutraceutical companies who
distribute these products under their own trademarks and who supply their labels
to Nutraceutix. Such private label customers are subject to governmental
regulations in connection with their purchase, marketing, distribution, and sale
of contract manufactured products. Nutraceutix is subject to such regulations as
apply to the manufacture of such products and its delivery of services to such
customers; however, the Company's private label customers, and their labeling,
marketing, and distribution of such products, are beyond the Company's control.
Nevertheless, the failure of these private label customers to comply with
applicable laws could have material adverse effects upon the Company.

RESEARCH AND DEVELOPMENT

     In 2000, the Company reorganized its research and development capabilities
and structure in order to focus on its exploitation of the newly acquired CDT
Patent No. 2 and the opportunities presented in the OTC and prescription drug
markets for drug delivery.

     The Company currently funds all research and development internally with
net earnings from its nutraceutical and dietary supplement business as well as
with license fees and co-development research and development payments received
from sub-licensees of drug delivery technology.

     In 2001 and 2000, the Company spent $420,542 (approximately 5% of revenues)
and $380,799 (approximately 4% of revenues), respectively, on product research
and development. The Company believes this level of research and development
expenditure to be adequate to enable it to realize the potential of existing
drug delivery technology in the dietary supplement market; however, the
pharmaceutical and OTC markets will require substantially more research and
development expense to fully exploit the patents.

     Increased research and development spending will be required to both
replace existing technologies with newer, state of the art technologies, as
current patents expire and to create an effective drug delivery development unit
within the Company.

     The pharmaceutical and nutraceutical industries are subject to rapid and
substantial technological change. A majority of product candidates being
developed by the Company or our collaborators involve the use of patented or
proprietary technology. There can be no assurance that developments by others
will not

                                        11
<PAGE>

render our product candidates or technologies non-competitive or that the
Company will be able to keep pace with technological developments. Other
companies have developed and will continue to develop technologies that could be
the basis of competitive products. Some of these products and technologies have
an entirely different approach or means of accomplishing the desired results,
and could be more effective and less costly than our product candidates.

     The Company may acquire technologies or businesses in the future. The
Company may not be successful at acquiring or integrating businesses or
technologies. An acquisition entails many risks, any of which could materially
harm our business.

MICROBIAL PRODUCT DEVELOPMENT

     The Company has conducted research into the role of resident bacteria that
are normally found in the gastrointestinal tract of humans and the delivery of
viable lactic acid bacteria in supplemental form. This research has also
resulted in the development of the LIVE-BAC process and Cryotabletting
technology for tableting lactic acid bacteria in order to extend shelf life at
room temperature and to preserve microorganism viability at room temperature.
The LIVE-BAC process has been shown through in-vitro studies to yield a
caplet/tablet with significantly superior shelf life as compared to conventional
capsules. The shelf life of lactic acid bacteria in dietary supplement form has
been historically problematic. The Company is continuing its efforts to develop
new applications of its LIVE-BAC and drug delivery technologies aimed at
extending lactic acid bacteria shelf life and viability in caplets. The Company
has developed proprietary strains of lactic acid bacteria that, in laboratory
in-vitro testing, suggest an ability to inhibit certain pathogens. Further
research will be required to generate evidence of the in-vitro and clinical
effectiveness of these strains. The Company intends to continue research into it
proprietary microbial strains in 2002 as well as into drug delivery technologies
applied to probiotics in general.

HEALTH SUPPLEMENT DEVELOPMENT

     The Company develops products requested by private label customers and/or
develops new product concepts that it then licenses to the customers. The
Company also actively seeks and reviews new nutraceutical materials (such as
Calcium D-glucarate) and drug delivery technologies developed at universities or
by independent researchers with the view to acquiring the intellectual property.
The Company then conducts applied research on the intellectual property in order
to develop a commercial product or application which it then licenses to
co-developers or commercial partners.

     The Company intends to further exploit its intellectual property position
within the nutraceutical and sports nutrition markets in 2002 and beyond.
Historical sales of patented and proprietary drug delivery technology within the
sports nutrition market have demonstrated this market segment's ready acceptance
of Nutraceutix technologies and their successful commercial applications.

PHARMACEUTICAL PRODUCT DEVELOPMENT

     If the Company fails to raise the capital necessary to fund our
pharmaceutical product development operations, we may be unable to advance our
technology, development programs and clinical trials. Developing drug delivery
systems and prescription drugs employing this technology is extremely expensive.
The Company plans to conduct research and development including clinical trials
on a number of projects simultaneously which will increase our costs.
Accordingly, it is likely that the Company will need additional capital to fund
these projects. See Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".

COMPLIANCE WITH ENVIRONMENT LAWS

     The Company may incur significant costs in complying with environmental
laws and regulations. The Company is subject to federal, state, local and other
laws and regulations governing the use, manufacture, storage, handling, and
disposal of materials and certain waste products. The risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held
                                        12
<PAGE>

liable for any damages that result and any such liability could exceed our
resources. There can be no assurance that the Company will not be required to
incur significant costs to comply with environmental laws and regulations in the
future, or that our operations, business, or assets will not be materially
adversely affected by current or future environmental laws or regulations.

EMPLOYEES

     As of December 31, 2001, the Company employed 49 full time employees,
consisting of two executives, 29 production personnel, three sales and marketing
personnel, three research and development personnel, seven quality control
personnel and five administrative personnel. None of the Company's employees are
represented by labor unions. The Company believes its relationship with
employees is good.

     If the Company fails to hire and retain key management, scientific and
technical personnel, we may be unable to successfully implement our business
plan. The Company is highly dependent on our senior management, scientific and
technical personnel. The competition for qualified personnel in the
nutraceutical and pharmaceutical industries is intense, and the Company relies
heavily on its ability to attract and retain qualified managerial, scientific
and technical personnel. In addition, our ability to manage growth effectively
will require us to continue to implement and improve our management systems and
to recruit and train new employees. There can be no assurance that we will
successfully be able to attract and retain skilled and experienced personnel.

LEGAL

     The Company's ability to operate could be hindered by the proprietary
rights of others. A number of nutraceutical and pharmaceutical companies and
research and development companies or institutions have developed technologies,
filed patent applications or received patents on various technologies that may
be related to our business. Some of these technologies, applications, or patents
may conflict with our technologies or intellectual property rights.

     The Company may incur substantial costs as the result of litigation or
other proceedings relating to patent and other intellectual property rights. Our
future success and competitive position depends in part on our ability to obtain
and maintain certain proprietary intellectual property rights used in our
principal product and technology candidates. Any success may be achieved in part
by prosecuting claims against others who we believe are infringing our rights
and by defending claims of intellectual property infringement brought by our
competitors and others. Our involvement in intellectual property litigation
could result in significant expense to us, adversely affecting the development
of product and technology candidates, or sales of the challenged product or
intellectual property and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor. Some of our
competitors may be able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater resources.
Uncertainties resulting from the initiation or continuation of any litigation
could have a material adverse effect on our ability to continue our operations.

     Should third parties file patent applications, or be issued patents
claiming technology also claimed by us in pending applications, the Company may
be required to participate in interference proceedings with the U.S. Patent and
Trademark Office, or other proceedings outside the U.S., including oppositions
to determine priority of invention or patentability, which could result in
substantial cost to us even if the eventual outcome were favorable to us.

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 N.E., 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
                                        13
<PAGE>

corporate headquarters at 14822 NE 95th Street, Redmond, Washington. The storage
space is leased through July 31, 2003. 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 duplicates the fermentation facility located at 8340 154th
Avenue N.E. The new facility nearly doubled production capacity.

     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 property is
leased for a term of sixty (60) months with a lease termination date of July 31,
2006.

     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 lease property is in good and satisfactory condition, and is suitable for
the Company's business needs for the term of the respective leases.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not presently a party neither to any material litigation not
in the regular course of its business, nor to the Company's knowledge is such
litigation threatened.

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, 2001.

                                    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 2001                  HIGH ASK    LOW BID
               --------------------------                  --------    -------
<S>                                                        <C>         <C>
First Quarter ending March 31, 2001......................    1.03       0.30
Second Quarter ending June 30, 2001......................    0.75       0.55
Third Quarter ending September 30, 2001..................    0.68       0.35
Fourth Quarter ending December 31, 2001..................    0.91       0.35
</Table>

<Table>
<Caption>
               PERIOD -- FISCAL YEAR 2000                  HIGH ASK    LOW BID
               --------------------------                  --------    -------
<S>                                                        <C>         <C>
First Quarter ending March 31, 2000......................    0.88       0.38
Second Quarter ending June 30, 2000......................    0.91       0.41
Third Quarter ending September 30, 2000..................    0.91       0.38
Fourth Quarter ending December 31, 2000..................    0.59       0.22
</Table>

     The approximate number of record holders of the Company's Common Stock as
of December 31, 2001 was 1,398 inclusive of those brokerage firms and/or
clearinghouses holding the Company's common shares for their clientele (with
each such brokerage house and/or clearing house being considered as one holder).

                                        14
<PAGE>

     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.

     In transactions completed between December 3, 2001 and February 15, 2002,
the Company sold a total of 2,255,000 shares of its common stock to a total of
23 private investors, all of whom were accredited investors as defined in Rule
501 under Regulation D. The sales were exempt from registration under the
Securities Act of 1933, as amended, pursuant to Rule 506 of Regulation D and
Section 4(2) of such Act. The Company received cash proceeds in the total amount
of $780,000 from the sale of the shares. In addition, one investor paid for
300,000 shares by delivery of a promissory note in the principal amount of
$120,000, payable on or before December 3, 2002. No commissions were paid in
connection with the offering and sale of the shares.

                                        15
<PAGE>

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 quarterly 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. Important factors that may affect future results include,
but are not limited to: impact of competitive products and pricing, product
development, changes in law and regulations, customer demand, litigation,
availability of future financing and uncertainty of market acceptance of new
products. 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 new information, future events or otherwise.

NET REVENUES

     Net revenues decreased 8% or $701,305 to $8,190,500 for the year ended
December 31, 2001 from net revenues of $8,891,805 for the year ended December
31, 2000. From September through December, 2001, the Company's sales were
significantly lower due to altered customer buying patterns. Many customer
orders were delayed until first quarter, 2002. An analysis of the Company's
revenue-generating centers is outlined below:

REVENUE GENERATING CENTERS

     The Company operates two primary revenue-generating centers:

          1. Manufacturing Center -- consisting of two sub-centers as outlined
     below:

             A. Dietary Supplement Manufacturing -- The Company manufactures
        dietary supplement products, on an OEM or private label basis,
        containing Live-Bac(TM)caplets or CDT(TM) Controlled Delivery Technology
        and, as described below, previously manufactured Calcium
        D-glucarate(TM). Revenues are realized from the sales of Live-Bac
        caplets, dietary supplements incorporating CDT technology or
        manufacturing of tablets, capsules, herbal pre-blends, or natural
        product pre-blends for inclusion into food products or private label
        finished goods. The tableting, encapsulation and packaging operations
        are located in the Company's Lafayette, CO manufacturing facility. The
        Company discontinued sales of Calcium D-glucarate pursuant to an
        agreement entered into with the licensor of Calcium D-glucarate on
        September 19, 2001. See Note L of Notes to Financial Statements.

             B. Fermentation -- The Company manufactures and realizes revenues
        from the sale of viable (live) freeze dried microorganisms for companies
        on a private label and OEM basis. Revenues are also realized from the
        sale of Cobactin microbial feed additive products for feedlot and dairy
        cattle and sales of Bio Power silage inoculants. The fermentation plants
        are located in Redmond, WA.

          2. Licensing Fees, Research & Development Contracts and Royalties
     Center -- This includes Licensing Fees and Research & Development contracts
     for the formulation of Controlled Delivery Technology prescription drugs,
     over-the-counter (OTC) products, and dietary supplements. The licensing
     agreements and Research & Development contracts include royalty revenues
     that are expected to be recognized in future years. The Company believes
     that contracts for prescription drugs may result in royalty revenues
     starting in 2005. Contracts for dietary supplements and over-the-counter
     (OTC) products are expected to result in royalty revenues starting in 2002.

                                        16
<PAGE>

MANUFACTURING REVENUES

     The Company's manufacturing revenues decreased 10% or $876,305 to
$7,890,500 for the year ended December 31, 2001 from revenues of $8,766,805 for
the year ended December 31, 2000.

     A. Dietary supplement manufacturing revenues decreased 20% or $1,252,693 to
$4,976,457 for the year ended December 31, 2001 from revenues of $6,229,150 for
the year ended December 31, 2000. For the year ended December 31, 2001, sales to
MET-Rx USA/Rexall Sundown for CDT technology discontinued, resulting in lost
revenues of $744,710 as compared to the prior year. Calcium D-glucarate sales
decreased 49% or $563,870 from the year ended December 31, 2000 due to the
agreement entered in to with the licensor of Calcium D-glucarate on September
19, 2001. There will be no further sales of Calcium D-glucarate.

     In November, 2001, Odwalla, Inc. was acquired by Coca Cola and has
subsequently placed the Company as a secondary supplier. The Company does not
expect additional sales from Odwalla, Inc. Odwalla, Inc. sales for the year
ended December 31, 2001 were $694,053.

     According to industry sources, sales of herbal products decreased 21% and
vitamin sales decreased 9.1% for the year ended December 31, 2001 as compared to
the year ended December 31, 2000.

     B. Fermentation revenues increased 15% or $376,388 to $2,914,043 for the
year ended December 31, 2001 from revenues of $2,537,655 for the year ended
December 31, 2000. Sales to new customers and increased sales to existing
customers account for the increase in fermentation sales. The Company doubled
its fermentation capacity in November 2000 in anticipation of increased demand
for fermentation products. The Company currently has capacity to sustain the
current growth for 2002.

     According to industry sources, sales of acidophilus products increased
10.7% for the year ended December 31, 2001 as compared to the year ended
December 31, 2000.

LICENSING FEES, RESEARCH & DEVELOPMENT CONTRACTS AND ROYALTIES

     Licensing fees and Research & Development contract revenues for the year
ended December 31, 2001 were $300,000 as compared to $125,000 for the year ended
December 31, 2000. Management anticipates future growth in revenues derived from
drug delivery technology licensing fees and research & development contracts as
a result of its acquisition of an exclusive global license to a second
controlled delivery technology patent in the third quarter 2000 and the filing
of a third controlled delivery technology patent in conjunction with Dr. Reza
Fassihi in the quarter ended September 30, 2001. The licensing agreements and
Research & Development contracts include royalty revenues that will be
recognized in future years. Contracts for dietary supplements and
over-the-counter (OTC) products are expected to result in royalty revenues in
2002 and contracts for prescription drugs may result in royalty revenues
starting in 2005. The second and third controlled delivery patents, developed in
the laboratories of Dr. Reza Fassihi at Temple University School of Pharmacy in
Philadelphia, Pennsylvania are licensed exclusively to Nutraceutix, Inc. for all
applications in nutraceutical/dietary supplements, over-the-counter (OTC)
products, and prescription drugs.

GROSS PROFIT

     Gross profit decreased 32% or $767,374 to $1,653,787 for the year ended
December 31, 2001 compared to $2,421,161 for the year ended December 31, 2000.
The decrease in gross profit for the year ended December 31, 2001 compared to
the year ended December 31, 2000 is primarily due to the decrease in revenues
and the write-off of obsolete inventory of $454,199 for the year ended December
31, 2001, but increased cost of revenues was also realized due to the expansion
of the fermentation facility in November, 2000.

SELLING AND MARKETING EXPENSES

     Selling and marketing expenses increased 9% or $48,105 to $589,823 for the
year ended December 31, 2001 from $541,718 for the year ended December 31, 2000.
The Company increased selling and marketing

                                        17
<PAGE>

expenses with the addition of new sales and marketing employees mid-year 2001
and increased marketing efforts on behalf of its dietary supplement and
fermentation products.

RESEARCH & DEVELOPMENT EXPENSES

     Research & Development expenses increased 10% or $39,743 to $420,542 for
the year ended December 31, 2001 from $380,799 for the year ended December 31,
2000. The increase for the year ended December 31, 2001 compared to the year
ended December 31, 2000 is attributed to increased efforts with the ongoing
development of the Controlled Delivery Technologies and future development of
proprietary technologies and was partially offset by the departure of the Chief
Scientific Officer in January 2001. Research & development expenses are expected
to increase in 2002 and beyond.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses increased 18% or $278,691 to $1,849,158
for the year ended December 31, 2001 compared to $1,570,467 for the year ended
December 31, 2000. The increase is a result of additional personnel and legal
expense associated with further building and development of the corporate
infrastructure.

OPERATING PROFIT/LOSS

     Operating loss for the year ended December 31, 2001 was $1,205,736 as
compared to an operating loss of $71,823 for the year ended December 31, 2000.
The loss for the year ended December 31, 2001 is primarily the result of
decreased sales, inventory write-offs, and increased expenses as mentioned
above.

INTEREST EXPENSE

     Interest expense increased 6% or $17,558 to $324,484 for the year ended
December 31, 2001 compared to $306,926 for the year ended December 31, 2000. The
increase for the year ended December 31, 2001 compared to the year ended
December 31, 2000 is associated with an increase in borrowing under the Line of
Credit.

OTHER INCOME/EXPENSE

     Other income was $632,694 for the year ended December 31, 2001 compared to
other income of $271,231 for the year ended December 31, 2000. During the
quarter ended March 31, 2001, the Company entered into a separation agreement
with its former Chief Scientific Officer and its Vice President of
Administration, Secretary and Treasurer. In conjunction with the agreements, the
Company recorded severance costs of approximately $306,000, which is reflected
in Other Expense for the year ended December 31, 2001. See Note K of Notes to
Financial Statements. During the quarter ended September 30, 2001, the Company
entered into an agreement with its licensor of patented calcium D-glucarate that
resulted in other income of $480,614. See Note L of Notes to Financial
Statements. During the year ended December 31, 2001, Nutraceutix agreed with
Biotal to end their manufacturing contract for Micro-Cell Microbial Feed
Additive. As a result, Nutraceutix recognized other income of $750,000. See Note
M of Notes to Financial Statements. As a result of the settlement agreement with
MET-Rx USA/Rexall Sundown, the year ended December 31, 2000 reflects the
one-time, non-recurring cash payment, forgiveness of accounts payable and
termination of the exclusive license agreement.

NET EARNINGS

     The net loss for the year ended December 31, 2001 was $573,042 compared to
net income of $199,408 for the year ended December 31, 2000.

                                        18
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company finances its operations and capital requirements primarily
through borrowing and operations. As of December 31, 2001 the Company had
negative working capital of $559,750 as compared to working capital of $417,259
at December 31, 2000. The decrease in working capital at December 31, 2001 is
primarily the result of a decrease in accounts receivable and inventory which is
a result of decreased sales in the 4th quarter, 2001.

     The Company's conventional bank line of credit for $1,600,000 was scheduled
to expire on May 1, 2002 but was terminated by the Company's existing lender on
March 21, 2002. The bank replaced the line of credit with a short term loan in
the amount of approximately $1,183,000 which is scheduled to be repaid by April
25, 2002. The credit facility is collateralized by accounts receivable,
inventory and equipment. Although management is confident that the Company will
be able to secure a new line of credit or other financing, there can be no
assurance that the Company will obtain a new line of credit or other financing
to replace the existing facility.

     The Company raised $700,000 through the private sale of 1,750,000 common
shares of stock during the first quarter of 2002.

     In 2001 and 2000, the Company spent $420,542 (approximately 5% of revenues)
and $380,799 (approximately 4% of revenues), respectively, on product research
and development. The Company believes this level of research and development
expenditure to be necessary to realize the potential of existing drug delivery
technology in the dietary supplement market; however, the pharmaceutical and OTC
markets will require substantially more research and development expense to
fully exploit the Company's patents.

     The Company will require substantial additional funding to support the
research and development to both replace existing technologies as current
patents expire and to create an effective drug delivery development unit with
the Company. See Item 1. "Description of Business -- Research and Development".

     We may need to raise additional capital to: (1) fund operations, (2) fund
research and development, (3) fund clinical and bioavailability trials, (4)
continue development of our product and technology candidates; and (5)
commercialize our products.

     Additional financing may not be available on acceptable terms, if at all.
If we raise funds by issuing equity securities, holders of our common shares
will be diluted. If we issue preferred shares, the holders of such shares would
have rights senior to those of our common shares. If we raise funds by incurring
debt, the debt holders would have rights senior to the holders of our common
shares to make claims on our assets and the terms of any debt could restrict our
operations. If we are unable to raise additional funds when we need them, we may
be required to delay, reduce or eliminate some or all of our development
programs and some of our research and clinical studies. We may be forced to
license our technologies to others that we would prefer to develop ourselves.
Our business and operations may consume financial resources faster than
anticipated and we may be required to raise capital sooner due to a number of
factors, including:

     1. increase in the number, size and complexity of our development projects;

     2. slower than expected progress in developing our products and
technologies;

     3. higher than expected costs of development and regulatory approval; and

     4. higher than expected costs to acquire, retain, or protect our
intellectual property.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS
141 applies to all business combinations initiated after September 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later.

                                        19
<PAGE>

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. The provisions of SFAS 142 are required to be applied starting with
fiscal years beginning after December 15, 2001 with earlier application
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not been previously
issued. The statement is required to be applied at the beginning of the entity's
2002 fiscal year and will be applied to all goodwill and other intangible assets
recognized in the Company's financial statements.

     In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and APB
Opinion 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS 144 is effective for fiscal years beginning after December 15, 2001.

                      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 of 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)
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 2001, the Company received approximately 43% of its total revenues from
three customers: Rexall Sundown (16%) and EAS (15%) and Supplemental Sciences
(12%). The loss of any of these three customers could have a materially adverse
effect on the Company.

DEPENDENCE ON KEY PERSONNEL

     The Company believes that its success depends to a significant extent on
the existing management, the President and CEO, David Howard, the Vice President
of Operations, Steve Moger, and the Director of Product Development, Steve
Turner. The future success of the Company will depend, as well, upon its ability
to retain and attract key personnel in the future; both, in the dietary
supplement and nutraceutical unit and the drug delivery technology unit.

ABSENCE OF CLINICAL STUDIES

     Although many of the ingredients of 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.
While the Company believes all of its products to be safe when taken as
directed, there
                                        20
<PAGE>

is little long-term experience with human consumption of certain of these
innovative product ingredients in a 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, the
Company has not sponsored clinical trials on the long-term effect of human
consumption.

     With respect to the registration, approval, and commercialization of the
first and second generation CDT technology, the Company realizes that all
analytic work completed to-date has involved in-vitro scientific studies.
Additional human clinical bioavailability and bio-equivalence trials must be
conducted in order to fully validate the asset value and commercial advantages
associated with U.S. Patent 6,090,411. Until such clinical trials are performed,
there can be no assurances that either the first or second-generation CDT
technologies possess the necessary correlation between the available in-vitro
analytic work and their performance in human subjects to become commercially
viable technologies attractive to major pharmaceutical and OTC companies.

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, and 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 that the nutritional supplement, OTC, and
pharmaceutical markets are affected by national media attention regarding the
consumption of dietary supplements, OTC products and prescription drugs. There
can be no assurance that future scientific research or publicity will be
favorable to these industries or any particular product, or consistent with
earlier research or publicity. Future reports of research that are perceived
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.

                                        21
<PAGE>

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 markets is in part
dependent on the success of the companies which sub-license the Company's
technology. The Company has no direct or indirect control over the conduct of
the licensees' business or their operations. There is no assurance that adverse
events in the licensees' businesses would not negatively affect the Company.

DEPENDENCE ON INTELLECTUAL PROPERTY

     The Company's success will depend; in part, on its ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of others or having others infringe our rights. The Company
has filed and is actively pursuing patent applications in the US and other
jurisdictions. The patent positions of pharmaceutical, nutraceutical, and
bio-pharmaceutical firms, including the Company's, is uncertain and involves
complex legal and factual questions for which important legal issues are largely
unresolved. In addition, the coverage claimed in a patent application can be
significantly reduced before a patent is issued. There can be no assurance that
any of our patent applications will result in the issuance of patents, that the
Company will be able to develop additional proprietary products and processes
that are patentable, that patents issued to the Company will provide adequate
protection or any competitive advantages, that such patents will not be
successfully challenged by third parties, that the patents of others will not
impede our or our collaborators ability to commercialize the technology.

     Part of the Company's intellectual property is in the form of trade secrets
and know-how and may not be protected by patents. There can be no assurance that
we will be able to protect our trade secrets. To help protect the Company's
rights, we require employees, consultants, advisors, and collaborators to enter
into confidentiality agreements. There can be no insurance that these agreements
will provide meaningful protection for our trade secrets, know-how, or other
proprietary information in the event of any unauthorized use or disclosure.

ITEM 7. FINANCIAL STATEMENTS

     See "Financial Statements and Notes to Financial Statements" set forth on
pages F-1 through F-16 of this Annual Report on Form 10-KSB.

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

     None.

                                    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 2002 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."
                                        22
<PAGE>

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
-------                            -----------
<C>        <S>
 3.1       Certificate of Incorporation and Amendment thereto(1)
 3.2       Amended 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)
10.11      Rexall Showcase Agreement(2)
10.12      Building Lease -- 9625 153rd Avenue NE, Redmond, WA
           (Manufacturing Facility)(3)
10.13      MET-Rx, USA Agreement(3)
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 Carl W. Schafer
24.3       Power of Attorney of Daniel B. Ward
</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.

(3) Incorporated by reference to Registrant's Form 10-KSB for the fiscal year
    ended December 31, 2000.

     (b) Reports on Form 8-K: None.

                                        23
<PAGE>

                                   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.

                                          By:     /s/ DAVID T. HOWARD

                                          --------------------------------------
                                                     David T. Howard
                                            President, Chief Executive Officer

March 29, 2001

     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/ DAVID T. HOWARD                                  President, Chief Executive     March 29, 2001
-------------------------------------------------                  Officer
    David T. Howard                                     (Principal Executive Officer)
                                                                and Director

By: /s/ STEVEN H. MOGER                                    Chief Financial Officer      March 29, 2001
-------------------------------------------------         (Principal Financial and
    Steven H. Moger                                          Accounting Officer)

By: * /s/ HERBERT L. LUCAS                                        Director              March 29, 2001
-------------------------------------------------
    Herbert L. Lucas

By: * /s/ CARL W. SCHAFER                                         Director              March 29, 2001
-------------------------------------------------
    Carl W. Schafer

By: */s/ DANIEL B. WARD                                           Director              March 29, 2001
-------------------------------------------------
    Daniel B. Ward

* Attorney-In-Fact
</Table>

                                        24
<PAGE>

                                    CONTENTS

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

                                       F-1
<PAGE>

               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, 2001 and 2000, 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Nutraceutix, Inc. as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

GRANT THORNTON, LLP
Seattle, Washington

February 15, 2002

                                       F-2
<PAGE>

                               NUTRACEUTIX, INC.

                                 BALANCE SHEETS
                                  DECEMBER 31,

                                     ASSETS

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------    -----------
<S>                                                           <C>             <C>
Current assets
  Cash......................................................  $     93,082    $    98,241
  Accounts receivable, less allowance for doubtful accounts
     of $0 and $5,312, respectively.........................       974,840      1,464,392
  Current portion of notes receivable.......................       184,490          6,030
  Inventories...............................................       745,098      1,333,977
  Prepaid expenses..........................................       163,209        102,916
                                                              ------------    -----------
          Total current assets..............................     2,160,719      3,005,556
Property and equipment -- net...............................     1,706,977      1,874,315
Other assets
  Intangible assets -- net..................................       853,681        812,307
  Noncurrent portion of notes receivable....................       221,539          5,529
  Available-for-sale security...............................           747          4,444
                                                              ------------    -----------
                                                              $  4,943,663    $ 5,702,151
                                                              ============    ===========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Line of credit............................................  $  1,118,282    $ 1,184,500
  Current maturities of long-term obligations...............       255,030        215,995
  Current maturities of capital lease obligations...........       221,267        234,799
  Accounts payable -- trade.................................       728,117        837,826
  Accrued liabilities.......................................       147,773         91,047
  Deferred revenue..........................................       250,000         24,130
                                                              ------------    -----------
          Total current liabilities.........................     2,720,469      2,588,297
Long-term obligations, less current maturities..............       209,363        450,916
Capital lease obligations, less current maturities..........       433,636        586,004
Commitments and contingencies...............................            --             --
Stockholders' equity
  Preferred stock, authorized 5,000,000 shares, $.01 par
     value, none issued or outstanding......................            --             --
  Common stock, authorized 30,000,000 shares, $.001 par
     value..................................................        18,008         17,803
  Additional contributed capital............................    11,871,184     11,791,389
  Accumulated other comprehensive income....................       (35,982)       (32,285)
  Stock subscription........................................       120,000             --
  Subscription receivable...................................      (120,000)            --
  Accumulated deficit.......................................   (10,273,015)    (9,699,973)
                                                              ------------    -----------
          Total stockholders' equity........................     1,580,195      2,076,934
                                                              ------------    -----------
                                                              $  4,943,663    $ 5,702,151
                                                              ============    ===========
</Table>

   The accompanying notes are an integral part of these financial statements.

                                       F-3
<PAGE>

                               NUTRACEUTIX, INC.

                            STATEMENTS OF OPERATIONS
                            YEARS ENDED DECEMBER 31,

<Table>
<Caption>
                                                                 2001           2000
                                                              -----------    ----------
<S>                                                           <C>            <C>
Net revenues................................................  $ 8,190,500    $8,891,805
Cost of revenues............................................    6,536,713     6,470,644
                                                              -----------    ----------
     Gross profit...........................................    1,653,787     2,421,161
Operating expenses
  Marketing and selling.....................................      589,823       541,718
  Research and development..................................      420,542       380,799
  General and administrative................................    1,849,158     1,570,467
                                                              -----------    ----------
                                                                2,859,523     2,492,984
                                                              -----------    ----------
     Operating loss.........................................   (1,205,736)      (71,823)
Other income (expense)
  Interest expense..........................................     (324,484)     (306,926)
  Severance costs...........................................     (306,436)           --
  D-Glucarate agreement.....................................      480,614            --
  Micro-Cell/Cobactin agreement.............................      750,000            --
  Met-Rx settlement.........................................           --       519,004
  Other.....................................................       33,000        59,153
                                                              -----------    ----------
                                                                  632,694       271,231
                                                              -----------    ----------
       Net Earnings (Loss)..................................  $  (573,042)   $  199,408
                                                              ===========    ==========
       Net earnings (loss) per share........................  $     (0.03)   $     0.01
                                                              ===========    ==========
       Net earnings (loss) per share assuming dilution......  $     (0.03)   $     0.01
                                                              ===========    ==========
</Table>

   The accompanying notes are an integral part of these financial statements.

                                       F-4
<PAGE>

                               NUTRACEUTIX, INC.

                       STATEMENT OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
                                     COMMON STOCK       ADDITIONAL        ACCUMULATED
                                 --------------------   CONTRIBUTED   OTHER COMPREHENSIVE      STOCK       SUBSCRIPTION
                                   SHARES     AMOUNT      CAPITAL           INCOME          SUBSCRIPTION    RECEIVABLE
                                 ----------   -------   -----------   -------------------   ------------   ------------
<S>                              <C>          <C>       <C>           <C>                   <C>            <C>
Balance at December 31, 1999...  17,486,812   $17,489   $11,725,754        $     --           $     --      $      --
Exercise of stock options for
  cash and stock, net..........     316,477       314        62,533              --                 --             --
Stock options issued for
  services.....................          --        --         3,102              --                 --             --
Unrealized losses on
  available-for-sale
  security.....................          --        --            --         (32,285)                --             --
Net earnings for the year......          --        --            --              --                 --             --
                                 ----------   -------   -----------        --------           --------      ---------
Balance at December 31, 2000...  17,803,289    17,803    11,791,389         (32,285)                --             --
Issuance of common stock for
  cash.........................     205,000       205        79,795              --                 --             --
Unrealized losses on
  available-for-sale
  security.....................          --        --            --          (3,697)                --             --
Issuance of subscription
  agreement for note
  receivable...................          --        --            --              --            120,000       (120,000)
Net loss for the year..........          --        --            --              --                 --             --
                                 ----------   -------   -----------        --------           --------      ---------
Balance at December 31, 2001...  18,008,289   $18,008   $11,871,184        $(35,982)          $120,000      $(120,000)
                                 ==========   =======   ===========        ========           ========      =========

<Caption>

                                 ACCUMULATED
                                   DEFICIT        TOTAL
                                 ------------   ----------
<S>                              <C>            <C>
Balance at December 31, 1999...  $ (9,899,381)  $1,843,862
Exercise of stock options for
  cash and stock, net..........            --       62,847
Stock options issued for
  services.....................            --        3,102
Unrealized losses on
  available-for-sale
  security.....................            --      (32,285)
Net earnings for the year......       199,408      199,408
                                 ------------   ----------
Balance at December 31, 2000...    (9,699,973)   2,076,934
Issuance of common stock for
  cash.........................            --       80,000
Unrealized losses on
  available-for-sale
  security.....................            --       (3,697)
Issuance of subscription
  agreement for note
  receivable...................            --           --
Net loss for the year..........      (573,042)    (573,042)
                                 ------------   ----------
Balance at December 31, 2001...  $(10,273,015)  $1,580,195
                                 ============   ==========
</Table>

    The accompanying notes are an integral part of this financial statement.
                                       F-5
<PAGE>

                               NUTRACEUTIX, INC.

                            STATEMENTS OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,

<Table>
<Caption>
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
  Net earnings (loss).......................................  $(573,042)   $ 199,408
  Adjustments to reconcile net earnings (loss) to net cash
     provided by operating activities
     Depreciation and amortization..........................    461,505      405,012
     Settlement of accounts payable.........................    (83,160)          --
     Stock options granted for services.....................         --        3,102
     Changes in assets and liabilities
       Accounts receivable..................................    489,552     (576,053)
       Notes receivable.....................................   (394,470)          --
       Inventories..........................................    588,879      412,497
       Prepaid expenses.....................................    (60,293)       9,105
       Accounts payable.....................................    (26,549)    (375,915)
       Accrued liabilities and deferred revenue.............    282,596       14,764
                                                              ---------    ---------
          Net cash provided by operating activities.........    685,018       91,920
                                                              ---------    ---------
Cash flows from investing activities:
  Purchase of equipment and furniture.......................    (45,249)     (73,367)
  Patent and technology rights expenditures.................   (212,753)    (165,727)
                                                              ---------    ---------
          Net cash used in investing activities.............   (258,002)    (239,094)
                                                              ---------    ---------
Cash flows from financing activities:
  Payments on long-term obligations and capital lease
     obligations............................................   (549,587)    (538,488)
  Proceeds from long-term obligations.......................    103,630      226,735
  Net borrowings (payments) on line of credit...............    (66,218)     345,000
  Net proceeds from issuance of common stock................     80,000       62,847
                                                              ---------    ---------
          Net cash provided by (used in) financing
            activities......................................   (432,175)      96,094
                                                              ---------    ---------
Net decrease in cash........................................     (5,159)     (51,080)
Cash at beginning of year...................................     98,241      149,321
                                                              ---------    ---------
Cash at end of year.........................................  $  93,082    $  98,241
                                                              =========    =========
Cash paid during the year for:
  Interest..................................................  $ 324,484    $ 306,926
                                                              =========    =========
Noncash investing and financing activities:
  Additions to equipment under capital lease obligations....  $  77,539    $ 596,197
  Marketable securities received for reduction in customer
     receivable.............................................  $      --    $  36,729
  Issuance of subscription agreement for note receivable....  $ 120,000    $      --
</Table>

   The accompanying notes are an integral part of these financial statements.
                                       F-6
<PAGE>

                               NUTRACEUTIX, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nutraceutix, Inc. (the Company) is a biopharmaceutical company that
develops and manufactures pharmaceutical, over-the-counter, and nutritional
products. Nutraceutix is active in two marketplaces: controlled delivery
technologies and nutraceuticals. The Company uses its patented CDT(TM)
controlled delivery technologies to develop products and license technology to
pharmaceutical and nutritional product companies. The Company also manufactures
and packages probiotics, develops proprietary nutritional product formulations,
and offers specialty nutraceutical ingredients, including several that utilize
CDT(TM) technologies. The Company's customers are located throughout the United
States.

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

  1. Accounts Receivable

     In 2001, the Company considered accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts was required. In
2000, the Company established an allowance for doubtful accounts totaling
$5,312.

  2. Inventories

     Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method. The Company has established an allowance
for potentially obsolete and slow moving items.

  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>

     The Company uses accelerated depreciation methods for tax purposes.

  4. Intangible Assets

     Intangible assets include capitalized technical and product rights, patents
and trademarks. 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. Revenue Recognition

     Revenue from the sale of nutraceutical products is recognized upon shipment
to the customer.

                                       F-7
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  6. Research and Development Costs

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

  7. Other Comprehensive Income (Loss)

     Other comprehensive income (loss) includes unrealized losses on an equity
security classified as available-for-sale. Available for sale securities are
reported at fair value, based on quoted market prices, with the net unrealized
gains or losses reported as other comprehensive income or loss in stockholders'
equity.

  8. 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.

  9. Reclassifications

     Certain reclassifications have been made to the 2000 financial statements
to conform to the 2001 presentation.

  10. Recently Issued Accounting Standards

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS
141 applies to all business combinations initiated after September 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later. The
adoption of SFAS 141 did not have an impact on the Company's financial
statements.

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. The provisions of SFAS 142 are required to be applied starting with
fiscal years beginning after December 15, 2001 with earlier application
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not been previously
issued. The statement is required to be applied at the beginning of the entity's
2002 fiscal year and will be applied to all goodwill and other intangible assets
recognized in the Company's financial statements. The Company is currently
evaluating the potential affect of the initial application of the SFAS 142.

     In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and APB
Opinion 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the potential effect of the initial application
of the SFAS 144 on its financial statements.

NOTE B -- MANAGEMENT PLANS

     The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate the continuation of the Company as a going concern. However, the
Company had an operating loss of $1,205,736 and a net loss of $573,042 for the

                                       F-8
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

year ended December 31, 2001. The Company's current liabilities exceed its
current assets, resulting in a working capital deficit of $559,750 as of
December 31, 2001. In addition, the Company's financial institution has informed
management that it will not renew its line of credit upon expiration in May
2002.

     The Company raised $700,000 in a private placement of common stock
subsequent to December 31, 2001 (see note U). Although management is confident
that the Company will be able to secure a new line of credit in May 2002 with a
different financial institution, there can be no assurance that the Company can
raise additional financing if necessary or that the Company will obtain a new
line of credit in May 2002.

NOTE C -- NOTES RECEIVABLE

     Notes receivable consist of the following at December 31:

<Table>
<Caption>
                                                                2001       2000
                                                              --------    -------
<S>                                                           <C>         <C>
Note receivable for D-Glucarate agreement; with initial
  payment of $40,000 due February 1, 2002 and monthly
  payments of $13,846 through April 2004....................  $400,000    $    --
Note receivable for settlement of account receivable; with
  monthly payments of $503 through December 2002............     5,529     11,559
Other.......................................................       500         --
                                                              --------    -------
                                                               406,029     11,559
Less current portion........................................   184,490      6,030
                                                              --------    -------
                                                              $221,539    $ 5,529
                                                              ========    =======
</Table>

     Aggregate maturities of notes receivable are as follows:

<Table>
<Caption>
                 YEAR ENDING DECEMBER 31,
                 ------------------------
<S>                                                         <C>
     2002.................................................  $184,490
     2003.................................................   166,154
     2004.................................................    55,385
                                                            --------
     Total................................................  $406,029
                                                            ========
</Table>

NOTE D -- INVENTORIES

     Inventories consist of the following at December 31:

<Table>
<Caption>
                                                           2001         2000
                                                        ----------   ----------
<S>                                                     <C>          <C>
Raw materials.........................................  $  698,801   $  903,564
Work in progress......................................     388,427      473,276
Finished goods........................................     115,169      146,589
                                                        ----------   ----------
                                                         1,202,397    1,523,429
Less allowance for obsolete and slow moving items.....     457,299      189,452
                                                        ----------   ----------
                                                        $  745,098   $1,333,977
                                                        ==========   ==========
</Table>

                                       F-9
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE E -- PROPERTY AND EQUIPMENT

     Property and equipment consist of the following at December 31:

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Furniture and fixtures......................................  $   62,843   $   66,672
Machinery and equipment.....................................   1,890,873    1,931,708
Leasehold improvements......................................      71,961       73,069
Machinery and equipment under capital leases................   1,347,877    1,278,010
                                                              ----------   ----------
                                                               3,373,554    3,349,459
Less accumulated depreciation and amortization..............   1,305,893    1,269,794
Less accumulated amortization of machinery and equipment
  under capital leases......................................     360,684      205,350
                                                              ----------   ----------
                                                              $1,706,977   $1,874,315
                                                              ==========   ==========
</Table>

NOTE F -- INTANGIBLE ASSETS

     Intangible assets consist of the following at December 31:

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Technical and product rights................................  $2,237,444   $2,237,444
Patents and trademarks......................................     745,386      532,633
                                                              ----------   ----------
                                                               2,982,830    2,770,077
Less accumulated amortization...............................   2,129,149    1,957,770
                                                              ----------   ----------
                                                              $  853,681   $  812,307
                                                              ==========   ==========
</Table>

NOTE G -- LINE OF CREDIT

     The Company has a line of credit with a bank collateralized by accounts
receivable, inventory and equipment, which expires on May 1, 2002. Under the
terms of the line of credit, the Company can borrow up to $1,600,000 at an
interest rate of prime plus 1% (5.75% at December 31, 2001). The Company has
certain minimum financial covenants with which it is not in compliance at
December 31, 2001. Additionally, in December 2001, the bank informed the Company
that it was not willing to waive these covenants and that it does not intent to
renew the line of credit in May 2002.

                                       F-10
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H -- LONG-TERM OBLIGATIONS

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

<Table>
<Caption>
                                                                2001        2000
                                                              --------    --------
<S>                                                           <C>         <C>
Notes payable for equipment; with monthly installments
  totaling $13,801, including 16.4% interest; collateralized
  by production equipment; due in 2003......................  $232,988    $348,246
Notes payable to third party for leasehold improvement
  advance, payable in 34 monthly installments of $3,695
  including 15.5% interest, due in 2004.....................   105,882     131,628
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..........    70,000     130,000
Note payable to a third party; with monthly installments of
  $1,643, including interest at 12.7%; collateralized by
  equipment; due in 2004....................................    42,046      55,484
Other notes payable.........................................    13,477       1,553
                                                              --------    --------
                                                               464,393     666,911
Less current maturities.....................................   255,030     215,995
                                                              --------    --------
                                                              $209,363    $450,916
                                                              ========    ========
</Table>

     Aggregate maturities of long-term obligations are as follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                         <C>
     2002.................................................  $255,030
     2003.................................................   157,402
     2004.................................................    51,961
                                                            --------
                                                            $464,393
                                                            ========
</Table>

NOTE I -- LEASE OBLIGATIONS

     The Company conducts a substantial portion of its operations utilizing
leased manufacturing and office facilities, expiring through 2006. 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 through 2006.

     The following is a schedule by years of future minimum lease payments
together with the present value of the minimum payments under capital and
operating leases as of December 31, 2001:

<Table>
<Caption>
                                                              CAPITAL     OPERATING
                  YEAR ENDING DECEMBER 31,                     LEASES       LEASES
                  ------------------------                    --------    ----------
<S>                                                           <C>         <C>
     2002...................................................  $310,742    $  550,854
     2003...................................................   234,214       522,898
     2004...................................................   191,451       297,528
     2005...................................................   100,001       216,153
     2006...................................................     3,224       128,942
                                                              --------    ----------
Future minimum lease payments...............................   839,632    $1,716,375
                                                                          ==========
Less amount representing interest...........................   184,729
                                                              --------
Present value of minimum lease payments.....................  $654,903
                                                              ========
Current maturities..........................................  $221,267
Long-term maturities........................................   433,636
                                                              --------
                                                              $654,903
                                                              ========
</Table>

                                       F-11
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Rent expense for leased facilities and equipment was $734,474 and $665,277
for the years ended December 31, 2001 and 2000, respectively.

NOTE J -- 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 approximately as follows at December 31:

<Table>
<Caption>
                                                        2001            2000
                                                      ---------       --------
<S>                                                   <C>             <C>
Tax expense (benefit) at statutory rate...........    $(194,800)      $ 67,800
Permanent differences.............................        5,300          8,700
Stock options exercised...........................           --             --
Change in valuation allowance.....................      189,500        (76,500)
                                                      ---------       --------
                                                      $      --       $     --
                                                      =========       ========
</Table>

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

<Table>
<Caption>
                                                       2001           2000
                                                    -----------    -----------
<S>                                                 <C>            <C>
Current asset, net
  Inventory reserve...............................  $   155,500    $    64,400
  Other accrued liabilities.......................       74,900         96,300
  Less valuation allowance........................     (230,400)      (160,700)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
Non-current asset, net
  Net operating loss carry forwards...............  $ 1,503,600    $ 1,849,000
  Depreciation and amortization...................     (174,900)      (174,000)
  Other tax credits...............................       36,700         90,800
  Less valuation allowance........................   (1,365,400)    (1,765,800)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
</Table>

     The Company has established a valuation allowance of $1,595,800 and
$1,926,500 as of December 31, 2001 and 2000, respectively, due to the
uncertainty of future utilization of net operating loss carryforwards and
realization of other deferred tax assets.

     At December 31, 2001, an operating loss carryforward of approximately
$4,422,300 expiring through 2021 is available to offset future taxable income.
Net operating loss carryforwards of approximately $1,371,700 and $1,884,300
expired during 2001 and 2000, respectively. Investment tax credits and research
and experimentation tax credits totaling $36,700 expiring through 2003 are also
available. Tax credits of approximately $54,100 and $43,400 expired during 2001
and 2000, respectively. If ownership changes should occur, there may be certain
limitations on the use of these carryforwards, as defined by Internal Revenue
Code Section 382.

     Included in the net operating loss for 2000 is approximately $177,300 as a
result of the exercise of stock options with a strike price less than the fair
value of the shares acquired. If this portion of the net operating loss is
ultimately recognized for income tax purposes, the resulting benefit will not be
recognized in the income statement but will increase additional paid in capital.

                                       F-12
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE K -- SEPARATION AGREEMENT

     The Company entered into a separation agreement with its former Chief
Scientific Officer and a separation agreement with its former Vice President of
Administration, Secretary and Treasurer, both of which became fully binding on
the parties on March 31, 2001 and effective as of January 15, 2001. In
conjunction with the separation agreements, the Company recorded severance costs
totaling $306,436, which is included in other expense in the Statement of
Operations for the year ended December 31, 2001.

     Under this agreement the Company is to pay the former Chief Scientific
Officer $12,500 a month through January 15, 2004. If this individual earns an
income during the three-year period from January 15, 2001 through January 15,
2004, then the amounts earned will offset payments due him. For the first twelve
months of the agreement, no amounts offset the monthly payments. Beginning with
the period ending January 15, 2002 and for each twelve-month period thereafter,
the former Chief Scientific Officer is to provide the Company with an accounting
of income earned during the preceding 12 months. The amount earned will then be
used to offset future payments. As future payments are contingent upon the
earnings of this individual, no liability has been established as of December
31, 2001.

NOTE L -- D-GLUCARATE AGREEMENT

     On September 19, 2001, the Company entered into an agreement with its
licensor of patented calcium D-Glucarate. Under the terms of the agreement, the
Company will discontinue all sales, marketing, and distribution activities
related to Calcium D-glucarate. In return, the Company received a $400,000
non-interest bearing note receivable and the forgiveness of certain accounts
payable totaling $83,160. As a result of this transaction, the Company
recognized income of $480,614 for the year ended December 31, 2001, which is
included in other income in the Statement of Operations. The first payment of
$40,000 under the note receivable was paid in February 2002, and monthly
payments of $13,846 will be due thereafter through April 2004.

NOTE M -- MICRO-CELL(R)/COBACTIN(R) AGREEMENT

     On December 4, 2001, the Company entered into an agreement with Biotal,
Inc. (Biotal) and Danstar Ferment AG (Danstar) whereby the Company assigned to
Danstar its rights and obligations under the Product Marketing and Manufacturing
Agreement dated August 19, 1999 between the Company and Biotal. Under the terms
of the new agreement, the Company sold its rights to produce Micro-Cell(R)
microbial beef feed additive. The Company retains the intellectual property
rights and production of its Cobactin(R) microbial feed additive product, while
Biotal will have the exclusive rights to distribute the product. In accordance
with the agreement, the Company received a $750,000 payment, which is included
in other income in the Statement of Operations for the year ended December 31,
2001.

NOTE N -- MET-RX AGREEMENT

     On September 18, 2000, the Company entered into an agreement with Met-Rx,
USA, Inc. (Met-Rx), which terminated the Product Sales and Sublicense Agreement
for Controlled Delivery Technology and Molecular Dispersion Technology Products
(the Sublicense Agreement), entered into on March 6, 2000. The termination
agreement required Met-Rx to pay the Company a one-time payment of $150,000 to
satisfy all of Met-Rx's obligations under the Sublicense Agreement. In
conjunction with the termination agreement, certain accounts payable and advance
payments totaling $369,000 due to Met-Rx were forgiven. As a result, the Company
recognized a gain on the transaction of approximately $519,000, which is
included in other income in the Statement of Operations for the year ended
December 31, 2000.

                                       F-13
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE O -- TECHNICAL RIGHTS AND ROYALTY AGREEMENTS

     During 2001, the Company amended an agreement with Temple University
(Temple) to obtain exclusive worldwide license of licensed products, with the
right to sublicense. During 2000, the Company entered into a similar agreement
with Temple relating to a different product. Under the terms of the agreements
with Temple, the Company is required to make minimum annual royalty payments
totaling $55,000.

     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, 2010. During 2001 and 2000, royalty expense for
Feed Additives amounted to $38,423 and $18,912, respectively.

NOTE P -- 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 8% of employee contributions. The Company contributed
$12,269 and $11,105 to the Plan for the years ended December 31, 2001 and 2000,
respectively.

NOTE Q -- 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
4,000,000 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 Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). The Company applies Accounting Principles Boards 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>
                                                          2001         2000
                                                        ---------    --------
<S>                                                     <C>          <C>
Net earnings (loss)
  As reported.........................................  $(573,042)   $199,408
  Pro forma...........................................  $(700,634)   $101,342
Net earnings (loss) per share
  As reported.........................................  $   (0.03)   $   0.01
  Pro forma...........................................  $   (0.04)   $   0.01
</Table>

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

<Table>
<Caption>
                                                           2001         2000
                                                         ---------    ---------
<S>                                                      <C>          <C>
Expected volatility....................................         88%          73%
Expected dividend yield................................          0%           0%
Risk-free interest rate................................        5.0%         5.5%
Expected life..........................................  7.0 years    7.0 years
</Table>

                                       F-14
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                       2001                           2000
                                            ---------------------------    ---------------------------
                                                            WEIGHTED                       WEIGHTED
                                                            AVERAGE                        AVERAGE
                                             SHARES      EXERCISE PRICE     SHARES      EXERCISE PRICE
                                            ---------    --------------    ---------    --------------
<S>                                         <C>          <C>               <C>          <C>
Outstanding at beginning of year..........  2,740,601        $0.71         2,436,052        $0.71
Granted...................................    916,840         0.59         1,073,060         0.64
Exercised.................................         --           --          (368,592)        0.25
Forfeited.................................   (166,858)        0.76          (399,919)        0.98
                                            ---------        -----         ---------        -----
Outstanding at end of year................  3,490,583        $0.67         2,740,601        $0.71
                                            =========        =====         =========        =====
Options exercisable at end of year........  2,078,197        $0.72         1,768,396        $0.75
                                            =========        =====         =========        =====
Weighted-average fair value of options
  granted during the year.................                   $0.48                          $0.35
                                                             =====                          =====
</Table>

     The following is a summary of stock options outstanding at December 31,
2001:

<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...........................   2,425,183        8.12 years           1,012,797
$0.80 - $1.25...........................   1,065,400        3.53 years           1,065,400
</Table>

NOTE R -- 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, 2001:

<Table>
<Caption>
                                                  NET LOSS         SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Loss per shares
  Income available to common stockholders......   $(573,042)     17,803,851       $(0.03)
</Table>

     At December 31, 2001, the Company had 926,072 of stock options, which were
dilutive. The computation for loss per share assuming dilution for the year
ended December 31, 2001 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, 2000:

<Table>
<Caption>
                                                 NET EARNINGS       SHARES        PER SHARE
                                                 (NUMERATOR)     (DENOMINATOR)     AMOUNT
                                                 ------------    -------------    ---------
<S>                                              <C>             <C>              <C>
Earnings per share:
  Income available to common stockholders......    $199,408       17,621,984        $0.01
Effect of dilutive securities:
  Stock options................................          --          178,004           --
                                                   --------       ----------        -----
Earnings per common share assuming dilution:
  Earnings available to common stockholders and
     effect of assumed conversions.............    $199,408       17,799,988        $0.01
                                                   ========       ==========        =====
</Table>

                                       F-15
<PAGE>
                               NUTRACEUTIX, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE S -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

     In 2001, the Company had sales to three customers, which accounted for
approximately 16%, 15% and 12%, of net revenues. In 2000, sales to two different
customers accounted for approximately 40% and 10% of net revenues. The Company
does not require its receivables to be collateralized; as such the Company's
receivables are unsecured.

NOTE T -- CONTINGENCIES

     In 2001, the Company was engaged in a lawsuit for wrongful termination of a
former employee. On September 20, 2001, the lawsuit was dismissed by the Equal
Opportunity Commission. The former employee may pursue his claim through normal
litigation channels; however, in the opinion of management, based upon advice of
legal counsel, no further pursuit of this claim is expected to occur.

NOTE U -- PRIVATE PLACEMENT

     In November 2001, the Board of Directors authorized the sale of up to
2,000,000 shares of the Company's common stock in a private placement.

     The Company entered into a one year consulting agreement effective December
1, 2001 with an investor relations company to increase investment community
awareness of the Company for a monthly fee of $7,500. As part of this
arrangement, the owner of the investor relations company will purchase 300,000
shares of unregistered common stock at $0.40 per share. The shares will be paid
for with a note totaling $120,000, which will accrue interest at 5.0% and will
be due on the later of December 1, 2002 or at the time the purchased shares are
publicly saleable. As of December 31, 2001, the Company had not issued the
300,000 shares of common stock; accordingly, the Company has recorded a stock
subscription for the shares totaling $120,000.

     As of February 15, 2002, the Company had sold 1,955,000 shares of common
stock for $780,000 relating to this private placement. Of this amount, 205,000
shares were sold to a related party for $80,000 prior to December 31, 2001.

NOTE V -- FOURTH QUARTER ADJUSTMENT

     During the fourth quarter of 2001, the Company recorded an adjustment to
reduce licensing fee revenue by $250,000. The amount was reclassified to
deferred revenue as of December 31, 2001. The licensing fee revenue was
originally recognized in the second quarter prior to the Company fulfilling its
contractual obligations. The adjustment increased current liabilities by
$250,000 and increased the net loss by $250,000.

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