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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, 2000

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

       FOR THE TRANSITION PERIOD FROM                TO                 .

                        COMMISSION FILE NUMBER 000-24693

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

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

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

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

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

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

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

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

     The issuer's revenues for the fiscal year ended December 31, 2000 were
$8,891,805.

     The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was and asked price of
such stock, as of March 21, 2001 was approximately $11,332,747.

     As of March 21, 2001, there were 17,803,289 shares outstanding of the
issuer's common stock.
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant has incorporated into Part III of this Form 10-KSB by
reference portions of its Proxy Statement for the 2001 Annual Meeting of
Shareholders.

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                               TABLE OF CONTENTS

                               NUTRACEUTIX, INC.

                                  FORM 10-KSB

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                                                                        PAGE
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Item 1.   Description of Business.....................................    3
Item 2.   Description of Property.....................................   13
Item 3.   Legal Proceedings...........................................   13
Item 4.   Submission of Matters to a Vote of Security Holders.........   13
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...................................   15
Item 7.   Financial Statements........................................   20
Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   20
Item 9.   Directors, Executive Officers, Promoters and Control
          Persons; Compliance with Section 16(a) of the Exchange
          Act.........................................................   21
Item 10.  Executive Compensation......................................   21
Item 11.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   21
Item 12.  Certain Relationships and Related Transactions..............   21
Item 13.  Exhibits and Reports on Form 8-K............................   21
</TABLE>

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

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

BUSINESS DEVELOPMENT

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

     In 1998, the Company acquired from Temple University an exclusive worldwide
license 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 2000. In collaboration
with Temple University, the Company developed several controlled delivery
technology ("CDT") products aimed at the nutraceutical market. However, as of
December 31, 2000, the only CDT formulations which had been introduced
commercially were the ephedra and caffeine thermogenic product for weight loss,
the CDT Enzyme Co Q-10 formulation, and the CDT sports nutrition prohormones.
The thermogenic and prohormone formulations containing patented and proprietary
drug delivery technology were exclusively licensed to MET-Rx USA, Inc. in 1999.
In 1999, the Company also acquired the worldwide rights to use CDT Patent No. 1
for Over-the-Counter ("OTC") products.

     In September 2000, the Company exclusively licensed the worldwide rights to
United States patent 6,090,411 from Temple University. This new, second
generation CDT was exclusively licensed to the Company for all applications in
health and dietary supplements, OTC products, and prescription drugs for the
life of the patent ("CDT Patent No. 2"). 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.

     Unless the context indicates otherwise, references hereinafter to "the
Company' includes both Nutraceutix, Inc. and Bio Techniques Laboratories, Inc.
The Company's principal place of business is 8340 154th

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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 and prescription drugs
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 Patent No. 2
technology 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 successful product approval and
commercialization by the sub-licensee, royalty payments based on net revenues
realized by the sale of patented CDT products. 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 after 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
manufactures 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 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.

  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. Subsequent to the acquisition of this license, 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. Its wide applicability within the available range of vitamin and
herbal products suitable for once or twice daily dosing or pulsed release offers
the Company a unique commercial opportunity in the $19 billion U.S.
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

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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
specific to each health supplement or OTC product and the desired release
profile. Depending upon the matrix composition, the selection and ratio of
polymers, 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. The application of
this technology to these prohormones necessitated the development of MDT
Molecular Dispersion Technology, which was also licensed to MET-Rx and
incorporated into these products. MET-Rx 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 and the initial sales volumes of these
products through year-end 1999 looked promising. However, in early 2000, Rexall
Sundown, Inc. of Boca Raton, Florida acquired MET-Rx USA, Inc., which in turn
was acquired in the spring of 2000 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 supplements
containing either prohormones or ephedra alkaloids. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in Item
6.

     In 1999, the Company licensed the right from Temple University to apply the
CDT Patent No. 1 technology to the manufacture of OTC products. During 2000, no
OTC products were manufactured using the technology contained in the CDT Patent
No. 1.

     In September 2000, the Company acquired the worldwide rights to CDT Patent
No. 2 for application in dietary and health supplements, OTC products and
prescription drugs. This new, second generation technology embodied in U.S.
patent 6,090,411 (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 API. The Company
believes the CDT Patent No. 2 technology possesses several

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critical and unique advantages over comparable sustained-release technologies
currently employed by the drug delivery industry in manufacturing extended or
sustained-release products:

     - The CDT Patent No. 2 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 contained in the second Temple patent 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 any 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, nor friability.

     - The CDT Patent No. 2 technology has a full patent life of 20 years.

The Company believes that the technology embodied in the CDT Patent No. 2
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. 2 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 reducing anxiety (St. John's Wort) or by lowering
cholesterol (soy extracts), and assisting in sleep (valerian). The active
ingredients in nutraceuticals may include complex mixtures of organic molecules,
small molecules, oligosaccharides, lactic acid 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. Among the
non-proprietary dietary supplement products manufactured by the Company are
capsules, tablets, and pre-mixes containing single vitamins (such as Vitamin C
and Vitamin E), herbal extracts (such as ginseng, garlic, and ginkgo biloba),
antioxidants, enzymes, and lactic acid bacteria cultures.

  Calcium D-Glucarate

     In July of 1997, the Company and Biochemix, Inc. ("Biochemix"), an
unaffiliated privately held company, entered into a definitive agreement for the
exclusive licensing to Nutraceutix of certain patents pertaining to the use of
glucarate salts and their derivatives in a sustained-release form. Glucarate
salts are specifically used for the nutritional support of one of the body's
major mechanisms of ridding itself of carcinogens and environmental toxins, a
process referred to as glucoronidation. The agreement provides for the exclusive
licensing of certain formulas, which contain vitamins, minerals, herbal
extracts, and antioxidants that incorporate the glucarate salt, Calcium
D-glucarate for lung, breast and prostate health.

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     In August of 1998, the Company and Biochemix entered into agreements for
the exclusive licensing of certain other formulas, which incorporate Calcium
D-glucarate for colon and liver health. Biochemix is a technology transfer
company whose principals developed and patented the applications of glucarate
salts at the Science Park at the University of Texas, MD Anderson Cancer Center.
These principals are now at the AMC Cancer Center in Denver, Colorado.

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

     Glucuronic acid is found in low concentrations in humans and animals and is
a material constituent of certain fruits and vegetables. Currently, no toxic
effects have been observed with dietary supplementation in humans with Calcium
D-glucarate and the FDA does not require an extended approval for its use as a
nutritional supplement.

     As of December 31, 2000, the Company has sub-licensed Calcium D-glucarate
to approximately 57 companies for products marketed as dietary supplements for
the maintenance of breast, colon, liver, lung, and prostate health. To date, the
sales histories of these companies suggest continued growth and usage of Calcium
D-glucarate in health supplements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 6.

  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 trademarks: COBACTIN, COBACTIN II, and 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.

     COBACTIN and COBACTIN II microbial feed additives for dairy cows have been
shown in independent field trials to increase milk production.

     COBACTIN microbial feed additive for poultry has been shown in independent
field trials to increase feed efficiency in poultry; however, the lack of an
effective delivery system for poultry has prevented commercial development of
this product line.

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

     In September 1999, Nutraceutix and Biotal, Inc. announced the formation a
strategic alliance to sell microbial feed additives to cattle feedlots. Prior to
this agreement, Nutraceutix and Biotal were competitors. Biotal has marketed
their MICRO-CELL direct feed microbials since 1994, and recently, Biotal
introduced a successful phase-feeding microbial program. As part of the
agreement, Biotal represents and distributes COBACTIN and MICRO-CELL products.
In addition to revenues generated by the manufacture of both COBACTIN and
MICRO-CELL, Nutraceutix will receive royalties on the Biotal sales of both of
these product lines.

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

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

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 26 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. This includes health
supplements that incorporate Calcium D-glucarate, probiotic strains developed by
the Company, and probiotic strains employed in the Company's LIVE-BAC caplet
process.

     The LIVE-BAC caplet process is a 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 at its corporate
headquarters in Redmond, Washington. These products include microbial inoculum,
feed and food additives and microbial-based dietary supplements. The company has
over 15 years of experience in microbial fermentation, and holds two patents
relating to a proprietary strain of Lactobacillus acidophilus.

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MARKETING, SALES AND DISTRIBUTION

     In the human dietary supplement market, the Company relies on its sales and
marketing personnel to sell lactic acid bacteria, Calcium D-glucarate, LIVE-BAC
products and nutraceuticals incorporating the Company's patented and proprietary
drug delivery technologies. In 2000, 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 companies in the nutraceutical and
pharmaceutical fields to co-develop unique and distinctive dietary supplements,
OTC products, and prescription drugs incorporating Nutraceutix patented delivery
technology.

     The Company relies on its sales partner, Biotal, Inc., to service customers
of its animal feed products. The Company also markets and sells OEM and private
label silage inoculum directly to branded companies in agriculture. Biotal Inc.
markets, sells, and provides technical support 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.

     The Company sells its own branded dietary supplements exclusively via the
Internet under the BIOPOWER brand. The Company provides these products as a
service to shareholders and employees. Other than the Internet posting of the
BIOPOWER products, the Company is not actively involved in promoting sales via
e-commerce.

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 and animal nutritional supplement markets.
Increased competition could have a material adverse effect on the Company, as
many competitors have superior financial and manufacturing resources available
to them and may possess 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 animal and human dietary
supplements include Chris Hansen, Rhodia, Lallemand, Institut Rosell and
Harmonium International, Inc.

     The Company believes that its primary competitive advantage results from
proprietary technologies, which are not available from other suppliers,
including LIVE-BAC caplets, Calcium D-glucarate, CDT controlled delivery
technology, and lactic acid bacteria microbial feed technology. In the feed
additive market, the September 1999 strategic alliance with Biotal Inc.
increased Nutraceutix' competitiveness in the microbial feed additive market for
beef cattle. The Company believes that this alliance will continue to provide
increased sales in the beef feed additive markets. 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 offer some competitive advantage
with regards to these specific competitors.

     In the drug delivery field, the Company's major competitors include Alza
Corporation, Biovail, Inc., Skyepharma PLC, Elan, Andrx, Inc., 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 research and development resources. The
Company believes that it possesses advantages in the drug delivery industry with
its CDT Patent No. 2 because of quicker product development, faster to market,
and lower cost manufacturing.

     The oral controlled release market for OTC products and prescription drugs
has been estimated at $7.74 billion in 2000 and is forecast at $8.0 billion in
the United States in 2002. The Company believes that
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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. The introduction of 2 - 3 new products per year by each major
pharmaceutical corporation is needed for the industry to maintain double-digit
growth rates. Since revenues from a drug can drop by up to 70% when its patent
expires, any method of adding new life to an existing product will protect brand
sales. Incorporation of new, patented drug delivery technology is one such
proven 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. With the exception of Calcium D-glucarate, 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.
There are currently several suppliers of calcium D-glucarate in the United
States, however, Biochemix, Inc. through its primary distributor Glucona, Inc.
of Janesville, Indiana is the Company's exclusive supplier. Management expects
Biochemix to be able to supply sufficient Calcium D-glucarate for the dietary
supplement market. However, Nutraceutix has no direct control over Biochemix,
Inc. or Glucona, Inc. and any prolonged interruption in the supply of Calcium
D-glucarate could adversely affect the Company.

DEPENDENCE ON SIGNIFICANT CUSTOMERS

     In 2000, the Company received approximately 34% of its revenues from two
customers: Rexall Sundown (18%) and Experimental and Applied Sciences (EAS)
(16%). 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 continues to expand its sales customer base
and, in 2000, over 90% of the sales generated for proprietary technologies and
LIVE-BAC, other than those from Rexall Sundown, originated with new customers
developed during the course of the year 2000.

INTELLECTUAL PROPERTY

     The Company currently holds two U.S. and one Canadian patent pertaining to
COBACTIN feed additives, two U.S. patents related to the dispensing of microbial
cultures, one exclusively licensed patent related to the uses of Calcium
D-glucarate, and two issued U.S. patents for controlled delivery technologies
licensed exclusively from Temple University. In November 2000, the Company filed
patent applications jointly with Temple University for S.E.T. Self-Emulsifying
Technology in both Canada and the United States. This patent is pending. S.E.T.
technology has been shown to improve the bioavailability and reduce the side
effects associated with drugs which are insoluble in water and increases the
rate and extent of absorption in the gastrointestinal tract.

     The licensed Calcium D-glucarate patent expires in 2006, the Canadian
patent pertaining to COBACTIN feed additives expires in 2009, and the other U.S.
patents pertaining to COBACTIN feed additives will expire in 2010 and 2011. The
two CDT patents licensed from Temple University have their full 20 years patent
life commencing in 2000.

     As of December 2000, the Company had approximately 10 federal trademark
registrations and six trademark applications pending with the U.S. 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, MDT, S.E.T., BT1386,
COOL-TAB, BIO-TRACT, CO-EPO, BT1386, and COBACTIN E.

     The Company has a license agreement with Biochemix for delivery of calcium
D-glucarate in certain health supplements. Under this agreement, the Company is
required to purchase all Calcium D-glucarate raw material required in
manufacturing and distribution from Glucona, Inc. which is the exclusive
distributor for

                                        10
<PAGE>   11

Biochemix's patented D-glucarate. The Company pays for the development and use
of certain Biochemix formulas for breast, liver, lung, colon, and prostate
health through the exclusive procurement of D-glucarate raw material from
Biochemix, Inc. and Glucona, Inc. at an agreed upon price.

     The Company pays certain royalties to the original developers of certain of
its agriculture products. See "Note J 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. In December 1998, the Company
paid a non-refundable license fee of $25,000 to Temple University pursuant to
the terms of the license agreement for the patent pending on the first CDT
technology. Also, the Company is obliged to pay a royalty of $0.30 per
1000 tablets or capsules of dietary supplements produced using this first
technology. The Company is obligated to pay an annual $10,000 license
maintenance fee, which license maintenance fee payment may be credited against
royalties due during the calendar year. The agreement does not provide for
carry-over of unused credit to subsequent years. During 2000, royalty payments
totaled $10,000, which were applied against the annual license maintenance fee.

     In June 1999, the Company and Temple University signed a definitive
agreement for the exclusive licensing of OTC pharmaceuticals using CDT Patent
No. 1. The Company is obligated to pay a royalty of $0.40 per thousand tablets
or capsules of OTC products produced using this first generation technology. The
Company is also obligated to pay an annual non-refundable license maintenance
fee of $10,000 which license maintenance fee payment may be credited against
royalties due during the same calendar year. The agreement does not provide for
carry-over of unused credit to subsequent years. The Company has not developed
any OTC products employing this CDT Patent No. 1 technology, but continues to
actively seek co-development partners in this area.

     With regard to the second exclusive license agreement between the Company
and Temple University, dated September 28, 2000 for the CDT Patent No. 2
technology, the Company paid an initial licensing fee of $50,000 and pays an
annual non-refundable licensing fee of $25,000. However, up to 50% of this fee
may be reduced by credits for license fees, and research and development costs
involved in commercializing the technology. Pursuant to this license agreement
the Company is obligated to pay royalties to Temple University of $0.30 per
thousand tablets of dietary supplements produced using the CDT Patent No. 2,
$0.45 per thousand tablets of OTC products produced, and a 4% royalty on net
sales of prescription drugs produced by Nutraceutix or its co-development
partners. Furthermore, the Company is obligated to share equally any up-front
monies paid to Nutraceutix by co-development partners after deducting the
specified research and development costs associated with the product
development. There is provision for the Company to carry forward any unused
credits from one product development project to the next against the annual
license fee and sharing of up-front payments.

GOVERNMENT REGULATION

     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

                                        11
<PAGE>   12

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 technology.

     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 2000 and 1999, the Company spent $380,799 (approximately 4% of revenues)
and $295,979 (approximately 3% of revenues), respectively, on product research
and development. The Company believes this level of research and development
expenditure to be necessary for the full realization of the potential of
existing drug delivery technology in the dietary supplement market; however,
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.

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 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
2001 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 universi-

                                        12
<PAGE>   13

ties 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 2001 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.

COMPLIANCE WITH ENVIRONMENT LAWS

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

EMPLOYEES

     As of December 31, 2000, the Company employed 47 full time employees,
consisting of four executives, 28 production personnel, two sales and marketing
personnel, two research and development personnel, five quality control
personnel and six administrative personnel. None of the Company's employees are
represented by labor unions. The Company believes its relationship with
employees is good.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company's corporate headquarters, including administrative offices,
production and research and development facilities are located approximately
fifteen miles northeast of Seattle at 8340 154th Avenue Northeast, Redmond,
Washington 98052. The property, consisting of 15,893 square feet, is leased for
a term of sixty (60) months with a lease termination date of November 30, 2003.
The production facility includes equipment for fermentation, formulation,
packaging and storage. The Company leases an additional building consisting of
1,879 square feet for off-site storage and product blending, located
approximately one-half mile from the corporate headquarters at 14822 NE 95th
Street, Redmond, Washington. The storage space is leased through July 31, 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 Northeast. 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 premises had
been subject to four (4) separate lease agreements with the same lessor, all of
which had different lease termination dates. The leases were consolidated,
effective August 1, 1998, into one lease for a term of three (3) years. The
initial term of the consolidated lease expires on July 31, 2001. The Company has
an option to extend the lease for an additional term of two (2) years.

     Each lease was negotiated at arm's length and entered into by the Company,
as tenant, with an unaffiliated third party, as the lessor. The Company believes
all 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 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, 2000.

                                        13
<PAGE>   14

                                    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 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>

<TABLE>
<CAPTION>

               PERIOD -- FISCAL YEAR 1999                  HIGH ASK    LOW BID
               --------------------------                  --------    -------
<S>                                                        <C>         <C>
First Quarter ending March 31, 1999......................    0.91       0.44
Second Quarter ending June 30, 1999......................    0.63       0.38
Third Quarter ending September 30, 1999..................    0.91       0.38
Fourth Quarter ending December 31, 1999..................    0.59       0.22
</TABLE>

     The approximate number of record holders of the Company's Common Stock as
of December 31, 2000 was 1,405 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).

     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.

                                        14
<PAGE>   15

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

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

     The following discussion and analysis should be read in conjunction with
the Financial Statements, including the notes thereto, appearing in this Form
10-KSB. Except for the historical information contained herein, the matters
discussed in this report contain forward-looking statements that are based on
management's beliefs and assumptions, current expectations, estimates and
projections. Statements that are not historical facts, including without
limitation, statements which are preceded by, followed by or include the words
"believes," "anticipates," "plans," "expects," "may," "should," or similar
expressions are forward-looking statements. These statements are subject to
risks and uncertainties and, therefore, actual results may differ materially.
Important factors to consider in evaluating such forward-looking statements
include (i) the potential sales and earnings volatility of the Company (ii) the
impact on the Company of the loss of a major customer; (iii) the absence of
clinical studies on long-term effects of human consumption of the ingredients
the Company uses in its products; (iv) the effect of potential new laws and
regulations; (v) the effect of unfavorable publicity; (vi) the Company's
dependence on new product developments; (vii) the dependence of the Company on
its suppliers; and (viii) the dependence on sublicensees and the impact on the
Company's ability to grow in existing markets. The Company disclaims any
obligation to update forward-looking statements whether as a result of the new
information, future events or otherwise.

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

NET REVENUES

     Net revenues decreased 13% or $1,380,612 to $8,891,805 for the year ended
December 31, 2000 from net revenues of $10,272,417 for the year ended December
31, 1999. The Company had two major customers that represented 18% (Rexall
Sundown) and 16% Experimental and Applied Sciences (EAS) of net revenues in 2000
An analysis of the Company's four revenue-generating centers is outlined below:

REVENUE GENERATING PROFIT CENTERS

     The Company operates four primary revenue-generating profit centers:

        1. Proprietary Technology -- The Company's proprietary technologies
     include Calcium D-Glucarate, Live-Bac caplets, molecular dispersion
     technology and controlled delivery technology. Revenues are realized from
     the sales of glucarate as a raw material to other manufacturers for
     incorporation into sublicensed customer's private label products,
     manufacturing by the Company for sublicensed customer's private label
     products containing Calcium D-Glucarate, sales of Live-Bac caplets,
     licensing and research and development fees for development of controlled
     delivery technology prescription drugs, over the counter (OTC) products and
     the manufacture of health supplements incorporating CDT controlled delivery
     technology and molecular dispersion technology.

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

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

          4. Cobactin microbial feed additive -- Cobactin for feedlot cattle is
     a viable (live) Lactobacillus acidophilus that provides a stable blend of
     lactic acid bacteria on a daily basis. Revenues are realized

                                        15
<PAGE>   16

     from the sale of Cobactin brand proprietary products and royalties
     resulting from the microbial feed additive alliance with Biotal, Inc.

  Proprietary Technology

     Revenues from proprietary technology increased 17% or $797,501 to
$5,469,308 for the year ended December 31, 2000 from revenues of $4,671,807 for
the year ended December 31, 1999.

     Calcium D-Glucarate sales increased 62% or $438,162 to $1,150,232 for the
year ended December 31, 2000 compared to $712,070 for the year ended December
31, 1999. The increases are attributed to the addition of 26 new sub-licensees
since December 31, 1999 as well as increased orders for product from existing
customers.

     LIVEBAC sales increased 50% or $662,766 to $2,000,379 for the year ended
December 31, 2000 compared to $1,337,613 for the year ended December 31, 1999.
The increased sales of products produced using the LIVEBAC technology reflects
the addition of new customers and increased sales to current customers.

     Proprietary delivery system technology sales decreased 12% or $303,427 to
$2,318,697 for the year ended December 31, 2000 compared to $2,622,124 for the
year ended December 31, 1999. During the fourth quarter of 1999, MET-Rx USA was
acquired by Rexall Sundown and in turn, Rexall Sundown was itself acquired by
Royal Numico in the first quarter of 2000. During the quarter ending June 30,
2000, Rexall Sundown cancelled all in-house orders for products containing
androstiene in response to the Food and Drug Administration review of the
regulations surrounding the sale of these products. The cancellation of the
androstiene orders resulted in the lowest quarterly sales of CDT/MDT technology
products since the first quarter of 1999. For the year ended December 31, 2000,
sales to MET-Rx USA decreased 72% or $1,877,414 to $744,710 compared to
$2,622,124 for the year ended December 31, 1999. New customers sub-licensed to
sell proprietary delivery system technology during the twelve months ended
December 31, 2000 represent 62% or $1,448,987 of proprietary delivery system
technology sales.

     Licensing fees and research and development contract revenues for the year
ended December 31, 2000 were $125,000 as compared to $0 for the year ended
December 31, 1999. The licensing fees and research and development contracts
include royalty revenues that will be recognized in future years. Contracts for
health supplements and OTC products are expected to result in royalty revenues
starting in 2002 and contracts for prescription drugs are expected to result in
royalty revenues starting in 2005.

  Private Label Manufacturing of Health Supplements

     Sales of private label manufacturing of health supplements decreased 71% or
$2,136,657 to $884,842 for the year ended December 31, 2000 compared to
$3,021,499 for the year ended December 31, 1999. The Company expects sales of
private label manufacturing of health supplements to decrease further in 2001 as
the Company focuses on proprietary technology products.

     In 1999, the Company manufactured non-proprietary, powder fill products for
MET-Rx USA as an interim service. There were no sales in the powder fill
business during 2000 and there will be no further sales. The decrease in private
label manufacturing reflects a decrease of non-proprietary product sales to
MET-Rx USA totaling $1,349,782 as compared to the year ended December 31, 1999
of which $554,068 was powder fill products.

     Additionally, there was a decrease of $642,514, from $789,941 to $147,427
in sales to Rexall Showcase International for non-proprietary products from the
year ended December 31, 1999 to the year ended December 31, 2000.

  Fermentation

     Sales of fermentation products increased 46% or $645,434 to $2,038,669 for
the year ended December 31, 2000 compared to $1,393,235 for the year ended
December 31, 1999. Sales to new customers, increased sales

                                        16
<PAGE>   17

to existing customers and the alliance with Biotal, Inc. for the manufacture of
MICRO-CELL feed additive product account for the increase in fermentation sales.
The Company doubled its fermentation capacity in November 2000 in anticipation
of increased demand for our fermentation products.

  COBACTIN

     The Company's sales of COBACTIN microbial feed additives decreased 58% or
$686,890 to $498,986 for the year ended December 31, 2000 compared to $1,185,876
for the year ended December 31, 1999. These diminishing results reflect the
September 1, 1999 agreement with Biotal, Inc. that reduced the sales price of
COBACTIN feed additive, and correspondingly decreased sales and marketing
expenses, and increased sales of fermentation products through the manufacture
of MICRO-CELL feed additive product for Biotal, Inc. Management believes that
lowered sales continue to reflect the impact of the conversion of COBACTIN
customers to the MICRO-CELL two-phase feeding program. The overall financial
effect of the Biotal agreement on Nutraceutix has been minimal.

GROSS PROFIT

     Gross profit decreased 2% or $45,816 to $2,421,161 for the year ended
December 31, 2000 compared to $2,466,977 for the year ended December 31, 1999.
The decline in gross profit reflects the decrease in total product revenues and
the discontinuance of the MET-Rx USA business. This decrease was somewhat offset
by the increase of fermentation, Live-bac and Calcium D-glucarate sales which
carry higher gross margins.

SELLING AND MARKETING EXPENSES

     Selling and marketing expenses decreased 31% or $244,846 to $541,718 for
the year ended December 31, 2000 from $786,564 for the year ended December 31,
1999. Approximately $183,000 of the decrease is attributed to the implementation
of the Biotal, Inc. agreement on September 1, 1999 with the balance of the
decrease in expenses reflecting reduced salaries and related expenses for the
year ended December 31, 2000.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses increased 29% or $84,820 to $380,799 for
the year ended December 31, 2000 from $295,979 for the year ended December 31,
1999. The increase is attributed to salaries and other expenses associated with
the development of the controlled delivery technology and future development and
discovery of proprietary technologies.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses increased 4% or $57,395 to $1,570,467
for the year ended December 31, 2000 compared to $1,513,072 for the year ended
December 31, 1999.

INTEREST EXPENSE

     Interest expense increased 26% or $64,014 to $306,926 for the year ended
December 31, 2000 compared to $242,912 for the year ended December 31, 1999. The
increase was due to new equipment leases in late 1999 and during the first
quarter of 2000, as well as an increase in borrowing under the line of credit.

OTHER INCOME/EXPENSE

     Settlement expense of $180,000 in 1999 was a one-time expense associated
with a settlement of litigation with BioUniversal, Inc. The MET-Rx settlement of
$519,004 in 2000 was the accounting of a one-time, non-recurring settlement
agreement with MET-Rx USA/Rexall Sundown for the termination of the agreement
and cancelled purchase orders for CDT/MDT products. The terms of the settlement
agreement consisted of a one-time cash payment, forgiveness of accounts payable
and termination of the exclusive license agreement. See Note I of Notes to
Financial Statements.

                                        17
<PAGE>   18

     Other income was $59,153 for the year ended December 31, 2000 compared to
other expense of $32,667 for the year ended December 31, 1999.

NET EARNINGS

     The net earnings for the year ended December 31, 2000 were $199,408
compared to a net loss of $584,217 for the year ended December 31, 1999.

     Management believes that the Company has substantially realized the adverse
effects of the decision by MET-Rx USA/Rexall Sundown to cancel the androstiene
orders during the first half of 2000. Management does not anticipate any future
CDT/MDT androstiene business with MET-Rx USA/Rexall Sundown due to regulatory
issues. Other income realized by the settlement agreement with Rexall
Sundown/MET-Rx USA diminished the negative impact of the terminated MET-Rx USA
CDT/MDT androstiene business. The settlement agreement along with the corrective
actions and expense controls initiated late in the second quarter of 2000 has
mitigated the unfavorable effects of the lost MET-Rx sales.

EARNINGS PER SHARE

     Net earnings per share in 2000 was $0.011, while the net loss per share in
1999 was ($0.034).

LIQUIDITY AND CAPITAL RESOURCES

     The Company finances its operations and capital requirements primarily
through borrowing and operations. As of December 31, 2000 the Company had
working capital of $422,788 as compared to working capital of $369,397 at
December 31, 1999. The recognized increase in working capital at December 31,
2000 was mainly generated from the net earnings for the year ended December 31,
2000. The major changes associated with working capital were an increase in
accounts receivable of $539,324, a decrease in inventories of $412,497, a
decrease in accounts payable of $375,915 and an increase in the line of credit
of $345,000.

     The Company's conventional bank line of credit for $1,200,000 was renewed
on May 1, 2000 for a term of twelve months subject to compliance with financial
covenants. As of December 31, 2000, the Company had an available balance of
$15,500 for borrowing. The bank line of credit continues to be collateralized by
accounts receivable, inventory and equipment. The Company believes it will have
adequate capital based on the presumption of a continuation of the bank line of
credit.

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

                      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
                                        18
<PAGE>   19

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 2000, the Company received approximately 34% of its total revenues from
two customers: Rexall Sundown (18%) and EAS (16%). The loss of either of these
two 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; such
as the glucarate salt, Calcium D-glucarate. While the Company believes all of
its products to be safe when taken as directed, there is little long-term
experience with human consumption of certain of these innovative product
ingredients in 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, expanded documentation of the properties of certain products, or
expanded or

                                        19
<PAGE>   20

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.

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.

ITEM 7. FINANCIAL STATEMENTS

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

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

     None.

                                        20
<PAGE>   21

                                    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 2001 Annual Meeting of Shareholders pursuant to and in
accordance with section 240.14a-101 within 120 days after the end of the fiscal
year covered by this form. The information required by this item is incorporated
by reference to the Proxy Statement under the headings "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 10. EXECUTIVE COMPENSATION

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <S>       <C>
     3.1      Certificate of Incorporation and Amendment thereto(1)
     3.2      First Amended and Restated Bylaws(1)
     3.3      Amendment to Bylaws(3)
    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
</TABLE>

                                        21
<PAGE>   22

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <S>       <C>
    24.1      Power of Attorney of Herbert L. Lucas
    24.2      Power of Attorney of Arthur S. Pearson
    24.3      Power of Attorney of Carl W. Schafer
    24.4      Power of Attorney of Daniel B. Ward
</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 Form 10-KSB (Reg. No. 000-24693) filed by the
    Company on March 30, 2000.

     (b) Reports on Form 8-K.

     None.

                                        22
<PAGE>   23

                                   SIGNATURES

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

                                          NUTRACEUTIX, INC.

March 30, 2001                            By:      /s/ DAVID T. HOWARD
                                            ------------------------------------
                                                      David T. Howard
                                             President, Chief Executive Officer

     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 30, 2001
  ----------------------------------------------       Officer (Principal Executive
                  David T. Howard                                Officer)

              By: /s/ STEVEN H. MOGER                  Vice President of Operations     March 30, 2001
  ----------------------------------------------           (Principal Financial
                  Steven H. Moger                         and Accounting Officer)

          By:      */s/  HERBERT L. LUCAS                        Director               March 30, 2001
  ----------------------------------------------
                 Herbert L. Lucas

By:     */s/  ARTHUR S. PEARSON                                  Director               March 30, 2001
--------------------------------------------------
    Arthur S. Pearson

By:      */s/  CARL W. SCHAFER                                   Director               March 30, 2001
--------------------------------------------------
    Carl W. Schafer

By:       */s/  DANIEL B. WARD                                   Director               March 30, 2001
--------------------------------------------------
    Daniel B. Ward

By:      */s/  DAVID T. HOWARD                                                          March 30, 2001
--------------------------------------------------
    David T. Howard,
    Attorney-in-Fact*
</TABLE>

                                        23
<PAGE>   24

                                    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>   25

               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, 2000 and 1999, 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, 2000 and 1999, 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.

Seattle, Washington
February 9, 2001

                                       F-2
<PAGE>   26

                               NUTRACEUTIX, INC.

                                 BALANCE SHEETS
                                  DECEMBER 31,

                                     ASSETS

<TABLE>
<CAPTION>
                                                                 2000           1999
                                                              -----------    -----------
<S>                                                           <C>            <C>
Current assets
  Cash......................................................  $    98,241    $   149,321
  Accounts receivable, less allowance for doubtful accounts
     of $5,312 and $0, respectively.........................    1,475,951        936,627
  Inventories...............................................    1,333,977      1,746,474
  Prepaid expenses..........................................      102,916        112,021
                                                              -----------    -----------
          Total current assets..............................    3,011,085      2,944,443
Property and equipment -- net...............................    1,874,315      1,461,324
Other assets
  Intangible assets -- net..................................      812,307        795,019
  Available-for-sale security...............................        4,444             --
                                                              -----------    -----------
                                                              $ 5,702,151    $ 5,200,786
                                                              ===========    ===========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Line of credit............................................  $ 1,184,500    $   839,500
  Current maturities of long-term obligations...............      215,995        203,998
  Current maturities of capital lease obligations...........      234,799        217,394
  Accounts payable -- trade.................................      837,826        550,900
  Accounts payable -- Met-Rx................................           --        662,841
  Accrued liabilities.......................................       91,047         84,952
  Deferred revenue..........................................       24,130         15,461
                                                              -----------    -----------
          Total current liabilities.........................    2,588,297      2,575,046
Long-term obligations, less current maturities..............      450,916        533,730
Capital lease obligations, less current maturities..........      586,004        248,148
Commitments and contingencies...............................           --             --
Stockholders' equity
  Preferred stock authorized, 5,000,000 shares $.01 par
     value..................................................           --             --
  Common stock authorized, 30,000,000 shares $.001 par
     value..................................................       17,803         17,489
  Additional contributed capital............................   11,791,389     11,725,754
  Accumulated other comprehensive income....................      (32,285)            --
  Accumulated deficit.......................................   (9,699,973)    (9,899,381)
                                                              -----------    -----------
          Total stockholders' equity........................    2,076,934      1,843,862
                                                              -----------    -----------
                                                              $ 5,702,151    $ 5,200,786
                                                              ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-3
<PAGE>   27

                               NUTRACEUTIX, INC.

                            STATEMENTS OF OPERATIONS
                            YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                 2000          1999
                                                              ----------    -----------
<S>                                                           <C>           <C>
Net revenues................................................  $8,891,805    $10,272,417
Cost of revenues............................................   6,470,644      7,805,440
                                                              ----------    -----------
     Gross profit...........................................   2,421,161      2,466,977
Operating expenses
  Marketing and selling.....................................     541,718        786,564
  Research and development..................................     380,799        295,979
  General and administrative................................   1,570,467      1,513,072
                                                              ----------    -----------
                                                               2,492,984      2,595,615
                                                              ----------    -----------
     Operating loss.........................................     (71,823)      (128,638)
Other income (expense)
  Interest expense..........................................    (306,926)      (242,912)
  Settlement expense........................................          --       (180,000)
  Met-Rx settlement.........................................     519,004             --
  Other.....................................................      59,153        (32,667)
                                                              ----------    -----------
                                                                 271,231       (455,579)
                                                              ----------    -----------
       Net earnings (loss)..................................  $  199,408    $  (584,217)
                                                              ==========    ===========
       Net earnings (loss) per share........................  $     .011    $     (.034)
                                                              ==========    ===========
       Net earnings (loss) per share assuming dilution......  $     .011    $     (.034)
                                                              ==========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>   28

                               NUTRACEUTIX, INC.

                       STATEMENT OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                    ACCUMULATED
                                               COMMON STOCK       ADDITIONAL           OTHER
                                           --------------------   CONTRIBUTED      COMPREHENSIVE      ACCUMULATED
                                             SHARES     AMOUNT      CAPITAL           INCOME            DEFICIT       TOTAL
                                           ----------   -------   -----------   -------------------   -----------   ----------
<S>                                        <C>          <C>       <C>           <C>                   <C>           <C>
Balance at December 31, 1998.............  16,861,812   $16,864   $11,570,129        $     --         $(9,315,164)  $2,271,829
Issuance of common stock through
  subscription agreement.................     625,000       625       155,625              --                  --      156,250
Net loss for the year....................          --        --            --              --            (584,217)    (584,217)
                                           ----------   -------   -----------        --------         -----------   ----------
Balance at December 31, 1999.............  17,486,812    17,489    11,725,754              --          (9,899,381)   1,843,862
Exercise of stock options for cash and
  stock, net.............................     316,477       314        62,533              --                  --       62,847
Stock options issued for services........          --        --         3,102              --                  --        3,102
Unrealized losses on available-for-sale
  security...............................          --        --            --         (32,285)                 --      (32,285)
Net earnings for the year................          --        --            --              --             199,408      199,408
                                           ----------   -------   -----------        --------         -----------   ----------
Balance at December 31, 2000.............  17,803,289   $17,803   $11,791,389        $(32,285)        $(9,699,973)  $2,076,934
                                           ==========   =======   ===========        ========         ===========   ==========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       F-5
<PAGE>   29

                               NUTRACEUTIX, INC.

                            STATEMENTS OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    ---------
<S>                                                           <C>         <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
  Net earnings (loss).......................................  $199,408    $(584,217)
  Adjustments to reconcile net earnings (loss) to net cash
     used in operating activities
     Depreciation and amortization..........................   405,012      379,045
     Stock options granted for services.....................     3,102           --
     Write-off of start-up costs............................        --       50,266
     Legal settlement entered into under long-term
      obligation............................................        --      180,000
     Changes in assets and liabilities
       Accounts receivable..................................  (576,053)    (198,711)
       Inventories..........................................   412,497     (922,181)
       Prepaid expenses.....................................     9,105       89,167
       Accounts payable.....................................  (375,915)     932,022
       Accrued liabilities and deferred revenue.............    14,764       (8,364)
                                                              --------    ---------
          Net cash provided by (used in) operating
            activities......................................    91,920      (82,973)
                                                              --------    ---------
Cash flows from investing activities:
  Purchase of equipment.....................................   (73,367)    (155,785)
  Patent expenditures.......................................  (165,727)     (54,083)
                                                              --------    ---------
          Net cash used in investing activities.............  (239,094)    (209,868)
                                                              --------    ---------
Cash flows from financing activities:
  Payments on long-term and capital lease obligations.......  (538,488)    (397,067)
  Proceeds from long-term obligations.......................   226,735      161,539
  Net borrowings on line of credit..........................   345,000      428,000
  Net proceeds from issuance of common stock................    62,847      156,250
                                                              --------    ---------
          Net cash provided by financing activities.........    96,094      348,722
                                                              --------    ---------
Net increase (decrease) in cash.............................   (51,080)      55,881
Cash at beginning of year...................................   149,321       93,440
                                                              --------    ---------
Cash at end of year.........................................  $ 98,241    $ 149,321
                                                              ========    =========
Cash paid during the year for:
  Interest..................................................  $306,926    $ 242,912
                                                              ========    =========
Noncash investing and financing activities:
  Purchase of equipment under capital lease obligations.....  $596,197    $ 213,524
  Marketable securities received for reduction in customer
     receivable.............................................  $ 36,729    $      --
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-6
<PAGE>   30

                               NUTRACEUTIX, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nutraceutix, Inc. (the Company) is a manufacturer of branded and private
label nutritional supplements for human health, animal and food applications.
The Company is also engaged in the research and development of pharmaceutical,
microbial, nutritional and plant based products. 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 2000, the Company established an allowance for doubtful accounts
totaling $5,312. In 1999, the Company considered accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts was required.

  2. Inventories

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

  3. Equipment and Furniture

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

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

  4. 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. Research and Development Costs

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

 6. Other Comprehensive Loss

     Other comprehensive 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.

                                       F-7
<PAGE>   31
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

 7. 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.

 8. Reclassifications

     Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation.

NOTE B -- INVENTORIES

     Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                         2000          1999
                                                      ----------    ----------
<S>                                                   <C>           <C>
Raw materials.......................................  $  714,112    $1,122,128
Work in progress....................................     473,276       589,720
Finished goods......................................     146,589        34,626
                                                      ----------    ----------
                                                      $1,333,977    $1,746,474
                                                      ==========    ==========
</TABLE>

NOTE C -- PROPERTY AND EQUIPMENT

     Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                         2000          1999
                                                      ----------    ----------
<S>                                                   <C>           <C>
Furniture and fixtures..............................  $   66,672    $   74,192
Machinery and equipment.............................   1,931,708     1,613,449
Leasehold improvements..............................      73,069        35,267
Machinery and equipment under capital leases........   1,278,010       967,109
                                                      ----------    ----------
                                                       3,349,459     2,690,017
Less accumulated depreciation and amortization......   1,269,794       933,864
Less accumulated amortization of machinery and
  equipment under capital leases....................     205,350       294,829
                                                      ----------    ----------
                                                      $1,874,315    $1,461,324
                                                      ==========    ==========
</TABLE>

NOTE D -- INTANGIBLE ASSETS

     Intangible assets consist of the following at December 31:

<TABLE>
<CAPTION>
                                                         2000          1999
                                                      ----------    ----------
<S>                                                   <C>           <C>
Technical and product rights........................  $2,237,444    $2,237,444
Patents and trademarks..............................     532,633       366,906
                                                      ----------    ----------
                                                       2,770,077     2,604,350
Less accumulated amortization.......................   1,957,770     1,809,331
                                                      ----------    ----------
                                                      $  812,307    $  795,019
                                                      ==========    ==========
</TABLE>

                                       F-8
<PAGE>   32
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

NOTE E -- LINE OF CREDIT

     The Company has a line of credit with a bank collateralized by accounts
receivable, inventory and equipment which expires May 1, 2001. Under the terms
of the line of credit, the Company can borrow up to $1,200,000 at an interest
rate of prime plus 1% (10.5% at December 31, 2000). The Company has certain
minimum financial covenants and is in compliance with all covenants at December
31, 2000.

NOTE F -- LONG-TERM OBLIGATIONS

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

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Notes payable for equipment; with monthly installments
  totaling $13,801, including 16.4% interest; collateralized
  by production equipment; due in 2003......................  $348,246    $445,733
Notes payable to third party for leasehold improvement
  advance, payable in 34 monthly installments of $3,695
  including 15.5% interest, due in 2004.....................   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..........   130,000     180,000
Note payable to a third party; with monthly installments of
  $1,643, including interest at 12.7%; collateralized by
  equipment; due in 2004....................................    55,484      67,328
Notes payable to a third party; with monthly installments of
  $6,643, including interest at 12.3%; collateralized by
  equipment; due in 2000....................................        --      25,985
Notes payable to third parties; no stated interest rate;
  uncollateralized; due on demand...........................        --      10,000
Other notes payable.........................................     1,553       8,682
                                                              --------    --------
                                                               666,911     737,728
Less current maturities.....................................   215,995     203,998
                                                              --------    --------
                                                              $450,916    $533,730
                                                              ========    ========
</TABLE>

     Aggregate maturities of long-term obligations are as follows:

<TABLE>
<CAPTION>
                 YEAR ENDING DECEMBER 31,
                 ------------------------
<S>                                                         <C>
     2001.................................................  $215,995
     2002.................................................   241,654
     2003.................................................   156,734
     2004.................................................    52,528
                                                            --------
                                                            $666,911
                                                            ========
</TABLE>

NOTE G -- LEASE OBLIGATIONS

     The Company conducts a substantial portion of its operations utilizing
leased manufacturing and office facilities, expiring through 2004. Some of the
operating leases provide that the Company pay taxes, maintenance, insurance and
other occupancy expense applicable to leased premises. The Company also leases
machinery and equipment under capital leases expiring through 2005.

                                       F-9
<PAGE>   33
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

     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, 2000:

<TABLE>
<CAPTION>
                                                               CAPITAL      OPERATING
                  YEAR ENDING DECEMBER 31,                      LEASES        LEASES
                  ------------------------                    ----------    ----------
<S>                                                           <C>           <C>
     2001...................................................  $  347,772    $  536,000
     2002...................................................     282,412       354,100
     2003...................................................     207,405       323,000
     2004...................................................     168,224        89,700
     2005...................................................      78,617            --
                                                              ----------    ----------
  Future minimum lease payments.............................   1,084,430    $1,302,800
                                                                            ==========
  Less amount representing interest.........................     263,627
                                                              ----------
  Present value of minimum lease payments...................  $  820,803
                                                              ==========
  Current maturities........................................  $  234,799
  Long-term maturities......................................     586,004
                                                              ----------
                                                              $  820,803
                                                              ==========
</TABLE>

     Rent expense for leased facilities and equipment was $665,277 and $502,781
for the years ended December 31, 2000 and 1999, respectively.

NOTE H -- INCOME TAXES

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

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

<TABLE>
<CAPTION>
                                                          2000        1999
                                                        --------    ---------
<S>                                                     <C>         <C>
Tax expense (benefit) at statutory rate...............  $ 67,800    $(198,600)
Permanent differences.................................     8,700        5,700
Tax credits...........................................        --       26,800
Change in valuation allowance.........................   (76,500)     166,100
                                                        --------    ---------
                                                        $     --    $      --
                                                        ========    =========
</TABLE>

                                       F-10
<PAGE>   34
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                       2000           1999
                                                    -----------    -----------
<S>                                                 <C>            <C>
Current asset, net
  Inventory reserve...............................  $    64,413    $        --
  Stock options granted and exercised.............       22,423             --
  Other accrued liabilities.......................       21,969         18,661
  Less valuation allowance........................     (108,805)       (18,661)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
Non-current asset, net
  Net operating loss carry forwards...............  $ 2,418,838    $ 2,684,645
  Depreciation and amortization...................     (174,017)      (273,208)
  Other tax credits...............................      134,265        134,265
  Less valuation allowance........................   (2,379,086)    (2,545,702)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
</TABLE>

     The Company has established a valuation allowance of $2,487,891 and
$2,564,363 as of December 31, 2000 and 1999, respectively, due to the
uncertainty of future utilization of net operating loss carryforwards and
realization of other deferred tax assets.

     At December 31, 2000, an operating loss carryforward of approximately
$7,100,000 expiring through 2020 is available to offset future taxable income.
Investment tax credits and research and experimentation tax credits of $43,443
and $90,822, respectively, expiring in 2000 through 2003, are also available. If
ownership changes should occur, there may be certain limitations on the use of
these carryforwards, as defined by Internal Revenue Code Section 382.

NOTE I -- 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.

NOTE J -- TECHNICAL RIGHTS AND ROYALTY AGREEMENTS

     In September 2000, the Company entered into an agreement with Temple
University (Temple) to obtain an exclusive worldwide license of a licensed
product, with the right to sublicense. Under this agreement and agreements
previously entered into with Temple, the Company is required to make minimum
annual royalty payments totaling $45,000.

     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 2000 and 1999, royalty expense for
Feed Additives amounted to $18,912 and $39,834, respectively.

                                       F-11
<PAGE>   35
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

NOTE K -- RETIREMENT PLAN

     The Company has a defined contribution 401(k) retirement plan (the Plan)
which covers all employees. The Company will match 25% of employee
contributions, up to 4% of employee contributions. The Company contributed
$11,105 and $7,625 to the Plan for 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
                                                          2000        1999
                                                        --------    ---------
<S>                                                     <C>         <C>
Net earnings (loss)
  As reported.........................................  $199,408    $(584,217)
  Pro forma...........................................  $101,342    $(650,670)
Net earnings (loss) per share
  As reported.........................................  $   .011    $   (.034)
  Pro forma...........................................  $   .006    $   (.038)
</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>
                                                           2000         1999
                                                         ---------    ---------
<S>                                                      <C>          <C>
Expected volatility....................................         73%          69%
Expected dividend yield................................          0%           0%
Risk-free interest rate................................        5.5%         6.5%
Expected life..........................................  7.0 years    7.0 years
</TABLE>

                                       F-12
<PAGE>   36
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                        2000                           1999
                                             ---------------------------    ---------------------------
                                                             WEIGHTED                       WEIGHTED
                                                             AVERAGE                        AVERAGE
                                                             EXERCISE                       EXERCISE
                                              SHARES          PRICE          SHARES          PRICE
                                             ---------    --------------    ---------    --------------
<S>                                          <C>          <C>               <C>          <C>
Outstanding at beginning of year...........  2,436,052        $0.71         2,314,098        $0.75
Granted....................................  1,073,060         0.64           270,652         0.53
Exercised..................................   (368,592)        0.25                --           --
Forfeited..................................   (399,919)        0.98          (148,698)        0.96
                                             ---------        -----         ---------        -----
Outstanding at end of year.................  2,740,601        $0.71         2,436,052        $0.71
                                             =========        =====         =========        =====
Options exercisable at end of year.........  1,768,396        $0.75         1,846,812        $0.72
                                             =========        =====         =========        =====
Weighted-average fair value of options
  granted during the year..................                   $0.52                          $0.19
                                                              =====                          =====
</TABLE>

     The following is a summary of stock options outstanding at December 31,
2000:

<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING
                                          ----------------------------------------------------
                                                         WEIGHTED-AVERAGE
                                                            REMAINING
                                            NUMBER         CONTRACTUAL       NUMBER OF OPTIONS
             EXERCISE PRICE               OUTSTANDING          LIFE             EXERCISABLE
             --------------               -----------    ----------------    -----------------
<S>                                       <C>            <C>                 <C>
$0.25 - $0.78...........................   1,591,301        7.79 years             676,062
$0.80 - $1.25...........................   1,149,300        5.18 years           1,092,334
</TABLE>

     The Company has issued stock options to consultants outside of the 1995
Stock Option Plan. Options totaling 66,666 were outstanding and exercisable at
December 31, 1999. No options were outstanding or exercisable at December 31,
2000. The weighted average exercise price of the options was $0.50 as of
December 31, 1999, and the average remaining contractual life was 0.25 years.
The events effecting these options in 2000 and 1999 are as follows: in 2000,
66,666 options were forfeited at an exercise price of $.50 and in 1999, 66,666
options were forfeited at an exercise price of $.50.

NOTE M -- 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 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        $.011
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        $.011
                                                   ========       ==========        =====
</TABLE>

                                       F-13
<PAGE>   37
                               NUTRACEUTIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 2000 AND 1999

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

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

     At December 31, 1999, the Company had 311,223 of stock options, which were
dilutive. The computation for loss per share assuming dilution for the year
ended December 31, 1999 was anti-dilutive; and therefore, is not included.

NOTE N -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

     In 2000, the Company had sales to two customers which accounted for
approximately 18% and 16% of net revenues. In 1999, 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 O -- CONTINGENCIES

     In 1999 and 2000, the Company was engaged in various lawsuits including,
wrongful termination of a former employee, improper disposal of customer
materials and violation of certain licensing rights of patented product. The
management of the Company is vigorously contesting all claims.

     In the opinion of management, based upon advice of legal counsel, the
ultimate outcome of the outstanding claims will not have a material impact on
the Company's financial statements.

NOTE P -- SUBSEQUENT EVENT

     On the effective date of January 15, 2001, the Company entered into a
separation agreement with each of its former Chief Scientific Officer and Vice
President of Administration, Secretary and Treasurer. In conjunction with the
agreement, the Company recorded severance costs in the first quarter of 2001
totaling approximately $306,000 of which approximately $261,000 will be paid
over a twelve month period.

                                       F-14