<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange 
    Act of 1934

                  For the fiscal year ended December 31, 1998

                                      or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 For the transition period from ________ to _________.

                        Commission File Number 0-19811
                                               -------

                          OPTA FOOD INGREDIENTS, INC.
                          ---------------------------
            (Exact name of registrant as specified in its charter)

           Delaware                                        04-3117634      
 ------------------------------                  ------------------------------
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                         Identification No.)

      25 Wiggins Avenue
    Bedford, Massachusetts                                    01730         
 ----------------------------------------        -------------------------------
 (Address of principal executive offices)                   (Zip Code)

      Registrant's telephone number, including area code: (781) 276-5100
                                                          --------------
<TABLE> 
<S>                                                         <C> 
Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 par value per share
                                                             --------------------------------------
                                                                        (Title of Class)
</TABLE> 

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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        
                                               -------          --------

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate market value, based upon the closing sale price of the
shares as reported by the Nasdaq National Market System, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) at March 5, 1999 was $24,796,887.

     As of March 5, 1999, 11,123,779 shares of the registrant's Common
Stock, $.01 par value per share, were issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report on Form 10-K.

The following discussion of the Company's business in this Annual Report on Form
10-K contains, in addition to historical statements, forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include the factors
discussed in this section under the caption "Cautionary Statement Regarding
Forward-Looking Statements."
<PAGE>
 
Item 1. Business

GENERAL
-------
         Opta Food Ingredients, Inc. (referred to herein as the "Company" or
"Opta") was incorporated in Delaware on April 23, 1991 and its executive offices
are located at 25 Wiggins Avenue, Bedford, Massachusetts 01730. The Company's
telephone number is (781) 276-5100 and fax number is (781) 276-5101. Opta,
CrystaLean, EverFresh, OptaFil, OptaGlaze, OptaGrade and Optex are registered
trademarks of the Company.

         Opta is a leading innovator, manufacturer and marketer of proprietary
texturizing products sold to food processors in North America who focus on the
dairy, dressings/sauces, meat and baked goods categories. Opta applies advanced
enzymology and protein and carbohydrate chemistries to develop innovative food
ingredient products such as fat replacers, bulking agents and other texturizing
agents that solve specific customer problems. Opta creates its products through
the modification of inexpensive, readily available raw materials to produce food
ingredients that it considers to be Generally Recognized As Safe ("GRAS") under
current U.S. Food and Drug Administration ("FDA") regulations. At December 31,
1998, Opta's products were being used in more than 35 applications by nearly 170
different customers, including five of the ten largest U.S. consumer packaged
food companies and three of the world's largest quick service restaurant chains.

INDUSTRY BACKGROUND AND MARKET OPPORTUNITY
------------------------------------------

         The food industry is experiencing an unprecedented period of
significant, fundamental change worldwide. The pace of change is accelerating
and impacts on every aspect of the food business. Key sectors of the industry
are consolidating through mergers and acquisitions. Indeed, 1998 was another
record year of food company mergers. Driving forces within the industry have
shifted away from the manufacturers to the retailer and, ultimately, to the
consumer. Food safety remains the number one concern of consumers. Public sector
regulatory agencies as well as private sector consumer associations are becoming
more vigilant. Consumer education, recently enacted labeling requirements, and a
high level of popular interest in extending and improving the quality of life
have greatly increased consumer awareness of food and its role in promoting and
maintaining a healthy lifestyle. Since 1994, consumer spending on food prepared
outside the home has exceeded consumer spending on food prepared at home.
Consumers are demanding foods that are safe, convenient, nutritious, healthful,
readily available, competitively priced and that taste great. Food processors
are under tremendous pressure to remove undesirable components such as fat and
sugar or unwanted additives from foods through reformulation of their products.
This trend has now gone a step further. Not only are undesired components being
formulated out, but ingredients with purported health benefits are being
incorporated into a growing number of everyday foods.

         In the face of these challenges, consumer food and food service
companies are seeking ways to increase their ability to respond quickly and
effectively to an extremely dynamic marketplace. In addition, as the industry
further consolidates and becomes more competitive, pressure has mounted to cut
costs. Investment in basic research and new product development by consumer food
and foodservice companies over the past decade has not kept pace with these
demands. As a result, a "technology gap" now exists between the demand for
reformulation of current products and the development of new, healthier foods.
This is especially true in the lack of development of new, highly functional
food ingredients that deliver the taste and textural attributes that consumers
are demanding.



                                      -2-
<PAGE>
 
         Opta's strategy is to capture the opportunity represented by this
"technology gap" by utilizing its proprietary technologies, know-how and
experience to create healthy, safe, inexpensive food ingredients with taste and
textural qualities that appeal to consumers. Opta is a customer driven,
flexible, responsive food ingredient supplier to consumer food and foodservice
companies with particular emphasis on the dairy, baked goods and meat segments
of the market. Opta's core expertise in the development, modification and
maintenance of specific food textures coupled with the Company's capabilities in
new ingredient development and commercialization has resulted in a portfolio of
highly functional, innovative, GRAS food ingredients. Opta's ingredient
portfolio includes ingredients that have achieved industry recognition and
commercial use as fat replacers as well as agents that function as stabilizers,
bulking agents, thickeners, gelling agents and extenders in a wide variety of
food applications.

         According to industry sources, the worldwide market for high
value-added food ingredients is approximately $20 billion per year. Opta's
primary target market of North America accounts for nearly 1/3 of this total.
The Company's products compete functionally within broad categories of the food
ingredients industry, including but not limited to, hydrocolloids, fibers, fat
replacers, emulsifiers and proteins. The Company estimates that the value of the
ingredients with which Opta directly competes is between $500 and $800 million
in North America. Dairy and bakery applications account for a significant
portion of this total opportunity; therefore, Opta has focused its sales and
marketing efforts, as well as its technical efforts, primarily on these two
sectors of the domestic market and more recently has expanded its reach into the
meat category.

OPTA'S STRATEGY
---------------

         The Company works closely with consumer food and foodservice companies
to identify product formulation, cost and/or productivity issues and develop
solutions to these problems based on proprietary, value-added, highly functional
food ingredients. Core elements of the Company's strategy include:

         Solving Customer Problems Through Innovation. Opta's primary focus is
on solving its customers' problems rapidly through innovation rather than
through the traditional approach of selling basic raw materials or products
derived through chemical syntheses. The Company works closely with its customers
to identify each of their specific needs, establish probable solutions, develop
a prototype food ingredient or formulation and to develop finished products that
meet or exceed the required sensory, functional, physical and nutritional
parameters. Also, the finished food containing Opta's ingredient should fit
existing manufacturing processes in a cost-effective manner. Opta differentiates
itself from its competitors by being dependent neither upon any one raw material
or a single type of technology. This provides Opta the flexibility to take
whatever approach is most appropriate to solve the customer problem at hand.

         Opta makes a significant investment in establishing long term
customer/supplier relationships with all its key current and prospective
accounts. This investment includes an outstanding level of service at all phases
of the customer's product development effort, from small scale formulation work
and analytical support through full commercial scale processing in their
manufacturing facilities. The return on this investment is chiefly captured via
ingredient sales, but this approach has other intangible benefits for the
Company including long-term customer relationships and a high degree of
credibility in the marketplace.



                                      -3-
<PAGE>
 
         Focusing on Technology Platforms as Sources of Innovation. The Company
intends to continue leveraging the expertise and knowledge base that it has
developed since its inception to further the development of families of related,
highly functional, value-added food ingredients. In order to best exploit both
internal and external resources and play to its strengths, the Company has
organized its product portfolio and continuing new product development efforts
on the basis of two main technology platforms: fiber-based texturizing agents
and starch-based texturizing agents. These technology platforms serve as an
organizing principle around which new learning can be captured, intellectual
property can be expanded new products and applications can be developed, and
existing products can be effectively supported. These platforms have enabled the
development of the Company's current proprietary products and will serve as a
solid base for the addition of future ingredients with physical properties and
functionality targeted to specific end uses and the solution of specific
customer problems.

         Opta believes the technology platform approach permits it to solve
multiple customer and industry problems without requiring a separate investment
for each solution while retaining the flexibility to customize solutions for a
wider variety of industry problems. The Company also believes that future growth
will be derived from internally developed technology as well as from
acquisitions of complementary product lines and technologies to which Opta is
confident that it can add value and generate incremental revenue growth.

         Employing Sophisticated Science and Practical Food Industry Experience
to Develop GRAS Food Ingredients. The Company relies upon its ability to combine
proprietary technological advances with practical food industry experience to
solve highly complex and specific food formulation problems presented by its
customers. Opta's research and development effort is conducted by a team of
scientists with expertise in the relevant sciences, including enzymology and
protein and carbohydrate chemistries, who work alongside experts in food science
and food engineering. The Company seeks to modify inexpensive raw materials to
produce value-added, natural food ingredients that meet the requirements for
GRAS status and that permit customers to have consumer-friendly labels which may
enable all-natural or other claims for their products.

         Utilizing a Technically Sophisticated Customer Account Team and
Marketing Force. Opta believes the most effective way to solve a customer's
problem is to gain a thorough understanding of each customer at all levels,
build solid working relationships throughout the customer's organization, be
knowledgeable of the market segment in which the customer competes, and have a
detailed technical understanding of the customer's problem as well as their
preferred solution. The Company takes a multidisciplinary approach in order to
achieve this level of customer understanding and level of service. Members of
Opta's direct sales force are teamed up with the appropriate technical personnel
to work as "consultants" in defining and developing a range of potential
solutions to their formulation and product development problems. Through an
iterative process, the solution is refined and ultimately delivered according to
the customer's specification. In all cases, Opta's strategy is to provide
outstanding service and responsiveness, which the Company believes, will lead to
additional opportunities with existing and prospective customers.

OPTA'S PRODUCT DEVELOPMENT AND COMMERCIALIZATION PROCESS
--------------------------------------------------------

         All of the Company's product development efforts are driven by
specifically stated and defined customer or market needs. In order to respond
quickly to market needs that represent credible opportunities for the Company,
Opta employs a simple, efficient system for integrating its development and
commercialization activities. The system has three primary stages: Discovery,
Assessment and Planning, and Execution and Review.

                                      -4-
<PAGE>
 
The Discovery Stage

         The Company's management, marketing, applications and technical
service, research and development personnel, as well as its direct sales team,
maintain close working relationships with leading consumer food and foodservice
companies. Opta actively seeks to assist in the definition and assessment of its
customers' ingredient-related needs whether the issue is quality, functionality,
cost, processibility, or otherwise. Opta assimilates this information on
customer needs into its Opportunity Portfolio, a database of new product ideas
and concepts. The Opportunity Portfolio is reviewed on a regular basis to keep
the pipeline of new developmental ingredients full. The review examines certain
criteria such as technical feasibility, market opportunity, the specific
customer need that is to be fulfilled, ability to patent or maintain as
proprietary, potential manufacturing costs and efficiencies, availability of raw
materials and qualification for GRAS status. Once an opportunity is judged to be
credible and achievable, the program proceeds to the next step.

The Assessment and Planning Stage

         In this phase, key questions and critical hurdles regarding successful
outcome of a specific ingredient development effort are identified and
evaluated. An in-depth assessment is then made of the opportunity as technical
hurdles are defined, and a manufacturing strategy is developed. The purpose of
this stage is to ensure that there is a clear and common understanding within
the Company of the exact nature of the opportunity, the resources that will be
required to execute such opportunity and the deadline for its completion.

The Execution and Review Stage

         Opta pursues its new product development and commercialization efforts
by employing cross-functional project teams and classic project management
techniques. A clear objective and deadline is set, the appropriate team members
from each of Opta's functional groups are assembled, and a Project Team Leader
is appointed. A formal project plan is put in place that contains the key
milestones, critical path activities, and other pertinent information for
driving the development and commercialization effort. Opta works closely with
its customers at all stages of new ingredient development--bench, pilot and
commercial scale--by the sampling of prototypes to the appropriate customers for
real world testing. This approach is essential in maximizing the chances for
success of newly commercialized ingredients. Another main feature of this
development stage is periodic project review. As any project proceeds, the
original objective and project plan may be modified based on new information or
the results of customer testing. Opta's process allows for flexibility and
provides opportunities to ensure that the ingredient under development is on
target with the customer need to be filled.

         Once Opta and a potential customer agree that a test ingredient is
functional and of practical value, production scale-up commences, manufacturing
process is verified and any regulatory clearances are obtained. After launching
a new ingredient, Opta commercializes the ingredient for other applications and
other customers. Whenever possible, Opta manufactures and markets its own
products and distributes them through its direct sales organization within the
U.S. and through strategic partners internationally.

PRODUCTS
--------

         Opta has organized its product portfolio on the basis of two main
technology platforms: fiber-based texturizers which include Opta Oat Fibers,
konjac flour and microcrystalline cellulose (MCC) and starch-based texturizers
which include OptaGrade, OptaMist, Optex, OptaFil, CrystaLean and Opta Baking
Gloss.


                                      -5-
<PAGE>
 
         In addition to helping food manufacturers improve the healthfulness of
their food products, Opta's family of texturizing ingredients can improve the
overall quality of food products, reduce formulation costs and meet specific
processing requirements. The Company believes that all of its products are GRAS
under current FDA regulations.

Opta Oat Fibers

         Opta Oat Fibers are a family of natural insoluble fiber products
derived from oat hulls. Opta Oat Fibers are used commercially to increase yield
and enhance texture in ground meat products, to add strength and reduce breakage
of taco shells and ice cream cones, and to enhance texture in breads, cookies
and crackers. In addition, Opta Oat Fibers are sold to a group of independent
bakers for use in McDonald's hamburger buns.

Konjac Flour

         In 1997, Opta signed an agreement with Shimizu International, Inc. of
Japan to become its exclusive North American distributor for konjac flour. A
unique and very versatile texturizing agent obtained from the konjac plant
commonly cultivated in East Asia, konjac flour provides excellent heat and
freeze thaw stability when used to thicken or gel processed foods. The potential
advantages and uses of konjac flour as a functional ingredient in food are just
beginning to be realized by the North American food industry. In Asia, konjac
flour is valued not only for its use as a food ingredient, but also for its
beneficial role as a soluble fiber in the diet. For example, there are many
published studies, which demonstrate the ability of konjac flour to reduce serum
cholesterol levels in humans. Konjac flour is currently being tested by a number
of food companies for a variety of applications including surimi, vegetarian
burgers and ground meat.

Microcrystalline Cellulose (MCC)

         In 1998, Opta signed an agreement with Blanver Farmoquimica, Ltda. of
Brazil to become its exclusive North American distributor for MCC. MCC, commonly
known and labeled as cellulose gel, is a naturally derived stabilizer,
texturizing agent and fat replacer. It is used extensively in reduced fat salad
dressings, numerous dairy products including cheese, frozen desserts and whipped
toppings and bakery products. MCC is currently being tested by a number of food
companies for a variety of applications including reduced fat salad dressings
and sauces.

OptaGrade

         OptaGrade is a natural, starch-based texturizing agent that is used
commercially in a variety of dairy products including natural, imitation and
processed cheeses, sour cream, cream cheese and cottage cheese. Fat free cheeses
made with OptaGrade have shown superb meltability with none of the off-taste or
rubbery texture found in most fat free and reduced fat cheeses. By using
OptaGrade in cottage cheese, food manufacturers are able to reduce total
formulation costs while delivering excellent taste, texture and appearance.
OptaGrade is also used to improve the taste and texture of reduced fat and fat
free cream cheeses. In sour cream, OptaGrade is used to create a smooth, creamy
texture and can replace up to eight other ingredients allowing for a "cleaner"
ingredient label.



                                      -6-
<PAGE>
 
OptaMist

         OptaMist is also a starch-based texturizing agent that improves the
taste, texture and appearance of dairy products, salad dressings and mayonnaise.
While the functionality of OptaMist is similar to that of OptaGrade, its unique
processing flexibility allows it to be used in food products made within a wide
variety of processing systems.

Optex

         Optex is a microparticulated, starch-based texturizing agent that
provides a smooth, fat-like texture and opacity in high viscosity food products
such as reduced fat or fat free mayonnaise, margarine-type spreads and spoonable
salad dressings. Optex is currently being tested by a number of food companies
for a variety of applications including reduced fat peanut butter spread.

OptaFil

         Optafil is a starch-based opacifying agent and whitener used in reduced
fat or fat free dairy and non-dairy creamers, whipped toppings, beverages,
cheeses and salad dressings. OptaFil has gained acceptance in the marketplace
because it is easy to use and reduces residue on processing equipment. It is
being used commercially in fat free non-dairy creamers and, in combination with
OptaGrade, in fat free feta cheese.

CrystaLean

         CrystaLean is an enzyme-resistant, starch-based bulking and texturizing
agent designed to enhance texture and add fiber to food products including baked
goods and extruded products such as cereals and snack foods. CrystaLean is being
tested by a number of food companies for various applications and is being used
commercially in a nutrition bar specifically marketed to diabetics.

Opta Baking Gloss

         Baking Gloss is a ready-to-use product that provides outstanding shine
and adhesion to baked goods. Launched in 1998, it is targeted for use in retail
and in-store bakeries.

         Substantially all of the Company's 1998 revenue is derived from sales
of Opta Oat Fibers and OptaGrade.

         Opta's priorities over the next few years are to increase market
penetration for OptaGrade in the product categories where it is currently being
sold, as well as to extend its use to other targeted product categories; to
complete the development and commercial launch of a new, starch-based
texturizing product technology that the Company believes will extend the
starch-based technology platform into new applications; to continue the
marketing and commercial development of OptaMist, Optex, CrystaLean, OptaFil,
MCC and konjac flour; and to continue to innovate next generation products and
technologies based upon specific customer needs and requests. There can be no
assurance that the Company will be successful in fulfilling any or all of these
priorities on a timely basis, or at all, or that, for various reasons including
market conditions, available capital and management resources, the Company will
be able to continue to pursue these priorities.


                                      -7-
<PAGE>
 
CUSTOMERS, SALES AND MARKETING
------------------------------

Customers

         At December 31, 1998, Opta's products were being used in more than 35
different applications by nearly 170 different customers, including five of the
ten largest U.S. consumer packaged food companies and three of the world's
largest quick service restaurant chains. In the competitive consumer food and
food service industries, product formulations are competitive assets, and, as a
result, the Company's customers and prospective customers generally require Opta
to retain their identity in strict confidence. As a consequence, Opta is
typically prohibited from revealing any such product or customer information
without their consent.

         During 1998, a single customer, Case Swayne, accounted for $5.2 million
or 37% of product sales. In addition, during 1998, 1997 and 1996, $3.9 million,
$3.5 million and $4.1 million of product sales were to a group of independent
bakeries that supply a quick service restaurant chain. There were no individual
customers during the years ended December 31, 1997 and 1996 representing greater
than 10% of total revenue. Export sales were $795,000 ($418,000 to Europe and
$377,000 to the Middle East); $1,209,000 ($376,000 to Europe and $833,000 to the
Middle East); and $1,041,000 ($285,000 to Europe and $756,000 to the Middle
East) for the years ended December 31, 1998, 1997, and 1996, respectively.

Sales and Marketing

         Utilizing a technically sophisticated customer account team and
marketing force, Opta believes the most effective way to solve a customer's
problem is to gain a thorough understanding of each customer at all levels,
build solid working relationships throughout the customer's organization, be
knowledgeable of the market segment in which the customer competes, and have a
detailed technical understanding of the customer's problem as well as their
preferred solution. The Company takes a multidisciplinary approach in order to
achieve this level of customer understanding and service. Members of Opta's
direct sales force are teamed up with the appropriate technical personnel to
work as "consultants" in defining and developing a range of potential solutions
to their formulation and product development problems. Through an iterative
process, the solution is refined and ultimately delivered to the customer's
specification. In all cases, Opta's strategy is to provide outstanding service
and responsiveness, which the Company believes, will lead to additional
opportunities with existing and prospective customers.

MANUFACTURING
-------------

         During 1998, the Company expanded its Opta Oat Fibers facility in
Louisville, Kentucky increasing the plant's capacity by 40%. With this
additional capacity, the Company expects that it will be able to meet its
customers' orders. In addition, as a result of growing customer demand for
OptaGrade, in May 1996, the Company acquired a 35,000 square foot manufacturing
facility in Galesburg, Illinois. The facility was renovated during 1997 and
began production in 1998. The Company anticipates the facility to produce all of
its starch-based food ingredient products in 1999. The facility has
significantly increased the Company's production capacity for its starch-based
food ingredient products including OptaGrade, OptaMist and Optex. There can be
no assurance that the demand for the Company's products will increase or remain
at current levels to justify any such additional capacity, or that the Company's
manufacturing capability will otherwise be sufficient to meet customer demands.
The Company does not believe that there are any limitations on sources and
availability of raw materials.



                                      -8-
<PAGE>
 
COMPETITION
-----------

         The food ingredients industry is intensely competitive. Competitors
include major chemical companies with food ingredient divisions, other food
ingredient companies and those consumer food companies that also engage in the
development and sale of food ingredients. Many of these competitors have
substantially greater financial and technical resources as well as production
and marketing capabilities than the Company. In addition, many of the Company's
competitors have significantly greater experience than the Company in the
testing of new or improved products.

         The texturizing agent market is particularly competitive. Many
companies are engaged in the development of fat replacers and other texturizing
agents, and have introduced a number of products. Few of these fat replacers
have succeeded and none has become dominant. Opta believes that specifically
tailored texturizers must be developed to meet the particular textural, taste
and processing requirements of each food category. The Company, therefore, is
developing a number of separate and distinct products with functionality
tailored to a specific end use.

         The fiber segment of the texturizing agent market is large and
competitive. Besides competing with other oat fiber companies, Opta competes
directly and indirectly with producers of other types of fiber including soy and
sugar beet fibers. Opta believes that the Company will be able to use its
scientific expertise and proprietary knowledge to manipulate oat fiber so that
it can be used to improve the texture of foods in a manner that offers certain
advantages over competitive fiber products, but there can be no assurance that
any such advantages will be realized.

         The Company believes that its success in competing with others will be
based on retaining scientific and technical expertise, identifying customer
needs for food ingredient solutions to solve food processing problems, rapidly
innovating and developing new food ingredients, developing food ingredients
which are GRAS and successfully testing, producing and marketing these products.

PATENTS AND TRADE SECRETS
-------------------------

         The Company's policy is to protect its technology by, among other
things, filing patent applications for technology relating to the development of
its business in the U.S. and in selected foreign jurisdictions. The Company has
32 issued U.S. patents and has 13 pending U.S. patent applications relating to
products at various stages of technological development. Certain of the U.S.
issued patents and pending patent applications have corresponding foreign patent
applications.

         The Company's successes will depend, in part, on its ability to protect
its products and technology under U.S. and international patent laws and other
intellectual property laws. The Company believes that it owns or has the right
to use all proprietary technology necessary to manufacture and market its
products under development. There can be no assurance, however, that patent
applications relating to the Company's products or technology will result in
patents being issued or that current or additional patents will afford
protection against competitors with similar technology. In addition, companies
that obtain patents claiming products or processes that are necessary for or
useful to the development of the Company's products can bring legal actions
against the Company claiming infringement.

         The Company also relies on trade secrets and proprietary know-how and
confidentiality agreements to protect certain of its technologies and processes.
There can be no assurance that the Company's outside partners and contract
manufacturers will be prevented from gaining access to the Company's
proprietary technology and confidential information.


                                      -9-
<PAGE>
 

REGULATORY FRAMEWORK
--------------------

         Opta's food ingredient products are regulated under the 1958 Food
Additive Amendments to the Federal Food, Drug and Cosmetic Act of 1938 (the
"Act"), as administered by the FDA. Under the Act, pre-marketing approval by the
FDA is required for the sale of a food ingredient which is a food additive
unless the substance is GRAS under the conditions of its intended use by experts
qualified by scientific training and experience to evaluate the safety of food
ingredients. A food additive is any substance, "the intended use of which
results or may reasonably be expected to result, directly or indirectly, in its
becoming a component or otherwise affecting the characteristics of any food."
Such pre-marketing approval for ingredients that are not GRAS, which is issued
in the form of formal regulation, requires a showing both that the food
ingredient is safe under its intended conditions of use and that it achieves the
function for which it is intended. GRAS status can be established in two ways,
either by "self-affirmation" in which the producer determines on its own that
the ingredient is GRAS, or by the issuance of a "GRAS affirmation regulation" by
the FDA in response to a GRAS petition. A food ingredient may be deemed GRAS
under the conditions of its intended use based upon its history of common use in
foods prior to 1958, or based upon scientific procedures which produce the same
quantity and quality of scientific evidence as would be required for the FDA to
issue a pre-market approval of the sale of a food additive.

         In either case, in order to establish that a product is GRAS, it must
not only actually be safe in its intended use, but it must be generally
recognized as such. If a food ingredient is not entitled to GRAS status,
pre-market approval must be sought through the filing of a Food Additive
Petition.

         Countries other than the U.S. also regulate the sale of food
ingredients. Regulations vary substantially from country to country, and Opta
takes appropriate steps to comply with such regulations as necessary.

         Opta Oat Fibers, OptaGrade, OptaMist, Optex, CrystaLean and OptaFil are
being marketed pursuant to GRAS self-affirmation. Opta believes that the other
products for which it has retained commercial rights will also be determined to
be GRAS. However, such status cannot be determined until actual formulations and
uses are finalized. Thereafter Opta will decide whether self-affirmation
procedures or a GRAS petition will be appropriate. Certain of the Company's
products may require a Food Additive Petition and in the event that one is
required, the Company may elect to sell or license its rights to another party.
There can be no assurance that the Company will be successful in bringing its
products to market based on its determination that such products meet these
criteria. Opta has established an independent Regulatory Board, a panel of
industry experts, to review the publicly available information and certify that
they have reviewed such data and regard an ingredient as GRAS.

HUMAN RESOURCES
---------------

         At December 31, 1998, Opta employed 84 full-time employees, 9 of who
hold Ph.D. or other advanced scientific degrees. Many of the Company's
management and professional employees have had prior experience with consumer
food companies. None of the Company's employees is covered by collective
bargaining agreements, and management considers relations with its employees to
be good.


                                     -10-
<PAGE>
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
---------------------------------------------------------

         Statements in this Annual Report on Form 10-K under the captions
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf, that are not historical fact constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause the actual results of the
Company to be materially different from the historical results or from any
results expressed or implied by such forward-looking statements. Factors which
could cause actual results to differ from these expectations include the side
and timing of significant orders, as well as deferral of orders, over which the
Company has no control; the extended product testing cycles of the Company's
potential customers; the variation in the Company's sales cycles from customer
to customer; increased competition posed by food ingredient manufacturers;
changes in pricing policies by the Company and its competitors; the adequacy of
existing, or the need to secure or build additional manufacturing capacity in
order to meet the demand for the Company's products; the Company's success in
expanding its sales and marketing programs and its ability to gain increased
market acceptance for its existing product lines; the Company's ability to
timely develop and successfully introduce new products in its pipeline at
acceptable costs; the ability to scale up and successfully produce its products;
the potential for significant quarterly variations in the mix of sales among the
Company's products; the gain or loss of significant customers; shortages in the
availability of raw materials from the Company's suppliers; the impact of new
government regulations on food products; potential Year 2000 problems; and
general economic conditions.


Item 2. Properties

         The Company owns a 45,000 square foot building in Bedford,
Massachusetts which the Company uses for its headquarters, pilot plant, research
and development laboratories and general corporate offices. Approximately 15,000
square feet of space in this building is leased to a third party under a lease
expiring in September 1999. In addition, the Company subleases approximately
24,000 square feet in Louisville, Kentucky, for a term expiring in 2005. This
space is occupied by the Company's Opta Oat Fibers manufacturing plant,
warehouses, related laboratories and offices. In May 1996, the Company acquired
a 35,000 square foot manufacturing facility in Galesburg, Illinois. This
facility supports the production of the Company's starch-based food ingredient
products.

Item 3. Legal Proceedings

         From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is currently not a party to any legal proceedings, the adverse outcome
of which, individually or in the aggregate, management believes would have a
material adverse effect on the financial position or results of operations of
the Company.

Item 4. Submission of Matters to a Vote of Security Holders

        Not applicable.



                                     -11-
<PAGE>
 
                                    PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------

         The Company's Common Stock is traded on the Nasdaq Stock Market under
the symbol "OPTS", and is listed on Nasdaq's National Market System. The
following table sets forth the high and low closing sales prices for the
Company's Common Stock as reported by the Nasdaq National Market system for each
of the periods indicated:

         Year Ended December 31, 1997               High               Low
         ----------------------------               ----               ---

              First Quarter                        7 1/2             5 3/8
              Second Quarter                       8 1/8                 4
              Third Quarter                        7 5/8            5 1/16
              Fourth Quarter                       7 1/4             4 3/8

         Year Ended December 31, 1998
         ----------------------------

              First Quarter                        5 7/8            3 3/4
              Second Quarter                      6 3/16            4 3/4
              Third Quarter                      5 25/32                3
              Fourth Quarter                       4 1/2           3 1/16


         The Company has never paid a cash dividend. The Company intends to
retain all of its earnings, if any, for use in its business and does not intend
to pay cash dividends in the foreseeable future. In addition, certain of the
Company's loan agreements contain covenants that restrict the Company's ability
to pay dividends. Any future dividend policy will depend upon, among other
factors, the Company's earnings and its financial condition.

         As of March 5, 1999, there were approximately 161 holders of record of
the Company's Common Stock and the Company believes that the number of
beneficial holders exceeds 2,400.


                                     -12-
<PAGE>
 
Item 6.  Selected Financial Data (in thousands, except per share data)
----------------------------------------------------------------------

         The following selected financial data for the five years ended 
December 31, 1998 has been derived from the Company's financial statements
audited by PricewaterhouseCoopers LLP, independent accountants.

<TABLE>
<CAPTION>

                                                                  For the Years Ended December 31,                
                                            -----------------------------------------------------------------------
                                                 1998            1997           1996           1995            1994
                                                 ----            ----           ----           ----            ----
<S>                                         <C>            <C>            <C>            <C>               <C>     
Statement of Operations Data:

Revenue                                     $  13,971      $    8,799     $    9,229     $    7,067        $  4,821
Cost of revenue                                10,146           6,730          7,409          6,340           4,209
Selling, general and admin expenses             4,033           3,874          3,868          2,725           2,397
Research and development expenses               3,665           4,236          4,038          3,102           3,018
Loss from operations                           (3,873)         (6,041)        (6,086)        (5,100)         (4,803)
Net loss                                       (2,482)         (4,569)        (4,527)        (4,197)         (4,596)
Basic and diluted net loss per share (1)        (.22)            (.41)          (.42)          (.48)           (.75)

 (1)  Computed on the basis described in Note 2 of Notes to Financial Statements.

<CAPTION> 
                                                                              December 31,                                          
                                            -----------------------------------------------------------------------
                                                 1998            1997           1996           1995            1994
                                                 ----            ----           ----           ----            ----
<S>                                       <C>              <C>            <C>            <C>               <C> 
Balance Sheet Data:

Current assets                            $    34,720      $   37,808     $   42,876     $   48,848        $ 16,055
Total assets                                   47,888          50,965         55,903         61,269          25,423
Current liabilities                             2,685           3,847          3,117          3,152           1,928
Long term liabilities                           3,126           2,625          4,417          6,125           4,544
Total stockholders' equity                     42,077          44,493         48,369         51,992          18,951
</TABLE>


                                     -13-
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

         The following Discussion and Analysis of the Company's Financial
Condition and Results of Operations contained in this Annual Report on Form 10-K
contains, in addition to historical statements, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include the factors
discussed in the section titled "Business" under the caption "Cautionary
Statement Regarding Forward-Looking Statements" as well as other factors in this
Annual Report on Form 10-K.

Introduction

         Opta is a fully integrated developer, manufacturer and marketer of
proprietary food ingredients used by consumer food companies to improve the
nutritional content, healthfulness and taste of a wide variety of foods. The
Company modifies inexpensive raw materials and produces natural food ingredients
that can be considered GRAS under current FDA regulations.

         The Company began shipping its first product, EverFresh, in November
1991, acquired an oat fiber business in June 1992 and launched Opta Oat Fibers
in September 1992, began shipping OptaGrade in the fourth quarter of 1993,
commercialized CrystaLean and OptaFil in 1994, introduced OptaMist, Optex and
OptaGlaze in June 1996 and launched Opta Baking Gloss in May 1998. The Company
currently derives substantially all of its revenue from its Opta Oat Fibers,
OptaGrade, OptaMist and CrystaLean products. The Company has not been profitable
since inception and expects to incur additional losses. This discussion should
be read in conjunction with the section titled "Business", the financial
statements, and the notes to the financial statements, included elsewhere in
this Annual Report on Form 10-K.

Results of Operations

1998 Compared to 1997
---------------------

         Revenue. Revenue for the year ended December 31, 1998 was $14.0 million
representing an increase of $5.2 million or 59% over 1997 revenue of $8.8
million. The increase in 1998 revenue was largely the result of increased demand
from two of the Company's existing major customers as well as the addition of a
new major customer during 1998. In addition, during 1997, the Company relied on
various contract manufacturers to supply certain of the Company's finished goods
for sale to its customers. The Company's 1997 third and fourth quarter revenue
was negatively impacted by one such contract manufacturer's refusal to continue
to supply finished product to Opta for a new major customer. This dispute was
resolved in June 1998 without negatively impacting 1998 revenue.

         Cost of Revenue. Cost of revenue for the year ended December 31, 1998
was $10.1 million representing an increase of $3.4 million or 51% over 1997 cost
of revenue of $6.7 million. Cost of revenue as a percentage of revenue decreased
to 73% in 1998 as compared to 76% in 1997. This percentage decrease was largely
the result of certain improvements in Opta Oat Fibers' margins resulting from
production efficiencies related to increased production capacity as well as a
reduction in manufacturing costs. Opta is attempting to further reduce its cost
of revenue as a percentage of revenue in 1999 due to manufacturing efficiencies
gained from increased production volume, although there is no assurance that
such reductions will be realized.


                                     -14-
<PAGE>
 
         Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the year ended December 31, 1998 were $4.0
million representing an increase of $159,000 or 4% over 1997 SG&A expenses of
$3.9 million. SG&A expenses as a percentage of revenue decreased to 29% in 1998
from 44% in 1997 as a result of the increase in 1998 revenue. The increase in
actual SG&A expenses was principally due to additional staffing and bonus costs
as well as an increase in public/investor relations costs offset by a reduction
in consulting costs in 1998.

         Research and Development. Research and development ("R&D") expenses for
the year ended December 31, 1998 were $3.7 million representing a decrease of
$571,000 or 13% over 1997 R&D expenses of $4.2 million. R&D expenses as a
percentage of revenue decreased to 26% in 1998 from 48% in 1997 as a result of
the reduction in 1998 R&D expenses and the increase in 1998 revenue. The
decrease in actual R&D expenses was the result of initial start-up costs of the
Galesburg, Illinois production facility incurred during 1997.

         Other Income. Other income for the year ended December 31, 1998 was
$1.4 million representing a decrease of $81,000 or 6% as compared to 1997 other
income of $1.5 million. The decrease is due to decreased interest income on
reduced amounts of cash and cash equivalents offset in part by decreased
interest expense on lower levels of debt during 1998.


1997 Compared to 1996
---------------------

         Revenue. Revenue for the year ended December 31, 1997 was $8.8 million
representing a decrease of approximately $430,000 or 5% in comparison to 1996
revenue of $9.2 million. The decrease in 1997 revenue was largely the result of
decreased demand from one of the Company's major customers. During 1997, the
Company relied on various contract manufacturers to supply certain of the
Company's finished goods for sale to its customers. As the Company previously
indicated in its Form 10-Q filing for the quarters ended June 30, 1997 and
September 30, 1997, third and fourth quarter revenue was negatively impacted by
one such contract manufacturer's refusal to continue to supply finished product
to Opta for a new major customer. However, this dispute did not negatively
impact 1998 revenue.

         Cost of Revenue. Cost of revenue for the year ended December 31, 1997
was $6.7 million representing an decrease of $679,000 or 9% in comparison to
1996 cost of revenue of $7.4 million. Cost of revenue as a percentage of revenue
decreased to 76% in 1997 as compared to 80% in 1996. This percentage decrease
was largely the result of certain improvements in Opta Oat Fibers' margins
resulting from operating efficiencies as well as a reduction in manufacturing
costs.

         Selling, General and Administrative Expenses. SG&A expenses for the
year ended December 31, 1997 and 1996 were $3.9 million. SG&A expenses as a
percentage of revenue increased to 44% in 1997 from 42% in 1996.

         Research and Development Expenses. R&D expenses for the year ended
December 31, 1997 were $4.2 million representing an increase of $198,000 or 5%
in comparison to 1996 R&D expenses of $4.0 million. R&D expenses as a percentage
of revenue increased to 48% in 1997 from 44% in 1996. The increase in R&D
expenses was the result of initial operating costs of the Galesburg, Illinois
production facility incurred during 1997.

         Other Income. Other income for the year ended December 31, 1997 was
$1.5 million representing a decrease of $87,000 or 6% in comparison to 1996
other income of $1.6 million. The decrease was due to decreased interest income
on reduced amounts of cash and cash equivalents offset by decreased interest
expense on lower levels of debt in 1997 as compared to 1996.


                                     -15-
<PAGE>
 
Income Taxes

         At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $31.2 million for income tax purposes. In
addition, the Company had approximately $786,000 of unused research and
development tax credits. Ownership changes, as defined in the Internal Revenue
Code, resulting from the Company's initial public offering in March 1992 and a
second public offering in August 1995, have limited the amount of net operating
loss and tax credit carryforwards that can be utilized annually to offset future
taxable income or tax liabilities. As a result, the amount of these net
operating losses and tax credit carryforwards which can be utilized annually is
$3.0 million for losses incurred prior to March 1992 and $9.1 million for losses
incurred prior to August 1995. These net operating loss and credit carryforwards
expire at various dates between 2006 and 2018. Subsequent changes in ownership
could further affect the limitation in future years.

Liquidity and Capital Resources

         At December 31, 1998, the Company had approximately $30.3 million in
cash and cash equivalents and approximately $32 million of working capital. The
Company used approximately $1.4 million of cash in operations during the year
ended December 31, 1998 compared with approximately $2.4 million in 1997. The
Company expects to incur significant operating losses as it continues to
increase its investment in the development, production and marketing of its new
and existing products. The Company intends to fund its operating losses
principally through product sales, existing cash and cash equivalents, short
term investments, equity financing, collaborative arrangements and long and
short term debt.

         Capital expenditures for the years ended December 31, 1998 and 1997
were approximately $1.4 million and $1.3 million, respectively. The Company's
various debt agreements contain covenants that restrict the Company's ability to
participate in merger discussions, pay dividends, limit annual capital
expenditures, invest in certain types of securities and obtain additional debt
financing without bank approval. The Company was in compliance with respect to
all covenants and restrictions in its loan agreements at December 31, 1998.

         The Company believes that continued expenditure of funds will be
necessary to support its anticipated growth. The Company believes its existing
cash and cash equivalents, short term investments, long and short term debt and
product sales, will be adequate to fund its planned operations, capital
requirements and expansion needs through at least 1999. However, the Company may
require additional capital in the longer term, which it may seek through equity
or debt financing, collaborative arrangements with corporate partners, equipment
lease financing or funds from other sources. No assurance can be given that
these funds will be available to the Company on acceptable terms, if at all. In
addition, because of the Company's need for funds to support future operations,
it may seek to obtain capital when conditions are favorable, even if it does not
have an immediate need for additional capital at such time.


Year 2000 Compliance

         The Year 2000 issue concerns the inability of certain computerized
information systems to properly recognize date sensitive information such as a
date using "00" as the year 2000 rather than the year 1900. This could cause
systems to fail or miscalculate, causing a disruption of operations. The Company
may be at risk both with respect to its own Year 2000 compliance and the Year
2000 compliance of third parties, particularly suppliers of materials and
services as well as customers.


                                     -16-
<PAGE>
 
         The Company relies on computer-based technology and utilizes a variety
of third party hardware and software extensively for financial and
administrative functions, such as accounting and management information. Based
on a recent internal assessment of Year 2000 issues, the Company has identified
and verified that its internal information technology ("IT") systems are deemed
to be Year 2000 compliant, including accounting/financial reporting,
manufacturing/production and sales/invoicing systems.

         The Company is in the process of retaining a consultant to review the
Year 2000 compliance of its non-IT systems which include equipment or processes
used in its manufacturing facilities that may contain embedded technology. The
Company expects to receive the consultant's report and assessment of its Year
2000 compliance by the end of the second quarter of 1999. In addition, the
Company is currently evaluating all other non-IT systems including research and
development, telecommunications and general office equipment for Year 2000
compliance utilizing internal resources. The Company expects to complete this
evaluation by the end of the second quarter of 1999.

         Management believes that the most significant risk to the Company of
Year 2000 compliance issues is the effect such issues may have on its suppliers
and customers. The Company is taking steps including contacting its significant
suppliers and major customers in 1999 to assess the Year 2000 readiness of its
such suppliers and customers. Upon completion of this assessment which will be 
concluded by the third quarter of 1999, the Company will undertake an evaluation
of the potential effects on its operations of any such third-party non-
compliance on the Company's operations. Based on such evaluation, the Company
will determine the most reasonably likely worst case scenarios arising from Year
2000 non-compliance and contingency plans to respond to such scenarios.

         The costs related to Year 2000 activities have not been and are not
anticipated to be material and management does not believe that the financial
impact of the Year 2000 issues discussed above will have a material adverse
effect on the Company's financial condition or results of operations; however,
it is uncertain to what extent the Company may be affected by third party Year
2000 compliance issues.


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------

         In January 1997, the Securities and Exchange Commission issued
Financial Reporting Release No. 48, which expands the disclosure requirements
for certain derivatives and other financial instruments. The Company does not
utilize derivative financial instruments. See Notes 1 and 2 to the Financial
Statements. The carrying amounts reflected in the balance sheet of cash and cash
equivalents, trade receivables and trade payables approximates fair value at
December 31, 1998 due to the short maturities of these instruments.


Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

         Financial Statements and Supplementary Data appear at pages F-1 through
F-17 of this Report on Form 10-K.


Item 9.  Changes in and Disagreements with Accountants on Accounting and        
------------------------------------------------------------------------
         Financial Disclosure
         --------------------

         Not applicable.


                                     -17-
<PAGE>
 
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

         (a)  Directors. The information with respect to directors required by
this item is incorporated herein by reference from the section entitled
"Election of Directors" in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held May 18, 1999 (the "1999 Proxy
Statement"), to be filed with the Securities and Exchange Commission not later
than April 30, 1999.

         (b)  Executive Officers.

         The executive officers of the Company, who are elected to serve at the
discretion of the Company's Board of Directors, are as follows:

Name                             Age     Position
----                             ---     --------

Lewis C. Paine, III              46      Chairman of the Board, President,
                                         Chief Executive Officer and Director

Arthur J. McEvily, Ph.D.         47      Executive Vice President

Joel A. Stone                    46      Vice President Operations

Scott A. Kumf                    42      Chief Financial Officer, Vice President
                                         Administration and Treasurer

         Mr. Paine has served Opta as President and Director since May 1991,
Chief Executive Officer since December 1992, and Chairman of the Board since
June 1993. He served as President of the Food Ingredients Division of Enzytech,
Inc. ("Enzytech"), the Company's predecessor, from October 1990 to May 1991.
Prior to joining Enzytech, Mr. Paine was at Carnation Company and its parent
company, Nestle, S.A., from 1974 to 1990, where he most recently served as Vice
President of Marketing and New Business Development for the Refrigerated
Products Division from December 1987 to October 1990. From April 1986 to
December 1987, he served as an International Marketing Manager for Nestle, S.A.
in Vevey, Switzerland.

         Dr. McEvily was named Executive Vice President in January 1999.
Previously, he was named Senior Vice President, Commercial Development in
December 1997 and served as Vice President Applications, Technical Service and
New Product Commercialization from August 1996 to December 1997. He served as
Vice President Sales and Business Development of the Company from December 1993
to July 1996. From May 1991 to December 1993 he held various positions at Opta,
ranging from Senior Research Scientist to Product Director to Director of
Business Development. Dr. McEvily served in various scientific capacities at
Enzytech from October 1988 to May 1991. Dr. McEvily received a B.Sc. in
Biochemistry from Marlboro College, Marlboro, Vermont and a Ph.D. in chemistry
from The University of North Carolina at Chapel Hill. He was a postdoctoral
fellow at Harvard Medical School.

         Mr. Stone has served as Vice President Operations and Manufacturing
since May 1991. He served as Senior Director of Manufacturing and Engineering
Management at Enzytech from April 1990 to May 1991. Prior to joining Enzytech,
Mr. Stone was Director of Manufacturing at Genencor, Inc. from August 1988 to
March 1990. From August 1986 to August 1988, Mr. Stone was Manager of Operations
at the Harbert Lummus Joint Venture.


                                     -18-
<PAGE>
 
         Mr. Kumf joined Opta in August 1996 as Chief Financial Officer and Vice
President Administration. He was elected Treasurer and Assistant Secretary in
December 1996. Prior to joining Opta, Mr. Kumf served at BostonCoach, Inc. as
Chief Financial Officer from September 1995 to August 1996. From August 1994 to
May 1995, he was the Chief Financial Officer of Trotter, Inc. and from September
1990 to July 1994 he served as Chief Financial Officer for Polar Corp. Mr. Kumf
is a Certified Public Accountant in Massachusetts.


Item 11.  Executive Compensation
--------------------------------

         The information required under this item is incorporated herein by
reference from the section entitled "Executive Compensation" in the 1999 Proxy
Statement.


Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         The information required by this item is incorporated herein by
reference from the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the 1999 Proxy Statement.


Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The information required by this item is incorporated herein by
reference from the section entitled "Certain Transactions" in the 1999 Proxy
Statement.


                                     -19-
<PAGE>
 
                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------

(a) Documents filed as part of this Report:
<TABLE>
<CAPTION>

       (1)    Financial Statements:
              --------------------
       <S>    <C>                                                                                    <C>         
              Report of Independent Accountants                                                      F-1         
              Balance Sheet at December 31, 1998 and 1997                                            F-2         
              Statement of Operations for the three years ended December 31, 1998                    F-3         
              Statement of Stockholders' Equity for the three years ended December 31, 1998          F-4         
              Statement of Cash Flows for the three years ended December 31, 1998                    F-5         
              Notes to Financial Statements                                                          F-6          

       (2)    All financial statement schedules are omitted because they are not applicable, not 
              material, or the required information is shown in the financial statements or the notes
              thereto.

       (3)    Exhibits
              --------
</TABLE>

Exhibit Number                      Description
--------------                      -----------

    3.1     Amended and Restated Certificate of Incorporation of the Company
            (Filed as Exhibit 4.2 to the Company's Registration Statement on
            Form S-8, Registration No. 33-93518, and incorporated herein by
            reference)

    3.2     Restated By-Laws of the Company (Filed as Exhibit 3.4 to the
            Company's Registration Statement on Form S-1, Registration No. 33-
            45700, as amended, and incorporated herein by reference)

    4.1     Article 4 of the Amended and Restated Certificate of Incorporation
            of the Company (see Exhibit 3.1) (Filed as Exhibit 4.2 to the
            Company's Registration Statement on Form S-8, Registration No. 33-
            93518, and incorporated herein by reference)

    4.2     Form of Common Stock Certificate of the Company (Filed as Exhibit
            4.2 to the Company's Registration Statement on Form S-1,
            Registration No. 33-45700, as amended and incorporated herein by
            reference)

    4.3     Form of Warrant Certificate of the Company (Filed as Exhibit 4.3 to
            the Company's Registration Statement on Form S-3, Registration No.
            33-80860, and incorporated herein by reference)

    10.1    Form of Unit Purchase Agreement dated as of April 21, 1994 between
            the Company and the respective parties thereto (Filed as Exhibit
            99.2 to the Company's Form 8-K, Commission File No. 0-19811, and
            incorporated herein by reference)

    10.2    Amended and Restated Master Food Ingredients Collaborative
            Development Agreement, dated August 11, 1994, between the Company
            and Pfizer Inc. (Filed as Exhibit 10.1 to the Company's Quarterly
            Report on Form 10-Q for the quarter ended September 30, 1994, and
            incorporated herein by reference)*


                                     -20-
<PAGE>
 
    10.3    Master Food Ingredients License Agreement dated June 13, 1991
            between the Company and Pfizer Inc. (Filed as Exhibit 10.2 to the
            Company's Registration Statement on Form S-1, Registration No. 33-
            45700, as amended, and incorporated herein by reference)*

    10.4    Form of First Amendment to Master Food Ingredients License Agreement
            (Filed as Exhibit 10.3 to the Company's Registration Statement on
            Form S-1, Registration No. 33-45700, as amended and incorporated
            herein by reference)


    10.5    Licensed Product Term Sheet dated March 2, 1994 between the Company
            and Pfizer Inc. (Filed as Exhibit 10.5 to the Company's 1994 Annual
            Report on Form 10-K, Commission File No. 0-19811, and incorporated
            herein by reference). *

    10.6    License and Technology Transfer Agreement effective as of May 1,
            1991 between the Company and Enzytech, Inc. (Filed as Exhibit 10.6
            to the Company's Registration Statement on Form S-1, Registration
            No. 33-45700, as amended, and incorporated herein by reference)

    10.7    Promissory Note and Mortgage Agreement dated August 19, 1993 between
            the Company and Springfield Institution for Savings (Filed as
            Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 1993, Commission File No. 0-19811, and
            incorporated herein by reference)

    10.8    Loan Agreement dated November 5, 1992 between the Company and
            Massachusetts Business Development Corporation (Filed as Exhibit
            10.12 to the Company's Annual Report on Form 10-K for the year ended
            December 31, 1992, Commission File No. 0-19811, and incorporated
            herein by reference)

    10.9    Mortgage and Security Agreement dated November 3, 1994 executed by
            the Company in favor of the Massachusetts Business Development
            Corporation (Filed as Exhibit 10.9 to the Company's Annual Report on
            Form 10-K for the year ended December 31, 1994, Commission File No.
            0-19811, and incorporated herein by reference)

    10.10   Authorization and Loan Agreement dated May 18, 1992 among the
            Company, Massachusetts Certified Development Corporation and U.S.
            Small Business Administration (Filed as Exhibit 10.13 to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1992, Commission File No. 0-19811, and incorporated herein by
            reference)

    10.11   Fixed Asset Line of Credit dated March 29, 1993 between the Company
            and Silicon Valley Bank (Filed as Exhibit 10.3 to the Company's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            1993, Commission File No. 0-19811, and incorporated herein by
            reference)

    10.12   Asset Purchase Agreement dated June 17, 1992, between Williamson
            Fiber Products, Inc., The Williamson Group, Inc. and the Company
            (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
            dated June 17, 1992, Commission File No. 0-19811, and incorporated
            herein by reference)


                                     -21-
<PAGE>
 
    10.13   Sublease and Consent dated June 17, 1992 among Williamson Fiber
            Products, Inc., the Company and Spring Street Developers (Filed as
            Exhibit 28.2 to the Company's Current Report on Form 8-K dated June
            17, 1992, Commission File No. 0-19811, and incorporated herein by
            reference)

    10.14   Consulting Agreement, dated January 28, 1992, between the Company
            and A.S. Clausi (Filed as Exhibit 10.24 to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1992, Commission
            File No. 0-19811, and incorporated herein by reference)#

    10.15   Stock Purchase and Repurchase Agreement, dated May 29, 1991, between
            the Company and Akiva T. Gross (Filed as Exhibit 10.18 to the
            Company's Registration Statement on Form S-1, Registration No. 33-
            45700, as amended, and incorporated herein by reference)

    10.16   Employment Agreement, dated May 1, 1991, between the Company and
            Akiva T. Gross (Filed as Exhibit 10.21 to the Company's Registration
            Statement on Form S-1, Registration No. 33-45700, as amended, and
            incorporated herein by reference)#

    10.17   Letter agreement, dated May 1, 1995, between the Company and Akiva
            T. Gross (Filed as Exhibit 10.1 to the Registrant's Quarterly Report
            on Form 10-Q for the quarter ended June 30, 1995, Commission File
            No. 0-19811, and incorporated herein by reference)#

    10.18   Promissory Note dated August 12, 1994 executed by Akiva T. Gross in
            favor of the Company (Filed as Exhibit 10.2 to the Registrant's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            1994, Commission File No. 0-19811, and incorporated herein by
            reference)

    10.19   Pledge Agreement dated August 12, 1994 between Akiva T. Gross and
            the Company (Filed as Exhibit 10.2 to the Registrant's Quarterly
            Report on Form 10-Q for the quarter ended September 30, 1994,
            Commission File No. 0-19811, and incorporated herein by reference)

    10.20   Extension and amendment of Employment Agreement, dated October 1,
            1992 between the Company and Lewis C. Paine, III, dated December 31,
            1993 (Filed as Exhibit 10.2 to the Company's Quarterly Report on
            Form 10-Q for the quarter ended June 30, 1994, Commission File No.
            0-19811, and incorporated herein by reference)#

    10.21   Stock Purchase and Repurchase Agreement, dated May 29, 1991, between
            the Company and Lewis C. Paine, III (Filed as Exhibit 10.17 to the
            Company's Registration Statement on Form S-1, Registration No. 33-
            45700, as amended, and incorporated herein by reference)

    10.22   Amended and Restated Promissory Note dated as of September 19, 1990
            executed by Lewis C. Paine, III in favor of the Company (Filed as
            Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1992, Commission File No. 0-19811, and
            incorporated herein by reference)

    10.23   Promissory Note dated January 8, 1993, executed by Lewis C. Paine,
            III in favor of the Company (Filed as Exhibit 10.27 to the Company's
            Annual Report on Form 10-K for the year ended December 31, 1992,
            Commission File No. 0-19811, and incorporated herein by reference)
            
            
                                     -22-
<PAGE>
 
    10.24   Pledge Agreement dated January 8, 1993, between Lewis C.    
            Paine, III and the Company (Filed as Exhibit 10.28 to the Company's
            Annual Report on Form 10-K for the year ended December 31, 1992,  
            Commission File No. 0-19811, and incorporated herein by reference) 
 
    10.28   Employee Agreement for Protection of Company Property, dated May 1,
            1991, in the form executed by Officers of the Company (Filed as
            Exhibit 10.23 to the Company's Registration Statement on Form S-1,
            Registration No. 33-45700, as amended, and incorporated herein by
            reference)

    10.29   1992 Employee, Director and Consultant Stock Option Plan, as amended
            through March 10, 1993 (Filed as Exhibit 28.1 to the Company's
            Registration Statement on Form S-8, Registration No. 33-65406, and
            incorporated herein by reference)#

    10.30   Amendment to 1992 Employee, Director and Consultant Stock Option
            Plan, adopted January 19, 1995 (filed as Exhibit 10.30 to the
            Company's 1994 Annual Report on Form 10-K, Commission File No. 
            0-19811, and incorporated herein by reference)#

    10.31   Employee Stock Purchase Plan, as amended and restated (Filed as
            Exhibit 28.3 to the Company's Registration Statement on Form S-8,
            Registration No. 33-48624, and incorporated herein by reference)#

    10.32   Amendment to Employee Stock Purchase Plan, adopted February 16, 1993
            (Filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K
            for the year ended December 31, 1992, Commission File No. 0-19811,
            and incorporated herein by reference)#

    10.33   Press Release dated June 4, 1996, announcing that the Company's
            revenue and earnings for the second quarter and 1996 as a whole are
            likely to be lower than Wall Street estimates. (Filed as Exhibit
            99.1 to the Company's Current Report on Form 8-K dated June 4, 1996,
            Commission File No. 0-19811, and incorporated herein by reference)

    10.34   Amendment to 1992 Employee, Director and Consultant Stock Option
            Plan, adopted March 5, 1996 (filed as Exhibit 10.34 to the Company's
            1998 Annual Report on Form 10-K, Commission File No. 0-19811, and
            incorporated herein by reference)#

    10.35   Amendment to 1992 Employee, Director and Consultant Stock Option
            Plan, adopted February 26, 1998 (filed as Exhibit 10.35 to the
            Company's 1998 Annual Report on Form 10-K, Commission File No. 0-
            19811, and incorporated herein by reference)#

    10.36   Employment Agreement dated December 8, 1998 between the Company and
            Lewis C. Paine, III (filed as Exhibit 10.36 to the Company's 1998
            Annual Report on Form 10-K, Commission File No. 0-19811, and
            incorporated herein by reference) #

    23      Consent of PricewaterhouseCoopers LLP (filed herewith)

    *   Confidential treatment has been granted by the Securities and Exchange 
        Commission.

    #   Management contract or compensatory plan or arrangement.

(b)  Reports on Form 8-K
     -------------------

        No Reports on Form 8-K were filed by the Company during the quarter
        ended December 31, 1998.


                                     -23-
<PAGE>
 
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                         OPTA FOOD INGREDIENTS, INC.

 Date: March 12, 1999                    By:  /s/ Lewis C. Paine, III
                                            -----------------------------------
                                            Lewis C. Paine, III
                                            Chairman of the Board, President and
                                            Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

Signature                     Title                                  Date
---------                     -----                                  ----     

/s/ Lewis C. Paine, III       Chairman of the Board,             March 12, 1999
---------------------------   President, Chief Executive    
Lewis C. Paine, III           Officer and Director          
                              (principal executive officer) 
                                                            

/s/ Scott A. Kumf             Chief Financial Officer,
---------------------------   Vice President Administration      March 12, 1999
Scott A. Kumf                 and Treasurer (principal financial
                              and accounting officer)

/s/ A.S. Clausi               Director                           March 12, 1999
---------------------------
A.S. Clausi


/s/ Anthony B. Evnin          Director                           March 12, 1999
---------------------------
Anthony B. Evnin


/s/ Harry Fields              Director                           March 12, 1999
---------------------------
Harry Fields


/s/ Glynn C. Morris           Director                           March 12, 1999
---------------------------
Glynn C. Morris


/s/ Charles W. Newhall, III   Director                           March 12, 1999
---------------------------
Charles W. Newhall, III


/s/ Frederic Stevenin         Director                           March 12, 1999
---------------------------
Frederic Stevenin


                                     -24-
<PAGE>
 
                        Report of Independent Accountants


To the Board of Directors and
Stockholders of Opta Food Ingredients, Inc.

In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 20 present fairly, in all material respects, the financial
position of Opta Food Ingredients, Inc. at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.



PricewaterhouseCoopers LLP

Boston, Massachusetts
February 9, 1999

                                      F-1
<PAGE>
 
Opta Food Ingredients, Inc.
Balance Sheet (in thousands, except share amounts)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                                                December 31,
                                                                                         --------------------------
                                                                                             1998          1997
                                                                                         ------------  ------------
<S>                                                                                      <C>           <C> 
Assets
Current assets:
    Cash and cash equivalents                                                            $    30,315   $    33,689
    Accounts receivable, net                                                                   1,950         1,409
    Inventories, net                                                                           2,071         2,548
    Prepaid expenses and other assets                                                            384           162
                                                                                         ------------  ------------

      Total current assets                                                                    34,720        37,808

    Fixed assets, net                                                                         12,473        12,208
    Patents and trademarks, net                                                                  626           791
    Other assets                                                                                  69           158
                                                                                         ------------  ------------

                                                                                         $    47,888   $    50,965
                                                                                         ============  ============

Liabilities and Stockholders' Equity
Current liabilities:
    Current portion of long term debt                                                    $       426   $     1,485
    Accounts payable                                                                           1,003         1,303
    Accrued expenses                                                                           1,256         1,059
                                                                                         ------------  ------------

      Total current liabilities                                                                2,685         3,847

Long term debt                                                                                 3,126         2,625

Commitments (Note 16)                                                                         -             -

Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized,
  no shares issued or outstanding                                                             -             -
Common stock, $.01 par value; 15,000,000 shares authorized,
 11,096,002 and 11,079,833 shares issued and outstanding at
 December 31, 1998 and 1997, respectively                                                        111           111
Additional paid-in capital                                                                    79,747        79,681
Accumulated deficit                                                                          (37,781)      (35,299)
                                                                                         ------------  ------------

                                                                                              42,077        44,493
                                                                                         ------------  ------------

                                                                                         $    47,888   $    50,965
                                                                                         ============  ============

</TABLE> 

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

                                      F-2
<PAGE>
 
Opta Food Ingredients, Inc.
Statement of Operations (in thousands, except per share amounts)
--------------------------------------------------------------------------------


<TABLE> 
<CAPTION> 
                                                  Year ended December 31,
                                         -----------------------------------
                                            1998         1997        1996
                                         -----------  ----------  ----------
<S>                                      <C>          <C>         <C>  
Product revenue                          $   13,971   $   8,799   $   9,229
                                                                  
Cost and expenses:                                                
    Cost of revenue                          10,146       6,730       7,409
    Selling, general and administrative       4,033       3,874       3,868
    Research and development                  3,665       4,236       4,038
                                         -----------  ----------  ----------
                                                                  
                                             17,844      14,840      15,315
                                         -----------  ----------  ----------
                                                                  
Loss from operations                         (3,873)     (6,041)     (6,086)
                                                                  
Interest income                               1,637       1,906       2,146
Interest expense                               (263)       (418)       (569)
Other income (expense), net                      17         (16)        (18)
                                         -----------  ----------  ----------
                                                                  
Net loss                                 $   (2,482)  $  (4,569)  $  (4,527)
                                         ===========  ==========  ==========
                                                                  
Basic and diluted net loss per share     $    (.22)   $   (.41)   $   (.42)
                                         ===========  ==========  ==========
                                                                  
Weighted average shares outstanding          11,084      11,034      10,877
                                         ===========  ==========  ==========
</TABLE> 

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

                                      F-3
<PAGE>
 
Opta Food Ingredients, Inc.
Statement of Stockholders' Equity (in thousands, except share amounts)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                     Common Stock          
                                                             -------------------------- Additional                      Total     
                                                               Number of        Par       Paid-in     Accumulated    Stockholders'
                                                                 Shares        Value      Capital       Deficit         Equity    
                                                             -------------  -----------  ----------  ------------    ------------ 
<S>                                                            <C>             <C>        <C>         <C>            <C> 
Balance at December 31, 1995                                   10,745,532      $   107    $ 78,088     $ (26,203)    $    51,992  
                                                                                                                                  
Sale of common stock pursuant to exercise of stock options        135,145            2         423             -             425  
Sale of common stock pursuant to exercise of stock warrants        76,000            1         421             -             422  
Sale of common stock under employee stock purchase plan             9,004            -          57             -              57  
Net loss                                                                -            -           -        (4,527)         (4,527) 
                                                             -------------  -----------  ----------  ------------    ------------ 
                                                                                                                                  
Balance at December 31, 1996                                   10,965,681          110      78,989       (30,730)         48,369  
                                                                                                                                  
Sale of common stock pursuant to exercise of stock warrants        85,526            1         615             -             616  
Sale of common stock pursuant to exercise of stock options         21,918            -          45             -              45  
Sale of common stock under employee stock purchase plan             6,708            -          32             -              32  
Net loss                                                                -            -           -        (4,569)         (4,569) 
                                                             -------------  -----------  ----------  ------------    ------------ 
                                                                                                                                  
Balance at December 31, 1997                                   11,079,833          111      79,681       (35,299)         44,493  
                                                                                                                                  
Sale of common stock pursuant to exercise of stock options          3,000            -          16             -              16  
Sale of common stock under employee stock purchase plan            13,169            -          50             -              50  
Net loss                                                                -            -           -        (2,482)         (2,482) 
                                                             -------------  -----------  ----------  ------------    ------------ 
                                                                                                                                  
Balance at December 31, 1998                                   11,096,002      $   111    $ 79,747     $ (37,781)    $    42,077  
                                                             =============  ===========  ==========  ============    ============ 

</TABLE> 

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

                                      F-4
<PAGE>
 
Opta Food Ingredients, Inc.
Statement of Cash Flows (in thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                                 Year ended December 31,
                                                                       -----------------------------------------
                                                                          1998           1997            1996
                                                                       ----------     ----------      ----------
<S>                                                                    <C>            <C>             <C> 
Cash flows from operating activities:
      Net loss                                                          $ (2,482)      $ (4,569)      $ (4,527)
      Adjustments to reconcile net loss to net cash used in
        operating activities:
        Depreciation and amortization                                      1,412          1,226          1,206
        Forgiveness of notes receivable                                       40             40             20
        Changes in assets and liabilities:
          (Increase) decrease in accounts receivable, net                   (541)          (406)           130
          (Increase) decrease in inventories, net                            477            942         (1,256)
          (Increase) decrease in prepaid expenses and other assets          (222)           (26)           178
          Increase (decrease) in accounts payable                           (300)           545             (5)
          Increase (decrease) in accrued expenses                            197            192            (15)
          Decrease in other liabilities                                        -           (300)          (327)
                                                                        --------       --------       --------

             Total adjustments                                             1,063          2,213            (69)
                                                                        --------       --------       --------

             Net cash used in operating activities                        (1,419)        (2,356)        (4,596)

  Cash flows from investing activities:
      Purchase of short term investments                                       -         (3,944)        (5,970)
      Maturity of short term investments                                       -          4,586         10,321
      Purchase of fixed assets                                            (1,449)        (1,304)        (1,783)
      Increase in patents and trademarks                                     (63)          (124)          (178)
      Decrease in other assets                                                49             32            129
                                                                        --------       --------       --------

             Net cash (used in) provided by investing activities          (1,463)          (754)         2,519


  Cash flows from financing activities:
      Proceeds from issuance of common stock, net                             66            693            904
      Proceeds from issuance of long term debt                               955              -            151
      Principal payments on long term debt                                (1,513)        (1,499)        (1,547)
                                                                        --------       --------       --------

             Net cash used in financing activities                          (492)          (806)          (492)

  Net decrease in cash and cash equivalents                               (3,374)        (3,916)        (2,569)
  Cash and cash equivalents at beginning of year                          33,689         37,605         40,174
                                                                        --------       --------       --------

  Cash and cash equivalents at end of year                              $ 30,315       $ 33,689       $ 37,605
                                                                        ========       ========       ========

  Supplemental disclosure of cash flow information:
      Cash paid for interest                                            $    263       $    404       $    551
                                                                        ========       ========       ========

</TABLE> 

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

                                      F-5
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------


1.   Organization and Basis of Presentation

     Opta Food Ingredients, Inc. (the "Company") is a leading innovator,
     manufacturer and marketer of proprietary food ingredients that improve the
     nutritional content, healthfulness, texture and taste of its customers'
     food products. Opta is committed to finding solutions to customers'
     formulation challenges by providing texturizing agents that it markets
     primarily in North America to the dairy, dressings and sauces, meat and
     baked goods categories. The Company was legally incorporated on April 23,
     1991.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenue and expense during
     the year. Actual results could differ from those estimates.


2.   Summary of Significant Accounting Policies

     Revenue Recognition
     Revenue for product sales is recognized upon shipment. Revenue from product
     licensing and contract research agreements is recognized as earned pursuant
     to the related agreement terms. Advance payments received under these
     agreements are recorded as deferred revenue.

     Cash and Cash Equivalents and Concentration of Credit Risk
     Cash and cash equivalents include investments with initial maturities of
     three months or less. The Company does not believe that it is subject to
     any unusual credit risk beyond the normal credit risk related to operating
     its business.

     Accounts Receivable
     Accounts receivable are reflected net of an allowance for doubtful accounts
     of $90,000 and $107,000 at December 31, 1998 and 1997, respectively.

     Fair Value of Financial Instruments
     The carrying amount of the Company's financial instruments, primarily cash
     equivalents, at December 31, 1998 and 1997, approximates its fair value due
     to the short maturity or holding period.

     Inventories
     Inventories are stated at the lower of cost or market, cost determined
     using the first-in, first-out method. Inventories are reflected net of
     reserves of $80,000 and $250,000 at December 31, 1998 and 1997,
     respectively.

     Fixed Assets
     Fixed assets are stated at cost and depreciated using the straight-line
     method over the estimated useful lives of the assets, which range from five
     to thirty-nine years. Maintenance and repair costs are expensed.

     Patents and Trademarks
     Patent and trademark costs are capitalized and amortized on a straight-line
     basis over the shorter of the estimated economic lives or the stated terms
     of the patent or trademark. Amortization periods are eight and ten years,
     respectively.

                                      F-6
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

     Stock Compensation
     The Company's stock option plans are accounted for using the intrinsic
     value method to measure compensation expense in accordance with Accounting
     Principles Board Opinion No. 25, "Accounting for Stock Issued to
     Employees". In 1996, the Company adopted only the footnote disclosure
     requirements of Statement of Financial Accounting Standards No. 123,
     "Accounting for Stock-Based Compensation" ("FAS 123", Note 12) which
     discloses the pro forma effect of compensation expense of all equity
     instruments issued to employees.

     Net Loss Per Share
     Basic net loss per share is determined by dividing the net loss by the
     weighted average number of common shares outstanding during the year. All
     common stock equivalents have been excluded from weighted average shares
     outstanding for calculating diluted net loss per share because such
     equivalents are anti-dilutive.

     Reclassifications
     Certain reclassifications have been made to the prior years financial
     statements to conform to current presentation. These reclassifications have
     no effect on the Company's results of operations or financial position.


3.   Cash Equivalents

     Following is a summary of the fair market value of available-for-sale
     securities by balance sheet classification (in thousands):


                                                             December 31,
                                                        ----------------------
                                                          1998          1997
                                                        --------      --------
     Cash equivalents:
       Money market funds                               $ 24,280      $ 24,783
       Commercial paper                                    4,725         3,975
       U.S. government obligations                           995         1,895
       Repurchase agreement                                  456         1,119
                                                        --------      --------
    
                                                        $ 30,456      $ 31,772
                                                        ========      ========


     Gross unrealized gains and losses at December 31, 1998 and 1997 and
     realized gains and losses on sales of securities for the years then ended
     were not significant.

                                      F-7
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

4.   Notes Receivable

     At December 31, 1998 and 1997, notes receivable from an officer and an
     employee are included in other assets. The terms of the notes forgive the
     principal and related interest ratably over a five year period as long as
     the officer and employee remain employed by the Company or if terminated
     without cause. The officer's note receivable was satisfied during 1998.
     Balances of these notes are as follows (in thousands):



                                                              December 31,
                                                          ---------------------
                                                           1998          1997
                                                          -------       -------

     Unsecured note bearing interest at 8%                $    60       $    80

     Non-interest bearing note receivable, secured
     by the  Company's common stock owned by officer            -            20
                                                          -------       -------

                                                          $    60       $   100
                                                          =======       =======



5.   Inventories

     Inventories consist of the following (in thousands):



                                                             December 31,
                                                         ---------------------
                                                          1998          1997
                                                         -------       -------

     Raw materials                                       $   420       $   333
     Finished goods                                        1,651         2,215
                                                         -------       -------

                                                         $ 2,071       $ 2,548
                                                         =======       =======

                                      F-8
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

6.   Fixed Assets

     Fixed assets consist of the following (in thousands):

<TABLE> 
<CAPTION> 
                                                        December 31,
                                                    --------------------
                                                     1998       1997
                                                    ---------  ---------
<S>                                                 <C>        <C>            
     Plant equipment                                $ 10,271   $  8,994
     Land, building and improvements                   5,816      5,794
     Office furniture and equipment                      726        604
     Lab equipment                                       590        562
                                                    ---------  ---------
                                                               
                                                      17,403     15,954
     Accumulated depreciation                         (4,930)    (3,746)
                                                    ---------  ---------
                                                               
                                                    $ 12,473   $ 12,208
                                                    =========  =========
</TABLE> 

7.   Patents and Trademarks

     Patents and trademarks consist of the following (in thousands):

<TABLE> 
<CAPTION> 
                                                        December 31,
                                                    --------------------
                                                     1998        1997
                                                    ---------  ---------
<S>                                                 <C>        <C> 
     Patents and trademarks                         $  1,886   $  1,822
     Accumulated amortization                         (1,260)    (1,031)
                                                    ---------  ---------
                                                               
                                                    $    626   $    791
                                                    =========  =========
</TABLE> 

8.   Accrued Expenses

     Accrued expenses consist of the following (in thousands):

<TABLE> 
<CAPTION> 
                                                         December 31,
                                                    ----------------------
                                                       1998        1997
                                                    ----------  ----------
<S>                                                 <C>         <C> 
     Bonuses                                        $     670   $     242
     Payroll costs and benefits                           154          89
     Professional fees                                    123         127
     Other                                                309         601
                                                    ----------  ----------
                                                                
                                                    $   1,256   $   1,059
                                                    ==========  ==========
</TABLE> 


                                      F-9
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

9. Borrowings

   Long term debt consists of the following (in thousands):

<TABLE> 
<CAPTION> 

                                                                                      December 31,
                                                                              --------------------------
                                                                                  1998          1997
                                                                              ------------  ------------
<S>                                                                           <C>           <C> 
Mortgage payable to a bank due in quarterly installments of $27
including interest at 7.37% with the remaining balance of $1,678 due
June 2002, secured by the Company's corporate headquarters                    $     2,145   $     2,225

Equipment line of credit due in quarterly installments of $80 plus
interest at LIBOR plus 2.5% (7.75% at December 31, 1998) beginning
August 1999, secured by certain fixed assets, due March 2002                          955             -

Note payable to a bank due in quarterly installments of $275 plus interest
at prime plus 1%, secured by certain fixed assets                                       -         1,100

Note payable to a state government agency and guaranteed by the U.S.
Small Business Administration due in monthly installments of $6
including interest at 5.554% due July 2003, secured by certain fixed assets           269           320

Note payable to a state government agency due in monthly installments
of $6 plus interest at prime plus 2 1/2 % (10.25% at December 31, 1998)
due June 2000, secured by certain fixed assets                                        107           179

Note payable to a state government agency due in monthly installments
of $3 including interest at 3% due July 2001, secured by certain fixed assets          76           103

Other                                                                                   -           183
                                                                              ------------  ------------
                                                                                    3,552         4,110
Current portion                                                                      (426)       (1,485)
                                                                              ------------  ------------

                                                                              $     3,126   $     2,625
                                                                              ============  ============

</TABLE> 

Maturities of long term debt for each of the years ended December 31 are as
follows (in thousands):

           1999                                              $   426 
           2000                                                  553 
           2001                                                  502 
           2002                                                2,011 
           2003                                                   60 
                                                             --------
                                                                     
                                                             $ 3,552 
                                                             ========

                                     F-10
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
 
     The Company has a $5 million equipment line of credit from a bank with
     interest at prime or 90 day LIBOR plus 2.5%. The line of credit is
     available through March 1999 and expires in March 2002. At December 31,
     1998, the Company had $4,045,000 available to borrow under the equipment
     line of credit. The Company's debt agreements contain certain financial
     covenants and restrict the Company's ability to participate in merger
     discussions, pay dividends, limit annual capital expenditures, invest in
     certain types of securities and obtain additional debt financing without
     bank approval. At December 31, 1998, the Company was in compliance with the
     terms of these agreements.


10.  Income Taxes
 
     Deferred tax benefits consist of the following (in thousands):

<TABLE> 
<CAPTION> 
                                                          December 31,
                                                 ------------------------------ 
                                                   1998       1997       1996
                                                 --------  ---------  ---------
<S>                                              <C>       <C>        <C> 
     Federal                                     $   918   $  1,548   $  1,563
     State                                           220        389        411
                                                 --------  ---------  ---------
                                                              
                                                   1,138      1,937      1,974
     Increase in valuation allowance              (1,138)    (1,937)    (1,974)
                                                 --------  ---------  ---------
                                                                      
                                                 $     -   $     -    $     -
                                                 ========  =========  =========
</TABLE> 
                                            
     Deferred tax assets consist of the following (in thousands):

<TABLE> 
<CAPTION> 
                                                             December 31,
                                                         -----------------------
                                                            1998         1997
                                                         ----------  -----------
<S>                                                      <C>         <C> 
     Net operating loss carryforwards                    $  12,571   $   11,576
     Research and development credit                         1,033          889
     Other state tax credits                                    20           27
     Expense accruals and other                                489          483
                                                         ----------   ----------
                                                                      
     Gross deferred tax assets                              14,113       12,975
     Valuation allowance                                   (14,113)     (12,975)
                                                         ----------   ----------
                                                                        
                                                         $     -      $     -
                                                         ==========   ==========
</TABLE> 

                               F-11             
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

The Company has provided a valuation allowance for the full amount of the
deferred tax assets since realization of these future benefits is not
sufficiently assured. As the Company achieves profitability, these deferred tax
assets may be available to offset future income tax liabilities and expense.

A reconciliation between the amount of reported tax expense and the amount
computed using the U.S. federal statutory rate of 35% follows (in thousands):

<TABLE> 
<CAPTION> 

                                                                                December 31,
                                                                ----------------------------------------
                                                                    1998           1997         1996
                                                                ------------  ------------  ------------
<S>                                                             <C>           <C>           <C> 
Income tax benefit at statutory rate                                 $ (869)      $(1,599)      $(1,584)
State tax benefit, net                                                 (129)         (234)         (247)
Stock option exercises                                                    -            (3)         (135)
Research and development credits                                       (160)         (146)         (114)
Other state credits                                                      24            28            29
Other                                                                    (4)           17            77
                                                                ------------  ------------  ------------

                                                                     (1,138)       (1,937)       (1,974)
Increase in valuation allowance                                       1,138         1,937         1,974
                                                                ------------  ------------  ------------

                                                                      $   -         $   -         $   -
                                                                ============  ============  ============
</TABLE> 

At December 31, 1998, the Company had federal net operating loss carryforwards
and research and development credits which may be used to offset future federal
taxable income and tax liabilities as follows (in thousands):

                                                                Research
                                                  Net             and
              Year of                          Operating      Development
            expiration                           Loss            Credit
         ----------------                     ------------   -------------

               2006                           $   1,219         $    76
               2007                               4,247             128
               2008                               5,570             144
               2009                               3,720             112
               2010                               4,991              70
               2011                               4,713              48
               2012                               4,335             101
               2018                               2,377             107
                                              ----------       --------

                                              $  31,172         $   786
                                              ==========       ========

                                     F-12
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------


     A portion of the net operating loss carryforwards and valuation allowances
     totaling $1,938,000 and $754,000, respectively, relates to deductions for
     non-qualified stock option exercises and incentive stock option
     disqualifying dispositions. This amount will be credited to additional
     paid-in capital upon realization.

     Ownership changes, as defined in the Internal Revenue Code, resulting from
     the Company's initial public offering in March 1992 and a second offering
     in August 1995, have limited the amount of net operating loss and tax
     credit carryforwards that can be utilized annually to offset future taxable
     income or tax liabilities. As a result, the amount of these net operating
     loss carryforwards which can be utilized annually is $3,000,000 for losses
     incurred prior to March 1992 and $9,077,000 for losses incurred prior to
     August 1995. Subsequent changes in ownership could further affect the
     limitation in future years.


11.  Stockholders' Equity

     Preferred Stock
     Shares of preferred stock may be issued at the discretion of the Board of
     Directors of the Company with such designations, rights and preferences as
     the Board may determine from time to time.

     Common Stock
     In June 1994, the Company completed the sale and issuance of 2,274,052
     units in a private placement to institutional investors resulting in net
     proceeds of $10,053,000. Each unit consists of one share of the Company's
     common stock and one-half of one common stock purchase warrant. Each full
     warrant may be exercised over a three year period beginning in June 1994
     for one share of common stock at a per share price of $5 during year one,
     $6 during year two and $7 during year three. The aggregate fair value of
     the common stock purchase warrants of $1,592,000 was recorded as additional
     paid-in capital. During 1997 and 1996, 85,526 and 76,000 shares of common
     stock were issued pursuant to exercises of such warrants resulting in net
     proceeds of $616,000 and $422,000, respectively.


12.  Stock Option and Stock Purchase Plans

     During 1992 and 1991, the Company established the 1992 Employee, Director
     and Consultant Stock Option Plan and the 1991 Non-Employee Stock Option
     Plan, respectively. These plans provide for the issuance of non-qualified
     or incentive stock options to key employees, directors and consultants of
     the Company. The Board of Directors determines the term, price, number of
     shares and the vesting period of each option grant. However, the price may
     be no less than the par value of the common shares for non-qualified
     options, and no less than the fair market value of the shares on the date
     granted for incentive stock options (or no less than 110% of the fair
     market value in the case of holders of more than 10% of the voting stock of
     the Company). Additionally, the term of incentive stock options cannot
     exceed ten years (five years for options granted to holders of more than
     10% of the voting stock of the Company).

     In May 1998, the stockholders approved an increase in the number of common
     shares authorized for issuance under the 1992 Employee, Director, and
     Consultant Stock Option Plan from 1,666,667 to 1,916,667. The number of
     common shares authorized for issuance under the 1991 Non-Employee Stock
     Option Plan is 101,244.

                                     F-13
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

The Company has reserved 1,601,569 shares of common stock for issuance under the
1992 Employee, Director and Consultant Stock Option Plan and 9,838 shares for
issuance under the 1991 Non-Employee Stock Option Plan at December 31, 1998.

At December 31, 1998, options to purchase 1,551,500 shares were outstanding
under the plans, of which 623,929 were exercisable. There were 59,907 shares
available for future grant under the plans at December 31, 1998.


Stock option plan transactions were as follows:

<TABLE> 
<CAPTION> 

                                                                    Weighted average
                                                     Shares          exercise price
                                                 --------------   --------------------
<S>                                              <C>              <C> 
Options outstanding at December 31, 1995               934,387           $ 5.62

Granted                                                562,353           $10.53
Exercised                                             (135,145)          $ 3.14
Cancelled                                             (254,756)          $ 9.25
                                                 --------------

Options outstanding at December 31, 1996             1,106,839           $ 7.58

Granted                                                644,497           $ 5.90
Exercised                                              (21,918)          $ 2.08
Cancelled                                             (512,938)          $ 9.83
                                                 --------------

Options outstanding at December 31, 1997             1,216,480           $ 5.86

Granted                                                390,050           $ 4.79
Exercised                                               (3,000)          $ 5.25
Cancelled                                              (52,030)          $ 6.23
                                                 --------------

Options outstanding at December 31, 1998             1,551,500           $ 5.58
                                                 ==============
</TABLE> 

                                     F-14
<PAGE>
 

Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

The following table summarizes information about stock options outstanding and 
exercisable at December 31, 1998:

<TABLE> 
<CAPTION> 

                                        Options Outstanding                             Options Exercisable
                      ---------------------------------------------------------  ---------------------------------

      Range of           Number of        Weighted Average          Weighted        Number of         Weighted
      Exercise            Options             Remaining             Average          Options           Average
       Prices           Outstanding       Contractual Life       Exercise Price    Outstanding     Exercise Price
-------------------   --------------   ----------------------   ---------------  --------------   ----------------
<S>                     <C>               <C>                    <C>               <C>             <C> 
$    .06 -  $  .45           63,735            2.40              $         .14          61,235      $        0.13
    3.94 -    5.50          493,570            8.70                       4.88          77,260               5.11
    5.53 -    9.00          938,969            6.80                       6.02         442,394               6.11
   10.00 -   15.50           55,226            4.70                      10.62          43,040              10.39
                      --------------                                             --------------

                          1,551,500                                                    623,929
                      ==============                                             ==============

</TABLE> 

In 1992, the stockholders approved the Employee Stock Purchase Plan. This plan
enables eligible employees to purchase common shares at 85% of the fair market
value of the shares during two six month periods beginning January 1 and July 1
of each year. The Company has authorized 200,000 shares of the Company's common
stock for issuance under this plan. At December 31, 1998, 143,190 shares remain
available for issuance under this plan.

The Company has adopted the disclosure only provisions of FAS 123. Accordingly,
no compensation cost has been recognized for the stock plans. Had compensation
cost for the Company's stock plans been determined based on fair value at the
grant dates for awards in 1998 and 1997 as prescribed by FAS 123, the Company's
net loss and net loss per share would have been as follows (in thousands, except
for per share amounts):

                                               December 31,
                                       --------------------------
                                          1998          1997
                                       ------------  ------------

Net loss:
As reported                             $(2,482)      $(4,569)
Pro forma                                (2,827)       (5,025)

Net loss per share:
As reported                              $ (.22)       $ (.41)
Pro forma                                  (.26)         (.51)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, risk-free interest rate of 5%, expected volatility of 64.9%, and an
option term of 8 years. The weighted average fair value of options granted
during the years ended December 31, 1998 and 1997 was $3.45 and $4.20,
respectively.

                                     F-15
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------


13.  Retirement Savings Plan

     The Company has a 401(k) Plan which is available to employees of the
     Company who meet certain eligibility requirements. This plan is qualified
     under Section 401(k) of the Internal Revenue Code and is subject to
     contribution limitations as set annually by the Internal Revenue Service.
     Eligible employees may enroll January 1 and July 1 of each year. The
     Company does not make matching contributions.



14.  Related Party Transactions

     In 1991, the Company licensed to Pfizer the exclusive worldwide right to
     manufacture and market EverFresh for use in seafood processing and the
     exclusive rights outside of the U.S. to manufacture and market certain Opta
     Oat Fibers and OptaGrade products in exchange for license fees and royalty
     payments. The Company provided applications development and marketing
     support for certain products for additional cash payments from Pfizer
     through June 1996. In January 1997, all agreements with Pfizer were
     terminated except for the EverFresh license agreement which was assigned to
     an unrelated third party. Revenue recognized under these agreements in
     1998, 1997 and 1996 was $100,000, $125,000 and $509,000, respectively.



15.  Sales to Major Customers and Export Sales

     During 1998, a single customer accounted for $5.2 million or 37% of product
     sales. In addition, during 1998, 1997, and 1996, $3.9 million, $3.5 million
     and $4.1 million of product sales were to a group of independent bakeries
     that supply a quick service restaurant chain. There were no major
     individual customers during 1997 and 1996.

     Export sales were $795,000 ($418,000 to Europe and $377,000 to the Middle
     East); $1,209,000 ($376,000 to Europe and $833,000 to the Middle East); and
     $1,041,000 ($285,000 to Europe and $756,000 to the Middle East) for the
     years ended December 31, 1998, 1997 and 1996, respectively.

                                     F-16
<PAGE>
 
Opta Food Ingredients, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------

16.  Commitments

     Leases

     The Company leases certain equipment and facilities under noncancellable
     operating leases. Total future minimum payments under these leases are as
     follows (in thousands):

     Year ended December 31,

     1999                                                          $     144
     2000                                                                144
     2001                                                                136
     2002                                                                150
     2003                                                                150
     Thereafter                                                          323
                                                                   ---------
      
                                                                   $   1,047
                                                                   =========

     Rent expense for the years ended December 31, 1998, 1997, and 1996 was
     $157,000, $159,000 and $141,000, respectively.

                                     F-17