U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                                   (Mark One)

                   |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal years ended..................................October 31, 2005

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

         For the transition period from ______________ to ______________

                         COMMISSION FILE NUMBER 0-22011
                 -----------------------------------------------

                                BIONUTRICS, INC.

             (Exact name of registrant as specified in its charter)

                 -----------------------------------------------




                      Nevada                                    86-0760991
         (State or other jurisdiction of                      (I.R.S. Employer
          incorporation or organization)                     Identification No.)


 2575 East Camelback Road, Suite 450, Phoenix, AZ                 85016
     (Address of principal executive offices)                   (zip code)

               Registrant's telephone number, including area code:
                                 (602) 508-0112


                 -----------------------------------------------

         Securities registered under Section 12(b) of the Exchange Act:

                                      None.

         Securities registered under Section 12(g) of the Exchange Act:

                    Common Stock, $0.001 par value per share
                    -----------------------------------------
                                (Title of Class)



<PAGE>

Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined by Rule 405 of the Securities Act.     Yes [ ] No [ X ].

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.     Yes [ ] No [ X ].

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 in response to Item
405 of Regulation S-K (ss.229.405 of this chapter) 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.     [ ].

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes     [ ] No [ X ]

As of January 21, 2006, the aggregate  market value of the voting and non-voting
common equity held by non-affiliates  computed by reference to the closing sales
price of such stock as of such date on the OTC Bulletin Board was $58,972,485.

As of January 21, 2006, there were 22,681,725 shares of common stock
outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      NONE


                           FORWARD-LOOKING STATEMENTS

         Certain  statements  made in  this  Annual  Report  on  Form  10-K  are
"forward-looking  statements"  (within  the  meaning of the  Private  Securities
Litigation  Reform Act of 1995) regarding the plans and objectives of management
for  future  operations.  Such  statements  involve  known  and  unknown  risks,
uncertainties  and other factors that may cause actual  results,  performance or
achievements of Bionutrics,  Inc., a Nevada  corporation (the "Company"),  to be
materially  different  from any  future  results,  performance  or  achievements
expressed or implied by such  forward-looking  statements.  The  forward-looking
statements  included  herein  are based on  current  expectations  that  involve
numerous risks and uncertainties.  The Company's plans and objectives are based,
in  part,  on  assumptions   involving  the  continued  expansion  of  business.
Assumptions  relating to the foregoing  involve judgments with respect to, among
other things,  future  economic,  competitive  and market  conditions and future
business  decisions,  all of  which  are  difficult  or  impossible  to  predict
accurately and many of which are beyond the control of the Company. Although the
Company believes its assumptions  underlying the forward-looking  statements are
reasonable,  any of the assumptions could prove inaccurate and, therefore, there
can be no assurance the forward-looking  statements included in this Report will
prove to be accurate. In light of the significant  uncertainties inherent in the
forward-looking  statements  included herein,  the inclusion of such information
should not be regarded as a  representation  by the Company or any other  person
that the objectives and plans of the Company will be achieved.



                                       2
<PAGE>


                                     PART I

ITEM 1.  BUSINESS.

GENERAL

         Bionutrics,  Inc. was  incorporated on December 22, 1990 under the laws
of the State of Nevada. The Company has three active wholly-owned  subsidiaries,
LipoGenics,  Inc.  ("LipoGenics"),  Bionutrics Health Products, Inc. ("BHP") and
InCon  Technologies  Inc.  ("InCon")  which were  incorporated on July 13, 1992,
November 19, 1996 and October 1, 1997, respectively, under the laws of the State
of Delaware. The Company has a 50% ownership interest together with Asia Pacific
Investment Holdings Limited ("Asia Pacific"), a private company operating out of
Singapore, in InCon Processing, LLC ("InCon Processing") which was formed on May
18,  1999  under the laws of the State of  Delaware.  Bionutrics  also has three
inactive  subsidiaries,  Nutrition Technology Corporation which was incorporated
on December 15, 1994 under the laws of the State of Nevada,  InCon International
Ltd.  which  was  formed  under  the laws of the  British  Virgin  Islands,  and
Cosmedics,  Inc. which was  incorporated  on April 2, 1998 under the laws of the
State of  Delaware.  The Company and its  subsidiaries  are  referred to herein,
collectively, as "Bionutrics", "we", "us", "our" and the "Company".

         The Company  maintains  its  principal  offices at 2575 East  Camelback
Road, Suite 450, Phoenix,  Arizona 85016; its telephone number is (602) 508-0112
and its fax number is (602) 508-0115.

         We file  periodic  and  current  reports,  proxy  statements  and other
materials with the Securities and Exchange Commission. You may read and copy any
materials  we file  with the SEC at the  SEC's  Public  Reference  Room at 100 F
Street,  NE, Washington DC 20549. You may obtain information on the operation of
the  Public  Reference  Room  by  calling  the  SEC at  1-800-SEC-0330.  The SEC
maintains a web site at www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC, including our filings.

BACKGROUND

         Bionutrics  is a  pharmaceutical  development  company  focusing on the
development of difficult to formulate, oral controlled-release drug formulations
utilizing  proprietary drug formulation and delivery  technologies.  The Company
has licensed  proprietary  oral  control-release  technology  with the rights to
develop exclusively and worldwide, ten generic and ten 505(B)(2) drugs, improved
formulations  of previously  approved  drugs.  Bionutrics  intends to invest the
majority of its  resources in the  development  and  commercialization  of these
products during the next few years.

         Bionutrics  was founded to pioneer the  discovery  and  development  of
biological  active  compounds  having  applications as both  pharmaceutical  and
functional  nutrition  products.  The Company's early efforts targeted the newly
emerging  field of functional  nutrition - the marriage of drugs and food - with
the view that it affords an early route to commercialization of



                                       3
<PAGE>

proprietary  active  biologics.  The Company's  efforts over the previous decade
have positioned it with proprietary technology,  compounds,  processing methods,
and products.

BUSINESS OVERVIEW AND STRATEGY

         Bionutrics  is a  pharmaceutical  company  engaged in the  development,
manufacturing and commercialization of oral controlled-release generic drugs and
improved  formulations of previously  approved  drugs.  The Company has licensed
exclusive   and   worldwide   rights  to   employ   certain   proprietary   oral
controlled-release drug formulation technologies (the "Technology") developed by
Nostrum Pharmaceuticals, Inc. ("Nostrum"), a corporation owned and controlled by
the Company's Chief Scientific Officer, Nirmal Mulye, Ph.D. (Temple University).
Bionutrics   is   undertaking   the   initiation   of   U.S.   development   and
commercialization  of its  difficult  to  formulate  generic and branded  drugs.
Bionutrics intends to file Abbreviated New Drug Applications  ("ANDAs") with the
FDA for its oral  controlled-release  generic  drugs.  Total U.S.  sales for the
branded  drugs  targeted  with  the  Company's  generic   development  plan  are
approximately  $7 billion.  The Company believes it has numerous "first to file"
or only to file  opportunities  on it's ANDAs which could be awarded  periods of
marketing  exclusivity.   Additionally,  the  Company  intends  to  develop  its
portfolio  of  oral  controlled-release  branded  drugs  and  file a  series  of
505(b)(2)  New Drug  Applications  with the FDA.  Drug  applications  which  are
designated as 505(b)(2) drug  applications  pertain to  pharmaceutical  products
based on new or improved uses of existing drugs.

         Bionutrics'  technology  program  was  founded by its Chief  Scientific
Officer,  Nirmal Mulye,  Ph.D. The Company has entered into a license  agreement
with Nostrum  pursuant to which Nostrum  licensed the  Technology to Bionutrics,
certain  exclusive  worldwide  rights to select and  develop ten generic and ten
505(b)(2) brandable drug candidates to be reformulated utilizing the Technology,
creating a  specialty  pharmaceutical  company.  Bionutrics'  licensed  delivery
systems are based on proprietary oral delivery  polymeric unit formulations that
are  designed to allow  precise  multi-hour  delivery of an  incorporated  drug.
Controlled-release  drug delivery  technologies  can provide more consistent and
appropriate drug levels in the bloodstream than  immediate-release  dosage forms
and may improve drug efficacy and reduce side effects by releasing  drug dosages
at specific times and in specific  locations in the body.  This  Technology also
allows  the  development  of  "patient-friendly"   dosage  forms,  which  reduce
frequency  of  drug  administration  thus  improving  patient  compliance,   can
eliminate offensive tastes and mitigate "food-effect" that may cause potentially
significant    variations   of   the   drugs    availability   to   a   patient.
Controlled-release  pharmaceuticals  can be  especially  beneficial  for certain
patient populations,  such as the elderly, who often require several medications
with differing dosing regimens.  Pursuant to the terms of its license  agreement
with Nostrum,  the Company acquired its rights to the Technology described above
by issuing to Nostrum  12,000,000  shares of its common stock (6,000,000  shares
for its  505(b)(2)  rights and  6,000,000  shares for its generic  rights);  the
license agreement contains no further milestone payments or product  development
fees,  which are  typically  found in industry  license  agreements  (other than
reimbursing  Nostrum for costs  associated  with  formulation  and  pre-clinical
studies conducted in India).  Under such agreement,  the Company does,  however,
have the  obligation  to pay for  development  costs of  these  drugs,  and with
generic drugs only,  Nostrum will receive a 50% royalty of net profit (less cost
of goods and other  customary  charge  backs and  certain  general,  sales,  and
administrative



                                       4
<PAGE>

costs).  This  arrangement  is similar to license  agreements  Nostrum  executed
previously with third party pharmaceuticals  companies.  Such agreement does not
require  royalty  payments or other sales or revenue  payments  with  respect to
505(b)(2) or functional nutrition products.

         The Technology and future potential products are and will be covered by
a series of patents owned, and patent  applications  submitted,  by Nostrum with
respect to controlled  release matrix  formulations,  controlled  release tablet
formulations,  carrier  for  controlled  release  matrixes,  controlled  release
coatings and a method for improved dissolution.

         Pursuant to its license  agreement  with Nostrum,  Bionutrics  benefits
from the services  provided by Enem Nostrum  Remedies  Pvt.  Ltd.  ("Enem"),  an
Indian corporation affiliated with Nostrum.  Through Nostrum's relationship with
Enem, Enem's research  facilities provide  Bionutrics,  by means of an "at cost"
formulation and testing contract,  distinct  competitive  advantages in terms of
development expenses without compromising quality. Enem's operation is employing
the technology  licensed by Nostrum to Bionutrics in pre-clinical study research
and  development  of generic and  505(b)(2)  drugs at  Bionutrics'  direction to
provide  the  Company  with  preliminary  data  for the  selection  of its  drug
candidates.  Enem's  research  facilities are state of the art and equipped with
technologically  advanced  equipment  such  as  LC  MS  MS  and  other  chemical
analytical  equipment to determine  chemical  composition  and content of tested
materials. The lower costs of scientific manpower and related expenses allow the
Company to test numerous  iterations  and variations in  formulations  at a cost
substantially  below  industry  standards.  As  part  of  this  formulation  and
development  contract,  the Company  anticipates that all  pharmacokinetics  and
related  "pre-studies"  will be  conducted  in the  Indian  facility  under  FDA
prescribed guidelines. Upon achieving satisfactory formulation and bioequivalent
"fast and fed" results,  Bionutrics  intends to initiate its  requisite  pivotal
clinical trials and Chemical,  Manufacturing and Control ("CMC") development for
drug applications in the U.S.

         CMC development  includes  verification and validation of manufacturing
methods,  batches  produced for pivotal  trials and stability of products.  This
information is part of the  requirements for submission of ANDA filings with the
FDA for drug approval.

         The Company anticipates that ANDAs for generic  pharmaceuticals will be
its first drug applications to be submitted to the FDA.  Bionutrics'  management
believes  it will be  able to  initiate  pivotal  trials  on four  generic  drug
candidates  in the  first  half of 2006,  subject  to  necessary  financing.  If
successful,  the Company  anticipates the earliest of these  candidates could be
ready for FDA  submission  during the fourth  quarter of 2006,  also  subject to
necessary  financing.  These  drugs  have the  potential  to be  "first to file"
applications with Paragraph IV  certifications or only to file ANDAs.  Under its
license agreement with Nostrum,  Bionutrics has the right to designate ten drugs
as  generics  over the next three years  employing  the  technology  licensed to
Bionutrics  pursuant to this agreement.  The Company is selecting ten candidates
for which the pre-studies are effectively  completed and of which for many there
are  no  currently  approved  generics.  Bionutrics,  employing  the  same  drug
technology,   intends  to  develop  and  market  early  proprietary   functional
nutritional  products  that  will be sold  with  clinical  based  health  claims
addressing   blood  lipids   including   cholesterol   and  related   issues  of
cardiovascular  disease  to  generate  cash flow  while it  continues  its drugs
development efforts.


                                       5
<PAGE>

         The Company  presently has no drug products approved for manufacture or
sale by the FDA and  accordingly  has no product sales or revenue.  The Company,
based on its plans for development and FDA drug approval applications,  does not
foresee the initiation of sales of its  pharmaceutical  products  until,  at the
earliest, fourth quarter 2007.

         The Company's  subsidiaries  each  contribute to our overall efforts to
develop and  commercialize  proprietary  and  brandable  drug and/or  functional
nutrition  products.  LipoGenics  has served as the product  research arm of the
Company with a focus on the discovery and  development  of active  compounds for
both  potential  new  chemical  entity  drugs (as  opposed to the noted  program
described  above for generic and  505(b)(2)  drug  development)  and  functional
nutrition.  BHP is the market research and product  positioning  company charged
with delivering new functional  nutrition products to marketing partners.  InCon
Processing is a molecular  separation  company and has provided the Company with
certain functional nutrition product  ingredients.  Future BHP products based on
proprietary   technology  including   tocotrienol  (a  new  form  of  vitamin-E)
formulated products may be developed for the purpose of generating cash flow for
the Company as its pharmaceutical products are being commercialized.

         On July  22,  2005,  the  Company  announced  that it  entered  into an
agreement to acquire Kirk Pharmaceuticals,  LLC from John D. Copanos and John S.
Copanos (the "Sellers"). The Company will also acquire its affiliate, Andapharm,
LLC  (collectively,  with  Kirk  Pharmaceuticals  LLC,  "Kirk")  as  part of the
transaction.  The  agreement  provides  for the  sale of all of the  issued  and
outstanding  membership units of Kirk by the Sellers,  sole owners of the units,
to the  Company.  Under the  agreement,  Bionutrics  shall pay to the Sellers an
aggregate purchase price of $12 million.  The agreement provides that payment of
the purchase  price shall be made as follows:  (i) $9 million in cash and (ii) a
promissory note in the amount of $3,000,000 at closing.

         Kirk is a  Florida  based  pharmaceutical  company  which  manufactures
over-the-counter  ("OTC") and generic  prescription  drugs.  Kirk was founded in
1999 and has  grown  from  four  employees  to more than 120 at the date of this
Report.  Kirk has 70,000 square feet of  manufacturing  space in its FDA and DEA
approved   facility  and  Schedule  II,  III,  IIIN,  IV  and  V  pharmaceutical
manufacturing and List I Chemicals  certification.  Kirk currently  manufactures
and/or markets more than 30 OTC solid dose and soft-gel pharmaceutical products.
Kirk's business strategy continues to be to develop and manufacture low-cost OTC
products  in  a  streamlined   manufacturing   environment  using  Current  Good
Manufacturing Practices ("cGMP") guidelines, which is a strategy that has proven
to be successful, even in the highly competitive OTC market.

         The Company  intends to utilize Kirk and its  expertise to complete the
CMC development work with respect to certain products it elects for development.
The use of Kirk as Bionutrics'  designated  manufacturer in its drug development
program and as its  manufacturer  following FDA approval of certain  generic and
505(b)(2) drug applications is a core element to the Company's strategy.



                                       6
<PAGE>

         For a description of the financial information and financing structures
of  the  Company,   please  reference  the  Company's   Consolidated   Financial
Statements,  and the  accompanying  Footnotes,  provided  in  Item 6  below  and
attached to this Report commencing on page F-1.

RESEARCH AND DEVELOPMENT

         Our  research  and  development   efforts  are  initially   focused  on
developing  generic drugs  employing  our  proprietary  controlled-release  drug
delivery Technology.  The Company plans to initiate the U.S. development of four
generic  products with the intent of filing ANDAs with the FDA upon  completion.
The  Company  also  intends to continue a limited  effort to develop  functional
nutrition products in parallel with its drug development efforts. Total research
and development expenses were $1,521,508,  $250, and $6,250 for the fiscal years
ended October 31, 2005, 2004 and 2003, respectively.

PATENTS AND TRADEMARKS

         Bionutrics has licensed its technology from Nostrum.  The Technology is
proprietary  and  any  derived  commercialized   products  would,  in  part,  be
potentially  protected  by one or more of a series  of issued  patents  owned by
Nostrum. These patents are:

PATENT NUMBER     ISSUED                            SUBJECT
-------------     ------                            -------

6,635,680         November 2002            Controlled release pellet formulation
6,475,493         August 2002              Controlled release oral dosage
                                           suitable for oral administration
6,437,000         July 2002                Sustained release tablet containing
                                           hydrocolloid and cellulose ether
6,416,786         October 2003             Controlled release pellet formulation
6,946,146         September 2005           Coating for a sustained release
                                           pharmaceutical composition

         Bionutrics has developed  technology,  independent of its licensed drug
technology, and has received 10 issued U.S. patents and has several pending U.S.
patent  applications  (with  numerous  foreign   counterparts)   covering  novel
tocotrienols and tocotrienol-like compounds, methods for their use, compositions
containing those compounds and production processes in the area of tocotrienols.
In  addition,  the Company  acquired  one U.S.  patent  with four  corresponding
foreign patent applications claiming methods for promoting weight and fat loss.

         Bionutrics'   first  U.S.  patent,   obtained  through  its  subsidiary
LipoGenics  (U.S.  patent  5,591,772)  was issued in January 1997.  This patent,
through  composition  of matter  claims,  secures  protection  for several novel
vitamin-E  like  compounds  discovered by the Company and by means of method and
process  claims,  protects  methods for using and processes for producing  those
compounds.  A second  U.S.  patent  was  issued in  October  1998  (U.S.  patent
5,821,264)  with claims that parallel those of the January 1997 patent but refer
to a broader and more generic class of compounds.



                                       7
<PAGE>

         The Company has also obtained  patent  protection  for its  distinctive
tocotrienol  processing  technology.  In June 1999,  Bionutrics  received a U.S.
patent directed to specific  tocotrienol/tocopherol  production  processes (U.S.
patent  5,908,940).  In March 2001,  the  Company was awarded a U.S.  patent for
tocotrienol-rich fractions produced using its proprietary tocotrienol/tocopherol
production process (U.S. patent 6,204,290).

         Bionutrics  continued to enhance its portfolio of patents  covering the
use of  tocotrienols  to  treat  and  prevent  a wide  range  of  disorders  and
conditions.  In July 1999,  a broad U.S.  patent was issued to the  Company  for
methods to treat and prevent cancer using  tocotrienols (U.S. patent 5,919,818).
This patent contains method claims  directed to the known,  naturally  occurring
tocotrienols  (such  as  (a)-tocotrienol  and   (y)-tocotrienol),   as  well  as
Bionutrics' novel  proprietary  tocotrienols and other vitamin-E like compounds.
The Company was awarded a similarly broad U.S. patent in May 2001,  claiming the
use of tocotrienols to treat inflammatory conditions (U.S. patent 6,239,171). In
November 2000,  Bionutrics received another patent (U.S. patent 6,143,770) for a
composition  comprising  tocotrienol,  or a mixture thereof, and nicotinic acid.
This  technology  has  application  to  cardiovascular  health and  diabetes and
related disorders.

         Continued  development  of the  Company's  technology  and  pursuit  of
tocotrienol  based or similar patents  (including  previously  submitted  patent
applications) will depend on the Company's research,  development and commercial
success in series of intended near term dietary supplements. Irrespective of the
success  of  this  near  term  effort,  the  Company  anticipates  that  dietary
supplements and related technology including patents will be a minor constituent
of the Company's product development and product commercialization plans.

         Prior to the  enactment  in the  United  States  of new  laws  adopting
certain changes mandated by the General Agreement on Tariffs and Trade ("GATT"),
the  exclusive  rights  afforded by a U.S.  Patent were for a period of 17 years
measured from the date of grant. Under GATT, the term of any U.S. Patent granted
on an application filed subsequent to June 8, 1995, terminates 20 years from the
date on which the patent application was filed in the United States or the first
priority date,  whichever occurs first. Future patents granted on an application
filed before June 8, 1995,  will have a term that  terminates 20 years from such
date, or 17 years from the date of grant, whichever date is later.

         Under the Drug Price  Competition  and Patent Term  Restoration  Act, a
U.S.  product  patent or use patent may be  extended  for up to five years under
certain  circumstances to compensate the patent holder for the time required for
FDA  regulatory  review of the product.  The benefits of this Act are  available
only to the first approved use of the active  ingredient in the drug product and
may be applied  only to one patent per drug  product.  There can be no assurance
that we will be able to take advantage of this law.

         Also,  different  countries  have  different  procedures  for obtaining
patents,  and patents issued by different countries provide different degrees of
protection  against the use of a patented  invention by others.  There can be no
assurance,  therefore,  that  the  issuance  to us in one  country  of a  patent
covering an  invention  will be followed by the  issuance in other  countries of
patents covering the same invention,  or that any judicial interpretation of the
validity,  enforceability,  or scope of the  claims  in a patent  issued  in one
country will be similar to the judicial interpretation



                                       8
<PAGE>

given to a corresponding patent issued in another country.  Furthermore, even if
our patents are determined to be valid,  enforceable,  and broad in scope, there
can be no  assurance  that  competitors  will not be able to design  around such
patents and compete with us using the resulting alternative technology.

         We also rely upon unpatented  proprietary  and trade secret  technology
that we seek to  protect,  in  part,  by  confidentiality  agreements  with  our
collaborative    partners,    employees,    consultants,    outside   scientific
collaborators,  sponsored  researchers,  and  other  advisors.  There  can be no
assurance that these agreements provide meaningful  protection or that they will
not be breached,  that we will have  adequate  remedies for any such breach,  or
that our trade secrets,  proprietary know-how,  and technological  advances will
not  otherwise  become known to others.  In addition,  there can be no assurance
that,  despite  precautions  taken by us,  others  have not and will not  obtain
access to our proprietary technology.

GOVERNMENT REGULATION AND APPROVAL

         The design,  development and marketing of pharmaceutical  compounds, on
which our success  depends,  is subject to extensive  regulation  by the federal
government, principally the FDA, and to a lesser extent, other federal and state
government agencies.  The Federal Food, Drug and Cosmetic Act (the "FFDCA"), the
Controlled  Substances Act and other federal statutes and regulations govern the
development,  testing,  manufacture,  safety/effectiveness,  labeling,  storage,
record keeping,  approval,  advertising and promotion of the Company's products.
Non-compliance  with  applicable  regulations  can result in  judicially  and/or
administratively   imposed  sanctions,   including  the  initiation  of  product
seizures,  injunction actions, fines and criminal  prosecutions.  Administrative
enforcement measures may involve the recall of products,  as well as the refusal
of an  applicable  government  authority  to enter into supply  contracts  or to
approve new drug  applications.  The FDA also has the  authority to withdraw its
approval of drugs in accordance with regulatory due process procedures. The cost
of complying with  government  regulations  substantially  increases the cost of
producing the Company's products.

         FDA approval is required  before any new drug can be marketed.  The FDA
requires  extensive testing of new  pharmaceutical  products to demonstrate that
such products are both safe and effective in treating the  indications for which
approval  is  sought.  Testing  in humans may not be  commenced  until  after an
investigational  new drug application ("IND") exemption is granted by the FDA. A
New Drug  Application  ("NDA") or supplemental  NDA must be submitted to the FDA
both for new drugs that have not been previously approved by the FDA and for new
combinations  of, new  indications  for, or new delivery  methods for previously
approved drugs. FDA approval of an ANDA is required before a generic  equivalent
of an existing or  referenced  brand drug can be  marketed.  The ANDA process is
abbreviated  in that the FDA  waives  the  requirement  of  conducting  complete
preclinical and clinical studies and, instead,  relies on bioequivalence studies
which compare the  applicant's  drug with an already  approved  reference  drug.
These ANDA filings  allow a company to avoid the  expensive  and  time-consuming
process of clinical efficacy and safety studies that are required for NDAs.



                                       9
<PAGE>

         NDAS AND NDAS UNDER SECTION 505(b) OF THE DRUG PRICE ACT

         The FDA approval  procedure for an NDA is generally a two-step process.
During the Initial Product  Development  stage, an IND for each product is filed
with the FDA. A 30-day  waiting  period after the filing of each IND is required
by the FDA prior to the  commencement of initial  clinical  testing.  If the FDA
does not comment on or  question  the IND within  such  30-day  period,  initial
clinical studies may begin. If, however, the FDA has comments or questions, they
must be answered to the  satisfaction of the FDA before initial clinical testing
can begin. In some instances this process could result in substantial  delay and
expense.  These initial clinical studies generally constitute Phase I of the NDA
process  and are  conducted  to  demonstrate  the product  tolerance/safety  and
pharmacokinetic in healthy subjects.

         After  Phase I  testing,  extensive  efficacy  and  safety  studies  in
patients must be conducted.  After completion of the required  clinical testing,
an NDA is filed, and its approval, which is required for marketing in the United
States,  involves an  extensive  review  process by the FDA. The NDA itself is a
complicated  and detailed  application and must include the results of extensive
clinical and other testing,  the cost of which is substantial.  However, the NDA
filings  contemplated  by us on  already  marketed  drugs  would  be made  under
Sections  505 (b)(1) or 505 (b)(2) of the Drug Price Act,  which do not  require
certain studies that would otherwise be necessary;  accordingly, the development
timetable  should be shorter.  While the FDA is required to review  applications
within a certain  timeframe in the review process,  the FDA frequently  requests
that  additional  information  be  submitted.  The  effect of such  request  and
subsequent  submission  can  significantly  extend  the time for the NDA  review
process.  Until an NDA is actually approved,  there can be no assurance that the
information  requested and submitted  will be considered  adequate by the FDA to
justify approval.  The packaging and labeling of our developed products are also
subject to FDA  regulation.  It is impossible  to anticipate  the amount of time
that will be needed to obtain FDA approval to market any product.

         Whether or not FDA approval has been obtained,  approval of the product
by comparable  regulatory  authorities  in any foreign  country must be obtained
prior to the  commencement  of  marketing  of the product in that  country.  The
Company's current strategy is to conduct marketing in territories other than the
United  States via  marketing  and sales  agreements  with other  pharmaceutical
companies based in those countries.  The approval  procedure varies from country
to country,  can involve  additional  testing,  and the time required may differ
from that  required for FDA approval.  Although  there are some  procedures  for
unified filings for certain European countries,  in general each country has its
own procedures and requirements, many of which are time consuming and expensive.
Thus, there can be substantial  delays in obtaining required approvals from both
the FDA and foreign regulatory  authorities after the relevant  applications are
filed.  After such  approvals are obtained,  further  delays may be  encountered
before the products become commercially available.

         ANDAs

         In  our  generic  operations,   we  apply  our  proprietary  technology
processes and  formulations  to develop a product that will  reproduce the brand
product's physiological characteristics (i.e., the rate and extent of absorption
into the bloodstream), but not infringe the



                                       10
<PAGE>

patents of the brand owner or other  innovator  of the NDA. In  connection  with
this process,  we conduct studies to establish that our product is bioequivalent
to the brand product, and obtain legal advice that our product does not infringe
the NDA owner's or the  innovator's  patents or that such patents are invalid or
unenforceable. FDA approval is required before a generic version of a previously
approved  drug or certain new dosage forms of an existing  drug can be marketed.
Approval for such  products  generally  is sought using an ANDA.  In most cases,
bioavailability  and bioequivalence  studies must be conducted in support of the
ANDA and clinical studies are not required.  Bioavailability  indicates the rate
of  absorption  and  levels  of  concentration  of a drug in the  blood  stream.
Bioequivalence  compares  the  bioavailability  of one drug product with another
and,  when  established,  indicates  that the rate of  absorption  and levels of
concentration  in the  body  are  substantially  equivalent  to  the  previously
approved  reference  listed drug. An ANDA may be submitted for a drug product on
the basis that it is bioequivalent to a previously  approved drug product or, in
the case of a new dosage form,  that it is suitable for use for the  indications
specified without the need to conduct additional safety or efficacy testing.

         The Drug Price Competition and Patent Restoration Act of 1984, known as
the Hatch-Waxman Amendments,  require that we submit an ANDA to the FDA for each
generic  product we seek to market.  The ANDA contains a  substantial  amount of
information about the proposed product's formulation, ingredients, chemistry and
manufacturing  controls,  stability and the  bioavailability  and bioequivalence
studies conducted on such product,  all of which is reviewed by the FDA's Office
of Generic  Drugs (OGD).  In addition,  the ANDA is required to contain the ANDA
applicant's  certification  concerning  each patent that has been listed for the
reference  brand product in the Orange Book. If there is no patent listed in the
Orange Book, the ANDA applicant so states by submitting what is referred to as a
Paragraph I certification.  If the patent listed in the Orange Book has expired,
the ANDA applicant so states by submitting what is referred to as a Paragraph II
certification. If the ANDA applicant intends to wait until the expiration of the
patent  listed in the Orange Book before it intends to market its  product,  the
ANDA  applicant so states by  submitting  what is referred to as a Paragraph III
certification.  And, if the ANDA  applicant  believes  that the listed patent is
invalid or unenforceable,  or that its product does not infringe such patent(s),
the ANDA applicant so states by submitting what is referred to as a Paragraph IV
certification in its ANDA.

         If a Paragraph IV  certification  is made, the ANDA applicant must also
send a notice containing its factual basis for its Paragraph IV certification to
the NDA owner and any  patent  holder.  The NDA owner or patent  holder may then
initiate a legal challenge  against the ANDA applicant for patent  infringement.
Before the December 2003  Amendments to  Hatch-Waxman  were enacted,  if the NDA
owner or  patent  holder  asserted  a patent  challenge  within 45 days of their
receipt of notice of the ANDA applicant's  Paragraph IV  certification,  the FDA
was  prevented  from  approving  that ANDA until the  earlier of 30 months,  the
expiration of the patent,  or when the  infringement  case  concerning each such
patent was favorably  decided in an ANDA  applicant's  favor, or such shorter or
longer  period as may be  ordered  by a court.  This  prohibition  is  generally
referred to as the 30-month  stay. In some cases,  NDA owners and patent holders
obtained additional patents for their products after an ANDA had been filed, but
before that ANDA received  final  marketing  approval,  and then initiated a new
patent challenge, which resulted in more than one 30-month stay.



                                       11
<PAGE>

         The December 2003 Amendments to Hatch-Waxman were intended to eliminate
certain  unfair   advantages  of  patent  holders  in  the   implementation   of
Hatch-Waxman. As a result of those amendments, the NDA owner remains entitled to
an automatic 30-month stay if they initiate a patent infringement lawsuit within
45 days of their receipt of notice of the Paragraph IV  certification,  but only
if their patent infringement  lawsuit is directed to patents that were listed in
the Orange Book before the ANDA was filed.  Where there are no patents listed in
the Orange Book at the time the applicant files its ANDA,  there is no automatic
30-month stay of regulatory  approval.  If patents are listed in the Orange Book
after the ANDA has been  filed,  the NDA owner may still sue the ANDA  applicant
for that  patent,  but the ANDA  will not be  subject  to an  automatic  stay of
regulatory  approval.  An ANDA  applicant  is  permitted to take legal action to
enjoin or prohibit the listing of certain patents in the Orange Book.

         An FDA regulation  effective  August 2003 further  defines the types of
patents that may be listed in the Orange Book and requires increased  disclosure
requirements  for  listed  patents  in an  effort  to  decrease  the  number  of
improperly  listed  patents.  While most of these  changes  should help  prevent
improperly  listed patents,  the long-term  effectiveness of this regulation and
the December 2003 amendments is unclear.

         If an ANDA  applicant  is the first to file an ANDA with a Paragraph IV
certification  and  provides  appropriate  notice  to the  NDA  holder  and  all
patentees  for a particular  generic  product,  the  applicant  may be awarded a
180-day   period  of  marketing   exclusivity   against  other   companies  that
subsequently  file ANDAs containing  Paragraph IV  certifications  for that same
product.  We  believe  this  period of  marketing  exclusivity  can  provide  an
opportunity for the successful  patent  challenger to build its market share, to
recoup the expense of patent  litigation and to realize  greater profit margins,
and in some cases, to gain value by relinquishing or transferring this marketing
exclusivity  right to others.  In  addition,  once that  exclusivity  period has
lapsed,  we believe  that the marketer of the first  commercialized  product may
more effectively  defend its market share position  against future  competition.
However,  an ANDA applicant's  ability to secure the benefit of this exclusivity
period, and the actual benefit it gains from the exclusivity period,  depends on
a variety of factors, some of which are beyond the applicant's control, such as:
the  timing  of  FDA  approval,   whether  other  ANDA  applicants   share  that
exclusivity, patent litigation related to the product and competitors' products,
raw material  availability,  and whether the brand product will also be marketed
as a generic (sometimes referred to as an authorized generic).  Court decisions,
FDA  interpretations,  legislative changes and the date of filing of an ANDA all
affect, among other things, how this exclusivity period is to be awarded, how it
is affected by other ANDA  applicants,  and the  benefit,  if any,  which may be
obtained from the 180-day marketing exclusivity period.

         The December  2003  Amendments  to  Hatch-Waxman  also modify the rules
governing when generic products are eligible for 180-day exclusivity periods and
when the 180-day  exclusivity  period is triggered or forfeited.  The Amendments
retroactively  apply a final and  non-appealable  court decision trigger for all
ANDAs filed before  December 8, 2003. As for ANDAs filed after December 8, 2003,
exclusivity is only triggered  upon the first  commercial  marketing of the ANDA
product. However, that exclusivity may be forfeited under certain circumstances,
including among other things,  if the ANDA is not marketed by the first-filer or
another ANDA



                                       12
<PAGE>

applicant  within a certain  timeframe  after a final and  non-appealable  court
decision,  or if the FDA does not  tentatively  approve the  first-filer's  ANDA
within 30 months.

         Certain ANDA procedures for generic  controlled-release drugs and other
products  are  presently  the  subject  of  petitions  filed by brand  name drug
manufacturers,  which seek  changes  from the FDA in the  approval  process  for
generic  drugs.  We cannot  predict at this time  whether  the FDA will make any
changes  to  the  ANDA  procedures  as  a  result  of  such  petitions,  ongoing
rulemakings or  litigation,  or the effect that such changes may have on us. Any
changes in FDA regulations,  policies or procedures may make ANDA approvals more
difficult or may otherwise have a significant adverse effect on our business.

         Under the Generic Drug  Enforcement  Act of 1992, the FDA is allowed to
impose  debarment and other  penalties on individuals  and companies that commit
certain  illegal acts  relating to the generic drug  approval  process.  In some
situations,  the Generic Drug  Enforcement Act requires the FDA to not accept or
review  ANDAs  for a period of time from a  company  or an  individual  that has
committed certain violations.  It also provides for temporary denial of approval
of applications  during the investigation of certain  violations that could lead
to  debarment  and  also,  in  more  limited  circumstances,  provides  for  the
suspension  of the  marketing  of approved  drugs by the affected  company.  The
Generic Drug  Enforcement  Act also allows for civil penalties and withdrawal of
previously approved applications.

         CONTROLLED SUBSTANCES

         We are also  subject  to  federal,  state,  and local  laws of  general
applicability, such as laws relating to working conditions. We are also licensed
by,  registered  with, and subject to periodic  inspection and regulation by the
Drug  Enforcement  Agency (DEA) and various state agencies,  pursuant to federal
and state  legislation  relating to drugs and  narcotics.  Certain drugs that we
currently  develop or may  develop  in the future may be subject to  regulations
under the Controlled Substances Act and related statutes. As we manufacture such
products,  we may become subject to the  Prescription  Drug Marketing Act, which
regulates wholesale distributors of prescription drugs.

         GMP

         All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must be operated in conformity  with FDA's
current Good Manufacturing Practices ("cGMP") regulations issued by the FDA. The
Company  engages in  manufacturing  on a commercial  basis for  distribution  of
products, and operates its facilities in accordance with cGMP regulations. If we
hire another company to perform  contract  manufacturing  for us, we must ensure
that our contractor's facilities conform to cGMP regulations.

COMPLIANCE WITH ENVIRONMENTAL LAWS

         We are subject to comprehensive  federal, state and local environmental
laws and regulations that govern,  among other things, air polluting  emissions,
waste water discharges,  solid and hazardous waste disposal, and the remediation
of contamination associated with current



                                       13
<PAGE>

or  past  generation  handling  and  disposal  activities,  including  the  past
practices  of  corporations  as to  which  we are the  successor  legally  or in
possession.  We do not expect that compliance with such  environmental laws will
have a material  effect on our capital  expenditures,  earnings  or  competitive
position in the foreseeable  future.  There can be no assurance,  however,  that
future changes in environmental laws or regulations,  administrative  actions or
enforcement actions, or remediation obligations arising under environmental laws
will not have a material adverse effect on our capital expenditures, earnings or
competitive position.

COMPETITION

         The  pharmaceutical  industry is highly  competitive.  Our  competition
varies in each of our principal  areas of  operations;  and in each such area of
operation,   our   competition   consists  of  those   companies  which  develop
controlled-release drugs and alternative drug delivery systems.

         The principal competitive factors in the generic  pharmaceutical market
include:  (i)  introduction  of other  generic drug  manufacturers'  products in
direct competition with the Company's  product,  (ii) introduction of authorized
generic products in direct competition with the Company's products, particularly
during exclusivity  periods,  (iii)  consolidation  among  distribution  outlets
through  mergers and  acquisitions  and the  formation  of buying  groups,  (iv)
ability of generic  competitors to quickly enter the market after the expiration
of patents or  exclusivity  periods,  diminishing  the  amount and  duration  of
significant products,  (v) the willingness of generic drug customers,  including
wholesale and retail customers,  to switch among  pharmaceutical  manufacturers,
(vi) pricing pressures and product  deletions by competitors,  (vii) a company's
reputation as a  manufacturer  and  distributor  of quality  products,  (viii) a
company's level of service (including  maintaining  sufficient  inventory levels
for timely deliveries), (ix) product appearance and labeling and (x) a company's
breadth of product  offerings.  The Company  believes  that these  factors  will
impact its product selection, development decisions and research plans.

         In recent years, an increasing number of pharmaceutical  companies have
become  interested  in  the  development  and   commercialization   of  products
incorporating   advanced  or  novel  drug  delivery  systems.   We  expect  that
competition  in the field of drug  delivery will  significantly  increase in the
future  since  smaller  specialized  research  and  development   companies  are
beginning  to  concentrate  on this  aspect of the  business.  Some of the major
pharmaceutical  companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery  companies.  Many
of these  companies have greater  financial and other  resources as well as more
experience than we do in commercializing  pharmaceutical  products.  The Company
believes  that its  principal  competitors  are those  that  have a  history  of
developing successful  controlled-release drugs, including Alpharma, Inc., Andrx
Corporation,   Mylan  Laboratories,   Inc.,  Par  Pharmaceuticals,   Inc.,  Teva
Pharmaceuticals  Industries Ltd., Biovail  Corporation,  Ethypharm S.A., Eurand,
Impax Laboratories, Inc., K-V Pharmaceutical Company and Penwest Pharmaceuticals
Company.  Each of these  companies has  developed  expertise in certain types of
drug delivery  systems,  although such expertise does not necessarily carry over
to  developing a  controlled-release  version of all drugs.  Such  companies may
develop  new  drug  formulations  and  products  or may  improve  existing  drug
formulations and products



                                       14
<PAGE>

more  efficiently  than we can. In addition,  almost all of our competitors have
vastly greater resources than we do. While our product development  capabilities
and, if obtained,  patent protection may help us to maintain our market position
in the field of advanced drug  delivery,  there can be no assurance  that others
will  not be able to  develop  such  capabilities  or  alternative  technologies
outside the scope of our patents,  if any, or that even if patent  protection is
obtained, such patents will not be successfully challenged in the future.

SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING

         The active pharmaceutical  ingredients and other materials and supplies
to  be  used  in  our  pharmaceutical  manufacturing  operations  are  generally
available  and purchased  from many  different  foreign and domestic  suppliers.
However,  in some cases,  the raw materials used to  manufacture  pharmaceutical
products may be only available from a single FDA-approved  supplier.  Any change
in a supplier not  previously  approved must then be submitted  through a formal
approval  process with the FDA. A delay of six months or more in the manufacture
and marketing of the drug involved while a new supplier becomes qualified by the
FDA and its  manufacturing  process is determined  to meet FDA standards  could,
depending  on the  particular  product,  have a material  adverse  effect on the
Company's  results of  operations  and  financial  condition.  The Company  will
attempt to mitigate  the  potential  effects of any such  situation by providing
for, where  economically  and otherwise  feasible,  two or more suppliers of raw
materials for the drugs it manufactures. In addition, the Company may attempt to
enter  into a  contract  with a raw  material  supplier  in an  effort to ensure
adequate supply for its products.

DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS

         The Company  presently has no drug products approved for manufacture or
sale by the FDA and  accordingly  has no product  sales.  Based on its plans for
development, and the process involved in FDA approval of drug applications,  the
Company does not foresee the initiation of its sale of  pharmaceutical  products
until the fourth quarter of 2007.

EMPLOYEES

         As of the date hereof,  Bionutrics has four full-time employees and has
plans to hire additional  employees in order to pursue its product  development,
marketing and  commercialization  plans. We intend to hire additional  personnel
with  experience  in clinical  testing,  government  regulation,  marketing  and
business  development  when the business  warrants the  expense.  Currently,  we
fulfill  several of our  management  functions  through  the use of  independent
contractors.  These functions include legal,  accounting and investor relations.
The current  full-time  employees  of the Company  are its  President  and Chief
Executive Officer, Chief Scientific Officer, V.P. of Purchasing and Controller.

         We believe our relationship  with each employee is good.  However,  the
Company's ability to achieve its financial and operational objectives depends in
large part upon its ability to attract,  integrate,  retain and motivate  highly
qualified personnel, when need for such personnel arises, and upon the continued
service of our senior management and key personnel.



                                       15
<PAGE>

ITEM 1A. RISK FACTORS


         BIONUTRICS HAS A LIMITED  OPERATING  HISTORY UPON WHICH AN INVESTOR CAN
EVALUATE ITS POTENTIAL FOR FUTURE SUCCESS.

         The Company  commenced  sales of its first  product  late in the second
quarter of fiscal 1997. There is limited historical financial  information about
the Company upon which to base an evaluation of the Company's  performance or to
make a decision regarding an investment in shares of the Company's common stock.
The Company has generated an accumulated  deficit of  approximately  $44,832,000
through  its fiscal  year ended  October  31,  2005;  approximately  $41,921,000
through October 31, 2004,  $40,797,000 through October 31, 2003, and $40,037,000
through its fiscal year ended October 31, 2002.  The Company's  operations  have
been limited to the efforts of negotiating and consummating the recently entered
into agreement with Nostrum and maintaining its books and records. The Company's
current  business  plan  is to  focus  on  its  relationship  with  Nostrum  and
Technologies  developed  by Nostrum.  At this time,  the  Company's  nutritional
products are not viewed as a significant part of the Company's business.  In the
future,  sales of  products  the  Company  may  introduce  may  fail to  achieve
significant levels of market acceptance.  The Company's business will be subject
to all the problems, expenses, delays and risks inherent in the establishment of
an early stage business enterprise, including limited capital, delays in product
development, cost overruns due to price increases in raw products and unforeseen
difficulties in manufacturing, uncertain market acceptance and the absence of an
operating  history.  Therefore,  the  Company  may  never  achieve  or  maintain
profitable  operations,  and the Company may encounter  unforeseen  difficulties
that may deplete its capital more rapidly than anticipated.

         THE COMPANY WILL REQUIRE ADDITIONAL CAPITAL,  AND IF ADDITIONAL CAPITAL
IS NOT AVAILABLE, THE COMPANY MAY HAVE TO CURTAIL OR CEASE OPERATIONS.

         To become and remain competitive,  the Company will be required to make
significant investments in research and development on an ongoing basis. At this
time, the Company has committed  sources of financing that the Company  believes
would allow a limited number of its products to be developed and commercialized.
For the  Company to be able to  continue to use its  technology,  including  the
Technology,  in the  development of future drug products as planned it will need
additional  capital beyond that  committed.  It is intended that this additional
capital  will  be  derived  from  future  product  sales,   including   products
manufactured by Kirk,  cash derived from product  license  agreements with other
pharmaceutical  companies  or future  capital  raised by means of debt or equity
financing. There can be no assurance that additional necessary financing will be
attainable  on terms  acceptable  to the  Company,  in the future or at all.  If
financing is not available on satisfactory  terms,  the Company may be unable to
operate at its  present  level or develop and expand its  business,  develop new
products or develop new markets at the rate desired,  and its operating  results
may be adversely affected.  Debt financing increases expenses and must be repaid
regardless  of  operating  results.  The  availability  of equity  financing  is
uncertain,  and successful equity financing would result in additional  dilution
to existing stockholders. The losses incurred to date, the uncertainty regarding
the ability to raise additional  capital and questions  concerning the Company's
ability to  generate  net income and  positive  cash flows from  operations  may
indicate that the Company will be unable to continue as a going



                                       16
<PAGE>

concern for a reasonable period of time. The Company's audit opinion,  as of and
for the three  years  ended  October  31,  2005,  also  indicates  that there is
substantial doubt about the Company's ability to continue as a going concern.

         THE COMPANY'S  FAILURE TO COMPETE  EFFECTIVELY MAY LIMIT ITS ABILITY TO
ACHIEVE PROFITABILITY.

         Competition in the  pharmaceutical  area is intense,  and the Company's
competitors have substantially  greater resources than the Company.  The Company
may be required to obtain  development  and/or marketing partners to effectively
enter the drug market.

         We  expect  that  competition  in  the  field  of  drug  delivery  will
significantly  increase in the future  since  smaller  specialized  research and
development  companies  are  beginning  to  concentrate  on this  aspect  of the
business.  Some of the major  pharmaceutical  companies  have  invested  and are
continuing to invest significant  resources in the development of their own drug
delivery  systems  and  technologies  and  some  have  invested  funds  in  such
specialized  drug  delivery  companies.  Many of these  companies  have  greater
financial  and  other  resources  as  well  as  more  experience  than  we do in
commercializing pharmaceutical products. The Company believes that its principal
competitors   are  those   that  have  a  history   of   developing   successful
controlled-release  drugs.  Each of these  companies has developed  expertise in
certain  types  of drug  delivery  systems,  although  such  expertise  does not
necessarily carry over to developing a controlled-release  version of all drugs.
Such  companies  may develop new drug  formulations  and products or may improve
existing  drug  formulations  and  products  more  efficiently  than we can.  In
addition,  almost all of our competitors  have vastly greater  resources than we
do.  While  our  product  development  capabilities  and,  if  obtained,  patent
protection may help us to maintain our market  position in the field of advanced
drug delivery, there can be no assurance that others will not be able to develop
such capabilities or alternative  technologies outside the scope of our patents,
if any, or that even if patent protection is obtained,  such patents will not be
successfully challenged in the future.

         InCon  Processing's  current  competition is primarily from specialized
local and regional processing facilities. However, many of their toll processing
customers have the capacity to perform toll processing and molecular  separation
in-house.   InCon   Processing's   current   customers  may  discontinue   their
relationship  with InCon  Processing,  or they may choose to utilize a different
local processor instead of InCon  Processing.  If either of these events occurs,
InCon Processing's revenue would suffer.

         THE COMPANY MAY FAIL TO ESTABLISH OR CULTIVATE  STRATEGIC  PARTNERSHIPS
TO EXPAND ITS BUSINESS.

         The  Company has stated its intent to develop  its  business  model and
build its business initially through strategic partnerships. The principal focus
of these  relationships  is the funding of product  development  (and regulatory
approval   when   necessary),   marketing,   sales  and   co-promotion   of  its
technology/products.  Manufacturing  is also  currently  intended to be achieved
through  partnerships,  either  as  part of a  marketing  agreement  with  other
companies,  or by contract with companies  exclusive of marketing and sales. The
Company may not be able to successfully form or manage such partnerships, and if
not, the Company's ability to execute its



                                       17
<PAGE>

business plan will be at risk. Further, if these partnerships are formed but are
not  successful  in their  execution,  further  revenue  derived from  licensing
payments  or other  such  technology/product  payments  to the  Company  may not
materialize.

         THE  COMPANY'S  ABILITY  TO  MARKET  ITS  PRODUCTS  IS  SUBJECT  TO THE
INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

         The potential  505(b)(2)  products the Company currently is considering
to develop and  market,  and those that it may develop and market in the future,
may infringe patent and other rights of third parties. In addition,  Bionutrics'
competitors, many of which have substantially greater resources than the Company
and have made significant investments in competing technologies or products, may
seek to apply for and obtain patents that will prevent,  limit or interfere with
the  Company's  ability to make,  use and sell  products  either in the U.S.  or
international  markets.  Intellectual  property litigation in the pharmaceutical
industry is common, and the Company expects this to continue.

         IF BIONUTRICS IS UNABLE TO FILE FOR APPROVAL UNDER SECTION 505(B)(2) OF
THE FDCA OR IF THE COMPANY IS REQUIRED TO GENERATE  ADDITIONAL  DATA  RELATED TO
SAFETY AND EFFICACY IN ORDER TO OBTAIN APPROVAL UNDER SECTION 505(B)(2),  IT MAY
BE UNABLE TO MEET ITS ANTICIPATED DEVELOPMENT AND COMMERCIALIZATION TIMELINES.

         The Company's current plans for filing NDAs for its product  candidates
include efforts to minimize the data the Company will be required to generate in
order to obtain  marketing  approval for its product  candidates  and  therefore
possibly obtain a shortened review period for the applications.  The Company has
not yet  discussed  or  agreed  with the FDA as to the  nature  or extent of any
studies it may be  required to conduct in order to achieve  approval  for any of
its product  candidates.  The timeline for filing and review of NDAs is based on
the  Company's  plan to submit NDAs under  Section  505(b)(2) of the FDCA,  as a
result of which the  Company  may rely in part on data in the  public  domain or
elsewhere.  The Company has not yet filed an NDA under Section 505(b)(2) for any
product  candidates.  Depending  on the data that may be required by the FDA for
approval,  some of the data may be related to products  already  approved by the
FDA. If the data relied upon is related to products  already approved by the FDA
and covered by third-party patents the Company would be required to certify that
it does not  infringe  the listed  patents or that such  patents  are invalid or
unenforceable.  As a result of the certification,  the third-party would have 45
days from  notification  of  certification  to  initiate  an action  against the
Company.  In the  event  that  an  action  is  brought  in  response  to  such a
certification,  the approval of the  Company's NDA could be subject to a stay of
up to 30 months or more while the Company defends against such a suit.  Approval
of the  Company's  potential  product  candidates  under  Section  505(b)(2) may
therefore  be delayed  until  patent  exclusivity  expires or until the  Company
successfully  challenges  the  applicability  of those  patents to its potential
product candidates.  Alternatively, the Company may elect to generate sufficient
additional  clinical data so that it no longer  relies on data which  triggers a
potential stay of the approval of its product candidates. Even if no exclusivity
periods apply to the Company's applications under Section 505(b)(2), the FDA has
broad  discretion  to require  the Company to  generate  additional  data on the
safety and efficacy of its product candidates to supplement  third-party data on
which the Company may be permitted to rely. In either  event,  the Company could
be required, before



                                       18
<PAGE>

obtaining  marketing  approval  for any of its  product  candidates,  to conduct
substantial  new research and  development  activities  beyond those the Company
currently plans to engage in order to obtain approval of its product candidates.
Such additional new research and development activities would be costly and time
consuming.

          THE COMPANY MAY BECOME SUBJECT TO INCREASED  GOVERNMENTAL  REGULATION,
WHICH COULD  INCREASE THE COSTS OR CAUSE THE COMPANY TO REVISE  CERTAIN  PRODUCT
CLAIMS.

         The design,  development and marketing of pharmaceutical  compounds, on
which our success  depends,  is subject to extensive  regulation  by the federal
government, principally the FDA, and to a lesser extent, other federal and state
government agencies.  The FFDCA, the Controlled Substances Act and other federal
statutes  and  regulations   govern  the  development,   testing,   manufacture,
safety/effectiveness,  labeling, storage, record keeping, approval,  advertising
and  promotion  of  the  Company's  products.   Non-compliance  with  applicable
regulations can result in judicially and/or administratively  imposed sanctions,
including the  initiation of product  seizures,  injunction  actions,  fines and
criminal  prosecutions.  Administrative  enforcement  measures  may  involve the
recall of products, as well as the refusal of an applicable government authority
to enter into supply contracts or to approve new drug applications. The FDA also
has the  authority  to  withdraw  its  approval  of  drugs  in  accordance  with
regulatory  due  process  procedures.  The  cost of  complying  with  government
regulations   substantially  increases  the  cost  of  producing  the  Company's
products.

         FDA approval is required  before any new drug can be marketed.  The FDA
requires  extensive testing of new  pharmaceutical  products to demonstrate that
such products are both safe and effective in treating the  indications for which
approval is sought.  Testing in humans may not be  commenced  until after an IND
exemption is granted by the FDA. A NDA or supplemental  NDA must be submitted to
the FDA both for new drugs that have not been previously approved by the FDA and
for new  combinations  of, new  indications  for,  or new  delivery  methods for
previously  approved drugs. FDA approval of an ANDA is required before a generic
equivalent  of an existing or  referenced  brand drug can be marketed.  The ANDA
process is  abbreviated  in that the FDA waives the  requirement  of  conducting
complete preclinical and clinical studies and, instead, relies on bioequivalence
studies which compare the applicant's  drug with an already  approved  reference
drug.   These  ANDA  filings   allow  a  company  to  avoid  the  expensive  and
time-consuming process of clinical efficacy and safety studies that are required
for NDAs.

         THE   COMPANY   HAS  NO  HISTORY  OF  RESEARCH   AND   DEVELOPMENT   OR
COMMERCIALIZATION OF DRUG PRODUCTS.

         The Company has not previously formulated,  researched,  developed, and
filed for FDA approval,  nor has it commercialized any drug product,  generic or
505(b)(2).  While  the  Company  believes  it can  successfully  accomplish  the
development,  manufacturing  and  launch  of  products  based  on  its  licensed
Technology  by  hiring  requisite  competent  and  experienced   management  and
operational personnel,  employing its intended relationship with Kirk or teaming
with other pharmaceutical  companies to create strategic partnerships at various
stages  of the  process,  there is no  assurance  that any or all of this can be
accomplished to the degree necessary to ensure a successful drug development and
commercialization operation.


                                       19
<PAGE>

         THE COMPANY MAY NOT COMPLETE THE  ACQUISITION OF KIRK  PHARMACEUTICALS,
LLC WHICH WOULD ADVERSELY AFFECT THE COMPANY'S  DEVELOPMENT AND MANUFACTURING OF
PHARMACEUTICAL PRODUCTS.

         On July  22,  2005,  the  Company  announced  that it  entered  into an
agreement to acquire Kirk Pharmaceuticals,  LLC. The closing of this purchase is
dependent  upon the  Company  receiving  approval  from the  Department  of Drug
Enforcement as the new owner,  completion of related financing and completion of
due diligence. There is no assurance that these matters will be accomplished and
that the  acquisition  will be  successfully  completed.  If not  completed  the
Company's  plans for product R&D and execution of product CMC could be adversely
affected. The Company does not presently have an alternative site for its R&D or
CMC efforts  and its time table for FDA  filings of its  planned  ANDAs could be
negatively impacted by the need to locate an appropriate replacement to Kirk.

         THE COMPANY  EXPECTS TO INCUR  SUBSTANTIAL  LOSSES FOR THE  FORESEEABLE
FUTURE AS A RESULT OF  INCREASES IN ITS  RESEARCH  AND  DEVELOPMENT  ACTIVITIES,
INCLUDING COSTS ASSOCIATED WITH CLINICAL TRIALS AND REGULATORY COMPLIANCE.

         Bionutrics  is a  development  stage  company  and  is  anticipating  a
prolonged  period of losses  and  negative  cash  flows  while it  develops  and
commences  commercialization  of its planned products.  As a result, its chances
for  achieving  profitability  on a  sustained  basis  will  depend on  numerous
factors, including the following:

         o successful development and testing of product candidates;

         o the receipt of required regulatory approvals relating to product
           candidates;

         o commercialization of our products; and

         o gaining a competitive position in the market.

         THE COMPANY FACES PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE INSURANCE TO PROTECT IT AGAINST LOSSES.

         As a marketer of pharmaceutical  products and dietary  supplements that
are  intended  to be ingested by  consumers,  even if sold to the  consumer by a
third party company and/or  formulated in a third party company's  product,  the
Company may be subject to various product  liability  claims,  including,  among
others,   that  its  products   contain   contaminants  or  include   inadequate
instructions  as to use or  inadequate  warnings  concerning  side  effects  and
interactions with other substances. While no such claims have been made to date,
any future product  liability claims and the resulting  adverse  publicity could
harm the Company's  business.  If a successful product liability claim or series
of claims is brought against the Company for uninsured  liabilities or in excess
of insured liabilities, the Company's assets may not be sufficient to cover such
claims and its business operations could be impaired.

         BECAUSE  OF THE  SPECIALIZED  NATURE  OF THE  COMPANY'S  BUSINESS,  THE
TERMINATION OF RELATIONSHIPS WITH ITS KEY MANAGEMENT AND SCIENTIFIC PERSONNEL OR
ITS  INABILITY  TO RECRUIT AND RETAIN  ADDITIONAL  PERSONNEL  COULD  PREVENT THE
COMPANY FROM DEVELOPING ITS TECHNOLOGIES AND OBTAINING FINANCING.



                                       20
<PAGE>

         The Company is dependent on its  management,  particularly  Drs. Ronald
Lane,  a Founder  and the Chief  Executive  Officer,  and  Nirmal  Mulye,  Chief
Scientific Officer for all its business and technology  development  activities.
The  Company is  dependent  on its  ability  to  attract,  retain  and  motivate
additional  qualified  personnel.  The  Company is  currently  in the process of
preparing long-term employment  contracts for these two key employees.  The loss
of the  services  of Drs.  Lane and Mulye or other  executive  officers  and key
employees could have a material adverse effect on the business of the Company.

         IF  THE  SUPPLIERS  AND  MANUFACTURERS  OF  THE  COMPANY'S  INGREDIENTS
ENCOUNTER DIFFICULTIES, THE COMPANY COULD EXPERIENCE PRODUCTION PROBLEMS.

         The Company's functional nutrition technology and products are based on
raw products or ingredients that may be naturally derived. Many of the potential
sources for these raw products or  ingredients  originate or are accessed in the
Third World. Because of political or economic uncertainty  associated with Third
World  countries,  there may be catastrophic  events  including acts of God that
could affect the reliability or dependability of sources so located. The Company
has identified several potential suppliers of such raw products in various Third
World countries.  These potential suppliers, while evidencing current economical
soundness and viable operations, are subject to these same uncertainties.  There
is no assurance, therefore, that in the face of catastrophic events in the Third
World, these potential  suppliers would be able to meet the product needs of the
Company or of the Company's strategic partners.

         THE  COMPANY  MAY  EXPERIENCE  DIFFICULTY  IN  ENTERING   INTERNATIONAL
MARKETS.

         The creation of strategic  partnerships  and the  marketing and sale of
the Company's  pharmaceutical  technology/products  could experience  difficulty
entering international markets due to greater regulatory barriers, the necessity
of  adapting to new  regulatory  systems and  problems  related to entering  new
markets  with  different  cultural  bases and  political  systems.  Operating in
international  markets  exposes the Company to certain risks,  including,  among
other things: (i) changes in or interpretations of foreign  regulations that may
limit the Company's  ability to sell certain  products or repatriate  profits to
the United States; (ii) exposure to currency  fluctuations;  (iii) the potential
imposition of trade or foreign exchange  restrictions or increased tariffs;  and
(iv)  political   instability.   If  the  Company  expands  into   international
operations,  these and other risks associated with international  operations are
likely  to be  encountered.  In  addition,  there can be no  assurance  that the
Company  will be able to enter  into  agreements  with  international  marketing
partners and thereby would limit the expansion of its revenue base.

         THE  COMPANY  RELIES ON PATENTS,  LICENSES  AND  INTELLECTUAL  PROPERTY
RIGHTS TO PROTECT ITS PROPRIETARY INTERESTS.

         The  Company's  success  depends  in part on its  continued  ability to
obtain  patents,  licenses and other  intellectual  property rights covering its
products.  The  Company's  current  patent  rights  are  held by its  subsidiary
LipoGenics and relate to dietary  supplement  and potential  future new chemical
entity drug development.  There can be no assurance that the Company's licenses,
patents and patent  applications  are or will be sufficiently  comprehensive  to
protect these



                                       21
<PAGE>

products.  Although there can be no assurance,  the Company may be successful in
filing for patent  protection  for generic or 505(b)(2)  products it develops in
the future independent or together with the Nostrum  technology.  The process of
seeking further patent protection can be long and expensive, and there can be no
assurance that the Company will have  sufficient  capital  reserves to cover the
expense  of  patent  prosecution  for its  application  or that  all or even any
patents will issue from currently  pending or any future patent  applications or
that any of the patents when issued will be of  sufficient  scope or strength to
provide meaningful protection or any commercial advantage to the Company.  While
the  Company  believes  the  bases  on  which  patent  applications  were  filed
correspond  to the patents that have been issued for  composition  and method of
production and use and are reasonable  given the issuance of the latter patents,
there can be no  assurance  that the patents  for which it has  applied  will be
issued.  The  Company  may  be  subject  to  or  may  be  required  to  initiate
interference   proceedings  in  the  U.S.  Patent  and  Trademark  Office.  Such
proceedings could demand  significant  financial and management  resources.  The
Company may receive communications  alleging possible infringement of patents or
other intellectual  property rights of others. The Company believes that in most
cases  it could  obtain  necessary  licenses  or other  rights  on  commercially
reasonable  terms, but it may be unable to do so. In addition,  litigation could
ensue or damages for any past infringements could be assessed. Litigation, which
could result in substantial cost to and diversion of efforts by the Company, may
be necessary to enforce  patents or other  intellectual  property  rights of the
Company or to defend the Company against  claimed  infringement of the rights of
others.  The failure to obtain necessary  licenses or other rights or litigation
arising out of infringement  claims could have a material  adverse effect on the
Company.

         THE  COMPANY'S  STOCK  IS  THINLY  TRADED  AND  MAY  EXPERIENCE   PRICE
VOLATILITY,  WHICH COULD AFFECT A  STOCKHOLDER'S  ABILITY TO SELL THE  COMPANY'S
STOCK OR THE PRICE FOR WHICH IT CAN BE SOLD.

         There  has been and may  continue  to be,  at least  for the  immediate
future, a limited public market for the common stock of the Company. On July 18,
2001,  the  Company's  common  stock was delisted  from  quotation on the Nasdaq
SmallCap  Market  due  to  non-compliance   with  certain   continuing   listing
requirements.  From July 19, 2001 to February 28,  2003,  the  Company's  common
stock was quoted on the OTC  Bulletin  Board  under the symbol  "BNRX.OB."  From
March 1, 2003 to July 12,  2005,  the  Company's  common stock was quoted on the
"Pink Sheets" under the symbol "BNRX.PK".  On July 13, 2005 the Company's common
stock was approved by the NASD and appeared on the OTCBB with an unpriced quote.
Three  business  days later,  on July 18,  2005,  HDSN showed a priced quote for
BNRX.OB.  Thirty days later,  on August 15,  2005 all other  market  makers were
eligible to appear on the OTCBB with their  quotes,  and have been quoted  there
through the present.

         RIGHTS TO ACQUIRE  SHARES OF THE COMPANY'S  COMMON STOCK WILL RESULT IN
DILUTION TO OTHER HOLDERS OF ITS COMMON STOCK.

         As of the date  hereof,  options to  acquire a total of 113,000  shares
were  outstanding  under the  Company's  1996 Stock Option Plan.  An  additional
441,153  shares of common  stock  are  reserved  for  issuance  pursuant  to the
exercise of options that may be granted in the future under the  Company's  1996
Stock Option Plan.  The Company  also has  outstanding  options and warrants not
issued under the 1996 Plan to purchase up to 635,160 shares of common stock,  as


                                       22
<PAGE>

well as a convertible promissory notes of $2,995,000; convertible into shares of
common stock at $3.00 per share,  unless adjusted by formula per the convertible
promissory note agreements.  During the terms of such options and warrants,  the
holders  thereof  will have the  opportunity  to profit  from an increase in the
market price of the common  stock with  resulting  dilution in the  interests of
holders of common stock.  The existence of such stock options and warrants could
adversely affect the terms on which the Company can obtain additional financing,
and the holders of the options and  warrants  can be expected to exercise  those
options and warrants at a time when the  Company,  in all  likelihood,  would be
able to obtain  additional  capital by  offering  shares of its common  stock on
terms more  favorable to the Company than those  provided by the exercise of the
options and warrants.

         The Company also has the authority to issue additional shares of common
stock and  shares of one or more  series of  convertible  preferred  stock.  The
issuance of those  shares  could  result in the  dilution of the voting power of
outstanding  shares of common stock and could have a dilutive effect on earnings
per share.

         IT MAY BE  DIFFICULT  FOR A THIRD PARTY TO GAIN CONTROL OF THE COMPANY,
EVEN IF THE  ACQUISITION  OF  CONTROL  WOULD  BE IN THE  BEST  INTERESTS  OF ITS
STOCKHOLDERS.

         The Company's Restated Articles of Incorporation and the Nevada General
Corporation  Law  contain  provisions  that may have the  effect of making  more
difficult or delaying attempts by others to obtain control of the Company,  even
when those attempts may be in the best interest of stockholders. Nevada law also
imposes conditions on certain business combination transactions with "interested
stockholders"  (as  defined  therein).  The  Restated  Articles  provide  for  a
staggered  board,  which makes it more difficult for the  stockholders to change
the majority of the Company's  directors.  In addition,  the Company's  Restated
Articles  authorize the Board of Directors,  without  stockholder  approval,  to
issue one or more  series of  preferred  stock,  which  could  have  voting  and
conversion  rights that adversely  affect the voting power of the holders of its
common stock.

         FORWARD-LOOKING  STATEMENTS  SHOULD NOT BE RELIED ON  BECAUSE  THEY ARE
INHERENTLY UNCERTAIN.

         Certain  statements  and  information  contained in this 10-K regarding
matters that are not historical facts are  forward-looking  statements,  as that
term is defined under  applicable  securities  laws.  These  include  statements
concerning the Company's future,  proposed, and anticipated activities;  certain
trends with respect to its revenue,  operating results,  capital resources,  and
liquidity,  and certain  trends with respect to the markets in which the Company
competes or its industry in general.  Forward-looking  statements, by their very
nature, include risks and uncertainties,  many of which are beyond the Company's
control. Accordingly,  actual results may differ, perhaps materially, from those
anticipated in or implied by such forward-looking statements.



                                       23
<PAGE>


ITEM 2.  PROPERTIES.

FACILITIES AND EQUIPMENT

         The total office rental expense for fiscal 2003,  2004 and 2005 for the
Company and its  subsidiaries  was $7,465,  $23,696  and  $25,967,  respectively
(these amounts do not include InCon  Processing's  rental expense for 2003, 2004
and 2005).

         The Company currently leases its principal executive offices consisting
of approximately 1,561 square feet, in Phoenix, Arizona under a three year lease
agreement that expires on January 1, 2009, with monthly payments of $4,659.

         In November 2005, the Company entered in to a sub-leasing agreement for
approximately  1,208 square feet of office space for its research and technology
development staff in Edison,  New Jersey,  with monthly payments of $2,750.  The
agreement expires on September 9, 2007.

         InCon Processing leases 30,000 square feet in Batavia, Illinois under a
10-year lease agreement, with monthly payments of $15,408. This lease expires on
July 31, 2007.

ITEM 3.  LEGAL PROCEEDINGS.

         The  Company  is not party to any  legal  proceedings  that  management
believes would have a material adverse effect on the business of the Company.

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

         None.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S  COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

         The Company's  common stock was quoted on the Nasdaq OTCBB from October
1, 2001-  February 28, 2003 and on the "Pink  Sheets" from March 1, 2003 to July
12, 2005. On July 13, 2005 the  Company's  common stock was approved by the NASD
and appeared on the OTCBB with an unpriced quote.  Three business days later, on
July 18, 2005,  HDSN showed a priced quote for  BNRX.OB.  Thirty days later,  on
August 15, 2005 all other  market  makers  were  eligible to appear on the OTCBB
with their quotes, and have been quoted there through the present.



                                       24
<PAGE>


                                                       High             Low
                                                       ------           ----
Fiscal Year Ended October 31, 2005(1)

Three months ended January 31, 2005                    4.00             0.20
Three months ended April 30, 2005                      4.50             0.70
Three months ended July 31, 2005                       2.25             0.51
Three months ended October 31, 2005                    4.50             1.35

Fiscal Year Ended October 31, 2004

Three months ended January 31, 2004                    0.25             0.01
Three months ended April 30, 2004                      0.45             0.01
Three months ended July 31, 2004                       0.45             0.04
Three months ended October 31, 2004                    1.00             0.15

Fiscal Year Ended October 31, 2003

Three months ended January 31, 2003                    0.85             0.16
Three months ended April 30, 2003                      0.15             0.01
Three months ended July 31, 2003                       0.25             0.01
Three months ended October 31, 2003                    0.25             0.01

Fiscal Year Ended October 31, 2002(1)

Three months ended January 31, 2002                    3.50             2.30
Three months ended April 30, 2002                      3.30             1.05
Three months ended July 31, 2002                       1.37             0.65
Three months ended October 31, 2002                    0.82             0.36

Fiscal Year Ended October 31, 2001

Three months ended January 31, 2001                    5.94             2.03
Three months ended April 30, 2001                      5.16             1.85
Three months ended July 31, 2001(2)                    3.60             0.30
Three months ended October 31, 2001                    2.97             0.30

     (1) Stock price  information for the years ended October 31, 2005 and 2002
         have been derived from www.siliconinvestor.com.
                                -----------------------

     (2) Stock delisted from Nasdaq July 18, 2001.

         Such  quotations  reflect  inter-dealer  bids,  without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.


                                       25
<PAGE>

         As of  October  31,  2005,  there  were 163  holders  of  record of the
Company's  common stock.  This figure does not  represent the actual  beneficial
owners  of our  common  stock  because  shares  are  held in  "street  name"  by
securities dealers and others for the benefit of individual owners.

DIVIDEND POLICY

         The Company has not  declared or paid any cash  dividends on its common
stock and does not intend to declare or pay any cash dividend in the foreseeable
future.  We currently intend to retain our future  earnings,  if any, to finance
the further  development  of our business and execution of our long-term  goals.
The  payment of  dividends,  if any,  is within the  discretion  of the Board of
Directors  and will  depend  on the  Company's  earnings,  if any,  its  capital
requirements,  and  financial  condition  and such other factors as the Board of
Directors may consider.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         On October 31, 1996, the Company's  Board of Directors  adopted a stock
option plan to be known as the 1996 Stock Option Plan (the "Plan").  The purpose
of this  grant  program  is to  further  the  interest  of the  Company  and its
shareholders by encouraging  key persons  associated with the Company to acquire
shares of the Company's common stock,  thereby acquiring a proprietary  interest
in its business and an increased personal interest in it continued  success.  As
of the  date  hereof,  options  to  acquire  a  total  of  113,000  shares  were
outstanding  under the Company's  1996 Stock Option Plan. An additional  441,153
shares of common stock are  reserved  for  issuance  pursuant to the exercise of
options that may be granted in the future under the Company's  1996 Stock Option
Plan.

RECENT SALES OF UNREGISTERED SECURITIES

         On  October 3, 2005,  the  Company  completed  a private  placement  of
convertible  notes and warrants  (the  "Financing").  The gross  proceeds of the
Financing were $1.845  million.  Pursuant to the  Financing,  the Company issued
$1,845,000  of  principal  amount  of 9%  convertible  notes  (the  "Convertible
Notes"),  which are  convertible  into an aggregate of 615,000 shares of Company
common  stock at a price  of $3.00  per  share,  and  warrants  to  purchase  an
aggregate  307,496  shares of  Company  common  stock at $4.00  per  share  (the
"Private  Warrants").  These  Warrants  were valued at $461,245  using the Black
Scholes  Model,  assuming a life of three years,  volatility of 550%, and a risk
free borrowing  rate of 3.125% and will be charged to interest  expense over the
life of the debt  commencing in 2005.  The price per share for the conversion of
the  Convertible  Notes and Private  Warrants  into  common  stock is subject to
potential downward adjustment in accordance with the terms of the agreement. The
Financing was conducted in accordance with Section 4(2) of the Securities Act of
1933, as amended,  (the "Securities Act") and Rule 506 of Regulation D under the
Securities Act.

         On September 15, 2005, the Company issued 50,000 shares of common stock
to Asia Pacific at an aggregate  price of $50,000,  in accordance with the terms
of the warrant agreement



                                       26
<PAGE>

dated February 12, 2004. Such shares were issued without  registration  pursuant
to the exemption from  registration  contained in Section 4(2) of the Securities
Act.

         On August 15, 2005, the Company issued 80,000 shares of common stock to
James  Belcher and his  designees  as payment for rights to certain  proprietary
technology.  Such  shares  were  issued  without  registration  pursuant  to the
exemption from registration contained in Section 4(2) of the Securities Act.

         On August 15, 2005, the Company issued 85,000 shares of common stock to
Divine  Capital  for  consulting  services.  Such  shares  were  issued  without
registration  pursuant to the exemption from  registration  contained in Section
4(2) of the Securities Act.

         On August 1, 2005,  the Company issued 30,000 shares of common stock in
a private placement to Pharm Advisors for consulting services.  Such shares were
issued  without  registration   pursuant  to  the  exemption  from  registration
contained in Section 4(2) of the Securities Act.

         In May 2005, the Company issued 159,625 shares of common stock at $1.60
per share in a private  placement  offering.  Such shares  were  issued  without
registration  pursuant to the exemption from  registration  contained in Section
4(2) of the Securities Act.

         On April 27, 2005,  the Company issued 25,000 shares of common stock to
an  employee  of the Company  for  services.  Such  shares  were issued  without
registration  pursuant to the exemption from  registration  contained in Section
4(2) of the Securities Act.

         On March 16, 2005,  the Company issued 6 million shares of common stock
to  Nostrum as payment  for the  modification  to the  licensing  agreement  for
technology  to  rights to  develop  an  additional  ten  generic  pharmaceutical
products  under its  license  agreement  with  Nostrum.  Such shares were issued
without  registration  pursuant to the exemption from registration  contained in
Section 4(2) of the Securities Act.

         On February 28,  2005,  the Company  entered  into a private  placement
purchase  agreement  whereby  135,000  shares were sold at $1.50 per share,  and
65,000 shares were issued to Landmark Financial Corporation, the warrant holder,
for no  consideration.  The issuance  was made  pursuant to section 4 (2) of the
Securities Act.

         In December  2004,  the Company issued 49,500 shares of common stock at
$1.00 per share to Asia Pacific  Investment  Holdings Limited ("Asia  Pacific"),
pursuant to the terms of the convertible note entered into on February 12, 2004.
The  issuance  to  Asia  Pacific  was  made  pursuant  to  section  4 (2) of the
Securities Act.

         On August 24,  2004,  the  Company  issued and sold  150,000  shares of
common stock to Karen Harwell,  a former employee of the Company,  at a purchase
price of $.01 per share. Such shares were issued without  registration  pursuant
to the exemption from  registration  contained in Section 4(2) of the Securities
Act.



                                       27
<PAGE>


         On August  18,  2004 and August 23,  2004 the  Company  issued and sold
250,000  shares  of  common  stock  to each of  William  McCormick  and  Richard
Feldheim,  respectively,  members  of the  Company's  board of  directors,  at a
purchase price of $.01 per share.  Such shares were issued without  registration
pursuant to the  exemption  from  registration  contained in Section 4(2) of the
Securities Act.

         On August 10, 2004,  the Company  issued and sold  1,000,000  shares of
common stock in a private placement to Asia Pacific Investment Holdings Limited,
the  current  owner of a 50%  interest  in  InCon  Processing  for an  aggregate
purchase  price of  $1,000,000.  Such shares were  issued  without  registration
pursuant to the  exemption  from  registration  contained in Section 4(2) of the
Securities Act.

         On June 16, 2004, the Company issued  6,000,000  shares of common stock
in a private  placement to Nostrum as payment for the technology and products to
be made  available  under its agreement  with  Nostrum.  Such shares were issued
without  registration  pursuant to the exemption from registration  contained in
Section 4(2) of the Securities Act.

         On June 1, 2004,  the Company  issued for  services  3,750,000  million
shares of common stock to the Company's  chief executive  officer,  Ronald Lane.
Such shares were issued  without  registration  pursuant to the  exemption  from
registration contained in Section 4(2) of the Securities Act.

         On March 22, 2004, the Company issued and sold 200,000 shares of common
stock to Asia Pacific Investment  Holdings Limited, in exchange for ownership of
certain  functional  nutrition  technology.  Such  shares  were  issued  without
registration  pursuant to the exemption from  registration  contained in Section
4(2) of the Securities Act.

         On February 12, 2004,  the Company  issued the following  securities to
Asia Pacific Investment Holdings Limited: (i) 50,000 shares of common stock at a
purchase price of $.01 per share;  (ii) a $49,500  convertible  promissory note,
convertible  into  shares of  common  stock at a  conversion  price of $1.00 per
share,  interest rate of 4% per annum with a maturity date of December 13, 2004;
and (iii)  warrants to  purchase  50,000  shares of common  stock at an exercise
price of $1.00 per share,  and a term of two years.  The  exercise  period shall
commence on the date of the warrant  issuance  and  terminate on the January 31,
2006. Such securities were issued without registration pursuant to the exemption
from registration contained in Section 4(2) of the Securities Act.

         All purchasers  represented that they acquired the securities for their
own  accounts.  A legend was placed on the stock  certificates  stating that the
securities have not been registered  under the Securities Act and cannot be sold
or  otherwise  transferred  without an  effective  registration  or an exemption
therefrom.  All  purchasers of the Company's  securities  are either  accredited
investors or employees of the Company.


                                       28
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

The following  selected  financial data should be read in  conjunction  with the
Company's  consolidated  financial statements and the related notes and with the
Company's  management's  discussion  and  analysis of  financial  condition  and
results of  operations,  provided  elsewhere  herein and attached to this Report
commencing on page F-1.

<TABLE>
<CAPTION>

                                                                       YEAR ENDED
                                                                       OCTOBER 31,
                                            2005           2004            2003           2002           2001
<S>                                      <C>             <C>            <C>            <C>             <C>
Gross Revenues                                 $8,192         $98,767        $32,005        $45,265         $95,978
Net Revenues                                   $8,192         $98,767        $31,978        $36,516         $37,630
Cost of Sales                                 $45,289         $18,269         $5,829        $14,182         $59,746
Gross Profit (Loss)                          ($37,097)        $80,498        $26,149        $22,334        ($22,116)
Operating Expenses                         $1,874,468        $866,913       $468,418     $1,246,583      $2,464,974
Other Income (Expense)                      ($999,695)      ($337,921)     ($317,253)     ($612,026)      ($402,095)
Net Loss                                  ($2,911,260)    ($1,124,336)     ($759,522)   ($1,836,275)    ($2,889,185)
Basic and Diluted Loss Per Share(1)            ($0.14)         ($0.14)        ($0.17)        ($0.42)         ($0.64)
Weighted Average Shares
   Outstanding(1)                          20,094,784       7,840,496      4,352,600      4,352,600       4,540,108
Balance Sheet Data:
Working Capital (Deficit)                 ($3,713,386)    ($3,079,327)   ($3,661,647)   ($3,407,218)    ($2,114,842)
Total Assets                              $16,911,555      $2,875,306     $2,210,696     $2,714,644      $3,264,070
Total Liabilities                          $5,607,804      $3,779,939     $3,707,993     $3,489,219      $2,281,909
Stockholders equity (deficit)             $11,303,751       ($904,633)   ($1,497,297)     ($774,575)       $982,161
</TABLE>

1.  Adjusted for a  one-for-five  reverse  stock split  affected at the close of
business on May 29, 2001. These shares do not include 620,472; 910,370; 713,836;
and 795,066  shares of common stock for the years ended October 31, 2005,  2004,
2003,  2002 and 2001,  and  respectively,  that may be issued  upon  exercise of
outstanding stock options,  warrants and convertible preferred stock as they are
antidilutive.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.

         THE  FOLLOWING  DISCUSSION  OF THE  COMPANY'S  FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS AS WELL AS CERTAIN STATEMENTS AND INFORMATION UNDER ITEM 1
"BUSINESS" INCLUDE CERTAIN FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT,
THE WORDS "EXPECTS,"  "INTENDS," "PLANS" AND "ANTICIPATES" AND SIMILAR TERMS ARE
INTENDED TO IDENTIFY  FORWARD  LOOKING  STATEMENTS  THAT RELATE TO THE COMPANY'S
FUTURE  PERFORMANCE.  SUCH  STATEMENTS  INVOLVE  RISKS  AND  UNCERTAINTIES.  THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED HERE.

INTRODUCTION

         Bionutrics is a  pharmaceutical  development  company focusing upon the
development of difficult to formulate, oral controlled-release drug formulations
utilizing  proprietary drug formulation and delivery  technologies.  The Company
has licensed  proprietary  oral  control-release  technology  with the rights to
develop exclusively and worldwide, ten generic and ten 505(B)(2) drugs, improved
formulations  of previously  approved  drugs.  Bionutrics  intends to invest the
majority of its  resources in the  development  and  commercialization  of these
products during the



                                       29
<PAGE>

next few years.  These rights for each product to be selected shall be exclusive
and worldwide.  Prior to 1999,  management's efforts had been primarily directed
toward  conducting  research and  development,  applying  for patent  approvals,
developing   manufacturing   and  distribution   arrangements  for  its  dietary
supplement  product and  obtaining  initial  capital and financing to fund these
activities.

         Bionutrics  (formerly  NutraGenics,   Inc.  until  December  26,  1996)
completed a merger with LipoGenics, Inc., a Delaware corporation ("LipoGenics"),
on October 31, 1996,  and  LipoGenics  became a wholly owned  subsidiary  of the
Company.  The merger with  LipoGenics was accounted for in a manner similar to a
pooling-of-interest  and as  such  Bionutrics'  accounts  reflect  the  historic
operations of LipoGenics.  Bionutrics  issued 418,549 shares in connection  with
the merger.  Pursuant to the merger,  Bionutrics  obtained  ownership of certain
proprietary rights related to dietary  supplements  previously licensed to it by
LipoGenics and acquired  ethical drug (a regulated  pharmaceutical),  functional
food and other dietary supplement rights owned by LipoGenics.

         On October  31,  1997,  Nutrition  Technology  Corporation  ("Nutrition
Technology"), a subsidiary of Bionutrics,  completed a forward triangular merger
of a  subsidiary  of  Nutrition  Technology  with  InCon  Technologies  Inc.,  a
specialty  chemical  processing  company in Illinois  ("InCon").  InCon became a
wholly  owned  subsidiary  of  Nutrition  Technology.  The merger with InCon was
accounted for as a purchase and  Bionutrics  issued 280,000 shares in connection
with the merger.  In connection with the merger,  the edible oil plant sales and
consulting  business formerly conducted by an InCon affiliate was transferred to
InCon International Ltd., a wholly-owned subsidiary of Bionutrics, and specialty
vitamin E technology  relating to soluble and powder  vitamin E owned by another
affiliate was transferred to InCon.

         In  1997,  the  Company  launched  its  first  product   EvolvE(R),   a
proprietary,  tocotrienol  cardiovascular  health promoting dietary  supplement,
which  attained  distribution  in 40,000  stores  nationwide.  In  addition,  it
commenced  operations at a 50,000 square foot rice bran  extraction  facility in
Louisiana.  The Company's business plan at the time provided for the infusion of
additional  capital to support the market  launch of  EvolvE(R)  and growing the
infrastructure  to maintain it. Funding  delays  prompted the Company in 1998 to
revise the business plan to accommodate financial constraints. Under the revised
business plan,  management sought marketing and  manufacturing  partners for the
Company's  products and focused  efforts on the core  competency of the Company,
which is the  creation  of new  proprietary,  biologically  active  ingredients.
Consistent  with this  course of  action,  the  Company  also  decided to seek a
partner  to take over its rice bran  processing  operation  on a profit  sharing
basis.

         To  this  end,  in  1998,   the  Company   entered   into  a  strategic
manufacturing  partnership with Associated British Foods, North America/ACH Food
Companies,  Inc.  ("ABF"),  which made a substantial  investment in  Bionutrics'
stock. The Company's objective was to employ its technology as a platform for 1)
ABF  to  manufacture  value-added  micronutrients  and  nutritional  commodities
derived through secondary processing of food processing  by-products,  and 2) to
market   proprietary   functional   nutrition   ingredients   based   on   these
micronutrients through strategic partnerships.  Bionutrics' goal was to leverage
its core competency to obtain revenue



                                       30
<PAGE>

from both the manufacturing  and marketing of these  value-added  micronutrients
and nutritional commodity product streams.

         Late in 1998, to streamline  operations and cut costs, the Company sold
its rice bran extraction operation and related technology to the ABF subsidiary,
ACH (formerly AC HUMKO), for approximately  $4,500,000.  Bionutrics also reduced
its employee base by one-half as part of a restructuring  of the way the Company
marketed its principal product, EvolvE(R).

         In 1999, the Company reduced its manufacturing  exposure by merging its
molecular  separation  operation,  InCon, with ACH to create a new joint venture
company, InCon Processing.  InCon transferred substantially all of its assets to
the new entity for which it received a payment of $3,000,000 and a 50% ownership
interest.  The formation of this venture  allowed the Company more ably to avail
itself  of the  research  and  development  capacity  of  InCon  Processing  for
specialty  processing  without being  encumbered by capital  requirements of the
operation for new facilities.

         Since the Company's  inception  through the current fiscal year, it has
received an opinion noting the substantial  doubt about the Company's ability to
continue as a going concern from its independent auditors due to the significant
recurring  operating losses.  However,  the Company is working towards resolving
the conditions giving rise to this opinion through the efforts outlined above.

         During  years 2000 and 2001,  the Company  attempted to maintain a very
modest operation as it attempted to forge product development relationships with
product marketing companies. Little effort was made to grow technology or to use
the Company's limited resources in expanding its products.

         In  2001,  the  Company  announced  an  agreement  with  Pharmaceutical
Marketing  Brands,  Inc.  ("PMB").  The agreement  called for Bionutrics to sell
common  stock  directly to PMB or its  designees  for the purchase of 49% of the
outstanding capital stock of the Company. HealthSTAR Holdings, LLC (an affiliate
of PMB),  intended to transfer three  strategic  relationship  agreements it had
with HealthSTAR  Communications,  Inc. (also affiliated with PMB) to Bionutrics.
HealthSTAR   Communications,   Inc.   was   established   as   a   comprehensive
pharmaceutical  marketing  services company that integrates  advertising  agency
services,  products and services with audience  specific,  exclusive  controlled
media venues to provide pharmaceutical manufacturers with an effective, targeted
and economical  way to  communicate  with  physicians,  patients,  providers and
payors.  The intention of the agreement  was to couple  targeted  to-be-acquired
pharmaceutical marketing services companies with the marketing resources offered
by HealthSTAR  and the product  development  of Bionutrics  and thereby create a
unique company that integrated R&D with a full-spectrum pharmaceutical marketing
services operation.

         The Company and PMB were  unable to close the  transaction  and in 2002
both parties  agreed to terminate  the  agreement.  Each party waived any claims
against the other party  (except for claims with respect to a secured loan which
is outstanding  and payable by the Company).  Following the  termination of this
transaction,  the Company  further  reduced its staff,  office space and related
administrative  expenses  as it  pursued  other  avenues  to  commercialize  its
technology.



                                       31
<PAGE>

         In 2003,  the Company  conducted  several  negotiations  with marketing
oriented  companies  for the purpose of  exploiting  its  technology,  but these
efforts did not result in any agreements,  revenue or related capital  infusion.
While  the  Company  continues  to sell  EvolvE(R)  as a result  of  calls  from
long-time  customers or through  orders  received  over the  Internet,  with the
Company's  limited  resources  there has been no concerted  effort to market the
product,  and the revenue generated from sales of EvolvE(R) are immaterial.  The
Company continued to operate by deferring  numerous  expenses,  including salary
payments to its President and Controller.

         In 2004,  the Company began the  development  of four new  proprietary,
functional  nutrition  products that address  maintenance  of normal blood lipid
ratios.  The Company  intends to conduct  clinical  trials to support  marketing
claims for these new products and to file patent applications in respect thereof
when and as appropriate.

         In 2004,  the  Company  began to  pursue a  relationship  with  Nostrum
Pharmaceuticals,  Inc.,  wherein the Company  acquired  oral  controlled-release
technology rights to be used in the development and commercialization of certain
to-be-named  505(b)(2)  drug  candidates  in exchange  for  6,000,000  shares of
Bionutrics  common stock. An agreement was executed  between the parties on June
16, 2004, memorializing the transaction.  As part of that agreement,  Bionutrics
was  required to raise  $1,000,000  for working  capital by means of the sale of
common  stock  within  120  days of the  closing  of the  agreement.  Bionutrics
succeeded  in raising the  requisite  funds by selling  1,000,000  shares of its
common  stock for  $1,000,000  to Asia  Pacific.  The cash was  utilized for the
purpose of covering  expenses  (including  administrative  expenses)  related to
conducting the Company's  audits for fiscal years 2002, 2003 and 2004 and filing
its tax returns and SEC reports for those years.

         Subsequent  and  unrelated  to the Nostrum  transaction,  InCon made an
asset  distribution  to its  respective  owners of  certain  dietary  supplement
technology   that  Bionutrics  had  previously   contributed.   Bionutrics  then
re-acquired  the other half of the  distributed  technology from Asia Pacific in
exchange  for  200,000  shares  of its  common  stock.  As part  of the  Nostrum
agreement,  Bionutrics  is required to have 1) a loan on its books in the amount
of approximately  $1,500,000 and  collateralized by 100 percent of the assets of
the  Company,  converted  to common stock at the price of $1.00 per share and 2)
secure  a  "lock-up"  of a  total  of  13,500,000  shares  of its  common  stock
(including   Nostrum's  stock)  for  a  period  of  18  months.   The  date  for
accomplishing  the  conversion  and stock lock-up has been extended from October
15, 2004 to February 15,  2005,  to March 16,  2005,  June 30, 2005,  August 25,
2005, and September 30, 2005 by successive agreements with Nostrum.

         On March 16,  2005,  the Company  issued six  million  shares of common
stock in a private  placement to Nostrum as payment for the  modification to the
licensing  agreement  for  technology  to rights to  develop an  additional  ten
pharmaceutical  products as generic drugs under its agreement with Nostrum. Such
shares  were  issued  without  registration   pursuant  to  the  exemption  from
registration  contained in Section  4(2) of the  Securities  Act. The  provision
contained in the previous licensing agreement wherein Bionutrics was required to
have 1) a loan on its  books  in the  amount  of  approximately  $1,500,000  and
collateralized by 100 percent of the assets of the Company,  converted to common
stock at the price of $1.00 per  share and 2) secure



                                       32
<PAGE>

a  "lock-up"  of a total of  19,000,000  shares of its common  stock  (including
Nostrum's  stock)  for a period  of 18  months  was  modified  to  included  the
additional shares issued to Nostrum.

         On October 3, 2005,  the Company  completed  the  Financing.  The gross
proceeds of the Financing were $1.845  million.  Pursuant to the Financing,  the
Company issued $1,845,000 of principal amount of 9% Convertible Notes, which are
convertible  into an  aggregate of 615,000  shares of Company  common stock at a
price of $3.00 per share, and Private Warrants to purchase an aggregate  307,496
shares of Company  common stock at $4.00 per share.  The price per share for the
conversion of the  Convertible  Notes and Private  Warrants into common stock is
subject  to a  potential  downward  adjust in  accordance  with the terms of the
agreement.  The portions of the proceeds  from the  Financing  were used to meet
certain obligations under the Company's agreement with Nostrum for reimbursement
of cost  pertaining to development  of its oral  controlled-release  drugs.  The
Financing was conducted in accordance  with Section 4(2) of the  Securities  Act
and Rule 506 of Regulation D under the Securities Act.

         As part of this  Financing  and  payment to Nostrum  of  $1,508,000  to
reimburse product development cost per the licensing agreement with Nostrum, the
provision  requiring  Bionutrics to have 1) a loan on its books in the amount of
approximately  $1,500,000 and collateralized by 100 percent of the assets of the
Company, converted to common stock at the price of $1.00 per share and 2) secure
a  "lock-up"  of a total of  19,000,000  shares of its common  stock  (including
Nostrum's stock) for a period of 18 months was waived.

         On October 31, 2005,  the Company  together with Asia Pacific agreed to
sell their respective interests in InCon to John Palmer and N.P. Shaikh, current
managers of that operation.  The InCon operation was deemed by the Company to no
longer be an  important  element  in its  current  business  strategy.  The sale
provides for the  distribution to the sellers of future earning before interest,
depreciation  and  amortization  (EBITDA) in the total amount of  $600,000,  the
assignment of certain  tocotrienol  processing  technology and the conveyance of
the  respective  interest  of Messrs.  Palmer and Shaikh  Bali  Holding,  LLC, a
holding  company that has Bionutrics  restricted  common stock (this stock being
payment by Bionutrics for the  acquisition  of InCon in 1997),  of which 118,000
shares would accrue to the sellers.  The sale proceeds noted above will be split
between  Bionutrics  and Asia Pacific  when  distribution  is made.  The sale by
Bionutrics  was  dependent  upon  approval  by the  holders  of a  consolidated,
multiple advance,  non-revolving  note agreement with the Company,  which have a
security  interest in InCon. The Company has agreed to hold any distributed sale
proceeds in escrow  pending  satisfaction  of such note. The sale approval is in
the process of being  addressed by the Company,  and while  management  believes
that it will be successfully obtained, no assurance can be given that it will be
completed nor that the sale will be consummated.

CRITICAL ACCOUNTING POLICIES

         The section herein  entitled  "Management's  Discussion and Analysis of
Financial   Condition  and  Results  of   Operation"   addresses  the  Company's
consolidated  financial statements,  which have been prepared in accordance with
accounting  principles  generally accepted in the United States of America.  The
preparation  of these  statements  requires  management  to make  estimates  and
assumptions  that affect the  reported  amounts of assets and  liabilities,  the
disclosure



                                       33
<PAGE>

of contingent assets and liabilities at the date of financial statements and the
reported  amounts of revenue and expenses  during the  reporting  period.  On an
ongoing basis, management evaluates its estimates and judgment,  including those
related  to  revenue  recognition,   goodwill,  bad  debts,  income  taxes,  and
contingent  liabilities.   Management  bases  its  estimates  and  judgments  on
historical  experience  and on various  other  factors  that are  believed to be
reasonable  under the  circumstances,  the  results  of which form the basis for
making judgments as to the carrying value of assets and liabilities that are not
readily  apparent  from other  sources.  Actual  results  may differ  from these
estimates under different assumptions and conditions.

         The  Securities  and  Exchange  Commission  ("SEC")  defines  "critical
accounting  policies" as those that require  application  of  management's  most
difficult,  subjective  or complex  judgments,  often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.

         The following discussion of critical accounting policies represents the
Company's  attempt  to report on those  accounting  policies  which the  Company
believes are critical to the Company's  consolidated  financial  statements  and
other financial disclosure. It is not intended to be a comprehensive list of all
of the Company's significant accounting policies, which are more fully described
in Note 1 of the Notes to the Consolidated Financial Statements included in this
report.

         Bionutrics has identified the following as critical accounting policies
affecting the Company: Revenue Recognition and Income Taxes.

         REVENUE RECOGNITION

         Bionutrics generally recognizes product revenue at the time of shipment
to the customer.  Revenues from the sale of consignment inventory are recognized
upon the sale of the  inventory by third  parties.  Revenues  from  services are
recorded at the time the service is rendered  and/or  reimbursable  expenses are
incurred.

         INCOME TAXES

         The Company has a history of losses.  These losses  generated  sizeable
federal  net  operating  loss  ("NOL")  carryforwards  as of October 31, 2005 of
approximately $39 million.

         Generally  accepted  accounting  principles  require  that the  Company
record a valuation  allowance  against the deferred income tax asset  associated
with these NOL carryforwards and other deferred tax assets if it is "more likely
than not" that the  Company  will not be able to utilize  them to offset  future
income  taxes.  Due to the Company's  history of  unprofitable  operations,  the
Company only  recognizes net deferred tax assets in those  subsidiaries in which
it  believes  that it is "more  likely than not" that it will be able to utilize
them to offset future income taxes in the future. The Company currently provides
for income taxes only to the extent that it expects to pay cash taxes on current
income.  At October 31, 2005,  net deferred  tax assets were  approximately  $16
million.


                                       34
<PAGE>

         It is possible,  however,  that the Company  could be profitable in the
future at levels  which  cause  management  to  conclude  that it may  realize a
portion of the NOL  carryforwards  and other deferred tax assets.  However,  the
realization  of such NOL  carryforwards  may be  significantly  limited if it is
deemed that a change in ownership  has occurred.  For tax purposes,  a change in
ownership has occurred if an entity or group of entities that previously did not
own 50% or more of a Company acquires enough new equity to raise its interest to
more than 50% over a three year period.  Subsequent  revisions to the  estimated
net  realizable  value of the  deferred  tax assets  could  cause the  Company's
provision for income taxes to vary significantly from period-to-period.

RESULTS OF OPERATIONS

RESULTS OF  OPERATIONS  FOR YEAR ENDED  OCTOBER 31, 2005  COMPARED TO YEAR ENDED
OCTOBER 31, 2004.

REVENUES, EXPENSES AND NET LOSS

         During 2005, the Company  focused on negotiating and  consummating  its
agreement  with  Nostrum and  furthering  the research  and  development  of the
licensed technology of such agreement.  Total revenues generated during the year
ended  October  31, 2005  amounted  to $8,000,  compared to $99,000 for the year
ended October 31, 2004.  Bionutrics Health Products generated $8,000 in revenues
for the year ended  October  31,  2005,  compared  to $99,000 for the year ended
October 31, 2004. LipoGenics generated $0 in revenues for the year ended October
31, 2005,  compared to $0 for the year ended  October 31, 2004.  The  Bionutrics
Health Products revenues reflect the sales of its first product, EvolvE(R) which
is sold directly to consumers via the Internet. The Company no longer views this
product as a material  part of its future  plans,  and  therefore the decline in
revenue is due to the elimination of advertising and promotional programs. Total
expenses  for the year ended  October  31,  2005  aggregated  $2,874,000,  which
amounted to a net loss of  $2,911,000.  This  compares to net loss of $1,124,000
for the year ended October 31, 2004.  This increase in net loss is due primarily
to  an  increase  in  the  Company's  research  and  development  activities  of
approximately  $1,522,000,   legal  and  accounting  fees  associated  with  the
Company's   efforts  to  maintain   compliance   with  the  periodic   reporting
requirements  of the Exchange  Act, as well as interest  expense of $732,000 for
the  recognition  of an accelerated  interest rate of 25% on borrowings  under a
consolidated,  multiple advance,  non-revolving note agreement. There was also a
one time expense for of $43,750 for stock based  compensation  to an employee of
the  Company.  The net loss per share was $.14 for the year  ended  October  31,
2005, as compared to a net loss of $.14 per share for the year ended October 31,
2004.

RESULTS OF  OPERATIONS  FOR YEAR ENDED  OCTOBER 31, 2004  COMPARED TO YEAR ENDED
OCTOBER 31, 2003.

REVENUES, EXPENSES AND NET LOSS

         During 2004,  the Company  maintained a very limited  operation.  Total
revenues  generated  during the year ended October 31, 2004 amounted to $99,000,
compared to $32,000



                                       35
<PAGE>

for the year ended October 31, 2003.  BHP generated  $99,000 in revenues for the
year ended October 31, 2004,  compared to $32,000 for the year ended October 31,
2003.  LipoGenics  generated $0 in revenues for the year ended October 31, 2004,
compared to $0 for the year ended October 31, 2003. The BHP revenues reflect the
sales of its first  product,  EvolvE(R)  which is sold directly to consumers via
the  Internet.  The Company no longer views this product as an integral  part of
its future plans, and therefore the decline in revenue is due to the elimination
of  advertising  and  promotional  programs.  Total  expenses for the year ended
October  31,  2004  aggregated  $1,205,000,  which  amounted  to a net  loss  of
$1,124,000.  This  compares to net loss of $ 760,000 for the year ended  October
31, 2003.  This  increase in net loss is due  primarily to the increase in legal
and accounting fees associated with the Company's efforts to achieve  compliance
with the periodic  reporting  requirements of the Exchange Act, as well as a one
time  expense of  $150,000  for stock  based  compensation  to an officer of the
Company. The net loss per share was $.14 for the year ended October 31, 2004, as
compared to a net loss of $.17 per share for the year ended October 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

YEAR ENDED OCTOBER 31, 2005, 2004, AND 2003

         To date, the Company's  operations  have not generated  sufficient cash
flow to satisfy the  Company's  capital  needs.  The Company  has  financed  its
operations  primarily  through  the  private  sale of its  equity  (through  the
placement of its common stock and warrants) and debt securities. The Company had
a working  capital deficit of  approximately  $3,913,000 at October 31, 2005, as
compared  with  $3,079,000  and  $3,407,000  at  October  31,  2004,  and  2003,
respectively.  Cash and cash equivalents was $129,000,  $629,000, and $3,000, at
October 31, 2005, 2004 and 2003,  respectively, a decrease of $500,000 from 2004
to 2005.

         Net cash used in operating  activities  during the years ended  October
31, 2005, 2004 and 2003, was $2,258,000,  $640,000, and $324,000,  respectively.
The  increase  in net cash used in  operating  activities  during the year ended
October 31, 2005 resulted  primarily from the Company's net loss of $2.9 million
in 2005,  offset  by  non-cash  expenses  including  equity in net loss of joint
venture of  $220,000,  stock  based  compensation  of  $44,000,  a write down of
inventory of $44,000, as well as an interest accrual for accelerated interest on
the Multiple Advance Non-Revolving Note of $732,000, which was not paid in cash.
The  increase  in net cash used in  operating  activities  during the year ended
October 31, 2004 resulted  primarily from the Company's net loss of $1.1 million
in 2004  offset  by  non-cash  expenses  including  equity  in net loss of joint
venture of $332,000 and stock based  compensation  of $157,000.  The increase in
net cash used in  operating  activities  during the year ended  October 31, 2003
resulted  primarily  from  the  Company's  net  loss of  $760,000  in 2003 and a
non-cash  gain on sale of assets of  $228,000,  offset by a non-cash  expense of
equity in net loss of joint venture of $516,000.

         Net cash used in investing  activities  during the years ended  October
31, 2005,  and 2004,  was $350,000 and $13,000,  for the purchase of  equipment,
fees associated with acquisition activities,  and net cash provided by investing
activities  was  $150,000  during  the year ended  October  31,  2003.  The cash
provided  in 2003  reflects  the  proceeds  from the sale of assets  less patent
acquisition costs.


                                       36
<PAGE>

         Net cash  provided  by  financing  activities  during  the years  ended
October 31, 2005,  2004, and 2003,  was  $2,108.000,  $1,280,000,  and $150,000,
respectively.  The cash  provided  in 2005,  2004  and 2003  reflects  $508,000,
$1,201,000,  and $0 from the  proceeds  from the  placement  of common stock and
warrants,  and  $1,600,000,  $80,000,  and $150,000  from the proceeds  from the
issuance of notes payable, respectively.

         The Company will require  additional  equity and/or debt  financing for
fiscal 2006 to fund its operations and to satisfy its debt service  obligations.
The Company has been exploring and negotiating the securing of additional equity
as well as debt  financing.  On September 27, 2005,  the Company  entered into a
Placement  Agency  Agreement  with  Indigo  Securities  LLC, a Delaware  limited
liability  company  ("Indigo")  whereby,  Indigo  agreed to act as the Company's
agent in  connection  with (i) the sale by the  Company  of from  $5,000,000  to
$10,000,000  million,  face  amount of the  Company's  10% Senior  Notes,  to be
offered  together with warrants,  (ii) the sale (the "Bridge  Financing") by the
Company of up to $2,500,000,  face amount of the Company's 9% Convertible Bridge
Notes (the "Bridge  Notes"),  to be offered  together with warrants (the "Bridge
Warrants")  and (iii) the sale by the  Company  of up to $5  million of Series A
Convertible Preferred Stock ("Series A Preferred Stock") of the Company together
with warrants,  all of which will be offered on terms and conditions agreed upon
by the  Parties.  As of the date of the filing of this  Report,  the Company has
issued $2,995,000 under the 9% Convertible Bridge Notes. No Series A Convertible
Preferred  Stock has been  issued.  There  can be no  assurance  given  that the
Company  will be  successful  in the  issuance of Series A  Preferred  Stock nor
additional  capital  from  other  sources  or means.  Bionutrics  auditors  have
expressed in their audit report a qualification as to its ability to continue as
a  going  concern.  See  Note  2 of the  Notes  to  the  Consolidated  Financial
Statements regarding the Company's plans to address this concern.

         The  Company  did not  enter  into  any  material  capital  expenditure
agreements, nor did it engage in any off balance sheet financing.

The following  table depicts our  obligations  and commitments as of October 31,
2005 to make future payments under existing contracts or contingent commitments.


<TABLE>
<CAPTION>
                                                                  PAYMENTS DUE BY PERIOD
                                                          LESS THAN 1                                 AFTER 5
CONTRACTUAL OBLIGATIONS                    TOTAL             YEAR         1-3 YEARS     4-5 YEARS      YEARS
<S>                                         <C>           <C>                <C>           <C>           <C>
Short - Term Debt Obligations
includes interest through 01/31/06          $2,333,722    $2,333,722         $0            $0            $0
Long - Term Obligations includes
interest through maturity                    2,177,000        0            2,177,000        0             0
Total                                       $4,510,722    $2,333,722      $2,177,000       $0            $0
</TABLE>

PROSPECTIVE INFORMATION

         The Company expects to incur losses from operations for the foreseeable
future as it  aggressively  pursues the  commercialization  of certain  products
employing the licensed  technology  from Nostrum and the development of products
with Kirk.  We expect to incur



                                       37
<PAGE>

increasing  research and development  expenses,  including  expenses  related to
additions  to  personnel,  product  formulation  and  development,  and clinical
trials.  We expect that our selling,  general and  administrative  expenses will
increase  in the  future  as we  expand  our  business  development,  legal  and
accounting staff, and add sales and marketing to our infrastructure.  Our future
capital requirements will depend on a number of factors, including the continued
progress  of our  research  and  development  of our  licensed  technology  from
Nostrum, the timing and outcome of regulatory  approvals,  the costs involved in
preparing,  filing,  prosecuting,  maintaining,  defending and enforcing  patent
claims and other intellectual  property rights, and the availability of debt and
equity  financing.  It is management's  belief that successful  execution of our
existing  Placement  Agency Agreement with Indigo will be sufficient to fund our
operating expenses,  debt repayments and capital equipment requirements until at
least through the second quarter of 2006 and expect to seek additional  funds in
2006.  We also intend on further  exploring  strategic  alliances  and licensing
agreements with other  pharmaceutical  companies to generate  revenues,  but can
give no  assurance  that any of the noted  efforts  will be  successful  or meet
expectations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Bionutrics  does  not  invest  in or  own  any  market  risk  sensitive
instruments entered into for trading purposes or for purposes other than trading
purposes.  All loans made to the Company have been for fixed  interest rates and
accordingly, the market risk to the Company prior to maturity is minimal.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Reference  is made to the  Consolidated  Financial  Statements  for the
fiscal  year ended 2005,  the Notes  thereto and  Independent  Auditors'  Report
thereon commencing at Page F-1 of this Report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

         None.

ITEM 9A. CONTROLS AND PROCEDURES.

         The  Company's   management  is  responsible   for   establishing   and
maintaining a system of disclosure  controls and  procedures (as defined in Rule
13a-15(e) and 15d-15(e)  under the Exchange Act) that is designed to ensure that
information  required to be  disclosed  by the  Company in the reports  that the
Company  files  or  submits  under  the  Exchange  Act is  recorded,  processed,
summarized and reported,  within the time periods  specified in the Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls  and  procedures  designed  to ensure that  information  required to be
disclosed  by an  issuer  in the  reports  that it files or  submits  under  the
Exchange  Act  is  accumulated  and  communicated  to the  issuer's  management,
including its principal  executive  officer or officers and principal  financial
officer or officers, or persons performing similar functions,  as appropriate to
allow timely decisions regarding required disclosure.


                                       38
<PAGE>

         In accordance with Exchange Act Rules 13a-15 and 15d-15,  an evaluation
was completed under the supervision and with the  participation of the Company's
management,  including  the Company's  President,  Chief  Financial  Officer and
Secretary,  of the  effectiveness  of the design and  operation of the Company's
disclosure  controls and  procedures as of the end of the period covered by this
Annual Report. Based on that evaluation,  the Company's management including the
President,  Chief Financial Officer and Secretary,  concluded that the Company's
disclosure controls and procedures are effective to provide reasonable assurance
that  information  required to be disclosed in the  Company's  reports  filed or
submitted  under  the  Exchange  Act is  recorded,  processed,  summarized,  and
reported within the time periods specified in the Commission's  rules and forms.
There have been no  significant  changes to the Company's  internal  controls or
other factors that could  significantly  affect internal controls  subsequent to
the period covered by this Annual Report.

ITEM 9B. OTHER INFORMATION.

None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The   following   table  sets  forth  certain   information   regarding
Bionutrics' current and certain former directors and executive officers:

<TABLE>
<CAPTION>
NAME                                           AGE      POSITION

<S>                                            <C>      <C>
Ronald H. Lane, Ph.D.                          60       Chairman of the Board, Chief Executive  Officer,  President,
                                                        Secretary and Treasurer
Nirmal Mulye, Ph.D.(1)                         39       Chief Scientific Officer, Director
William M. McCormick(2)                        65       Director
Richard M. Feldheim(1)(2)                      64       Director
John R. Palmer                                 62       Chief Executive Officer, InCon Processing, LLC, Chairman
                                                        and Chief Executive Officer, InCon Technologies Inc. and
                                                        InCon International Ltd.


</TABLE>

----------------------
(1)      Member of the Compensation Committee
(2)      Member of the Audit Committee

         RONALD HOWARD LANE,  PH.D., has served as Chairman of the Board,  Chief
Executive  Officer and  President  of the Company  since  December  1994 and its
predecessor,  NutraGenics  (Delaware),  since  April  1994 and  served  as Chief
Executive  Officer and President of  LipoGenics  from July 1992 to October 1997.
Dr. Lane is responsible for directing Bionutrics' corporate



                                       39
<PAGE>

development and growth.  He received a Ph.D. and  post-doctorate  NIH fellowship
from  the  University  of  Wisconsin  (Madison)  in  Neurophysiology.  Dr.  Lane
spearheaded  development  of the  technology  at  LipoGenics.  He  was  employed
previously with Norcap Financial  Corporation,  The National Western Group, Inc.
(an investment company), and Taylor Pearson Corporation.

         NIRMAL MULYE serves as the Chief Scientific Officer of the Company.  Dr
Mulye  received a B.S. in Pharmacy from Bombay  University and Ph.D. in Pharmacy
from Temple University,  Philadelphia. Dr. Mulye is the founder and President of
Nostrum Pharmaceuticals,  Inc. of Princeton, New Jersey. Nostrum Pharmaceuticals
is  a  developer  of   pharmaceutical   formulation   technologies  and  related
proprietary products.  Previously employed by Forest Laboratories and AL Pharma,
Dr. Mulye is the  inventor of numerous  patented  technologies  owned by Nostrum
Pharmaceuticals.

         RICHARD M.  FELDHEIM has been a member of the board of directors  since
October 1995. He served as a director,  Secretary and Chief Financial Officer of
LipoGenics  from July 1992  until  October  1996.  Mr.  Feldheim  has  served as
Chairman and Co-Chief Executive Officer of Abby's, a restaurant chain in Oregon,
since 1991. He was in private practice as a lawyer prior thereto, has previously
been employed with Goldman Sachs & Co.;  Donaldson,  Lufkin & Jenrette;  J. Aron
Company;   and  Price   Waterhouse,   and  was  President  of  Norcap  Financial
Corporation.   Mr.  Feldheim  received  a  B.S.,  B.A.,  a  Master's  Degree  in
Accounting,  and a J.D. from the  University of Arizona,  as well as an LL.M. in
Taxation from New York University. He is a Certified Public Accountant.

         WILLIAM M. MCCORMICK has been a member of the board of directors  since
May 1996, and he currently  serves as Chairman of the Executive  Advisory Board,
Inverness  Management,  LLC. Mr.  McCormick was  President  and Chief  Executive
Officer of PennCorp Financial Group, Inc., a NYSE company, from 1990 to 1995 and
was a director from 1990 until 1997.  Prior thereto,  Mr. McCormick was employed
by the American  Express  Company.  His titles ranged from Senior Vice President
Finance,  Systems & Operations  of the American  Express  International  Banking
Corporation to President of American  Express' Travel Related Services  Company.
Mr.  McCormick  then spent  five years as  Chairman  and CEO of  Fireman's  Fund
Insurance.  After  graduating from Yale, Mr.  McCormick spent his early years in
investment banking and management  consulting with Donaldson,  Lufkin & Jenrette
and McKinsey & Company, Inc., respectively.

         JOHN  R.  PALMER  has  served  as  Chief  Executive  Officer  of  InCon
Processing,  LLC since June 1999.  He has served as Chief  Executive  Officer of
InCon Technologies,  Inc. since October 1997, its Chairman since March 1998, and
served as its President  from October 1997 until  February  1998. Mr. Palmer was
Chief  Executive  Officer and an owner of InCon  Technologies at the time of the
acquisition.  Prior to organizing InCon Technologies in 1990, he was employed at
E.I.  DuPont for 22 years in various  technical and management  jobs. Mr. Palmer
graduated  from Cornell  University  in 1966 with a master's  degree in chemical
engineering and marketing.

         The Company's  officers and  directors  are elected  annually for a one
year term or until their respective successors are duly elected and qualified or
until their earlier resignation or removal.

                                       40
<PAGE>

         There  have  been no events  under  any  bankruptcy  act,  no  criminal
proceedings  and no judgments,  injunctions,  orders or decrees  material to the
evaluation  of the ability and  integrity of any  director,  executive  officer,
promoter or control person of the Company during the past five years.

         The Company has  established a standing audit committee of its board of
directors.  Messrs.  Feldheim  and  McCormick  are  the  members  of  the  audit
committee.  Mr.  Feldheim is an  independent  director,  as defined by the rules
governing the American Stock  Exchange,  and has been  designated as a financial
expert.

         The  Company  has not yet  adopted a code of ethics  applicable  to its
principal executive officer,  principal financial officer,  principal accounting
officer  or  controller.  The  Company  is  currently  examining  its  corporate
governance  and other  policies  and  procedures  that  will  relate to a larger
enterprise.  Following such examination,  the Company expects to adopt a code of
ethics  applicable  to all  directors,  officers and  employees.

SECTION  16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires the Company's  directors and
officers,  and  persons  who own  more  than  10% of a  registered  class of the
Company's  equity  securities,  to file  reports  of  ownership  and  changes in
ownership with the SEC.  Officers,  directors and greater than 10%  stockholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

         Based  solely  on the  Company's  review  of the  copies  of the  forms
received  by it during  the fiscal  year  ended  October  31,  2005 and  written
representations  that no other reports were required,  the Company believes that
each person who, at any time during such fiscal year, was a director, officer or
beneficial  owner of more than 10% of the Company's  common stock  complied with
all Section  16(a)  filing  requirements  during such fiscal  year,  except with
respect to the following individuals who have not made filings on Form 3 or Form
5 for the fiscal year ended  October 31,  2005:  Ronald H. Lane,  Nirmal  Mulye,
William M. McCormick, Richard M. Feldheim and John Palmer. However, Mr. Lane and
Mr.  McCormick  did file on Form 5 for the fiscal year ending  October 31, 2004.

ITEM 11. EXECUTIVE COMPENSATION.

         The  following  table sets forth the total  compensation  received  for
services  rendered in all  capacities  to the Company for the fiscal years ended
October 31, 2005 by the  Company's  Chief  Executive  Officer,  and its two most
highly compensated executive officers whose aggregate cash compensation exceeded
$100,000 (together the "Named Executive Officers").


                                       41
<PAGE>






SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                LONG-TERM COMPENSATION
                              ANNUAL COMPENSATION                                        AWARDS
                                                                                                       SECURITIES
NAME AND                                                                OTHER ANNUAL     RESTRICTED    UNDERLYING    ALL OTHER
PRINCIPAL POSITION            YEAR   SALARY-PAID SALARY-DEFERRED       COMPENSATION    STOCK AWARD(S)  OPTIONS(#)  COMPENSATION
                                         ($)          ($)                   ($)             ($)                        ($)

<S>                           <C>    <C>         <C>                      <C>              <C>        <C>           <C>
Ronald H. Lane, Ph.D.         2005   $225,910
  Chief Executive Officer     2004   $163,919     $39,028
  and President               2003    $93,668    $109,279
                              2002   $132,696     $70,251
                              2001   $116,221     $86,726                                              91,000
                              2000   $202,947                                                             800        $2,500(1)


John R. Palmer                2005   $200,000
  Chief Executive Officer     2004   $200,000
  and President of InCon      2003   $200,000                                                                       $14,000(1)
  Technologies Inc.           2002   $200,000                                                                       $12,000(1)
                              2001   $200,000                                                                       $10,500(1)
                              2000   $200,000                                                                        $3,942(1)
</TABLE>

         (1)  REPRESENTS CONTRIBUTIONS TO A 401(K) PLAN.

OPTION GRANTS

         There were no employee options granted in the fiscal year ended October
31, 2005.

OPTION HOLDINGS

         The following  table  represents  certain  information  respecting  the
options held by the Named  Executive  Officers as of October 31, 2005,  2004 and
2003.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                      SHARES                     NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                                     ACQUIRED                   UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS
                                        ON          VALUE     OPTIONS AT FISCAL YEAR-END
                                                 REALIZED($)              (%)               AT FISCAL YEAR-END ($)(1)
NAME                         YEAR  EXERCISE($)                EXERCISABLE  UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
<S>                          <C>       <C>           <C>           <C>                  <C>          <C>            <C>
Ronald H. Lane, Ph.D.        2005      ---           ---           91,000               0            $0             $0
                             2004      ---           ---           91,800               0             0              0
                             2003      ---           ---           61,800          30,000             0              0
</TABLE>

(1) There are no in-the-money  options  calculated based on $2.30, which was the
closing  sale  price of the Common  Stock as quoted on the OTCBB on October  31,
2005.


                                       42
<PAGE>

DIRECTOR COMPENSATION

         The Company pays all of its Board  members  reimbursement  for expenses
for each Board meeting attended.  There were no options granted nor compensation
given to any  member of the Board of  Directors  for  performing  the  duties of
directors during the fiscal year ended October 31, 2005.

EMPLOYMENT AGREEMENTS

         The Company  does not have any  Employment  Agreement in effect at this
time. It is in the process of preparing long-term  employment  arrangements with
its two key  employees:  Drs.  Ronald  Lane,  a Founder and the Chief  Executive
Officer, and Nirmal Mulye, Chief Scientific Officer.

         As of June 25, 1999, the Company  entered into an Employment  Agreement
with Mr. John R. Palmer that  superseded,  in its entirety,  the 1997 Employment
Agreement previously executed.  The new agreement was entered into in connection
with  the  formation  of  InCon  Processing,  and was  assumed  by that  company
effective  January  1,  2000.  The  Employment  Agreement  expired at the end of
August, 2004.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

         The following  tables set forth certain  information  as of October 31,
2005,  regarding (i) each person known by the Company to be the beneficial owner
of more than 5% of the outstanding  shares of Common Stock,  (ii) each director,
nominee and executive  officer of the Company,  (iii) all officers and directors
as a group.

BENEFICIAL OWNER AS OF OCTOBER 31, 2005              AMOUNT
NAME OF BENEFICIAL OWNER                            OWNED(2)      PERCENT
DIRECTORS AND NAMED EXECUTIVE OFFICERS(1):
Ronald H. Lane, Ph.D.(3)                               3,951,835    17.42%
John R. Palmer (4)                                        62,075       *
Richard M. Feldheim (5)                                  406,529     1.79%
William M. McCormick (6)                                 551,834     2.43%
Nirmal Mulye (7)                                      12,002,000    52.91%

Executive officers and directors as a group
(5 persons)                                           16,912,198    74.56%

OTHER 5% STOCKHOLDERS
Nalin Rathod (8)                                       1,854,661     8.18%

(9)

*Denotes less than a 1% interest in the Company



                                       43
<PAGE>

(1) Except as indicated, and subject to community property laws when applicable,
the persons named in the table above have sole voting and  investment  power and
with respect to all shares of Common Stock shown as beneficially owned by them.

(2) Includes  shares of Common Stock issuable to the identified  person pursuant
to stock options or warrants that may be exercised  within 60 days after October
31, 2005. In calculating the percentage of ownership,  such shares are deemed to
be  outstanding  for the purpose of computing the percentage of shares of Common
Stock owned by such person, but are not deemed to be outstanding for the purpose
of  computing  the  percentage  of  shares of  Common  Stock  owned by any other
stockholders.

(3) Represents  shares held of record by R.H. Lane Limited  Partnership of which
Dr. Lane is a general  partner.  He shares  voting  power over these shares with
Richard M. Feldheim,  a general partner. Dr. Lane disclaims beneficial ownership
of 60,000 shares held by such  partnership for the benefit of other partners and
180,000  shares held by the  partnership  for the benefit of his wife.  Includes
91,000 shares of Common Stock issuable upon exercise of stock options.

(4) Includes  56,000 shares held of record by Bali Holdings.  Mr. Palmer holds a
one-fifth ownership interest in the corporation.

(5)  Includes  3,966  shares  held of  record by  Abby's,  Inc.,  a  corporation
controlled  by Mr.  Feldheim,  and  401,563  shares  held of record by the R. M.
Feldheim Limited Partnership of which Mr. Feldheim is the general partner.  Does
not include  3,403,638  shares held by R.H.  Lane  Limited  Partnership  for the
benefit of other  partners.  He shares  voting  power  over the  shares  held by
Abby's, Inc. and R.H. Lane Limited Partnership.  Includes 1,000 shares of Common
Stock issuable upon exercise of stock options.

(6) Includes  120,000 shares  issuable upon exercise of warrants.  Also includes
10,000  shares  held  by Mr.  McCormick's  wife  and  7,000  shares  held by Mr.
McCormick's minor children,  of which shares he disclaims beneficial  ownership.
Also  includes  21,000  shares of Common Stock  issuable  upon exercise of stock
options.

(7) Includes 12,000,000 shares held of record by Nostrum Pharmaceuticals, Inc, a
corporation  controlled  by Mr. Mulye.  Also  includes  2,000 shares held by Mr.
Mulye's wife, of which he disclaims beneficial ownership.

(8) Includes 1,749,500 shares held of record by Asia Pacific Investment Holdings
Ltd,  30,000  shares held of record by  Macropower  Development  Ltd, and 14,286
shares  held  of  record  by  Technology   Resources  &  Investments   Ltd,  all
corporations  controlled by Mr. Rathod.  Also includes 20,000 shares held in the
street name CEDE & Co, 40,875 shares held in the Indian Bank Depository Trust.

(9) The  address  for  each  individual  listed  on the  chart  above is 2575 E.
Camelback Road, Suite 450, Phoenix, AZ 85016

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On September 27, 2005, the Company entered into an Assumption Agreement
with Nostrum  Pharmaceuticals,  whereby the Company assumed Nostrum's obligation
to pay Enem Nostrum  Remedies Pvt. Ltd.  $1,508,000 for its work in the research
and development of  pharmaceutical  products.  In consideration of the Company's
assumption of the foregoing obligations,  Nostrum agrees that the assumption and
payment shall be a credit against the Company's  obligation  pursuant to Section
3.2(c)  of the  Technology  License  Agreement  dated as of March 16,  2005,  as
amended,  to reimburse  Nostrum for  reasonable  costs and expenses  incurred in
providing assistance to the Company.

         On August 15, 2005, the Company issued 80,000 shares of Common Stock in
a private  placement to James Belcher and his designees,  a current  shareholder
and  note  holder  of  the  Company,  for  rights  to  certain  technology.  The
transaction was valued at $116,000, the fair market value of the Company's stock
on the given date.


                                       44
<PAGE>

         On March 16,  2005,  the  Company  entered  into a  Technology  License
Agreement  and  replaced in its  entirety  the Product  Development  and License
Agreement  with Nostrum  Pharmaceuticals,  Inc. dated June 16, 2004. The license
grant   provided   exclusive   worldwide   rights  to  employ   Nostrum's   oral
controlled-release  delivery  technology  in the future  development  of ten 505
(b)(2) drugs and ten generic  drugs,  and the Company issued 6 Million shares of
its common stock to Nostrum.  In July 2004,  Nirmal Mulye,  an  individual  that
controls  Nostrum  and also owns 52.91% of the  Company,  was  appointed  to the
Company's board of directors. Nostrum will receive a 50% royalty payment derived
for net  sales  less  cost of goods  and  other  customary  offsets  on  revenue
generated for generic drug sales. There will is no royalty agreement nor payment
required to Nostrum for sale of 505(b)(2) drugs or dietary supplements employing
the licensed technology.

         On August 10, 2004,  the Company  issued and sold  1,000,000  shares of
Common Stock in a private placement to Asia Pacific Investment Holdings Limited,
the current owner of a 50% interest in InCon  Processing  (as  described  above,
Bionutrics also owns a 50% interest in InCon Processing,  LLC), for an aggregate
purchase price of $1,000,000.

         On June 16, 2004, the Company  entered into a Product  Development  and
License  Agreement  with  Nostrum  Pharmaceuticals,   Inc  extending  rights  to
Bionutrics to develop and own exclusively and worldwide certain to be determined
505(b)(2)  drug  products..  In July,  2004,  Nirmal Mulye,  an individual  that
controls Nostrum, was appointed to the Company's board of directors.

         The Company  issued  Nostrum six  million  shares of common  stock in a
private  placement as payment for the  exclusive use of technology in the future
development  of 505(b)(2) drug products made available to it under the agreement
with  Nostrum.  There  is no  additional  compensation  due to  Nostrum  for the
technology available to Bionutrics under the agreement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         The  following  is a  description  of the fees paid by the  Company  to
Miller,  Ellin & Co., LLP ("Miller  Ellin") during the fiscal year ended October
31, 2005:

         AUDIT FEES

         The Company paid fees of  approximately  $156,000 and $62,000 to Miller
Ellin in  connection  with its  audit  and  review  of the  Company's  financial
statements for the fiscal years ended October 31, 2005 and 2004, respectively.

         TAX FEES

         The Company did not pay any fee to Miller Ellin in connection  with its
services related to tax compliance,  tax advice and tax planning for the Company
for the fiscal years ended October 31, 2005 and 2004, respectively.

         ALL OTHER FEES

         The  Company did not pay any fee to Miller  Ellin to perform  non-audit
services or any other services  during the year ended October 31, 2005 and 2004,
respectively.


                                       45
<PAGE>

                                     PART IV


ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) (1) Financial Statements

(a) (2)  Index to Exhibits

Exhibit           Description

3.1     Restated Articles of Incorporation (1)

3.2     Articles of Amendment to the Articles of Incorporation (1)

3.3     Bylaws (1)

4.1     Form of Certificate evidencing shares of common stock (1)

10.1    Employment Agreement between the Registrant and John R. Palmer (3)

10.2    1996 Stock Option Plan, as amended through March 26, 1998 (7)

10.3    Agreement and Plan of Merger by and among InCon Technologies, Inc.,
        InCon Holdings, LLC, Bionutrics, Inc. and BNRX, Inc.(2)

10.4    Stock Purchase Agreement dated as of August 14, 1998, between the
        Registrant and AC HUMKO CORP.(4)

10.5    Warrant Agreement dated as of August 14, 1998, between the Registrant
        and AC HUMKO CORP.(4)

10.6    Exclusive Supply Agreement dated as of August 14, 1998, between AC HUMKO
        CORP. and Bionutrics Entities (filed in redacted format pursuant to a
        confidential treatment request) (5)

10.7    Warrant Agreement for the purchase of 20,000 shares of common stock
        between the Company and William M. McCormick dated August 7, 1998 (7)

10.8    Warrant Agreement for the purchase of 120,000 shares of common stock
        between the Company and William M. McCormick dated August 7, 1998 (7)



                                       46
<PAGE>

10.9    Stock Purchase Agreement and Common Stock Purchase Warrants dated
        January 28, 1999 between Ropart Investments, LLC and the Company (8)

10.10   Warrant Certificates dated April 27, 1999 issued to Gary J. Shemano,
        Mart Bailey and Michael Jacks for an aggregate of 20,000 shares of
        common stock and Warrant Agreement effective April 9, 1998 between The
        Shemano Group and the Company (8)

10.11   Master Formation Agreement for InCon Processing, LLC among AC HUMKO
        CORP., InCon Technologies, Inc., InCon International, Inc., Nutrition
        Technology Corp., and Bionutrics, Inc., dated June 25, 1999 (filed in
        redacted format pursuant to a confidential treatment request) (9)

10.12   Members Agreement for InCon Processing, LLC, between AC HUMKO CORP. and
        InCon Technologies, Inc., dated June 5, 1999 (filed in redacted format
        pursuant to a confidential treatment request) (9)

10.13   First Amendment to Agreement for Purchase and Sale of Assets (9)

10.14   Common Stock Purchase Agreement dated September 7, 2000 between the
        Company and Justicia Holdings Limited (11)

10.15   Registration Rights Agreement dated September 7, 2000 between the
        Company and Justicia Holdings Limited (11)

10.16   Escrow Agreement dated September 7, 2000 among the Company, Justicia
        Holdings Limited and Epstein, Becker & Green P.C. (11)

10.17   Form of Stock Purchase Warrant pursuant to Common Stock Purchase
        Agreement dated September 7, 2000 (11)

10.18   Common Stock Purchase Agreement dated September 20, 2000 between the
        Company and AMRO International, S.A. (12)

10.19   Registration Rights Agreement dated September 20, 2000 between the
        Company and AMRO International, S.A. (12)

10.20   Escrow Agreement dated September 20, 2000 among the Company, AMRO
        International, S.A. and Epstein, Becker & Green P.C. (12)

10.21   Warrant Agreement for the purchase of 10,000 shares of common stock
        dated September 20, 2000 between the Company and AMRO International,
        S.A. (12)

10.22   Series A Convertible Preferred Stock Acquisition Agreement dated October
        27, 2000 between the Company and Milton Okin (12)



                                       47
<PAGE>

10.23   Common Stock Acquisition Agreement dated October 28, 2000 between the
        Company and Macropower Development Limited (12)

10.24   First Modification to the Master Formation Agreement for InCon
        Processing, LLC, entered into October 30, 2000 among ACH Food Companies,
        Inc. (formerly AC HUMKO CORP.), InCon Technologies, Inc., InCon
        International, Inc., Nutrition Technology Corp. and Bionutrics, Inc.
        (12)

10.25   First Modification to the Members Agreement for InCon Processing, LLC,
        entered into October 30, 2000 among ACH Food Companies, Inc. (formerly
        AC HUMKO CORP.), InCon Technologies, Inc. and Bionutrics, Inc. (12)

10.26   Common Stock Acquisition Agreement dated October 30, 2000 between the
        Company and ACH Food Companies, Inc. (formerly AC HUMKO CORP.) (12)

10.27   Warrant Agreement for the purchase of 400,000 shares of common stock
        dated October 30, 2000 between the Company and ACH Food Companies, Inc.
        (formerly AC HUMKO CORP.) (12)

10.28   Common Stock Purchase Agreement dated December 20, 2000 by and between
        the Company and Ropart Investments, LLC (12)

10.29   Warrant Agreement for the purchase of 14,000 shares of common stock
        dated December 20, 2000 between the Company and Ropart Investments, LLC
        (12)

10.30   Stock Purchase Agreement dated August 23, 2001 between Pharmaceutical
        Marketing Brands, Inc. and Bionutrics, Inc. (13)

10.31   Amended and Restated Consolidated Multiple Advance Non-Revolving Note,
        dated October 26, 2001 (14)

10.32   Amended and Restated Loan and Stock Pledge Agreement (14)

10.33   Amended and Restated Security Agreement (14)

10.34   Amendment No. 1 to Stock Purchase Agreement between Pharmaceutical
        Marketing Brands, Inc. and Bionutrics, Inc., effective as of August 23,
        2001, executed as of October 5, 2001 (14)

10.35   Amendment No. 2 to Stock Purchase Agreement, dated as of October 31,
        2001 (14)

10.36   Amendment No. 3 to Stock Purchase Agreement, dated as of December 28,
        2001 (15)



                                       48
<PAGE>

10.37   Amendment No. 4 to Stock Purchase Agreement, dated as of January 29,
        2002 (16)

10.38   Second Amended and Restated Consolidated Multiple Advance Non- Revolving
        Note, dated April 9, 2002 (17)

10.39   Amendment No. 1 to Amended and Restated Loan and Stock Pledge Agreement,
        dated April 9, 2002 (18)

10.40   Amendment No. 1 to Amended and Restated Security Agreement, dated April
        9, 2002 (19)

10.41   Third Amended and Restated Consolidated Multiple Advance Non- Revolving
        Note, dated July 10, 2002 (20)

10.42   Amendment No. 2 to Amended and Restated Loan and Stock Pledge Agreement,
        dated July 10, 2002 (21)

10.43   Amendment No. 2 to Amendment No. 1 to Amended and Restated Security
        Agreement, dated July 10, 2002 (22)

10.44   Product Development and License Agreement dated June 16, 2004, by and
        between the Company and Nostrum Pharmaceuticals, Inc. (23)

10.45   Stock Purchase Agreement dated June 16, 2004, by and between the Company
        and Nostrum Pharmaceuticals, Inc. (24)

10.46   Stock Purchase Agreement dated August 2, 2004, by and between the
        Company and Asia Pacific Investment Holdings Limited. (25)

10.47   Fourth Amended and Restated Consolidated Multiple Advance Non- Revolving
        Note, dated January 31, 2003. (26)

10.48   Stock Purchase Agreement dated September 1, 2004, by and between the
        Company and Asia Pacific Investment Holdings Limited. (26)

10.49   Technology License Agreement, by and between the Company and Nostrum
        Pharmaceuticals, Inc., dated March 16, 2005 (27)

10.50   Stock Purchase Agreement, by and between the Company and Nostrum
        Pharmaceuticals, Inc., dated March 16, 2005 (27)

10.51   Amendment No. 1 to Technology License Agreement, by and between the
        Company and Nostrum Pharmaceuticals, Inc., dated June 30, 2005



                                       49
<PAGE>

10.52   Purchase Agreement, by and between the Company, John D. Copanos and John
        S. Copanos, dated July 18, 2005 (28)

10.53   Amendment No. 2 to Technology License Agreement, by and between the
        Company and Nostrum Pharmaceuticals, Inc., dated August 31, 2005

10.54   Letter Agreement, by and between the Company, Nostrum Pharmaceuticals,
        Inc. and Enem Nostrum Remedies Pvt. Ltd, dated September 27, 2005 (29)

10.55   Placement Agency Agreement, by and between the Company and Indigo
        Securities LLC, dated October 3, 2005 (30)

10.56   Form of Subscription Agreement associated with the Bridge Financing (30)

10.57   Form of 9% Convertible Bridge Notes (30)

10.58   Form of Registration Rights Agreement associated with the Bridge
        Financing (30)

10.59   Form of Bridge Warrants associated with the Bridge Financing (30)

10.60   Amendment No. 3 to Technology License Agreement, by and between the
        Company and Nostrum Pharmaceuticals, Inc., dated October 3, 2005 (30)

21      Subsidiaries of the Company

31.1    Certification of Principal Executive Officer Pursuant to Section 302 of
        the Sarbanes-Oxley Act of 2002 and Securities and Exchange Commission
        Release 34-46427

31.2    Certification of Principal Financial Officer Pursuant to Section 302 of
        the Sarbanes-Oxley Act of 2002 and Securities and Exchange Commission
        Release 34-46427

32.1    Certification of Principal Executive Officer pursuant to Section 906 of
        the Sarbanes-Oxley Act of 2002.

32.2    Certification of Principal Financial Officer pursuant to Section 906 of
        the Sarbanes-Oxley Act of 2002.

-----------------------------
(1)     Incorporated by reference to Re gistrant's Form 10 filed with the
        Commission on or about January 21, 1997.



                                       50
<PAGE>

(2)     Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about November 7, 1997, as amended by Registrant's Form
        8-K/A filed with the Commission on or about January 30, 1998.

(3)     Incorporated by reference to Registrant's Form 10-K filed with the
        Commission on or about January 15, 1998, as amended by Registrant's Form
        10-K/A filed with the Commission on or about January 30, 1998.

(4)     Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about August 31, 1998.

(5)     Incorporated by reference to Registrant's Form 8-K/A filed with the
        Commission on or about October 13, 1998

(6)     Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about October 21, 1998.

(7)     Incorporated by reference to Registrant's Form 10-K filed with the
        Commission on or about January 29, 1999.

(8)     Incorporated by reference to Registrant's Second Quarter Form 10-Q filed
        with the Commission on or about June 10, 1999.

(9)     Incorporated by reference to Registrant's form 8-K filed with the
        Commission on or about July 12, 1999.

(10)    Incorporated by reference to Registrant's First Quarter Form 10-Q filed
        with the Commission on or about March 15, 2000.

(11)    Incorporated by reference to Registrant's Third Quarter Form 10-Q filed
        with the Commission on or about September 13, 2000.

(12)    Incorporated by reference to Registrant's Form 10-K filed with the
        Commission on or about January 17, 2001.

(13)    Incorporated by reference to Registrant's form 8-K filed with the
        Commission on or about August 23, 2001.

(14)    Incorporated by reference to Registrant's form 8-K filed with the
        Commission on or about November 9, 2001.

(15)    Incorporated by reference to Registrant's Form 10-K filed with the
        Commission on or about January 21, 1997.

(16)    Incorporated by reference to Registrant's Form 10-Q filed with the
        Commission on or about March 15, 2002.



                                       51
<PAGE>

(17)    Incorporated by reference to Registrant's Form 10-Q filed with the
        Commission on or about June 14, 2002.

(18)    Incorporated by reference to Registrant's Form 10-Q filed with the
        Commission on or about June 14, 2002.

(19)    Incorporated by reference to Registrant's Form 10-Q filed with the
        Commission on or about June 14, 2002.

(20)    Incorporated by reference to Registrant's Form 10-Q filed with the
        Commission on or about September 13, 2002.

(21)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about September 13, 2002.

(22)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about September 13, 2002.

(23)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about September 14, 2004.

(24)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about September 14, 2004.

(25)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on or about September 14, 2004.

(26)    Incorporated by reference to Registrant's Form 10-K filed with the
        Commission on January 11, 2005.

(27)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on March 21, 2005.

(28)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on July 22, 2005

(29)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on October 3, 2005

(30)    Incorporated by reference to Registrant's Form 8-K filed with the
        Commission on October 7, 2005, as amended on October 11, 2005

(b)     Financial Statements filed as part of this Report:

         Consolidated  Financial Statements and Supplemental Schedules as listed
         in the Index to Consolidated  Financial  Statements on Page F-1 of this
         Report.



                                       52
<PAGE>


                                   SIGNATURES

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

                                     BIONUTRICS, INC.



Dated:   January 30, 2006            By: /s/  Ronald Howard Lane
                                         -----------------------------------
                                              Name: Ronald Howard Lane
                                              Title: President and
                                                     Chief Executive Officer


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

                                    Title                       Date

/S/ RONALD HOWARD LANE              Chief Executive Officer,    January 30, 2006
-----------------------             President, Principal
Ronald Howard Lane                  Executive Officer,
                                    Principal Financial
                                    and Accounting Officer,
                                    Chairman of the Board




/S/ RICHARD M. FELDHEIM                                         January 30, 2006
-----------------------
Richard M. Feldheim                 Director


/S/ WILLIAM M. MCCORMICK                                        January 30, 2006
------------------------
William M. McCormick                Director


/S/ NIRMAL MULYE                                                January 30, 2006
-----------------------
Nirmal Mulye                        Director





                                       53

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Bionutrics, Inc.

We have audited the accompanying consolidated balance sheets of Bionutrics, Inc.
and  Subsidiaries  as of October 31, 2005 and 2004 and the related  consolidated
statements of operations,  stockholders'  equity (deficit)and cash flows for the
years ended October 31, 2005, 2004 and 2003. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted  our audits in  accordance  with  auditing  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain  reasonable  assurance  about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Bionutrics, Inc. and
Subsidiaries as of October 31, 2005 and 2004 and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
2005, 2004, and 2003 in conformity with accounting principles generally accepted
in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue  as a going  concern.  As shown in the  consolidated
financial  statements,  the  Company  has  experienced  significant  losses  and
negative cash flows which raises  substantial  doubt about the Company's ability
to continue as a going concern.  Management's plans in this regard are described
in Note 2.


                                                     Miller Ellin & Company, LLP
                                                    Certified Public Accountants

New York, New York
January 25, 2006

                                      F-1


<PAGE>


BIONUTRICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  OCTOBER 31,
                                                                        ------------------------------
                                                                            2005              2004
                                                                        ------------      ------------
<S>                                                                     <C>               <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                             $    128,819      $    629,257
  Inventory                                                                    4,010            49,321
  Prepaid expenses and other current assets                                  137,609            22,034
                                                                        ------------      ------------
                  Total Current Assets                                       270,438           700,612
                                                                        ------------      ------------

PROPERTY - Net of accumulated depreciation of $70,689
  and $68,971, respectively                                                    4,513             2,916
                                                                        ------------      ------------

OTHER ASSETS:
  Deposits on equipment                                                      234,494                --
  Deposit on purchase agreement                                              200,000                --
  Deferred financing fees                                                    375,042                --
  Patents  - net of accumulated amortization of
   $312,816 and $282,520, respectively                                    14,600,149           724,445
  Investment in joint venture                                              1,226,919         1,447,333
                                                                        ------------      ------------
                  Total Other Assets                                      16,636,604         2,171,778
                                                                        ------------      ------------

TOTAL                                                                   $ 16,911,555      $  2,875,306
                                                                        ============      ============



LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
  Accounts payable                                                      $  1,007,570      $  1,575,934
  Notes payable - shareholders and others                                  1,452,100         1,484,000
  Accrued interest on notes payable to shareholders and others               731,792                --
  Other accrued liabilities                                                  992,362           720,005
                                                                        ------------      ------------
                  Total current liabilities                                4,183,824         3,779,939
                                                                        ------------      ------------

LONG-TERM LIABILITIES:
   Convertible bridge notes                                                1,423,980                --
                                                                        ------------      ------------

                  Total Liabilities                                        5,607,804         3,779,939
                                                                        ------------      ------------

STOCKHOLDERS' EQUITY (DEFICIT):
  Preferred stock - $.001 par value - authorized, 5,000,000 shares;
     591,850 and 591,850 issued and outstanding, respectively
     (liquidation preference of $798,998)                                    798,998           798,998
  Common stock - $.001 par value - authorized, 45,000,000 shares;
     22,681,725 and 16,002,600 issued and outstanding, respectively           22,681            16,002
  Additional paid-in capital                                              54,802,634        39,800,127
  Warrants                                                                   511,650           401,191
  Accumulated deficit                                                    (44,832,212)      (41,920,951)
                                                                        ------------      ------------
                  Total stockholders' equity (deficit)                    11,303,751          (904,633)
                                                                        ------------      ------------

TOTAL                                                                   $ 16,911,555      $  2,875,306
                                                                        ============      ============
</TABLE>

See notes to the consolidated financial statements.

                                      F-2
<PAGE>

BIONUTRICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                            YEARS ENDED OCTOBER 31,
                                                               ------------------------------------------------
                                                                     2005            2004              2003
                                                               -------------     -------------     ------------

<S>                                                            <C>               <C>               <C>
REVENUES, net                                                  $      8,192      $     98,767      $     31,978
COST OF REVENUES                                                     45,289            18,269             5,829
                                                               -------------     -------------     ------------
                       GROSS PROFIT (LOSS)                          (37,097)           80,498            26,149
OPERATING EXPENSES
  Research and development                                        1,521,508               250             6,250
  Selling, general, and administrative                              352,960           866,663           462,168
                                                               -------------     -------------     ------------
                       Total expenses                             1,874,468           866,913           468,418
                                                               -------------     -------------     ------------
                       OPERATING LOSS                            (1,911,565)         (786,415)         (442,269)
                                                               -------------     -------------     ------------
OTHER INCOME (EXPENSES):
     Equity in the loss of joint venture                           (220,414)         (332,250)         (516,227)
     Gain (loss) on disposition of assets and other income           13,695            (3,849)          215,634
     Interest expense, net                                         (792,976)           (1,822)          (16,660)
                                                               -------------     -------------     ------------
                       Total other (expenses) income               (999,695)         (337,921)         (317,253)
                                                               -------------     -------------     ------------
NET LOSS BEFORE PROVISION FOR
     INCOME TAX                                                  (2,911,260)       (1,124,336)         (759,522)
PROVISION FOR INCOME TAXES                                               --                --                --
                                                               -------------     -------------     ------------
                       NET LOSS                                $ (2,911,260)     $ (1,124,336)     $   (759,522)
                                                               =============     =============     ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE                    $      (0.14)     $      (0.14)     $      (0.17)
                                                               =============     =============     ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING                                                      20,094,784         7,840,496         4,352,600
                                                               =============     =============     ============
</TABLE>

See notes to the consolidated financial statements

                                      F-3
<PAGE>

BIONUTRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                        Common Stock                     Preferred Stock                       Warrants
                                 ---------------------------         -------------------------         --------------------------
                                    Shares         Amount              Shares       Amount              Number          Amount
                                 ----------     ------------         ---------    ------------         ---------     ------------
<S>                             <C>            <C>                  <C>          <C>                  <C>           <C>
Balances, November 1, 2002        4,352,600     $   4,352.00          591,850     $    798,998          360,000      $    605,258
Warrants issued                          --               --               --               --          375,000            36,799
Warrants expired                         --               --               --               --          (76,000)         (194,034)
Net loss                                 --               --               --               --               --                --
                                 ----------     ------------         ---------    ------------         ---------     ------------
Balances, October 31, 2003        4,352,600            4,352          591,850          798,998          659,000           448,023
Issuance of common stock         11,650,000        11,650.00               --               --               --                --
Warrants issued                          --               --               --               --           50,000                --
Warrants expired                         --               --               --               --          (24,000)          (46,832)
Net loss                                 --               --               --               --               --                --
                                 ----------     ------------         ---------    ------------         ---------     ------------
Balances, October 31, 2004       16,002,600           16,002          591,850          798,998          685,000           401,191
Issuance of common stock          6,679,125            6,679               --               --               --                --
Warrants issued                          --               --               --               --          307,496           461,245
Warrants expired                         --               --               --               --         (555,000)         (350,786)
Net Loss                                 --               --               --               --               --                --
                                 ----------     ------------         ---------    ------------         ---------     ------------
Balances, October 31, 2005       22,681,725     $     22,681          591,850     $    798,998          437,496      $    511,650
                                 ==========     ============         =========    ============         =========     ============
</TABLE>

<TABLE>
<CAPTION>

                                    Paid in          Accumulated      Stockholders'
                                    Capital            Deficit           Equity
                                 ------------
<S>                             <C>               <C>               <C>
Balances, November 1, 2002       $ 37,853,911      $(40,037,094)     $    774,575
Warrants issued                            --                --            36,799
Warrants expired                      194,034                --                --
Net loss                                   --          (759,522)         (759,522)
                                 ------------      ------------      ------------
Balances, October 31, 2003         38,047,945       (40,796,616)       (1,497,297)
Issuance of common stock            1,705,350                --         1,717,000
Warrants issued                            --                --                --
Warrants expired                       46,832                --                --
Net loss                                   --        (1,124,336)       (1,124,336)
                                 ------------      ------------      ------------
Balances, October 31, 2004         39,800,127       (41,920,952)         (904,633)
Issuance of common stock           14,651,720                --        14,658,399
Warrants issued                            --                --           461,245
Warrants expired                      350,786                --                --
Net Loss                                             (2,911,260)       (2,911,260)
                                 ------------      ------------      ------------
Balances, October 31, 2005       $ 54,802,633      $(44,832,212)     $ 11,303,751
                                 ============      ============      ============
</TABLE>

See notes to the consolidated financial statements.


                                      F-4
<PAGE>

BIONUTRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                             YEARS ENDED OCTOBER 31,
                                                                                ------------------------------------------------
                                                                                     2005              2004             2003
                                                                                ------------      ------------      ------------
<S>                                                                             <C>               <C>               <C>
OPERATING ACTIVITIES:
Net loss                                                                        $ (2,911,260)     $ (1,124,336)     $   (759,522)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                       32,015            30,880            29,585
  Equity in the loss of joint venture                                                220,414           332,275           516,227
  Stock based compensation                                                            43,750           156,500            36,800
  Amortization of bridge loan discount                                                40,225                --                --
  Gain on sale of assets                                                                  --                --          (227,519)
  Expenses satisfied with issuance of common stock                                   141,250                --                --
  Write down of Inventory                                                             44,000                --                --
  Changes in operating assets and liabilities:
      Accounts receivable                                                                 --                --               540
      Inventory                                                                        1,311           (21,731)            5,828
      Prepaids and other current assets                                             (305,577)           (6,431)            4,926
      Accounts payable                                                              (568,364)          (56,725)           43,711
      Accrued liabilities                                                          1,004,150            49,171            25,063
                                                                                ------------      ------------      ------------
Net cash used in operating activities                                             (2,258,086)         (640,397)         (324,361)
                                                                                ------------      ------------      ------------
INVESTING ACTIVITIES:
  Purchases and deposits on purchases of equipment                                  (237,809)           (3,499)               --
  Deferred fees associated with acquisition activities                              (112,247)               --                --
  Proceeds from sale of assets                                                            --                --           250,000
  Patent acquisition cost                                                                 --           (10,000)         (100,000)
                                                                                ------------      ------------      ------------
Net cash used in investing activities                                               (350,056)          (13,499)          150,000
                                                                                ------------      ------------      ------------
FINANCING ACTIVITIES:
  Proceeds from sale of common stock                                                 507,900         1,200,500                --
  Proceeds from debt, net of financing fees                                        1,599,804            79,500           150,000
                                                                                ------------      ------------      ------------
Net cash provided by financing activities                                          2,107,704         1,280,000           150,000
                                                                                ------------      ------------      ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS                                                                    (500,438)          626,104           (24,361)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       629,257             3,153            27,514
                                                                                ------------      ------------      ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                        $    128,819      $    629,257      $      3,153
                                                                                ============      ============      ============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
  Settlement of debt through issuance of common stock                           $     49,500      $         --      $         --
                                                                                ============      ============      ============
  Rights to technology acquired through issuance of common stock                $ 13,916,000      $    360,000      $         --
                                                                                ============      ============      ============
</TABLE>


                                      F-5
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ORGANIZATION, AND NATURE OF
BUSINESS

PRINCIPLES OF CONSOLIDATION

The consolidated  financial statements include the accounts of Bionutrics,  Inc.
and its wholly owned subsidiaries, (collectively the "Company"). All significant
inter-company accounts and transactions have been eliminated in consolidation.

The Company  consolidates all majority owned entities under its control and uses
the  equity  method  to  account  for  companies  in  which  it has  significant
investment and has the ability to exercise significant  influence over operating
or financial policies.

ORGANIZATION AND NATURE OF BUSINESS

Bionutrics is a specialty  pharmaceutical  company  engaged in the  development,
manufacturing and commercialization of oral controlled-release generic drugs and
improved formulations of previously approved drugs (505(B)(2)). Bionutrics, Inc.
("Bionutrics") was incorporated in Nevada in 1990. The Company has three primary
subsidiaries, LipoGenics, Inc. ("LipoGenics"),  Bionutrics Health Products, Inc.
("BHP" or "Health Products"), and InCon Technologies Inc. ("InCon").  LipoGenics
has  served  as the  product  research  arm of the  Company  with a focus on the
discovery and  development  of active  compounds  for both drugs and  functional
nutrition.  Health  Products  is the market  research  and  product  positioning
company  charged to deliver  new  functional  nutrition  products  to  marketing
partners.  InCon was merged into a limited liability company,  InCon Processing,
LLC ("InCon  Processing")  in which the Company has a 50% ownership.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.  At October 31, 2005, and 2004 cash
consisted of cash on deposit with banks and the Company had no cash equivalents.

INVENTORY

The  Company's  inventory  is  stated at the  lower of cost or  market.  Cost is
determined using the first in first out method.

PROPERTY AND DEPRECIATION

Property and equipment are stated at cost.  Major renewals and  improvements are
capitalized and replacements,  maintenance and repairs,  which do not improve or
extend the lives of the respective assets, are charged to expense when incurred.
When items of property and equipment  are retired or otherwise  disposed of, the
original cost and related accumulated  depreciation to date are removed from the
accounts and any gain or losses upon retirement or sale is recognized in income.

                                      F-6
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,  ORGANIZATION AND NATURE OF
BUSINESS (cont'd)

The Company's  property consists of computer  equipment which is depreciated for
financial  reporting purposes using the straight-line  method over its estimated
useful life of 3 years.

PATENTS

The  provisions  of SFAS No. 142,  GOODWILL  AND OTHER  INTANGIBLE  ASSETS,  are
applied to patents and trademarks. Costs incurred for the application of patents
are capitalized and amortized on the straight-line method for 17 years, which is
their estimated useful life. These costs are charged to expense if the patent is
unsuccessful.  The  Company  continually  reviews  patents  for  impairment.  If
conditions  indicate that the carrying  value is not  recoverable  an impairment
charge is recognized to reduce the carrying  amount to the estimated  fair value
of the asset.  Patents  currently  capitalized  relate to both the processes and
products associated with the Company's business.

INVESTMENTS

The Company has a 50% interest in InCon Processing, L.L.C. ("InCon Processing").
InCon Processing is engaged in toll processing,  molecular  separation,  and the
design and sale of molecular separation facilities. The Company accounts for its
investment in InCon Processing using the equity method.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance  with SFAS No. 144,  ACCOUNTING  FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED  ASSETS,  the  Company  continually   evaluates  the  fair  value  of
long-lived  assets for impairment  whenever  events or changes in  circumstances
indicate  that the  carrying  amount  of an  asset  may not be  recoverable.  No
material  impairments  were  determined to have occurred  during the years ended
October 31, 2005, 2004, or 2003.

REVENUE RECOGNITION

The Company generally  recognizes product revenue at the time of shipment to the
customer.  Revenues from the sale of consigned inventory are recognized upon the
sale of the inventory by third  parties.  Revenues from services are recorded at
the time the service is rendered and/or reimbursable expenses are incurred.

Bionutrics' remodeled its strategy to focus on the development of the technology
that  it  has  licensed,  and  the  Company  intends  to  perform  the  Chemical
Manufacturing  and Controls  ("CMC")  development at Kirk  Pharmaceuticals,  its
designated manufacturer. Revenues for the years ended October 31, 2005, 2004 and
2003 were derived  primarily  from  services and product  sales.  Revenues  from
product  sales  during the years  ended  October  31,  2005,  2004 and 2003 were
entirely from the sales of evolve(R), the Company's dietary supplement product.

The Company had no customers  that  accounted for over 10 percent of revenues in
any of the years ended October 31, 2005, 2004, and 2003.

                                      F-7
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,  ORGANIZATION AND NATURE OF
BUSINESS (cont'd)

ADVERTISING EXPENSES

The cost of advertising is charged to expense as incurred.

RESEARCH AND DEVELOPMENT

The cost of research and development is charged to expense as incurred.

STOCK-BASED COMPENSATION

The  Company  accounts  for  stock-based  compensation  in  accordance  with the
provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,  (SFAS 123)
and SFAS NO. 148,  ACCOUNTING  FOR  STOCK-BASED  COMPENSATION  - TRANSITION  AND
DISCLOSURE - AN AMENDMENT OF SFAS NO. 123. The  application  of SFAS No. 148 had
no material effect.

INCOME TAXES

The Company accounts for income taxes using the liability method.  The liability
method  measures  deferred income taxes by applying  enacted  statutory rates in
effect at the  balance  sheet date to the  differences  between the tax bases of
assets and liabilities and their reported  amounts in the financial  statements.
Any resulting deferred tax assets or liabilities are adjusted to reflect changes
in tax laws as they occur.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,  the
disclosure of contingent  assets and  liabilities,  and the reported  amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.  Significant  estimates include the allowance for doubtful
accounts.

CONCENTRATIONS AND CREDIT RISK

CASH

The Company  maintains cash balances in banks,  which, at times,  may exceed the
limits of amounts insured by the Federal Deposit Insurance  Corporation  (FDIC);
however, because deposits are maintained at high quality financial institutions,
management  does  not  believe  that  there  is a  significant  risk  of loss of
uninsured amounts.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

In 2005, the FASB issued the following new statements and interpretations:

In December  2004,  the FASB issued  SFAS No.  152,  Accounting  for Real Estate
Time-Sharing  Transactions  - an  amendment  of FASB  Statements  No. 66 and 67.
Statement 152 is effective  during fiscal years  beginning  after June 15, 2005,
with early application permitted.  The Company does not expect this statement to
have a material impact on its results of operations or financial position.

In December 2004, the FASB issued SFAS No. 153,  Exchanges of Nonmonetary Assets
an  amendment  of ABP  Opinion  No.  29,  which  eliminates  the  exception  for
nonmonetary  exchanges  of  similar  productive  assets and  replaces  it with a
general  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have
commercial  substance.  SFAS  No.  153 is  effective  for

                                      F-8
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,  ORGANIZATION AND NATURE OF
BUSINESS (cont'd)

nonmonetary  assets exchanges  occurring in fiscal periods  beginning after June
15, 2005. The Company will adopt SFAS No. 153 effective October 1, 2005 and does
not expect this statement to have a material impact on its results of operations
or financial position.

In May  2005,  the FASB  issued  SFAS No.  154,  Accounting  Changes  and  Error
Corrections - a replacement of APB Opinion No. 20,  Accounting  Changes and SFAS
No. 3, Reporting  Accounting Changes in Interim Financial  Statements.  SFAS 154
requires   that   voluntary   change  in   accounting   principle   be   applied
retrospectively  with all prior period financial statements presented on the new
accounting  principle.  SFAS  154  also  requires  that a change  in  method  of
depreciating  or amortizing a long-lived  non  financial  asset be accounted for
prospectively  as a change in estimate and  correction  of errors in  previously
issued  financial  statements  should  be  termed a  "restatement".  SFAS 154 is
effective for  accounting  changes and correction of errors made in fiscal years
beginning  after  December 15, 2005. The Company does not expect the adoption of
SFAS 154 to have a material  impact on its results of  operations  or  financial
position.

NOTE 2 - BASIS OF PRESENTATION

GOING CONCERN AND OPERATING PLANS

The accompanying  consolidated  financial statements have been prepared assuming
the Company will continue to operate as a going concern.  Under that assumption,
it is expected that assets will be realized and liabilities will be satisfied in
the normal course of business.  However, the Company has experienced significant
operating  losses and negative  cash flows from  operations in each of the three
years ended  October  31,  2005,  2004,  and 2003.  The  Company  has  sustained
cumulative  losses of approximately $45 million through October 31, 2005 and has
a working capital deficit of approximately $3.9 million at that date. Management
has adopted a plan of action that it believes will address its current financial
requirements  and enables it to achieve a more sound  financial  condition.  The
accompanying  consolidated  financial  statements do not include any adjustments
relating to the  recoverability  and classification of assets and liabilities as
might be necessary if the Company be unable to continue as a going concern.

Substantial doubts have been raised about the Company's ability to continue as a
going concern. As shown in the accompanying  financial  statements,  the Company
has  recurring  losses and negative  cash flows from  operations.  Management is
currently  attempting to secure additional  financing through private placements
and negotiate long-term contracts with foreign companies using its patents.  The
Company's  continuation  as a going  concern is  dependent  upon its  ability to
generate  sufficient  cash flow to meet its  obligations  on a timely basis,  to
maintain adequate financing, and ultimately to attain successful operations.

NOTE 3 - INVENTORY

As of October 31, 2005, and 2004 inventory consists of:

                                  2005        2004
                                  ----        ----

         Finished goods         $ 4,010     $49,321
         Raw materials             --        40,000
                                -------     -------
                                $ 4,010     $ 9,321
                                =======     =======

                                      F-9
<PAGE>

NOTE 4 - PATENTS

Patents consisted of patents for  pharmaceutical-nutritional  chemical compounds
that the Company hopes to develop into effective  pharmaceutical products, and a
license  to  market  certain  pharmaceutical   products  acquired  from  Nostrum
Pharmaceuticals,  Inc. The license,  which has a carrying value of  $13,800,000,
and the right,  which has a carrying value of $116,000 were both acquired during
the year ended  October 31, 2005 in exchange  for 6 million  shares,  and 80,000
shares,  respectively,  of the Company's common stock.  Amortization  charged to
operations  for the years ended  October  31,  2005,  2004  amounted to $30,296,
$30,297, and $24,414, respectively.

NOTE 5 - INVESTMENT IN JOINT VENTURE

The Company accounts for its 50% interest in InCon Processing,  under the equity
method of  accounting  as  economic  control  is shared  with the joint  venture
partner.  The following  presents  summarized  financial  information  for InCon
Processing, which has a fiscal year that ends on August 31.

                                      F-10
<PAGE>

NOTE 5 - INVESTMENT IN JOINT VENTURE (cont'd)

                                INCON PROCESSING
                                 BALANCE SHEETS

                                                               AUGUST 31,
                                                       -------------------------
                                                          2005           2004
ASSETS                                                    ----           ----
  CURRENT ASSETS:
    Cash and cash equivalents                          $   17,668     $  114,356
    Accounts receivable                                   214,214        768,193
    Prepaid expenses and other current assets              42,490         73,034
                                                       ----------     ----------
  Total current assets                                    274,372        955,583
                                                       ----------     ----------
  PROPERTY AND EQUIPMENT                                1,809,954      2,249,302
                                                       ----------     ----------
  GOODWILL                                                721,428        721,428
                                                       ----------     ----------
                                                       $2,805,754     $3,926,313
                                                       ==========     ==========

LIABILITIES AND MEMBERS' EQUITY
  CURRENT LIABILITIES:
    Accounts payable                                   $  315,208     $  254,504
    Accrued expenses and other current liabilities         33,308        442,919
    Customer deposits                                       3,400        143,503
    Deferred revenue                                           --        108,720
    Estimated loss on contracts                                --         82,000
                                                       ----------     ----------
  Total current liabilities                               351,916      1,031,646
                                                       ----------     ----------
  COMMITMENTS AND CONTINGENCIES
  MEMBERS' EQUITY                                       2,453,838      2,894,667
                                                       ----------     ----------
                                                       $2,805,754     $3,926,313
                                                       ==========     ==========

                                      F-11
<PAGE>

NOTE 5 - INVESTMENT IN JOINT VENTURE (cont'd)

                                INCON PROCESSING
                            STATEMENTS OF OPERATIONS

                                               YEAR ENDED AUGUST 31,
                                               ---------------------
                                        2005            2004            2003
                                        ----            ----            ----
REVENUES:
  Service Revenue                   $ 1,856,928     $ 2,242,165     $ 2,621,555
  Equipment sales                     1,586,564       1,817,435         472,517
                                    -----------     -----------     -----------
Total revenues                        3,443,492       4,059,600       3,094,072
                                    -----------     -----------     -----------
COST OF REVENUES:
  Service Revenue                       156,105         105,490         110,640
  Equipment sales                     1,473,353       1,788,432         491,678
                                    -----------     -----------     -----------
Total cost of revenues                1,629,457       1,893,922         602,318
                                    -----------     -----------     -----------
GROSS PROFIT                          1,814,034       2,165,678       2,491,754
                                    -----------     -----------     -----------
SELLING, GENERAL AND
  ADMINISTRATIVE EXPENSES             2,251,646       2,831,007       2,839,431
                                    -----------     -----------     -----------
LOSS FROM OPERATIONS                   (437,612)       (665,329)       (347,677)
                                    -----------     -----------     -----------
OTHER INCOME (EXPENSES):

  Interest income (expense)              (1,960)            779              58
  Loss on abandonment of assets
  and loss on currency                   (1,257)              0        (684,834)
                                    -----------     -----------     -----------
Total other income (expenses)            (3,217)            779        (684,776)
                                    -----------     -----------     -----------
NET LOSS                               (440,829)       (664,550)     (1,032,453)
                                    -----------     -----------     -----------
MEMBERS' EQUITY - BEGINNING           2,894,667       3,559,217       4,591,670
                                    -----------     -----------     -----------
MEMBERS' EQUITY - ENDING            $ 2,453,838     $ 2,894,667     $ 3,559,217
                                    ===========     ===========     ===========



NOTE 6 - NOTES PAYABLE - SHAREHOLDERS AND OTHERS

At October 31, 2005, and 2004, notes payable - shareholders and others consisted
the following:

                                            2005           2004
                                            ----           ----
Notes payable under consolidated,
  multiple advance non-revolving
  agreement - shareholders, matured
  on June 30, 2003 - currently being
  negotiated to include conversion
  feature                                $  583,000     $  583,000
Notes payable under consolidated,
  multiple advance non-revolving
  agreement - others,  matured on
  June 30, 2003 - currently being
  negotiated to include conversion
  feature                                   671,500        671,500
Note payable - third party, bearing
  interest at 12% per year, monthly
  interest only payments, matured on
  December 24, 2003                         150,000        150,000
Other third party note                           --         49,500
Note payable - third party, bearing
  interest at 5% per year                    30,000         30,000
Note payable - third party, bearing
  interest at 9% per year                    17,600             --
Convertible bridge notes, bearing
  discount of $421,020                    1,423,980             --
                                         ----------     ----------
    Total                                $2,876,080     $1,484,000
                                         ==========     ==========

                                      F-12
<PAGE>

NOTE 6 - NOTES PAYABLE - SHAREHOLDERS AND OTHERS (cont'd)

The Company has borrowings under a consolidated, multiple advance, non-revolving
note agreement  with some of its  shareholders  and certain other  parties.  The
fourth  amended  version of this  agreement,  dated  January  31,  2003,  with a
maturity date of June 30, 2003 replaces  earlier  versions of the note agreement
dated in July 2002, April 2002,  October 2001, and June 2001. The original notes
and each of the  amendments  thereto  have an  interest  cost that is based on a
defined  original issue discount,  and which results in a fixed interest cost of
$260,000  applicable to the period from the date of  origination  to the date of
maturity.  The fourth amended version of this agreement specifies an accelerated
interest rate of 25%, which applies to the periods  subsequent to maturity until
the  date of  full  loan  satisfaction.  The  accelerated  interest  results  in
additional  interest  cost of $732,000  through  October 31, 2005.  The combined
interest cost totals  $992,000 and results in an effective  annual interest rate
of  approximately  18% per year since June 2001.  The  Company is  currently  in
negotiations  with the lenders to redraft the note instrument with the intent of
allowing for a conversion feature,  wherein the lenders would have the option to
convert their interest into shares of the Company's common stock in lieu of cash
payment. The outcome of those negotiations can not be predicted.

In October 2005,  the Company began issuing  convertible  bridge notes  ("Bridge
Notes").  The Bridge Notes bear interest at 9% per annum and are  convertible at
$3.00 per share at the option of the holder.  The Bridge  Notes mature 18 months
from the date of issuance.

In  connection  with the issuance of the Bridge  Notes,  the Company also issued
detachable  stock purchase  warrants to purchase 307,496 shares of common stock.
Under the warrant agreement,  a warrant holder is entitled to purchase shares of
the  Company's  common stock at $4.00 per share.  The  warrants  expire in three
years from the date of issuance.  Based on the relative fair values, the Company
has  attributed  $461,245 of the total proceeds to the warrants and has recorded
the  warrants  as  additional  paid in capital  and as a discount  to the Bridge
Notes.  The resulting  discount on the Bridge Notes is being  amortized over the
term of the Bridge Notes as interest Expense.

NOTE 7 - STOCKHOLDERS' DEFICIT

COMMON STOCK

The Company has authorized  45,000,000  shares of common stock, with a par value
of $0.001,  which may be issued.  During the year ending  October 31, 2005,  the
Company issued 6,679,125 shares as follows:

      SHARES ISSUED      CONSIDERATION
      -------------      -------------
            49,500       Settlement of debt.
           250,000       Warrants exercised for gross proceeds of $252,500.
         6,080,000       Pharmaceutical license and technology rights with an
                         aggregate value of $13,916,000.
            25,000       Employee compensation of $43,750.
           159,625       Private sales of stock of $305,400.
           115,000       Shares issued for consulting services of $141,250
         ---------
         6,679,125
         =========

                                      F-13
<PAGE>

PREFERRED STOCK

The Company has authorized  5,000,000  shares of Series A Convertible  Preferred
Stock, with a par value of $0.001,  which may be issued. The 591,850 outstanding
shares  were  issued  prior  to  November  1,  2001  as  consideration  for  the
cancellation of $798,998 of debt and accrued interest thereon that was owed to a
director.  The shares have an annual cumulative dividend of $0.108 per share and
a  liquidation  value of $6.75 per  share,  and each share is  convertible  into
one-fifth of a share of common stock. The preferred shares have a dividend and a
liquidation  preference over common shares.  No dividend on the preferred shares
outstanding  has ever been declared or paid and  dividends in arrears  amount to
$313,470 at October 31, 2005.

On October 3, 2005, the Company entered into a Placement  Agency  Agreement with
Indigo Securities LLC, a Delaware limited liability company ("INDIGO")  whereby,
Indigo agreed to act as the Company's  agent in connection  with the sale by the
Company of up to $5 million of Series A Convertible  Preferred  Stock ("SERIES A
PREFERRED STOCK") together with warrants,  all of which will be offered on terms
and conditions  agreed upon by the Parties.  As of the date herein,  no Series A
Convertible Preferred Stock has been issued on this agreement.

NOTE 7 - STOCKHOLDERS' DEFICIT (cont'd)

STOCK-BASED COMPENSATION

At October 31, 1996, the Company  authorized  380,000 shares of common stock for
issuance under its  Nonqualified  1996 Stock Option Plan (the "1996 Plan) to key
personnel,  consultants, and independent contractors.  Subsequently, in 1997, an
additional 190,000 shares of common stock were authorized for issuance under the
1996 Plan. As of October 31, 2005, and the total of 570,000 common shares remain
as the authorized  number of shares for issuance under the 1996 Plan.  Under the
1996 Plan,  incentive  stock options are granted to purchase common stock at 100
percent (110% for an optionee who is a 10% stockholder) of the fair market value
of the stock on the date of grant.  Stock  options have been granted to purchase
common  stock  at a  price  determined  by the  plan  administrator  and  can be
exercisable  for a period of up to ten years from the date of grant  (five years
for an option granted to a 10%  stockholder).  All  participants are eligible to
receive stock awards and stock  appreciation  rights, as to be determined by the
Company's Board of Directors.  No stock awards or stock appreciation rights have
been granted under the plan.

NON-EMPLOYEE STOCK BASED COMPENSATION

A summary of transactions  for  non-employee  stock options and warrants for the
years ended October 31, 2005, 2004 and 2003 is as follows:

                                      F-14
<PAGE>

<TABLE>
<CAPTION>
                                                                                        WEIGHTED AVERAGE
                                           NUMBER              OPTION                   ----------------
                                             OF                 PRICE              REMAINING        EXERCISE
                                           SHARES               RANGE                 LIFE            PRICE
                                           ------               -----                 ----            -----

<S>                                       <C>              <C>                         <C>            <C>
OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2002                           287,800          $1.00 - $35.00             1.3             $5.84
Warrants issued                            375,000              $1.00                  1.3             $1.00
Warrants canceled                          (56,000)         $5.50 - $35.00              --            $10.22
Options canceled                           (60,000)            $10.00                   --            $10.00
                                          --------

OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2003                           546,800          $1.00 - $20.13             2.8             $1.43
Warrants issued                             50,000              $1.00                  1.3             $1.00
Warrants canceled                          (24,000)             $5.00                   --             $5.00
Options issued                               9,000          $5.00 - $18.13               1            $10.84
Options canceled                            (5,200)        $10.00 - $20.00              --            $17.69
                                          --------

OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2004                           576,600          $1.00 - $18.13             0.4             $1.24
Warrants issued                            307,496              $4.00                  3.0             $4.00
Warrants canceled                         (555,000)             $1.00                   --             $1.00
Options canceled                            (5,600)            $18.13                   --            $18.13
                                          --------

OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2005                           323,496          $3.00 - $5.00              2.9             $3.99
                                          ========
</TABLE>


                                            2005          2004         2003
                                            ----          ----         ----

Options exercisable, end of year            6,000        11,600        7,800
                                          -------       -------      -------
Warrants exercisable, end of year         317,496       565,000      539,000
                                          -------       -------      -------

Weighted average fair value of
  options granted during the year           $0.00         $0.00        $0.00
                                          -------       -------      -------
Weighted average fair value of
  warrants granted during the year          $4.00         $1.00        $1.00
                                          -------       -------      -------


Additional  information regarding options and warrants outstanding as of October
31, 2005 is as follows:

<TABLE>
<CAPTION>
                                                        WEIGHTED
                                         WEIGHTED        AVERAGE                         WEIGHTED
         RANGE OF                         AVERAGE       REMAINING                        AVERAGE
         EXERCISE          NUMBER        EXERCISE      CONTRACTUAL                     EXERCISABLE
          PRICES         OUTSTANDING       PRICE      LIFE (YEARS)     EXERCISABLE        PRICE
          ------         -----------       -----      ------------     -----------        -----

       <S>                 <C>             <C>            <C>             <C>             <C>
       $3.00 - $5.00       323,496         $3.99          2.89            323,496         $3.99
                           =======                                        =======
</TABLE>


In accordance with the methodology prescribed under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company did not recognize any compensation expense
related to  non-employee  stock  options in 2005,  2004,  or 2003.  Compensation
expense of $0, $0, and $36,799  related to employee stock options was recognized
in 2005, 2004, or 2003, respectively.

The fair value of each employee-nonemployee option and warrant was calculated on
the date of grant  using the  Black-Scholes  model with the  following  weighted
average assumptions:

               RISK FREE     VOLATILITY     DIVIDEND
                INTEREST        RATE         YIELD
                --------        ----         -----
       2005       3.13%         550%           0
       2004       2.00%          77%           0
       2003       1.65%         176%           0

                                      F-15
<PAGE>

NOTE 7 - STOCKHOLDERS' DEFICIT (cont'd)

STOCK-BASED COMPENSATION (cont'd)

EMPLOYEE STOCK BASED COMPENSATION

A summary of transactions  for employee stock options and warrants for the years
ended October 31, 2005, 2004, and 2003 is as follows:

<TABLE>
<CAPTION>
                                                                                        WEIGHTED AVERAGE
                                           NUMBER               OPTION                  ----------------
                                             OF                 PRICE              REMAINING        EXERCISE
                                           SHARES               RANGE                 LIFE            PRICE
                                           ------               -----                 ----            -----

<S>                                       <C>              <C>                         <C>            <C>
OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2002                           398,000          $5.00 - $25.00             3.47           $11.11
Options granted                                 --               $ --                   --              --
Options canceled                           (35,800)        $20.00 - $25.00              --            $20.28
                                          --------

OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2003                           362,200          $5.00 - $18.13             2.75           $10.20
Options granted                                 --               $ --                   --              --
Options canceled                          (106,800)         $5.00 - $18.13              --             $8.42
                                          --------

OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2004                           255,400          $5.00 - $18.13             2.44           $10.70
Options granted                                 --               $ --                   --              --
Options canceled                           (22,400)         $5.00 - $18.13              --             $8.75
                                          --------

OPTIONS AND WARRANTS
OUTSTANDING,
October 31, 2005                           233,000          $5.00 - $18.13             2.44           $10.70
                                          ========
</TABLE>


                                         2005         2004         2003
                                         ----         ----         ----

Options exercisable, end of year        113,000      135,400      242,200
                                       --------     --------     --------
Warrants exercisable, end of year       120,000      120,000      120,000
                                       --------     --------     --------

Weighted average fair value of
  options granted during the year      $     --     $     --     $     --
                                       --------     --------     --------

Options available for future grant
  under the 1996 Plan                   441,153
                                       ========

                                      F-16
<PAGE>

NOTE 7 - STOCKHOLDERS' DEFICIT (cont'd)

STOCK-BASED COMPENSATION (cont'd)

EMPLOYEE STOCK BASED COMPENSATION (cont'd)

Additional  information regarding options and warrants outstanding as of October
31, 2005 is as follows:

<TABLE>
<CAPTION>
                                        OUTSTANDING                            EXERCISABLE
                         -----------------------------------------     ---------------------------
                                                        WEIGHTED
                                         WEIGHTED        AVERAGE                        WEIGHTED
         RANGE OF                        AVERAGE        REMAINING                        AVERAGE
         EXERCISE          NUMBER        EXERCISE      CONTRACTUAL                     EXERCISABLE
          PRICES         OUTSTANDING      PRICE       LIFE (YEARS)     EXERCISABLE        PRICE
          ------         -----------      -----       ------------     -----------        -----

      <S>                  <C>           <C>              <C>            <C>             <C>
           $5.00           113,000       $ 5.00           0.42           113,000         $ 5.00
          $16.25           120,000       $16.25           2.75           120,000         $16.25
                           -------                                       -------

      $5.00 - $16.25       233,000       $10.79           1.62           233,000         $10.79
                           =======                                       =======
</TABLE>


In  accordance  with the  methodology  prescribed  under  SFAS  123,  pro  forma
compensation  cost for the employee  stock options for 2005,  2004, and 2003 was
estimated to be $0.00, $-0-, and $-0-, respectively.

LOSS PER COMMON SHARE

Net loss per common  share is  calculated  by dividing  net loss by the weighted
average number of shares outstanding during each period presented.  Common stock
equivalents,  consisting  of options and warrants  have not been included in the
calculation  for any of the three years ended October 31, 2005,  2004, and 2003,
because their effect would be anti-dilutive.  The following potentially dilutive
securities were not included in the computation of diluted loss per share:

                              2005        2004        2003
                              ----        ----        ----
          Options           119,000     147,000     250,000

          Warrants          437,496     685,000     659,000

The following  table sets forth the numerator and denominator in the computation
of basic and diluted per share information:

<TABLE>
<CAPTION>
                                               2005            2004           2003
<S>                                       <C>              <C>             <C>
Numerator for basic and diluted loss
per share:
  Net Loss                                $ (2,911,260)    $(1,124,336)    $ (759,522)
                                          ------------     -----------     ----------

Denominator for basic and diluted
loss per share:
  Weighted-average shares outstanding       20,094,784       7,840,496      4,352,600
                                          ------------     -----------     ----------
</TABLE>

                                      F-17
<PAGE>

NOTE 9 - EMPLOYEE BENEFIT PLANS

The Company's  defined  contribution  employee plan under Section  401(k) of the
Internal Revenue Code was discontinued. The plan assets were distributed to plan
participants,  and the final tax  return  was filed  with the  Internal  Revenue
Service during the year ending October 31, 2005.

NOTE 10 - INCOME TAXES

Federal and state income tax expense  (benefit)  for the years ended October 31,
2005, 2004 and 2003 and a reconciliation  of income taxes computed at the United
States  federal  statutory  income tax rate to the  provision  for income  taxes
reflected in the Statements of Operations is presented below:

                                   2005             2004             2003
                               -----------      -----------      -----------
Current:
  Federal                      $  (989,828)     $  (382,274)     $  (258,237)
  State                           (174,676)         (67,460)         (45,571)

Deferred:
  Federal                       (1,146,225)         (30,369)        (175,516)
  State                           (202,275)          (5,359)         (30,974)

Valuation allowance              2,513,004          414,006           97,318
                               -----------      -----------      -----------

Provision for Income Taxes     $        --      $        --      $        --
                               ===========      ===========      ===========


Deferred  income  taxes  reflect  the net tax  effect of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the  amounts  used for income tax  purposes.  Deferred  tax assets
result primarily from net operating loss  carry-forwards.  The components of the
Company's  deferred tax assets and  liabilities  at October 31, 2005,  2004, and
2003 are as follows:

DEFERRED TAX ASSETS:                 2005             2004             2003
                                 ------------     ------------     ------------
Operating loss carryforwards     $ 15,821,702     $ 12,927,701     $ 12,513,695
Stock option compensation             262,706          392,098          392,098
Deferred loss on inventory             17,600           47,002           47,002
Reserve accounts                           --          184,844          184,844
Other                                      --           37,359           37,359
                                 ------------     ------------     ------------

Total Deferred Tax Asset           16,102,008       13,589,004       13,174,998
Valuation Allowance               (16,102,008)     (13,589,004)     (13,174,998)
                                 ------------     ------------     ------------

                                 $         --     $         --     $         --
                                 ============     ============     ============


A full  valuation  allowance is provided  against all deferred tax assets due to
the uncertainty as to their future realization.  In addition, the realization of
such NOL  carryforwards  may be  significantly  limited  if it is deemed  that a
change in ownership  has occurred.  For tax purposes,  a change in ownership has
occurred if an entity or group of entities  that  previously  did not own 50% or
more of a Company  acquires enough new equity to raise its interest to more than
50% over a three year period.

                                      F-18
<PAGE>

NOTE 10 - INCOME TAXES (cont'd)

As of October  31,  2005,  the Company  has  federal  net  operating  loss carry
forwards totaling  approximately  $39,554,000 available to offset future federal
taxable income. The federal net operating loss carry-forwards  expire in varying
amounts  through  2024. In addition,  the Company has state net  operating  loss
carry forwards  totaling  approximately  $35,700,000  available to offset future
state taxable income.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leased office space on a month-to-month  basis. Rent expense for the
years ended October 31, 2005,  2004, and 2003 was $25,967  $23,696,  and $7,464,
respectively.

LITIGATION

The Company and a subsidiary have been subject to litigation  seeking to recover
amounts due for services of approximately  $267,000.  The Company disputes these
liabilities  and  intends to defend  itself as well as pursue  negotiations  for
settlement. The final outcome of these matters cannot be determined.

NOTE 12 - RELATED PARTY TRANSACTIONS

On March 16, 2005, the Company entered into a Technology  License  Agreement and
replaced in its  entirety the Product  Development  and License  Agreement  with
Nostrum Pharmaceuticals, Inc. ("Nostrum") dated June 16, 2004. The license grant
provided for ten 505 (b)(2) Products and ten Generic  products,  and the Company
issued 6 Million shares of its common stock to Nostrum.  In July,  2004,  Nirmal
Mulye, an individual that is the majority  shareholder of Nostrum, was appointed
to the Company's board of directors.

On August 15,  2005,  the  Company  issued  80,000  shares of Common  Stock in a
private placement to James Belcher and his designees,  a current shareholder and
note holder of the Company,  for rights to certain  technology.  The transaction
was valued at  $116,000,  the fair market  value of the  Company's  stock on the
given date.

On September 27, 2005,  the Company  entered into an Assumption  Agreement  with
Nostrum  Pharmaceuticals,  whereby the Company's assumed Nostrum's obligation to
pay Enem Nostrum Remedies Pvt. Ltd., a related party to Nostrum,  $1,508,000 for
its  work  in the  research  and  development  of  pharmaceutical  products.  In
consideration of the Company's assumption of the foregoing obligations,  Nostrum
agrees that the  assumption  and payment shall be a credit against the Company's
obligation  pursuant to Section 3.2(c) of the Technology License Agreement dated
as of March 16, 2005,  to reimburse  Nostrum for  reasonable  costs and expenses
incurred in providing assistance to the Company.

NOTE 13 - LICENSE AGREEMENT

In September,  2004, the Company  announced a Product and  Technology  Agreement
("Agreement") with Nostrum Pharmaceuticals  ("Nostrum"), in which Nostrum agreed
to provide  Bionutrics with certain drug technology in connection with 505(b)(2)
drug  candidates,  and in  return  Nostrum  received  6  Million  shares  of the
Company's common stock as compensation.  Section  505(b)(2) of the federal Food,
Drug, and Cosmetic Act was established by the Hatch-Waxman Amendments of 1984 to
allow  sponsors  to  obtain  approval  of  new  drug  applications   ("New  Drug
Applications") based upon "full reports of investigations" establishing a drug's
safety and efficacy where such investigations  "were not conducted by or for the
505(b)(2)  applicant  and for which the  applicant  has not  obtained a right of
reference  or use  from  the  person  by or for  whom  the  investigations

                                      F-19
<PAGE>

were conducted" (21 U.S.C.  355(b)(2)).  The Food, Drug, and Cosmetic Act permit
the  approval  of certain  products  under a modified  version of the  original,
traditional New Drug Application process. The complexity,  development costs and
approval processes for new 505(b)(2) drugs generally fall between those required
for a traditional  New Drug  Application  and those  required for generic drugs.
Drug  applications  referred to as 505(b)(2)  drug  candidates are drug products
that are potentially "brandable," that may have higher margins than generic drug
products but that would have lower  development  costs than would completely new
chemical entities. There are no royalty payments due Nostrum per this agreement.

On March 16, 2005, the Company announced a revised  Technology License Agreement
(the "License  Agreement") with Nostrum for the development of an additional ten
proprietary  generic drugs utilizing  Nostrum's  technology.  For  compensation,
Nostrum  received an additional 6 Million shares of the Company's  common stock.
As a result of the License Agreement,  Bionutrics will have exclusive  worldwide
rights to these products. The Company is required to pay to Nostrum a royalty of
50% of net sales less cost of goods and other customary offsets.

On October 3, 2005,  the Company  entered  into  Amendment  No. 3 to the License
Agreement,  dated as of March 16, 2005,  as amended June 30, 2005 and August 25,
2005, by and between the Company and Nostrum  whereby,  Nostrum  agreed to waive
termination  rights set forth in the Agreement.  In consideration of such waiver
of termination rights, the Company assumed and discharged  Nostrum's  obligation
to pay Enem Nostrum Remedies Pvt. Ltd. $1,508,000 for its work in development of
certain pharmaceutical products which were previously invoiced to Nostrum.

Nostrum  is a New Jersey  based  pharmaceutical  company  which  specializes  in
formulation  and delivery drug  technology and which has focused its research on
the  development  of generic and  alternative,  505(b)(2) drug products based on
existing  chemical  formulations.  In exchange  for the  technology  and product
rights extended to Bionutrics,  Nostrum  received  shares of Bionutrics'  common
stock, making Nostrum the largest shareholder of the Company.

Note 14 - PURCHASE AGREEMENT

In July,  2005, the Company entered into a Purchase  Agreement  ("Agreement") to
acquire  Kirk   Pharmaceuticals,   LLC,  and  its  affiliate,   ANDAPharm,   LLC
("collectively  Kirk") for $12,000,000 in cash and a promissory  note. Kirk is a
Florida based pharmaceutical company that manufactures  over-the-counter ("OTC")
and  generic  prescription  drugs  in its FDA and DEA  approved  facility.  Kirk
currently   manufactures   and/or  markets  30  OTC  solid  dose  and  soft  gel
pharmaceuticals  under cGMP (current Good Manufacturing  Practices)  guidelines.
Kirk was  founded  in 1999 and has grown to more than 100  people  and  occupies
70,000 square feet of  manufacturing  space. If the Company is successful in its
acquisition  of Kirk, the Company  intends to fund some of its planned  clinical
trials and product  development  programs with  potential  cash flow from Kirk's
operations.   The  Company   anticipates   that  Kirk  will  be  the  designated
manufacturing  facility for its  products,  subsequent  to their  approval.  The
Company  is  currently  awaiting  approval  of the  acquisition  from  the  Drug
Enforcement Agency ("DEA").

Note 15 - PLACEMENT AGENCY AGREEMENT

On September 27, 2005,  the Company  entered into a Placement  Agency  Agreement
with Indigo  Securities LLC, a Delaware  limited  liability  company  ("Indigo")
whereby,  Indigo agreed to act as the Registrant's  agent in connection with (i)
the sale by the  Registrant of from  $5,000,000  to  $10,000,000  million,  face
amount of the Company's 10% Senior Notes, to be offered  together with warrants,
(ii) the sale (the "Bridge Financing") by the Company of up to $2,500,000,  face
amount of the Company's 9% Convertible Bridge Notes (the "Bridge Notes"),  to be
offered together with warrants (the "Bridge Warrants") and (iii) the sale by the
Company of up to $5 million of Series A Convertible  Preferred  Stock ("Series A
Preferred  Stock") of the Company  together with warrants,  all of which will be
offered  on

                                      F-20
<PAGE>

terms and  conditions  agreed upon by the Parties.  As of the date  herein,  the
Company has issued $2,995,000 under the 9% Convertible Bridge Notes. No Series A
Convertible Preferred Stock has been issued.

Note 16 - SALES AGREEMENT OF INCON PROCESSING, LLC

On October 31, 2005, the Company together with Asia Pacific Investment  Holdings
Limited  ("Asia  Pacific")  agreed to sell their  respective  interests in InCon
Processing,  LLC ("InCon"),  to John Palmer and N.P. Shaikh, current managers of
that operation. The InCon operation was deemed by the Company to no longer be an
important  element in its current business  strategy.  The sale provides for the
distribution to the sellers of future Earnings Before Interest, Depreciation and
Amortization (EBITDA) in the total amount of $600,000, the assignment of certain
tocotrienol  processing technology and the conveyance of the respective interest
of Messrs.  Palmer and Shaikh in Bali Holding,  LLC, a holding  company that has
Bionutrics  restricted common stock, of which 118,000 shares would accrue to the
sellers.  The sale proceeds  noted above would be split between  Bionutrics  and
Asia Pacific when  distribution  was made.  The sale by Bionutrics was dependent
upon approval by the holders of a Consolidated,  Multiple Advance, Non-Revolving
Note (Note) agreement with the Company, which have a security interest in InCon.
The Company has agreed to hold any  distributed  sale proceeds in escrow pending
satisfaction  of the Note. Such approval is in the process of being addressed by
the  Company,  and  while  management  believes  that it  will  be  successfully
obtained,  no assurance can be given that it will be completed nor that the sale
will be consummated.

Note 17 - INTEREST EXPENSE ON CONVERTIBLE NOTES

In November  2005, the Company  issued  $450,000 of 9% convertible  bridge notes
along with detachable  warrants to certain  investors under the Indigo Placement
Agency  Agreement.  The convertible notes are convertible into common stock at a
price per share which was below the estimated fair value of the Company's common
stock at the date of issuance of the notes. Accordingly,  the Company recorded a
"non-cash  beneficial  conversion  charge"  of $57,351  as  additional  interest
expense, to be amortized over the term of the notes.

In December  2005, the Company  issued  $200,000 of 9% convertible  bridge notes
along with detachable  warrants to certain  investors under the Indigo Placement
Agency  Agreement.  The convertible notes are convertible into common stock at a
price per share which was below the estimated fair value of the Company's common
stock at the date of issuance of the notes. Accordingly,  the Company recorded a
"non-cash  beneficial  conversion  charge"  of $78,852  as  additional  interest
expense, to be amortized over the term of the notes.

In January 2006,  the Company  issued  $100,000 of 9%  convertible  bridge notes
along with detachable  warrants to certain  investors under the Indigo Placement
Agency Agreement.  The convertible notes were convertible into common stock at a
price per share which was below the estimated fair value of the Company's common
stock at the date of issuance of the notes. Accordingly,  the Company recorded a
"non-cash  beneficial  conversion  charge"  of $16,898  as  additional  interest
expense, to be amortized over the term of the notes.

NOTE 18 - SUBSEQUENT EVENTS

On November 3, 2005, the Company  received a commitment from BHC Interim Funding
II L.P.,  a merchant  banking  firm  ("BHC"),  to lend up to $10.0  million to a
newly-formed  subsidiary  of the  Company  for the  purpose of  acquiring  Kirk.
Funding  pursuant to the Commitment is subject to satisfactory  legal review and
documentation,  no material  adverse  changes,  as well as additional  terms and
conditions.  The  Loan  is  anticipated  to  be  structured  as  senior  secured
indebtedness, of which $8,000,000 will be drawn at closing (the "INITIAL LOAN"),
and an incremental  $2,000,000  credit facility (the "FACILITY") to be available
on

                                      F-21
<PAGE>

the six month  anniversary  of the closing.  The  Facility  will  constitute  an
additional draw under the loan documents. The Loan will have an interest rate of
12% per annum,  payable  monthly in  arrears,  and will mature on the date three
years from the date of the closing of the  acquisition of Kirk.  There will also
be a  maintenance  fee,  adjusted  periodically,  to achieve an accrual  rate of
4.75%. The Loan is not subject to an amortization schedule and may be prepaid at
any time. In the event the Loan is not paid in full at maturity, notwithstanding
any other penalties that may be paid, and notwithstanding BHC's rights,  actions
and efforts to pursue repayment,  the Company shall, among other things, after a
15-day cure period pay a cash fee of 5.0% of the amount then outstanding to BHC.

The  Company  will be  required  to utilize  the  proceeds  of any new senior or
subordinated  debt or equity  or other new  financing  by or  investment  in the
Company,  as well as the  proceeds  from  the  sale of any  assets  outside  the
ordinary  course of  business  or the sale or merger of the Company to repay the
Investment.

The  Company  shall be  required  to pay a 3.0%  transaction  fee based upon the
amount funded and,  upon  repayment of the  Investment,  will be required to pay
maintenance  fees  prorated  to  reflect  the time and  principal  amount of the
Investment.

The Loan shall be secured by a first  priority  lien on all  existing and future
tangible and intangible assets owned by the Company,  including the tangible and
intangible assets of Kirk.  Notwithstanding the foregoing,  the Loan will have a
second priority lien on specific  tangible assets that, after the closing of the
acquisition of Kirk, are financed with equipment loans. The Loan will be further
secured  by:  (i) a pledge of 100% of the  Company's  interest  in Kirk;  (ii) a
pledge of 100% of the Company's interest in ANDAPharm,  LLC, (iii) the corporate
guarantees of the Company and ANDAPharm,  LLC, and (iv) a first priority lien on
the Company's  technology,  including its patents and products  derived from its
license agreement with Nostrum Pharmaceuticals, Inc. However that lien shall not
preclude the Company from entering into agreements  related to its technology in
the  ordinary  course of  business,  so long as no event of default has occurred
under the loan documents.

Further,  upon the  closing  of the  Loan,  BHC will  have the right to a 5-year
warrant to purchase  shares of the 125,000 shares of common stock of the Company
for $4.00 per share, subject to a number of conditions.

While the Initial Loan is outstanding,  BHC shall a) have observation  rights to
Board of Directors and Audit Committee  meetings of the Company and Kirk, (b) be
given  reasonable  notification  of such meeting  dates,  and (c) be entitled to
receive copies of all written  information and notices  provided to the Board of
Directors and Audit Committee at the same time as the members. In the event of a
payment default under the Initial Loan and the Facility which is not cured in 15
days,  BHC would be entitled to appoint one person to the Board of  Directors of
the Company.

In the event that the Company  determines not to utilize the Loan there shall be
a $75,000 break-up fee.

In November 2005, the Company completed a private placement of convertible notes
and warrants (the  "Financing").  The gross  proceeds of the  Financing  totaled
$450,000.  Pursuant to the Financing,  the Company issued  $450,000 of principal
amount of 9% convertible notes (the "Convertible Notes"),  which are convertible
into an aggregate of 150,000 shares of Company common stock at a price of $3.00,
and warrants to purchase an aggregate  74,999 shares of Company  common stock at
$4.00 per share (the "Private Warrants"). These Warrants were valued at $132,351
using the Black  Scholes  Model,  assuming a life of three years,  volatility of
550%,  and a risk free  borrowing rate of 3.375% and will be charged to interest
expense over the life of the debt  commencing in 2005.  In connection  with this
financing, the Company paid a cash private placement fee of $40,500 and incurred
approximately  $1,300 in indirect fees  consisting of primarily  legal expenses.
This will also be amortized and charged to interest expense over the life of the
debt.

                                      F-22
<PAGE>

In  November  2005,  the  Company  entered  in to a  sub-leasing  agreement  for
approximately  1,208 square feet of office space for its research and technology
development staff in Edison,  NJ, with monthly payments of $2,750. The agreement
expires on September 9, 2007.

In December 2005, the Company completed a private placement of convertible notes
and warrants (the  "Financing").  The gross  proceeds of the  Financing  totaled
$200,000.  Pursuant to the Financing,  the Company issued  $200,000 of principal
amount of 9% convertible notes (the "Convertible Notes"),  which are convertible
into an aggregate of 66,666 shares of Company  common stock at a price of $3.00,
and warrants to purchase an aggregate  33,333 shares of Company  common stock at
$4.00 per share (the "Private Warrants").  These Warrants were valued at $68,852
using the Black  Scholes  Model,  assuming a life of three years,  volatility of
550%,  and a risk free  borrowing rate of 3.375% and will be charged to interest
expense over the life of the debt  commencing in 2005.  In connection  with this
financing,  the Company paid a cash private placement fee of $18,000, which will
also be amortized and charged to interest expense over the life of the debt.

In December  2005, the Company  formed three new Nevada  Corporations;  Synovics
Laboratories,  Inc., Kirk Pharmaceuticals,  Inc. and ANDAPharm Inc. Synovics was
formed for future use and does not  currently  have any  operations / employees.
Ronald H. Lane, Ph.D. is the sole director, President,  Secretary, and Treasurer
of the  Company.  Kirk and  ANDAPharm  were formed in  anticipation  of the Kirk
acquisition.  Ronald H. Lane, Ph.D. is the sole director,  Chairman,  Secretary,
and Treasurer and John S. Copanos  remains as President of each. The acquisition
is currently pending due to DEA approval.

In January 2006, the Company  entered in to a lease  agreement for its principal
executive  offices  consisting of  approximately  1,561 square feet, in Phoenix,
Arizona under a three year lease agreement that expires on January 1, 2009, with
monthly payments of $4,659.

In January 2006, the Company  completed a private placement of convertible notes
and warrants (the  "Financing").  The gross  proceeds of the  Financing  totaled
$500,000.  Pursuant to the Financing,  the Company issued  $500,000 of principal
amount of 9% convertible notes (the "Convertible Notes"),  which are convertible
into an aggregate of 166,666 shares of Company common stock at a price of $3.00,
and warrants to purchase an aggregate  83,332 shares of Company  common stock at
$4.00 per share (the "Private Warrants"). These Warrants were valued at $139,322
using the Black  Scholes  Model,  assuming a life of three years,  volatility of
550%,  and a risk free  borrowing  rate of 3.25% and will be charged to interest
expense over the life of the debt  commencing in 2005.  In connection  with this
financing,  the  Company  paid a cash  private  placement  fee of  $45,000,  and
incurred  approximately  $29,000 in indirect fees consisting  primarily of legal
expenses.

On January 18, 2006, the Company announced that it has initiated the process for
its first  controlled-release  generic drug candidate,  SNG1001a, with chemical,
manufacturing and control ("CMC")  development.  Concurrently,  the Company will
conduct  biostudies to  demonstrate  "bioequivalency"  as the Company moves this
first product towards  commercialization.  These efforts are intended to provide
confirmation of the formulation and biostudies  previously  undertaken in India.
Completion of these  efforts is  anticipated  to result in the  Company's  first
Abbreviated New Drug  Application  ("ANDA")  filing with the FDA.  SNG1001a is a
formulated  generic  version  of a branded  drug in a  treatment  category  with
annualized US sales in excess of $1.4 billion (IMS).

                                      F-23
<PAGE>

                            INCON PROCESSING, L.L.C.

                                 BALANCE SHEETS

                                     ASSETS

                                                               AUGUST 31,
                                                       -------------------------
                                                          2005           2004
                                                       ----------     ----------

CURRENT ASSETS:
    Cash and cash equivalents                          $   17,668     $  114,356
    Accounts receivable                                   214,214        768,193
    Prepaid expenses and other currrent assets             42,490         73,034
                                                       ----------     ----------
               Total current assets                       274,372        955,583
                                                       ----------     ----------

PROPERTY AND EQUIPMENT                                  1,809,954      2,249,302
                                                       ----------     ----------

GOODWILL                                                  721,428        721,428
                                                       ----------     ----------

                                                       $2,805,754     $3,926,313
                                                       ==========     ==========


                        LIABILITIES AND MEMBERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                   $  315,208     $  254,504
    Accrued expenses and other current liabilities         33,308        442,919
    Customer deposits                                       3,400        143,503
    Deferred revenue                                           --        108,720
    Estimated loss on contract                                 --         82,000
                                                       ----------     ----------
               Total current liabilities                  351,916      1,031,646
                                                       ----------     ----------

COMMITMENTS AND CONTINGENCIES

MEMBERS' EQUITY                                         2,453,838      2,894,667
                                                       ----------     ----------

                                                       $2,805,754     $3,926,313
                                                       ==========     ==========



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

                                      F-24
<PAGE>

                            INCON PROCESSING, L.L.C.

             STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' EQUITY
<TABLE>
<CAPTION>

                                                       YEARS ENDED AUGUST 31,
                                           ---------------------------------------------
                                               2005             2004             2003
                                           -----------      -----------      -----------
<S>                                        <C>              <C>              <C>
REVENUES:
      Service Revenue                      $ 1,856,928      $ 2,242,165      $ 2,621,555
      Equipment sales                        1,586,564        1,817,435          472,517
                                           -----------      -----------      -----------
         Total revenues                      3,443,492        4,059,601        3,094,072
                                           -----------      -----------      -----------
COST OF REVENUES:
      Service Revenue                          156,105          105,490          110,640
      Equipment sales                        1,473,353        1,788,432          491,678
                                           -----------      -----------      -----------
         Total cost of revenues              1,629,458        1,893,922          602,318
                                           -----------      -----------      -----------
GROSS PROFIT                                 1,814,034        2,165,679        2,491,754
                                           -----------      -----------      -----------
SELLING, GENERAL AND
      ADMINISTRATIVE EXPENSES                2,251,646        2,831,007        2,839,431
                                           -----------      -----------      -----------
LOSS FROM OPERATIONS                          (437,612)        (665,329)        (347,677)
                                           -----------      -----------      -----------
OTHER INCOME (EXPENSES):
      Interest expense, net                     (1,960)             779               58
      Loss on currency                          (1,257)              --               --
      Loss on abandonment of assets                 --               --         (684,834)
                                           -----------      -----------      -----------
         Total other income (expenses)          (3,217)             779         (684,776)
                                           -----------      -----------      -----------
NET LOSS                                      (440,829)        (664,550)      (1,032,453)
MEMBERS' EQUITY - beginning                  2,894,667        3,559,217        4,591,670
                                           ===========      ===========      ===========
MEMBERS' EQUITY - ending                   $ 2,453,838      $ 2,894,667      $ 3,559,217
                                           ===========      ===========      ===========
</TABLE>


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

                                      F-25
<PAGE>

                            INCON PROCESSING, L.L.C.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                YEARS ENDED AUGUST 31,
                                                                    ---------------------------------------------
                                                                         2005             2004            2003
                                                                    -----------      -----------      -----------
<S>                                                                 <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                      $  (440,829)     $  (664,550)     $(1,032,453)
      Adjustments to reconcile net loss to net cash provided by
         (used in) operating activities:
           Depreciation and amortization                                439,347          450,433          432,334
           Amortization of goodwill                                          --               --               --
           Abandonment of equipment                                          --               --          684,835
           Estimated loss on contract                                   (82,000)          14,842           67,159
           Changes in assets and liabilities:
              Accounts receivable                                       553,979         (419,283)        (164,490)
              Prepaid expenses and other current assets                  30,544          (25,195)          22,232
              Accounts payable                                           60,704          111,581          (39,762)
              Accrued expenses and other current liabilities           (409,610)         209,546           91,516
              Customer deposits                                        (140,103)         143,503               --
              Deferred revenue                                         (108,720)         108,720          (41,928)
                                                                    -----------      -----------      -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                     (96,688)         (70,403)          19,443
                                                                    -----------      -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES                                         --               --               --
                                                                    -----------      -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES                                         --               --               --
                                                                    -----------      -----------      -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS                                 (96,688)         (70,403)          19,443
CASH AND CASH EQUIVALENTS  - beginning                                  114,356          184,760          165,317
                                                                    -----------      -----------      -----------
CASH AND CASH EQUIVALENTS  - ending                                 $    17,668      $   114,356      $   184,760
                                                                    ===========      ===========      ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid during the year for:
         Interest                                                   $        --      $        --      $        --
         Income taxes                                               $        --      $        --      $        --
</TABLE>


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

                                      F-26
<PAGE>



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

InCon  Processing,  LLC (the  "Company")  was created as a 50/50  joint  venture
between InCon Technologies,  Inc.  ("InCon"),  a 100 percent owned subsidiary of
Bionutrics,  Inc. ("Bionutrics"),  and ACH Food Companies, Inc. ("ACH," formerly
AC HUMKO CORP.) on June 25, 1999.  During fiscal 2003, ACH sold its 50% interest
to Asia Pacific Investment Holdings, Ltd.

The Company took over substantially all of the business previously engaged in by
InCon relating to toll processing, molecular separation, and the design and sale
of   molecular   separation   facilities.   The  Company   operates  a  chemical
manufacturing  facility near Chicago,  Illinois.  The Company  provides its toll
processing and molecular separation services for chemical, food processing,  and
pharmaceutical  companies  primarily  in the  United  States of  America  and in
Southeast  Asia.  The  Company  intends to utilize its  expertise  to expand its
existing  business into  processing  micronutrients  that would be available for
food grade products.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America 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 reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

PROPERTY AND DEPRECIATION

Property and equipment are stated at cost.  Improvements that extend the life or
usefulness of an asset are capitalized.  Depreciation is computed principally on
a straight-line method over the estimated useful lives of the individual assets.
The estimated useful lives of depreciable assets are:

         Equipment, furniture and fixtures           3 - 10 years
         Leasehold improvements                      10 years
         Capitalized software                        3 years

Leasehold  improvements  are amortized  over the lesser of the lease life or the
useful  life of the  asset.  Expenditures  for    repairs  and  maintenance  are
expensed when incurred.

                                      F-27
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,  ORGANIZATION AND NATURE OF
BUSINESS (cont'd)

GOODWILL

Management  performs an annual  review of the  carrying  amount of goodwill  for
impairment.  Whenever  circumstances  indicate  that the value of  goodwill  has
become impaired a charge is recorded to reflect its continuing value.

Long-Lived Assets

The Company  reviews the carrying  amounts of long-lived  assets for  impairment
whenever  events or  changes in  circumstances  indicate  that the net  carrying
amount may not be  recoverable.  When such events  occur,  the Company  measures
impairment  by  comparing  the  carrying  value of the  long-lived  asset to the
estimated  undiscounted  future  cash flows  expected  to result from use of the
assets and their eventual  disposition.  If the sum of the expected undiscounted
future cash flows were less than the carrying amount of the assets,  the Company
would  recognize an impairment  loss. The  impairment  loss, if determined to be
necessary,  would be measured as the amount by which the carrying  amount of the
asset exceeds the fair value of the asset.

REVENUE RECOGNITION

The Company  recognizes  revenue from  services at the time service is rendered.
Revenues on  long-term  contracts  are  recorded  on the basis of the  estimated
percentage  of  completion  of  individual   contracts   determined   under  the
cost-to-cost  method.  The  percentage  deemed to be complete is  calculated  by
comparing the costs incurred to date to estimated total costs for each contract.
Adjustments to this  measurement are made when  management  believes that actual
costs incurred exceed the expected costs to date.  Estimated losses on long-term
contracts are recognized in the period in which the loss becomes apparent.

INCOME TAXES

The Company has elected to be treated as a limited liability company for federal
and state  income  tax  purposes.  As such,  all  taxable  income or loss of the
Company  is  included  in the  income tax  returns  of the  respective  members.
Accordingly, no provision has been made for federal or state income taxes in the
accompanying financial statements.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

In 2005, the FASB issued the following new statements and interpretations:

In December  2004,  the FASB issued  SFAS No.  152,  Accounting  for Real Estate
Time-Sharing  Transactions  - an  amendment  of FASB  Statements  No. 66 and 67.
Statement 152 is effective  during fiscal years  beginning  after June 15, 2005,
with early application permitted.  The Company does not expect this statement to
have a material impact on its results of operations or financial position.

In December 2004, the FASB issued SFAS No. 153,  Exchanges of Nonmonetary Assets
an  amendment  of ABP  Opinion  No.  29,  which  eliminates  the  exception  for
nonmonetary  exchanges  of  similar  productive  assets and  replaces  it with a
general  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have
commercial substance. SFAS No. 153 is effective for

                                      F-28
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,  ORGANIZATION AND NATURE OF
BUSINESS (cont'd)

nonmonetary  assets exchanges  occurring in fiscal periods  beginning after June
15, 2005. The Company will adopt SFAS No. 153 effective October 1, 2005 and does
not expect this statement to have a material impact on its results of operations
or financial position.

In May  2005,  the FASB  issued  SFAS No.  154,  Accounting  Changes  and  Error
Corrections - a replacement of APB Opinion No. 20,  Accounting  Changes and SFAS
No. 3, Reporting  Accounting Changes in Interim Financial  Statements.  SFAS 154
requires   that   voluntary   change  in   accounting   principle   be   applied
retrospectively  with all prior period financial statements presented on the new
accounting  principle.  SFAS  154  also  requires  that a change  in  method  of
depreciating  or amortizing a long-lived  non  financial  asset be accounted for
prospectively  as a change in estimate and  correction  of errors in  previously
issued  financial  statements  should  be  termed a  "restatement".  SFAS 154 is
effective for  accounting  changes and correction of errors made in fiscal years
beginning  after  December 15, 2005. The Company does not expect the adoption of
SFAS 154 to have a material  impact on its results of  operations  or  financial
position.

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment at August 31, consists of the following:

                                       2005             2004
                                   -----------      -----------

Equipment, furniture and
fixtures                           $ 4,231,557      $ 4,231,557

leasehold improvements                  51,745           51,745
                                   -----------      -----------

                                     4,283,302        4,283,302

Less: Accumulated depreciation

and amortization                    (2,473,348)      (2,034,000)
                                   -----------      -----------

                                   $ 1,809,954      $ 2,249,302
                                   ===========      ===========


NOTE 3 - LEASES

The Company has  operating  leases for office  space that expires July 31, 2007.
Total rental  expense was $113,469,  $184,590,  and $176,905 for the years ended
August 31, 2005,  2004,  and 2003,  respectively.  Future minimum lease payments
under noncancelable operating leases at August 31, 2005 are as follows:

         2006             $  151,496
         2007                138,871
                          ----------
                             290,367
                          ==========


NOTE 4 - EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code. Each participant may elect to defer up to 15 percent of his or her
compensation

                                      F-29
<PAGE>

and have such  amounts  matched by the  Company at a rate of 50 percent  for the
first 6 percent contributed.  The Company recognized expenses under this plan of
$19,694,  $22,705, and $29,058 during the years ended August 31, 2005, 2004, and
2003, respectively.

NOTE 5 - ECONOMIC DEPENDENCE

For the years ended August 31, 2005, 2004, and 2003, customer  concentrations in
revenue consist of the following:

      Customer A      14.6%     29.0%     31.2%
      Customer B      11.9%     14.6%     24.4%
      Customer C       7.2%     11.8%     10.1%
                      ----      ----      ----
                      33.7%     55.4%     65.7%
                      ====      ====      ====


NOTE 6 - RELATED PARTY TRANSACTIONS

During the years ended August 31, 2005,  2004,  and 2003,  the Company  provided
services to an entity in which the President of the Company is a shareholder and
recorded   revenues  of   approximately   $274,000,   $133,600,   and  $206,700,
respectively from that entity.

                                      F-30
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


TO THE MEMBERS' OF
INCON PROCESSING, LLC
PHOENIX, ARIZONA

We have audited the accompanying  balance sheets of InCon Processing,  LLC as of
August 31, 2005,  2004 and 2003,  and the related  statements of operations  and
changes in members'  equity and cash flows for the years ended  August 31, 2005,
2004  and  2003.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of InCon Processing,  LLC as of
August 31, 2005,  2004 and 2003,  and the results of their  operations and their
cash flows for the years ended August 31,  2005,  2004 and 2003,  in  conformity
with accounting principles generally accepted in the United States of America.




                                                /s/ MILLER, ELLIN & COMPANY, LLP
                                                CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
January 25, 2006

                                      F-31