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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Bionutrics, Inc.

2425 E. Camelback Road, Suite 650, Phoenix, Arizona 85016

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share

         Indicate by check mark whether 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

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

         As of January 28, 2002, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing sales price of such stock as of such date on the OTC Bulletin Board, was $8,480,311. Shares of common stock held by each officer and director and by each person who owned 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive and may not apply for other purposes.

         As of January 28, 2002, there were 4,352,600 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of registrant’s definitive Proxy Statement for its 2002 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

PART I

ITEM 1.  BUSINESS

Introduction

         Bionutrics, Inc. (“Bionutrics” or the “Company”) is a biopharmaceutical company founded to discover, develop and apply novel biologically active compounds from natural sources. The Company’s goal is to be a leader in the newly emerging field of functional nutrition, the marriage of drugs and food, by providing food ingredients that can prevent and even cure diagnosed diseases. Bionutrics’ business model is to source biologically active compounds from food commodity processing by-product streams and develop these compounds as proprietary functional nutrition products and/or ethical drug products, which are regulated pharmaceutical products. The disciplines and efforts comprising a discovery and development program for functional nutrition and ethical drugs are fundamentally the same. Products derived from the Company’s research program will be directed initially towards functional nutrition to generate early revenue and reduce the need for capital while it pursues the development and regulatory approval of drug candidates.

         The Company’s building efforts of the previous decade have positioned it with proprietary technology, compounds, processing methods and products having application to worldwide markets of potential significance. Bionutrics has sources of raw material by-products streams available to it in large quantities and it has developed specific capabilities in engineering and processing technologies for the separation of these streams into both high-value biologically active products and bulk food ingredients. This technology provides the Company the potential advantage of access to proprietary active ingredients at relatively low cost. Initial products are tocotrienol (a new form of vitamin E) concentrates derived from rice bran. The Company also has patent rights to a composition of niacin and dietary fiber that have application to dietary supplements, medical foods or over-the-counter products.

         Bionutrics’ operating strategy has changed from prior years where it manufactured and marketed its products to its current strategy, which is to leverage its core competency of new product development by partnering the manufacturing and marketing. The Company’s goal is to discover, define and protect its products and technology and to partner manufacturing and marketing. Bionutrics believes this strategy will allow it to exploit its strengths while recognizing its resource limitations, and at the same time accessing the unfolding global opportunity.

         The Company’s three primary subsidiaries are LipoGenics, Inc. (“LipoGenics”), Bionutrics Health Products, Inc. (“Health Products”), and InCon Technologies Inc. (“InCon”). LipoGenics serves 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 Technologies was merged in June 1999 into a new limited liability company, InCon Processing, LLC (“InCon Processing”) in which the Company has a 50% ownership together with ACH Food Companies, Inc. (“ACH”, formerly known as AC HUMKO CORP), a subsidiary of ABF North America Corp. (“ABF”). InCon Processing provides engineering and design for the Bionutrics’ compound recovery systems and ingredient processing. In addition, the Company has three inactive subsidiaries, Nutrition Technology Corporation, InCon International Ltd. and Cosmedics, Inc.

         The Company has generated an accumulated deficit of approximately $38.2 million through its fiscal year ended October 31, 2001. Due to financial constraints the Company has curtailed advertising and support for its initial product and continues to experience a significant decline in sales. Unless the Company is successful in obtaining additional capital and developing strategic partnerships for manufacturing and marketing it will not be able to execute its business plan.

         In connection with a stock purchase agreement entered into with HealthSTAR Holdings LLC, the Company expects to enter into three strategic relationship agreements with HealthSTAR Communications, Inc. These agreements are designed to provide the Company with a foundation to commercialize its technology, market its products, and expand its business beyond traditional product research and development functions. The agreements provide for administrative and professional support, marketing services for the Companies products, and assistance in identifying acquisition candidates. HealthSTAR Communications, Inc. will retain a three year right of first refusal with respect to the sale by Bionutrics of any company Bionutrics may acquire with HealthSTAR’s assistance.

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It is also expected that four new persons will join the board of directors. This transaction has not yet been completed. The initial closing pursuant to the stock purchase agreement must occur on or before March 1, 2002 or the agreement is subject to termination unless extended by the parties.

         Bionutrics was incorporated in Nevada in 1990. All its subsidiaries are organized in Delaware except Nutrition Technology Corporation, which is organized in Nevada, and InCon International Ltd., which is organized in the British Virgin Islands. References herein to Bionutrics or the Company are to the parent corporation and its subsidiaries except where otherwise indicated. The Company maintains its principal offices at 2425 East Camelback Road, Suite 650, Phoenix; its telephone number is (602) 508-0112.

Industry Overview

Functional Nutrition

         The Company competes within the Functional Nutrition category that includes functional foods, medical foods and dietary supplements, including vitamins, minerals and supplements. Each of these sub-categories has a definition, legal and competitive, which distinguishes it from the others.

         Functional foods began with a National Cancer Institute initiative to find ways of supplementing foods to enhance their cancer fighting potential. The functional food category may be defined as conventional foods or foods for special dietary use that are regulated under the Nutritional Labeling and Education Act (NLEA 1990) that have enhanced health benefits. Such product may require FDA pre-approval of a health claim or of a food additive petition. From a marketing perspective, it may be difficult to distinguish between certain non-modified products such as vegetables and those that have been specially prepared to enhance health. However, the majority of new entries in this category are specially-fortified versions of conventional foods. The market for these products is purported to have surpassed $18 billion last year in the U.S. Products that exemplify the category are ones such as stanol fortified margarines and salad dressings as well as certain fortified bars and meal replacements. As these products take hold in the mainstream, newer products such as enriched eggs and fully prepared and packaged foods continue to proliferate. The backbone for these products is the bioactive ingredients used to deliver on health or function claims. Bioactive ingredients from soy protein, oat bran and psyllium as macro ingredients, to stanols, isoflavones and tocotrienols are beginning to fuel growth and product development momentum in the food industry.

         The medical food category is unique in that it is separate from NLEA. These products are different from NLEA regulated foods for special dietary use in that they must meet certain requirements. Products that meet the strict statutory definition of medical foods, which include the requirement that such products be used under the direction and care of a physician, are a small segment of the group represented as such. However, many marketing companies are adding medical foods to their product lines. In using this special category, many new dietary ingredients may be conveniently delivered to consumers and more specific information may be provided on labels to help consumers identify products that may help their specific health concerns. The market for these products is being driven by the consumers increasing willingness to self-medicate. Examples of current medical foods are arginine enriched bars for heart health and specially formulated bars and other foods for diabetics.

         Dietary supplements are part of the health and natural food market in the United States. This market increased from an estimated $17.3 billion in sales in 1999 to $17.6 billion in 2000, a growth rate of 2%. The expansion of this market is largely the result of the rapidly growing portion of the population over 40 years old, who are concerned with aging and disease, combined with favorable consumer attitude shifts toward natural health care. Within the health and natural food market, dietary supplement sales were $10.8 billion in 2000. Recent estimates indicate that 54% of the U.S. population uses nutritional supplements at least occasionally in some form. Nutritional awareness and market size are also growing in other parts of the world. Bionutrics intends to access these global opportunities for product sales of both dietary supplements and functional foods, in each case through strategic partners.

         The growth of sales of dietary supplements has resulted largely from recent studies indicating a correlation between the regular consumption of selected vitamins and nutritional supplements and reduced incidences of conditions such as cancer, heart disease and osteoporosis. Within the dietary supplement category, antioxidants remain the growth leader. One antioxidant, vitamin E, has shown particularly strong growth, resulting in estimated

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retail sales in excess of $500 million in mass-market sales alone in 1999. Dietary supplements, including both vitamins and nutritional supplements, are consumed specifically to enhance bodily structure or functions, such as thinking or athletic performance or cholesterol maintenance. Under current law a dietary supplement may not claim to prevent, treat or cure a disease (see below under “Government Regulation”), which restricts the manner in which it may be marketed and the claims that can lawfully be made.

         Regulated Pharmaceutical Products

         Bionutrics has technology with potential application to cardiovascular health, cancer, anti-inflammation, anti-oxidation and diabetes. These applications reflect proprietary claim positions for compositions that may have use in more than one disease indication. The market for successful and fully exploited ethical drug or medical device candidates can be measured in the hundreds of millions of dollars or more. There is significant risk in development and obtaining regulatory approval for any new candidate with no assurance of success. It is the Company’s intent to define the initial opportunity with its research for its most promising candidates and if the results warrant, to partner their full development.

Product Development

         The Company intends to continue to develop proprietary compositions potentially as both ethical drugs and functional nutrition products. The functional nutrition products will be created and developed as novel medical food, functional food and dietary supplement formulations for use by specific target populations. These ingredients and formulations may include tocotrienols or other compounds that can be marketed with statements of nutritional support authorized per the 1990 NLEA and 1994 DSHEA legislation (see below under “Government Regulation”). The intent of the ingredients development program will be to generate future proprietary products with a point-of-difference and wide marketability. Such products would reflect the Company’s business model of focusing on new ingredients that exploit its core competency.

         Cardiovascular

         Clearesterol™: Bionutrics’ first cardiovascular product was a dietary supplement marketed under the brand name of evolvE®, and contained a tocotrienol based ingredient, Clearesterol™. evolvE® was launched in 1997 in a national campaign targeting mass-market retail distribution. The Company has no present plans to promote or support the sales of evolvE® and, accordingly, Clearesterol™ is not viewed as a significant part of the Company’s product future.

         Vitenol E®. The Company has also produced a more concentrated form of rice bran-derived tocotrienols, Vitenol E®, which it plans to use as an ingredient in its own novel formulations and to sell to other companies as a “value-added” vitamin E complex. Bionutrics is obtaining this material from InCon Processing.

         CARDIO-CIN™. The Company acquired the rights to patented technology for the use of a timed-released composition of niacin and dietary fiber, which has demonstrated in preliminary on-going research a 22-24% reduction in LDL-cholesterol, 13-18% increase in HDL-cholesterol and a 21-29% drop in triglycerides following four weeks of treatment with 1.2 grams of niacin daily. This particular composition may have application as a medical food to diabetics and other populations with dyslipidemia. (See “Special Considerations – Reliance on patents, licenses and intellectual property rights” concerning contract dispute.)

         Cancer

         Bionutrics received a broad patent this past year covering the use of tocotrienols to treat cancer (see “Patents and Trademarks” below). Third-party research published in peer-reviewed journals supports the Company’s position that tocotrienols may be effective in the treatment of certain cancer types. Bionutrics has also discovered other compounds isolated from natural sources that preliminarily appear to be effective against certain cancer cell-lines and intends to extend the current research on those compounds to determine their potential efficacy and commercial feasibility. Any such commercial application would be dependent on obtaining the prior approval of the FDA.

         Inflammation

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         The Company has filed a patent application on compounds that treat inflammation. These compounds potentially have a wide use with autoimmune and autoimmune-like diseases and their possible prevention. Bionutrics expects to continue research on these compounds and may develop products for both the functional nutrition and ethical drug markets based on the results of the trials.

         Oxidative Stress

         Bionutrics has filed a patent application on a novel composition, which has unique anti-oxidative activity and may be used to reduce oxidative stress. Oxidative stress is a condition produced within cells promoted by environmental, enzymatic or dietary oxidizing events that lead to the overproduction of reactive oxidizing agents that may cause damage to cell membranes, nuclear structures (including DNA) or other critical cellular components, or may affect cellular processes or intra/inter-cellular signaling and, thereby, producing pathological consequences. In many cases this oxidative stress process can be mitigated with antioxidants. The Company has also acquired technology that has application as a means of measuring oxidative stress in both blood and urine (see “Patents and Trademarks” below). The urine based assay can be employed as a self-administered take home kit for the determination of an individuals level of oxidative stress, potential contribution of a disease state to the oxidative stress and the benefit derived by the administration of the Company’s potential proprietary antioxidant products.

         Diabetes

         Diabetes is a disease closely associated with obesity and age. The Company has acquired certain rights to proprietary technology and is conducting research on compounds and formulations that may have application to obesity and the progression of diabetes. The Company may also file future patents on technology relating to obesity and diabetes and is considering a line of new products based on this technology.

Marketing

         The Company intends to market its ingredients for functional nutrition worldwide via marketing agreements with strategic partners. Because of the high cost of product entry today, the companies with the commitment and capacity to provide consumer advertising and support with the retail trade will be best positioned for success. Bionutrics has stated its intent to market its products through partnerships with such companies. This design is intended to allow the Company to invest its resources in product development and rely on its partners to address the advertising, public relations and other promotional costs for their respective markets.

         The Company announced the first of its proprietary ingredients for functional nutrition during the first quarter of 2001. These products are initially positioned as dietary supplement ingredients and are directed towards cardiovascular health. As part of the Company’s strategy for functional nutrition product development, antioxidation and blood lipid management will be targeted and the technology used in these products is covered by one or more of its patents. Bionutrics will focus on multi-level companies as primary channels of distribution for its first round of products, with mass-market retail and Internet distribution channels to follow.

         As part of Bionutrics’ strategy to partner marketing and manufacturing, the previously launched retail brand, evolvE®, is not being supported with consumer advertising or product promotion funds. Accordingly, this product has only a limited presence in the mass market. The Company is principally serving the evolvE® consumers through its Internet address and 800-phone line. The Company began sales of its first product, evolvE®, late in the second quarter of fiscal 1997. In order to obtain distribution through many of the leading drug and food chains throughout the United States, it was necessary to provide customers the right to return the product. Credit is granted based upon a credit report and payment terms generally provide a 2% discount if paid within 30 days.

Manufacturing

         Bionutrics’ operating strategy is to leverage its core competency of new product development by partnering raw material and finished goods manufacturing and consumer marketing initiatives. In particular, the Company desires to expand its manufacturing base and take advantage of value-added commodity by-product processing technology without operational responsibility or capital risk. To accomplish this, the Company seeks to form partnerships with global food manufacturing firms who will assume the logistic, transportation, distribution, regulatory, environmental, labor, administration and other operational elements associated with processing by-product streams necessary to manufacture its products.

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         ABF Alliance

         In 1998, Bionutrics and ABF North America Corp. (“ABF”), the U.S. subsidiary of Associated British Foods Plc, a company headquartered in London, England entered into an alliance for the manufacturing of certain rice bran based food and other functional nutrition products. The intent of the alliance was for ABF to partner in the manufacturing of Bionutrics’ products, when feasible, and in the process to unburden the Company of related operational and capital issues.

         As part of the 1998 transaction, ACH (formerly AC HUMKO CORP.), a subsidiary of ABF, acquired for $2 million Bionutrics’ rice bran-processing technology for use in North America. The technology acquisition was part of a contemporaneous $4 million stock investment in Bionutrics and a subsequent purchase for approximately $2.5 million of certain oil processing assets from the plant owned by Bionutrics’ subsidiary, Nutrition Technology Corp., in West Monroe, Louisiana, which plant was closed on October 1, 1998. As part of the divestiture, Bionutrics retained the right to participate in rice bran processing profits by ACH without operational responsibility or capital risk.

         Although the Company has agreed to acquire the Clearesterol ingredient from ACH as well as other ingredients, the current inventory of evolvE® has been sufficient such that the Company has not needed Clearesterol. Additionally, the Company also relies on outside sources for evolvE® encapsulation. With the current inventory levels and reduced sales of evolvE®, the Company does not anticipate needing encapsulation services in the foreseeable future. Consequently, the Company does not consider any supplier or manufacturer as significant to its current operations.

         InCon Processing

         In June 1999, the Company further reduced its manufacturing exposure by merging its molecular separation operation, InCon Technologies, with ACH to create a new joint venture company, InCon Processing, LLC, a limited liability company. InCon transferred substantially all of its assets to the newly formed LLC for which it received a payment of $3,000,000 and a 50% interest in the new company. As part of this transaction, Bionutrics restructured a profit sharing provision of the 1998 transaction relating to the calculation of profit and minimums. In the future, the Company will receive 15% of all EBIT, if any, (earnings before interest and taxes) derived by ACH from the sale of rice bran derivative products (verses a graduated percentage of EBITDA [earnings before interest, taxes, depreciation and amortization]) without an offset against a floor or minimum earnings deduction (verses a graduated minimum earnings deducted prior to a percentage participation calculation). In October 2000, the Company agreed to issue 60,000 shares of common stock, valued at $300,000, to ACH as consideration for the release of certain obligations under the Master Formation Agreement and Members Agreement related to the formation of this venture.

         The formation of this venture allowed the Company to more ably avail itself of the research and development capacity of InCon for specialty processing without being encumbered by capital requirements of the operation or for new facilities. As new functional nutrition products are developed within Bionutrics, and InCon Processing designs and engineers systems necessary for their processing, the Company will look initially to ACH for manufacturing. ACH will provide the manufacturing of these products where feasible and when such manufacturing is taken on by ACH, capital expenditures and operational responsibilities will also be theirs. It is management’s view that the InCon Processing venture with ACH, in a practical sense, enhances Bionutrics’ manufacturing base, broadens the valued partnership between Bionutrics and ABF, and gives the Company greater strength to deal with its future marketing partners.

         A critical aspect of the core competency of the Company is the ability to engineer and design equipment necessary to convert raw material sources into value-added active compounds and nutritional products. This is important because the nature of active compounds renders them difficult to process, isolate, and recover. Producers of raw material by-product streams generally do not have this requisite equipment. Bionutrics believes its compound discovery, clinical research and product market capabilities in combination with InCon Processing’s technology and ACH’s manufacturing abilities give the Company competitive and operational advantages.

         InCon Processing operates a specialized development and chemical manufacturing facility located in Batavia, Illinois, approximately 45 miles due west of Chicago. The 30,000 square foot facility contains uniquely fabricated molecular distillation and other molecular separation equipment. Molecular distillation is a manufacturing

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process where under vacuum selective molecules are evaporated and, thereby, removed or concentrated in a precise manner. Molecular distillation has advantages over other systems, depending on the material processed, of limiting thermal degradation, greater precision or enhanced economics. InCon Processing has developed significant skill in applying molecular distillation technology to engineering and designing molecular separation equipment. Other methods of molecular separation including dry fractionation, chromatographic isolation, solvent extraction, membrane separation and enzymatic fermentation are potentially employed in its designed systems.

         InCon Processing provides toll molecular separation services for Eastman Chemical and other independent companies requiring chemical separation services for the manufacturing of their products. InCon Processing markets its engineering and design skills independently of the Company’s raw material sourcing and sells specifically designed equipment to unrelated third parties as part of oil processing plant design and construction oversight.

         InCon Processing faces competition for its services from a number of companies as well as from expanding in-house capabilities of several of its customers and potential customers. However, the Company believes that InCon Processing’s management enjoys an excellent reputation in the field, has long-standing relationships with its customers and, particularly with the advantage of its state-of-the-art equipment, believes it is well-positioned to retain and expand its customer base.

Key Customers

         During fiscal year 1999, total gross revenues were $3,690,000, of which 23% were attributable to sales of evolvE® and 67% were from toll processing. Of the revenues generated at InCon, Eastman Chemical Co. and ADM accounted for approximately 44% and 22% of those revenues, respectively. During fiscal year 2000, total gross revenues were $356,000, of which 41% were attributable to sales of evolvE®, 31% were from a grant received from the National Heart, Blood and Lung Institute and the remaining 28% were related to product development activities. The product development revenues were received from Mead Johnson Nutritionals. During fiscal 2001, gross revenues were $96,000, of which 100% were attributable to the sales of evolvE®.

Patents and Trademarks

         As of October 31, 2001, Bionutrics has ten issued U.S. patents and eleven 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. Furthermore, the Company has acquired one U.S. patent with four corresponding foreign patent applications claiming methods for promoting weight and fat loss. In addition, the Company has secured exclusive licenses under eleven additional U.S. patents and two additional pending U.S. patent applications relating to other therapeutic and diagnostic areas of commercial interest to the Company.

         Bionutrics’ first U.S. patent, obtained through its R&D 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 Bionutrics and through method and process claims, protects methods for using and processes for producing those compounds. The patent may also serve to protect the Clearesterol™ ingredient contained in Bionutrics’ evolvE® brand dietary supplement. 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.

         The Company has also been successful in obtaining patent protection for its unique tocotrienol processing technology. In June 1999, Bionutrics received another 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 continues to enhance its portfolio of patents covering the use tocotrienols to treat and prevent a wide range of disorders and conditions. In July 1999, a broad U.S. patent was issued to Bionutrics 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

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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, the Company received another patent (U.S. patent 6,143,770) for a composition comprising tocotrienol, or a mixture thereof, and nicotonic acid. This technology has application to cardiovascular health and diabetes. Additional U.S. and foreign patent applications that focus on other diseases and conditions are pending.

         Bionutrics continues to protect its trademarks by seeking registration in the U.S. and abroad. Bionutrics obtained U.S. trademark protection for the evolvE® brand name and associated logo in fiscal year 1997 and has obtained additional registrations in certain foreign countries. In January 1999, Bionutrics obtained registration of the mark P₂₅ for one of its proprietary tocotrienols. In September and October 1999, the Company was granted registration of the marks Vitenol and Vitenol E. In November 1999 and March 2000, the Company obtained registration of two separate marks for Clearesterol and the related logo. U.S. and foreign trademark applications are currently pending for other marks that the Company uses or intends to use on its products.

         Bionutrics has also continued its activities directed towards acquiring additional patents and other intellectual property to augment its holdings. In late 1995, Bionutrics acquired a U.S. patent from the Wisconsin Alumni Research Foundation (U.S. patent 4,603,142) covering the use of a-tocotrienol for lowering cholesterol. This patent serves to protect Bionutrics’ dietary supplement, evolvE®, which contains a significant amount of a-tocotrienol. In 1997, Bionutrics acquired a U.S. patent from Dr. Tung-Ching Lee (U.S. patent 5,047,254) covering a process for recovering edible oil from rice bran. This patent has since been assigned to ABF/ACH as part of a strategic alliance formed in August 1998. In 1999, Bionutrics licensed the exclusive rights to certain proprietary technology owned by Eric Kuhrts, Lipoprotein Diagnostics, Inc., and Hauser-Kuhrts, Inc., located in California (See Special Considerations – Reliance on patents, licenses and intellectual property rights). This technology relates to two main areas: (1) niacin/fiber compositions having cardiovascular applications and (2) oxidative stress diagnostic test kits to measure the positive effects of dietary antioxidants, as well as the negative impact of environmental factors (such as smoking) and disease states. In February 2000, Bionutrics acquired the rights to certain patents and patent applications owned by John Gustin and Mark F. McCarty claiming methods for promoting weight and fat loss. Bionutrics intends to pursue commercializing these technologies independently, as well as possibly integrating them with Bionutrics’ existing proprietary technology.

         As a part of the August 1998 Bionutrics/ABF agreement, Bionutrics transferred certain rights in Bionutrics’ rice bran processing technology to ACH. Most notably, Bionutrics assigned to ACH its rights in U.S. patent 5,047,254 and in the process claims of future Bionutrics patents in North America as they pertain to rice bran. In the June 1999 InCon Processing transaction (see “InCon Processing” above), Bionutrics’ wholly owned subsidiary, InCon, has assigned certain of its current and future intellectual property rights to InCon Processing relating to processing of natural source materials. InCon retained, however, all current and future rights relating to proprietary compounds and compositions of matter having biological activity and/or utility and products incorporating such compositions of matter.

Competition

         The market for functional nutrition is presently developing with many companies just beginning to determine how and if they will compete in this new segment. Candidate companies for mass-market retail competition include virtually all firms currently engaged in retail mass-market consumer marketing of food and OTC products. While these same companies are potential customer targets for Bionutrics, they also are potential competitors because of their own product development programs or programs they sponsor. Notably, these companies include American Home Products, Bayer, Warner-Lambert, Pharmaton Boehringer Ingleheim, Bristol-Myers&Squibb, Novartis and Smith Kline Beecham with OTC and dietary supplements, and Kraft, Nabisco, Nestle, Danone, Kellogg, General Mills, Proctor&Gamble and Hunt-Wesson/ConAgra with food. Ingredient manufacturing companies such as BASF, ADM, Hoffmann LaRoche, Heckle, Cargill, and Eastman Chemical are all involved in both food and pharmaceutical/pharmaceutical intermediate processing and sales, and have begun to promote products with functional food applications. These companies represent some of the largest companies in the world and most formidable competition for any firm considering entering the functional nutrition business, including Bionutrics. These firms, to one degree or another, represent potential strategic partners for firms entering the field depending upon the significance and value of the technology they bring.

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         Because the ethical drug and functional food markets are highly competitive and require extensive resources to develop new products, the Company intends to pursue strategic partnerships for this purpose. No arrangements have yet been entered into and no assurance can be given that partners can be found or that terms acceptable to the Company can be negotiated. The Company does not have any products that have been submitted for regulatory approval. Its research in the near term is expected to focus on compounds and devices in the preclinical stage of development.

Government Regulation

         Dietary Supplements

         The Federal Food and Drug Administration (“FDA”) is the most active regulatory authority exercising jurisdiction over vitamins, minerals and other dietary supplements. It regulates the Company’s products under the Food, Drug and Cosmetic Act (“FDCA”) and regulations promulgated by FDA to implement this statute. In 1976, FDA’s ability to regulate the composition of dietary supplements was restricted in several material respects by the Proxmire Amendment to the FDCA. Under this amendment, FDA is precluded from establishing maximum limits on the potency of vitamins, minerals and other dietary supplements, from limiting the combination or number of any vitamins, minerals or other food ingredients in dietary supplements and from classifying a vitamin, mineral or combination of vitamins and minerals as a drug solely because of its potency. However, the Proxmire Amendment did not affect FDA’s authority to determine that a vitamin, mineral or other dietary supplement is a new drug on the basis of disease or drug claims made in the product’s labeling. Such a determination would require deletion of such claims, or the Company’s submission and FDA’s approval of a new drug application, which entails costly and time-consuming clinical studies over successive phases.

         In 1990, FDA’s authority over dietary supplement labeling was expanded in several respects by the Nutrition Labeling and Education Act (“NLEA”). This statute amended the FDCA by establishing a requirement for the nutrition labeling of most foods including dietary supplements. In addition, the NLEA prohibits the use of any health claim (as opposed to a statement of nutritional support; see below) in dietary supplement labeling unless the claim is supported by significant scientific agreement and is pre-approved by the FDA. Interested companies may petition the FDA for the approval of health claims. To date, the FDA has approved health claims for dietary supplements seldomly, including in connection with the use of calcium for prevention of osteoporosis and the use of folic acid for prevention of neural tube defects and, it is understood, applications therefor have been few. NLEA also allows nutrient content claims characterizing the level of a particular nutrient in a dietary supplement (e.g., “high in,” “low in,” “source of”) if they are in compliance with definitions issued by FDA. Significantly, NLEA precludes any state from mandating nutritional labeling, nutrient content claim or health claim requirements that differ from those established under NLEA, thereby eliminating the risk that the Company’s products might be subject to inconsistent labeling requirements.

         In October 1994, the FDCA was amended by enactment of the Dietary Supplement and Health Education Act (“DSHEA”), which introduced a new statutory framework governing the composition and labeling of dietary supplements. In the Company’s judgment, DSHEA is in some parts favorable to the dietary supplement industry while imposing additional burdens in other parts. With respect to composition, DSHEA creates a new class of “dietary supplements,” dietary ingredients consisting of vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, metabolites, extracts or combinations of such dietary ingredients.

         As for labeling, DSHEA permits “statements of nutritional support”, also known as structure/function claims, for dietary supplements without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well-being, but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease. Nor can a claim be made that would be interpreted as a health claim under NLEA, that is, generally a claim that the dietary supplement will lower the risk of a disease or correct an existing health condition. A company making a statement of nutritional support must possess adequate substantiating scientific evidence for the statement, disclose on the label that FDA has not reviewed the statement and that the product is not intended to mitigate, treat, cure or prevent disease, and notify FDA of the statement within 30 days after its initial use. There can be no assurance that FDA will, if it makes a demand therefor, accept as adequate in support of the Company’s product structure/function claims substantiating scientific evidence

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possessed by the Company. There can be no assurance that FDA will not determine that a given statement of nutritional support the Company decides to make is a disease claim rather than an acceptable nutritional support statement relating to body function or structure. Such a determination would require (a) deletion of the disease claim or (b) if it is to be used at all, submission by the Company and the approval by FDA of a new drug application (which would entail costly and time-consuming clinical studies) or (c) revision from a disease claim to a health claim, which would, as noted above, require demonstration of significant scientific agreement and prior FDA approval or (d) revision to a structure/function claim. There can be no assurance that FDA will accept as adequate for a health claim such substantiation as has been amassed by the Company for nutritional support (structure/function) claims and thus, the Company, if the health claim is to be used at all, may be required to document or await significant scientific agreement on the claim’s basis.

         DSHEA allows dissemination of “third party literature,” such as reprints of scientific articles that link particular dietary ingredients with health benefits. Third party literature may be used in connection with the sale of dietary supplements to consumers under certain conditions. Such a publication may be so distributed if it is not false or misleading, if no particular manufacturer or brand of dietary supplement is mentioned, if the publication is presented in such manner so as to offer a balanced view of available scientific information on the subject matter, if it is physically separated from products when used in a retail establishment and if it does not have any other information appended to it. There can no assurance, however, that all pieces of third party literature that may be disseminated in connection with the Company’s products will be determined by FDA to satisfy each of these requirements, and any such failure to comply could subject the product involved to regulation as a new drug.

         On December 24, 1996, the Company filed its notification letter for the evolvE® dietary supplement with FDA with respect to the product’s statements of nutritional support. Although DSHEA only requires companies to notify FDA, the agency has adopted an unofficial policy of responding with a letter, which has become known as a “courtesy letter,” when it believes that there may be a question with respect to any statement of nutritional support. On January 29, 1997, FDA responded with a courtesy letter raising questions concerning one of Bionutrics’ statements of nutritional support. In its March 10, 1998, notification to FDA, the Company announced labeling changes — to add a statement on the importance to cholesterol-lowering of a low-fat diet and exercise — in deference to FDA’s courtesy letter. At present, the Company’s chief structure/function claims for evolvE® are that it works to help lower cholesterol when taken as part of an overall program including a low-fat, low-cholesterol diet and exercise, acts as a powerful antioxidant and promotes normal circulation.

         On April 29, 1998, FDA proposed regulations to limit statements that may be placed on product labels and labeling concerning the effect that a dietary supplement has on the structure or function of the human body. FDA sought to prohibit as disease claims requiring agency pre-approval all cholesterol lowering statements such as those that currently appear on the evolvE® label and in labeling. The Company, as did numerous other affected parties and organizations, wrote to oppose such FDA rules. On January 6, 2000, the FDA issued its final regulation concerning structure and function claims for dietary supplements. In the preamble to the regulation, FDA states, with regard to cholesterol claims for dietary supplements, that the agency has concluded that an appropriate structure/function claim for maintaining cholesterol would be, “helps to maintain cholesterol levels that are already within the normal range.” The agency also stated its position that a “lowers cholesterol” claim, however qualified, is an implied disease claim.

         As such, the Company has reviewed and, where necessary, is revising its claims for evolvE® to comply with the new regulation.

         In September 1997, FDA published final regulations to implement certain DSHEA labeling provisions, which became effective in March 1999. These regulations necessitate material changes in the labeling of all dietary supplement products, including products sold by the Company. DSHEA also requires that dietary supplements be prepared, packed and held under conditions that meet the good manufacturing practice (“GMP”) regulations to be promulgated but not yet proposed by FDA with respect to dietary supplements. Therefore, there can be no assurance that the Company’s manufacturing partner ABF’s production facilities will meet all GMP regulations when issued by FDA with respect to dietary supplements, and the Company may be required to expend resources to take appropriate action to ensure compliance with such regulations.

         FTC, which exercises jurisdiction over the advertising of dietary supplements, has in the past several years instituted enforcement actions against several dietary supplement companies for false and misleading advertising of

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certain products. These enforcement actions have resulted in consent decrees, agency cease and desist orders, injunctions and the payment of fines by the companies involved. In addition, FTC has increased its scrutiny of infomercials and Internet websites. There can be no assurance that FTC will not question the Company’s advertising in the future. FTC has been very active in enforcing its requirements that companies possess adequate substantiation in their files for claims in product advertising.

         The Company intends to market certain products pursuant to contracts with customers who will distribute the products under their own or other trademarks. In addition to Bionutrics’ responsibilities, such customers are subject to the governmental regulations discussed in this section in connection with their marketing, distribution and sale of such products, and the Company will be subject to such regulations in connection with the manufacture of such products. However, the Company’s manufacturing contractors are independent companies, and their labeling, marketing and distribution of such products are beyond the Company’s control except by contract. Failure of these customers to comply with applicable laws or regulations could have a material adverse effect on the Company. Governmental regulations in foreign countries where the Company or a strategic partner may determine to sell products may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of the Company’s products. Compliance with such foreign governmental regulations generally will be the responsibility of the Company’s customers in those countries. Those customers are expected to be independent companies over which the Company will have no control except by contract.

         FDA has broad authority to enforce the provisions of the laws and regulations applicable to dietary supplements, including the power to seize adulterated or misbranded products or unapproved new drugs, to request their recall from the market, to enjoin their further manufacture or sale, to publicize information about a hazardous product, to issue warning letters and to institute criminal proceedings. The Company may be subject to additional laws or regulations administered by FDA, FTC or other regulatory authorities, such as the individual state attorneys general who have authority under individual state consumer protection acts to impose injunctions within their states and fines. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, may have on its business. They could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation of the properties of certain products, expanded or different labeling and additional scientific substantiation. Any of or all such requirements could have a material adverse effect on the Company’s results of operations and financial condition.

         Food Additive/New Dietary Ingredient

         If the Company decides to market any new ingredient for use in conventional foods or for a technical effect (e.g., as a colorant, preservative, etc.) in dietary supplements, the ingredient may be subject to the FDA food additive provisions. Such an ingredient must be shown to be generally recognized, among experts qualified by scientific training and experience to evaluate its safety, as having been adequately shown through scientific procedures to be safe under the conditions of its intended use. This is known as generally recognized as safe or “GRAS” status and can be accomplished by submitting what is known as a GRAS affirmation to FDA.

         In the alternative, if the ingredient is not generally known among scientists as set forth above, the Company may submit a food additive petition to FDA setting forth how the ingredient is to be used in food additive petition to FDA setting forth how the ingredient is to be used in food and all scientific data that establishes safety for such use. This can include costly and time consuming clinical studies over successive phases.

         FDA can accept or reject the Company’s GRAS affirmation or food additives petition. There can be no assurance that FDA will accept as adequate the scientific data presented with either the GRAS affirmation or as part of the food additive petition. The Company can seek judicial review if it disagrees with the FDA determination.

         For dietary ingredient in dietary supplements, under DSHEA, a “new dietary ingredient” is a dietary ingredient that was not marketed in the United States before October 15, 1994 and does not include any dietary ingredient marketed in the United States before that date.

         DSHEA requires notification to be submitted to the FDA at least 75 days before a company introduce or deliver for introduction into interstate commerce a dietary supplement that contains a new dietary ingredient that has

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not been present in the food supply as an article used for food in a form in which the food has not been chemically altered. Information that provides the basis for concluding the ingredient is safe is also required by the statute to be included in the notification.

         The FDA may not disclose the existence of, or the information contained in, the new dietary ingredient notification for 90 days after the filing date of the notification. After the 90th day, all information that is not trade secret or otherwise confidential commercial information will be placed on public display.

         Failure of the FDA to respond does not constitute a finding that the new dietary ingredient (or the dietary supplement containing the new dietary ingredient) is safe or is not adulterated. FDA has stated that the process is intended to identify those new dietary ingredients that present a concern. With respect to dietary supplements that contain a new dietary ingredient, if FDA determines that there is inadequate information to provide reasonable assurance that such new dietary ingredient does not present a significant or unreasonable risk of harm, the FDA could initiate civil or criminal proceedings.

         With respect to its mission to promote newly discovered active compounds for functional nutrition as ingredients in dietary supplements and functional foods, the Company or its strategic partners will be subject to the foregoing regulatory schemes.

         Drugs

         Products that are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans are subject to extensive governmental regulation. All such products must undergo extensive characterization, and are subject to regulation for quality assurance, toxicology and safety. Products containing such agents must undergo thorough preclinical and clinical evaluations of performance as to safety and efficacy under approved protocols.

         The Company intends to pursue regulatory approval for the pharmaceutical and related uses of drug products. Such pharmaceutical products will be subject to the regulatory approval processes for new drugs. To take a pharmaceutical product from the discovery stage through research and preclinical development to the point where the Company and its partners can make the necessary filings (to FDA and governmental agencies outside the U.S.) to conduct human clinical trials may take several years. Regulatory requirements for human clinical trials are substantial, depend upon a variety of factors, vary by country and will further add to the time necessary to determine whether a product candidate can be approved for human use. The Company does not have any pharmaceutical products that have commenced this trial process. There can be no assurance that the Company will be able to demonstrate that its proposed drug products are safe and will be efficacious under these regulatory procedures.

Employees

         The Company currently employs 9 people. Of the current employees, two are involved in marketing and sales at Bionutrics Health Products, five in corporate and general administration, and two in research and development at LipoGenics.

Special Considerations

The Company 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. Additional revenue sources have only recently been acquired or developed. Accordingly, 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 $38.2 million through its fiscal year ended October 31, 2001. The Company’s operations to date have progressed from research and development activities to the marketing and sale of its first product evolvE®. All other products are in the developmental stage. Sales of evolvE® or other 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 a new business enterprise including limited capital, delays in product development, possible cost overruns due to price increases in raw

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product and unforeseen difficulties in its manufacturing processes, 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 resources 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. The Company requires additional financing of at least $3,000,000 to support its general working capital needs as well as to fund the research and development costs necessary to complete the launch of its recently developed products. The Company is currently in negotiations to secure this necessary capital through equity private placements as well as debt financing. The Company does not at this time have any committed sources of financing, other than the Justicia equity line of credit, the terms of which currently prohibit the Company from drawing down any funds. There can be no assurance that additional financing will be attainable on terms acceptable to the Company, or at all, at such time as the Company’s needs may require. If such 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. Equity financing could result in additional dilution to existing shareholders. As of October 31, 2001, the Company had negative working capital of $2,115,000 and total current assets of $167,000. The losses incurred to date, the uncertainty regarding the ability to raise additional capital and the Company’s inability to generate net income and positive cash flows from operations may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company’s audit opinion, as of and for the 3 years in the period ended October 31, 2001, also indicates that there is substantial doubt about the Company’s ability to continue as a going concern.

If the Company’s business plan assumptions prove to be inaccurate, the business will suffer.

         The Company has formulated its business plans and strategies based on certain assumptions regarding opportunities in the pharmaceutical market based on the Company’s technology, the depth and nature of edible oil and derivative products markets, the size of the dietary supplement market, the Company’s anticipated share of these markets and the estimated price and acceptance of the Company’s projected products. If the Company’s assumptions regarding these factors prove to be incorrect, it’s business will suffer. Any future success that the Company might enjoy will depend upon many factors including factors that may be beyond the control of the Company or that cannot be predicted at this time. Factors beyond the Company’s control may include changes in the pharmaceutical, edible oil (and processing derivatives) and dietary supplement industry, governmental regulation, increased levels of competition including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs including costs of production, supplies, personnel, equipment and reduced margins caused by competitive pressures and other factors.

The health food industry is intensely competitive, and the Company’s failure to compete effectively may limit its ability to achieve profitability.

         Competition in the health food industry is vigorous with a large number of businesses present. In addition, many companies are just beginning to determine how and if they will compete in the functional nutrition market presently developing. Candidate companies for mass-market retail competition include virtually all firms currently engaged in retail mass-market consumer marketing of food and over the counter, or “OTC” products. While these same companies are potential customer targets for Bionutrics, they also are potential competitors because of their own product development programs or programs they sponsor. Notably, these companies include American Home Products, Bayer, Warner-Lambert, Pharmaton Boehringer Ingleheim, Bristol-Myers&Squibb, Novartis, and Smith Kline Beecham with OTC and dietary supplements, and Kraft, Nabisco, Nestle, Danone, Kellogg, General Mills, Proctor&Gamble and Hunt-Wesson/ConAgra with food. Ingredient manufacturing companies such as BASF, ADM, Hoffmann LaRoche, Heckle, Cargill, and Eastman Chemical are all involved in both food and pharmaceutical/pharmaceutical intermediate processing and sales, and have begun to promote products with functional food applications. These companies represent some of the largest companies in the world and present formidable competition for any firm considering entering the functional nutrition business. Other companies have recently announced tocotrienol (a new form of vitamin E) supplement products, including Eastman Chemical

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Company, whose new product is also derived from rice bran oil and claims antioxidant properties. Many of the competitors have established reputations for successfully developing and marketing dietary supplement products. Many of such companies have greater financial, managerial and technical resources than the Company, which may put it at a competitive disadvantage. Even though the Company intends to license its dietary supplement to marketing partners and this would eliminate certain elements of risk, the Company may not be successful in its licensing efforts or its potential marketing partners may not be successful in marketing and selling the Company’s products. If the Company is not successful in competing in the dietary supplement market, it may not be able to achieve profitability.

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

         InCon Processing’s current competition is primarily from specialized local and regional processing facilities. However, many of its toll processing customers have the capacity to perform toll processing and molecular separation in-house. InCon Processing’s customers may discontinue to outsource toll processing to InCon Processing, or that they may choose to utilize a different local processor instead of InCon Processing. If either of these events occur, 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 through strategic partnerships. The principal focus of these relationships is the funding of the marketing, sales and co-promotion of its technology/products. Manufacturing is also intended to be achieved through partnerships, either as part of a marketing agreement with given 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 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 has formed an alliance with ABF (Associated British Foods, Plc) to pursue the exploitation of certain food processing by-product streams. As part of this alliance, ACH Food Companies, Inc. (“ACH”, a U.S. division of ABF) is considering the exploitation of rice bran derivative products. The rice bran, rice bran oil and other derivative products business is highly competitive and ACH may not succeed or produce profits, of which the Company is entitled to 15% EBIT, or ACH may not decide to stay in the business even if profitable. As of October 31, 2001, the Company has received no revenue from this alliance.

The Company may become subject to increased governmental regulation, which could increase the costs or cause the Company to revise certain product claims.

         The processing, formulation, packaging, labeling and advertising of the Company’s products are primarily subject to regulation by FDA and FTC. In addition, individual state attorneys general have authority to enforce individual state consumer protection acts within their own states. Although Congress has recently recognized by enacting DSHEA the potential impact of dietary supplements in promoting the health of U.S. citizens, there are a number of new provisions not yet subject to judicial interpretation with respect to FDA’s regulation of dietary supplements and the Company cannot predict the ultimate effect of DSHEA. Further, because of the technical requirements imposed by DSHEA, the Company believes it may be difficult for any company manufacturing or marketing dietary supplements to remain in strict compliance. FDA has recently promulgated regulations effective in March 1999 in part to implement DSHEA. Proposals have also been made to modify or change the provisions of DSHEA. It is impossible to predict whether those proposed changes will become law or the full effect that such regulations will have on the business and operations of the Company. Various aspects of the new regulations are still being reviewed by the Company. Material changes in the labeling of all dietary supplement products, including products sold by the Company, are and will be required. In addition, due to the finalization of the FDA’s structure/function regulations on January 6, 2000, the Company is modifying cholesterol claims presently being made for the Company’s evolvE® product.

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         Functional nutrition, which includes functional foods, medical foods and dietary supplements, is a broad field that is being defined in the market place as well as by regulation. A health claim, in principle, requires regulatory approval to be used in the promotion and sale of a product. In the case of medical foods, the FDA has issued regulations that give guidelines to industry. “Functional foods” is a term of art and does not have a legal definition, per se. Any and all claims for foods conveying health benefits that go beyond a limited list of claims allowed by the FDA for the promotion of such benefits will need to be submitted to the FDA for approval. If the Company is unable to obtain approval of health claims for products that it develops, it may not be able to sell or otherwise promote those products based on such claims and, accordingly, the marketability and value of such products may be negatively impacted.

         The pharmaceutical industry is subject to extensive federal regulation and oversight by the FDA. For instance, the Federal Food, Drug and Cosmetic Act, as supplemented by various other statutes, regulates, among other matters, the approval, labeling, advertising, promotion, sale and distribution of drugs, including the practice of providing product samples to physicians. Under this statute, the FDA asserts its authority to regulate all promotional activities involving prescription drugs.

The Company relies on a limited number of products and customers; therefore, any reduction in orders for any single product or from any single customer would harm its business.

         To date the Company’s only product is the evolvE® dietary supplement, containing a patented tocotrienol vitamin E ingredient, Clearesterol™, derived from rice bran. The Company is not actively marketing evolvE® and, therefore, expects sales of this product to be minimal in the future and to contribute limited revenue to its operations. The Company has recently announced two new products, however, it is not yet marketing them. The Company’s dependence on a limited number of products increases risk since a failure to gain market share or a decline in demand could cause revenue to decline.

         Two customers accounted for approximately 34 and 30 percent of InCon Processing’s revenues related to its core business of toll processing and molecular distillation for the 12 months ended August 31, 2001. InCon’s utilization of facilities has dropped to approximately 35% due to customer cutback or delays in the scheduling of product tolling. Accordingly, InCon has recently shown great sensitivity to customer scheduling and is susceptible to potentially critical cash flow squeezes because of delays or other failures of customers to use the InCon’s tolling as scheduled.

         The Company’s participation in ACH’s efforts to market derivative products is just beginning and ACH may fail to continue to pursue the product and market development or capture a critical share of the market for such products to ensure continued marketing and sale of the products. A limited number of customers or limited commitment by ACH to develop the derivative products could adversely affect the Company’s revenue by decreasing or eliminating sales.

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The Company faces product liability risks and may not be able to obtain adequate insurance to protect it against losses.

         As a marketer of dietary supplements that are 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 and the Company maintains product liability insurance, 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.

The Company depends on its marketing partners to market its products.

         The Company is dependent on its ability to market through marketing partners its products to large mass merchandise and health food retailers and to other companies for use in their products. The Company does not anticipate that long-term contractual relationships will be entered into with any of its customers. The Company has stated its intent to rely in the future on strategic partnerships with marketing companies to market and sell its current and to-be-developed functional nutrition products. The Company may not be successful in finalizing such strategic partnerships. Even if finalized, the selected strategic partner(s) may not be successful in marketing and selling the Company’s products.

The Company’s business will suffer if its technology is questioned or refuted.

         The Company has invested a decade in research and development to demonstrate the value of its technology and secure patents and make patent applications. The Company has chosen to apply for and secure and acquire by acquisition patent protection of strategic elements of this technology. The science upon which the technology is based may be refuted or otherwise drawn into question by further research conducted by the Company or independent laboratories or its strategic partners. The Company’s business would suffer if such an event were to occur.

If the Company receives unfavorable publicity, its business could be harmed.

         The Company believes the functional nutrition market is affected by national media attention regarding the consumption of dietary supplements. Negative publicity concerning future nutritional or other scientific research could be unfavorable to the functional nutrition market or any particular product within that market, or be inconsistent with earlier favorable research or publicity. Future reports of research that are perceived as less favorable or that question such earlier research could hurt the Company’s business. Because the value of the Company is in part dependent upon consumer perceptions, negative publicity concerning any adverse effects resulting from the consumption of the Company’s products, products based on the Company’s technology, or any similar products distributed by other companies could also hurt the Company’s business. Such adverse publicity could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products as directed. In addition, the Company may not be able to counter the effects of negative publicity concerning the efficacy of its products. Some of the Company’s technology and products are derived from natural sources, and there are naturally occurring variations in compositions of these sources. These naturally occurring variations in a source composition could affect a product’s functionality, which may in turn require the Company to modify its processing methodology or the product formulations. Such changes or modifications could negatively impact consumer perception and hurt the Company’s business.

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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.

         The Company is dependent on its management, particularly Dr. Ronald Lane, a founder and the chief executive officer, for all its business activities. The Company is dependent on its ability to attract, retain and motivate additional qualified personnel. There are no long-term employment or other agreements with any executive officer except for Mr. Palmer, President and CEO of InCon Processing, LLC. The loss of the services of Dr. Lane 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 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 of 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 also has an agreement to acquire certain proprietary rice bran derived ingredients from ACH, if and when needed. If ACH encounters difficulties in obtaining, on commercially reasonable terms, quality rice bran for use in its manufacturing process and if the Company could not arrange a timely and cost effective alternative, the Company or its strategic partners could experience production delays or the inability to fulfill orders on a timely basis. The purchase of the derivative products from ACH is on a cost-plus basis, any material increase in projected costs of manufacture could materially affect the Company’s or any strategic marketing partner’s ability to compete with any functional food product containing such ingredients. The Company may also rely on United States or other First World sources for processing of ingredients from time to time. In the event these or Third World contract manufacturers cannot meet manufacturing and delivery requirements, the Company or its strategic partners may suffer interruptions or failure to deliver. Access to replacement sources could be delayed depending on the cause of the delay.

The Company may experience difficulty in entering international markets.

         The creation of strategic partnerships and the marketing and sale of the Company’s 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 ability to obtain patents, licenses and other intellectual property rights covering its products. The Company’s patent rights are held by its subsidiary LipoGenics. There can be no assurance that the Company’s patents and patent applications are sufficiently comprehensive to protect evolvE® or other Company products intended. The process of seeking further patent protection can be long and expensive, and there can be no assurance that all patents will issue from the fifty-five currently pending or 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 basis on

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which it has made further patent applications correspond to the patents that have been issued for composition and method of production and use and is 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 has licensed certain rights relating to patents for compositions and the use of those compositions to modulate blood lipids. The Company and licensor have a disagreement on performance requirements of various elements of the agreements. If the Company is not able to resolve the disagreement with the licensor or if lengthy litigation results from the disagreement, in addition to the cost of such litigation, the technology and any related products may not be available to the Company for commercialization, now or in the future.

The Company’s stock is thinly traded and may experience price volatility, which could affect your ability to sell our stock or the price for which you can sell it.

         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. The Company’s common stock was quoted on the Nasdaq SmallCap Market under the symbol “BNRX” from November 19, 1997 until July 18, 2001. 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. Since July 19, 2001, the Company’s common stock has been quoted on the OTC Bulletin Board under the symbol “BNRX.OB.” On July 31, 2001, the Company requested that the Nasdaq Listing and Hearing Review Council review the July 18, 2001 delisting decision. In October 2001, the Listing Council reviewed the delisting decision and declined to relist the Company at that time. The Company intends to reapply to list its securities on the Nasdaq SmallCap Market immediately at such time that it meets the then applicable Nasdaq listing requirements. There can be no assurance that the Company will ever meet such criteria, and, even if it does, there can be no assurance that Nasdaq will decide to relist the Company’s stock, or under what conditions any such relisting may take place.

         The stock markets have experienced extreme price and volume fluctuations during recent periods. The following data illustrates the volatility of the Company’s common stock over the past two fiscal years ended October 31, as adjusted for a one-for-five reverse stock split effected at the close of business on May 29, 2001:

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         These broad market fluctuations and other factors may adversely affect the market price of the common stock, which could affect both your ability to sell the Company’s stock and the Company’s ability to raise necessary capital and finance possible acquisitions including acquisitions of technology.

Rights to acquire shares of the Company’s common stock will result in dilution to other holders of its common stock.

         As of October 31, 2001, options to acquire a total of 379,333 shares were outstanding under the Company’s 1996 Stock Option Plan. An additional 180,820 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 332,030 shares of common stock. 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 such options and warrants can be expected to exercise such 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 such 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 such 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. See “Shares Eligible for Sale.”

Sales of large numbers of shares could adversely affect the price of the Company’s common stock.

         Of the 4,352,600 shares outstanding as of October 31, 2001, 3,953,723 are eligible for resale in the public markets. Of these eligible shares, 1,825,390 shares are eligible for resale in the public markets subject to compliance with the volume and manner of sale rules of Rule 144 under the Securities Act of 1933, as amended, and 2,128,333 are eligible for resale in the public markets either as unrestricted shares or pursuant to Rule 144(k). In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who beneficially owns restricted securities with respect to which at least one year has elapsed since the later of the date the shares were acquired from the Company, or from an affiliate of the Company, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock of the Company and the average weekly trading volume in common stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain manner-of-sale provisions and notice requirements and to the availability of current public information about the Company. A person who is not an affiliate, who has not been an affiliate within three months prior to sale and who beneficially owns restricted securities with respect to which at least two years have elapsed since the later of the date the shares were acquired from the Company, or from an affiliate of the Company, is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations or other requirements described above. Sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices.

         The Company has registered for offer and sale up to 570,000 shares of common stock that are reserved for issuance pursuant to the Company’s 1996 Stock Option Plan. Shares issued after the effective date of such registration statement upon the exercise of stock options generally will be eligible for sale in the public market, except that affiliates will continue to be subject to volume limitations and other requirements of Rule 144. The issuance of such shares could depress the market price of the Company’s common stock.

         On March 22, 2000, the Company registered for the sale of up to 66,000 shares of common stock issuable upon the exercise of warrants and options held by certain selling stockholders.

         On September 7, 2000, the Company executed a registration rights agreement under which the Company agreed to file a registration statement with the SEC for the resale of the shares of its common stock issuable in connection with a common stock purchase agreement with Justicia Holdings Limited dated September 7, 2000. The agreement permits the Company, in its sole discretion and subject to certain restrictions, to sell up to an aggregate of 800,000 shares plus 40,000 shares issuable upon exercise of warrants granted in connection with the common stock purchase agreement. The period during which the Company can make such sales is two years beginning upon the

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effective date of a registration statement for the resale of the shares. The Company also agreed to include in this registration statement 5,000 shares of common stock issued in payment of expenses. A registration statement covering such shares was filed in February 2001 but is not yet effective.

         The Company’s common stock purchase agreement with Justicia Holdings Limited would limit the Company’s ability to sell its securities for cash at a discount to the market price pursuant to an equity line type of financing for 24 months from the effective date of the registration statement or 60 days after the entire 800,000 shares have been purchased. This restriction would limit the Company’s ability to access the capital markets.

         On January 31, 2001, the Company registered for resale up to 112,000 shares of common stock and common stock issuable upon the exercise of warrants held by certain selling stockholders.

         The sales of shares under these registration statements could depress the market price of the Company’s common stock.

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. The Nevada Law also imposes conditions on certain business combination transactions with “interested stockholders” (as defined therein). The Restated Articles provides for a staggered board, which makes it more difficult for the shareholders 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 expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include those discussed under “Special Considerations.”

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ITEM 2.   PROPERTIES

Facilities and Equipment

         The total rental expense for fiscal 2001 for the Company and its subsidiaries was $191,000.

         The Company currently leases its principal executive offices in Phoenix, Arizona. The office contains approximately 6,155 square feet. The term of the lease is for 60 months commencing January 27, 1998 and monthly lease payments are approximately $13,600.

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 VOTE OF SECURITY HOLDERS

         None.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company’s common stock was quoted on the Nasdaq SmallCap Market from November 19, 1997 until July 18, 2001. Since July 19, 2001, the Company’s common stock has been quoted on the OTC Bulletin Board.

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

         On October 31, 2001, the closing price of the common stock on the OTC Bulletin Board was $2.93. As of October 31, 2001, there were 134 holders of record of the Company’s common stock.

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. 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.

Recent Sales of Unregistered Securities

         In October 2001, the Company executed an amended and restated consolidated multiple advance non-revolving note to borrow up to $700,000 from its affiliates. The accreted interest is equal to $140,000 if the full $700,000 is advanced under the loan. The note is payable in full on the earlier of (a) January 2, 2002, (b) the funding of any loan in cumulative amounts in excess of one million dollars, or (c) the issuance by the company of any common stock or preferred stock in cumulative amounts in excess of one million dollars, (d) the sale of any assets for an amount equal to at least two million dollars. As of October 31, 2001, the Company has borrowed $583,000 under the note. Subsequent to year-end, the note has been amended to increase the amount that can be borrowed under the note to $860,000 and to extend the term to March 1, 2002. As of January 28, 2002 the Company had borrowed $805,000 under the note. The note is secured by the assets of the Company and is convertible, at the option of the Lenders, into shares of the Company’s common stock at the rate of $1.00 per share.

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         The sales and issuances of the securities in the transactions above were deemed to be exempt from registration under the 1933 Act by virtue of Section 4(2). Appropriate legends have been placed on the documents evidencing the securities and investment representations were obtained from the purchasers. All purchasers of securities either received adequate information about the Company or had access, through employment or other relationships, to such information and were sophisticated investors. All such securities issued pursuant to such exemption are restricted securities as defined in Rule 144(a)(3) promulgated under the 1933 Act.

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ITEM 6.   SELECTED CONSOLIDATED 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. See Item 14, “Exhibits, Financial Schedules and Reports on Form 8-K,” for the historical financial statements of, and other financial information regarding, the Company.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         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. Factors that might cause such a difference includes, but is not limited to, those discussed under “Business – Special Considerations.”

Introduction

         Results of operations for fiscal 2001 reflect the current strategy of Bionutrics, Inc., to continue its efforts to reposition the Company as a product development company. Prior to 1997, 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’s 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®, 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 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 has sought marketing and manufacturing partners for the Company’s products and has focused efforts on the core competency of the Company, that 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 is 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 is to leverage its core competency to obtain revenue from both the manufacturing and marketing of these value-added micronutrients and nutritional commodity product streams.

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         To streamline operations and cut costs, late in 1998 the Company sold its rice bran extraction operation together with related technology to the ABF subsidiary, ACH (formerly AC HUMKO), for approximately $4.5 million. Bionutrics also reduced its employee base by one-half as part of a restructuring of the way the Company markets its principal product, evolvE®.

         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, LLC. InCon transferred substantially all of its assets to the newly formed LLC for which it received a payment of $3,000,000 and a 50% interest in the new company. The formation of this venture allowed the Company to more ably avail itself of the research and development capacity of InCon for specialty processing without being encumbered by capital requirements of the operation or for new facilities.

         Since the Company’s early days as a development stage company, through the current fiscal year, it has received an opinion noting the substantial doubt about our ability to continue as a going concern from its independent auditors due to the significant recurring operating losses. Additionally, at October 31, 2001, 2000 and 1999 the Company had negative working capital. However, the Company is working towards resolving the conditions giving rise to this opinion through the efforts outlined above.

         The Company has reduced its monthly negative operating cash flow to less than $150,000 from approximately $1,000,000 during 1998. Despite the reduction of its monthly negative cash flow, current assets at October 31, 2001 are $167,000 and accounts payable are $972,000. Management believes the strategy of partnering manufacturing and marketing to leverage the Company’s core competency of product development is correct at a time when the functional nutrition market is witnessing such an explosive awakening and growth. Management also believes that by reducing the Company’s labor and infrastructure costs and focusing on strategic partnerships for revenue generation, the Company will see significant improvement in its financial condition in the coming year. If the Company is not successful in its efforts to secure strategic partnerships to provide the Company with substantial revenues, management anticipates that operating losses will continue for the foreseeable future.

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Results of Operations

Year ended October 31, 2001, compared to Year Ended October 31, 2000

         Consolidated gross revenues for the 12 months ended October 31, 2001 were $96,000 versus $356,000 for the same 12 months in 2000, summarized by subsidiary as follows (intercompany sales excluded):

         Bionutrics Health Products continues to experience a significant decline in sales due to curtailment of advertising and support for the brand, evolvE® because of financial constraints and, therefore, the Company does not expect evolvE® will contribute significant revenue to its operations in the future. The Company is repositioning itself as a product development company and as such is engaged in discussions with several potential marketing partners concerning new branded ingredients that it is developing, including dietary supplements and functional food products. Bionutrics Health Products recognized revenues of $100,000 in the first quarter of fiscal 2000 for services related to its product development activities. New products will be based on new technology extending beyond a tocotrienol platform. The Company has announced that it is launching two new cardiovascular products under the brand names, “Vitenol® E 20/20 – For Heart & Health” and “CARDIO-CINTM – For Heart and Health”. Vitenol E is a rice bran extract and is a more effective antioxidant that standard vitamin E. CARDIO-CIN is based on Bionutrics’ patented niacin and soluble fiber composition. These products are targeted to the cholesterol dietary supplement market. However, they are not currently being marketed.

         LipoGenics revenues were attributable to a Phase I Small Business Innovation Research (SBIR) grant from the National Heart, Blood and Lung Institute. This grant was received during the fourth quarter of fiscal 1999 and was concluded during fiscal 2000. Revenues shown for the year ended October 31, 2000 relate to this grant.

         Cost of revenues for the year ended October 31, 2001, was $60,000 versus $165,000 for the same period in 2000. This reduction is primarily due to decreased sales during fiscal 2001 as well as a one-time adjustment to inventory during fiscal 2000 to reflect market value.

         Operating expenses for the year ended October 31, 2001 of $2,465,000 were $487,000 lower than that recognized for the same period in 2000 of $2,952,000. This reduction is primarily due to a cost containment program as well as the recording of an allowance of $263,071 for a long-term receivable recorded during fiscal 2000.

         Other expense for the year ended October 31, 2001 was $402,000 compared to the prior years’ expense of $163,000. This increase is primarily due to the recognition of the Company’s 50% equity in the losses of InCon Processing, LLC for the year ended August 31, 2001.

         Net loss decreased to $2,889,000, or $.64 per share for the year ended October 31, 2001 from $3,146,000, or $.75 per share for the year ended October 31, 2000 due primarily to reduced operating expenses as described above.

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Year ended October 31, 2000, compared to Year Ended October 31, 1999

         Consolidated gross revenues for the 12 months ended October 31, 2000 were $356,000 versus $3,690,000 for the same 12 months in 1999, summarized by subsidiary as follows (intercompany sales excluded):

         In June 1999, InCon transferred substantially all of its assets to InCon Processing. Therefore, InCon’s revenues for the 12 months ended October 31, 2000 are zero as compared to the same period in 1999. As a result of its investment in InCon Processing, the Company will be entitled to 50% of the future profits, if any, but it is anticipated that InCon Processing will retain the cash generated from operations for the foreseeable future to expand and develop its business.

         Bionutrics Health Products revenues reflect the sales of its first product, evolvE®, as well as revenues related to product development activities during fiscal year 2000. As of the 12 months ended October 31, 2000, evolvE® maintained distribution in over 10,000 stores including many leading drug and food chains throughout the United States. The Company also sells the product directly to the consumer via the Internet. Nonetheless, sales of evolvE® have been less than anticipated and declining because the Company was forced to cut back on budgeted advertising and promotions for the product due to delays in raising capital during this and prior periods. In addition, some customers have returned the product due to low volume activity. The provision for returns account for the year ended October 31, 1999 includes a one-time charge of $125,000, to increase the allowance account for the possible returns resulting from the advertising cut back and resulting product expiration. The Company recognizes that a substantial advertising program is necessary to achieve growth in the evolvE® product line, and that failure to show positive sales trends will have a negative impact on obtaining and maintaining distribution store accounts. The Company is seeking a marketing partner to provide the resources needed to properly market and promote the evolvE® brand and other anticipated dietary supplements and functional food products. The Company is engaged in discussions with several potential marketing partners involving the present and future brand products.

         Nutrition Technology is substantially inactive. Gross revenues reflected in fiscal 1999 represent remaining byproducts sold out of inventory. In August of 1998, the Company entered into a contract with ACH which provided: (i) for the sale of certain rice bran oil and processing assets to ACH; (ii) for the development of rice bran oil and other derivative products whereby Bionutrics will receive a perpetual profit sharing interest; and (iii) for a supply agreement where ACH will provide rice bran-derived ingredients. All elements of the alliance with ACH were executed on or before October 31, 1998.

         LipoGenics revenues were attributable to a Phase I Small Business Innovation Research (SBIR) grant from the National Heart, Blood and Lung Institute. This grant was received during the fourth quarter of fiscal 1999 and was concluded during fiscal 2000. Revenues shown for both periods relate to this grant.

         Cost of revenues for the 12 months ended October 31, 2000, was $165,000 versus $2,335,000 for the same 12 months in 1999. This reduction is primarily due to the new 50/50 joint venture entered into with ACH, which substantially took over all of the business engaged in by InCon. Due to this transaction which occurred during fiscal 1999, cost of revenues decreased $2,170,000 for fiscal 2000 as compared to fiscal 1999.

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         Operating expenses for the 12 months ended October 31, 2000 of $2,952,000 were $2,861,000 lower than that recognized for the same 12 months in 1999 of $5,813,000. This reduction is primarily due to the 50/50 joint venture entered into during the third quarter of 1999 with ACH as well as significantly reduced advertising and salaries expense and a cost containment program.

         Other expense for the 12 months ended October 31, 2000 was $163,000 compared to the prior years’ expense of $391,000. The current year includes certain non-recurring income items. Both years reflect recognition of the Company’s 50% equity in the losses of InCon Processing LLC.

         Net loss decreased to $3,146,000, or $.75 per share for the 12 months ended October 31, 2000 from $5,408,000, or $1.31 per share for the 12 months ended October 31, 1999 due primarily to lower cost of revenues and operating expenses as outlined above.

Liquidity and Capital Resources

         Net cash used in operating activities during the year ended October 31, 2001, was $1,691,000 as compared to $1,857,000 during the same period in 2000. This decrease is due primarily to lower cost of revenues and operating expenses.

         Net cash used in investing activities during the year ended October 31, 2001, was $0 as compared to $3,000 during the same period in 2000.

         Net cash provided by financing activities totaled $1,081,000 for the year ended October 31, 2001, as compared to $1,891,000 for the same period in 2000. The cash provided was from the sale of common stock and the issuance of short term notes payable for both years. The cash provided during 2001 reflects $500,000 from the sale of common stock and $583,000 from short-term notes payable. The cash provided during 2000 reflects $1,000,000 from the sale of common stock, $750,000 from short-term notes from a director and $150,000 from a note payable to an unrelated third party.

         In October 2001, the Company executed an amended and restated consolidated multiple advance non-revolving note to borrow up to $700,000 from its affiliates. The accreted interest is equal to $140,000 if the full $700,000 is advanced under the loan. The note is payable in full on the earlier of (a) January 2, 2002, (b) the funding of any loan in cumulative amounts in excess of one million dollars, or (c) the issuance by the company of any common stock or preferred stock in cumulative amounts in excess of one million dollars, (d) the sale of any assets for an amount equal to at least two million dollars. As of October 31, 2001, the Company had borrowed $583,000 under the note. Subsequent to year-end, the note has been amended to increase the amount that can be borrowed under the note to $860,000 and to extend the term to March 1, 2002. As of January 28, 2002 the Company had borrowed $805,000 under the note. The note is secured by the assets of the Company and is convertible, at the option of the Lenders, into shares of the Company’s common stock at the rate of $1.00 per share.

         In August, 2001, the Company entered into a stock purchase agreement with Pharmaceutical Marketing Brands, Inc. (PMB), as nominee, for the purchase of 49% of the Company and options to purchase 5,000,000 shares of common stock at $1.00 per share, for $5 million. This agreement was amended on October 5, 2001, to assign PMB’s rights, as nominee, to its principal HealthSTAR Holding LLC and to provide for an increase in the investment from $5 million to a minimum of $6.5 million up to a maximum of $10 million at $1.00 per share of common stock and for the Company to sell such shares directly to institutional and or accredited investors subject to a voting agreement among the parties. The agreement was further amended on October 31, 2001 to essentially extend the closing date as well as provide for the issuance of 5,227,000 shares of the Company’s common stock at $1.00 per share to HealthSTAR in exchange for a 5-year, interest-bearing promissory note. The amendment also eliminated the 5,000,000 stock options at $1.00 per share. The Company has further agreed, at initial closing, to enter into certain strategic agreements and purchase certain assets in the field of pharmaceutical marketing services. On December 28, 2001 the agreement was amended to extend the initial closing date for the purchase of a minimum number of shares to January 31, 2002 and allow for one or more subsequent closings until March 31, 2002. On January 29, 2002 the agreement was amended to extend the initial closing date until March 1, 2002 with subsequent closings on or before May 1, 2002. There can be no assurance that this stock purchase agreement with HealthSTAR will close.

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         In September 2000, the Company and Justicia Holdings Ltd. entered into a common stock Purchase Agreement for the future issuance and purchase of shares of the Company’s common stock. The Agreement establishes what is sometimes termed as an equity line of credit or an equity draw down facility. The Agreement permits the company, in its discretion, and subject to certain restrictions, to sell up to an aggregate of 800,000 shares, with the maximum amount for each sale not to exceed $1,000,000 each month, based on a formula of weighted average price and total trading volume for a given period. The period during which the Company can make such sales is two years beginning upon the effective date of a registration statement for the resale of the shares. The price is based on the volume weighted average daily price of the Company’s common stock for the 22 trading days following a draw down notice. Drawdowns are available every 29 trading days. The current stock price and trading volume severely limit the amount available to the Company at any one drawdown period. The common stock purchase agreement with Justicia Holdings Ltd limits the Company’s ability to sell its securities for cash at a discount to the market price pursuant to an equity line type financing for 24 months from the effective date of the registration statement filed on December 28, 2000 or 60 days after the entire 800,000 shares have been purchased. The Company is not permitted to drawdown on the equity line until the registration statement filed on Justicia’s behalf becomes effective. The Company intends to continue to pursue such registration statement during fiscal year 2002. There is no assurance that the registration statement will become effective.

         The Company requires additional financing of at least $3,000,000 to support its general working capital needs such as salaries and administrative expenses for the next 12 months, as well as to fund the research and development costs necessary to complete the launch of its recently developed products. If the Company were in a position to begin phase II trials, it would require at least an additional $500,000. The Company is currently in negotiations to secure this necessary capital through equity private placements as well as debt financing. The Company does not at this time have any committed sources of financing, other than the Justicia equity line of credit, the terms of which currently prohibit the Company from drawing down any funds. There can be no assurance that additional financing will be attainable on terms acceptable to the Company, or at all, at such time as the Company’s needs may require. Access to additional capital will depend substantially upon prevailing market conditions, and the Company’s financial condition and prospects at the time. On July 18, 2001, the Company’s common stock was delisted from the Nasdaq SmallCap Market, and the shares are currently quoted on the OTC Bulletin Board. As a result, activity in the Company’s common stock has declined substantially, which could adversely affect the Company’s ability to raise necessary capital. Such additional financing may not be attainable, or attainable on terms acceptable to the Company. Access to additional capital will depend substantially upon prevailing market conditions, and the financial condition of and prospects for the Company at the time.

         The Company has made application for a loan in the amount of $5,000,000 to a lender that specializes in loans secured by intellectual properties. If the Company is successful in obtaining this loan, it would receive $5,000,000 cash (less closing costs and points estimated to total $350,000) and would be required to place $5,000,000 of debt on its financial statement. The loan is being negotiated with a 10-11% annual interest cost and a 1% fee for prepayment during the first 12 months. There is no assurance the Company will succeed in obtaining this loan or that, if successful in obtaining the loan, that the terms and conditions will be as described herein.

         The loan will be secured by a “pod” of six patents owned by the Company’s subsidiary, LipoGenics, Inc. If the Company defaults on the loan’s interest payments, loan repayment or other material provisions of the loan agreements, the lender would be entitled to foreclose on the collateral and, in such case, the Company would lose the patents and all associated rights. The loss of these patents will likely have a material adverse effect on the Company.

         The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative operating losses of $38,201,000 through October 31, 2001, which have been funded through the issuance of stock and debt. The losses incurred to date, the uncertainty regarding the ability to raise additional capital and the Company’s inability to generate gross profits and positive cash flows from operations raise substantial doubt about whether the Company will be able to continue as a going concern for a reasonable period of time.

         The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is

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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.

ITEM 8.   FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

         Reference is made to the Consolidated Financial Statements, the Notes thereto and Independent Auditors’ Report thereon commencing at Page F-1 of this Report, which Consolidated Financial Statements, Notes and Report are included herein by reference.

PART III

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

         None.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The information required by Item 10 is incorporated by reference to the information to be contained under the heading “Proposal to Elect Directors – Nominees” to be set forth in the Company’s definitive Proxy Statement for its 2002 Annual Meetings of Stockholders. The information required by this Item relating to executive officers of the Company is included in “Business-Executive Officers” contained in Item 1 of this Report.

ITEM 11.   EXECUTIVE COMPENSATION

         The information required by Item 11 relating to directors of the Company is incorporated herein by reference to the information to be contained under the heading “Proposal to Elect Directors – Director Compensation and Other Information” to be set forth in the Company’s definitive Proxy Statement for its 2002 Annual Meetings of Stockholders. The information required by this Item relating to executive officers of the Company is to be included in “Executive Compensation” to be set forth in the Company’s definitive proxy statement for its 2002 Annual Meeting of Stockholders.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS and MANAGEMENT

         The information required by Item 12 is incorporated by reference to the information to be contained under the heading “Security Ownership of Principal Stockholders, Directors and Named Executive Officers” to be set forth in the Company’s definitive Proxy Statement for its 2002 Annual Meeting of Stockholders.

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ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 13 is incorporated by reference to the information to be contained under the heading “Certain Relationships and Related Transactions” to be set forth in the Company’s definitive Proxy Statement for its 2002 Annual Meetings of Stockholders.

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PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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(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.

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(c)

Reports on Form 8-K:

	Form 8-K filed October 5, 2001 regarding an amendment to the stock purchase agreement dated August 23, 2001 with Pharmaceutical Marketing Brands, Inc.
	Form 8-K filed November 9, 2001 regarding amendments no. 1 and no. 2 to the stock purchase agreement dated August 23, 2001 with Pharmaceutical Marketing Brands, Inc., which assigned its interest effective August 23, 2001 to Healthstar Holdings LLC.

(d)

Financial Statement Schedules:

	Valuation and Qualifying Accounts

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SIGNATURES

         Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

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.

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Bionutrics, Inc. and Subsidiaries

Consolidated Financial Statements as of
October 31, 2001 and 2000, and for Each of the
Three Years in the Period Ended October 31,
2001, and Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

Board of Directors
Bionutrics, Inc.
Phoenix, Arizona

We have audited the consolidated balance sheets of Bionutrics, Inc. and subsidiaries (the “Company”) as of October 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s operating losses since inception, the uncertainty regarding the Company’s ability to raise additional capital, and the Company’s inability to generate income and positive cash flows from operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Deloitte & Touche LLP

Phoenix, Arizona
January 18, 2002
January 30, 2002 as to Notes 5 and 6

F-1

BIONUTRICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2001 AND 2000

See notes to consolidated financial statements.

F-2

BIONUTRICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2001, 2000, AND 1999

See notes to consolidated financial statements.

F-3

BIONUTRICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED OCTOBER 31, 2001, 2000, AND 1999