1 9 9 9 A N N U A L R E P O R T

Direction

In 1994, Fytokem planted a unique seed – with proven power known only to

northern peoples of old. Incubating for a time of strength and maturity,

the seed took root, preparing itself for growth and promise. With refined

purpose and vision now in place, Fytokem is poised to flourish with a new

generation of innovative and natural ingredient products.

Contents

Letter to Shareholders - Refined Direction and Purpose . . . . . . . . . . . . . . . . . . . .1

Direction 2000 - Poised to Flourish . . . . . . . . . . . . . . . . . . . . .3

Proving The Products - A New Generation . . . . . . . . . . . . . . . .4

Financial Statements . . . . . . . . . . . . . . . 6

Shareholder Information . . . . . . . . . . . . . .15

Corporate Profile . . . . . . . . . . . . . . . . . . . . . . . . .16

Products and Revenue Streams . . . . . . .inside back cover

1

To Fytokem Shareholders:

Refined Direction and Purpose

Fiscal 1999 was a year of success and positive change for Fytokem. It was the start of

a new direction for the Company. The past year was highlighted with research

breakthroughs, positive clinical testing results, increased sales volumes through

new marketing agreements and a change in company leadership. From this learning

experience we have acquired the corporate maturity and knowledge to move forward to

the next stage of Fytokem’s growth.

Many research breakthroughs occurred in the year, however the most significant was

the isolation and identification of the rare, naturally occurring active molecule which

gives Canadian Willowherb™ its anti-irritant / anti-inflammatory and free radical

scavenging properties. This discovery not only validates the company’s product

development strategy, but more importantly, it opens the door to the lucrative

nutraceutical and pharmaceutical markets.

Positive independent clinical trials proved that the Tyrostat™ skin brighteners

effectively reduce the appearance of age spots in just 3 weeks of treatment.

Positive research and development efforts resulted in the introduction of an entirely

new line of products with tremendous potential. Fytosorb™-20 was introduced

commercially as an absorber of skin damaging oxy-free radicals for effective skin

protection. Oxy-free radicals are destructive, super-energized oxygen molecules created

on the skin during exposure to the sun and have been shown by independent researchers

to be the cause of some skin cancers. Fytosorb™-20 helps to boost the body’s natural

defenses against these oxy-free radicals and may help to reduce the occurrence of some

types of skin cancer.

The company signed a collaborative supply and product development agreement

with Dragoco Gerberding and Co. of Germany. Dragoco, a leading international raw

materials and ingredients company, will invest cash, market intelligence, and technical

expertise to accelerate the development of Fytokem’s specialty products for the cosmetic

ingredient market.

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Financing was obtained to ensure future growth. Fytokem successfully raised over

$900,000 through private placement share offerings in 1999 and an additional $885,000

in May 2000. These financings demonstrate confidence in Fytokem’s products

and potential.

The company moved from the “concept phase” to the “product development

and commercialization phase” in 1999. This brought about many management

changes, including the appointment of a new three-member senior management

team which will steer the company through the next phase of growth. A suitable

replacement is presently being sought for John Schaw, who stepped down as

President, CEO and Chairman of the Board, subsequent to year-end.

The management team is unified and focused on the future. We have developed

an aggressive business plan to make Fytokem a profitable leader in its market

segment by 2002.

We appreciate your continued support of Fytokem. With our high standard of

excellence and product acceptance, we are making the transition from research and

development to product commercialization, and are well on our way to the next

level of success.

Respectfully submitted,

Greg DutkaInterim President

Fytokem has delivered astory worth telling and, mostimportantly, has done thetesting to back it up. Theyhave provided the tools for a unique position and an efficacious product.

Steve Schnittger Manager, R&D

Estée Lauder

3

Direction 2000

Poised to Flourish

Fytokem is uniquely positioned to meet the growing demand from cosmetic and skin

care product manufacturers. We are just beginning to realize significant revenue from

sales of our anti-irritants, skin brighteners and moisturizers. With key marketing and

distribution now in place, sales are developing substantial momentum. More than 20

major multi-national companies in the U.S., Europe and Japan are at the prototype or

test market stage with product lines containing Fytokem ingredients.

We have initially targeted the active ingredient segment of the personal care industry

(PCI), specifically the active ingredient subset of the skin, hair and sun care market. That

portion is worth an estimated US$13 billion globally and is growing at an annual rate of

15%. Fytokem’s focus on plant-derived active ingredients and anti-aging products fits

perfectly with trends in the personal care industry.

In test after test, Fytokem products have outperformed leading natural and

synthetic products on the market. Our products have applications in both the

personal care and therapeutic markets, and we plan to increase our product line

by launching six new products a year. Fytokem has focused its research efforts

on extracts of 500 northern prairie plants and the isolation and identification

of the principal active molecules responsible for the curative and preventative

benefits of those plants. This development program also allows the company to

enter multiple markets (PCI, nutraceutical, therapeutic and pharmaceuticals)

with various refinements of the same plant extracts. The graphic representation

on the inside back cover of this annual report clearly shows this metamorphosis.

Fytokem has developed a number of marketing and sales strategies to employ in its new

direction. We have established worldwide marketing, sales and distribution networks for

use in the PCI industry, focused on Europe, Asia and North America, and we will

strengthen these as well as enter other markets through strategically chosen distributors.

We will also develop direct relationships with customers to produce tailored products,

and continue to patent, trademark, and maintain our trade secrets. With strategic

partners, we will continue to identify and target new markets in the nutraceutical and

pharmaceutical sectors.

The producers of botanicalactives who back up theirclaims with meaningful dataare hard to find. Fytokem’sstudies are an exceptional tool with which to make thedecision to proceed with product development andclaims substantiation.

Lee PalerDirector, R&D

Garden Botanika

4

Proving the Products

A New Generation

Significant achievements in 1999 have enabled Fytokem to plot a definite course for

present and future product offerings.

Canadian Willowherb™: Principal Active Molecule Discovered

The most significant of this year’s achievements was the isolation and identification

of the principal active molecule in Canadian Willowherb™ – which is responsible

for giving the plant its exceptional anti-irritant / anti-inflammatory and free radical

scavenging properties.

This potent molecule is rarely found in nature, and re-creating it synthetically is nearly

impossible. As such, the discovery gives Fytokem an exclusive window to worldwide

nutraceutical and pharmaceutical markets - worth an estimated US$91 billion and

US$110 billion respectively.

Currently, Canadian Willowherb™ is used in two of Fytokem’s commercial

anti-irritant products under the Fytosoothe™ label, and in one commercial

‘free-radical’ absorber called Fytosorb™-20.

Fytosoothe™ Anti-irritants: More to Come

In addition to the Canadian Willowherb™ the company plans

to release at least one to two other anti-irritants in the year

2000. This product line will continue to grow as additional

highly effective ant-irritants are discovered.

Fytosorb™-20: A Proven Skin Protectant

Testing in 1999 proved that Fytosorb™-20 outperforms three

industry-leading skin protection agents in terms of absorbing

harmful oxy-free radicals. Created on the skin during exposure to the sun, oxy-free

radicals are super-energized oxygen molecules which can damage skin cells.

First introduced at a California trade show in October, 1999, Fytosorb™-20 is now

available commercially. Two new products, Fytosorb™-30 and

Fytosorb™-40, are currently being targeted to companies

interested in obtaining exclusive rights to these novel ingredients.

Finding chemicals (actives) that outperform old standardsin their categories of activity isthe goal of cosmetic researchworldwide. The performanceof Canadian Willowherb™coupled with its economicvalue (pricing) should guarantee its place as an anti-irritant standard for thecosmetic formulary.

Gerry BrionManager, R&DMerle Norman

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Tyrostat™-11: Proven To Reduce The Appearance of Age Spots

Independent clinical tests in New York this year proved that a lotion containing Fytokem’s

Tyrostat™-11 is effective in reducing the dark appearance of age spots. Age spots are a

challenge for any skin brightener, yet marked results were clearly visible after just 3 weeks

of treatment.

Other Tyrostat™ Products: Additional Plant Sources Found

In addition to the Rumex species of plant used in the Tyrostat™-09 and Tyrostat™-11

products, the company plans to develop and release additional skin brightening products

based on other plants.

Fytosterol™: A Proven Skin Moisturizer

There is currently one commercial product in the Fytosterol™ line. Made from a

by-product of processed Canadian canola, it is used as a moisturizer and skin conditioner

in creams and lotions.

Fytosterol™: Great Potential in the Nutraceutical Market

Fytosterol™ also has great potential in the nutraceutical market. A number of phytosterol

products have been recently introduced to the market by such companies as Raisio,

Unilever, and Forbes Medi-Tech. These products have been shown to reduce the uptake

of cholesterol. Fytokem’s Fytosterol™ has potential in this marketplace as well. More

clinical trials would have to be done prior to commercialization of such a nutraceutical or

pharmaceutical product.

Prolastin™: Topical Wrinkle and Sagging Skin Reducer (Fall 2000 scheduled release)

This line of products inhibits elastase, a skin enzyme that gradually breaks down the skin’s

elasticity, thereby reducing wrinkles and sagging skin. This product has

tremendous potential in the cosmetic skin care and dermatological

therapeutic markets.

FytoOil-IP™: Non-GMO Oils For The PCI Industry

(July 2000 scheduled release)

This line of products represent the first oils available

for the PCI industry from non-genetically

modified plant sources.

Fytokem’s strategy, widely implemented, will positionthem as a technology targetfor the next generation ofcosmetic active ingredients.

Dave FotchmanSenior Chemist, R&DAmway Corporation

6

Management’s Responsibilities for Financial Reporting

Management is responsible for the preparation and integrity of the Company’s financial statements. These financial statements have been prepared in accordance with accounting principles generally acceptedin Canada and, where appropriate, reflect estimates based on judgment. Management has determined suchamounts on a reasonable basis to ensure that the financial statements are presented fairly, in all materialrespects. Financial information used throughout this Annual Report is consistent with that in the financial statements.

The Company’s policy is to maintain systems of internal accounting and administrative control designed toprovide reasonable assurance that the financial information is accurate and reliable and that the Company’sassets are appropriately accounted for and adequately safeguarded.

The Board of Directors, through the Audit Committee, is responsible for ensuring that management fulfillsits financial reporting responsibilities. The Audit Committee meets periodically with management and theauditors to discuss internal accounting, auditing matters, financial reporting issues, and to review the financial statements and the auditors’ report. The Audit Committee reports its findings to the Board forconsideration by the Board when it approves the financial statements for issuance to the shareholders. The auditors have unrestricted access to the Audit Committee. The Audit Committee recommends theappointment of the Company’s auditors who are appointed at the Company’s Annual Meeting.

Mark S. Pasloski, C.A.Vice-President - Finance and Administration

Auditors’ Report

To the Shareholders of Fytokem Products Inc.

We have audited the balance sheets of Fytokem Products Inc. as at December 31, 1999 and 1998 and thestatements of loss and deficit and cash flows for the years then ended. These financial statements are theresponsibility of the company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Canada. Those stan-dards require that we plan and perform an audit to obtain reasonable assurance whether the financial state-ments are free of material misstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financialstatement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of thecompany as at December 31, 1999 and 1998 and the results of its operations and its cash flows for the yearsthen ended in accordance with accounting principles generally accepted in Canada.

Chartered AccountantsSaskatoon, SaskatchewanFebruary 18, 2000, except for the matters described in Note 15, which are as of May 3, 2000

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Finan

cial Statemen

ts

FYTOKEM PRODUCTS INC.STATEMENTS OF LOSS AND DEFICIT

Years ended December 31, 1999 and 1998

1999 1998

REVENUESales $ 142,319 $ 15,089Cost of sales 32,756 4,348Gross margin 109,563 10,741Project revenue 149,545 66,578Other 14,163 20,105

273,271 97,424

EXPENSESProduct development 319,213 212,577 Marketing 240,580 296,735Finance and administration 562,400 309,799Depreciation (Note 6) 26,511 18,984Interest on debt (Note 7) 63,435 5,767

1,212,139 843,862

NET LOSS 938,868 746,438

DEFICIT, BEGINNING OF YEAR 1,316,764 570,326

DEFICIT, END OF YEAR $ 2,255,632 $ 1,316,764

LOSS PER SHAREBasic (Note 12) $ 0.09 $ 0.09

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FYTOKEM PRODUCTS INC.BALANCE SHEETS

December 31, 1999 and 1998

1999 1998

CURRENT ASSETSCash and temporary investments $ 523,576 $ 93,877 Accounts receivable 58,790 28,266Inventories (Note 4) 171,553 133,784Prepaid expenses 10,626 22,582

764,545 278,509

NOTES RECEIVABLE (Note 5) - 7,000 DEFERRED FINANCE CHARGES 25,850 -EQUIPMENT (Note 6) 124,007 113,387

$ 914,402 $ 398,896

CURRENT LIABILITIESAccounts payable and accrued liabilities $ 118,114 $ 96,729 Deferred project revenue 2,352 -Current portion of long term debt 25,114 19,255

145,580 115,984

LONG TERM DEBT (Note 7) 453,604 29,656DUE TO SHAREHOLDERS (Note 8) - 3,521

599,184 149,161

SHAREHOLDERS’ EQUITYShare capital (Notes 9 and 15) 2,506,866 1,450,113Share warrants (Note 10) - 116,386Equity portion of convertible debt (Note 7) 63,984 -Deficit (2,255,632) (1,316,764)

315,218 249,735$ 914,402 $ 398,896

APPROVED BY THE BOARD

Tom Gorman: Director

Andrew Nichols, C.A.: Director

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Finan

cial Statemen

ts

FYTOKEM PRODUCTS INC.STATEMENTS OF CASH FLOWS

Years ended December 31, 1999 and 1998

1999 1998

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIESNet loss $ (938,868) $ (746,438)Items not affecting cash

Depreciation 26,511 18,984Non-cash interest expense 58,400 -

(853,957) (727,454)

Changes in non-cash working capital Accounts receivable (30,524) 49,606Inventories (37,769) (116,254)Investment tax credits receivable - 4,495Prepaid expenses 11,956 (2,394)Accounts payable and accrued liabilities 21,385 50,444Deferred project revenue 2,352 -Cash flows used in operating activities (886,557) (741,557)

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Acquisition of equipment (23,332) (16,663)Repayment of notes receivable 7,000 -Cash flows used in investing activities (16,332) (16,663)

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIESProceeds from issuance of common shares 907,719 -Costs of share issuance (34,551) -Proceeds from issuance of share warrants - 196,500Costs of share warrants issuance - (80,114)Repayment of shareholder loans (3,521) -Proceeds from convertible debt 500,000 -Costs of convertible debt (17,051) -Repayment of long term debt (20,008) (14,945)Cash flows from financing activities 1,332,588 101,441

NET INCREASE (DECREASE) IN CASH 429,699 (656,779) CASH POSITION, BEGINNING OF YEAR 93,877 750,656 CASH POSITION, END OF YEAR $ 523,576 $ 93,877

Interest paid $ 5,035 $ 5,767

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FYTOKEM PRODUCTS INC.NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 1999 and 1998

1. DESCRIPTION OF BUSINESSThe Company was incorporated under The Business Corporations Act of Saskatchewan on March 25, 1994. The Company engages in the research, development, production and marketingof refined natural chemicals and extracts from plants.

2. ACCOUNTING POLICIESThe financial statements have been prepared in accordance with accounting principles generallyaccepted in Canada and include the following significant accounting policies:

Use of EstimatesThe preparation of these financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect reported amountsof assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.

Translation of Foreign CurrenciesMonetary assets and liabilities denominated in foreign currencies are translated into CanadianDollars at the year-end rates of exchange. No foreign exchange hedges have been placed to date,as foreign currency activity has been minimal. Revenues and expenses are translated at exchangerates prevailing on the dates on which such items are recognized in earnings. Gains and lossesarising from the translation of foreign currency monetary assets and liabilities at each period endare included in earnings.

InventoriesInventories are recorded at the lower of cost and estimated net realizable value.

EquipmentEquipment is recorded at cost. The cost of additions, and where useful lives are significantlyextended, betterments and renewals are capitalized. Repairs and consumable supplies are expensed as incurred. Depreciation is computed using the straight-line method at rates estimatedto amortize the cost of the assets over their useful lives.

The Company periodically assesses the amortization period and recoverability of the carryingamount of its equipment to determine potential impairment based upon expected future cashflows from the related business.

Financial Instruments For certain of the Company’s financial instruments, including cash and temporary investments,accounts receivable, notes receivable, and accounts payable and accruals, the carrying amountsapproximate fair value due to the immediate or short-term maturity of these items.

Deferred Finance ChargesDeferred finance charges relate to the issuance of the convertible debt and are being amortizedover a five year period.

Revenue RecognitionRevenue includes project revenue and product sales. Project revenue is recognized as the projects are completed. Revenue on sales of product is recognized when the goods are shipped to the customer.

Government AssistanceThe Company makes periodic applications for financial assistance under available governmentincentive programs for project funding and Scientific Research and Experimental Development(SR&ED) tax credits. Government assistance relating to capital expenditures is reflected as a reduction of the cost of such assets. Government funding for research and development projectsis recorded as revenue in the period the related expenditures are incurred, and SR&ED tax creditsrelating to non-capital expenditures are recorded as a reduction of expenses when the relatedexpenditures are incurred.

Research and Development Costs incurred in respect of research projects and for development of new products have, to date,been expensed as incurred.

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3. UNCERTAINTY DUE TO THE YEAR 2000 ISSUEThe Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the entity, including those related to customers, suppliers, or other third parties, have been fully resolved.

4. INVENTORIES1999 1998

Raw materials $ 131,577 $ 52,675Work in process - 56,281Finished product 39,976 24,828

$ 171,553 $ 133,784

5. NOTES RECEIVABLENotes receivable represent cash loaned to two employees for the purpose of purchasing shares in the Company. They were non-interest bearing notes and were repaid during 1999.

6. EQUIPMENTNet Book Value

Estimated AccumulatedLife Cost Depreciation 1999 1998

Furniture and fixtures 8 years $40,018 $ 10,646 $ 29,372 $ 29,183Computers and office automation 4 years 63,211 28,049 35,162 21,386Lab equipment 8 years 77,361 17,888 59,473 62,818

$ 180,590 $ 56,583 $ 124,007 $ 113,387

Included in the above cost figures are assets under capital leases as follows: 1999 1998

Computers and office automation $25,818 $ 12,018Lab equipment 52,718 52,718

$78,536 $ 64,736

In 1999, $13,800 of equipment was purchased under capital leases (1998: NIL)

7. LONG TERM DEBT1999 1998

Convertible promissory note $ 500,000 $ -Equity portion of promissory note (63,984) -Capital lease obligations 42,702 48,911

478,718 48,911Less current portionsCapital lease obligations (25,114) (19,255)

$453,604 $ 29,656

Convertible DebtOn February 5, 1999 the company issued a $500,000 convertible promissory note with monthly principal paymentsof $10,417 beginning February 5, 2001, and a maturity date of January 31, 2005 to Saskatchewan OpportunitiesCorporation (SOCO). The promissory note is secured by a general security agreement.

Finan

cial Statemen

ts

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Interest was paid in the first year by the issuance of 240,000 common shares. The company hasthe option to issue 240,000 shares in the second year or to pay interest at a rate of 20%. Beginningin the third year interest will be paid in cash calculated at 12% of the outstanding balance of the loan.

SOCO has the option at any time during the term of the Loan to convert any portion of the outstanding balance of the loan to common shares of the company. The company can repay thepromissory note any time until maturity.

Principal repayments required in the next five years are:2000 -2001 $103,9542002 $125,0002003 $125,0002004 $125,000

Classification of Liability and Equity Components of Convertible DebtThe company has assigned carrying amounts to the liability and equity elements of the above financial instrument in accordance with the substance of the contractual arrangement. The companyhas determined the carrying amount of the financial liability by discounting the stream of future cashpayments of interest and principal at an estimated market rate of 20% for a similar liability that doesnot have an associated equity component.

The carrying amount of the equity instrument represented by the option to convert the promissorynote was determined as follows:

Total convertible promissory note: $500,000Present value of future cash payments at 20% representingthe carrying amount of the liability of convertible promissory note $436,016Carrying amount of equity component of convertible promissory note $ 63,984

Lease obligationsThe capital lease obligations are at fixed rates varying from 8 3/8% to 12.1%. The operating lease obligations are primarily for the Company’s rented office and lab space at its head office in Saskatoon.Minimum lease payments are as follows:

Capital leases Operating leases2000 $ 28,458 $ 28,9762001 11,557 -2002 7,722 -

47,737 28,976Less interest portion 5,035 N/A

$ 42,702 $ 28,976

8. DUE TO SHAREHOLDERSThe amounts due to shareholders are unsecured, non-interest bearing and have no fixed terms ofrepayment. These amounts were repaid in 1999.

9. SHARE CAPITALAuthorized:Unlimited number of Common shares without nominal or par value and an unlimited number ofPreferred shares.

Common SharesDate Issued Net Proceeds

December 31, 1997 Balance 8,450,000 $ 1,395,513March 5, 1998 Conversion of debenture 109,200 54,600

December 31, 1998 Balance 8,559,200 1,450,113January 25, 1999 Private Placement 384,709 88,358

February 17, 1999 Shares in lieu of interest on convertible debt 240,000 67,200March 5, 1999 Private Placement 535,715 150,000June 15, 1999 Share warrants converted (Note 10) 262,000 116,386

November 15, 1999 Private Placement 1,333,333 344,368December 21, 1999 Private Placement 600,000 290,441December 31, 1999 Balance 11,914,957 $ 2,506,866

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On March 5, 1998, the company issued 109,200 common shares upon conversion of a convertibledebenture. The carrying amount of the debenture at that date was $54,600.

On January 25, 1999, the company issued 384,709 common shares for cash proceeds of $107,719through a private placement. Issue costs of $19,361 have been netted against the proceeds of these shares.

On February 17, 1999, the company issued 240,000 common shares in lieu of one year’s interest onthe SOCO convertible promissory note.

On March 5, 1999, the company issued 535,715 common shares for cash proceeds of $150,000through a private placement.

On November 15, 1999, the company issued 1,333,333 common shares for cash proceeds of $350,000 through a private placement. Issue costs of $5,632 have been netted against the proceeds of these shares.

On December 21, 1999, the company issued 600,000 common shares for cash proceeds of $300,000 through a private placement. Issue costs of $9,559 have been netted against the proceedsof these shares.

A Share Purchase Incentive Plan (the “Plan”) was authorized by the Board of Directors of the Companyand approved by the shareholders of the Company on May 27, 1997, to provide incentive to qualifiedparties to increase their proprietary interest in the Company and thereby encourage their continuingassociation with the Company. Pursuant to the Plan, 10% of the total issued Common shares fromtime to time, may be reserved for issuance to the directors, officers, employees and consultants of theCompany as designated by the Board of Directors from time to time. The Plan consists of a SharePurchase Plan, a Bonus Plan and a Share Option Plan.

The maximum number of Common shares, which may be issued under the Shares Purchase Plan, is200,000 shares. To date, no shares have been issued under the Share Purchase Plan.

The maximum number of Common shares, which may be issued under the Share Bonus Plan, shallnot exceed 200,000 shares. To date, no shares have been issued under the Share Bonus Plan.

The maximum number of shares, which may be issued under the Share Option Plan, is 10% of thethen issued and outstanding Common shares. The maximum number of shares reserved for issuanceto any one person upon the exercise of Options is limited to 5% of the total number of shares thenoutstanding. Notwithstanding the above, the maximum number of shares, which may be issuedunder the Share Option Plan, shall not exceed 1,250,000 shares.

1999 1998Stock Options Shares Weighted -Average Shares Weighted - Average

(000) Exercise Price (000) Exercise PriceOutstanding at beginning of year 245 $0.26 - -Granted 300 $0.27 275 $0.26Reserved 415 $0.34 - -Reserved 25 $0.30 - -Exercised - - - -Forfeited (25) $0.27 (30) $0.26Outstanding at end of year 960 $0.30 245 $0.26

Options exercisable at yearend 520 $0.26 245 $0.26

On December 8, 1998 the Company granted Share Options to directors, officers and employees to purchase an aggregate of 275,000 shares at a price of $0.26 per Common Share. 245,000 of theseoptions remain outstanding at yearend and expire on December 8, 2003.

On June 11, 1999 the company granted share options to directors, officers and employees to purchasean aggregate of 300,000 shares at a price of $0.27 per common share – 275,000 of these optionsremain outstanding at year end and expire on June 11, 2004. As stated above, the Directors,Officers, and Employee Options remain outstanding at year end. The Company has not grantedany further options, however it has reserved a further 415,000 share options to directors, officersand employees at an exercise price of $0.34 per common share. The company has also reserved afurther 25,000 share options at an exercise price of $0.30 per common share.

Finan

cial Statemen

ts

10. SHARE WARRANTSOn July 28, 1998 the company issued 262,000 special warrants at $0.75 each. Issue costs of $80,114 have been netted against the proceeds of these special warrants. Each special warrant entitled the holder to acquire one (1) Common Share at no additional cost. All special warrants were exercised on June 15, 1999.

11. INCOME TAXESThe Company has losses totaling $2,188,279 (1998: $1,256,782) available to reduce future taxableincome. The expiration dates for these losses are as follows:

2001 $ 682002 $ 26,8882003 $ 29,9332004 $ 497,0672005 $ 702,8262006 $ 931,497

Timing differences, including the above losses, which would have given rise to a deferred incometax debit balance amount to $2,500,829 (1998: $1,452,750). Other than the losses discussedabove, these timing differences can be carried forward indefinitely. The potential tax benefit ofthese items has not been reflected in these financial statements.

SR & ED tax credits of $71,292 in 1999 (1998: $36,640) are available for carry forward to thefuture years for offset against income taxes otherwise payable.

12. LOSS PER SHAREBasic loss per share is calculated on the weighted average number of shares issued and outstandingduring the year ended December 31, 1999, being 9,901,112 shares (1998: 8,559,200 shares).

13. RELATED PARTY TRANSACTIONSDuring the year, the Company contracted with four directors and officers (five in 1998) for$200,547 of services (1998: $227,739). These transactions were in the normal course of operationsand were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The following table summarizes the amounts contracted with the four directors and officers for services:

1999 1998Product development $ 47,881 $ 57,370Marketing - 77,256Administration 152,666 93,113

$ 200,547 $ 227,739

Trade accounts payable includes $945 payable to the above related parties (1998: $21,757).

14. COMPARATIVE FIGURES Certain of the prior year’s figures have been reclassified to conform to the current year’s presentation.

15. SUBSEQUENT EVENTPursuant to an agency agreement dated April 26, 2000 the company has arranged to raise$1,200,000 through the private placement issue of 2,000,000 Special Warrants at a price of $0.60per unit. Each Special Warrant entitles the holder to acquire one (1) common share and one-half(1/2) of one warrant for no additional consideration. Each whole warrant entitles the holder toacquire one common share at a price of $1.00 per common share for a period of one year. As ofMay 3, 2000, the company issued 1,475,664 Special Warrants for gross proceeds of $882,425. The company intends to close the remainder of this offering on May 10, 2000.

The agent Yorkton Securites Inc. received, in lieu of compensation, 121,167 Special Warrants. Asadditional compensation the company issued Agents Options for an additional 121,167 SpecialWarrants at $0.60 per Special Warrant exercisable within one year.

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Shareholder Information

Fytokem Products Inc. develops, processes and markets novel functional plant-derived substances – extractsand phytochemicals – for use as ingredients in cosmetic and personal care items, nutraceuticals and functional foods, and for therapeutic and pharmaceutical purposes.

Board of DirectorsTom Gorman, Murray McLaughlin, Peter Oliver, Thomas Carroll, Brian Mallard, Paul Marciniak, RitaMirwald, Andrew Nichols

OfficersGreg Dutka, Vice-President - Marketing & SalesMark Hetherington, Vice-President - Research & DevelopmentMark Pasloski, C.A. Vice-President - Finance & Administration

Stock InformationCompany Name: Fytokem Products Inc.Symbol: FYTExchange: Canadian Venture Exchange (CDNX) Shares Outstanding: 11,914,9571999 Share Price: $0.20 to $0.692000 Price (Q1): $0.45 to $1.50

Annual MeetingJune 23, 20002:00 PMRadisson HotelSaskatoon, SK

Shareholder ServicesInquiries regarding change of address, stock transfer, registered share holdings dividends, lost certificates andmultiple copies of mailed material should be directed to:

Transfer Agent and RegistrarCIBC Mellon Trust Company600 The Dome Tower333 - 7th Avenue S.W.Calgary, Alberta T2P 2Z1Ph: (403) 232-2413Fax: (403) 264-2100

Requests for additional information on the Company should be directed to:Fytokem Products Inc.101 - 110 Research DriveSaskatoon, SK S7N 3R3CANADA

Ph: (306) 668-2552Fax: (306) 978-2436E-mail: fytokem@fytokem.com

We encourage you to visit our web site for more information:www.fytokem.com

16

Corporate Profile

Fytokem Products Inc. develops, processes and markets novel functional

plant-derived substances – extracts and phytochemicals – for use as ingredients in

cosmetic and personal care products, nutraceuticals and functional foods, and for

therapeutic and pharmaceutical purposes. Agricultural crops, forest species and native

plants of the Canadian north form the foundation for our manufactured products.

Our vision is to become a globally-recognized leader in the development and

manufacturing of therapeutic phytochemical ingredients.

Our mission is to develop, manufacture and supply premier plant-derived therapeutic

ingredients to the personal care, nutraceutical and pharmaceutical sectors.

Because of the “large marketing networks” associated with the markets we have chosen

to pursue, we have chosen to focus our efforts on the development and processing of

plant-derived substances. The marketing of these products is done through strategic

alliances/partnerships with large multi-national PCI, nutraceutical/functional food, and

pharmaceutical companies. The key to our success therefore lies in our ability to develop

products that are multi-functional and serve multiple markets.

In 1999, we proved that we can develop products from the raw plant extract phase

through to the identification and isolation of the active molecule. We also demonstrated

that we can generate revenue streams at all of the development phases of a product. An

example of this is the products (and revenue streams by market) that we have identified

based on the Canadian Willowherb™ plant as illustrated on the following page:

Canadian Willowherb™

Raw Botanical

TARGETMARKETS

Whole Plant

Extract

Refined Plant

Extract

Plant ExtractActive

Concentrate

CW5

CW5(powder)

CW5C

CW5C(powder)

ActiveMolecule

Oenothein-B(85%+)

Personal CareIndustry

NutraceuticalIndustry

PharmaceuticalIndustry

The above chart communicates the many viable markets for Fytokem’s Canadian Willowherb™ at each stage of refinement. The development/

refinement cycle for all of Fytokem’s products mirrors the above.

ActiveMolecule

ActiveMolecule

Oenothein-B(60%+)

Fytosorb™-20

Fytokem Products Inc.101 - 110 Research Drive,Saskatoon, SK S7N 3R3

Canada

Ph: (306) 668-2552

Fax: (306) 978-2436

E-mail: fytokem@fytokem.com

Web site: www.fytokem.com