ERGO SCIENCE CORP, 10-K, 1999-03-30

ERGO SCIENCE CORP
10-K, 1999-03-30
PHARMACEUTICAL PREPARATIONS

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

FORM 10-K

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998

-OR-

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from...to...

Commission File No. 0-24936

ERGO SCIENCE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 04-3271667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

Charlestown Navy Yard
33 Third Avenue
Charlestown, Massachusetts 0219
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (617) 241-6800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| 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 |X|

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1999, was approximately $5,100,000. As of March 15,
1999, there were 14,254,467 outstanding shares of the registrant's common stock.

Portions of the registrant's Proxy Statement to be furnished to stockholders in
connection with its 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K

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PART I

ITEM 1. BUSINESS

This Report contains forward-looking statements of the Company.
Forward-looking statements reflect the Company's current views with respect to
these events. Actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. Important factors that
could cause actual results to differ materially include, without limitation, the
factors set forth below in "Risk Factors."

Overview

Ergo Science Corporation ("Ergo" or the "Company") is developing the drug
ERGOSET(R) tablets for the treatment of metabolic disorders. The Company has
decided to appeal the November 1998 denial by the U.S. Food & Drug
Administration ("FDA") of the Company's New Drug Application ("NDA") for
ERGOSET(R) tablets for the treatment of type 2 diabetes. As a result of the
FDA's denial, the Company discontinued funding of its pre-clinical programs,
including its pre-clinical development efforts on product candidates in both its
photodynamic therapy (PDT) program and its Neuroendocrine Resetting Therapy(R)
("NRT(R)") program, and significantly reduced its work-force. The Company is
also considering strategic alternatives.

The Company filed an NDA in August 1997 for its lead product candidate,
ERGOSET(R) tablets, for the treatment of type 2 diabetes. The FDA accepted this
application for filing in October 1997. On May 14, 1998, the FDA Advisory Panel
for ERGOSET(R) tablets found that there was not sufficient evidence to recommend
the NDA for approval. On November 20, 1998, Ergo received a letter from the
Division of Metabolic and Endocrinologic Drug Products at the FDA indicating
that the Company's NDA for ERGOSET(R) tablets for the treatment of type 2
diabetes was not approvable, citing an overall benefit to risk ratio. The
Company has decided to appeal this decision within the FDA.

In February 1998, the Company entered into a worldwide joint collaboration
with The R.W. Johnson Pharmaceutical Research Institute, Ortho-McNeil
Pharmaceutical, Inc. and Cilag AG International (collectively referred to as
"Johnson & Johnson") to develop and commercialize ERGOSET(R) tablets, as well as
other potential drug candidates acting through the NRT(R) mechanism, for the
treatment of type 2 diabetes and obesity. On December 4, 1998, Johnson & Johnson
notified Ergo of its termination of the joint collaboration, effective January
3, 1999. As a result, the Company does not have a marketing partner for
ERGOSET(R) tablets, if approved.

The Company's previous pre-clinical research primarily focused on novel
treatments for metabolic disorders, including type 2 diabetes and obesity based
on its core technology, NRT(R). NRT(R) is based on the role of neurotransmitters
in regulating metabolism. The Company believes that its approach may provide the
foundation for a new class of treatments for a variety of glucose and lipid
disorders. The Company's research suggests that diabetic humans have daily
neuroendocrine patterns that are different from healthy subjects. The Company's
strategy for treating type 2 diabetes in humans is to administer a
neurotransmitter-modulating agent, such as ERGOSET(R) tablets, on a timed basis
to reset the abnormal daily neuroendocrine patterns of the patients to resemble
more closely the daily neuroendocrine patterns of normal, lean, non-diabetic
subjects. See "Business-- Development of ERGOSET(R) Tablets for the Treatment of
Diabetes."

Development of ERGOSET(R) Tablets for the Treatment of Diabetes

Diabetes as a Metabolic Disorder. The Company's primary research focused
on the treatment of type 2 diabetes, obesity and related metabolic disorders.
These metabolic disorders involve defects in the neuroregulatory mechanisms that
control the integrated, complex relationship between glucose and fat metabolism.
To sustain life, the human body must break down food into glucose, fat and
protein. Glucose, a simple form of sugar, is used as a primary source of energy
for the body's cells. When the amount of glucose available becomes greater than
the body requires, it is converted into fat (triglycerides) and stored within
the adipose tissue for later use when food is unavailable. When glucose is not
available from food, triglycerides in the adipose tissue are broken down into
free fatty acids that stimulate glucose production by the liver. Insulin, which
is secreted by the pancreas, plays an important role in regulating the

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level of glucose in the blood stream by stimulating the use of glucose as fuel
primarily in muscle tissue and by inhibiting the production of glucose in the
liver. In a healthy metabolic state, a balance is maintained between the
production and utilization of glucose and fat.

Characteristics of Diabetes. The term diabetes refers to a group of
metabolic disorders that show a single common feature, i.e., abnormally high
levels of glucose in the blood. Type I diabetes (juvenile-onset diabetes or
insulin dependent diabetes mellitus) results from a rapidly progressive,
immunologically driven dysfunction that leads to total failure of the
insulin-producing cells (beta-cells) in the pancreas. In contrast, type 2
diabetes (adult onset or non-insulin dependent diabetes mellitus) occurs
generally in obese subjects around the fourth decade of life and
characteristically develops as a slow, insidious process that may take several
years to become clinically evident. One of the primary components of this
disease is the body's inability to use its available insulin effectively to
control the entry of glucose into the cells. This dysfunction is due to a
condition known as insulin resistance. The abnormal state of insulin resistance
exists when the insulin-stimulated uptake of glucose into muscle tissue and the
brain becomes impaired, resulting in a reduction of insulin's inhibitory effect
on glucose production. This condition leads to excessive blood levels of glucose
(hyperglycemia) which is frequently accompanied by increases in the blood levels
of triglycerides, free fatty acids and other lipids. Type 2 diabetes is a
chronic and incurable disease that accounts for 90% to 95% of all diagnosed
cases of diabetes. It is a leading cause of death in the United States. In
addition to the hallmark of hyperglycemia evident in type 2 diabetes, the
associated high blood levels of triglycerides, free fatty acids and total
cholesterol are believed to be potential risk factors for the premature
development of cardiovascular disease, including coronary artery disease.

Need for New Diabetes Treatments. There is no cure for diabetes. After
diagnosis, the first course of therapy for type 2 diabetics is to try to control
hyperglycemia through diet and exercise. If this fails to achieve glycemic
control, physicians will typically prescribe oral medication with one or more of
the available agents. Currently, there are five FDA approved classes of oral
medications for type 2 diabetes.

The first class of oral agents approved for treating type 2 diabetes was
sulfonylureas. Characteristically, each member of this drug class reduces blood
glucose levels by stimulating the pancreas to secrete more insulin. Some
researchers suspect that the increased risk of cardiovascular disease in
patients with type 2 diabetes may, in part, be the result of above-normal levels
of serum insulin, which may stimulate the liver to increase lipid levels in the
blood, contributing to atherosclerosis and obesity. Thus, the labeling of
sulfonylureas includes a special warning on the possible increased risk of
cardiovascular mortality from the use of the drugs. Over time, many patients who
are treated with sulfonylureas begin to re-experience elevated blood glucose and
lipid levels. When this type of therapeutic failure occurs, a next step may be
the addition of, or substitution with, one or more of the newer types of oral
therapies whose mechanisms of action are different than sulfonylureas.

Metformin (tradename Glucophage(R)) was approved by the FDA in March 1995
for monotherapy and adjunctive therapy for patients taking sulfonylureas and is
sold by Bristol-Myers Squibb Company. Glucophage(R) is an oral medication that
belongs to a class of drugs called biguanides. It is believed to work, at least
in part, by reducing glucose output from the liver. Its use carries the risk of
lactic acidosis, a rare but possibly fatal side effect.

Precose was approved by the FDA for monotherapy and adjunctive therapy in
September 1995 and is sold in the United States under the tradename Acarbose(R)
by Bayer Corporation (sold in Europe under the tradename GlucobayTM). Precose is
an alpha-glucosidase inhibitor that works in the intestine to block the enzymes
necessary for the digestion and absorption of carbohydrates in the intestines.
Precose reduces blood glucose levels primarily after meals by slowing down the
digestion of carbohydrates and lengthening the time it takes for carbohydrates
to convert to glucose. It must be taken orally at the start of each meal and
causes mild to moderate gastrointestinal side effects in most users.

The FDA approved Troglitazone, a thiazolodinedione sold by Warner-Lambert
Company under the tradename Rezulin(R), in January 1997 for use in diabetics
taking insulin. In August 1997, the FDA approved Troglitazone for use as
monotherapy or combination therapy for type 2 diabetes. Troglitizone is believed
to work in part by increasing the body's sensitivity to insulin. Following
reports of liver toxicity, Glaxo removed Troglitizone from the market in the
United Kingdom in 1998. Troglitizone has been placed on the agenda at the March
26, 1999, FDA Advisory Panel meeting to review its post-marketing safety and
efficacy data and Warner-Lambert's supplemental New Drug Application (sNDA) for
combination therapy with both Metformin and with sulfonylureas and Metformin.
Two new drugs in the same class as Troglitizone, namely Rosiglitizone and
Pioglitizone, are expected to be approved in 1999.

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Repaglinide (tradename Prandin(R)) was approved by the FDA for monotherapy
and adjunctive therapy for patients taking sulfonylureas in December 1997 and is
sold jointly by Novo Nordisk and Schering-Plough Corporation. Repaglinide is an
oral medication containing a benzoic acid derivative taken with meals and is
believed to act via calcium channels to stimulate insulin secretion. See
"Business--Competition."

Therapeutic failure, which occurs after exhausting oral drug treatments,
may signal loss of the pancreatic beta-cell function and the inability to
secrete insulin. In this case, the type 2 diabetic must then begin daily insulin
injections. An estimated 40% of type 2 diabetics are taking insulin according to
the American Diabetes Association ("ADA").

Demographics and Market Size. The U.S. National Institutes of Health
estimate that approximately 15.7 million people suffered from diabetes in the
United States in 1998, of whom approximately 10.3 million have been diagnosed
with the disease. Type 2 diabetes may account for 90% to 95% of these diagnosed
cases. Oral agents are a leading class of pharmaceutical products for the
treatment of diabetes and had total sales of approximately $2 billion in the
United States during 1998.

ERGOSET(R) Tablets in the Treatment of type 2 Diabetes. ERGOSET(R) tablets
are a low-dose, fast-release, oral formulation of bromocriptine mesylate, a
dopamine agonist previously approved by the FDA to treat Parkinson's disease,
acromegaly and hyperprolactinemic conditions. ERGOSET(R) tablets are a potent
dopamine-receptor agonist, which operates through a mechanism of action that
appears different from other anti-diabetic drugs. The Company selected
bromocriptine for use in treating type 2 diabetes primarily because of its
ability to increase dopaminergic activity in the hypothalamic area of the brain.
Research by the Company and its founding scientists indicates that healthy, lean
subjects evidence high levels of dopaminergic activity during the daytime and
that obese and type 2 diabetic subjects evidence low levels of dopaminergic
activity during the same time period. Specifically timed treatment with
ERGOSET(R) tablets is believed to help restore a more normal daily pattern of
dopaminergic activity in the brain. This "resetting" is believed to act as a
central regulator of metabolic function, that is, of lipid and glucose
metabolism.

Regulatory Status of ERGOSET(R) Tablets. The Company filed an NDA in
August 1997 for approval of ERGOSET(R) tablets to treat type 2 diabetes as a
monotherapy and as adjunctive therapy with sulfonylureas. In October 1997, the
FDA accepted the NDA for filing. On May 14, 1998, the FDA Advisory Panel for
ERGOSET(R) tablets found that there was not sufficient evidence to recommend the
NDA for approval. On November 20, 1998, Ergo received a letter from the Division
of Metabolic and Endocrinologic Drug Products at the FDA indicating that its NDA
for ERGOSET(R) tablets for the treatment of type 2 diabetes was not approvable,
citing an overall benefit to risk ratio. The Company has decided to appeal this
decision within the FDA. See "Risk Factors--Ergo May Not be Successful in its
Appeal of the Not-approval Letter for the NDA for ERGOSET(R) Tablets;" "Risk
Factors--Ergo's Business Faces Significant Government Regulation;" and
"Business-Commercialization."

Clinical Trials of ERGOSET(R) Tablets for type 2 Diabetes. The primary
goal of the Company's clinical trials to date has been to substantiate the
beneficial effect that ERGOSET(R) tablets have on glucose and lipid metabolism
for the treatment of type 2 diabetes and obesity previously seen in various
animal models. The Company began clinical trials of ERGOSET(R) tablets for the
treatment of type 2 diabetes in 1992 and completed its three Phase III clinical
trials of ERGOSET(R) tablets as adjunctive and monotherapy for type 2 diabetes
in 1996. Ergo initiated its three double-blinded, placebo-controlled Phase III
clinical trials of ERGOSET(R) tablets in obese, type 2 diabetics in January
1995. Over 650 subjects were enrolled in the three clinical trials, two of which
studied ERGOSET(R) tablets as adjunctive therapy with sulfonylurea agents and
one of which studied ERGOSET(R) tablets as monotherapy. The primary clinical
endpoint of each of the Phase III clinical trials was to achieve a clinically
and statistically significant reduction in blood levels of glycated hemoglobin
A1c (HbA1c). The FDA considers HbA1c to be a reliable indicator of glycemic
control in diabetics. In the three pivotal trials, ERGOSET(R) tablets or placebo
were given daily at approximately 8:00 a.m. to type 2 diabetics who were on
weight-maintaining diets.

The Adjunctive Therapy Trial Results. The two studies of ERGOSET(R)
tablets as adjunctive therapy were consistent with respect to baseline
population characteristics; that is, all subjects were overtly diabetic with
average baseline fasting glucose and HbA1c levels of 223 mg/dL and 9.4%,
respectively. Baseline fasting serum triglycerides and total cholesterol were
248 mg/dL and 212 mg/dL, respectively. Baseline fasting free fatty acids were
847 [symbol]eq/L in the one study for which this parameter was available.

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The intent-to-treat analysis indicated that ERGOSET(R) tablets improved
glycemic control, as measured by a reduction in HbA1c of 0.55% (p[less
than]0.0001) compared to placebo. The intent-to-treat analysis also showed that
ERGOSET(R) tablets compared to placebo reduced fasting serum triglycerides 61
mg/dL (p= 0.0058), a 24% reduction. In the one study for which free fatty acids
results were available, ERGOSET(R) tablets treatment resulted in a reduction of
fasting serum free fatty acids of 150 [symbol]eq/L (p=0.0424) compared to
placebo on an intent-to-treat basis.

The analysis of safety of ERGOSET(R) tablets showed the most frequently
reported side effects were nausea, fatigue and dizziness, which are known
potential side effects associated with the use of bromocriptine. Most side
effects reported were mild to moderate in degree and transient in nature. The
combined discontinuation rate in the two trials due to side effects was
approximately 13% for ERGOSET(R) tablets compared with approximately 2% in the
placebo group.

The Monotherapy Trial Results. Monotherapy treatment for type 2 diabetes
demonstrated reductions in HbA1c. Of the 122 subjects who completed the 24-week
trial, 60 received ERGOSET(R) tablets and showed a statistically significant
reduction of 0.6% (p[less than]0.02) compared to placebo in HbA1c. A reduction
of 0.44% (p[less than]0.03) compared to placebo in HbA1c was seen in the
intent-to-treat population. Results from the monotherapy trial also showed
trends in improving lipid profiles. The most frequently reported side effects in
the monotherapy trial were nausea, fatigue, nasal congestion and dizziness. Most
side effects reported were mild to moderate in degree and transient in nature.
The discontinuation rate due to side effects was approximately 13% for
ERGOSET(R) tablets versus 5% for placebo.

Additional Clinical Trials. In 1998, Ergo completed two Phase II clinical
trials of ERGOSET(R) tablets in patients with type 2 diabetes. The first study
demonstrated a statistically significant (p# 0.01) increase in insulin
sensitivity, as compared to placebo, in type 2 diabetic patients treated with
ERGOSET(R) tablets. Insulin sensitivity was measured by rates of
insulin-mediated total body glucose disposal. In the second study, ERGOSET?
tablets were effective in significantly reducing HbA1c by 0.7% (p[less than or
equal to]0.05) and diurnal glucose by 29 mg/dl (p[less than]0.006) relative to
placebo after 12 weeks of treatment in patients who were on insulin.
Additionally, the daily insulin requirement was less in the ERGOSET(R) tablets
treated group than in the placebo treated group at each biweekly visit during
the study resulting in an average 5-unit decrease (8%) over the treatment
period. A reduced insulin usage profile over time was observed among ERGOSET(R)
tablets relative to placebo patients (p[less than]0.04 for treatment by week
interaction and profile comparison).

Development of ERGOSET(R) Tablets for the Treatment of Obesity

General. The term obesity is defined as a disorder in which a person's
total body weight is more than 30% over the weight that is normal for healthy
persons of the same age and height. Obesity is generally characterized by a low
lean-to-fat body mass ratio and is often accompanied by high blood lipid levels.
While the causes of obesity vary, many researchers believe that insulin
resistance contributes to the development of obesity.

Clinical Trials of ERGOSET(R) Tablets for the Treatment of Obesity. The
Company initiated a Phase II clinical trial of ERGOSET(R) tablets to treat obese
subjects in June 1997 at 14 clinical sites across the United States in
approximately 300 clinically obese subjects. The trial was completed in late
1998, and the results of this study are currently being analyzed and should be
reported in the first half of 1999. See "Risk Factors-- Clinical Trials for
ERGOSET(R) Tablets May be Unsuccessful

Development of ERGOSET(R) Tablets for the Treatment of Cancer

Cancer. Preclinical studies that Ergo conducted suggest that temporal
neuroendocrine regulation may play an important role in the body's regulation of
immune function and its ability to fight cancer. In a presentation at the Ninth
International Congress of Immunology in 1995, Ergo's scientists demonstrated
that the alteration of daily neuroendocrine patterns through the timed
administration of neurotransmitter-modulating drugs can stimulate the immune
system and limit the growth of tumors in mice. In addition to treating cancer,
Ergo believes this approach may be useful in treating other immune system
disorders such as lupus.

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Clinical Trials of ERGOSET(R) Tablets for the Treatment of Breast Cancer.
In late 1995, Ergo began a small, open-label, uncontrolled, Phase II clinical
trial of ERGOSET(R) tablets with another neurotransmitter-modulating drug in
women with advanced metastatic breast cancer. The study was conducted to
evaluate timed, orally administered ERGOSET(R) tablets and a serotonin agonist
in improving the health status of these women. In this pilot study, the women
were maintained on standard chemotherapy, were administered ERGOSET(R) tablets
(1.6-4.8 mg/day) in the morning, and were administered a serotonin agonist in
the evening for 24 weeks. Disease status was evaluated at initiation and at
completion by physical examination, CT scan, bone scan, and/or chest x-ray. Of
the 24 women treated, 25% exhibited regression of total body tumor load. An
additional 20% of women exhibited no progression of disease or new disease.
Furthermore, mean total and CD3+ lymphocyte counts increased, and levels of
certain serum hormones known to promote breast cancer growth decreased with
treatment.

Commercialization

The Company's commercialization strategy includes the formation of
marketing alliances with major pharmaceutical companies to market the Company's
products. The Company also plans to establish long-term manufacturing agreements
for its product supply. The Company currently retains all marketing rights to
its drug candidates

Marketing. On January 3, 1999, Johnson & Johnson terminated its worldwide
Joint Collaboration and License Agreement (the "Joint Collaboration Agreement")
with Ergo to develop and commercialize ERGOSET(R) tablets. The Company currently
has no marketing partner for this product candidate. If the Company's appeal of
the denial of its NDA is successful, the Company intends to try to form a
strategic alliance with one or more pharmaceutical companies to market
ERGOSET(R) tablets in the United States and internationally. See "Risk
Factors--Ergo Does Not Have a Marketing Partner for ERGOSET(R) Tablets"

Manufacturing. Ergo does not operate and does not plan to operate
manufacturing facilities for the production of either bulk chemicals or the
finished pharmaceutical dosage forms for its product candidates. In 1995, the
Company entered into a supply agreement ("Geneva Agreement") to buy ERGOSET(R)
tablets from Geneva Pharmaceuticals, Inc., and Geneva agreed to supply all of
the Company's requirements for the final dosage form(s) of ERGOSET(R) tablets
for the treatment of type 2 diabetes and obesity. In October 1997, the Company
and Geneva amended and restated the Geneva Agreement. Under the amended Geneva
Agreement, the Company agreed to purchase its worldwide supply of ERGOSET(R)
tablets from Geneva on a "cost-plus" basis. The Company also shortened the term
of the agreement, agreed to issue Geneva shares of Ergo common stock, and agreed
to make additional payments to Geneva upon the occurrence of certain regulatory
events and for performance of the agreement for a specified period.

If Geneva does not perform its obligations under the Geneva Agreement, the
Company, or any corporate partner, may not be able to obtain supplies of
ERGOSET(R) tablets. Even if the Company is able to obtain ERGOSET(R) tablets
from other suppliers, it may not be on the terms or in the quantities that would
be acceptable to the Company. The active ingredient in ERGOSET(R) tablets is
available from few suppliers in the world, and the manufacturing process for the
active ingredient is complex and lengthy. Accordingly, the Company may encounter
significant delays if it must obtain supplies of active ingredient or finished
tablets from suppliers other than its current suppliers. See "Risk Factors
- --Ergo Does Not Manufacture ERGOSET(R) Tablets"

History and Science of the Company's Technology and Preclinical Research

Ergo's founding scientists, Anthony H. Cincotta, Ph.D., formerly of
Massachusetts General Hospital and Harvard Medical School, and Albert H. Meier,
Ph.D., formerly of Louisiana State University, conducted extensive research over
30 years into the way changes in the daily patterns of neuroendocrine activity
regulate changes in glucose and lipid metabolism observed in seasonal and
non-seasonal animals as well as in the ob/ob mouse. Ergo expanded on this
research to focus on how changes in daily patterns of neuroendocrine activities
may improve disease conditions in humans.

Overview of Temporal Neuroendocrine Regulation of Metabolism. Many animal
species become insulin resistant and obese during one season of the year and
insulin sensitive and lean during other seasons. These seasonal increases in
lipid

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production and storage provide an energy source to the animal to endure times of
low food availability, provide energy for migration and hibernation, and provide
insulation during the winter. Many species of animals have developed this
ability to become seasonally insulin resistant and obese in order to survive
adverse environmental conditions. Researchers have observed that animals in a
seasonally insulin resistant and obese condition display a metabolic profile
that is similar to the metabolic profile of insulin resistant and obese humans
who have type 2 diabetes and its related metabolic disorders.

Ergo's scientists have demonstrated that the seasonally insulin resistant
and obese condition in animals is associated with seasonal changes in the daily
pattern of neuroendocrine activity. The neuroendocrine system--a complex
physiological system that includes the brain, peripheral nervous system and
hormones--is one of the mechanisms that regulates and coordinates many functions
of the body. Neurotransmitters in the hypothalamic area of the brain, such as
dopamine, serotonin and noradrenaline, are involved in regulating the production
of hormones by the pituitary and other endocrine glands, which in turn help
regulate various cellular activities such as the liver's production of lipids.

Moreover, the Company's scientists have demonstrated that the timed
administration of certain pharmaceuticals in seasonal animals can alter
neurotransmitter activity, which affects daily hormone patterns to produce the
desired seasonal metabolic conditions out of season. When
neurotransmitter-modulating drugs were administered to a seasonally obese,
insulin resistant animal at specific times designed to shift its neuroendocrine
patterns to mimic those of a seasonally lean, insulin sensitive animal, the
animal's metabolism shifted to a lean, insulin sensitive state regardless of the
actual season of the year. In recent studies, Ergo's researchers measured levels
of neurotransmitter metabolites in the ventral medial hypothalamus ("VMH") of
obese, insulin resistant Syrian hamsters. The studies indicated that the
administration of neurotransmitter-modulating drugs at a specific time of day to
obese, insulin resistant Syrian hamsters caused the hamsters to become lean and
insulin sensitive in two weeks and also reduced the levels of neurotransmitter
metabolites in the VMH.

Ergo's scientists have also demonstrated that the timed administration of
certain pharmaceuticals in non-seasonal animals with insulin resistance and
obesity can alter the animal's daily neuroendocrine pattern and produce a
leaner, more insulin sensitive animal. In preclinical studies with the
leptin-deficient ob/ob mouse, a genetically obese and insulin resistant animal
model, Ergo's scientists achieved significant reductions in body fat compared
with control animals through the timed administration of
neurotransmitter-modulating drugs without injecting leptin. In over 20 studies
presented at major scientific meetings in 1996 and 1997, Ergo scientists have
demonstrated that central neuroendocrine- modulating drugs from the class of
dopamine agonists, when given to obese, diabetic animals, produced a significant
reduction in food intake and a decrease in body fat with no significant decrease
in lean body (muscle) mass compared with control animals. The treatment also
improved glycemic control, reducing glucose and insulin and improving beta-cell
function.

Patents, Proprietary Rights and Licenses

Ergo's ability to commercialize profitably any product candidates will
depend, in part, upon its or its licensors' ability to obtain patents, enforce
those patents, preserve trade secrets and operate without infringing upon the
proprietary rights of third parties. The Company has rights to more than 45
issued or pending U.S. patent applications as well as their respective
counterparts filed in other countries. LSU has licensed its interest in more
than 40 issued or pending U.S. patent applications exclusively to the Company.
See "Business-- LSU Agreement." The Company is a co-owner of certain of those
U.S. patent applications and U.S. patents. The Company's patent portfolio for
ERGOSET(R) tablets candidates is based on the timed administration of
neurotransmitter-modulating drugs to address abnormalities of the neuroendocrine
system. The Company was also issued a patent in the United States relating to a
fast-release formulation of ERGOSET(R) tablets. The Company has also entered
into a license agreement with Massachusetts General Hospital for its interest in
certain patent applications covering the treatment of immune dysfunctions and
cancer. See "Business-- MGH Agreement." See "Risk Factors--Ergo Depends on
Patents and Proprietary Rights That May Fail to Protects Its Business"

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LSU Agreement

The Company's rights to ERGOSET(R) tablets and its other technologies
derive in part from a license from LSU for certain patents and patent
applications. The Company is a co-owner of certain of these patents and patent
applications. Under an agreement originally signed in 1990 (as amended, the "LSU
Agreement"), LSU granted to Ergo an exclusive license to its rights under
certain patents and patent applications. The LSU Agreement will terminate upon
expiration of all licensed patents thereunder unless terminated earlier by LSU
or the Company in accordance with terms of the LSU Agreement. In the LSU
Agreement, the Company agreed to commercialize ERGOSET(R) tablets in all
countries where commercialization is reasonably justified economically. The
Company is responsible for prosecuting and maintaining the patents and patent
applications licensed from LSU and for obtaining governmental approval of any
product, process or method covered thereby in those countries (for example, FDA
approval in the United States). The Company's policy is to file foreign
counterparts to its licensed patent applications in countries with significant
pharmaceutical markets where such protection is obtainable. The Company has a
right of first negotiation for new technologies that LSU develops relating to
the licensed technologies. There can be no assurance that the Company will
successfully obtain rights to any such new technologies. The LSU Agreement
requires the Company to make specified fixed payments to LSU and pay LSU
royalties at varying rates on its product sales covered by the licensed patents.
The LSU Agreement also requires the Company to maintain customary general
liability insurance and customary product liability insurance for all countries
in which it sells products licensed under the LSU Agreement. LSU may terminate
the LSU Agreement if Ergo breaches the LSU Agreement and fails to cure the
breach within 45 days (for breach of payment obligations) or 90 days (for other
breaches) after notice of the breach from LSU. If the LSU Agreement is
terminated for any reason, the Company would no longer possess significant
rights to commercialize ERGOSET(R) tablets and certain other technologies
relating to the timed administration of neurotransmitter-modulating drugs. This
would have a material, adverse effect on the Company. See "Risk Factors-- Ergo
Depends on Patents and Proprietary Rights That May Fail to Protects Its
Business"

MGH Agreement

The Company entered into an exclusive license agreement with Massachusetts
General Hospital (the "MGH Agreement") for its interest in certain patent
applications covering the treatment of immune dysfunctions and cancer using the
timed administration of certain neurotransmitter modulators. The MGH Agreement
requires the Company to pay Massachusetts General Hospital a royalty on product
sales and to make specified payments upon the completion of certain milestones.
The agreement also sets forth a development schedule for products covered by the
licensed patents which requires the Company to commence and complete certain
clinical trials within specified time periods. The MGH Agreement requires the
Company to maintain insurance and prosecute the licensed patents. Massachusetts
General Hospital may terminate the MGH Agreement if the Company breaches its
terms and fails to cure the breach within 60 days. If the MGH Agreement is
terminated, the Company's rights in many of its patent applications covering the
treatment of immune disorders and cancer would become non-exclusive.

Rowland Agreement

Following the Company's decision to stop funding of its pre-clinical
development work in Photodynamic Therapy, the Company decided to terminate its
License Agreement with the Rowland Institute for Science ("Rowland") in March,
1999. The License Agreement had granted the Company rights to certain patents
covering the composition of matter and use of photodynamic molecules for the
treatment of neoplastic disorders.

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Competition

ERGOSET(R) tablets, if approved, will compete against existing therapies
for type 2 diabetes, such as insulin and oral anti-diabetic agents. In the
recent past, the FDA has approved four drugs for the treatment of type 2
diabetes that have methods of action that are different from sulfonylureas and
are intended to address the hyperglycemia associated with diabetes. Furthermore,
two new drugs in the same class as Troglitizone, namely Rosiglitizone and
Pioglitizone, are expected to be approved in 1999.

Metformin, under the tradename Glucophage(R), was approved in March 1995
and is sold by Bristol-Myers Squibb Company. Metformin has been used as an
adjunct to oral hypoglycemic agents and in monotherapy to improve glycemic
control in diabetic subjects without increasing serum insulin levels. It is an
oral medication that belongs to a class of drugs called biguanides. It is
believed to work, at least in part, by reducing glucose output from the liver.
Its use carries the risk of lactic acidosis, a rare but possibly fatal side
effect. Metformin has rapidly gained market acceptance.

Precose, approved for monotherapy and adjunctive therapy by the FDA in
September 1995, is sold in the United States by Bayer Corporation under the
tradename Acarbose(R) and sold in Europe under the tradename GlucobayTM.
Acarbose(R) is an alpha-glucosidase inhibitor which works in the intestine to
block the enzymes necessary for the digestion and absorption of carbohydrates in
the intestines. Acarbose(R) reduces blood glucose levels primarily after meals
by slowing down the digestion of carbohydrates and lengthening the time it takes
for carbohydrates to convert to glucose. It must be taken orally at the start of
each meal and causes mild to moderate gastrointestinal side effects.

In January 1997, the FDA approved Troglitazone, sold by Warner Lambert
Company under the tradename Rezulin(R), for use in treating diabetics who are
taking insulin. In August 1997, the FDA approved Troglitazone for use as
monotherapy or combination therapy for type 2 diabetes. The product is believed
to work in part by increasing the body's sensitivity to insulin. In December
1997, Warner Lambert initiated a change in prescribing information for
Rezulin(R). This came in response to reports of liver dysfunction potentially
associated with the drug. Troglitizone has been placed on the agenda at the
March 26, 1999, FDA Advisory Panel meeting to review its post-marketing safety
and efficacy data and Warner-Lambert's supplemental New Drug Application (sNDA)
for combination therapy with both Metformin and with sulfonylureas and
Metformin.

The FDA has approved the active ingredient in ERGOSET(R) tablets for
indications other than type 2 diabetes. Physicians may choose to prescribe other
drugs containing this active ingredient for off-label use to try to achieve the
same effects as ERGOSET(R) tablets. Substitution of other forms of the active
ingredient may have a material adverse effect on the market for ERGOSET(R)
tablets. This risk could be increased if current regulations prohibiting
off-label marketing are changed. See "Business-- Patents, Proprietary Rights and
Licenses" and "Business-- Government Regulation." There can be no assurance that
the Company's product candidates, if commercialized, will be accepted and
prescribed by healthcare professionals.

Ergo competes with biotechnology and established pharmaceutical companies
in all of its product development programs. Academic institutions, governmental
agencies and other public and private research organizations also conduct
research, seek patent protection, and establish collaborative arrangements with
commercial entities for product development and marketing. Products resulting
from these activities may compete directly with ERGOSET(R) tablets if approved
for commercial marketing. These companies and institutions also compete with the
Company in recruiting and retaining highly-qualified scientific personnel. Most
competitors and potential competitors have substantially greater scientific
research and product development capabilities, as well as greater financial,
marketing and human resources, than the Company.

Many other entities, including large pharmaceutical companies and
institutions, are developing therapeutic products that may compete with Ergo's
product candidates in the treatment of type 2 diabetes, obesity and cancer.
Several different approaches to treating type 2 diabetes are being tested in
United States clinical trials, including new oral hypoglycemic agents that
stimulate insulin production and new medicines that stimulate glucose uptake in
peripheral

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tissues. Other drugs are being developed that may limit or delay the damage that
diabetes causes to organs such as the eyes and kidneys.

Competition for treatments for type 2 diabetes is very intense. The
Company expects that competition among products approved for sale will be based
on, among other factors, product safety, efficacy, tolerability, ease of use,
effect on co-morbid conditions, availability, price, marketing and distribution.
Even if ERGOSET(R) tablets are approved by the FDA for sale as a new treatment
for type 2 diabetes, it may not be able to compete successfully against other
products. See "Business-- Development of ERGOSET(R) Tablets for the Treatment of
Diabetes."

Government Regulation

Ergo's development activities, such as clinical trials, and ultimately the
manufacturing, marketing and labeling of its products, if approved, are subject
to extensive regulation by the FDA and other regulatory authorities in the
United States. These activities are also regulated in other countries where the
Company may test and market its products. The United States Federal Food, Drug,
and Cosmetic Act and the regulations promulgated thereunder and other federal
and state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of the Company's products. Preclinical study and
clinical trial requirements and the regulatory approval process take years and
require the expenditure of substantial resources. Additional government
regulation may be established that could prevent or delay regulatory approval of
the Company's product candidates. Delays or rejections in obtaining regulatory
approvals would adversely affect the Company's ability to commercialize any
product candidates the Company develops and the Company's ability to receive
product revenues or royalties. If regulatory approval of a product candidate is
granted, the approval may include significant limitations on the indicated uses
for which the product may be marketed.

FDA and other regulatory authorities require that the safety and efficacy
of the Company's therapeutic product candidates must be established by at least
two adequate and well-controlled Phase III clinical trials. If the results of
Phase III clinical trials do not establish the safety and efficacy of the
Company's product candidates to the satisfaction of the FDA and other regulatory
authorities, the Company will not receive the approvals necessary to market its
product candidates. This would have a material adverse effect on the Company.

The steps required before a pharmaceutical agent may be marketed in the
United States include (a) preclinical laboratory, in vivo, and formulation
studies, (b) the submission to the FDA of an Investigational New Drug
application ("IND"), which must become effective before human clinical trials
may commence, (c) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, (d) the submission of an NDA to
the FDA, and (e) FDA approval of the NDA, including approval of all product
labeling and advertising.

Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies, to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with the FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of human clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in FDA authorization to commence clinical trials or that the
lack of an objection means that the FDA will ultimately approve an NDA.

Clinical trials involve the administration of the investigational new drug
to humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as a part of the IND. Also, each clinical trial must be
approved and conducted under the auspices of an Institutional Review Board,
which will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution conducting the clinical
trials.

Clinical trials are typically conducted in three sequential phases, but
the phases may overlap, as is the case with ERGOSET(R) tablets trials. Phase I
clinical trials involve the initial introduction of the drug into healthy human
subjects. In Phase I clinical trials, the drug is tested for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II clinical trials are conducted
in a limited subject

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<PAGE>

population to gather evidence about the efficacy of the drug for specific,
targeted indications to determine dosage tolerance and optimal dosage and to
identify possible adverse effects and safety risks. When a compound has shown
evidence of efficacy and an acceptable safety profile in Phase II evaluations,
Phase III clinical trials are undertaken to evaluate clinical efficacy and to
test for safety in an expanded subject population at geographically dispersed
clinical trial sites. There can be no assurance that any of the Company's
clinical trials will be completed successfully or within any specified time
period. The Company or the FDA may suspend clinical trials at any time. The FDA
inspects and reviews clinical trial sites, informed consent forms, data from the
clinical trial sites including case report forms and record keeping procedures
and the performance of the protocols by clinical trial personnel to determine
compliance with Good Clinical Practice. The FDA also seeks to determine whether
there was bias in the conduct of clinical trials. The conduct of clinical trials
in general and the performance of the Phase III clinical trial protocols is
complex and difficult. There can be no assurance that the design or the
performance of the Phase III clinical trial protocols will be acceptable to the
FDA.

The results of preclinical studies and clinical trials, if believed to be
successful, are submitted in an NDA to seek FDA approval to market and
commercialize the drug product for a specified use. The testing and approval
process require substantial time and effort. There can be no assurance that any
approval will be granted for any product or that approval will be granted
according to any schedule. The FDA may deny an NDA if it believes that
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy of the drug. Moreover, if regulatory
approval of a drug product is granted, the approval will be limited to specific
indications for which the FDA believes there is adequate supporting data. There
can be no assurance that any of the Company's product candidates will receive
regulatory approvals for commercialization. See "Risk Factors--Ergo's Business
Faces Significant Government Regulation"

Even if regulatory approvals for the Company's product candidates are
obtained, the Company, its products and the facilities manufacturing the
Company's products are subject to continual review and periodic inspection. The
FDA will require post-marketing reporting to monitor the safety of the Company's
products. Each United States drug manufacturing establishment must be registered
with the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with the FDA's current Good Manufacturing
Practices. To supply drug products for use in the United States, foreign
manufacturing establishments must comply with the FDA's Good Manufacturing
Practices and are subject to periodic inspection by FDA or by regulatory
authorities in those countries under reciprocal agreements with the FDA. In
complying with Good Manufacturing Standards, manufacturers must expend funds,
time and effort in the area of production and quality control to ensure full
technical compliance. The Company does not have any drug manufacturing
capability and must rely on outside firms for this capability. See "Business--
Commercialization" The FDA stringently applies regulatory standards for
manufacturing. Discovery of problems with respect to a product, manufacturer or
facility may result in restrictions on the product, manufacturer or facility,
including warning letters, suspensions of regulatory approvals, operating
restrictions, delays in obtaining new product approvals, withdrawal of the
product from the market, product recalls, fines, injunctions and criminal
prosecution.

Before Ergo's drug products can be marketed outside of the United States,
they are subject to regulatory approval similar to FDA requirements in the
United States, although the requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. No action can be taken to market any drug product in a country until an
appropriate application has been approved by the regulatory authorities in that
country. FDA approval does not assure approval by other regulatory authorities.
The current approval process varies from country to country, and the time spent
in gaining approval varies from that required for FDA approval. In some
countries, the sale price of a drug product must also be approved. The pricing
review period often begins after market approval is granted. Even if a foreign
regulatory authority approves any of the Company's product candidates, no
assurance can be given that it will approve satisfactory prices for the
products.

Ergo's research and development involved the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although the
Company believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. If such an
accident occurs, the Company could be held liable for resulting damages, which
could be material to the Company's financial condition and business. The Company
included an environmental assessment in the NDA for ERGOSET(R) tablets in
accordance with FDA regulations. The Company is also subject to numerous
environmental, health and workplace safety laws and regulations, including those
governing laboratory procedures,

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<PAGE>

exposure to blood-borne pathogens and the handling of biohazardous materials.
Additional federal, state and local laws and regulations affecting the Company
may be adopted in the future. Any violation of, and the cost of compliance with,
these laws and regulations could materially and adversely affect the Company.

Human Resources

As of March 15, 1999, the Company had 10 full-time employees. None of the
Company's employees is covered by a collective bargaining agreement.

RISK FACTORS

In addition to the other information in this Annual Report on Form 10-K,
you should consider the following factors in evaluating the Company and its
business.

Ergo May Not be Successful in its Appeal of the Not-approvable Letter for the
NDA for ERGOSET(R) Tablets

The Company filed an NDA with the FDA for ERGOSET(R) tablets to treat type
2 diabetes in August 1997. The FDA subsequently accepted the filing in October
1997. On May 14, 1998, the FDA Advisory Panel for ERGOSET(R) tablets found that
there was not sufficient evidence to recommend the NDA for approval. On November
20, 1998, Ergo received a letter from the Division of Metabolic and
Endocrinologic Drug Products at the FDA indicating that its NDA for ERGOSET(R)
tablets for the treatment of type 2 diabetes was not approvable, citing an
overall benefit to risk ratio. The Company has decided to appeal this decision
within the FDA. The Company has no experience in appealing these decisions, and
the appeal process is difficult. Thus, the Company cannot assure you that it
will be successful in its appeal of the FDA's decision not to approve ERGOSET(R)
tablets for the treatment of type 2 diabetes. Even if regulatory approval is
eventually obtained, any approval could contain material limitations on the
indicated uses for which ERGOSET(R) tablets may be marketed. See "Business--
Government Regulation." If the Company is unsuccessful in its appeal and if the
FDA maintains that ERGOSET(R) tablets are not approvable for the treatment of
type 2 diabetes, then the Company, or any corporate partner, will not be able to
market ERGOSET(R) tablets for that indication. This result will have a material
adverse effect on the Company.

Clinical Trials for ERGOSET(R) Tablets May be Unsuccessful

If the FDA does not overturn its not-approvable letter based upon the
Company's existing clinical data, the Company, or any corporate partner, may be
required to conduct additional clinical trials in order to obtain marketing
clearance for ERGOSET(R) tablets for the treatment of type 2 diabetes. The
Company has not decided whether it would conduct additional trials. The results
from such additional clinical trials may not be satisfactory to the FDA.
Therefore, the FDA may not grant regulatory approval of ERGOSET(R) tablets. The
FDA may be influenced by its views regarding :

o the magnitude and durability of the reduction of HbA1c, glucose, and
trigliceride levels;

o the design of the Company's clinical trials; and

o the risks/benefits profile of the drug.

Similarly, the Phase II clinical study currently being analyzed, and any
additional clinical studies, for ERGOSET(R) tablets for the treatment of obesity
may not be successful. If the Company or the FDA believes that the results of
these clinical studies do not establish that ERGOSET(R) tablets are safe and
effective in the treatment of the specific disease, the Company will not receive
the approval necessary to market ERGOSET(R) tablets for this indication. The
inability to market ERGOSET(R) tablets for the treatment of either type 2
diabetes or obesity would have a material adverse effect on the Company.

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<PAGE>

Ergo Does Not Have a Marketing Partner for ERGOSET(R) Tablets

The Company has no experience in sales, marketing and distribution. The
market for products for type 2 diabetes is large. To market a new product for
type 2 diabetes to primary care and general practice physicians requires
significant resources. If the Company's NDA is approved and the Company decides
to continue its business, the Company plans to either enter into a marketing
agreement with or to sell its marketing rights in ERGOSET(R) tablets to one or
more pharmaceutical companies that have established marketing and sales
capabilities. The Company may not be able to enter into a collaborative
marketing agreement or be able to find such a buyer. The Company's failure to
enter into marketing arrangements with third parties would have a material
adverse effect on the Company.

To the extent that the Company enters into marketing or distribution
arrangements with others, any revenues the Company receives will depend upon the
efforts of third parties. While the Company believes that its potential
collaborators will have an economic incentive to succeed in performing their
obligations under such arrangements, the other parties will control the amount
and timing of funds and other resources to be devoted under such arrangements.
These funds will also be subject to financial and other difficulties that may
befall the other parties. Third parties may not market the Company's products
successfully, and any third-party collaboration may not be on terms favorable to
the Company. If any marketing partner does not market a product successfully,
the Company's business would be materially adversely affected.

Ergo May Not Obtain Financing Necessary for Additional Clinical Trials for
ERGOSET(R) Tablets

The Company's resources are primarily funding its appeal of the FDA's
not-approvable letter. If the appeal is unsuccessful, the Company will require
substantial funds if it chooses to conduct additional clinical trials. The
Company's capital requirements will depend on many factors, including the size
and length of the clinical trials. The Company will have difficulty raising
funds in the public and private capital markets. The Company may seek additional
funding through corporate collaborations and other financing vehicles. Such
funding may not be available to the Company, or, if available, it may not be
available on acceptable terms. If adequate funds are not available, the Company
may be required to obtain funds through arrangements with future collaborative
partners or others. These arrangements may require the Company to relinquish
rights to some or all of its assets. If the Company is successful in obtaining
additional financing, the terms of the financing may have the effect of diluting
or adversely affecting the holdings or the rights of the holders of its common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources."

Ergo Does Not Manufacture ERGOSET(R) Tablets

The Company does not operate and does not plan to operate manufacturing
facilities for the production of either bulk chemicals or the pharmaceutical
dosage forms for its product candidates. In October 1997, the Company amended
and restated its 1995 United States supply agreement with Geneva
Pharmaceuticals, Inc. ("Geneva") for the finished dosage forms of ERGOSET(R)
tablets. If Geneva does not perform its obligations under this agreement or if
the agreement is terminated, the Company, or any corporate partner, may not be
able to obtain supplies of ERGOSET(R) tablets. Even if the Company is able to
obtain ERGOSET(R) tablets from other suppliers, it may not be on the terms or in
the quantities acceptable to the Company. Like Geneva, other suppliers would
need to meet FDA manufacturing requirements, and the Company cannot assure you
that they would receive FDA approval. The active ingredient in ERGOSET(R)
tablets, bromocriptine, is available from few suppliers in the world, and the
manufacturing process for the active ingredient is complex and lengthy.
Accordingly, the Company will encounter significant delays if it must obtain
supplies of active ingredient or finished tablets from other sources or
otherwise experience interruptions in its supplies. See
"Business--Commercialization." If the Company is unable to obtain adequate
supplies on favorable terms, its business would be materially adversely
affected. This activity is subject to FDA requirements, including demonstration
of satisfactory in vitro dissolution, bioavailability, bioequivalence, and
manufacturability. The Company cannot assure you of the outcome of these
activities or the times in which they may be completed, if at all.

Furthermore, certain dosage strengths for ERGOSET(R) tablets, in their
current formulation and packaging, have a limited shelf-life that may not be
sufficient for commercial marketing. The Company is currently conducting studies

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<PAGE>

to elaborate on these stability issues. The Company cannot assure you that it
will be able to resolve these issues and that any or all of these dosage
strengths of ERGOSET(R) tablets will be commercially marketable.

Ergo Faces Intense Industry Competition in the Treatment of Type 2 Diabetes

The Company is not aware of any other company attempting to treat type 2
diabetes, obesity or other metabolic diseases by altering daily neuroendocrine
patterns on a timed basis. However, many established biotechnology and
pharmaceutical companies, universities and other research institutions with
resources significantly greater than the Company's are developing products that
directly compete with the Company's products. Those entities may succeed in
developing products that are safer, more effective or less costly than the
Company's product candidates. Many drugs are commercially available for the
treatment of type 2 diabetes, including five drugs (Acarbose(R), Glucophage(R),
Amaryl(R), Rezulin(R) and Prandin(R)) that have recently been approved by the
FDA. Glucophage(R) and Rezulin(R) have rapidly gained market acceptance as
therapies for type 2 diabetes. Furthermore, the FDA is expected to approve two
new drugs in 1999. The Company cannot assure you that ERGOSET(R) tablets will be
able to compete successfully with any of these or other products if ERGOSET(R)
tablets receive regulatory clearance. In addition, promotional activities for
ERGOSET(R) tablets will be limited to the claims on the product label approved
by the FDA. Other companies may be more successful in marketing their products
than the Company because of greater financial resources, stronger sales and
marketing efforts and other factors. See "Business-- Competition."

Ergo May Not be Successful in Developing and Marketing ERGOSET(R) Tablets

The Company has not yet completed the development of any products and,
accordingly, has not generated revenues from the commercialization of products.
ERGOSET(R) tablets were studied in three Phase III clinical trials as therapy in
obese, type 2 diabetics. Based on the results of these studies, the FDA issued a
not-approvable letter to the Company. The completed clinical trials for
ERGOSET(R) tablets as treatment for obesity and cancer are at an early stage.
The Company may not successfully develop and market ERGOSET(R) Tablets for
either of these indications, which will have a material adverse effect on the
Company. Even if the Company establishes the safety and efficacy of its product
candidates and obtains FDA and other regulatory approvals for its product
candidates, physicians may not prescribe the approved product. Also, physicians
may not accept the Company's product candidates as producing clinically
significant benefits.

The administration of any product the Company develops may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt or delay clinical trials of product candidates and could result in the
FDA's or other regulatory authorities' denying approval of the Company's product
candidates for any or all targeted indications. In fact, the FDA cited the
benefits-to-risk ratio in not approving the Company's NDA. The Company, the FDA
or other regulatory authorities may suspend or terminate clinical trials at any
time. Even if the Company receives FDA and other regulatory approvals, the
Company's product candidates may later exhibit adverse effects that limit or
prevent their widespread use or that necessitate their withdrawal from the
market.

Ergo May Never be Profitable

The Company has generated no revenues from product sales. Its ability to
receive any revenues from product sales is dependent upon receiving market
clearance from the FDA. The Company has been unprofitable since its inception,
and as of December 31, 1998, the Company's accumulated deficit was $84 million.
To date, the Company has dedicated most of its financial resources to ERGOSET(R)
tablets research and development, general and administrative expenses and the
prosecution of patents and patent applications. The Company's expenses in 1999
will primarily relate to the appeal of the FDA's not-approvable letter. If the
appeal is unsuccessful, the Company will also incur significant expenses if the
Company chooses to conduct additional clinical trials with ERGOSET(R) tablets.
The Company's ability to achieve profitability will depend, among other things,
on its successfully obtaining regulatory approval for ERGOSET(R) tablets,
establishing and maintaining manufacturing, sales, and marketing collaborative
agreements, and raising sufficient funds to finance its activities. The Company
may not be able to achieve profitability from the sale of product. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business."

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<PAGE>

Ergo's Business Faces Significant Government Regulation

The Company's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, if approved, are subject to extensive regulation by the FDA and
foreign regulatory authorities. To market product candidates, the Company must
undergo an extensive regulatory approval process. The regulatory process takes
many years and requires the expenditure of substantial resources. Although
protocols for clinical trials are submitted to the FDA prior to commencement of
the trials, the FDA may not accept the clinical trials as adequate or
well-controlled or accept the results of those trials. In addition, delays or
rejections may result from changes in FDA policies about drug approval during
the period of product development, from FDA review of NDAs, and from other
causes. Similar delays may also be encountered in foreign countries. The Company
cannot assure you that any regulatory agency will conduct its review in a timely
manner or grant approval for any drugs developed by the Company, including
ERGOSET(R) tablets.

Moreover, if regulatory approval of a drug is granted, the approval may
entail limitations on the indicated uses for which it may be marketed. Further,
even if regulatory approval is obtained, a company's marketed drug, its bulk
chemical supplier, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections. The later discovery of problems
with a product, supplier, manufacturer or facility may result in restrictions on
the product, including a withdrawal of the product from the market. Failure to
comply with the applicable regulatory requirements can, among other things,
result in fines, suspensions of regulatory approvals, product recalls, operating
restrictions and criminal prosecution. Additional government regulation may be
enacted or adopted that could prevent or delay regulatory approval of the
Company's product candidates.

The Company's business is also subject to regulation under state and
federal laws regarding environmental protection and hazardous substances
control, including the Occupational Safety and Health Act, the Environmental
Protection Act, and the Toxic Substance Control Act. The Company cannot assure
you that statutes or regulations applicable to the Company's business will not
be adopted that impose substantial additional costs or otherwise materially
adversely affect the Company's operations. See "Business-- Government
Regulation."

Ergo May Not be Able to Sell its Products at Desired Prices

The Company's, or any marketing partner of the Company's, ability to
commercialize its product candidates successfully, if FDA approval is obtained,
will depend in part on the extent to which appropriate reimbursement levels for
the cost of the products and related treatment are obtained from government
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging pricing of pharmaceutical products. In addition, the trend toward
managed healthcare in the United States, the growth of organizations such as
HMOs and legislative proposals to reform healthcare and government insurance
programs could significantly influence the purchase of pharmaceutical products,
resulting in lower prices and reducing demand for the Company's product
candidates. Such cost containment measures and healthcare reform could affect
the Company's or its marketing partner's ability to sell its product candidates
and may have a material adverse effect on the Company.

Significant uncertainty exists about the reimbursement status of newly
approved pharmaceutical products. The Company cannot assure you of the
following:

o that reimbursement in the United States or foreign countries will be
available for any of the Company's product candidates, if approved
for commercial marketing;

o that any reimbursement granted will be maintained; or

o that limits on reimbursement available from third-party payors will
not reduce the demand for, or negatively affect the price of, the
Company's product candidates.

The unavailability or inadequacy of third-party reimbursement for the
Company's product candidates would have a material adverse effect on the
Company. The Company is unable to forecast what additional legislation or
regulation relating to the healthcare industry or third-party coverage and
reimbursement may be enacted in the future, or what effect the legislation or
regulation would have on the Company's business.

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Ergo Depends on Patents and Proprietary Rights That May Fail to Protect Its
Business

The Company's ability to commercialize any product candidates will depend,
in part, upon its or its licensors' ability to obtain patents, enforce those
patents, preserve trade secrets and operate without infringing upon the
proprietary rights of third parties. In addition, the Company's patent portfolio
for its current product candidates is based on the timed administration of
neurotransmitter-modulating drugs to address abnormalities of the neuroendocrine
system. If similar benefits could be achieved by using such drugs without timed
administration, the Company's patents and proprietary technology would not
prevent that use, and the use would likely have a material adverse effect on the
Company. The Company cannot assure you of the following:

o that the patent applications licensed to or owned by the Company
will result in issued patents;

o that patent protection will be secured for any particular
technology;

o that any patents that have been or may be issued to the Company or
its licensors will be valid or enforceable; or

o that any patents will provide meaningful protection to the Company.

If the Company is unable to obtain and maintain a proprietary position with
respect to its product candidates it would have a material adverse effect on the
Company.

In general, the United States patents and patent applications owned by or
licensed to the Company are method-of-use patents that cover the timed use of
certain compounds to treat specified conditions. The U.S. patents for
bromocriptine, the active ingredient in ERGOSET(R) tablets, have expired, and
composition-of-matter protection is not available for the active ingredient.
Bromocriptine is currently sold in the United States and other markets for
several uses other than the treatment of type 2 diabetes or obesity. Even in
jurisdictions where the timed use of bromocriptine for type 2 diabetes may be
covered by the claims of a use patent licensed to the Company, off-label sales
might occur. Off-label sales are more likely to occur if another company markets
bromocriptine at a price that is less than the price of ERGOSET(R) tablets,
thereby potentially reducing the sales of ERGOSET(R) tablets. See "Business--
Competition" and "Business-- Government Regulation."

The patent positions of biotechnology and pharmaceutical companies are
highly uncertain and involve complex legal and factual questions. The Company
cannot assure you that patents will issue from the patent applications filed by
the Company or its licensors or that the scope of any claims granted in any
patent will provide proprietary protection or a competitive advantage to the
Company. The Company cannot assure you that the validity or enforceability of
patents issued or licensed to the Company will not be challenged by others or
that, if challenged, a court will find the patents to be valid and enforceable.
In addition, the Company cannot assure you that competitors will not be able to
circumvent any patents issued or licensed to the Company.

The Company cannot assure you that the manufacture, use or sale of the
Company's product candidates will not infringe patent rights of others. The
Company may be unable to avoid infringement of those patents and may have to
seek a license, defend an infringement action or challenge the validity of the
patents in court. The Company cannot assure you that a license will be available
to the Company, if at all, upon terms and conditions acceptable to the Company
or that the Company will prevail in any patent litigation. Patent litigation is
costly and time consuming, and the Company cannot assure you that it will have
sufficient resources to pursue such litigation. If the Company does not obtain a
license under such patents, is found liable for infringement, or is not able to
have such patents declared invalid, the Company:

o may be liable for significant money damages;

o may encounter significant delays in bringing products to market; or

o may be precluded from participating in the manufacture, use or sale
of products or methods of treatment requiring such licenses.

The Company cannot assure you that it has identified United States and foreign
patents that pose a risk of infringement.

Ergo also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, the Company cannot assure you that others
may not independently develop the same or similar

15
<PAGE>

technologies. The Company seeks to protect trade secrets and proprietary
knowledge, in part through confidentiality agreements with its employees,
consultants, advisors and collaborators. Nevertheless, these agreements may not
effectively prevent disclosure of the Company's confidential information and may
not provide the Company with an adequate remedy in the event of unauthorized
disclosure of such information. If the Company's employees, scientific
consultants or collaborators develop inventions or processes independently that
may be applicable to the Company's product candidates, disputes may arise about
ownership of proprietary rights to those inventions and processes. Such
inventions and processes will not necessarily become the Company's property but
may remain the property of those persons or their employers. Protracted and
costly litigation could be necessary to enforce and determine the scope of the
Company's proprietary rights. Failure to obtain or maintain patent and trade
secret protection, for any reason, would have a material adverse effect on the
Company. See "Business-- Patents, Proprietary Rights and Licenses."

The Company's rights to ERGOSET(R) tablets derive in part from a license
from LSU for certain patents and patent applications. The Company is a co-owner
of certain of these patents and patent applications. The Company entered into a
license agreement with Massachusetts General Hospital for its interest in
certain patent applications covering the treatment of immune dysfunctions and
cancer. The Company has a right of first negotiation for new technologies that
LSU develops relating to the licensed technologies. The Company cannot assure
you that it will successfully obtain rights to any such new technologies. If the
license with LSU is terminated for any reason, the Company would no longer
possess the rights necessary to commercialize ERGOSET(R) tablets and certain
other technologies relating to the timed administration of
neurotransmitter-modulating drugs. This would have a material adverse effect on
the Company. The Company is currently in a dispute with LSU about certain
payments under the LSU License. See "Business--LSU Agreement" If the license
with Massachusetts General Hospital is terminated for any reason, the Company's
rights to certain product candidates and potential candidates would be
non-exclusive. See "Business-- LSU Agreement" and "Business-- MGH Agreement."

The Company has engaged in collaborations, sponsored research agreements
and other arrangements, such as the LSU Agreement, with academic researchers and
institutions that have received and may receive funding from United States
government agencies. As a result of these arrangements, the U.S. government or
certain third parties may have rights in certain inventions developed during the
course of the performance of such collaborations and agreements as required by
law or such agreements.

Influence of Concentrated Ownership of Existing Stockholders of Ergo

As of March 15, 1999, current directors, executive officers and principal
stockholders of the Company and certain of their affiliates beneficially own
approximately 43% of the outstanding common stock on a fully diluted basis.
Accordingly, these stockholders, individually and as a group, may be able to
influence the outcome of stockholder votes, including votes concerning:

o the election of directors;

o the adoption or amendment of provisions in the Company's Amended and
Restated Certificate of Incorporation (the "Certificate of
Incorporation"); and

o the approval of mergers and other significant corporate
transactions.

These levels of concentrated ownership by a few persons, along with the factors
described in "Risk Factors--Anti-takeover Provisions Could Impair Market Price
of Ergo Common Stock," may have the effect of delaying or preventing a change in
the management or voting control of the Company.

Ergo May Be Subject to Uninsured Product Liability Claims Arising Out of the
Manufacture, Testing and Sale of it Products

The Company risks exposure to product liability claims if the use of its
products is alleged to have an adverse effect on patients or subjects. This risk
exists for product candidates tested in human clinical trials as well as
products that are sold commercially, if any. The Company cannot assure you that
product liability claims, if made, would not result in a recall of the Company's
products or a change in the indications for which they may be used. The Company
currently

16
<PAGE>

maintains product liability insurance coverage for claims arising from the use
of its product candidates in clinical trials. The Company cannot assure you that
this coverage will be adequate to cover claims.

Product liability insurance is becoming increasingly expensive. The
Company cannot assure you that it will be able maintain such insurance or obtain
additional insurance at a reasonable cost or in sufficient amounts to protect
the Company against losses that could have a material adverse effect on the
Company. Further, the Company cannot assure you that it will be able to obtain
insurance for the administration of its product candidates, including ERGOSET(R)
tablets if approved, in the future. The Company also cannot assure you that such
insurance and the resources of the Company would be sufficient to satisfy any
liability resulting from product liability claims. In addition, the loss of
coverage for the administration of the Company's product candidates would be a
breach of the terms of the Company's agreements with its licensors, which could
lead to termination of those agreements. See "Business-- LSU Agreement" and
"Business-- MGH Agreement."

Lack of Key Personnel

The success of the Company depends in large part on the Company's ability
to attract and retain highly-qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. Over the
past year, the Company has terminated most of its employees, including many key
personnel. If the Company decides to either conduct additional clinical trials,
research, or other activities, it will have to hire more personnel. The Company
cannot assure you that it will be successful in hiring or retaining key
personnel. See "Business-- Competition" and "Business-- Human Resources."

The Market Value of Ergo Stock Has Been Volatile and Has Steadily Decreased Over
the Past Year

The market price for Ergo common stock has steadily decreased during the
past year as a result, the Company believes, of the decision of the FDA Advisory
Panel not to recommend the approval of and the FDA's issuance of a
not-approvable letter for the ERGOSET(R) tablets NDA. Ergo cannot assure you
that the market price of Ergo common stock will not continue to decrease in the
future. The following factors may have a significant effect on the market price
of Ergo common stock:

o disclosure of the result of the appeal of the not-approvable letter
for ERGOSET(R) tablets for type 2 diabetes;

o disclosure of the results of the phase II clinical study for
ERGOSET(R) tablets in the treatment of obesity

o announcements of technological innovations or new commercial
products by competitors;

o governmental regulation and approvals;

o developments in patent or other proprietary rights;

o public concern as to the safety of products developed by the
Company;

o future sales of the Company's common stock in the public market by
existing stockholders; and

o announcement or implementation of strategic alternatives, including
acquisitions, sales ,or mergers.

Ergo May Be Delisted From the Nasdaq National Market

Ergo cannot assure that it will be able to satisfy the requirements of the
Nasdaq Stock Market for continued listing of its common stock on the Nasdaq
National Market. The rules of the Nasdaq Stock Market require that companies
listed on the Nasdaq National Market satisfy certain requirements for listing.
As of March 15, 1999, Ergo does satisfy Nasdaq's $1 minimum bid price
requirement, but it may not in the future. If Nasdaq delists the common stock
from the National Market, the ability of stockholders of Ergo to buy and sell
shares of Ergo common stock may be materially impaired. In addition, the
continued delisting of Ergo common stock could adversely affect Ergo's ability
to enter into future equity financing transactions or to effect an acquisition
or merger with other businesses.

17
<PAGE>

Ergo May Become Subject to Rules Relating to Low-Priced or Penny Stock

If, for any reason, Ergo's common stock does not remain accepted for
listing on the Nasdaq National Market, Ergo expects that its common stock would
be traded in the over-the-counter markets through the "pink sheets" or on the
NASD's OTC Bulletin Board. In addition, if Ergo common stock is delisted from
the Nasdaq National Market, the common stock would be covered by a SEC rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5,000,000 or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers to sell
Ergo common stock and also may affect the ability of holders of Ergo common
stock to resell their shares of common stock.

Anti-Takeover Provisions Could Impair Market Price of Ergo Common Stock

Ergo has adopted certain anti-takeover measures. Its Certificate of
Incorporation:

o provides for staggered terms of office for directors;

o requires certain procedures to be followed and time periods to be
met for any stockholder to propose matters to be considered at
annual meetings of stockholders, including nominating directors for
election at those meetings;

o prohibits stockholders from calling special meetings of
stockholders; and

o authorizes the Board of Directors of the Company to issue up to
10,000,000 shares of preferred stock without stockholder approval
and to set the rights, preferences, and other designations,
including voting rights, of those shares as the Board of Directors
may determine.

These provisions, alone or in combination with each other and with the matters
described in "Risk Factors--Influence of Concentrated Ownership of Existing
Stockholders of Ergo," may discourage transactions involving actual or potential
changes of control of the Company. Such transactions may including those that
otherwise could involve payment of a premium over prevailing market prices to
holders of common stock. The Company also is subject to provisions of the
Delaware General Corporation Law that may make some business combinations more
difficult.

Forward Looking Statements and Associated Risks

This Annual Report on Form 10-K contains forward-looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may" and other expressions are intended to identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance and involve risks and
uncertainties, including without limitation, the risks described in "Risk
Factors." Should one or more of these risks or uncertainties occur, should
underlying assumptions prove incorrect or should other intervening events occur,
actual results may vary materially and adversely from those anticipated,
believed, estimated or otherwise indicated. The Company does not undertake to
update any forward-looking statement that may be made from time to time by or on
behalf of the Company.

ITEM 2. PROPERTIES

Facilities

Ergo leases approximately 30,000 square feet in two buildings in the
Charlestown Navy Yard, Charlestown, Massachusetts. The approximately 10,000
square feet space formerly used for research and development functions is leased
through June 1999. The Company has decided not to re-lease this space. The
Company's principal offices (approximately 20,000 square feet), used for
administrative functions, are leased through December 2003, with a renewal
option for one five-year term. The Company is considering the possibility of
subletting this space and relocating

18
<PAGE>

to a smaller facility. The Company believes that its facilities are too large
for its current needs and also believes it can obtain additional space, if
necessary, on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

Legal Proceedings and Insurance

In 1998, the Company and LSU entered into dispute resolution under the
provisions of the LSU Agreement. The dispute related to the amount of payment
owed to LSU from various payments received by the Company from Johnson &
Johnson. LSU is seeking payment of $4,138,000. The Company believes that the
payment owed is significantly less than that amount. The parties are currently
in mediation with respect to this dispute. The Company maintains product
liability coverage for claims arising from the use of ERGOSET(R) tablets and its
technologies in clinical trials. See "Risk Factors--Ergo May Be Subject to
Uninsured Product Liability Claims Arising Out of the Manufacture, Testing and
Sale of it Products."

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

There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.

PART II

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

The Company's common stock is quoted on the Nasdaq National Market System
under the symbol "ERGO". At March 15, 1999, the number of record holders of the
Company's common stock was approximately 270. The following table sets forth,
for the periods indicted, the high and low sale price for the Company's common
stock as reported on the Nasdaq National Market System.

High Low
------------- -----------
1998

First Quarter $ 17 5/8 $ 14
Second Quarter $ 17 7/8 $ 3 1/2
Third Quarter $ 4 $ 2 3/4
Fourth Quarter $ 4 13/16 $ 29/32

1997

First Quarter $ 17 1/4 $ 11 3/8
Second Quarter $ 16 $ 9
Third Quarter $ 14 1/2 $ 10
Fourth Quarter $ 20 1/8 $ 12 3/4

The Company has not paid cash dividends on its common stock and intends to
continue a policy of retaining any earnings for reinvestment in its business.

19
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected financial data for the Company as
of the dates and for the periods indicated. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included elsewhere in this report.

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues (1) ...................................... $ 18,924,552 -- -- -- --
Operating expenses:
Research and development ...................... 14,549,810 13,258,016 12,272,478 8,643,926 4,917,830
Cost of Product Revenue ....................... 2,488,520 -- -- -- --
Purchase of in-process research and
development ............................... -- -- 168,750 7,020,064 --
Write-off related to renegotiated supply
agreement (2) ............................. 2,499,000 -- -- -- --
General and administrative (3)(4)(5) .......... 7,558,572 6,973,776 6,139,072 6,580,308 4,256,934
------------ ------------ ------------ ------------ ------------
Total operating expenses ...................... 27,095,902 20,231,792 18,580,300 22,244,298 9,174,764
------------ ------------ ------------ ------------ ------------
Other Income:
Interest Income ............................... 1,862,453 1,689,252 1,397,521 94,348 214,916
------------ ------------ ------------ ------------ ------------
Net loss .................................. (6,308,897) (18,542,540) (17,182,779) (22,149,950) (8,959,848)
Accretion of dividends on preferred stock ......... (492,228) (463,968) (437,332) (668,313) (933,216)
Dividends on redeemable preferred stock ........... -- -- -- (7,123,536) --
Dividends on preferred stock ...................... -- -- -- (2,018,763) --
------------ ------------ ------------ ------------ ------------
Net loss to common stockholders ........... $ (6,801,125) $(19,006,508) $(17,620,111) $(31,960,562) (9,893,064)
============ ============ ============ ============ ============

Net loss per common share
(basic and diluted) (6) ....................... $ (.48) $ (1.44) $ (1.57) $ (9.92) $ (3.96)
============ ============ ============ ============ ============

Weighted average common stock and
common equivalents (basic and
diluted) ...................................... 14,087,917 13,212,042 11,248,315 3,222,707 2,500,025
============ ============ ============ ============ ============

<CAPTION>
December 31,
------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ......................... $ 15,715,708 $ 13,923,115 $ 18,066,884 $ 15,896,373 $ 1,880,982
Short-term investments ............................ 17,997,599 9,536,995 20,550,986 6,325,502 --
Working capital ................................... 29,563,042 20,943,195 36,917,629 19,609,791 679,177
Total assets ...................................... 34,724,868 28,664,666 41,385,280 24,949,911 4,302,889
Deferred revenue (2) .............................. -- -- -- -- 5,744,329
Long-term obligations ............................. 155,596 327,442 385,256 93,600 89,013
Total stockholders' equity (deficit) ............. 29,825,882 25,135,381 39,065,225 21,803,851 (20,674,994)
</TABLE>

- ----------
(1) Relates to revenue received from Johnson & Johnson in accordance with the
Joint Collaboration and License Agreement. See Note 9 of Notes to
Consolidated Financial Statements.

(2) See Note 9 of Notes to Consolidated Financial Statements.

(3) Includes noncash charges in 1997 totaling $647,413 related to the
resignation of two Company senior executives. See Note 10 of Notes to
Consolidated Financial Statements.

(4) Includes a noncash charge in 1996 of $1,030,981 related to the resignation
of a Company senior executive. See Note 10 of Notes to Consolidated
Financial Statements.

(5) Includes a noncash charge in 1995 of $1,747,931 for common stock issued in
connection with a renegotiated supply contract. See Note 9 of Notes to
Consolidated Financial Statements.

(6) The Company has never paid cash dividends on its common stock other than
distributions made to stockholders when the Company was owned only by
individuals and had elected to be an S corporation for U.S. federal income
tax purposes.

20
<PAGE>

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

This discussion contains forward-looking statements. Forward-looking
statements reflect Ergo's current views with respect to future events. Actual
results may vary materially and adversely from those anticipated, believed,
assumed, estimated or otherwise indicated. Important factors that could cause
actual results to differ materially include, without limitation,

o Ergo may not be successful in its appeal of the FDA's not-approvable
letter and may not receive approval of the NDA for ERGOSET(R);

o Ergo may not be able to submit clinical trial results in the future
that will produce an approval from the FDA of ERGOSET(R) tablets;

o Ergo may not have sufficient capital to complete any additional
trials that may be undertaken;

o any current or future clinical trial may not produce positive
results;

o data obtained from clinical trials are subject to varying
interpretations, and the FDA (or an FDA panel of experts) may not
agree with Ergo's assessment of any current or future clinical trial
results;

o uncertainty related to the scientific development of a new medical
therapy;

o competition in the anti-diabetic and anti-obesity markets is
intense; other products have been recently approved for these
indications and other companies are developing competing products;

o the need for additional funding;

o Ergo may not be able to establish corporate alliances to market
ERGOSET(R) tablets, if approved for commercial marketing;

o ERGOSET(R) tablets, if approved for commercial marketing, may not be
successful in the marketplace, or Ergo may not receive any profits
from its sale; and

o uncertainty relating to patent protection in the pharmaceutical and
biotechnology industries.

Further information and additional important factors are set forth in the
section entitled "Item. 1 Business - Risk Factors." Ergo Science does not
undertake to update any forward-looking statement that may be made from time to
time by or on behalf of the Company.

Overview

Since inception, Ergo has sought to develop novel treatments for metabolic
disorders, including type 2 diabetes and obesity, immune system disorders and
various forms of cancer based on its core technology, Neuroendocrine Resetting
Therapy(R) ("NRT(R)"). NRT(R) is based on the role of neurotransmitters in
regulating metabolism. The Company has dedicated most of its financial
resources, since inception, to research and development of ERGOSET(R) tablets,
the Company's lead product candidate, general and administrative expenses and
the prosecution of patents and patent applications. To date, the Company has not
received any revenues from the sale of products and its ability to receive any
revenues from product sales is dependent upon receiving market clearance from
the FDA.

From inception through 1998, the Company has been unprofitable. On
February 23, 1998, Ergo and Johnson & Johnson entered into a worldwide Joint
Collaboration and License Agreement to develop and commercialize ERGOSET(R)
tablets as well as other potential collaboration products for the treatment of
type 2 diabetes and obesity (the "Joint Collaboration Agreement"). In
conjunction with the Joint Collaboration Agreement, Ergo received a $10 million
license fee on signing and has received approximately $6.4 million from Johnson
& Johnson for its share of development expenses.

On May 14, 1998, the Endocrinologic and Metabolic Drugs Advisory Committee
of the FDA found that there was not sufficient evidence to recommend for
approval the Company's NDA for ERGOSET(R) tablets for type 2 diabetes. On
November 20, 1998, the Company received a letter from the Division of Metabolic
and Endocrine Drug Products at the FDA that its New Drug Application for
ERGOSET(R) tablets for the treatment of type 2 diabetes is not approvable,
citing the overall benefit to risk ratio. Subsequently in January 1999, Johnson
& Johnson terminated the worldwide Joint Collaboration & License Agreement (the
"Joint Collaboration Agreement") , which had been signed on February 23, 1998.
(See Also Note 9). As a result of these events, the Company further reduced its
work-force by approximately

21
<PAGE>

50% and discontinued funding of all its pre-clinical development programs. Based
on a vote of its Board of Directors, the Company has decided to appeal the FDA's
not-approvable letter for ERGOSET (R) tables. The Company is also considering
other strategic alternatives.

Results of Operations

Years ended December 31, 1997 and 1998

Total revenues increased from $0 in 1997 to $18,924,552 in 1998. Revenues
consisted of a $10 million license fee, approximately $6.4 million in
reimbursement of development expenses and approximately $2.5 million of product
revenue from raw material inventory sold at cost related to the Joint
Collaboration Agreement.

Research and development expenses increased from $13,258,016 in 1997 to
$14,549,810 in 1998. Substantial costs were incurred in 1997 related to the
preparation of the NDA for ERGOSET(R) (bromocriptine mesylate) tablets for type
2 diabetes. In 1998, significant expenditures were incurred due to the
preparation for the panel meeting with the Endocrinologic and Metabolic Drugs
Advisory Committee of the FDA and ongoing clinical trials of the Phase II
weight-loss study in obese subjects.

The write-off related to renegotiated supply agreement charge of
$2,499,000 represents the write-off of the capitalized fair value of stock
issued in the fourth quarter of 1997 to the Company's drug supplier. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources" for further discussion.

General and administrative expenses increased from $6,973,776 in 1997 to
$7,558,572 in 1998. The increase was principally due to a non-cash charge of
$1,042,000 to writedown the Company's property and equipment to net realizable
value and $700,000 in severance costs to reflect the 50% reduction in the
work-force as a result of the aforementioned FDA not-approvable letter, Johnson
& Johnson's notice of termination, and the Company's decision to discontinue
funding of its pre-clinical development programs.

Interest income increased from $1,689,252 in 1997 to $1,862,453 in 1998.
The increase in interest income is attributable to an increase in the average
amounts of cash, cash equivalents and short term investments during 1998,
compared to 1997. The amounts increased as a result of the Joint Collaboration
Agreement with Johnson & Johnson.

Net loss decreased from $18,542,540 to $6,308,897 and net loss to common
stockholders decreased from $19,006,508 to $6,801,125 in 1997 and 1998,
respectively. These decreases were mainly due to revenues received in
conjunction with the Joint Collaboration Agreement. Net loss per common share
decreased from $1.44 in 1997 to $.48 in 1998.

Years ended December 31, 1996 and 1997

Research and development expenses increased from $12,441,228 in 1996 to
$13,258,016 in 1997. The increase was principally the result of expenses related
to the preparation and filing of the NDA for ERGOSET(R) tablets and the Phase II
weight-loss study in obese subjects initiated in 1997 which exceeded expenses
related to the Phase III clinical trials for ERGOSET(R) tablets for type 2
diabetes in 1996. All other research and development expenses were relatively
constant from 1996 to 1997.

General and administrative expenses increased from $6,139,072 in 1996 to
$6,973,776 in 1997. The increase was principally due to increased corporate
communications and investor relations activities and costs associated with the
Company's efforts to establish corporate alliances to market ERGOSET(R) tablets
and assist with the development of other product candidates. In both 1996 and
1997 the Company recognized charges related to the resignation of senior
executives. These charges were approximately $1.3 million in both years.

Interest income increased from $1,397,521 in 1996 to $1,689,252 in 1997.
The increase in interest income is attributable to an increase in the average
amounts of cash, cash equivalents and short-term investments during 1997,
compared to 1996. The amounts increased as a result of proceeds received from
the Company's second public offering in August 1996.

22
<PAGE>

Net loss increased from $17,182,779 to $18,542,540 and net loss to common
stockholders increased from $17,620,111 to $19,006,508 in 1996 and 1997,
respectively. The increases were mainly due to the increased costs noted above.
Net loss per common share decreased from $1.57 in 1996 to $1.44 in 1997. The
decrease in net loss per common share in 1997 was due to the increased weighted
average shares outstanding, which totaled 11,248,315 in 1996 and 13,212,042 in
1997, offset by the increased net loss in 1997.

Net Operating Loss Carryforward

At December 31, 1998, the Company's reported federal net operating loss
carryforwards were approximately $73 million. If not used, the tax loss
carryforwards will begin to expire in 2007. The Company's ability to use these
carryforwards is subject to limitations resulting from an ownership change as
defined in the Internal Revenue Code sections 382 and 383. See Note 7 of Notes
to Consolidated Financial Statements.

Liquidity and Capital Resources

Since its inception, the Company's primary source of cash has been from
financing activities, which have consisted of private placements of equity
securities, two public offerings, and in the sale of common stock in conjunction
with the Joint Collaboration Agreement. Private placements of equity securities
provided the Company with aggregate proceeds of $42,999,000 through 1998. On
December 19, 1995, the Company raised $23,030,476 from the sale of stock in an
initial public offering, net of commissions and offering costs. Subsequently, on
August 14, 1996, the Company raised an additional $32,218,487, net of
commissions and offering costs, from the sale of stock in a second public
offering.

On February 23, 1998, Ergo and Johnson & Johnson entered into the Joint
Collaboration Agreement to develop and commercialize ERGOSET(R) tablets as well
as other potential collaboration products for the treatment of type 2 diabetes
and obesity. In March 1998, Johnson & Johnson made payments to Ergo totaling $20
million, including payment of a $10 million license fee and the purchase of $10
million of Ergo common stock. In addition, Johnson & Johnson had committed to
provide Ergo with significant, additional financial support in the form of
milestone payments upon achievement of other specified development, regulatory
and commercial objectives and reimbursement of certain development expenses
subject to the terms of the Joint Collaboration Agreement. In December 1998,
Johnson & Johnson provided 30-day notice of termination of the Joint
Collaboration Agreement. The agreement was terminated on January 3, 1999,
therefore there will be no further financial support from this agreement.

Cash, cash equivalents and short-term investments were $23,460,110 and
$33,713,307 at December 31, 1997 and 1998, respectively. The overall increase in
cash, cash equivalents and short-term investments at December 31, 1998, was due
primarily to payments received in connection with the Joint Collaboration
Agreement.

The Company's primary use of cash to date has been in operating activities
to fund research and development, including preclinical studies and clinical
trials, and general and administrative expenses. Because the Company has
terminated its funding of all pre-clinical development, its primary use of cash
is now the funding of the appeal of the FDA's not-approvable letter for
ERGOSET(R) tablets.

In 1997, the Company initiated a Phase II clinical study at 14 clinical
sites across the United States enrolling approximately 300 clinically obese
subjects to evaluate the safety and efficacy of ERGOSET(R) tablets to treat
clinical obesity. In July 1998, enrollment for this study was completed. Final
study results are anticipated to be reported in the first half of 1999.

In 1997, the Company filed with the FDA an NDA for ERGOSET(R) tablets to
treat type 2 diabetes and the FDA accepted the NDA for filing. On May 14, 1998,
the Endocrinologic and Metabolic Drugs Advisory Committee of the FDA found that
there was not sufficient evidence to recommend for approval the Company's NDA
for ERGOSET(R) tablets for type 2 diabetes. On November 20, 1998, the Company
received a letter from the FDA that its NDA for ERGOSET(R) tablets for the
treatment of type 2 diabetes is not approvable, citing the overall benefit to
risk ratio. The Company has decided to appeal this letter by the FDA.

23
<PAGE>

As a result of the unfavorable recommendation given by the Endocrinologic
and Metabolic Drugs Advisory Committee of the FDA, the Company recorded a
noncash charge of $2,499,000 for the write-off of a deferred asset. This asset
represented the capitalized fair value of stock issued in 1997 to the Company's
drug supplier in exchange for an improvement in the terms of the supply
agreement. The Company had determined that the value of this asset had been
materially impaired due to the uncertainty that the improved supply terms would
be realized by the Company and, thus, fully expensed the amount in the second
quarter of 1998.

As of December 31, 1998, the Company's net investment in equipment and
leasehold improvements was $367,123. A one-time asset write down charge of
$1,042,290 was recorded in 1998. Because of the recent staff reductions, the
Company does not expect that additional equipment and facilities will be needed.
The Company chose not to renew the lease on one of its facilities that expires
in July 1999. The Company is in the process of deciding whether to sublease its
other facility and relocate to a smaller facility.

Based on the decisions of the Advisory Committee and the Endocrinologic
and Metabolic Drugs Division of the FDA, discussed above, the Company terminated
the funding of its pre-clinical development programs. The Company expects that
its available cash, cash equivalents, short-term investments, and expected
interest income will fund its operations through mid-2000. In the event that the
appeal is successful and the FDA approves the NDA for ERGOSET(R) tablets, the
Company will need additional capital prior to launching the product for
commercial marketing. There can be no assurance that the Company will be able to
complete the development and/or initial commercial launch of ERGOSET(R) tablets
with such capital resources or that the Company will be able to find a corporate
partner to commercially market the product. To the extent the Company raises
additional capital by issuing equity securities, ownership dilution to existing
stockholders will result, and future investors may be granted rights superior to
those of existing stockholders. There can be no assurance, however, that
additional financing will be available from any source or, if available, will be
available on acceptable terms.

The terms of the Company's Series D Preferred Stock prohibit the Company
from paying dividends on the common stock.

Subsequent Events

In January 1999, Ronald H. Abrahams, Ph.D., announced his retirement from
the positions of Chairman, President and Chief Executive Officer, as well as
from his position on the Board of Directors effective March 26, 1999. The
Company announced on March 4, 1999 that David R. Burt was appointed President
and Chief Executive Officer effective March 26, 1999. In addition, Mr. Burt was
appointed as a member of the Board of Directors effective March 3, 1999.

The Company announced on January 21, 1999 its decision to discontinue
funding of all of its pre-clinical development programs and has reduced its work
force by approximately 50% from earlier staffing levels.

Year 2000

The Company has developed a plan to address its computer systems' compliance
with the year 2000. The Company expects that all internal acceptance testing
will be completed by mid-1999. The Company is in the process of ascertaining the
status of its vendors' Year 2000 compliance efforts. The Company currently
believes that the cost of addressing the Year 2000 issue will not be material to
the Company's business, operations or financial condition.

While the Company believes its internal data processing and computer
applications will not be materially altered by any date sensitive calculations,
there can be no guarantee that the systems of other companies on which the
Company relies will be converted in a timely manner. The Company will initiate
communications with third party vendors and request that they represent that
their products and services are to be Year 2000 compliant and that they have a
program to test for compliance.

24
<PAGE>

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The Company has determined that the
adoption of SFAS 133, which is effective for all fiscal quarters for all
fiscal years beginning after June 15, 1999, will have no impact on its
consolidated financial statements.

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and other Post Retirement Benefits," (SFAS 132). SFAS 132
standardizes the disclosure requirements for pensions and other post retirement
benefits and is effective for the Company's fiscal year ending December 31,
1999. SFAS 132 relates to disclosure only and will not effect the Company's
financial position or results of operations.

In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SoP 98-1, which is effective for the Company beginning January 1, 1999,
to have a material effect on its financial position or results of operations.

In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for the Company beginning January 1, 1999 and the Company
does not expect its adoption to have a material effect on its financial position
or results of operations.

25
<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements Page No.

Report of Independent Accountants.............................................26

Consolidated Balance Sheets as of December 31, 1998 and 1997..................27

Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996...........................................................28

Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996...........................................................29

Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997, 1996.................................................30

Notes to Consolidated Financial Statements....................................31

26
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Ergo Science Corporation:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Ergo Science
Corporation and its subsidiaries (the "Company") at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 15, 1999

27
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents .................................... 15,715,708 13,923,115
Short-term investments ....................................... 17,997,599 9,536,995
Inventory .................................................... -- 424,320
Prepaid and other current assets ............................. 593,125 260,608
----------- -----------
Total current assets ..................................... 34,306,432 24,145,038
Equipment and leasehold improvements, net ........................ 367,123 1,970,328
Deferred charges ................................................. -- 2,499,000
Other assets ..................................................... 51,313 50,300
----------- -----------
Total assets ............................................. 34,724,868 28,664,666
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses ........................ 4,477,254 2,921,538
Current portion of capital lease obligations ................. 266,136 280,305
----------- -----------
Total current liabilities ................................ 4,743,390 3,201,843

Long-term portion of capital lease obligations ................... 155,596 327,442

Commitments and contingencies (Note 11) .......................... -- --

Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
6,903 shares of Series D exchangeable preferred stock
issued and outstanding at December 31, 1998 and 1997
(liquidation preferences were $8,574,718 and $8,082,490,
at December 31, 1998 and 1997, respectively) ............. 5,700,048 5,207,820
Common stock, $.01 par value, authorized 50,000,000 at
December 31, 1998 and 1997; issued and outstanding
14,254,467 and 13,493,262 shares at December 31, 1998
and 1997, respectively ................................... 142,545 134,933
Additional paid-in capital ................................... 111,977,063 101,469,182
Cumulative dividends on preferred stock ...................... (3,690,481) (3,198,253)
Deferred compensation ........................................ (390,568) (874,473)
Accumulated deficit .......................................... (83,912,725) (77,603,828)
----------- -----------
Total stockholders' equity ............................... 29,825,882 25,135,381
----------- -----------
Total liabilities and stockholders' equity ........... 34,724,868 28,664,666
=========== ===========
</TABLE>

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

28
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product Revenue .................................. $ 2,488,520 $ -- $ --
Licensing and supplier fees ...................... 16,436,032 -- --
------------ ------------ ------------
18,924,552 -- --

Operating expenses:
Research and development ......................... 14,549,810 13,258,016 12,272,478
Cost of Product Revenue .......................... 2,488,520 -- --
Purchase of in-process research and development .. -- -- 168,750
Write-off related to renegotiated
supply agreement ............................. 2,499,000 -- --

General and administrative ....................... 7,558,572 6,973,776 6,139,072
------------ ------------ ------------
27,095,902 20,231,792 18,580,300
------------ ------------ ------------
Other Income
Interest Income .................................. 1,862,453 1,689,252 1,397,521
------------ ------------ ------------

Net loss ..................................... (6,308,897) (18,542,540) (17,182,779)

Accretion of dividends on preferred stock ............ (492,228) (463,968) (437,332)
------------ ------------ ------------
Net loss to common stockholders ...................... $ (6,801,125) $(19,006,508) $(17,620,111)
============ ============ ============

Net loss per common share
(basic and diluted) .............................. $ (.48) $ (1.44) $ (1.57)
============ ============ ============

Weighted average common shares outstanding
(basic and diluted) .............................. 14,087,917 13,212,042 11,248,315
============ ============ ============
</TABLE>

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

29
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (6,308,897) $(18,542,540) $(17,182,779)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization .......................... 1,940,278 1,446,944 1,094,748
Noncash compensation ................................... 427,944 1,201,495 2,015,251
Noncash purchase of in-process research and
development .......................................... -- -- 168,750
Noncash charge related to write-off of renegotiated
supplier agreement ................................... 2,499,000 -- --
Changes in operating assets and liabilities:
Inventory ............................................ 424,320 (424,320) --
Prepaid and other current assets ..................... (332,517) (26,049) 205,818
Other assets ......................................... (1,013) (9,314) (21,560)
Accounts payable and accrued expenses ................ 1,555,716 1,173,576 (1,261,385)
------------ ------------ ------------
Net cash provided by (used in) operating activities .......... 204,831 (15,180,208) (14,981,157)
------------ ------------ ------------

Cash flows from investing activities:
Purchase of short-term investments ....................... (65,248,505) (41,330,582) (35,783,642)
Proceeds from maturity of short-term investments ......... 56,787,901 52,344,568 21,558,158
Purchase of equipment and leasehold
Improvements ........................................... (165,376) (659,202) (1,318,380)
Proceeds received on sale of equipment ................... -- 6,000 --
------------ ------------ ------------
Net cash provided by (used in) investing activities .......... (8,625,980) 10,360,784 (15,543,864)
------------ ------------ ------------

Cash flows from financing activities:
Principal payments under capital lease
Obligations ............................................ (357,712) (236,552) (114,338)
Proceeds from issuance of common stock, net of issuance
costs ($515,273 in 1996) ............................... 10,000,000 1,500 32,218,487
Proceeds from stock option exercise ...................... 571,454 910,707 41,665
Proceeds from sale-leaseback agreement ................... -- -- 549,718
------------ ------------ ------------
Net cash provided by financing activities .................... 10,213,742 675,655 32,695,532
------------ ------------ ------------
Net increase (decrease) in cash and cash
Equivalents .............................................. 1,792,593 (4,143,769) 2,170,511
Cash and cash equivalents at beginning of
Period ................................................... 13,923,115 18,066,884 15,896,373
------------ ------------ ------------
Cash and cash equivalents at end of period ................... $ 15,715,708 $ 13,923,115 $ 18,066,884
============ ============ ============
</TABLE>

Supplemental non-cash investing and financing activities - See Note 12.

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

30
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Additional
Paid-In
Preferred Stock Common Stock Capital
--------------- ------------ -------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ...................... 6,903 $ 4,306,520 10,145,580 $ 101,456 $ 63,420,487
Accretion of dividends on preferred stock ......... 437,332
Exercise of stock options ......................... 41,000 410 41,255
Cancellation of compensatory stock option grants .. (651,003)
Issuance of compensatory stock option grants ...... 1,989,478
Issuance of common stock in public offering, net of
offering costs of $515,273 .................... 2,842,706 28,427 32,190,060
Common stock issuance related to license and
royalty agreement ............................. 18,750 187 168,563
Amortization of deferred compensation .............
Net loss for period ...............................
----- ------------ ---------- ------------ ------------
Balance at December 31, 1996 ...................... 6,903 4,743,852 13,048,036 130,480 97,158,840
Accretion of dividends on preferred stock ......... 463,968
Exercise of stock options ......................... 295,226 2,953 907,754
Cancellation of compensatory stock option grants .. (211,181)
Issuance of compensatory stock option grants ...... 1,114,769
Common stock issuance related to renegotiated
supply agreement ............................. 150,000 1,500 2,499,000
Amortization of deferred compensation .............
Net loss for period ...............................
----- ------------ ---------- ------------ ------------
Balance at December 31, 1997 ...................... 6,903 $ 5,207,820 13,493,262 $ 134,933 $101,469,182
Accretion of dividends on preferred stock ......... 492,228
Exercise of stock options ......................... 159,050 1,590 569,864
Cancellation of compensatory stock option grants .. (55,961)
Issuance of compensatory stock option grants
Common stock issuance related to joint
collaboration agreement ....................... 602,155 6,022 9,993,978
Amortization of deferred compensation .............
Net loss for period ...............................
----- ------------ ---------- ------------ ------------
Balance at December 31, 1998 ...................... 6,903 $ 5,700,048 14,254,467 $ 142,545 $111,977,063
===== ============ ========== ============ ============

<CAPTION>
Cumulative Total
Dividends on Deferred Accumulated Stockholders'
Preferred Stock Compensation Deficit Equity
--------------- ------------ ------- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ...................... $ (2,296,953) $ (1,849,150) $(41,878,509) $ 21,803,851
Accretion of dividends on preferred stock ......... (437,332)
Exercise of stock options ......................... 41,665
Cancellation of compensatory stock option grants .. 651,003
Issuance of compensatory stock option grants ...... (958,497) 1,030,981
Issuance of common stock in public offering, net of
offering costs of $515,273 .................... 32,218,487
Common stock issuance related to license and
royalty agreement ............................. 168,750
Amortization of deferred compensation ............. 984,270 984,270
Net loss for period ............................... (17,182,779) (17,182,779)
------------ ------------ ------------ ------------
Balance at December 31, 1996 ...................... (2,734,285) (1,172,374) (59,061,288) 39,065,225
Accretion of dividends on preferred stock ......... (463,968)
Exercise of stock options ......................... 910,707
Cancellation of compensatory stock option grants .. 211,181
Issuance of compensatory stock option grants ...... (664,768) 450,001
Common stock issuance related to renegotiated
supply agreement ............................. 2,500,500
Amortization of deferred compensation ............. 751,488 751,488
Net loss for period ............................... (18,542,540) (18,542,540)
------------ ------------ ------------ ------------
Balance at December 31, 1997 ...................... $ (3,198,253) $ (874,473) $(77,603,828) $ 25,135,381
Accretion of dividends on preferred stock ......... (492,228)
Exercise of stock options ......................... 571,454
Cancellation of compensatory stock option grants .. 55,961
Issuance of compensatory stock option grants
Common stock issuance related to joint
collaboration agreement ....................... 10,000,000
Amortization of deferred compensation ............. 427,944 427,944
Net loss for period ............................... (6,308,897) (6,308,897)
------------ ------------ ------------ ------------
Balance at December 31, 1998 ...................... $ (3,690,481) $ (390,568) $(83,912,725) $ 29,825,882
============ ============ ============ ============
</TABLE>

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

31
<PAGE>

ERGO SCIENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Overview and Summary of Significant Accounting Principles

Recent Events

Organization

Ergo Science Development Corporation ("ESDC") was incorporated on January
23, 1990. ESDC operated as an S Corporation from inception to September 10,
1992, when it converted to a C Corporation. In April 1995, ESDC went through a
recapitalization whereby all the stock of ESDC was exchanged on a one-for-one
basis for an equal amount of stock in Ergo Science Holdings, Incorporated,
previously a wholly-owned subsidiary of ESDC. Subsequent to the
recapitalization, Ergo Science Holdings, Incorporated changed its name to Ergo
Science Corporation ("Ergo" or the "Company"). The consolidated financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly-owned. All intercompany accounts and transactions are
eliminated upon consolidation.

Prior to January 1, 1998, the Company was a development stage enterprise
as defined in Statement of Financial Accounting Standards No. 7 ("SFAS 7"). As a
result of the collaboration agreement entered into with Johnson & Johnson in the
first quarter of 1998, the Company is no longer considered a development stage
enterprise as defined in SFAS 7.

Reclassification

Certain amounts from prior years have been reclassified to conform to the
current year presentation.

Research and Development Costs

Research and development costs are expensed as incurred.

Cash Equivalents and Investments

The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents.

Debt securities are classified as held-to-maturity when the Company has
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.

At December 31, 1998 and 1997 cash equivalents were composed primarily of
investments in money market funds, United States government obligations and
commercial paper that mature within 90 days of purchase.

32
<PAGE>

Concentration of Credit Risk

The Company has not realized any losses on its investments. The Company
has invested the net proceeds of its public offerings and payment received under
the Joint Collaboration Agreement in short-term, interest-bearing,
investment-grade securities, including U.S. Treasury and agency securities and
high-grade commercial paper.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

Uncertainties

The Company is subject to risks common to companies in the pharmaceutical
and biotechnology industries including, but not limited to, the need for
regulatory approvals, development by the Company or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, and compliance with FDA governmental regulations.

Net Loss Per Common Share

The Company follows Statement of Financial Accounting Standards No. 128
(SFAS 128) "Earnings Per Share," which requires the disclosure of Basic Earnings
per Common Share and Diluted Earnings per Common Share for all periods
presented. At December 31, 1998, 1997 and 1996, the Company had 1,676,627,
1,828,894, and 1,724,200 options outstanding, respectively.

In the computation of net loss per common share, accretion of preferred
stock to the redemption amount is included as an increase to net loss available
to common stockholders.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Depreciation is
calculated using straight-line basis over a 2 to 7 year estimated useful life.
Leasehold improvements are amortized over the shorter of the life of the leases
or the estimated useful life of the related assets. Repairs and maintenance
costs are charged to expense as incurred. Upon retirement or sale, the cost of
the assets disposed of and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the determination of
net income. The Company recorded an asset write-down of equipment to net
realizable value in the fourth quarter of 1998. (See Note 4).

Capital Leases

Assets and liabilities relating to capital leases are recorded at the
present value of the future minimum rental payments using interest rates
appropriate at the inception of the lease. Capital lease amortization is
included with depreciation and amortization expense.

Income Taxes

Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement basis and tax basis of assets and
liabilities using current statutory tax rates. A valuation allowance against net
deferred tax assets is established if, based on the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. (See Note 7).

33
<PAGE>

Comprehensive Income

In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This statement requires that all
items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. For example, other comprehensive
earnings may include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable securities
classified as available-for-sale. For the twelve months ending December 31,
1998, 1997 and 1996, comprehensive income was the same as net income.

New Accounting Pronouncements

2. Short-term Investments

The following is a summary of held-to-maturity securities not classified
as cash and cash equivalents as of December 31:

1998 1997
---- ----

Commercial paper ................... $ 4,371,496 $ 6,461,033

Federal agency notes ............... 13,626,103 3,075,962
----------- -----------
Total short-term investments ....... $17,997,599 $ 9,536,995
=========== ===========

Since held-to-maturity securities are short-term in nature, changes in market
interest rates would not have a significant impact on fair value of these
securities. These securities are carried at amortized cost, which approximates
fair value. All short-term investments mature within 89 days of December 31,
1998.

34
<PAGE>

3. Inventory

Pursuant to a supply agreement, the Company was responsible for the
purchase and supply of all active ingredient required for the manufacturing of
ERGOSET(R) tablets. In the fourth quarter of 1997, the Company purchased
$424,320 of active ingredient to be used in the manufacturing of ERGOSET(R)
tablets, all of which was held as raw material at December 31, 1997. The
inventory was sold to Johnson & Johnson in the first quarter of 1998.

4. Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following at December
31:

1998 1997
---- ----

Furniture and equipment .................... $ 1,554,053 $ 1,455,140
Lab equipment .............................. 2,667,132 2,442,471
Leasehold improvements ..................... 2,045,093 2,031,594
----------- -----------
6,266,278 5,929,205
Accumulated depreciation and amortization .. (5,899,155) (3,958,877)
----------- -----------
Equipment and leasehold improvements, net .. $ 367,123 $ 1,970,328
=========== ===========

Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $1,940,278, $1,446,944, and $1,094,748, respectively. Included in the 1998
depreciation expense, which is a component of general & administrative expense
on the statement of operations, is a $1,042,290 asset write-down of equipment
and leasehold improvements. The Company recorded this charge in order to
properly reflect the equipment and leasehold improvements at net realizable
value as of December 31, 1998, given the Company's decision to discontinue
funding of its preclinical development program.

Assets under capital leases, net of accumulated amortization at December
31, 1998 and 1997 were $133,751 and $616,264, respectively. See Note 12.

5. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following at December
31,

1998 1997
---------- ----------
Accounts payable ............................... $ 4,727 $ 424,488
Accrued legal costs ............................ 106,489 71,623
Accrued payroll and vacation ................... 119,784 192,240
Accrued bonuses ................................ 262,349 389,744
Accrued severance agreements ................... -- 408,114
Accrued clinical development costs ............. 164,162 863,649
Accrued manufacturing .......................... 3,230,000 --
Accrued other expenses ......................... 589,743 571,680
---------- ----------
Total accounts payable and accrued expenses $4,477,254 $2,921,538
========== ==========

35
<PAGE>

6. Leases

The Company leases office and research space and office equipment under
operating lease arrangements which expire on various dates through the year
2003. Certain operating lease arrangements include options to renew for
additional periods or payment terms that are subject to increases due to taxes
and other operating costs of the lessor. In addition, the Company leases certain
equipment under lease arrangements which have been accounted for as capital
leases. Future minimum commitments, by year and in the aggregate, under these
long-term noncancelable leases consist of the following at December 31, 1998:

Capital Operating
Leases Leases
---------- ----------
1999 ............................................ $ 315,819 $ 513,294
2000 ............................................ 153,558 401,712
2001 ............................................ -- 401,063
2002 ............................................ -- 401,063
2003 ............................................ -- 383,513
Thereafter ...................................... -- --
---------- ----------
469,377 $2,100,645
==========
Less amounts representing interest .............. 47,645
Present value of minimum lease payments ......... 421,732
----------
Less current portion of capital lease obligations 266,136
----------
Long-term portion of capital lease obligations .. $ 155,596
==========

Rent expense for the years December 31, 1998, 1997 and 1996 amounted to
$591,249, $668,594, and $657,574, respectively.

Cash paid for interest on capital leases was $96,202, $144,264, and
$51,206 in 1998, 1997 and 1996, respectively.

The operating lease commitment indicated above is principally due to the
rental of administrative office space. The Company is considering subletting
some or all of its space.

7. Income Taxes

Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:

1998 1997
---- ----

Deferred tax assets:
Equipment and leasehold improvements ...... $ 1,045,000 $ 565,000
Research and development credits .......... 2,807,000 857,000
Deferred compensation ..................... 156,000 350,000
Intangible amortization ................... 251,000 272,000
Net operating loss ........................ 29,151,000 26,239,000
------------ ------------
Total deferred tax assets ...................... 33,410,000 28,283,000
Valuation allowance for deferred tax assets .... (33,410,000) (28,283,000)
------------ ------------

Deferred tax liabilities:
Total deferred tax liabilities ................. -- --
------------ ------------

Net deferred tax assets ........................ -- --
============ ============

36
<PAGE>

The change in the total valuation allowance for the years ended December
31, 1998 and 1997 were increases of $5,127,000 and $7,424,000, respectively.

As of December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $73 million which expire through 2018.
The Company's ability to use the carryforwards is subject to limitations
resulting from an ownership change as defined in Internal Revenue Code Sections
382 and 383. The current year net operating loss includes amounts related to
stock option exercises, the benefits of which will be allocated to additional
paid-in-capital when realized.

8. Capital Stock

In October 1995, the Board of Directors increased the number of authorized
shares of common stock to 50,000,000 and the authorized number of shares of
preferred stock to 10,000,000. The Board of Directors may establish, without
stockholder approval, one or more classes or series of preferred stock having
the number of shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors may designate.

On December 19, 1995, the Company completed its Initial Public Offering
and sold an aggregate of 2,875,000 shares of common stock at $9.00 per share
resulting in net proceeds, after deducting underwriting discounts and offering
costs, of $23,030,476.

On August 14, 1996, the Company completed a second public offering and
sold an aggregate of 2,842,706 shares of common stock at $12.25 per share
resulting in net proceeds, after deducting underwriting discounts and offering
costs, of $32,218,487.

In conjunction with the Joint Collaboration Agreement, the Company entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Johnson &
Johnson Development Corporation on February 23, 1998. In accordance with the
terms of the Stock Purchase Agreement, Johnson & Johnson Development Corporation
purchased 602,155 shares of the Company's common stock for $10,000,000.

See Note 9 for a description of Series D Preferred Stock and its
liquidation preference, which amounts to $8,574,718 as of December 31, 1998.

9. License Agreements and Supplier Contracts

On April 27, 1995 in conjunction with a redesigned plan for
commercialization of the Company's products, the Company effectively canceled
the previous existing partnership sublicenses by acquiring all the partners'
interests. Rather than return the sublicense fees paid in by the partners, the
Company issued 278,875 shares of common stock and 5,618 shares of Series D
Exchangeable Preferred Stock (the "Series D Preferred Stock"), par value $.01.
The Company ascribed a value of $16 per share to the common stock issued and
$584 per share to the Series D Preferred Stock.

The holders of Series D Preferred Stock are entitled to receive quarterly
cash dividends at a rate of 6% per annum compounded semiannually on the stated
value. Such dividends shall be cumulative, commencing on the date of original
issue, and shall be payable to holders of record, when and as declared, by the
Board of Directors. The Company will have the option to convert the Series D
Preferred Stock into common stock during the 90 days after the Company receives
FDA approval to market its first product, if it receives that approval. If the
Company does not exercise its option to convert the Series D Preferred Stock
into common stock within the 90 days, the Series D Preferred Stock will
automatically be exchanged for subordinated debt securities at the end of the 90
days. The Company currently intends to exercise its option to convert the Series
D Preferred Stock to common stock if it receives FDA approval, and, accordingly,
the Series D Preferred Stock was recharacterized as Preferred Stock upon closing
of the IPO. The Series D Preferred Stock is carried at face value plus accrued
unpaid dividends. The terms of the Company's Series D Preferred Stock prohibit
the Company from paying dividends on the common stock. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Series D Preferred Stock then outstanding will be entitled to receive an
amount of cash equal to the Stated Value of Series D Preferred Stock after any
distribution is

37
<PAGE>

made on any senior securities and before any distribution is made on any junior
securities, including Common Stock. The liquidation preference amount for the
Series D Preferred Stock as of December 31, 1998 was $8,574,718.

On December 19, 1996, the one-year anniversary of the IPO, the Company
issued 18,750 common shares to LSU in conjunction with a novated license and
royalty agreement and, accordingly, recorded a charge of $168,750. See Note 11
for a description of the novated license and royalty agreement.

In October 1997, the Company amended and restated an agreement with its
drug supplier. Under the amended and restated agreement, the Company agreed to
purchase its worldwide supply of ERGOSET(R) tablets from the supplier on a
"cost-plus" basis. This cost arrangement was expected to result in a lower unit
cost for the product over the term of the contract. The Company also shortened
the term of the agreement, agreed to make additional payments to the supplier
upon the occurrence of certain regulatory events and for performance of the
agreement for a specified period and issued to the supplier shares of the
Company's common stock, with a fair value of $2,499,000. This deferred charge
was capitalized and was to be amortized on a straight line basis over a period
of 42 months commencing on the first day after Ergo receives written
communication from the FDA approving the NDA of ERGOSET(R) tablets for the
treatment of type 2 diabetes. In February 1998, the Company assigned its rights
and obligations, other than certain specified existing obligations, under the
amended and restated agreement to Johnson & Johnson under the terms of a
worldwide Joint Collaboration and License Agreement. As a result of the
unfavorable recommendation given by the Endocrinologic and Metabolic Drugs
Advisory Committee of the FDA on May 14, 1998, the Company determined that the
value of this asset had been materially impaired due to the uncertainty that the
improved supply terms would be resolved. As a result, the Company wrote-off the
balance of this asset in 1998. In January 1999, Johnson & Johnson terminated the
joint collaboration and license agreement and rescinded the assignment of the
amended and restated supply agreement.

On February 23, 1998, Ergo and Johnson & Johnson entered into a worldwide
Joint Collaboration and License Agreement (the "Joint Collaboration Agreement")
to develop and commercialize ERGOSET(R) tablets as well as other potential
collaboration products for the treatment of Type 2 diabetes and obesity. In
March 1998, Johnson & Johnson made payments to Ergo totaling $20 million,
including payment of a $10 million license fee and the purchase of $10 million
of Ergo common stock. Under the Joint Collaboration Agreement with Johnson &
Johnson, the Company was responsible for paying half of the development,
marketing, and commercialization costs, including launch costs, for ERGOSET(R)
tablets as well as any other collaboration compounds being developed and/or
commercialized under the Joint Collaboration Agreement. In January 1999, Johnson
& Johnson terminated the Joint Collaboration Agreement following the Company's
receipt of a letter from the FDA stating that its NDA for ERGOSET (R) tablets is
not approvable.

10. Stock Options and Incentive Plan

The Company has granted options to purchase shares of common stock to key
employees and directors. The options vest over periods of up to four years and
generally have a maximum term of ten years

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
or loss and earnings or loss per share in the notes to the financial statements.
The Company follows the disclosure provisions of SFAS 123 and applies APB
Opinion 25 and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock option plans. The effects
of applying SFAS 123 in this pro forma disclosure are not likely to be
representative of the effects on reported income or loss for future years. SFAS
123 does not apply to awards prior to 1995 and additional awards in future years
are anticipated. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS 123, the Company's net loss and loss per
share for the years ended December 31, 1998, 1997 and 1996 would have been
increased to the pro forma amounts indicated below

38
<PAGE>

<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------

Net Loss to Net Loss to Net Loss to
Common Loss Per Common Loss Per Common Loss Per
Stockholders Share Stockholders Share Stockholders Share
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
As Reported....... $6,801,125 $.48 $19,006,508 $1.44 $17,620,111 $1.57

Pro Forma......... $10,236,854 $.73 $20,277,206 $1.53 $18,334,693 $1.63
</TABLE>

The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:

1998 1997 1996
------- ------- -------

Expected Life...................... 5 years 5 years 5 years

Expected Volatility................ 95% 50% 44%

Dividend Yield..................... 0% 0% 0%

Weighted Average Risk-free
Interest Rate.................. 5.02% 5.44% 6.56%

The weighted average fair value of the options granted during 1998, 1997 and
1996 was $3.42, $6.72, and $6.61 per share, respectively.

In October 1995, the Company granted to various employees options to
purchase 621,625 shares of common stock at $6.71 per share. Deferred
compensation related to those option grants is being amortized to operations
over the four-year vesting period of the options.

In December 1995, the Company issued to its financial advisor, at the
closing of the IPO, an option exercisable for three years to acquire 20,000
shares of common stock with an exercise price per share equal to the IPO price
per share. These options expired in December 1998. Also in December 1995, the
Company granted one of its medical advisors an option to purchase 10,000 shares
of common stock at an exercise price equal to the IPO price per share. One
quarter of these shares vested on the grant date and the remaining balance is
vesting over three years.

During 1996, the Company granted to various employees and directors
options to purchase 771,395 shares of common stock at exercise prices ranging
from $6.71 to $23.50 per share. Of the total number of options issued in 1996,
493,550 were issued at prices equal to the market prices on the grant dates. The
remaining 277,845 options were granted at prices below market. Of those options
granted at prices below market, 220,000 were issued in conjunction with the
resignation of a Company senior executive. In connection with the issuance of
these options, the Company recorded compensation expense of $1,030,981.

During 1997, the Company granted to various employees options to purchase
555,100 shares of common stock at exercise prices ranging from $7.00 to $17.00
per share. Of the total number of options issued in 1997, 355,100 were issued at
prices equal to the market prices on the grant dates. The remaining 200,000
options were granted at prices below market: 100,000 options were issued in
conjunction with the resignation of a Company senior executive and 100,000
options were issued to the newly appointed CEO. In connection with the issuance
of these options, the Company recorded compensation expense of $491,930 in 1997
and will record an additional $245,570 over the next 41 months. In addition, the
vesting period of 21,250 shares of stock were accelerated in conjunction with
the resignation of a second Company senior executive, which resulted in a
compensation charge of $197,413 in 1997.

39
<PAGE>

In 1997, the Company also granted to each of its six medical advisors an
option to purchase 5,000 shares of common stock at an exercise price of $12.63
per share. These options were granted in connection with the medical advisors'
renegotiated consulting agreements. The option shares were issued at the market
price on the date of grant and vest over a four year period. The fair value of
these options total $175,388 and is being amortized on a straight line basis
over 22 months, the life of the consulting agreements. In 1997, the Company
recognized $23,917 in deferred compensation expense related to these options.

During 1998, the Company granted to various employees and directors
options to purchase 241,000 shares of common stock at exercise prices ranging
from $3.25 to $17.00 per share. All options issued in 1998 were issued at prices
equal to the market price on the grant dates.

Information related to stock option activity for the period from December
31, 1995 through December 31, 1998 is as follows:

Weighted
Average Option
Shares Price
--------- --------------
Outstanding at December 31, 1995 .............. 1,176,825 4.13
Granted .................................. 771,395 10.68
Exercised ................................ (41,000) 1.02
Canceled ................................. (183,020) 7.36
---------
Outstanding at December 31, 1996 .............. 1,724,200 6.70
Granted .................................. 586,600 11.41
Exercised ................................ (295,226) 3.08
Canceled ................................. (186,680) 10.49
---------
Outstanding at December 31, 1997 .............. 1,828,894 $ 8.41
Granted .................................. 241,000 6.90
Exercised ................................ (159,050) 3.59
Canceled ................................. (234,217) 11.86
---------
Outstanding at December 31, 1998 .............. 1,676,627 $ 8.41
=========

40
<PAGE>

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

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.00 to 2.35 210,250 4.9 years $.80 210,250 $ .80

$ 2.36 to 4.70 132,000 9.7 years $3.25 -- $ .00

$ 4.71 to 7.05 496,172 5.1 years $6.71 424,532 $ 6.71

$ 7.06 to 9.40 32,000 2.6 years $9.00 31,500 $ 9.00

$ 9.41 to 11.75 509,060 6.6 years $10.28 206,560 $ 10.85

$11.76 to 14.10 110,000 7.4 years $12.89 56,250 $ 12.78

$14.11 to 16.45 53,500 8.4 years $15.52 11,250 $ 15.49

$16.45 to 18.80 99,150 8.6 years $17.06 22,400 $ 17.13

$18.81 to 21.15 33,720 6.1 years $20.61 29,985 $ 20.71

$21.16 to 23.50 775 0.1 years $22.96 775 $ 22.95
--------- --------
$0.80 to 23.50 1,676,627 993,502
========= ========
</TABLE>

The following table summarizes information about stock options granted in
1998:

Weighted Average Weighted Average
Price Per Share Fair Value Per Share
--------------- --------------------
Shares Granted At Market Price....... $6.90 $3.42

At December 31, 1998 there were 1,676,627 options outstanding at a
weighted average price of $8.41 of which 993,502 options were exercisable. In
connection with the issuance of stock options at exercise prices below fair
market value, as determined by the Company's Board of Directors, the Company
recorded compensation expense of $427,944, $1,201,495, and $2,015,251 in 1998,
1997 and 1996, respectively. In 1998, 1997 and 1996, fair market value was based
on market price. The $390,568 remaining deferred compensation at December 31,
1998 will be amortized over the vesting periods of the underlying options.

Effective as of November 1, 1994, the Board of Directors adopted the Ergo
Science Development Corporation Long-Term Incentive Plan (the "Incentive Plan")
pursuant to which certain officers, directors, and key employees may be granted
awards with respect to shares of the Company's common stock. The awards that may
be granted under the Incentive Plan include incentive stock options,
nonstatutory options, stock appreciation rights (SARs) and restricted stock
awards. At December 31, 1998, 1997 and 1996, the aggregate number of shares of
the Company's common stock which may be issued pursuant to incentive awards
under the Incentive Plan were 2,116,750, 1,866,750 and 1,431,525 shares,
respectively (for which common shares have been reserved). Awards of options to
provide 201,000, 586,600, and 661,395 shares at exercise prices of $3.25 -
$17.00, $7.00 - $17.00, and $6.71-$23.50 per share, respectively, were granted
under the Incentive Plan in 1998, 1997 and 1996, respectively. These amounts are
included in the tables above.

41
<PAGE>

On May 15, 1996, the Board of Directors approved, subject to stockholder
approval, a proposal to adopt a Stock Option Plan for Non-Employee Directors of
the Company (the "Director Stock Plan"). The Director Stock Plan provides for an
initial grant of an option to purchase 10,000 shares of common stock to each
eligible non-employee director upon first being elected or appointed to serve on
the Board of Directors. Those eligible directors already serving at the time the
Director Stock Plan was approved by the stockholders of the Company were each
granted a stock option to purchase 10,000 shares of common stock with a deemed
date of grant of May 15, 1996. If a director remains eligible to receive stock
options under the Director Stock Plan on the second anniversary of the date that
a director is first granted a stock option under the Director Stock Plan, that
director will be granted a second stock option to purchase 10,000 shares of
common stock. Stock options granted under the Director Stock Plan will vest and
become exercisable in equal increments on the first and second anniversary of
their date of grant, but no stock options may be exercised more than ten years
after the date of its grant. The Director Stock Plan was approved by the
stockholders at the Company's 1996 Annual Meeting which took place on June 25,
1996. Awards of options to provide 40,000 and 50,000 shares at exercise prices
of $3.18 - $13.81 and $12.75 - $21.13 per share, respectively, were granted
under the Incentive Plan in 1998 and 1996, respectively. There were no shares
granted in 1997. These amounts are included in the tables above.

11. Commitments and Contingencies

The Company has a royalty agreement with LSU under which the Company pays
LSU a royalty based upon gross sales in the United States and a percentage
revenues the Company receives outside of the United States. The Company also has
a commitment to make payments of an agreed percentage of net cash flow to LSU
once the Company generates positive net cash flow, as defined. LSU is obligated
to expend substantially all of such net cash flow payments from the Company on
research supervised by one of the Company's consultants (or the Company's
designee), and the Company has the option of licensing any patents that arise
from such research.

On May 1, 1995, Ergo Research Corporation, a wholly-owned subsidiary of
the Company, entered into a novated license and royalty agreement with LSU that
replaces the royalty agreement with LSU described in the prior paragraph. In
conjunction with the new agreement an initial fee of $200,000 was paid to LSU
upon execution, $500,000 was paid upon the initial public offering of the common
stock of the Company in December 1995 and 18,750 common shares with a fair value
of $168,750 were issued one year after that offering in December 1996. These
costs were charged to operations in the periods indicated as the purchase of
in-process research and development. The agreement also requires additional fees
of $350,000 for the first and $500,000 for all subsequent administrative
approvals of licensed pharmaceutical products. The Company must pay LSU a
royalty based upon gross sales in the United States with minimum royalties due.

On April 29, 1998, the Company and LSU entered into dispute resolution
under the provisions of the parties' novated license and royalty agreement dated
May 1, 1995. The dispute relates to the amount of payment owed to LSU arising
from various payments received by the Company from Johnson & Johnson. LSU is
seeking payment of $4,138,000. The Company believes that the payment owed to LSU
is significantly less than this amount. The dispute resolution provisions of the
agreement provides for a period of good faith negotiations between the parties,
followed, if necessary, by mediation and binding arbitration. The Company and
LSU are currently in mediation.

12. Noncash Investing and Financing Activities

Certain capital lease obligations are considered noncash items and,
accordingly, are not reflected in the consolidated statements of cash flows.
Noncash capital lease obligations of $171,697 and $272,205 were incurred in 1998
and 1997, respectively, when the Company entered into leases for lab and office
equipment. In 1996, the Company entered into, a sale leaseback agreement which
resulted in the receipt of $549,718 in cash proceeds. (See Note 4).

13. Employee Benefit Plans

Effective February 1, 1997, the Company implemented a defined contribution
plan under Section 401(k) of the Internal Revenue Code (the "401k Plan"). Under
the 401k Plan, eligible employees are permitted to contribute, subject to
certain limitations, up to 20% of their gross salary. The Company makes a
matching contribution which currently totals 50% of the employee's contribution,
up to a maximum amount equal to the lesser of $2,500 or 6% of the employee's
gross salary. The employer matching contribution vests over a four year period,
25% for each year of

42
<PAGE>

service. Years of service prior to the implementation of the 401k Plan are
excluded from the vesting period. In 1998 and 1997, the Company's contributions
to the 401k Plan amounted to $91,333 and $74,014, respectively.

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the heading "Directors and Executive
Officers" contained in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A in connection with the Company's 1999 Annual Meeting
of Stockholders is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the heading "Compensation of Directors and
Executive Officers" contained in the Company's definitive Proxy Statement to be
filed pursuant to Regulation 14A in connection with the Company's 1999 Annual
Meeting of Stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1999 Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the heading "Certain Transactions"
contained in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A in connection with the Company's 1999 Annual Meeting of
Stockholders is incorporated herein by reference.

43
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

(a)(1) -- The financial statements filed as part of this Report at Item 8 are
listed in the Index to Consolidated Financial Statements on page 25
of this Report.

(a)(2) -- None.

(a)(3) -- The following documents are filed or incorporated by reference as
exhibits to this Report:

Exhibit
Number Document Description

3.1 -- Amended and Restated Certificate of Incorporation of the Company.
Filed as exhibit 3.1 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27,
1995, and incorporated by reference herein.

3.2 -- Certificate of Designations, Preferences and Rights of Series D
Exchangeable Preferred Stock, as amended and restated. Filed as
exhibit 3.2 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

3.3 -- Third Amended and Restated By-Laws of the Company. Filed as exhibit
3.3 to the Company's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.

4 -- Form of Stock Certificates of Common Stock, par value $.01 per share
of the Company (Incorporated by reference to exhibit 4 to the
Company's registration statement on Form S-1, file number 33-98162).

10.1 -- Loan Agreement dated September 1, 1995, by and among the Company,
together with the form of Promissory Note included as Exhibit A
thereto; and First Amendment to Loan Agreement dated October 6,
1995, among the Company, Citicorp Venture Capital Ltd., Citi Growth
Fund L.P., Hunt Financial Corporation and Lafayette Investment
Company. Filed as exhibit 10.1 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.

10.2 -- Novated License and Royalty Agreement dated May 1, 1995, between the
Board of Supervisors of Louisiana State University and Agricultural
and Mechanical College, the Company, E. Science Incorporated, a
Delaware corporation formerly known as Ergo Science Incorporated
that is a subsidiary of the Company ("Ergo Science Incorporated"),
and Ergo Research Corporation, a Delaware corporation that is a
subsidiary of the Company. Filed as exhibit 10.2 to the Company's
registration statement on Form S-1 (File No. 33-98162) filed with
the Commission on November 27, 1995, and incorporated by reference
herein.

10.3 -- Supply Agreement dated January 1, 1995, between Ergo Science
Incorporated and Geneva Pharmaceuticals, Inc. [Portions of this
exhibit have been omitted and filed separately with the SEC in
accordance with Rule 406 of the Securities Act and the Company's
request for confidential treatment.] Filed as exhibit 10.3 to the
Company's registration statement on Form S-1 (File No. 33-98162)
filed with the Commission on November 27, 1995, and incorporated by
reference herein.

44
<PAGE>

10.4 -- Registration Rights Agreement dated January 1, 1995, between Ergo
Science Incorporated and Geneva Pharmaceuticals, Inc.; and First
Amendment to Registration Rights Agreement dated September 1, 1995,
Ergo Science Incorporated and Geneva Pharmaceuticals, Inc. Filed as
exhibit 10.4 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.5 -- Stockholder Rights Agreement dated August 5, 1992, among Ergo
Science Incorporated and the stockholders of the Company that are
signatories thereto; First Amendment to Stockholder Rights Agreement
dated September 10, 1992, among Ergo Science Incorporated and the
stockholders of the Company that are signatories thereto; Second
Amendment to Stockholder Rights Agreement dated October 12, 1993,
among Ergo Science Incorporated and the stockholders of the Company
that are signatories thereto; Third Amendment to Stockholder Rights
Agreement and Consent dated October 12, 1993, among Ergo Science
Incorporated and the stockholders of the Company that are
signatories thereto; Fourth Amendment to Stockholder Rights
Agreement dated July 15, 1994, among Ergo Science Incorporated and
the stockholders of the Company that are signatories thereto; Fifth
Amendment to Stockholder Rights Agreement dated April 27, 1995,
among the Company, Ergo Science Incorporated and the stockholders of
the Company that are signatories thereto; Sixth Amendment to
Stockholder Rights Agreement dated September 1, 1995, among the
Company, Ergo Science Incorporated and the stockholders of the
Company that are signatories thereto; and Seventh Amendment to
Stockholder Rights Agreement dated October 6, 1995, among the
Company, Ergo Science Incorporated and the stockholders of the
Company that are signatories thereto. Filed as exhibit 10.5 to the
Company's registration statement on Form S-1 (File No. 33-98162)
filed with the Commission on November 27, 1995, and incorporated by
reference herein.

10.6 -- Third Amended and Restated Registration Rights Agreement dated April
27, 1995, among the Company, Ergo Science Incorporated, Citicorp
Venture Capital Ltd. and Hunt Financial Corporation. Filed as
exhibit 10.6 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.7 -- Registration Rights Agreement dated April 27, 1995, among the
Company and the stockholders of the Company that are signatories
thereto; and First Amendment to Registration Rights Agreement dated
September 1, 1995, among the Company and the stockholders listed as
signatories thereto. Filed as exhibit 10.7 to the Company's
registration statement on Form S-1 (File No. 33-98162) filed with
the Commission on November 27, 1995, and incorporated by reference
herein.

10.8 -- Stockholders Agreement dated April 27, 1995, among the Company and
the stockholders of the Company that are signatories thereto. Filed
as exhibit 10.8 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.9 -- Indemnification Agreement dated October 6, 1995, between the Company
and Manuel Cincotta, Jr., together with a schedule identifying
substantially identical documents and setting forth the material
details in which those documents differ from the foregoing document.
Filed as exhibit 10.18 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on November
27, 1995, and incorporated by reference herein.

45
<PAGE>

10.10 -- Amended and Restated Option Agreement dated October 12, 1993,
between Ergo Science Incorporated and Anthony H. Cincotta, Ph.D.;
First Amendment to Option Agreement dated April 27, 1995, among the
Company, Ergo Science Incorporated and Anthony H. Cincotta, Ph.D.;
and Second Amendment to Amended and Restated Option Agreement dated
November 6, 1995, between the Company and Anthony H. Cincotta, Ph.D.
Filed as exhibit 10.21 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on November
27, 1995, and incorporated by reference herein.

10.12 -- Nonstatutory Stock Option Agreement dated November 15, 1994,
between Ergo Science Incorporated and Stephen A. Duzan; and First
Amendment to Option Agreement dated April 27, 1995, among the
Company, Ergo Science Incorporated and Stephen Duzan. Filed as
exhibit 10.24 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.13 -- Option Agreement dated as of March 31, 1994, between the Company
and Ronald H. Abrahams, Ph.D.; and First Amendment to Option
Agreement dated November 6, 1995, between the Company and Ronald H.
Abrahams, Ph.D. Filed as exhibit 10.25 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.

10.14 -- Consulting Agreement dated August 24, 1995, between the Company
and DBM Corporate Consulting Group, Ltd. Filed as exhibit 10.28 to
the Company's registration statement on Form S-1 (File No. 33-98162)
filed with the Commission on November 27, 1995, and incorporated by
reference herein.

10.15 -- Form of Option and Registration Rights Agreement between the
Company and DBM Corporate Consulting Group, Ltd. Filed as exhibit
10.29 to the Company's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.

10.16 -- Ergo Science Corporation Stock Option Plan for Non-Employee
Directors (Incorporated by reference to exhibit 10.1 to the
Company's Registration Statement on Form S-8, file number
333-07159).

10.17 -- First Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan (Incorporated by reference to exhibit
10.2 to the Company's Registration Statement on Form S-8, file
number 333-07013).

10.18 -- License Agreement effective as of February 1, 1997, between The
General Hospital Corporation and Ergo Science Corporation and Ergo
Research Corporation. Filed as Exhibit 10.1 to the Company's
quarterly filing on Form 10-Q filed with the Commission on May 15,
1997 and incorporated by reference herein. [Portions of this exhibit
have been omitted and filed separately with the Commission in
accordance with Rule 406 of the Securities Act and the Company's
request for confidential treatment.]

10.19 -- Amended and Restated Supply Agreement dated October 31, 1997, by
and among Ergo Science Corporation, Ergo Research Corporation and
Geneva Pharmaceuticals, Inc. Filed as exhibit 10.1 to the Company's
quarterly filing on Form 10-Q filed with the Commission on November
14, 1997 and incorporated by reference herein.[Portions of this
exhibit have been omitted and filed separately with the Commission
in accordance with Rule 406 of the Securities Act and the Company's
request for confidential treatment.]

46
<PAGE>

10.20 -- Second Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan. Filed with the Commission on December
9, 1997 (Incorporated by reference to exhibit 10.3 to the Company's
Registration Statement on Form S-8, file number 333-41791).

21 -- Subsidiaries of registrant. Filed as exhibit 21 to the Company's
annual filing on Form 21 -- 10-K filed with the Commission on March
30, 1998.

23.1 -- Consent of PricewaterhouseCoopers L.L.P.

27 -- Financial data schedule

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

During the fourth quarter of 1998, the Company filed the following
reports on Form 8-K:

- On December 1, 1998 stating that on November 23, 1998, the
Company publicly disseminated a press release announcing that
it had received a letter from the Division of Metabolic and
Endocrine Drug Products at the U.S. Food and Drug
Administration that its New Drug Application for ERGOSET(R)
tablets for the treatment of type 2 diabetes is not
approvable, citing the overall benefit to risk ratio.

- On December 15, 1998 stating that on December 7, 1998, the
Company publicly disseminated a press release announcing that
Johnson & Johnson has provided notice of termination
(effective in 30 days) of the collaboration agreement for Ergo
Science's products to treat type 2 diabetes and obesity.

- On December 22, 1998 stating that on December 16, 1998, the
Company publicly disseminated a press release announcing that
it has reduced its work force by approximately 50 percent. In
addition, on December 17, 1998, the Company disseminated a
press release announcing that W. Leigh Thompson, M.D., Ph.D.,
has resigned from its Board of Directors.

47
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Charlestown and State of Massachusetts on March 25, 1999.

ERGO SCIENCE CORPORATION

By: /s/ Ronald H. Abrahams
----------------------------------
Ronald H. Abrahams, Ph.D.

President and Chief Executive Officer

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

/s/ Ronald H. Abrahams President, Chief Executive Officer and Chairman
- ---------------------------- of the Board and Director (Principal Executive
(Ronald H. Abrahams, Ph.D.) and Financial Officer)

/s/ David R. Burt Director
- ----------------------------
(David R. Burt)

/s/ David L. Castaldi Director
- ----------------------------
(David L. Castaldi)

/s/ Anthony H. Cincotta Director
- ----------------------------
(Anthony H. Cincotta, Ph.D.)

/s/ J. Richard Crowley Controller
- ----------------------------
(J. Richard Crowley)

/s/ Stephen A. Duzan Director
- ----------------------------
(Stephen A. Duzan)

/s/ Ray L. Hunt Director
- ----------------------------
(Ray L. Hunt)

/s/ Thomas F. McWilliams Director
- ----------------------------
(Thomas F. McWilliams)

/s/ Stephen P. Smiley Director
- ----------------------------
(Stephen P. Smiley)

48
<PAGE>

INDEX TO EXHIBITS

Exhibit
Number Document Description

3.2 -- Certificate of Designations, Preferences and Rights of Series D
Exchangeable Preferred Stock, as amended and restated. Filed as
exhibit 3.2 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.

3.3 -- Third Amended and Restated By-Laws of the Company. Filed as
exhibit 3.3 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.

4 -- Form of Stock Certificates of Common Stock, par value $.01 per
share of the Company (Incorporated by reference to exhibit 4 to the
Company's registration statement on Form S-1, file number 33-98162).

10.1 -- Loan Agreement dated September 1, 1995, by and among the Company,
together with the form of Promissory Note included as Exhibit A
thereto; and First Amendment to Loan Agreement dated October 6, 1995,
among the Company, Citicorp Venture Capital Ltd., Citi Growth Fund
L.P., Hunt Financial Corporation and Lafayette Investment Company.
Filed as exhibit 10.1 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27,
1995, and incorporated by reference herein.

10.2 -- Novated License and Royalty Agreement dated May 1, 1995, between
the Board of Supervisors of Louisiana State University and
Agricultural and Mechanical College, the Company, E. Science
Incorporated, a Delaware corporation formerly known as Ergo Science
Incorporated that is a subsidiary of the Company ("Ergo Science
Incorporated"), and Ergo Research Corporation, a Delaware corporation
that is a subsidiary of the Company. Filed as exhibit 10.2 to the
Company's registration statement on Form S-1 (File No. 33-98162)
filed with the Commission on November 27, 1995, and incorporated by
reference herein.

49
<PAGE>

10.5 -- Stockholder Rights Agreement dated August 5, 1992, among Ergo
Science Incorporated and the stockholders of the Company that are
signatories thereto; First Amendment to Stockholder Rights Agreement
dated September 10, 1992, among Ergo Science Incorporated and the
stockholders of the Company that are signatories thereto; Second
Amendment to Stockholder Rights Agreement dated October 12, 1993,
among Ergo Science Incorporated and the stockholders of the Company
that are signatories thereto; Third Amendment to Stockholder Rights
Agreement and Consent dated October 12, 1993, among Ergo Science
Incorporated and the stockholders of the Company that are signatories
thereto; Fourth Amendment to Stockholder Rights Agreement dated July
15, 1994, among Ergo Science Incorporated and the stockholders of the
Company that are signatories thereto; Fifth Amendment to Stockholder
Rights Agreement dated April 27, 1995, among the Company, Ergo
Science Incorporated and the stockholders of the Company that are
signatories thereto; Sixth Amendment to Stockholder Rights Agreement
dated September 1, 1995, among the Company, Ergo Science Incorporated
and the stockholders of the Company that are signatories thereto; and
Seventh Amendment to Stockholder Rights Agreement dated October 6,
1995, among the Company, Ergo Science Incorporated and the
stockholders of the Company that are signatories thereto. Filed as
exhibit 10.5 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.6 -- Third Amended and Restated Registration Rights Agreement dated
April 27, 1995, among the Company, Ergo Science Incorporated,
Citicorp Venture Capital Ltd. and Hunt Financial Corporation. Filed
as exhibit 10.6 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.7 -- Registration Rights Agreement dated April 27, 1995, among the
Company and the stockholders of the Company that are signatories
thereto; and First Amendment to Registration Rights Agreement dated
September 1, 1995, among the Company and the stockholders listed as
signatories thereto. Filed as exhibit 10.7 to the Company's
registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference
herein.

10.9 -- Indemnification Agreement dated October 6, 1995, between the
Company and Manuel Cincotta, Jr., together with a schedule
identifying substantially identical documents and setting forth the
material details in which those documents differ from the foregoing
document. Filed as exhibit 10.18 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.

50
<PAGE>

10.11 -- Nonstatutory Stock Option Agreement dated November 15, 1994,
between Ergo Science Incorporated and Stephen A. Duzan; and First
Amendment to Option Agreement dated April 27, 1995, among the
Company, Ergo Science Incorporated and Stephen Duzan. Filed as
exhibit 10.24 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.

10.12 -- Option Agreement dated as of March 31, 1994, between the Company
and Ronald H. Abrahams, Ph.D.; and First Amendment to Option
Agreement dated November 6, 1995, between the Company and Ronald H.
Abrahams, Ph.D. Filed as exhibit 10.25 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.

10.13 -- Consulting Agreement dated August 24, 1995, between the Company
and DBM Corporate Consulting Group, Ltd. Filed as exhibit 10.28 to
the Company's registration statement on Form S-1 (File No. 33-98162)
filed with the Commission on November 27, 1995, and incorporated by
reference herein.

10.14 -- Form of Option and Registration Rights Agreement between the
Company and DBM Corporate Consulting Group, Ltd. Filed as exhibit
10.29 to the Company's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.

10.15 -- Ergo Science Corporation Stock Option Plan for Non-Employee
Directors (Incorporated by reference to exhibit 10.1 to the Company's
Registration Statement on Form S-8, file number 333-07159).

10.16 -- First Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan (Incorporated by reference to exhibit
10.2 to the Company's Registration Statement on Form S-8, file number
333-07013).

10.17 -- License Agreement effective as of February 1, 1997, between The
General Hospital Corporation and Ergo Science Corporation and Ergo
Research Corporation. Filed as Exhibit 10.1 to the Company's
quarterly filing on Form 10-Q filed with the Commission on May 15,
1997 and incorporated by reference herein. [Portions of this exhibit
have been omitted and filed separately with the Commission in
accordance with Rule 406 of the Securities Act and the Company's
request for confidential treatment.]

10.18 -- Amended and Restated Supply Agreement dated October 31, 1997, by
and among Ergo Science Corporation, Ergo Research Corporation and
Geneva Pharmaceuticals, Inc. Filed as exhibit 10.1 to the Company's
quarterly filing on Form 10-Q filed with the Commission on November
14, 1997 and incorporated by reference herein.[Portions of this
exhibit have been omitted and filed separately with the Commission in
accordance with Rule 406 of the Securities Act and the Company's
request for confidential treatment.]

10.19 -- Second Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan. Filed with the Commission on December
9, 1997 (Incorporated by reference to exhibit 10.3 to the Company's
Registration Statement on Form S-8, file number 333-41791).

21 -- Subsidiaries of registrant. Filed as exhibit 21 to the Company's
annual filing on Form 10-K filed with the Commission on March 30,
1998.

23.1 -- Consent of PricewaterhouseCoopers L.L.P.

51
<PAGE>

27 -- Financial data schedule

EX-23.1
Consent of Independent Accountants

We consent to the incorporation by reference in the registration statement of
Ergo Science Corporation on Form S-8 (File No. 333-41791) of our report, dated
March 15, 1999, on our audits of the consolidated financial statements of Ergo
Science Corporation as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, which report is included in this
Annual Report on Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

March 30, 1999

<PAGE>
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