ERGO SCIENCE CORP, 10-K, 2000-03-30

ERGO SCIENCE CORP
10-K, 2000-03-30
PHARMACEUTICAL PREPARATIONS

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

FORM 10-K

(Mark One)

/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999

-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)

43 HIGH STREET
NORTH ANDOVER, MASSACHUSETTS 01845
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (978) 974-9474

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 10-K. / X /

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 13, 2000, was approximately $32,741,294. As of March 13,
2000, there were 14,269,467 outstanding shares of the registrant's common stock.

Portions of the registrant's Proxy Statement to be furnished to stockholders in
connection with its 2000 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

Since 1990, Ergo Science Corporation ("Ergo" or the "Company") has been
developing ERGOSET-R- tablets for the treatment of metabolic disorders. In the
fourth quarter of 1999, the U.S. Food & Drug Administration ("FDA") issued a
letter stating that the Company's New Drug Application ("NDA") for ERGOSET-R-
tablets for the treatment of type 2 diabetes was "approvable." However, before
ERGOSET-R- tablets can be approved by FDA for marketing, it will be necessary
for Ergo to address FDA concerns relating to the clinical safety of ERGOSET-R-
tablets and other issues, including biopharmaceutics, pharmacology and
toxicology. In its letter, FDA stated that ERGOSET-R- tablets are effective in
the treatment of type 2 diabetes as adjunctive therapy with sulfonylurea drugs.
The letter also stated, however, that data submitted by the Company, including
epidemiology data recently developed by the Company, did not adequately overcome
FDA's concerns about the possible increased risk of a serious adverse event with
the use of ERGOSET-R- tablets in type 2 diabetes patients. To address this
outstanding safety concern, the FDA has recommended that a "large, simple"
placebo-controlled study be undertaken to evaluate whether treatment with
ERGOSET-R- tablets is associated with an increase in the specified serious
adverse event. In the letter, FDA does not provide specifics about the size and
scope of such a clinical trial. The resolution of this safety concern must be
sufficient to support approval in light of a treatment effect which FDA
characterized as small.

The Company is working with FDA to determine the size and scope of the
safety clinical trial that FDA is requesting.

After the Company finalizes with FDA the requirements for the safety
study, the Company will determine whether to proceed with its ERGOSET-R-
program. Some of the options at FDA include, without limitation, appealing the
FDA letter with respect to the request for an additional safety trial,
requesting a rehearing before an advisory panel on the issue of whether the
additional safety trial is needed, or considering whether or not to move ahead
with the requested safety trial.

The Company has not made a final decision with respect to investing in
an additional safety study. The cost and time required for such a study are
important factors and have not yet been finalized. Other important factors
include, without limitation: the success of other recently introduced
antidiabetic medications from large pharmaceutical companies (including
Avandia-R- from SmithKline Beecham Pharmaceuticals and ACTOSTM from Takeda
Pharmaceuticals and Eli Lilly and Company), the competitive profile of
ERGOSET-R- tablets in the marketplace, additional therapies being developed by
other pharmaceutical companies, the ability to enter into development and/or
marketing agreements with other pharmaceutical or biotechnology companies for
the development of ERGOSET-R- tablets and other data.

The Company has also been considering its strategic options for its
ERGOSET-R- program. Some of the possible options include, without limitation:
selling the Company's rights to EROGSET-R- tablets, licensing the rights to
ERGOSET-R- tablets to another pharmaceutical or biotechnology company,
continuing ERGOSET-R- development on its own, or halting development of
EROGSET-R- tablets. If the Company does not receive approval of the NDA for
ERGOSET-R- tablets 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.

In addition to the ERGOSET-R- program, the Company is analyzing its
other strategic alternatives. The Company is reviewing various alternatives to
determine the best uses of its assets including its cash, its status as a public
company, its financial attributes (including tax attributes), and its
intellectual property assets other than ERGOSET-R- tablets. No decisions have
been made with respect to any of the possible alternatives.

The Company has been engaged in efforts to reduce its costs. Over the
past year, the Company has significantly reduced its expenses through reducing
the number of employees, cutting programs (including all pre-clinical
development programs) and significantly cutting other expenses. At September 30,
1999, the Company held cash, cash equivalents

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and short-term investments of $30,323,000. At December 31, 1999, the Company
held cash, cash equivalents and short-term investments of $22,016,000. In
addition, the Company held long-term investments of $8,324,000 which, together
with the cash, cash equivalents and short-term investments total $30,340,000 at
December 31, 1999. The Company has concentrated its efforts on managing its cash
burn rate, while it is considering its strategic alternatives. However, the
Company's cash burn rate is likely to fluctuate from quarter to quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEVELOPMENT OF ERGOSET-R- TABLETS FOR THE TREATMENT OF DIABETES

DIABETES AS A METABOLIC DISORDER. The Company's primary research has
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 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 1 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 three 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. 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 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 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.

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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. Troglitazone is
believed to work in part by increasing the body's sensitivity to insulin.
Following reports of liver toxicity, Glaxo removed Troglitazone from the market
in the United Kingdom in 1998. In June 1999, FDA withdrew the monotherapy
indication due to cases of hepatotoxicity that occurred in patients treated with
Troglitazone. The FDA also approved Troglitazone for use in combination with
sulfonylureas together with Metformin for patients who are not adequately
controlled with the combination of sulfonylurea and Metformin. In March 2000,
Warner Lambert voluntarily discontinued marketing Troglitazone. Two new drugs in
the same class as Troglitazone, namely Rosiglitazone and Pioglitazone were
approved in 1999.

Rosiglitazone (tradename Avandia-R-) was approved by FDA in June 1999
and is sold by SmithKline Beecham Pharmaceuticals. Rosiglitazone is an oral
medication, which acts primarily by increasing insulin sensitivity in type 2
diabetes patients.

Pioglitazone (tradename ACTOSTM) was approved by FDA in July 1999 and
is sold jointly by Takeda Pharmaceuticals America, Inc. and Eli Lilly and
Company. Pioglitazone is an oral medication, which acts primarily by decreasing
insulin resistance in type 2 diabetes patients.

Repaglinide (tradename Prandin-R-) was approved by the FDA 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").

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 therapy is believed to act as a central
regulator of metabolic function, i.e., 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 appealed
this decision within the FDA. In the fourth quarter of 1999, the Company
announced receipt of a letter from the Office of Drug Evaluation II, Center for
Drug Evaluation and Research at the FDA stating that its NDA for ERGOSET-R-
tablets is approvable. However, before ERGOSET-R- tablets can be approved by
FDA for marketing, it will be necessary for Ergo to address FDA concerns
relating to the clinical safety of ERGOSET-R- tablets and other issues,
including biopharmaceutics, pharmacology and toxicology. In its letter, FDA
stated that ERGOSET-R- tablets are effective in the treatment of type 2
diabetes as adjunctive therapy with sulfonylureas. The letter also stated,
however, that data submitted by the Company, including epidemiology data
recently developed by the Company, did not adequately overcome FDA's concerns
about the possible increased risk of a serious adverse event. In the letter, FDA
does not provide specifics about the size and scope of such a clinical trial.
The resolution of this safety concern must be sufficient to support approval in
light of a treatment effect which FDA characterized as small. See "Risk
Factors--Ergo May Not Receive Final Marketing Approval of the NDA for
ERGOSET-R- Tablets;" "Risk Factors--Ergo's Business Faces Significant
Government Regulation;" and "Business--Commercialization."

DEVELOPMENT OF ERGOSET-R- TABLETS FOR THE TREATMENT OF OBESITY

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A Phase II clinical trial of ERGOSET-R- tablets for the treatment of
obesity was initiated in June 1997 at 14 clinical sites across the United States
in approximately 300 clinically obese subjects. Although both the ERGOSET-R-
and placebo groups lost weight during the study, there was no statistically
significant difference in weight loss between patients treated with ERGOSET-R-
tablets and diet and patients treated with placebo and diet in the intent to
treat analysis. The Company has discontinued its obesity program. See "Risk
Factors--Clinical Trials for ERGOSET-R- Tablets May be Unsuccessful."

DEVELOPMENT 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, approximately 25% exhibited regression of total body tumor
load. Ergo is currently seeking a company to license this technology for further
development.

COMMERCIALIZATION

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
ERGOSET-R- tablets for the treatment of type 2 diabetes are approved for
marketing by FDA, the Company may try to form a strategic alliance with one or
more pharmaceutical or biotechnology companies to market ERGOSET-R- tablets in
the United States. 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 candidate. 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."

PATENTS, PROPRIETARY RIGHTS AND LICENSES

Ergo's ability to commercialize profitably any product candidates
depends, 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. Louisiana State University ("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 MGH for its
interest in certain patent

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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 Protect Its Business."

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 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 Protect Its Business."

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 that the Company received 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 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. Since mediation was completed without a resolution, the Company and
LSU are currently in arbitration.

In February 2000, the Company announced that a preliminary ruling has
been made, which relates to a payment received in March 1998 from Johnson &
Johnson for $10 million of the Company's common stock. The Company took the
position that this $10 million is not subject to a royalty to LSU under the LSU
Agreement. LSU had argued to the arbitrator that the Company owes a royalty on
this stock purchase. In the preliminary ruling, the arbitrator has ruled,
contrary to the Company's position, that a royalty is due to LSU on the $10
million received from Johnson & Johnson for the purchase of common stock. The
exact amount of the royalty due to LSU on this $10 million will be dependent on
several factual issues which are in dispute and will be settled by the
arbitrator at a later date.

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 MGH 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. MGH 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.

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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.

COMPETITION

ERGOSET-R- tablets, if approved by FDA for marketing (See "Risk
Factors--Ergo May Not Receive Final Marketing Approval of the NDA for
ERGOSET-R- Tablets"), 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 six 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.

Metformin, under the tradename Glucophage-R-, was approved in March
1995 and is sold by Bristol-Myers Squibb Company. Metformin has been used 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 was approved 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.

Both Avandia-R- and ACTOSTM are gaining market share rapidly.

Repaglinide (tradename Prandin-R-) was approved by the FDA 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.

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. 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 its product development program. 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.

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Products resulting from these activities may compete directly with ERGOSET-R-
tablets, if approved for commercial marketing. These 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. 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
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 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 FDA and other regulatory authorities in the
United States. These activities are also regulated in other countries where
products are tested. 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 product. 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 candidate.
Delays or rejections in obtaining regulatory approvals have affected and may
continue to 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 candidate. See "Business--Regulatory Status of ERGOSET-R-
Tablets."

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.

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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 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 complied with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
such a case 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, 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

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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 13, 2000, the Company had 7 employees, including 5
part-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
AND ALL OTHER SEC REPORTS OF THE COMPANY, YOU SHOULD CONSIDER THE FOLLOWING
FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS.

FDA MAY NOT GRANT FINAL MARKETING APPROVAL 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 appealed this decision within the
FDA. In the fourth quarter, the Company announced receipt of a letter from the
Office of Drug Evaluation II, Center for Drug Evaluation and Research at the FDA
stating that its NDA for ERGOSET-R- tablets is approvable. However, before
ERGOSET-R- tablets can be approved by FDA for marketing, it will be necessary
for Ergo to address FDA concerns relating to the clinical safety of ERGOSET-R-
tablets and other issues, including biopharmaceutics, pharmacology and
toxicology. In its letter, FDA stated that ERGOSET-R- tablets are effective in
the treatment of type 2 diabetes as adjunctive therapy with sulfonylureas. The
letter also stated, however, that data submitted by the Company, including
epidemiology data recently developed by the Company, did not adequately overcome
FDA's concerns about the possible increased risk of a serious adverse event. In
the letter, FDA does not provide specifics about the size and scope of such a
clinical trial. The resolution of this safety concern must be sufficient to
support approval in light of a treatment effect which FDA characterized as
small. The Company cannot assure you that it will ever receive approval to
market 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 does not receive
approval of the NDA for ERGOSET-R- tablets 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

Under the terms of the most recent letter from FDA, the Company is
required to conduct an additional clinical trial in order to obtain marketing
clearance for ERGOSET-R- tablets for the treatment of type 2 diabetes. The
Company has not decided whether it will conduct this additional trial. The
results from such additional clinical trial may not be satisfactory to the FDA.
Therefore, the FDA may not grant regulatory approval of ERGOSET-R- tablets. The
inability to market ERGOSET-R- tablets for the treatment of type 2 diabetes
would have a material adverse effect on the Company.

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 or biotechnology 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.

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<PAGE>

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 would 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 OR MAY DECIDE NOT TO FINANCE AN ADDITIONAL SAFETY TRIAL

The Company has not yet made a decision on whether it will fund the
additional safety trial. This decision will be based in part on the cost and
scope of the additional safety trial, which have not yet been finalized with
FDA. Other factors include:

o The Company may decide that it is not in the best interest of the
Company to invest its resources in an additional safety trial for
ERGOSET-R- tablets.

o The Company may also seek funding for the additional safety trial from
other pharmaceutical or biotechnology companies in the form of
marketing and development agreements. The Company cannot assure you
that another company will enter into any such agreement with Ergo or
that the terms of any such agreement will be favorable to Ergo.

o If the Company needs additional capital for any purpose, there can be
no assurance that such capital will be available to the Company at
all, or on terms favorable to the Company.

o 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 conducted studies 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

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. Many drugs are commercially available for the treatment
of type 2 diabetes, including six drugs (Acarbose-R-, Glucophage-R-,
Amaryl-R-, Prandin-R-, Avandia-R- and ACTOSTM) that have recently been
approved by the FDA. Glucophage-R-,

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<PAGE>

Avandia-R- and ACTOSTM have rapidly gained market acceptance as therapies for
type 2 diabetes. 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 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, 1999, the Company's accumulated deficit was $88.2
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. If the Company
chooses to conduct additional clinical trials with ERGOSET-R- tablets, the
Company will incur significant expenses. 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--Government Regulation."

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. See "Risk Factors--Ergo May Not Receive Final Marketing
Approval of the NDA for 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

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<PAGE>

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.

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. 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 that would be charged for
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

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<PAGE>

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 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 MGH for its interest in certain patent
applications covering the treatment of immune dysfunctions and cancer. If the
license with LSU is terminated for any reason, the Company may be prohibited
from commercializing 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. If the license
with MGH 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 13, 2000, current directors, executive officers and
principal stockholders of the Company and certain of their affiliates
beneficially own approximately 33% 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.

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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 ITS 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 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 personnel. Over the past year,
the Company has terminated most of its employees, including many key personnel.
In the fourth quarter, Anthony H. Cincotta, Ph.D., the Company's founding
scientist, resigned as an officer and employee but is still retained on a
part-time basis as a consultant and as a member of the Board of Directors. 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 OVER THE PAST TWO YEARS

The market price for Ergo common stock has been volatile over the past
two years 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, and then the approvable
letter that requests an additional safety trial. 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 announcements of technological innovations or new commercial
products by competitors;
o FDA actions on ERGOSET-R- tablets;
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, 2000, 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,

14
<PAGE>

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.

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 events occur, actual
results may vary materially and adversely from those anticipated, believed,
estimated, assumed 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

In May 1999 the Company leased approximately 2,700 square feet of
office space as its principal office in North Andover Mills, North Andover,
Massachusetts. This space is leased through May 2001. The Company did lease
approximately 30,000 square feet in two buildings in the Charlestown Navy
Yard, Charlestown, Massachusetts. The lease for approximately 10,000 square
feet of space formerly used for research and development functions expired in
June 1999. The Company did not renew this lease. The lease

15
<PAGE>

for approximately 20,000 square feet, which was used for administrative
functions, was also terminated in June 1999.

ITEM 3. LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

In the third quarter of 1999, the Company was sued by Incubator
Associates ("Incubator"), the previous landlord for the Company's laboratory
space. The dispute relates to the amount of payment owed to Incubator under
the lease, which expired at the end of June 1999. Incubator is seeking
payment of approximately $200,000. The Company is contesting Incubator's
claim.

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 1999.

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 13, 2000, the number of record holders
of the Company's common stock was approximately 254. 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
------------ ------------
<S> <C> <C> <C>
1999
First Quarter $ 1 7/16 $ 7/8
Second Quarter $ 2 1/8 $ 7/8
Third Quarter $ 1 1/2 $ 31/32
Fourth Quarter $ 1 31/32 $ 1
1998
First Quarter $ 18 5/8 $ 13 7/8
Second Quarter $ 18 3/8 $ 3 1/4
Third Quarter $ 4 1/8 $ 2 3/4
Fourth Quarter $ 5 3/4 $ 3/4

</TABLE>

16
<PAGE>

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

17
<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.

YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues (1) ................................ -- $ 18,924,552 -- -- --
Operating expenses:
Research and development ................ 2,269,450 14,549,810 13,258,016 12,272,478 8,643,926
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)(8) 3,597,382 7,558,572 6,580,308 6,973,776 6,139,072
------------ ------------ ------------ ------------ ------------
Total operating expenses ............. 5,866,832 27,095,902 20,231,792 18,580,300 22,244,298
Other Income:
Interest and other income .............. 1,628,206 1,862,453 1,689,252 1,397,521 94,348
------------ ------------ ------------ ------------ ------------
Net loss ........................... (4,238,626) (6,308,897) (18,542,540) (17,182,779) (22,149,950)
Accretion of dividends on preferred stock ... (522,202) (492,228) (463,968) (437,332) (668,313)
Dividends on redeemable preferred stock ..... -- -- -- -- (7,123,536)
Dividends on preferred stock ................ -- -- -- -- (2,018,763)
Net loss to common stockholders .... $ (4,760,828) $ (6,801,125) $(19,006,508) $(17,620,111) $(31,960,562)
============ ============ ============ ============ ============
Net loss per common share
(basic and diluted)(6) ............. $ (0.33) $ (0.48) $ (1.44) $ (1.57) $ (9.92)
============ ============ ============ ============ ============
Weighted average common shares outstanding
(basic and diluted) ................ 14,255,823 14,087,917 13,212,042 11,248,315 3,222,707
============ ============ ============ ============ ============
</TABLE>

DECEMBER 31,
------------
1999 1998 1997 1996 1995
-------------- -------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ...... $ 4,292,631 $15,715,708 $13,923,115 $18,066,884 $15,896,373
Short-term investments ......... 17,722,798 17,997,599 9,536,995 20,550,986 6,325,502
Long-term investments .......... 8,324,326 -- -- -- --
Working capital ................ 17,418,830 29,563,042 20,943,195 36,917,629 19,609,791
Total assets ................... 30,409,901 34,724,868 28,664,666 41,385,280 24,949,911
Long-term obligations .......... -- 155,596 327,442 385,256 93,600
Total stockholders' equity ..... 25,786,233 29,825,882 25,135,381 39,065,225 21,803,851

</TABLE>

- ----------------
(1) Relates to revenue received from Johnson & Johnson in 1998 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.
(7) Includes a charge in 1998 of $1,042,290 related to an asset write-down of
equipment and leasehold improvements. See Note 4 of Notes to Consolidated
Financial Statements.
(8) Includes a loss on the disposal of equipment in 1999 in the amount of
$157,000. See Note 4 of Notes to Consolidated Financial Statements.

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

18
<PAGE>

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 AN "APPROVABLE" LETTER DOES NOT MEAN THAT A PRODUCT WILL BE
APPROVED, PARTICULARLY WHERE, AS HERE, IT IS NECESSARY TO SATISFY
FDA (PRIOR TO APPROVAL) THAT THERE IS NOT AN INCREASED RISK OF A
SERIOUS ADVERSE EVENT;
o THE CLINICAL TRIAL TO ASSESS SAFETY RECOMMENDED BY FDA MAY
INVOLVE A RELATIVELY HIGH NUMBER OF PATIENTS AND MAY REQUIRE
SUBSTANTIAL RESOURCES AND TAKE YEARS TO COMPLETE;
o UNTIL THE SIZE AND SCOPE OF THE SAFETY TRIAL ARE DETERMINED WITH
FDA, AN ASSESSMENT OF THE ADVISABILITY OF ANY SUCH TRIAL CANNOT
BE MADE;
o ERGO MAY NOT HAVE SUFFICIENT RESOURCES FOR SUCH A SAFETY TRIAL OR
DECIDE, BASED ON ITS BUSINESS JUDGMENT, AGAINST INVESTING IN SUCH
A TRIAL;
o ERGO MAY NOT BE ABLE TO ATTRACT A PARTNER TO ASSIST IN
UNDERTAKING SUCH A SAFETY TRIAL;
o DATA OBTAINED FROM CLINICAL TRIALS ARE SUBJECT TO VARYING
INTERPRETATIONS, AND 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 MARKET IS INTENSE; OTHER
PRODUCTS HAVE BEEN RECENTLY APPROVED FOR THIS INDICATION 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 1990, Ergo Science Corporation ("Ergo" or the "Company") has been
developing ERGOSET-R- tablets for the treatment of metabolic disorders. In the
fourth quarter of 1999, the U.S. Food & Drug Administration ("FDA") issued a
letter stating that the Company's New Drug Application ("NDA") for ERGOSET-R-
tablets for the treatment of type 2 diabetes was "approvable." However, before
ERGOSET-R- tablets can be approved by FDA for marketing, it will be necessary
for Ergo to address FDA concerns relating to the clinical safety of ERGOSET-R-
tablets and other issues, including biopharmaceutics, pharmacology and
toxicology. In its letter, FDA stated that ERGOSET-R- tablets are effective in
the treatment of type 2 diabetes as adjunctive therapy with sulfonylureas. The
letter also stated, however, that data submitted by the Company, including
epidemiology data recently developed by the Company, did not adequately overcome
FDA's concerns about the possible increased risk of a serious adverse event with
the use of ERGOSET-R- tablets in type 2 diabetes patients. To address this
outstanding safety concern, the FDA has recommended that a "large, simple"
placebo-controlled study be undertaken to evaluate whether treatment with
ERGOSET-R- tablets is associated with an increase in the specified serious
adverse event. In the letter, FDA does not provide specifics about the size and
scope of such a clinical trial. The resolution of this safety concern must be
sufficient to support approval in light of a treatment effect which FDA
characterized as small.

From inception through 1999, the Company has been unprofitable.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1999

19
<PAGE>

Total revenues decreased from $18,924,552 in 1998 to $0 in 1999.
Revenues in 1998 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 decreased from $14,549,810 in 1998 to
$2,269,450 in 1999. 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 reduction in costs in 1999 are a result
of the Company's decision to discontinue funding of all of its preclinical
development programs and the closing of the Company's laboratory facility in
June 1999.

General and administrative expenses decreased from $7,558,572 in
1998 to $3,597,382 in 1999. The decrease was principally due to a reduction
in the work force as a result of the aforementioned FDA not-approvable letter
and the Company's decision to discontinue funding of its pre-clinical
development programs.

Interest income decreased from $1,862,453 in 1998 to $1,628,206 in
1999. The decrease in interest income is attributable to a decrease in the
average amounts of cash, cash equivalents and short-term investments during
1999, compared to 1998. The use of cash to fund the Company's operations
resulted in a decrease of cash available for investment.

Net loss decreased from $6,308,897 to $4,238,626 and net loss to
common stockholders decreased from $6,801,125 to $4,760,828 in 1998 and 1999,
respectively. These decreases were mainly due to the reduction in the
Company's workforce and the Company's decision to discontinue funding of its
pre-clinical development program. Net loss per common share decreased from
$.48 in 1998 to $.33 in 1999.

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.

20
<PAGE>

NET OPERATING LOSS CARRYFORWARDS

At December 31, 1999, the Company's reported federal net operating
loss carryforwards were approximately $79 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 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. The agreement was terminated on
January 3, 1999.

Cash, cash equivalents, short-term investments and long-term
investments were $33,713,307 and $30,339,755 at December 31, 1998 and 1999,
respectively. The overall decrease in cash, cash equivalents and short-term
investments at December 31, 1999, was due primarily to the use of cash to fund
the Company's operations including the costs of shutting down its preclinical
development programs, closing its laboratory and reducing staffing levels.

At September 30, 1999, the Company held cash, cash equivalents and
short-term investments of $30,322,678. At December 31, 1999, the Company held
cash, cash equivalents and short-term investments of $22,015,429. In addition,
the Company held long-term investments of $8,324,326 which, together with the
cash, cash equivalents and short-term investments total $30,339,755 at December
31, 1999. The Company has concentrated its efforts on managing its cash burn
rate, while it is considering its strategic alternatives. However, the Company's
cash burn rate is likely to fluctuate from quarter to quarter.

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.

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 appealed this decision within the FDA. In the fourth
quarter of 1999, the Company announced receipt of a letter from the Office of
Drug Evaluation II, Center for Drug Evaluation and Research at the FDA stating
that its NDA for ERGOSET-R- tablets is approvable. However, before
ERGOSET-R- tablets can be approved by FDA for marketing, it will be necessary
for Ergo to address FDA concerns relating to the clinical safety of ERGOSET-R-
tablets and other issues, including biopharmaceutics, pharmacology and
toxicology. In its letter, FDA stated that ERGOSET-R- tablets are effective in
the treatment of type 2 diabetes as adjunctive therapy with sulfonylureas. The
letter also stated, however, that data submitted by the Company, including
epidemiology data recently developed by the Company, did not adequately overcome
FDA's concerns about the possible increased risk of a serious adverse event. In
the letter, FDA does not provide specifics about the size and scope of such a
clinical trial. The resolution of this safety concern must be sufficient to
support approval in light of a treatment effect on HbA1c (blood sugar) which FDA
characterized as small. See "Risk Factors--Ergo May Not Receive Final Marketing
Approval of the NDA for ERGOSET-R- Tablets;" "Risk Factors--Ergo's Business
Faces Significant Government Regulation;" and "Business--Commercialization."

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

21
<PAGE>

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, 1999, the Company's net investment in equipment and
leasehold improvements was $39,759. The Company does not expect to incur
additional equipment and facility costs in the foreseeable future. In 1999, the
Company relocated to a smaller facility in North Andover, Massachusetts. In
conjunction with this move, the Company sold in auction substantially all of its
lab and office equipment. Auction receipts were approximately $300,000. In May
1999 a loss was recorded in the amount of $157,000 as a result of this auction.
In 1998, the Company recorded a $1,042,290 charge as an 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 at December 31, 1998, given the Company's decision to discontinue funding
of its preclinical development program.

The Company expects that its available cash, cash equivalents,
short-term investments, and expected interest income will fund its current
operations through mid-2001. As noted in "Overview", the Company is considering
various alternatives for its ERGOSET-R- program at FDA and various strategic
alternatives for all of its assets, including its ERGOSET-R- rights, its other
intellectual property rights, its cash and other financial attributes. Depending
on the strategic decisions that may be made, the Company's capital requirements
may exceed its current resources. In such a case, the Company will have to seek
additional capital from private or public sources. 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

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, 2000, will have no impact on its consolidated
financial statements.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," which is effective no later than
the quarter ending March 31, 2000. SAB 101 clarifies the SEC's views related to
revenue recognition and disclosure. We will adopt SAB 101 effective in the first
quarter of 2000, and management does not believe the effect will be material.

22
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is not subject to market risk associated with risk
sensitive institutions as the Company does not invest in institutions that are
not United States institutions and does not enter into hedging transactions.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE NO.

<S> <C>
Report of Independent Accountants................................................................................25

Consolidated Balance Sheets as of December 31, 1999 and 1998.....................................................26

Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................27

Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................28

Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997..............29

23
<PAGE>

Notes to Consolidated Financial Statements.......................................................................30

</TABLE>

<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, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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 13, 2000

25
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents..................................... $ 4,292,631 $ 15,715,708
Short-term investments........................................ 17,722,798 17,997,599
Prepaid and other current assets.............................. 27,069 593,125
------------ -------------
Total current assets..................................... 22,042,498 34,306,432
Long-term investments.................................................. 8,324,326 --
Equipment and leasehold improvements, net.............................. 39,759 367,123
Other assets........................................................... 3,318 51,313
------------ -------------

Total assets............................................. $ 30,409,901 $ 34,724,868
============ =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses......................... $ 4,623,668 $ 4,477,254
Current portion of capital lease obligations.................. -- 266,136
------------ -------------
Total current liabilities................................ 4,623,668 4,743,390

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

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, 1999 and 1998
(liquidation preference of $9,096,920 at December 31,
1999).................................................... 6,222,250 5,700,048
Common stock, $.01 par value, authorized 50,000,000 at
December 31, 1999 and 1998; issued and outstanding
14,269,467 and 14,254,467 shares at December 31, 1999
and 1998, respectively................................... 142,695 142,545
Additional paid-in capital.................................... 111,785,322 111,977,063
Cumulative dividends on preferred stock....................... (4,212,683) (3,690,481)
Deferred compensation......................................... -- (390,568)
Accumulated deficit........................................... (88,151,351) (83,912,725)
------------ -------------
Total stockholders' equity............................... 25,786,233 29,825,882
------------ -------------
Total liabilities and stockholders' equity....... $ 30,409,901 $ 34,724,868
============ =============

</TABLE>

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

26
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<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 ........ 2,269,450 14,549,810 13,258,016
Cost of product revenue ......... -- 2,488,520 --
Write-off related to renegotiated
supply agreement ............. -- 2,499,000 --
General and administrative ...... 3,597,382 7,558,572 6,973,776
------------ ------------ ------------
5,866,832 27,095,902 20,231,792
------------ ------------ ------------
Other income
Interest and other income 1,628,206 1,862,453 1,689,252
------------ ------------ ------------
Net loss ............... (4,238,626) (6,308,897) (18,542,540)
Accretion of dividends on preferred stock (522,202) (492,228) (463,968)
------------ ------------ ------------
Net loss to common stockholders .......... $ (4,760,828) $ (6,801,125) $(19,006,508)
============ ============ ============

Net loss per common share
(basic and diluted) ................... $ (0.33) $ (0.48) $ (1.44)
============ ============ ============

Weighted average common shares outstanding
(basic and diluted) .................. 14,255,823 14,087,917 13,212,042
============ ============ ============

</TABLE>

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

27
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
------------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................................ $ (4,238,626) $ (6,308,897) $(18,542,540)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 27,936 1,940,278 1,446,944
Loss on disposal of equipment ................................. 157,332
Noncash compensation .......................................... 186,977 427,944 1,201,495
Noncash charge related to write-off of
renegotiated .................................................. -- 2,499,00 --
supplier agreement
Changes in operating assets and liabilities:
Inventory ................................................... -- 424,320 (424,320)
Prepaid and other current assets ............................ 566,056 (332,517) (26,049)
Other assets ................................................ 47,995 (1,013) (9,314)
Accounts payable and accrued expenses ....................... 146,414 1,555,716 1,173,576
------------ ------------ ------------
Net cash provided by (used in) operating
activities .......................................................... (3,105,916) 204,831 (15,180,208)
------------ ------------ ------------

Cash flows from investing activities:
Purchase of short-term investments .............................. (56,178,270) (65,248,505) (41,330,582)
Purchase of long term investments ............................... (8,324,326) -- --
Proceeds from maturity of short-term ............................ 56,453,071 56,787,901 52,344,568
investments
Purchase of equipment and leasehold
improvements ............................................... (136,949) (165,376) (659,202)
Net proceeds received on sale of equipment ...................... 279,045 -- 6,000
------------ ------------ ------------
Net cash provided by (used in) investing
activities .......................................................... (7,907,429) (8,625,980) 10,360,784
------------ ------------ ------------

Cash flows from financing activities:
Principal payments under capital lease
obligations ................................................... (421,732) (357,712) (236,552)
Proceeds from issuance of common stock .......................... -- 10,000,000 1,500
Proceeds from stock option exercise ............................. 12,000 571,454 910,707
------------ ------------ ------------
Net cash provided by (used in) financing
activities .......................................................... (409,732) 10,213,742 675,655
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents .................................................. (11,423,077) 1,792,593 (4,143,769)
Cash and cash equivalents at beginning of
period .............................................................. 15,715,708 13,923,115 18,066,884
------------ ------------ ------------
Cash and cash equivalents at end of period .......................... $ 4,292,631 $ 15,715,708 $ 13,923,115
============ ============ ============

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

</TABLE>

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

28
<PAGE>

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Preferred Stock Common Stock Additional
--------------- ------------ Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
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
Accretion of dividends on preferred
stock .............................. 522,202
Exercise of stock options ............... 15,000 150 11,850
Cancellation of compensatory of
stock option grants ................ (203,591)
Amortization of deferred compensation ...
Net loss for period .....................
--------------------------------------------------------------
Balance at December 31, 1999 ............ 6,903 $ 6,222,250 14,269,467 $ 142,695 $111,785,332
===== ============ ========== ========= ============

Cumulative Total
Dividends on Deferred Accumulated Stockholders'
Preferred Stock Compensation Deficit Equity
--------------- ------------ ------- ------
<S> <C> <C> <C> <C>
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
Accretion of dividends on preferred
stock .............................. (522,202)
Exercise of stock options ............... 12,000
Cancellation of compensatory of
stock option grants ................ 203,591
Amortization of deferred compensation ... 186,977 186,977
Net loss for period ..................... (4,238,626) (4,238,626)
-----------------------------------------------------------
Balance at December 31, 1999 ............ $ (4,212,683) $ -- $(88,151,351 $ 25,786,233
============ ============ ============ ==============

</TABLE>

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

29
<PAGE>

ERGO SCIENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

RECENT EVENTS

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 50% and discontinued funding of all its pre-clinical
development programs. Based on a vote of its Board of Directors, the Company
appealed the FDA's not-approvable letter for ERGOSET-R- tablets and provided
additional safety data. The Company is also considering other strategic
alternatives.

In the fourth quarter of 1999, the Company announced that it received a
letter from the Office of Drug Evaluation II, Center for Drug Evaluation and
Research at the FDA, stating that its NDA for ERGOSET-R- tablets to treat Type 2
diabetes is approvable. However, before ERGOSET-R- tablets can be approved by
FDA for marketing, it will be necessary for Ergo Science to address FDA concerns
relating to the clinical safety of ERGOSET-R- tablets and other issues,
including biopharmaceutics, pharmacology and toxicology. In its letter, FDA
stated that ERGOSET-R- tablets are effective in the treatment of Type 2 diabetes
as adjunctive therapy with sulfonylureas. The letter also stated, however, that
data submitted by the Company, including epidemiology data recently developed by
the Company, did not adequately overcome FDA's concerns about the possible
increased risk of a serious adverse event with the use of ERGOSET-R- tablets in
type 2 diabetes patients. To address this outstanding safety concern, the FDA
has recommended that a "large, simple" placebo-controlled study be undertaken to
evaluate whether treatment with ERGOSET-R- tablets is associated with an
increase in the specified serious adverse event. In the letter, FDA does not
provide specifics about the size and scope of such a clinical trial. The
resolution of this safety concern must be sufficient to support approval in
light of a treatment effect which FDA characterized as small.

After the Company finalizes with FDA the requirements for the safety
study, the Company will determine how to proceed with its ERGOSET-R- program.
Some of the options at FDA include, without limitation, appealing the FDA letter
with respect to the request for an additional safety trial, requesting a
rehearing before an advisory panel on this issue of whether the additional
safety trial is needed, or considering moving ahead with the requested safety
trial.

In addition to ERGOSET-R- tablets, the Company is analyzing its other
strategic alternatives. The Company is reviewing various alternatives to
determine the best uses of its assets including its cash, its status as a public
company, its financial attributes (including tax attributes), and its
intellectual property assets other than ERGOSET-R- tablets. No decisions have
been made with respect to any of the possible alternatives.

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.

RESEARCH AND DEVELOPMENT COSTS

30
<PAGE>

Research and development costs are expensed as incurred.

CASH EQUIVALENTS AND INVESTMENTS

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

All debt securities are classified as held-to-maturity as 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, 1999 and 1998 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.

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 payments 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's 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, 1999, 1998 and 1997, the Company had 880,225,
1,676,627 and 1,828,894 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.

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 sold in auction substantially all of
its lab and office equipment in the second quarter of 1999. 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. All capital lease
liabilities were paid in full in 1999.

31
<PAGE>

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).

COMPREHENSIVE INCOME

For the years ended December 31, 1999, 1998 and 1997, comprehensive
income was the same as net income.

NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which is effective no later than the quarter ending March 31, 2000.
SAB 101 clarifies the Securities and Exchange Commission's views related to
revenue recognition and disclosure. Ergo will adopt SAB 101 in the first quarter
of 2000, and management does not believe the effect will be material.

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:

1999 1998
---- ----
<S> <C> <C>
Commercial paper........................................ $12,330,312 $ 4,371,496
Federal agency notes.................................... 5,392,486 13,626,103
----------- -----------
Total short-term investments............................ $17,722,798 $17,997,599
=========== ===========

</TABLE>

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,
1999.

3. LONG-TERM INVESTMENTS

Long-term investments with maturity of more than twelve months when
purchased, consist of high-grade commercial paper ($6,577,492) and federal
agency notes ($1,746,834) at December 31, 1999. There were no long-term
investments at December 31, 1998. Long-term investments are stated at amortized
cost plus accrued interest, which approximates market value.

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

1999 1998
---- ----
<S> <C> <C>
Furniture and equipment.......................... $ 67,696 $ 1,554,053
Lab equipment.................................... -- 2,667,132

</TABLE>

32
<PAGE>

<TABLE>

<S> <C> <C>
Leasehold improvements........................... -- 2,045,093
--------- -----------
67,696 6,266,278
Accumulated depreciation and amortization........ (27,937) (5,899,155)
--------- -----------
Equipment and leasehold improvements, net........ $ 39,759 $ 367,123
========= ===========

</TABLE>

Depreciation expense for the years ended December 31, 1999, 1998 and
1999 was $27,937, $1,940,278, and $1,446,944, respectively. The Company sold in
auction substantially all of its lab and office equipment in the second quarter
of 1999. As a result of this auction the Company recorded a loss in the amount
of $157,000, which is a component of general and administrative expense on the
statement of operations. 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, 1999 and 1998 were $0 and $133,751, respectively. See Note 12.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

1999 1998
----- ----
<S> <C> <C>
Accounts payable.................................................... $ 52,169 $ 4,727
Accrued legal costs................................................. 223,409 106,489
Accrued payroll, bonuses and vacation............................... 58,652 382,133
Accrued clinical development costs.................................. -- 164,162
Accrued manufacturing and related items............................. 3,730,000 3,230,000
Accrued other expenses.............................................. 559,438 589,743
----------- -----------

Total accounts payable and accrued expenses.................... $ 4,623,668 $ 4,477,254
=========== ===========
</TABLE>

6. LEASES

The Company leases office space under a lease arrangement which expires
in May 2001. The lease for the Company's office space includes payment terms
that are subject to increases due to taxes and other operating costs of the
lessor. The Company previously leased approximately 30,000 square feet in two
buildings in the Charlestown Navy Yard, Charlestown, Massachusetts. The lease
for approximately 10,000 square feet of space formerly used for research and
development functions expired in June 1999. The Company did not re-lease this
space. The lease for approximately 20,000 square feet, which was used for
administrative functions, was also terminated in June 1999. In addition, the
Company leased certain equipment under lease arrangements which have been
accounted for as capital leases. All of these leases were paid in full by the
Company prior to the auction of the equipment in May 1999 (See Note 4.)

Future minimum commitments, by year and in the aggregate, under the
long-term noncancelable operating lease consist of the following at December 31,
1999:

<TABLE>

<S> <C> <C>
1999.......... $48,808
2000.......... 17,204
-------
$66,012
=======

</TABLE>

33
<PAGE>

Rent expense for the years December 31, 1999, 1998 and 1997 amounted to
$309,601, $591,249, and $668,594, respectively.

Cash paid for interest on capital leases was $44,685, $96,202, and
$144,264 in 1999, 1998 and 1997, respectively.

7. INCOME TAXES

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

1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Equipment and leasehold improvements.......................... $ -- $ 1,045,000
Research and development credits.............................. 3,358,000 2,807,000
Deferred compensation......................................... 75,000 156,000
Intangible amortization....................................... 229,000 251,000
Net operating loss............................................ 31,801,000 29,151,000
------------ -------------
Total deferred tax assets.......................................... 35,463,000 33,410,000
Valuation allowance for deferred tax assets........................ (35,463,000) (33,410,000)
------------ -------------
Net deferred tax assets............................................ -- --
============ =============

</TABLE>

The change in the total valuation allowance for the years ended
December 31, 1999 and 1998 were increases of $2,053,000 and $5,127,000,
respectively.

As of December 31, 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $79 million which
expire through 2019. 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 $9,096,920 as of December 31, 1999.

34
<PAGE>

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. 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 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 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 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, 1999 was
$9,096,920.

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 received written
communication from the FDA approving the NDA of ERGOSET-R- tablets for the
treatment of type 2 diabetes. As a result of the unfavorable recommendation
given by the Endocrinologic and Metabolic Drugs Advisory Committee of the FDA on
May 14, 1998 and the not approvable letter received in November 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.

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 was 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

35
<PAGE>

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, 1999,
1998 and 1997 would have been increased to the pro forma amounts indicated
below:

1999 1998 1997
-------------------------------------------------------------------------------------------
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 $4,760,828 $0.33 $ 6,801,125 $0.48 $19,006,508 $1.44
Pro Forma......... $6,171,980 $0.43 $10,236,854 $0.73 $20,277,206 $1.53

</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
---- ----
<S> <C> <C>
Expected Life.................... 5 years 5 years

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

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

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

</TABLE>

The weighted average fair value of the options granted during 1998 and 1997 was
$3.42, and $6.72 per share, respectively. No stock options were granted in 1999.

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 was amortized to operations over the
four-year vesting period of the options, ending in 1999.

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
vested 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 deferred compensation 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 recorded an additional $245,570 over the next 27 months until that CEO
resigned in March 1999. 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.

36
<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 was amortized on a straight line basis
over 22 months, the life of the consulting agreements. The Company recognized
$55,800, $95,671 and $23,917 in deferred compensation expense related to these
options in 1999, 1998 and 1997, respectively.

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.

During 1999, the Company did not grant any stock options.

Information related to stock option activity for the period from
December 31, 1996 through December 31, 1999 is as follows:

Weighted
Average
Shares Option Price
------ ------------
<S> <C> <C>
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
Granted.............................................. --
Exercised............................................ (15,000) 0.80
Cancelled............................................ (781,402) 9.57
--------- --------
Outstanding at December 31, 1999.......................... 880,225 $ 7.51
--------- --------
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1999:

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 2.35 195,250 3.9 years $ .80 195,250 $ .80

$ 2.36 to 4.70 47,500 8.7 years $ 3.24 18,000 $ 3.24

$ 4.71 to 7.05 310,475 5.8 years $ 6.71 310,475 $ 6.71

$ 7.06 to 9.40 10,000 6.0 years $ 9.00 10,000 $ 9.00

$ 9.41 to 11.75 160,000 7.0 years $10.30 126,250 $ 10.41

</TABLE>

37
<PAGE>

<TABLE>

<S> <C> <C> <C> <C> <C>
$11.76 to 14.10 70,000 7.6 years $13.22 40,000 $ 13.21

$14.11 to 16.45 7.8 years $16.00 5,000 $ 16.00
5,000

$16.45 to 18.80 8.0 years $17.00 24,500 $ 17.00
62,000

$18.81 to 23.50 20,000 6.4 years $21.13 20,000 $ 21.13
------- -------

$ 0.80 to 23.50 880,225 749,475
======= =======

</TABLE>

At December 31, 1999 there were 880,225 options outstanding at a
weighted average price of $7.51 of which 749,475 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 $186,977, $427,944, and $1,201,495 in 1999,
1998 and 1997, respectively.

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, 1999, 1998 and 1997, 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, 2,116,750, and 1,866,750 shares,
respectively (for which common shares have been reserved). Awards of options to
provide 201,000 and 586,600 shares at exercise prices of $3.25 - $17.00 and
$7.00 - $17.00 per share, respectively, were granted under the Incentive Plan in
1998 and 1997, respectively. No awards were made in 1999. These amounts are
included in the tables above.

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 shares at exercise
prices of $3.18 - $13.81 per share were granted under the Incentive Plan in
1998. There were no shares granted in 1999 or 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.

38
<PAGE>

In February 2000, the Company announced that a preliminary ruling had
been made, which relates to a payment received in March 1998 from Johnson &
Johnson for $10 million of the Company's common stock. The Company took the
position that this $10 million is not subject to a royalty to LSU under the LSU
Agreement. LSU had argued to the arbitrator that the Company owes a royalty on
this stock purchase. In the preliminary ruling, the arbitrator has ruled,
contrary to the Company's position, that a royalty is due to LSU on the $10
million received from Johnson & Johnson for the purchase of common stock. The
exact amount of the royalty due to LSU on this $10 million will be dependent on
several factual issues which are in dispute and will be settled by the
arbitrator at a later date.

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 were incurred in 1998 when the
Company entered into leases for lab and office equipment. No noncash lease
obligations were incurred in 1999.

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 service. Years of service prior to the
implementation of the 401k Plan are excluded from the vesting period. In 1999,
1998 and 1997, the Company's contributions to the 401k Plan amounted to $25,275,
$91,333 and $74,014, respectively.

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

None

39
<PAGE>

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 2000 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 2000 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 2000 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 2000 Annual Meeting of
Stockholders is incorporated herein by reference.

40
<PAGE>

PART IV

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

10.2 -- 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.

10.3 -- 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.

41
<PAGE>

10.4 -- 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.

10.5 -- 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.

10.6 -- 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.

10.7 -- 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.

10.8 -- 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.

10.9 -- 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.

10.10 -- 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.

42
<PAGE>

10.11 -- 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.

10.12 -- 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).

10.13 -- 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).

10.14 -- 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.]

10.15 -- 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.]

10.16 -- 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 LLP

27 -- Financial data schedule

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

- None

43
<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 North
Andover and State of Massachusetts on March 30, 2000.

ERGO SCIENCE CORPORATION

By: /s/ J. RICHARD CROWLEY
-----------------------------
J. Richard Crowley

Controller (principal accounting 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.

<TABLE>

<S> <C>
/s/ DAVID R. BURT President, Chief Executive Officer and Director
- -----------------------------------
(David R. Burt) (Principal Executive and Financial Officer)

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

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

/s/ J. RICHARD CROWLEY Controller (principal accounting officer)
- -----------------------------------
(J. Richard Crowley)

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

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

</TABLE>

44
<PAGE>

INDEX TO EXHIBITS

Exhibit
Number Document Description

45
<PAGE>

10.7 -- 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.

10.12 -- 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).

46
<PAGE>

10.16 -- 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 LLP

27 -- Financial data schedule

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-41791) of Ergo Science Corporation (the
"Company") of our report, dated March 13, 2000, relating to the Company's
financial statements, which appears in this Annual Report on Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
March 30, 2000

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4292631
<SECURITIES> 26047124
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22042498
<PP&E> 67696
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