DONLAR CORP, S-1/A, 1997-10-16

DONLAR CORP
S-1/A, 1997-10-16
ADHESIVES & SEALANTS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997

REGISTRATION NO. 333-37579

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

PRE-EFFECTIVE AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER

THE SECURITIES ACT OF 1933

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

DONLAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<C> <C> <C>
ILLINOIS 36-3683785 2899
(State or other jurisdiction (I.R.S. Employer I.D. Number) (Primary Standard Industrial
of incorporation or Classification Code Number)
organization)
</TABLE>

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6502 South Archer Avenue
Bedford Park, Illinois 60501
(708) 563-9200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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

LARRY P. KOSKAN
Chief Executive Officer and President
Donlar Corporation
6502 South Archer Avenue
Bedford Park, Illinois 60501
(708) 563-9200
(Name, address, including zip code, and telephone number, including area code of
agent for service)

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

Copies to:

<TABLE>
<S> <C>
Eric M. Fogel, Esq. Frederick C. Lowinger, Esq.
Holleb & Coff Sidley & Austin
55 East Monroe Street One First National Plaza
Suite 4100 Chicago, Illinois 60603
Chicago, Illinois 60603 (312) 853-7000
(312) 807-4600
</TABLE>

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997

PROSPECTUS

, 1997

DONLAR CORPORATION LOGO

COMMON STOCK

All of the shares of Common Stock, no par value ("Common Stock"),
of Donlar Corporation ("Donlar" or the "Company") offered hereby (the
"Offering") are being sold by the Company.

Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price.

Application will be made to have the Common Stock quoted on the Nasdaq
National Market ("NASDAQ") under the trading symbol "DNLR."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
- ---------------------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the Underwriters.

(2) Before deducting expenses estimated at $ , which will be paid by the
Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover overallotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."

The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the share certificates will be made in New
York, New York, on or about , 1997.

DONALDSON, LUFKIN & JENRETTE SCHRODER & CO. INC.
SECURITIES
CORPORATION
<PAGE> 3

[INSIDE FRONT COVER]

[PHOTOS]

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary information is qualified in its entirety by reference
to, and should be read in conjunction with, the more detailed information and
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. The terms "Donlar" and "Company" when used herein includes Donlar
Corporation and its 90% owned subsidiary, Donlar Pharmaceutical Corporation.
Each prospective investor should read this Prospectus in its entirety. Unless
otherwise indicated, the information contained in this Prospectus: (a) assumes
no exercise of the Underwriters' overallotment option; (b) does not give effect
to the Common Stock issuable upon (i) exercise of the warrants to purchase the
Company's Common Stock outstanding on the date of this Prospectus (except for
the warrants specifically described below) and (ii) exercise of the options
granted or which may be granted under the Company's stock option plans or stock
based incentive plan; and (c) assumes that the following transactions
(collectively, the "Offering Related Transactions") are completed prior to or
concurrent with the consummation of the Offering: (1) a 1 for reverse split of
the Company's Common Stock, (2) the conversion of all shares of the Company's
Series A Preferred Stock into the Company's Common Stock at a conversion ratio
of 1 to 1, (3) the retirement of all shares of all other series of the Company's
preferred stock, (4) the exercise of all warrants for the purchase of Common
Stock that, by their terms, are required to be exercised or forfeited upon the
occurrence of a public offering, and (5) the exchange of convertible debt and
related rights for the payment of cash and issuance of the senior notes and
shares of Common Stock agreed to as part of the 1997 Agreement (as defined in
"Certain Transactions"), all as more fully described herein. Unless otherwise
indicated, capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Prospectus.

THE COMPANY

Donlar is the world leader in the development and marketing of a new family
of environmentally friendly and biodegradable specialty polymers, known as
thermal polyaspartates ("TPA"). TPA is non-hazardous, non-toxic and
hypo-allergenic and has a potentially wide range of applications in
agricultural, industrial and consumer markets. Utilizing its proprietary
technology, the Company develops and markets new agricultural products that
significantly increase the effectiveness of fertilizers and is developing a
similar class of products designed to enhance the efficiency of pesticides. In
each case, TPA is not absorbed by the plant. In addition, the Company develops
products that management believes provide environmentally superior alternatives
to certain existing specialty chemicals used in many consumer and industrial
applications. Through extensive research and development, the Company has
assembled a patent portfolio of over 30 issued patents worldwide that protect
the Company's cost efficient production technology, the resulting products and
their methods of use. In addition, the Company has entered into strategic
alliances and joint development agreements with several companies, including
BASF, FMC Corporation and National Starch and Chemical Company, to increase its
penetration of both the agricultural and specialty chemicals markets. Management
believes that the combination of the Company's commercialization experience with
TPA and its portfolio of patents provides a significant competitive advantage in
pursuing identified market opportunities.

The unique aspect of the Company's technology is that TPA can be used
effectively in a wide range of applications and is environmentally friendly.
This versatility results from TPA's characteristics as a highly active molecule
with strong affinity for surfaces, together with a high capacity for holding
onto water. As a result of their negative electrostatic charge, TPA products
attract or repel particles or surfaces. These key properties make TPA ideal for
attracting and collecting nutrients (crop nutrition), concentrating herbicides
and insecticides (crop protection), controlling mineral scale (water treatment),
inhibiting corrosion (oil field chemicals), acting as a moisture retention agent
(superabsorbents), acting as a moisturizer for hair and skin (personal care),
preventing dirt particles from reattaching to textile surfaces (laundry
detergents) and potentially neutralizing major basic proteins in the human body
(allergy relief). While there are well-established products that currently
perform these functions in non-agricultural applications, TPA products are
readily biodegradable and in many cases provide the same or higher levels of
performance than those products. The Company knows of no existing technology
that provides benefits comparable to those of the Company's products in
agricultural applications.
3
<PAGE> 5

The Company's commercialization efforts have focused on its crop nutrition
products. To support these efforts, the Company has conducted or commissioned
numerous studies and trials on winter wheat over the last three years. These
studies have confirmed the efficacy of the Company's AmiSorb(R) brand products.
Studies over the last two years on corn and cotton have produced similar
results. The purpose of these trials was to assess the efficacy of AmiSorb(R)
products under various agronomic conditions. Some of the variables that impact
the results of these studies and trials include: usage rate, fertility level,
soil type, hybrid type, irrigation vs. non-irrigation and method of application.
Results provide the Company with important information enabling it to refine the
optimum product usage rate and mode of application. During the most recent
growing season, farm field trials on winter wheat were conducted at 56 different
locations in 11 states using AmiSorb(R) products. The use of AmiSorb(R) products
at the currently recommended rate and application method resulted in increased
yields of up to 26 bushels per acre, with an average increase of 8 bushels per
acre, or approximately 18%. Initial farm field trials on corn were conducted in
1996 at 61 different locations in 10 states. Results for the trials demonstrated
yield increases from the use of AmiSorb(R) products of up to 60 bushels per
acre, with an average increase of 12 bushels per acre, or approximately 7%.
Results of the 1997 corn season are not available yet, but early assessments
indicate yield increases equal to or in excess of the prior year's results.
Initial field trials on cotton were also conducted in 1996 at 11 different
locations in 4 states and demonstrated yield increases of up to 690 pounds of
lint per acre, an average of 368 pounds of lint per acre, or approximately 40%.
Results for the 1997 cotton season are not available yet, but early evaluation
indicates yield increases similar to those obtained in 1996. All average
increases referred to in this paragraph were calculated on a per location basis
comparing land plots treated with AmiSorb(R) products to control land plots.

In addition to its performance characteristics, the value of TPA technology
in agricultural applications resides in its environmental friendliness and
biodegradability. The use of TPA in these applications is expected to reduce
specific environmental concerns, including fertilizer leaching and run-off and
accumulation of pesticide residues.

It has been demonstrated that TPA is an effective and environmentally safe
replacement for certain specialty chemical compounds, including polyacrylates,
in many performance chemicals applications. Since polyacrylates and many other
specialty chemicals are not biodegradable, TPA is an attractive alternative,
particularly when used in environmentally sensitive areas. Management estimates
that the world market for polyacrylates for which TPA appears to be a viable
substitute is approximately $2.2 billion annually.

In 1996, the United States Environmental Protection Agency ("EPA") awarded
the Company the first Presidential Green Chemistry Challenge Award in the small
business category for its role in the development, production and application of
TPA as a new and environmentally friendly polymer.

Management believes that the Company's development to date provides it with
a number of unique competitive advantages:

- COMMERCIALLY VIABLE PRODUCTS. The Company has successfully developed and
commercialized products for agricultural and industrial applications. The
efficacy of these products has been established in both laboratory and
field tests. In addition, the Company's strategic alliances and joint
development agreements enhance its ability to increase its penetration of
both the agricultural and specialty chemicals markets.

- ENVIRONMENTALLY FRIENDLY PRODUCTS AND TECHNOLOGY. The Company's products
are non-hazardous, non-toxic, hypo-allergenic and readily biodegradable,
and the TPA manufacturing process produces no harmful or hazardous waste
or emissions. In addition, TPA products are not absorbed by the plants.

- SIGNIFICANT BARRIERS TO ENTRY. Management believes that its extensive
patent portfolio, which covers its proven, cost efficient manufacturing
process, as well as its proprietary technology platform, provide
significant barriers to entry to its potential competitors.

- EXPERIENCED MANAGEMENT TEAM. The Company's management team has an average
of over 25 years experience in the development and marketing of specialty
chemical and agricultural products.
4
<PAGE> 6

The Company was incorporated in Illinois on January 8, 1990. The Company's
principal executive offices are located at 6502 South Archer Avenue, Bedford
Park, Illinois 60501, and its phone number is (708) 563-9200.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............. shares
Common Stock to be outstanding after the
Offering(1)................................... shares
Use of Proceeds................................. The net proceeds from the Offering will be used as
follows: (i) $12 million to fund the cash portion
of the 1997 Agreement described under "Certain
Transactions;" (ii) approximately $25 million to
fund the construction of an L-aspartic acid
manufacturing facility; and (iii) the remainder of
approximately $ million for the build-up of the
Company's sales and distribution network and
various working capital purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... DNLR
</TABLE>

- ------------------------------
(1) Excludes (a) shares of Common Stock issuable upon exercise of
warrants to purchase Common Stock outstanding on the date hereof, but not
required to be exercised or forfeited upon the occurrence of a public
offering, (b) shares of Common Stock issuable upon exercise of
options granted under the Company's stock option plans and (c)
additional shares of Common Stock reserved for issuance under the
Company's stock option plans and stock based incentive plan; and assumes the
completion, prior to or concurrent with the consummation of the Offering, of
all of the Offering Related Transactions. See "Management -- Long-Term
Incentive Plans" and "Recent Transactions."
5
<PAGE> 7

SUMMARY FINANCIAL DATA

The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto appearing elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................. $ -- $ -- $ 10 $ 23 $ 2,142 $ 575 $ 1,387
Gross profit............... -- -- 2 3 75 (111) 240
Loss from operations....... (555) (864) (1,424) (2,025) (10,606) (2,917) (4,356)
Net loss................... (617) (931) (1,522) (1,781) (12,844) (4,161) (6,925)
Net loss per common
share................... $ () $ ()
======== =======
Pro forma net loss......... $( 7,044)(1) $(4,225)(2)
======== =======
Pro forma net loss per
common share(3)......... $ ()(1) $ ()(2)
======== =======
Pro forma weighted average
common shares
outstanding(4):.........
======== =======
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $ 7,578 $
Working capital........................................... 11,334
Total assets.............................................. 26,955
Total long-term liabilities............................... 27,686
Shareholders' equity (deficit)............................ (2,860)
</TABLE>

- ------------------------------
(1) Pro forma net loss for the year ended December 31, 1996 excludes $5.8
million of non-recurring charges, consisting of the following: (i) $942,000
representing the fair value of warrants issued to providers of bridge loan
financing; (ii) $655,000 for the amortization of debt discount and deferred
financing costs incurred in connection with the 1996 Financing; (iii)
$350,000 for imputed interest on the royalty obligation incurred in
connection with the 1996 Financing; and (iv) $3.9 million for warrants to
purchase 712,299 shares of Series A Preferred Stock, with an exercise price
of $0.07 per share, that were issued to a provider of research and
development services. See "Certain Transactions."

(2) Pro forma net loss for the six-month period ended June 30, 1997 excludes
$2.7 million of non-recurring charges, consisting of the following: (i) $1.2
million for inducement warrants and preferred stock issued to holders of
convertible notes; (ii) $983,000 for the amortization of debt discount and
deferred financing costs incurred in connection with the 1996 Financing; and
(iii) $551,000 for imputed interest on the royalty obligation incurred in
connection with the 1996 Financing. See "Certain Transactions."

(3) Pro forma net loss per common share is computed based upon (i) pro forma net
loss as described in Notes (1) and (2) and (ii) pro forma weighted average
common shares as described in Note 4.

(4) Includes the weighted average number of common and common stock equivalents
as further adjusted to reflect all shares of Common Stock issuable in
connection with the Offering Related Transactions, but does not include the
Common Stock offered hereby. See "Recent Transactions" and "Certain
Transactions."

(5) Pro forma as adjusted to give effect to the Offering Related Transactions
and the sale of shares of Common Stock offered hereby at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses as described in
"Use of Proceeds."
6
<PAGE> 8

RISK FACTORS

This Prospectus contains certain forward looking statements within the
meaning of the federal securities laws. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. Actual results and the timing of certain events
could differ materially from those expressed in, or implied by, the
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Prospectus. Prospective purchasers of the shares of
Common Stock offered hereby should carefully consider those factors in
evaluating an investment in the Common Stock.

EARLY STAGES OF DEVELOPMENT OF THE COMPANY'S PRODUCTS

The Company was founded in 1990 and until 1996 was engaged principally in
research and development activities. While the Company has commenced marketing
its TPA products in the crop nutrition area, it is in the early stages of
commercialization and has only a limited number of product offerings, and
potential product applications are in various stages of development. As a
result, the Company's TPA products have been sold only in limited quantities and
there can be no assurance that a significant market will develop for such
products with respect to any of their potential applications. The Company's crop
nutrition products have been used commercially for only a short period of time:
three years with respect to winter wheat and two years each with respect to corn
and cotton. Current and potential customers in the agricultural, performance
chemicals and other fields in which the Company's products have potential
applications require predictable and consistent performance. Although certain
products incorporating the Company's TPA technology have passed product
performance and reliability testing in both laboratory and commercial use, there
can be no assurance that they will continue to do so consistently in the future,
will meet future customer performance standards or will offer sufficient price
or performance advantages required to achieve commercial success. The Company's
failure to develop, manufacture and commercialize TPA products on a timely and
cost effective basis would have a material adverse effect on the Company's
business, results of operations and financial condition.

ACCEPTANCE BY AGRICULTURAL CUSTOMERS

The Company's future success depends largely on acceptance of its TPA
technology by agricultural customers and the ability of the Company to educate
those customers about the proper methods and rates of application required to
obtain the levels of increased yield that its TPA products are capable of
generating. Traditionally, agricultural end users have been slow to adopt new
technologies until their consistent effectiveness and economic value have been
evidenced over several growing seasons. Successful introduction of the Company's
products will also depend to a large extent on recommendations of prior users.
Although the Company's research data has shown that the Company's crop nutrition
products result in increased yields, the level of such increase and, thus, the
economic return from use of such products, depends on the method and rate of
application and the type of crop and prevailing weather and soil conditions.
There can be no assurance that the Company will be able to demonstrate that the
purchase of the Company's crop nutrition products will be consistently cost
effective for the intended users.

As a result of the unique and innovative aspects of the Company's crop
nutrition products, those products have been the subject of numerous
agricultural industry media reports and articles. Some of these reports and
articles have been favorable, and some have been unfavorable. Of those that are
unfavorable, the Company attributes some of the adverse critical comment to
natural skepticism associated with new products and technologies, competitive
issues, and the limited number, and general public unavailability, of farm field
trial results. In addition, while some reported university studies have
suggested inconsistent performance results from the Company's products,
management believes that these results may have been affected by nonconformity
with the recommended methods and rates of application and by such variables as
weather and soil conditions. Further, the purpose of many of these studies was
to establish recommended methods and rates of application, rather than
validating the product's effectiveness. The Company's future success will
depend, in large part, on its ability to replicate its field trial successes on
an expanding scale in each crop growing season and to publicly disseminate the
results of those trials, not only to agricultural industry media, but also
directly to potential end users. There can be no assurance that the Company will
be successful in overcoming user resistance resulting from adverse publicity
regarding its products.

7
<PAGE> 9

DEPENDENCE ON PATENTS AND PROTECTION OF PROPRIETARY INFORMATION

The Company's success will depend, in part, on its ability to obtain patent
protection for its TPA processes, materials, and methods of use, to preserve its
trade secrets, and to operate without infringing the patent or other proprietary
rights of others. The Company has been granted 26 United States patents, has
received Notices of Allowances of Patentability for three additional United
States patents and has filed 12 applications for other United States patents.
Each time that the Company files a patent application in the United States, it
files similar applications in foreign jurisdictions that the Company believes
are important to its future business and that afford reasonable protection to
intellectual property rights. The Company has been granted 8 foreign patents,
including patents granted by the European Community, South Africa, Israel,
Japan, Mexico and Egypt, and currently has numerous patent applications pending
in such jurisdictions. No assurance can be given that the patent applications
filed by the Company will result in issued patents or that the scope and breadth
of any claims allowed in any patents issued to the Company will exclude
competitors or provide competitive advantages to the Company. In addition, there
can be no assurance that any patents issued to the Company will be held valid if
subsequently challenged, that others will not claim rights in the patents and
other proprietary technology owned by the Company, or that others have not
developed or will not develop similar products or technologies without violating
any of the Company's proprietary rights. The Company's inability to obtain
patent protection, preserve its trade secrets or operate without infringing the
proprietary rights of others, as well as the Company's loss of any rights to
technology that it now has or acquires in the future, could have a material
adverse effect on the Company's business, results of operations and financial
condition.

Litigation, which could result in substantial cost to, and diversion of
effort by, the Company, may be necessary to enforce patents issued to the
Company, to defend the Company against infringement claims made by others, or to
determine the ownership, scope or validity of the proprietary rights of the
Company and others. An adverse outcome in any such litigation could subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from third parties, and/or require the Company to cease using certain
technology, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company may also
become involved in interference proceedings declared by the United States Patent
and Trademark Office ("PTO") in connection with one or more of the Company's
patents or patent applications to determine priority of invention. Any such
proceeding could result in substantial cost to the Company, as well as a
possible adverse decision as to priority of invention of the patent or patent
application involved. In addition, the Company may become involved in reissue or
reexamination proceedings in the PTO in connection with the scope or validity of
the Company's patents. Any such proceeding could have a material adverse effect
on the Company's business, results of operations and financial condition, and an
adverse outcome in such proceeding could result in a reduction of the scope of
the claims of any such patents or such patents being declared invalid. In
addition, from time to time, to protect its competitive position, the Company
may initiate reexamination proceedings in the PTO with respect to patents owned
by others. Such proceedings could result in substantial cost to, and diversion
of effort by, the Company, and an adverse decision in such proceedings could
have a material adverse effect on the Company's business, results of operations
and financial condition.

The Company also relies on trade secrets and proprietary know-how in the
conduct of its business and uses employee and third-party confidentiality and
non-disclosure agreements to protect such trade secrets and know-how. There can
be no assurance that the obligation to maintain the confidentiality of such
trade secrets or proprietary information will not wrongfully be breached by
employees, consultants, advisors or others, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets or proprietary
know-how will not otherwise become known or be independently developed or
discovered by third parties. See "Business -- Patents."

ACCEPTANCE BY PERFORMANCE CHEMICALS CUSTOMERS

While the Company believes that its TPA products are efficient and
effective substitutes for certain existing polyacrylate and other products used
in performance chemicals applications, the Company's success in marketing its
products will depend on the Company's ability to sell its products profitably at
competitive

8
<PAGE> 10

prices, as well as on demand for products that do not harm the environment.
L-aspartic acid is the principal raw material used in the manufacture of the
Company's TPA products. The Company believes that it will need to construct an
L-aspartic acid production plant in order to be able to consistently obtain
L-aspartic acid at costs that will permit it to competitively price certain of
its performance chemicals products. In addition, in order to fully commercialize
TPA products cost effectively in certain performance chemicals applications, the
Company will need to construct an as yet undesigned liquid process and
derivatives manufacturing facility. If the Company is unable to construct or
operate either such manufacturing facility cost effectively, the Company may not
be able to effectively compete in certain performance chemicals markets. See
"Business -- Raw Materials," "Business -- Performance Chemicals Applications --
Targeted Applications" and "Business -- Manufacturing and Facilities."

ACCESS TO RAW MATERIALS AT FAVORABLE PRICES

The primary raw material in the Company's TPA products is L-aspartic acid.
Because L-aspartic acid accounts for such a large percentage of the Company's
costs, any material increase in the price of this raw material could have a
material adverse effect on the Company. There are only a limited number of
suppliers of L-aspartic acid worldwide and substantially all of the commercially
available L-aspartic acid is produced by non-domestic sources. The Company
purchases primarily from sources in the People's Republic of China (the "PRC").
The "Most Favored Nation" trade status of the PRC was last renewed in July 1997
and is reviewed on an annual basis. To the extent that the PRC ceases to have
Most Favored Nation trade status, or its exports become subject to political
retaliation, the cost of importing L-aspartic acid from the PRC could increase
significantly. While management believes that the world supply of L-aspartic
acid is sufficient to meet the Company's needs over the near term, management
also believes that, by the year 2000, the Company will require amounts of
L-aspartic acid exceeding the current annual world merchant supply. It is thus
important for the Company's long-term growth that it secure a low cost and
consistent supply of L-aspartic acid. See "Business -- Raw Materials."

NEED FOR ADDITIONAL CAPITAL AND UNCERTAINTY OF ADDITIONAL FINANCING

The Company believes that funds from operations, cash on hand and the net
proceeds of the Offering will be adequate to fund the Company's operating plans
for the foreseeable future. The Company believes that its future capital
requirements may depend on many factors, including its ability to meet its
performance goals, continued progress in its research and development and
product testing programs, the magnitude of these programs, the costs necessary
to increase the Company's manufacturing capabilities and to market any resulting
product applications, and customer acceptance of the Company's current and
potential product applications. Additional factors that may affect the Company's
future capital requirements are the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patents and other proprietary rights, the
ability of the Company to establish collaborative relationships and the amount
and timing of future revenues. Depending on its requirements, the Company may
seek additional funding through public or private debt or equity financing.
There can no assurance that such additional financing will be available on
acceptable terms or at all. Inadequate funding could impair the Company's
ability to compete in the marketplace. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

COMPETITION

While the Company is not aware of any technology directly competitive with
the Company's TPA products in the agricultural field, in the performance
chemicals field there is substantial competition, primarily from polyacrylates,
but also from other manufacturers of polyaspartates such as Bayer and Rohm &
Haas using production methods that may be outside the scope of the Company's
production patents and in target applications that may be outside the scope of
the Company's methods of use patents. The producers of polyacrylates, primarily
BASF and Rohm & Haas, have substantially greater financial and technical
resources, larger research and development staffs, and greater manufacturing and
marketing capabilities than the Company. There can be no assurance that the
Company's performance chemicals products will compete effectively against
products produced by such competitors. The failure of the Company to effectively
compete

9
<PAGE> 11

could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Competition."

LIMITED MANUFACTURING CAPACITY AND EXPERIENCE

The Company's success will depend, in part, on its ability to manufacture
its products in significant quantities, with consistent quality, at acceptable
costs and on a timely basis. The Company has limited experience in high-volume
manufacturing. With respect to its Peru, Illinois manufacturing facility, the
Company may incur significant start-up costs and unforeseen expenses in bringing
that facility on line. In addition, the Company will need to add new
manufacturing equipment to its Peru facility in the near future in order to
manufacture sufficient quantities of its products. The Company also anticipates
constructing an L-aspartic acid manufacturing facility beginning in 1998, with
expected completion in 2000. No assurance can be given that the Company will be
able to successfully make the transition to high volume polyaspartate production
or construct and operate an L-aspartic acid facility on a timely or economical
basis. See "Business -- Manufacturing and Facilities."

RELIANCE ON A SINGLE MANUFACTURING FACILITY

With the exception of the pilot plant located at the Company's headquarters
in Bedford Park, Illinois, the Company's Peru, Illinois plant is the Company's
sole manufacturing facility and the only facility capable of producing the
Company's products in quantities sufficient to meet the Company's projected
needs. Any material disruption in the Peru plant's operations, whether due to
fire, natural disaster, or otherwise, could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business -- Manufacturing and Facilities."

ABSENCE OF OPERATING PROFITS

The Company has only a limited operating history. The Company has incurred
a net loss in each year since its founding, and as of June 30, 1997, had an
accumulated deficit of $25.5 million. The Company expects to continue to incur
operating losses over the near term. The Company's ability to achieve
profitability will depend on many factors, including the Company's ability to
develop, manufacture, introduce and market commercially acceptable products
based on the Company's TPA technology. There can be no assurance that the
Company's products will be introduced or marketed successfully or that the
Company will ever achieve a profitable level of operations or, if profitability
is achieved, that it can be sustained. See "Management's Discussions and
Analysis of Financial Condition and Results of Operations" and "Business."

UNCERTAINTY OF REGULATORY APPROVALS

The Company's crop nutrition products may not be distributed in the various
states without regulatory approval by the applicable state agricultural agency.
Obtaining such approval generally requires that the Company demonstrate that its
products are safe and efficacious over a defined time period. Although the
Company has already obtained such approvals for its crop nutrition products from
the applicable agencies of 45 states, it has not received approvals from the
agriculturally significant states of California, Iowa or Mississippi because it
has not yet been able to provide performance data spanning a sufficient number
of years. Though the Company has no reason to believe that such approvals will
not be granted, there can be no assurance that such approvals will be granted on
a timely basis, if at all. In addition, the Company's products are subject to
approval by foreign regulatory authorities. See "Business -- Government
Regulation."

RELIANCE ON SINGLE TECHNOLOGY

Although the Company has obtained numerous patents covering manufacturing
processes, composition and methods of use, all of the Company's products are
based on its TPA technology. The fields in which the Company intends to sell its
products are highly competitive and intensive research and development is always
being undertaken by governmental entities, educational institutions and private
enterprises with respect to products having practical effects such as those of
certain of the Company's products. There can be no assurance that competitive
products will not be introduced by third parties or that competing materials
based

10
<PAGE> 12

on different or new technologies may not become commercially available. There
can be no assurance that the Company's competitors will not succeed in
developing or marketing materials, technologies or products that exhibit
superior performance or are more commercially desirable or more cost effective
than those developed and marketed by the Company. Any of the foregoing could
have a material adverse effect on the Company's business, results of operations
and financial condition.

RISKS ASSOCIATED WITH RAPID GROWTH

The Company's rate of growth has placed and will place significant demands
on the Company's management, as well as its administrative, operational and
financial resources. The Company's ability to manage its growth will require the
Company to continue to implement new, and improve existing, operational,
financial and management information systems. The Company's success will depend,
in large part, upon its ability to attract and retain highly qualified research
and development, management, manufacturing and marketing and sales personnel and
to continue to motivate and manage its work force, particularly its sales force.
If the Company is unable to effectively manage any of these factors, the
Company's business, its financial condition and results of operations could be
materially and adversely affected. No assurance can be given that the Company
will continue to experience growth or that the Company will be successful in
managing its growth, if any.

LIMITED MARKETING EXPERIENCE

While the Company's sales force has experience in marketing products to
agricultural end users, the Company has limited experience in marketing and
selling its TPA products. To market its products effectively, the Company will
be required to develop an expanded marketing and sales force that can
effectively demonstrate the advantages of, and recommended methods and rates of
application for, its TPA product applications. The Company's crop nutrition
products will also rely heavily on the availability of recommendations of prior
users. The Company currently maintains arrangements with third parties for
distribution of certain of its TPA products in the performance chemicals field
and expects to enter into additional arrangements with third parties for the
commercialization and marketing of its products. The Company's future success
will depend in part on its continued relationships with distributors, its
ability to enter into other similar arrangements, the continuing interest of the
Company's distributors in current and potential product applications and,
eventually, the distributors' success in marketing and willingness to purchase
the Company's products. There can be no assurance that the Company will be
successful in its marketing efforts, that it will be able to establish adequate
sales and distribution capabilities, that it will be able to enter into or
maintain marketing or distribution arrangements with third parties on
financially acceptable terms or that any third parties with whom it enters into
such arrangements will be successful in marketing the Company's products.

RELIANCE ON KEY PERSONNEL

The Company's principal executive officers have an average of over 25 years
of collective experience in chemicals research, development and sales. The loss
of the services of any of the Company's executive officers or other key
personnel, or the failure of the Company to attract and retain other skilled and
experienced personnel on acceptable terms, could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Management."

CUSTOMER CONCENTRATION

The Company has only recently begun commercial sales of its products. The
Company sells its crop nutrition products primarily to agricultural
distributors. A relatively small number of such distributors account for a
disproportionately large portion of sales to date. For the six months ended June
30, 1997, one such distributor accounted for approximately 30% and another for
approximately 10% of the Company's sales of crop nutrition products. While the
Company expects to significantly increase its sales in this product line, these
sales may continue to be concentrated among a relatively small group of
customers. Thus, the loss of any single customer could have a material adverse
effect on the Company, its results of operations and its financial condition.

11
<PAGE> 13

MARKETS FOR CROP NUTRITION PRODUCTS ARE SEASONAL AND VOLATILE

Demand for the Company's crop nutrition products can be expected to be
significantly affected by agricultural conditions, which can be unpredictable
and volatile as a result of a number of factors. The most important factors are
weather conditions and patterns, current and projected grain stocks and prices,
and governmental agricultural policies, including those that directly or
indirectly influence the number of acres planted, the level of grain stocks, the
mix of crops planted, and crop prices. Because of its dependence on agricultural
markets, the Company's crop nutrition business is seasonal and the Company's
operating results may vary significantly from quarter to quarter. See "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality; Quarterly Results."

ENVIRONMENTAL AND OTHER REGULATORY MATTERS

Like other manufacturers, the Company is subject to a broad range of
federal, state, local and foreign laws and requirements, including those
governing discharges to the air and water, the handling and disposal of solid
and hazardous substances and wastes, the remediation of contamination associated
with the release of hazardous substances, work place safety and equal employment
opportunities. The Company has made, and will continue to make, expenditures to
comply with such laws and requirements. The Company believes, based on
information currently available to management, that it is in compliance with
applicable environmental and other legal requirements and that it will not
require material capital expenditures to maintain compliance with such
requirements in the foreseeable future.

Governmental authorities have power to enforce compliance with such laws
and regulations, and violators may be subject to penalties, injunctions or both.
Third parties may also have the right to enforce compliance with such laws and
regulations. As the Company develops new formulations for its TPA products and
combines its TPA with other products, such as herbicides and insecticides, those
products may become subject to additional review and approval requirements
governing the sale and use of products such as those produced by the Company.
The Company's manufacturing processes do not currently result in the generation
of hazardous wastes. However, there can be no assurance that this will always be
the case, and there can be no assurance that material costs or liabilities will
not be incurred by the Company as a result. It is also possible that other
developments, such as additional or increasingly strict requirements of laws and
regulations of these types, or enforcement policies thereunder, could
significantly increase the Company's costs of operations. See "Business --
Government Regulation."

LIABILITY RISK

Products sold by the Company may expose it to potential liability for
personal injury or property damage claims relating to the use of those products,
particularly if used in a manner not in conformity with the Company's
instructions. Although product liability claims historically have not had a
material adverse effect on the Company, there can be no assurance that the
Company will not be subject to or incur liability for such claims in the future.
The Company does not currently maintain third party product liability insurance
and there can be no assurance that such insurance will be available on
economically reasonable terms. A significant claim that is uninsured or
partially insured could result in loss or deferral of revenues, diversion of
resources, or damage to the Company's reputation, any of which could have a
material adverse effect on the Company's business, operating results, and
financial condition.

CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS

Following the completion of this Offering, the Company's officers,
directors and principal shareholders will own approximately % of the
outstanding Common Stock and will be able to elect all of the directors of the
Company. See "Principal Shareholders" and "Description of Capital Stock."

ABSENCE OF PRIOR PUBLIC MARKET; PUBLIC VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or can be sustained after the Offering. The initial public

12
<PAGE> 14

offering price for the Common Stock has been determined by negotiations between
the Company and the Underwriters based on several factors and may not be
indicative of the price that may prevail in the public market. The stock market
has from time to time experienced significant price and volume fluctuations that
may be unrelated to the operating performance of any particular company. In
particular there has been significant volatility in the market price of
securities of technology companies that, like the Company, are still primarily
engaged in product development activities. Factors such as the announcement of
technology innovations and new product applications by the Company or its
competitors, disputes relating to patents and proprietary rights, changes in
financial estimates by securities analysts, failure to meet earnings
expectations of the market or of analysts, general market conditions and
fluctuations in quarterly operating results may have a significant impact on the
market price of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such a company. Any such litigation
initiated against the Company could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect the market price of the Common Stock. Upon
completion of the Offering, the Company will have shares of Common Stock
outstanding. Of these shares, the shares of Common Stock sold in the
Offering will be freely tradeable in the market, except for shares purchased by
"affiliates" of the Company, which will be subject to the resale limitations,
excluding the holding period requirement, of Rule 144 under the Securities Act
of 1933. Certain officers, directors and shareholders of the Company, who in the
aggregate hold shares of Common Stock and warrants and options to acquire
an aggregate of shares of Common Stock, and the Company have agreed not to
sell any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"). The Company believes that, following expiration
of the 180 day period, of those shares will be eligible for immediate
resale in the public market, subject to Rule 144 resale limitations. Further,
the exercise of registration rights by certain of the Company's significant
shareholders would permit such persons to sell shares of Common Stock upon
registration without regard to the limitations of Rule 144. The Company has
granted registration rights covering a total of shares of Common Stock. See
"Shares Eligible for Future for Sale" and "Certain Transactions."

ABSENCE OF DIVIDENDS

The Company intends to retain its earnings to finance its growth and for
general corporate purposes. Consequently, it does not anticipate paying any cash
dividends in the foreseeable future. In addition, any credit agreements to which
the Company becomes a party in the future may contain limitations on the payment
of cash dividends and other distributions of assets. Further, the 1997 Agreement
prohibits the payment of such dividends. See "Dividend Policy."

DILUTION

Purchasers of the securities offered hereby will experience an immediate
substantial dilution in the net tangible book value of their investment. See
"Dilution."

13
<PAGE> 15

RECENT TRANSACTIONS

Prior to or concurrent with the consummation of the Offering, the following
transactions will be completed: (i) a 1 for reverse split of the Common Stock;
(ii) the conversion of all outstanding shares of the Company's Series A
Preferred Stock into shares of the Common Stock at a 1 to 1 conversion ratio;
(iii) the retirement of all shares of all other series of the Company's
preferred stock; and (iv) the transactions called for by the 1997 Agreement. See
"Certain Transactions." In addition, the Company anticipates that warrants for
the purchase of an aggregate of 661,494 shares of the Common Stock will be
exercised on or prior to consummation of the Offering, as such warrants must be
exercised or forfeited upon the occurrence of a public offering by the Company.
All of the foregoing transactions are referred to herein collectively as the
"Offering Related Transactions."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
being offered hereby, at an assumed initial public offering price of $ per
share, are estimated to be approximately $ million ($ million if the
Underwriters' overallotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company.

The Company intends to use $12 million of the net proceeds of the Offering
to fund the cash portion of the 1997 Agreement. In addition, the Company will
utilize approximately $25 million to fund the construction of a facility for
manufacturing L-aspartic acid, in order to secure a consistent low-cost supply
of this key raw material for the production of TPA. The remaining net proceeds
of approximately $ million will be used to fund the build-up of its sales
and distribution network and for various working capital purposes. Pending such
uses, the Company plans to invest the net proceeds in investment grade,
interest-bearing securities.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends or other distributions on
its Common Stock in the forseeable future, but intends instead to retain any
future earnings for reinvestment in its business. In addition, the payment of
cash dividends by the Company is prohibited by the 1997 Agreement so long as 25%
or more of the shares owned by the 1996 Investors continue to be owned by the
1996 Investors or certain transferees. Subject to any contractual restrictions,
any future determination to pay cash dividends will be at the discretion of the
Company's Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors as
the Company's Board of Directors deems relevant. There can be no assurance that
the Company will determine to pay any cash dividends in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

14
<PAGE> 16

CAPITALIZATION

The following table sets forth as of June 30, 1997, (i) the actual cash,
cash equivalents and short-term investments and total capitalization of the
Company and (ii) such cash, cash equivalents and short-term investments and
capitalization on a pro forma basis as adjusted to give effect to (a) the
Offering Related Transactions and (b) the sale by the Company of shares of
the Common Stock offered hereby at an assumed initial public offering price of
$ per share (after deducting estimated underwriting discounts and
commissions and expenses) and the application of the net proceeds therefrom as
described under "Use of Proceeds." The foregoing should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Recent Transactions," and the Consolidated Financial Statements
and notes thereto, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $ 7,578 $
======== =======
Debt:
Convertible debt(1)....................................... $ 23,471 $ --
Current portion of royalty obligation(1).................. 101 --
Royalty obligation, net of current maturities(1).......... 4,215 --
Senior note............................................... -- 11,000
-------- -------
Total debt............................................. 27,787 11,000
-------- -------
Shareholders' equity (deficit):
Common Stock, no par value, 60,000,000 shares authorized;
188,323 shares issued and outstanding, issued and
outstanding, as adjusted............................... 51
Series A Preferred Stock, no par value, 38,000,000 shares
authorized; 19,064,905 shares issued and
outstanding(2)......................................... 16,536 --
Series B Preferred Stock, no par value, 6,020,000 shares
authorized; 0 issued and outstanding(3)................ -- --
Series C Preferred Stock, no par value, 6,020,000 shares
authorized; 6,019,531 issued and outstanding(3)........ 1 --
Additional paid-in capital(1)............................. 6,489
Accumulated deficit(1).................................... (25,525)
Shareholder note receivable............................... (412)
-------- -------
Total shareholders' equity (deficit)................... (2,860)
-------- -------
Total capitalization........................................ $ 24,927 $
======== =======
</TABLE>

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

(1) Pro forma as adjusted to give effect to the transactions contemplated by the
1997 Agreement. See Note 18 of "Notes to Consolidated Financial Statements."

(2) All outstanding shares to be retired upon conversion to or exchange for
Common Stock at the closing of the Offering.

(3) All outstanding shares to be retired upon closing of the Offering.

15
<PAGE> 17

DILUTION

As of June 30, 1997, the pro forma net tangible book value (deficit) of the
Company was $( ) or $( ) per share of Common Stock outstanding. Net
tangible book deficit per share is determined by dividing the tangible net
deficit of the Company (tangible assets less liabilities) by the number of
shares of Common Stock outstanding. After giving effect to the Offering, the
Offering Related Transactions, and the use of proceeds as described herein, the
pro forma net tangible book value of the Company at June 30, 1997 would have
been approximately $ million or $ per share of Common Stock. This
represents an increase in net tangible book value of $ per share of Common
Stock for existing shareholders of the Company and an immediate dilution of
$ per share of Common Stock to new shareholders at the assumed public
offering price. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)....... $
Pro forma net tangible book value (deficit) per
share before the Offering......................... $
Increase in pro forma net tangible book value per
share attributable to new shareholders............
--------
Pro forma net tangible book value per share after the
Offering...............................................
--------
Dilution in net tangible book value per share to
new shareholders....................................... $
========
</TABLE>

- ------------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses to be paid by the Company.

The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the existing shareholders and new shareholders with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
(before deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>

Existing shareholders.................. % $ % $
New shareholders.......................
--- --- ---- --- ------
Totals............................ % $ % $
=== === ==== === ======
</TABLE>

The foregoing calculations do not give effect to, as of June 30, 1997, (i)
shares of Common Stock issuable upon the exercise of outstanding warrants
at a weighted average exercise price of $ per share and (ii)
shares of Common Stock issuable upon the exercise of outstanding options at a
weighted average exercise price of $ per share. The foregoing also does not
give effect to shares of Common Stock reserved for issuance upon the
exercise of options that may be granted in the future under the Company's stock
option plans and stock-based incentive plans. See "Capitalization,"
"Management -- Long-Term Incentive Plans," "Description of Capital Stock" and
Note 10 of "Notes to Consolidated Financial Statements."

16
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements and related notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data set forth below for the year ended December 31,
1996 and the balance sheet data as of December 31, 1996 are derived from the
financial statements of the Company audited by Arthur Andersen LLP which are
included elsewhere in this Prospectus. The selected statement of operations data
for the years ended December 31, 1992, 1993, 1994 and 1995 and the balance sheet
data as of December 31, 1992, 1993, 1994 and 1995 are derived from financial
statements of the Company audited (in the case of the 1993, 1994 and 1995 data)
and compiled (in the case of the 1992 data)by Mulcahy, Pauritsch, Salvador & Co.
Ltd. The statement of operations data for the years ended December 31, 1992 and
1993, and the balance sheet data as of December 31, 1992, 1993 and 1994 are not
included in this Prospectus. The selected financial data for the six month
periods ended June 30, 1996 and 1997 have been derived from unaudited financial
statements of the Company which, in the opinion of management, include all
adjustments (consisting of normal and recurring adjustments) which are necessary
to present fairly the results of these interim periods. Results for the six
months ended June 30, 1997 are not necessarily indicative of results to be
expected during the remainder of the current fiscal year or for any future
period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ -- $ -- $ 10 $ 23 $ 2,142 $ 575 $ 1,387
Cost of products sold................... -- -- 8 20 2,067 686 1,147
------ ------- ------- ------- -------- ------- -------
Gross profit (loss)..................... -- -- 2 3 75 (111) 240
Selling, general and administrative
expenses.............................. 361 439 705 1,027 5,643 2,054 3,543
Research and development................ 194 425 721 1,001 5,038 752 1,053
------ ------- ------- ------- -------- ------- -------
Loss from operations.................... (555) (864) (1,424) (2,025) (10,606) (2,917) (4,356)
Interest income......................... 5 21 15 100 410 70 271
Interest expense........................ (67) (88) (113) (367) (2,648) (1,314) (2,840)
Research income......................... -- -- -- 511 -- -- --
------ ------- ------- ------- -------- ------- -------
Net loss................................ $ (617) $ (931) $(1,522) $(1,781) $(12,844) $(4,161) $(6,925)
====== ======= ======= ======= ======== ======= =======
Net loss per common share............... $( ) $( )
======== =======
Pro forma net loss...................... $ (7,044)(1) $(4,225)(2)
======== =======
Pro forma net loss per common
share(3).............................. $( )(1) $( )(2)
======== =======
Pro forma weighted average common shares
outstanding(4)........................
======== =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $ 857 $ 281 $ 37 $ 2,563 $ 14,793 $ 878 $ 7,578
Working capital (deficit)............... 357 (486) (583) 2,126 14,044 (2,121) 11,334
Total assets............................ 1,131 935 1,264 4,193 27,352 5,170 26,955
Total long-term liabilities............. 1,010 1,059 1,814 6,432 32,519 6,482 27,686
Total shareholders' (deficit)........... (521) (1,019) (1,228) (2,992) (9,556) (6,007) (2,860)
</TABLE>
- ------------------------------
(1) Pro forma net loss for the year ended December 31, 1996 excludes $5.8
million of non-recurring charges, consisting of the following: (i) $942,000
representing the fair value of warrants issued to providers of bridge loan
financing; (ii) $655,000 for the amortization of debt discount and deferred
financing costs incurred in connection with the 1996 Financing; (iii)
$350,000 for imputed interest on the royalty obligation incurred in
connection with the 1996 Financing; and (iv) $3.9 million for warrants to
purchase 712,299 shares of Series A Preferred Stock, with an exercise price
of $0.07 per share, which were issued to a provider of research and
development services. See "Certain Transactions."

(3) Pro forma net loss per common share is computed based upon (i) pro forma net
loss as described in Notes (1) and (2) and (ii) pro forma weighted average
common shares as described in Note 4.

17
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained elsewhere in this
Prospectus.

OVERVIEW

The Company is the world leader in the development and marketing of thermal
polyaspartates, a new family of biodegradable, environmentally friendly polymers
with applications in agricultural, industrial and consumer markets. The
principal agricultural product is a crop nutrient absorption enhancer, sold
under the brand name AmiSorb(R), which has been shown to increase the
effectiveness of applied fertilizers. The Company is also developing products
using TPA that are designed to enhance the efficiency of herbicides and
insecticides, reducing the overall amounts of those products introduced into the
environment. The Company's performance chemical products are designed to be
replacements for certain existing chemicals, primarily nonbiodegradable
polyacrylates. Sales in the performance chemicals area have been limited thus
far to the water treatment and secondary oil recovery markets.

The Company was founded in 1990. Prior to 1995, the Company was considered
a development stage company for financial reporting purposes, as it was engaged
primarily in developing its products and identifying potential markets for those
products. The Company has begun the commercialization of TPA in various
applications, but only since 1996 has it had significant sales activity.
Manufacturing activity has thus far been limited to production at the pilot
plant in Bedford Park, Illinois. As of June 30, 1997, the Company had invested
$8.9 million for the construction of a new production plant in Peru, Illinois.
Since that date, the Company has invested an additional $1.3 million to complete
the plant. The facility is currently undergoing break-in and ramp up leading to
full operational activity of its one installed chemical reactor, which is
anticipated to be achieved in early 1998. The Peru plant is designed to
accommodate up to four additional chemical reactors, with a maximum combined
annual production capacity of 150 million pounds of TPA.

The Company historically has been financed by the sale of private equity
and convertible debt. In August 1996, the Company completed a $26 million
private placement of securities, including convertible debt, primarily with a
professional venture capital firm (the "1996 Financing"). In addition, in April
1997, the Company secured approximately $5 million from the sale of Series A
Preferred Stock to a group of insurance companies related to the agriculture
industry. The proceeds of these transactions have been used to finance the
construction of the new production plant and to fund operations and inventory
buildup. In connection with the 1996 Financing, the Company became obligated to
pay certain "royalty obligations" to the investors in that financing (the "1996
Investors"), equal to a percentage of the Company's sales for specified future
periods, and the 1996 Investors were issued certain warrants to purchase shares
of the Company's Series A Preferred Stock.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1997 AND 1996

Net sales. Sales in the first half of 1997 were $1.4 million compared to
$575,000 in the same period in 1996, an increase of 141%. 1997 results include
primarily sales of the Company's AmiSorb(R) brand product and are concentrated
on winter wheat, corn and cotton applications, whereas a year ago, the crop
application was primarily winter wheat.

Cost of products sold. Cost of products sold of $1.2 million for the first
half of 1997 compared to $686,000 in the same period in 1996, an increase of
67%, reflects the high costs of operation of the Company's pilot plant in
Bedford Park, Illinois and, in 1997, $228,000 of costs during the transition
from the pilot plant to the new production plant in Peru, Illinois. Negative
margin of $111,000 in the first six months of 1996 reflects the start-up nature
of the pilot plant's operations.

Selling, general and administrative expenses. Selling, general and
administrative expense of $3.5 million for the six months ended June 30, 1997,
compared to $2.1 million in the same period in 1996, an increase of

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72%, which reflects $727,000 of advertising expense associated with acceleration
of the advertising campaign in advance of the spring planting season, $115,000
of administrative costs associated with the start-up and formal dedication of
the Company's new manufacturing facility, $98,000 for various outside
consultants and $306,000 of additional salary and benefit expense related to an
increase in staff.

Research and development. Research and development costs of $1.1 million
for the six months ended June 30, 1997, compared to $752,000 in the same period
in 1996 an increase of 40%, was primarily due to an increase in research staff.

Interest income. Interest income for the first six months of 1997 was
$271,000, compared to $70,000 in the same period in 1996, an increase of 290%,
which includes interest on short term securities purchased following the
Company's 1996 and April, 1997 financings.

Interest expense. Interest expense for the six months ended June 30, 1997
of $2.8 million compared to $1.3 million in the same period in 1996, an increase
of 116%, includes in 1997 $1.2 million, representing the fair value of stock and
inducement warrants issued to the holders of convertible notes, $983,000 of
amortization of debt discount and deferred financing costs incurred in
connection with the 1996 Financing, $551,000 of imputed interest on the royalty
obligation incurred in connection with the 1996 Financing, and $115,000 of
interest expense on convertible notes. 1996 includes expense associated with
warrants granted in connection with bridge financing of $942,000.

Income tax expense. The Company is currently in a tax loss carry-forward
situation. Tax loss carry-forwards begin to expire in 2007. No benefit for the
losses in the periods has been recorded.

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Net sales. Net sales increased from $9,600 in 1994 to $23,000 in 1995 to
$2.1 million in 1996. 1996 was the first year of significant product sales;
99.5% of such sales were from the agricultural market for the Company's
Amisorb(R) brand product primarily for application on winter wheat crops.

Cost of products sold. Cost of products sold increased from $8,100 in 1994
to $20,000 in 1995 to $2.1 million in 1996. The Company has operated from a
small scale pilot plant pending completion, break-in and production run up at
its plant in Peru, Illinois. The 3.5% gross margin achieved in 1996 reflects the
start-up nature of operations. Cost of sales in 1994 and 1995 were nominal,
reflecting the small batch volumes of product produced.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $705,000 in 1994 to $1.0 million in 1995
to $5.6 million in 1996. 1996 includes $368,000 of compensation expense relating
to Series A Preferred Stock options granted and vesting in 1996, and $380,000 of
compensation expense relating to common stock options granted and vesting in
1996. Employee costs increased by $1.2 million from $489,000 in 1995 to $1.7
million in 1996, reflecting increased staffing. Advertising costs increased from
$31,000 in 1995 to $1.3 million in 1996 due to the acceleration of the Company's
advertising campaign. Outside consultant costs increased by $622,000 to
$672,000, from $50,000 in 1995, and travel and entertainment costs increased
$314,000 to $407,000 in 1996, from $93,000 in 1995.

Research and development. Research and development expense increased from
$721,000 in 1994 to $1.0 million in 1995 to $5.0 million in 1996. 1996 research
and development expenses includes a charge of approximately $3.9 million of
compensation expense relating to the granting of a warrant to purchase 712,299
shares of Series A Preferred Stock to one of the Company's directors who is
developing pharmaceutical applications for the Company's products. This warrant
grant is a non-recurring item. See "Certain Transactions." The increase from
1994 to 1995 was primarily due to a research staff increase.

Interest income. Interest income increased from $15,000 in 1994 to $100,000
in 1995 to $410,000 in 1996, due to the additional short-term investments
available from the proceeds of the 1995 issuance of $4.8 million in convertible
notes, and the additional short term investments available following the 1996
Financing.

Interest expense. Interest expense increased from $113,000 in 1994 to
$367,000 in 1995 to $2.7 million in 1996. 1996 interest expense includes
$942,000 representing the fair value of warrants issued to providers of

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<PAGE> 21

bridge loan financing, $655,000 of amortization of debt discount and deferred
financing costs incurred in connection with the 1996 Financing, $350,000 of
imputed interest on the royalty obligation incurred in connection with the 1996
Financing and $687,000 of interest expense on convertible debt issued prior to
August 1996. Interest expense increased in 1995 related to interest on
convertible debt at rates of 8.0% and 8.5%. 1994 interest of $113,000 reflects
primarily interest expense on notes and convertible notes at rates ranging from
5.25% to 8.66%.

Research income. 1995 research income of $511,000 represents research
income from Bayer AG of $370,000 and National Starch of $140,000. Research
revenues are not expected to recur.

Income tax expense. The Company has tax loss carry-forwards available and
no future tax benefit for the losses was recorded in 1996, 1995 or 1994. These
carry-forwards begin to expire in 2007.

LIQUIDITY AND CAPITAL RESOURCES

The Company has not yet generated positive cash flow from operating
activities. It intends to use a portion of the proceeds of the Offering to fund
the cash portion of the 1997 Agreement, to fund the construction of its proposed
L-aspartic acid plant, as well as the build-up of its sales and distribution
network and working capital requirements. The Company is examining the
availability of project financing to fund the costs of construction of the
proposed L-aspartic acid plant and, if such financing is available on
commercially attractive terms, may utilize such financing. In such case, a
portion of the Offering proceeds would become available for alternative uses,
such as expanding manufacturing capabilities, further investments in the
Company's sales and distribution network, and general working capital uses. The
Company has not paid dividends in the past and does not anticipate the payment
of dividends for the foreseeable future. Cash in excess of operating
requirements is invested in U.S. government securities with maturities of
generally less than three months and money market accounts with major banks.

Cash, cash equivalents and short term investments at June 30, 1997, were
$7.6 million, or $7.2 million lower than at December 31, 1996. The reduction in
cash, cash equivalents and short-term investments reflects a $4.7 million
investment in the Company's new production plant in Peru, Illinois, and the
working capital needs associated with operations in the period and the buildup
of inventory for the 1997 Fall and 1998 Spring planting seasons, offset by the
sale of $5.0 million in Series A Preferred Stock.

On September 30, 1997, the Company completed construction of its Peru,
Illinois TPA production plant and began test operations of its first chemical
reactor at that plant. The Company anticipates that it will expend an additional
$1.1 million to pay outstanding obligations related to this project. As of
September 30, 1997, the Company had commitments to purchase approximately
$800,000 in raw materials from two overseas suppliers prior to December 31,
1997. The commitments are denominated in U.S. dollars.

In 1994, the Company entered into a licensing agreement with a shareholder
for the use of patent rights. The licensing agreement requires the Company to
pay $7.5 million in cumulative royalties, based on a percentage of future
agricultural sales. As of June 30, 1997, no royalties have been paid under this
agreement. See Note 13 of "Notes to Consolidated Financial Statements."

The Company believes that the net proceeds from the sale of Common Stock
offered hereby, together with funds generated by operations, will provide
adequate cash to fund its anticipated cash needs over the near term.

SEASONALITY; QUARTERLY RESULTS

The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors, including: (i) the introduction of
new products and the market response to those products, (ii) changes in product
pricing policies, (iii) changes in the level of marketing and other operating
expenses to support future growth, (iv) competitive factors, (v) seasonal
trends, (vi) relationships with distributors, (vii) weather patterns and
conditions, (viii) changes in demand for fertilizer and herbicide products in
the agriculture industry, and (ix) general economic conditions. Consequently,
quarterly revenues and operating

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results may fluctuate significantly, and the Company believes that
period-to-period comparisons of results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.

The Company expects sales of its agriculture products to be seasonal,
reflecting the purchasing patterns of the agriculture industry, with sales
concentrated in the first and fourth calendar quarters. The Company believes
that the impact of this seasonality will be mitigated to some extent as sales
from its performance chemicals begin to comprise a larger percentage of its
total revenues. However, there can be no assurance that either sales from its
specialty products will increase as a percentage of total revenues or that such
an increase will reduce the impact of seasonality.

RECENT DEVELOPMENTS

Pursuant to an agreement reached with the 1996 Investors, which modified
the terms of their original agreements, the Company will, upon closing of the
Offering: (i) pay the 1996 Investors $12 million in cash out of the proceeds of
the Offering; (ii) issue to the 1996 Investors an $11 million principal amount
senior note, maturing on the fifth anniversary of its issuance, bearing interest
at the rate of 12% per annum, payable-in-kind at the Company's option for the
first two years; and (iii) issue to such investors 9,019,531 shares of the
Company's Common Stock. In exchange for the foregoing, the 1996 Investors will
relinquish their Convertible Subordinated Promissory Notes and related rights
and securities acquired by them in the 1996 Financing, including all shares of
all series of the Company's preferred stock, royalty interests, shortfall
warrants and stock in the Company's Agricultural Technologies, Inc. subsidiary.
See "Certain Transactions" and Note 18 of "Notes to Consolidated Financial
Statements."

ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share" ("EPS"). Implementation of SFAS No. 128 is
required for periods ending after December 15, 1997. The standard establishes
new methods for computing and presenting EPS and replaces the presentation of
primary and fully-diluted EPS with basic and diluted EPS. The new methods under
this standard are not expected to have a significant impact on the Company's EPS
amounts.

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BUSINESS

THE COMPANY

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It has been demonstrated that TPA is an effective and environmentally safe
replacement for certain specialty chemical compounds, including polyacrylates,
in many performance chemicals applications. Since polyacrylates and many other
specialty chemicals are not biodegradable, TPA is an attractive alternative,
particularly when used in environmentally sensitive areas. Management estimates
that the world market for polyacrylates and other products for which TPA appears
to be a viable substitute is approximately $2.2 billion annually.

COMPETITIVE STRENGTHS

Management believes that the Company's development to date provides it with
a number of unique competitive advantages:

- SIGNIFICANT BARRIERS TO ENTRY. Management believes that its extensive
patent portfolio, which covers its proven, cost efficient manufacturing
process, as well as its proprietary technology platform provide
significant barriers to entry to its potential competitors.

- EXPERIENCED MANAGEMENT TEAM. The Company's management team has an average
of over 25 years experience in the development and marketing of specialty
chemicals and agricultural products.

TARGET APPLICATIONS AND STRATEGIES

The Company's primary objective is to utilize its leadership position in
the polyaspartate market to expand its penetration of agricultural and
industrial applications of TPA products. With rising pressure on farmers to
increase crop yields cost effectively and in an environmentally friendly manner,
and continued pressure on industry and consumers to use environmentally friendly
products, management believes that there will be strong demand for its TPA
products. The Company's commercialization efforts for TPA products will focus on
crop nutrition, crop protection and performance chemicals applications. The
following provides an overview of these three applications, the key elements of
the Company's strategy for each application and the Company's manufacturing and
research and development strategies to support these applications.

Crop Nutrition. The Company's AmiSorb(R) products work by enhancing the
uptake of fertilizers and nutrients by agricultural crops. The benefits of this
process are earlier crop maturity, increased crop growth, improved crop yield,
and noticeable improvement in crop quality. The Company's near-term strategic
initiatives will be to:

- INCREASE AND FOCUS SALES EFFORT. The Company intends to expand
significantly its sales force over the near term and focus its efforts on
leading distributors. By expanding its sales force the Company will be
able to increase the number of its dealer and distributor relationships
and better educate the end user about its products. The Company is
focusing on a core group of distributors in order to maximize the

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effectiveness of its selling efforts. Management believes that a key to
achieving rapid sales growth will be its ability to educate distributors,
dealers and end users about the efficacy, cost-competitiveness and safety
of its products.

- EXPAND TARGET MARKET. While the Company is currently targeting the winter
wheat, corn and cotton markets in the U.S., management intends to target
numerous other crops, such as soybeans, fruits, vegetables and sorghum, as
soon as its sales force reaches the required size to service those markets
effectively. In addition, management believes that there are substantial
opportunities in international markets, and it intends to continue to
pursue strategic alliances with leading international agri-chemical
companies to capitalize on these opportunities. The Company recently
entered into a five-year cooperation agreement with BASF AG to develop and
distribute its crop nutrition products in Europe.

Crop Protection. The Company is dedicated to developing products that by
enhancing the absorption, and therefore the efficiency, of herbicides and
insecticides, reduce the overall amount of those chemicals introduced into the
environment. To exploit opportunities in this application, the Company will:

- COMPLETE PRODUCT DEVELOPMENT. The Company plans to continue the
development of new crop protection products based on its proprietary
polyaspartate technology. Management believes that the Company will be in
a position to begin the commercialization process in the near term.

- PURSUE MARKET OPPORTUNITIES. Management is evaluating several
alternatives for commercializing crop protection products. These may
include pursuing strategic alliances, joint ventures and licensing
agreements as well as establishing a direct sales force. Given the
substantial market opportunity, the Company is likely to pursue a number
of these alternatives in order to maximize its market penetration.

Performance Chemicals. The Company markets TPA as a biodegradable
substitute for chemicals currently used in water treatment, oil field chemicals,
coatings and dispersants, detergents and cleaners, and personal care and
superabsorbent applications. Its strategic goals are to:

- INCREASE MARKET PENETRATION. Management intends to follow a two-fold
strategy for marketing and distributing its performance chemicals products
that will combine joint ventures and strategic alliances with the
development of a direct sales force. Given the unique competitive dynamics
and customer base for each target market, management believes that it will
require both elements of this strategy to maximize its sales effectiveness
and profitability. The Company has already established a development
agreement with British Petroleum and distribution agreements with FMC
Corporation and National Starch and Chemical Company.

- EXPAND PRODUCT LINE. While it is currently pursuing the oil field and
water treatment markets in the U.S. and Europe, the Company is also in the
process of developing additional environmentally friendly TPA products for
other markets, such as detergents, personal care, superabsorbents and
coatings. Because the Company's existing TPA products have been proven to
be as effective as existing polyacrylate and other products, management
believes that increasing worldwide pressure on industry and consumers to
use environmentally friendly products will produce significant demand for
its products in these markets.

Manufacturing and Research & Development. In support of its
application-specific growth strategies, the Company will:

- ENHANCE RAW MATERIAL POSITION. Management intends to assure itself of a
consistent low-cost supply of its key raw material, L-aspartic acid, by
constructing an L-aspartic acid manufacturing facility. The Company has,
and expects to continue over the near term, purchase contracts with
existing suppliers of this key raw material.

- EXPAND MANUFACTURING CAPABILITIES. To support the Company's growth, the
Company will expand its manufacturing facilities with the addition of four
chemical reactors to its Peru, Illinois manufacturing facility as demand
for its products increases, construct an L-aspartic acid manufacturing
facility, and plan for the construction of a liquid process and
derivatives plant as new TPA products are developed.

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The Company's manufacturing strategy is based on modular expansion and
management believes that this expansion process can be accomplished with
no adverse impact on continuing operations.

- CONTINUE TO DEVELOP INNOVATIVE PRODUCTS. The Company will continue to
conduct extensive research and development activity in order to enhance
the Company's position as the world leader in TPA technology and new
product development.

The Company has also identified uses for TPA in the pharmaceutical field,
and has obtained patent rights to those uses. While the Company has determined
that, due to the significant testing and regulatory requirements involved,
commercial development in this area will occur at a later stage, it continues to
invest in research and development in this area.

COMPANY HISTORY

Organized in 1990 as Koskan Chemical Company and funded by a series of
private financings, the Company was successful in obtaining early patent
protection for processes to produce polyaspartates and for several methods of
use for that product. The Company recognized that, if produced in commercially
economic quantities, polyaspartates could be an efficient replacement for a
related class of specialty chemicals known as polyacrylates, as well as other
chemicals. In addition, during the course of their early research and
development activities, Company researchers discovered that polyaspartates
increase crop yields by enhancing nutrient uptake. The Company made the decision
to exploit this aspect of TPA chemistry directly in agriculture markets
following the determination by the U.S. Environmental Protection Agency that TPA
was not subject to regulation under the Federal Insecticide, Fungicide and
Rodenticide Act. More recently, the Company discovered that when combined with
herbicides or insecticides, the Company's TPA products enhance the efficiency of
those chemicals. Therefore, while maintaining required effectiveness, the
quantity of herbicide or insecticide can be significantly reduced. Furthermore,
preliminary medical research has indicated that TPA can be used in
pharmaceutical applications. In 1997, the Company acquired two patents covering
use of polyaspartates as potential asthma and allergy treatments.

AGRICULTURAL APPLICATIONS

INDUSTRY OVERVIEW

Background. Long-term demand for fertilizers, herbicides and insecticides
is driven primarily by demand for worldwide grain production, which is closely
correlated to world population growth. The world population is forecasted to
increase from 5.8 billion people in 1997 to over 6.6 billion people by 2007.
Rising world populations, along with rising income levels, will necessitate
higher grain production. The need to increase grain production will be further
accelerated by the current low levels of global grain stocks, which are at their
second lowest level in 40 years. In the absence of significant additional arable
land for planting, increased emphasis will be placed on more intensive farming
practices. These practices are increasingly dependent upon high-technology,
science-based agriculture.

North America, China and Europe are the major grain producers in the world
and account for the largest share of world fertilizer consumption. World
consumption of fertilizers in 1996 was over 141 million tons, with the U.S.
representing approximately 22 million tons, or 16% of the total. Fertilizers
enhance the fertility of soil by replacing essential nutrients that are absorbed
from soil by crops. The three primary nutrients that are essential to plant
growth are nitrogen, potash and phosphate. Fertilizers must be applied each year
because virtually all of their nutritional value to crops is consumed or lost
during each growing season.

In addition to applying fertilizers to enhance crop yields, farmers also
apply significant amounts of pesticides, which include herbicides, insecticides,
fungicides and nematocides, to protect their crops from the damage caused by
weeds and insects. Worldwide sales of pesticides were approximately $32 billion
in 1996. The products that have been the most successful in gaining market share
have principally been the newer, more environmentally friendly and efficacious
products.

Environmental Aspects. Because substantial amounts of fertilizer applied to
crops are not used by those crops, those unused nutrients make their way into
watersheds. As a result, supplies of potable water become

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contaminated. These fertilizers also cause accelerated algae growth in those
watersheds, leading to low oxygen levels in the water. Several state and local
regulatory authorities have instituted or proposed limitations on the use of
certain fertilizers in identified geographic areas. In addition, the build-up of
pesticide residues is a serious environmental problem associated with the
agricultural industry. The use of TPA in agricultural applications promises to
reduce these significant environmental problems.

CROP NUTRITION

Nutrient use efficiency is a critical issue in agricultural economics, as
is the environmental impact created by unutilized nutrients. TPA products are
applied with fertilizer, requiring no significant change to current farming
practices. The Company has been able to demonstrate that TPA has the ability to
enhance the uptake of macro and micronutrients, enabling plants to use more of
the available nutrients, mature earlier and produce higher yields. Studies
conducted by major U.S. universities and crop consultants and actual farm
applications have shown that TPA is effective as a nutrient absorption enhancer
in a wide variety of crops, including winter wheat, corn, cotton, soybeans,
sorghum, peppers, tomatoes, and lettuce. In addition, because the use of TPA in
conjunction with fertilizer results in increased uptake of that fertilizer by
crops, less fertilizer remains in the soil. As a result, less fertilizer leaches
into watersheds and less contamination occurs.

The first polyaspartate product introduced by the Company for agricultural
application is based on the active ingredient called Carpramid. Carpramid
defines specific TPA formulations related to molecular weight and physical and
chemical properties. Carpramid is commercialized in two forms, a liquid product
sold under the AmiSorb(R) trade name and AmiSorb(R) 10G, a granular formulation.
These products are formulated for use on winter wheat, corn and cotton. In the
future, the Company plans to vary the molecular weight or other physical and
chemical properties of its products for use on additional crops.

PRODUCT CHEMISTRY

The mobility and availability of nutrients (fertilizers) applied to the
soil are determined by soil type (sand, clay, loams, etc.), moisture, pH and
other conditions. In general, fertilizer is not a very efficient crop input, as
plants are inefficient users of fertilizer. Typically, plants utilize only
50%-60% of nitrogen and only 40%-50% of phosphate and potash.

TPA works by attracting nutrients and facilitating their conveyance to the
plant's root system. TPA is characterized by a highly negative charged polymer
chain and a high capacity (10 to 20 times higher than most soils) to attract
positive charged ions. When TPA is applied with liquid fertilizers or in the
proximity of dissolving solid fertilizers in the soil, it acts "like a magnet"
to quickly attract nutrients made up of positive charged ions, including
potassium, ammonium, calcium, magnesium, zinc, manganese, and iron. Once it has
attracted a layer of positive charged ions, TPA is also able to attract
nutrients made up of negative charged anions such as phosphates, nitrates,
chlorides, and sulfates. This process, known as ionic double layering, creates
zones of nutrient concentration higher than those in the surrounding soil. These
reservoirs of high nutrient concentration provide an enhanced supply of
nutrients to the plant.

TARGETED CROPS

In order to maximize the effectiveness of its initial commercialization
efforts, the Company is concentrating on three of the country's largest crops in
terms of acres planted. For a full description of the field trials discussed
below, see "Business -- The Company."

Winter Wheat. The Company has targeted winter wheat as one of the initial
crops for its marketing efforts because it represents the world's largest, and
the United States' second largest, agricultural product in terms of planted
acres, with approximately 570 million acres of winter wheat planted worldwide in
1996, of which 57 million acres was planted in the U.S. During the most recent
growing season, farm field trials on winter wheat were conducted at 56 different
locations in 11 states using AmiSorb products. The use of AmiSorb products at
the currently recommended rate and application method resulted in increased
yields of up to 26 bushels per acre, with an average increase of 8 bushels per
acre, or approximately 18%. The Company's first commercial sales for a winter
wheat crop planting season (Fall 1996-Spring 1997) consisted

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of 50,000 gallons to 200 end users, covering 150,000 acres of winter wheat.
Donlar has initially targeted its sales efforts on 12 states that represent
nearly 80% of total U.S. acres of winter wheat planted.

[Insert Bar Graph Showing Winter Wheat Results]

Corn. The second primary crop targeted by the Company is corn. Corn is the
world's third largest, and the United States' largest, agricultural product in
terms of acres planted, with 350 million acres of corn planted worldwide in
1996, of which 73 million acres were planted in the U.S. Initial farm field
trials on corn were conducted in 1996 at 61 different locations in 10 states.
Results for the trials demonstrated yield increases from the use of AmiSorb
products of up to 60 bushels per acre, with an average increase of 12 bushels
per acre, or 7%. Results of the 1997 corn season are not available yet, but
early assessments indicate yield increases equal to or in excess of the prior
year's results.

[Insert Bar Graph Showing Corn Results]

Cotton. The third primary crop targeted by the Company is cotton. Cotton is
the world's fifth largest, and the United States' fourth largest, agricultural
product in terms of acres planted, with 88 million acres of cotton planted
worldwide in 1996, of which 16 million acres was planted in the U.S. Initial
field trials on cotton were conducted in 1996 at 11 different locations in 4
states and demonstrated yield increases of up to 690 pounds of lint per acre, an
average of 368 pounds of lint per acre, or approximately 40%. Results for the
1997 cotton season are not available yet, but early evaluation indicates yield
increases similar to those obtained in 1996.

[Insert Bar Graph Showing Cotton Results]

Other Crops. The effects of TPA on many other crops, including soybeans,
sorghum, vegetables, trees and vines, have been and will continue to be tested.
Initial test results with each of these crops have shown yield improvement and
potential economic returns similar to or higher than those resulting from the
use of AmiSorb(R) products on winter wheat, corn and cotton. Initial
commercialization efforts with respect to these crop applications are in
progress. However, full commercialization in any of these areas is not expected
to begin before 2000.

SALES AND DISTRIBUTION

The Company has positioned its products as new agricultural inputs that
provide significantly increased returns to growers. The Company believes that
successful trial usage and word-of-mouth endorsement by innovative growers, in
conjunction with marketing support from the Company, will be key factors in its
ability to successfully achieve rapid market acceptance of its products.
Management believes that the optimal method for achieving its domestic sales
strategy is to develop a direct sales force that will market and sell its
products to agricultural distributors and dealers, in part through education of
these parties and end users. In international markets, the Company has
determined to rely on strategic alliances with major international agricultural
distributors.

North America. The Company currently markets and sells its AmiSorb(R)
products through agricultural distributors and dealers. Distributors include
cooperatives, as well as national and regional distributors. Many of these
distributors sell through their own retail outlets as well as to independent
dealers. There are approximately 10,000 to 15,000 agricultural dealers in the
United States, including cooperatives. The Company currently plans to focus its
sales efforts on 10 to 14 distributors, with a combined customer base of
approximately 3,200 dealers, that have a reputation for being leaders in
marketing innovative and value-added specialty products.

In the U.S., the Company has established a sales force of nine salespersons
organized into four geographical regions. By the first quarter of 1998, the
Company expects to increase its U.S. sales force to 18 salespersons. The Company
is also in the process of forming a Mexican subsidiary for the purpose of
marketing and selling its AmiSorb(R) products in Mexico. The Company currently
sells products in Mexico through a major international distributor. In addition,
the Company is conducting marketing and product registration studies in the
Canadian market.

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International. Although the Company's focus in the near term is the North
American agricultural market, the Company is in the process of developing its
substantial international market opportunities. The Company plans to target
areas where there is significant pressure to produce higher crop yields due to a
limited availability of arable land. Management believes that market entry into
these countries may be most effectively pursued through strategic alliances with
existing agricultural companies. In order to pursue international opportunities,
the Company intends to establish a European sales office to manage activities
for that agricultural area.

In April, 1997, the Company entered into a five-year agreement with BASF AG
providing for BASF to conduct agricultural field trials of its AmiSorb(R)
products in various regions of Europe beginning in 1997. Subject to satisfactory
commercial feasibility studies, BASF will be entitled to act as the exclusive
distributor of AmiSorb(R) products on a region-by-region basis throughout
Europe. Other regions of the world will be handled on a case-by-case basis.

CROP PROTECTION

The Company has identified another major use for its TPA technology in the
rapidly changing crop protection industry. The worldwide crop protection market
reached record sales of $32 billion in 1996. North America, which is the largest
market for pesticides (herbicides, insecticides, fungicides and nematocides),
represents close to $10 billion of this total and grew by approximately 6.5% in
1996. Europe represents the second largest market for pesticides with 1996 sales
of approximately $9 billion. Most of the growth in this industry can be
attributed to the introduction of new products. In response to increasing public
and governmental pressure to reduce or even eliminate the use of certain
pesticides known to be serious pollutants, the pesticide industry is seeking to
develop more environmentally friendly products.

The Company has conducted preliminary field and laboratory tests indicating
that certain variations of TPA enhance the absorption, and therefore the
efficiency, of insecticides and herbicides. The potential to significantly
reduce the application levels of both herbicides and insecticides promises
reduction of the overall amount of these chemicals introduced into the
environment.

The Company was recently granted two U.S. patents covering methods of use
of certain polyaspartates that result in an increase in the uptake of herbicides
and insecticides. The Company expects these patents, together with a continued
research and development effort, to provide a framework for its proprietary
polyaspartate technology to bring to market a new class of crop protection
products. Preliminary university and field studies on both corn and soybeans
have shown no deleterious effect to crop production and fertility, while
maintaining weed control at reduced pesticide usage rates. The Company believes
that the mechanisms involved are similar to those evidenced in the crop
nutrition area and support the commercialization of crop protection products
incorporating the characteristics of weed and insect control, lower levels of
active ingredients, reduced environmental impact and equal or lower costs to the
end-user. The Company is conducting further tests to corroborate the manner in
which TPA enhances the uptake of herbicides and insecticides and believes it
will be in a position to begin commercializing products in the near term.

SALES AND DISTRIBUTION

Management is evaluating several alternatives for commercializing crop
protection products. These include pursuing strategic alliances, joint ventures
and licensing agreements, as well as establishing a direct sales force. Given
the substantial market opportunity, the Company is likely to pursue a number of
these alternatives in order to maximize its market penetration. The Company's
objective at this time is to evolve the present knowledge into a viable business
opportunity based on economic and environmental benefits.

PERFORMANCE CHEMICALS APPLICATIONS

TPA has been demonstrated to be an effective and environmentally safe
replacement for certain specialty chemical compounds, including polyacrylates,
in many performance chemicals applications. Laboratory studies have shown that
TPA products are readily biodegradable. Since polyacrylates and many other
specialty chemicals are not biodegradable, TPA is an attractive alternative,
particularly when used in environmentally

28
<PAGE> 30

sensitive areas. It is estimated that the world market for polyacrylates and
other products for which TPA appears to be a viable substitute exceeds $2.2
billion annually.

PRODUCT CHEMISTRY

As a result of its negative charge, TPA has the power to attract and hold,
or to repel. These properties can be modified by varying the length of the
polymer chain. TPA's ability to attract and hold is very useful in managing the
scaling effects of calcium and magnesium salts that are present in essentially
all water. This is commonly known as "water hardness." The ability to repel is
useful in keeping particles suspended and is valuable in providing dispersing or
suspending properties to particles in applications such as paints and pigments.
The polymer chain can also be made into a gel that has the ability to hold water
like a sponge. The water absorption effect of TPA is dramatic in that it can
hold nearly 100 times its own weight in water. While other specialty chemicals
exhibit similar properties, the key to the value of TPA as an alternative to
those chemicals is that TPA breaks down harmlessly in the environment after
performing its functions.

TARGET APPLICATIONS

Donlar has initially identified six distinct specialty chemicals markets
for application of its TPA technology. These markets are water treatment, oil
field chemicals, superabsorbents, personal care, coatings and dispersants, and
detergents and cleaners. The Company's products can be formulated with varying
molecular weights in order to specifically serve each target market.

Water Treatment. Water hardness is a major problem for applications
involving large quantities of water used for cooling, such as industrial or
commercial cooling towers. The natural evaporation of the water causes the
calcium and magnesium to increase in concentration, eventually adhering to the
cooling surfaces and inhibiting heat transfer, clogging pipes, and causing
corrosion. The same effect is seen when large quantities of water are pumped or
transferred through pipes, such as in mining operations. TPA is an ideal
compound for scale and corrosion inhibition and dispersancy for many industrial
water treatment applications. In Company conducted tests, Donlar's TPA products
have demonstrated significant performance improvements in scale inhibition
compared to commonly used polyacrylates. Working with Henkel Corporation, the
Company has established the first commercial specialty chemical application for
TPA, scale inhibition for pipes and pumps used to pump seepage and drilling
water out of abandoned mines in Germany. TPA is the only product known to the
Company that fulfills the region's requirement for an environmentally friendly
product that can be discharged directly into the waterways.

Current competing water treatment formulations include polyacrylates as
scale inhibitors, but also require the addition of other compounds as corrosion
inhibitors. Because TPA performs both functions, management believes that it
will be a cost effective and biodegradable replacement for existing water
treatment formulations. Management estimates that the current water treatment
market for polyacrylates and other products for which TPA appears to be a viable
substitute exceeds $250 million annually worldwide.

Oil Field Chemicals. In off-shore secondary oil recovery operations, sea
water is pumped into the oil field to increase oil production. However, sea
water both corrodes and causes scale to accumulate on the inside surface of the
water injection pipes. TPA's capacity to simultaneously act as both a scale and
corrosion inhibitor make it ideally suited as a biodegradable replacement for
currently used polyacrylate-based compounds in this application. Management
estimates that the current market for polyacrylates in oil production is
currently 800 million pounds per year, for an approximate worldwide market size
of $350 million.

British Petroleum is expected shortly to commence testing of the Company's
TPA product as a scale and corrosion inhibitor on one of its oil platforms in
the North Sea. Management estimates that usage of current scale and corrosion
inhibitors in the North Sea alone exceeds 50 million pounds per year.

Superabsorbents. TPA is a highly effective superabsorbent that can be used
as a biodegradable, substitute for polyacrylates. Management estimates that the
current worldwide market for polyacrylates used in superabsorbents is $1.3
billion. There are four large and growing superabsorbents markets: baby diapers,
adult incontinence products, feminine hygiene and other markets such as cat
litter, landfill liners, moisture

29
<PAGE> 31

control in the cable and packaging industries and fire fighting. Molnlycke, AB,
one of Europe's largest manufacturers of diapers is currently testing the
Company's TPA products in superabsorbent applications.

Personal Care. Certain TPA products provide enhanced performance
characteristics when used in hair care, cosmetics and skin care products,
without negative environmental impact. These characteristics include
conditioning, antistatic properties, increased hair volume, anti-irritancy,
humectancy, water proofing and foam stability. The Company estimates a market
potential for TPA products in personal care of approximately $80 million
annually worldwide.

Coatings and Dispersants. TPA products are also well suited to improve
suspension properties of small particles in a variety of coatings and
dispersants applications. These properties are important in paints, pigments,
food concentrates, toothpaste, pesticide blends and drilling muds used in oil
recovery operations. Because of its biodegradability, TPA is an attractive
alternative to compounds currently serving this market. Management estimates
that the market for polyacrylates in these applications is $50 million annually
worldwide.

Detergents and Cleaners. TPA products act as encrustation inhibitors and
anti-redeposition agents in detergent applications. TPA is comparable in
performance to polyacrylates in these applications, with the added benefit of
being biodegradable. The Company is developing a manufacturing process that will
make TPA cost-competitive with polyacrylates, while at the same time meeting the
required color and other formulation standards demanded by detergent companies.
Management estimates that the current market for polyacrylates in detergent
applications is in excess of $200 million annually worldwide.

With respect to superabsorbents, personal care, coatings and dispersants
and detergents and cleaners, the Company will be unable to undertake large scale
commercialization efforts prior to constructing a liquid process and derivatives
plant for the production of those products. The Company will require additional
sources of funding in order to construct such a plant and, if such funding is
available on commercially attractive terms and the Company's research and
development efforts continue to show positive results, the Company may undertake
to construct such a plant in the foreseeable future. In the absence of such
funding or positive research results, the Company will not fully commercialize
products for these applications over the near term.

SALES AND DISTRIBUTION

The Company's primary marketing and distribution strategy for performance
chemicals is to develop strategic alliances with major international enterprises
having marketing and distribution strength in each of the Company's potential
market sectors. In addition, the Company may selectively undertake direct sales
efforts to maximize market opportunities on a market-by-market basis.

In 1993, the Company entered into a development agreement with BP
Exploration Operating Company Limited ("BPX"), an affiliate of British
Petroleum, pursuant to which BPX will evaluate TPA products in the control of
scale and corrosion in oil pipelines. Under the terms of this agreement, BPX
will be entitled to a nonexclusive, royalty-free worldwide license for use of
the TPA products in that application, and Donlar will be the exclusive supplier
of BPX's requirements of those products. This agreement expired by its terms in
February 1997, but the parties continue to operate under this agreement pending
execution of a new agreement, identical in its terms.

In 1996, the Company granted to FMC Corporation (UK) Limited an exclusive
right to distribute TPA products in the oil field industry for use as a
corrosion and scale inhibitor. In order to maintain its exclusivity, FMC is
required to purchase increasing minimum annual quantities of TPA product from
the Company. FMC Corporation currently has a major presence in the oil field
chemical service business (particularly in the environmentally sensitive North
Sea region), supplying an extensive line of products to key oil field chemical
service companies.

The Company entered into joint technology development and distribution
agreements with National Starch and Chemical Company ("National Starch") in 1996
to provide for joint research and development activities as well as distribution
of TPA products. Under the terms of these agreements, the Company has

30
<PAGE> 32

granted National Starch exclusive rights with regard to TPA product derivatives
in cosmetics, paper, adhesives, textile pre-treatment, water treatment/corrosion
control, industrial dispersants, detergents, cleaning products for industry and
institutions and industrial dispersants, while the parties share rights to TPA
product derivates in the pharmaceuticals field. Donlar has reserved the fields
of agriculture, superabsorbents and oil field chemicals from the provisions of
these agreements. The parties will jointly own and use technology developed by
them under the agreements in return for cross-royalty payments. Donlar is to be
the exclusive supplier of TPA products to National Starch for its sales in these
fields.

PHARMACEUTICAL APPLICATIONS

Medical researchers have identified pharmaceutical applications for
polyaspartates ranging from blood plasma substitutes to allergy and asthma
treatments to antibiotic extenders. Dr. Gerald Gleich, Professor of Immunology
and Medicine at the Mayo Medical School in Rochester, Minnesota, recently was
granted two patents relating to the use of polyaspartates in the treatment of a
wide variety of allergic conditions. In an effort to expedite research and
development and possible subsequent commercialization of TPA in pharmaceutical
applications, the Company and Dr. Gleich entered into an agreement whereby the
Company purchased these patents and named Dr. Gleich as Vice President of
Research of its subsidiary, Donlar Pharmaceuticals Corporation. In return for
those patents, Dr. Gleich was granted a 10% equity interest in Donlar
Pharmaceutical Corporation and the right to receive royalties, at rates ranging
from 0.5% to 2.0%, on sales of products based on those patents, to a maximum
aggregate of $10 million. Dr. Gleich's research has shown that polyaspartates
neutralize the major basic protein that is believed to be the primary cause for
development of allergic reactions resulting in asthma, hay fever,
conjunctivitis, and other conditions. Initial animal studies have demonstrated
the ability of polyaspartates to inhibit the onset of these allergic reactions.
The Company is currently funding toxicology studies of TPA necessary to apply
for Food and Drug Administration Phase I clinical testing. The Company expects
to expend as much as $2 million to $3 million over the next several years to
reach this stage of research. Because of the extensive regulatory process
involved, the Company does not foresee commercialization of its TPA products for
pharmaceutical purposes over the near term.

RAW MATERIALS

The principal raw material in the Company's TPA products is L-aspartic
acid. There are a limited number of suppliers worldwide and substantially all of
the commercially available L-aspartic acid is produced by non-domestic sources.
The sources of substantially all of the L-aspartic acid used by the Company are
in the People's Republic of China. The Company forward purchases L-aspartic acid
from these sources in order to ensure a stable supply over the near term. Based
on management's estimates of the Company's increased production of polyaspartate
products over the foreseeable future, management believes that its requirements
for L-aspartic acid will outstrip the world merchant supply by the year 2000.

The Company intends to utilize approximately $25 million of the proceeds of
the Offering to construct an L-aspartic acid manufacturing facility, to be
located on its Peru site. The Company intends to thereby ensure itself of a
captive supply of this key raw material at a lower cost and in sufficient
quantities to meet its anticipated requirements. The Company anticipates that
this facility will be capable of producing 47 million pounds of L-aspartic acid
annually. The Company expects to break ground for this facility by late 1998, to
complete the facility in 2000 and to begin full scale production at this
facility in 2001. There are a number of proven technologies for the production
of L-aspartic acid, all of which are proprietary to industrial manufacturers.
The Company expects to license one of these production technologies for this
plant's operations. Management believes that it will be able to do so on
economically acceptable terms and is currently in discussions with manufacturers
concerning such licensing arrangements.

Once this L-aspartic acid plant is completed, the Company will have to
provide for a stable supply of maleic anhydride, a basic raw material in the
manufacture of L-aspartic acid. There are a number of suppliers of maleic
anhydride worldwide and the Company is currently in discussions with several of
these suppliers. The production of L-aspartic acid from maleic anhydride
involves the conversion of maleic anhydride to fumaric acid as a first step.
Subsequently, fumaric acid is converted to aspartic acid via an enzymatic
process.

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<PAGE> 33

The production of L-aspartic acid will require the construction of a simple
waste treatment facility involving readily available equipment.

PROCESS

The Company's TPA products are manufactured using the following patented
process.

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------

-------------- ------------------- -----------------------
L-aspartic Heat Polysuccinimide Base chemical Polyaspartate (TPA)
acid ----------> (intermediate) ---------> (10%-60% solution)
-------------- ------------------- -----------------------
Water
- --------------------------------------------------------------------------------------------------------------
</TABLE>

In the Company's patented continuous process, L-aspartic acid is conveyed
as a powder to a thin film cascading reactor where heat is applied, yielding an
intermediate compound called polysuccinimide. In this step, water vapor, the
only by-product of the TPA manufacturing process, is produced. Polysuccinimide
is then mixed with water and a base chemical, such as sodium hydroxide or
potassium hydroxide. The finished or final product is a liquid solution
containing between 10% and 60% active sodium polyaspartate (TPA). Because there
are no hazardous emissions from this process or from the Company's current
manufacturing facilities, the need for any waste treatment facility is
eliminated.

MANUFACTURING AND FACILITIES

The Company's headquarters, located in Bedford Park, Illinois, consists of
approximately 11,000 square feet of office and laboratory space, and the pilot
plant described below. This property is leased by the Company from the Illinois
Institute of Technology (the "Landlord"). The Company's lease for this facility
expired in July 1997. The Company is currently negotiating with the Landlord for
a new lease and, until execution of such a lease, the Landlord is extending the
expired lease on a month-to-month basis.

The Company currently operates a pilot plant at its headquarters for the
production of TPA products. The pilot plant has the capacity to produce 13
million pounds of polyaspartate products annually, an amount sufficient for the
development and testing of such products, but not sufficient to meet anticipated
production requirements over the near term.

To meet its projected production requirements for TPA, the Company has
constructed a polyaspartate manufacturing facility in Peru, Illinois on a 40
acre parcel purchased by the Company in 1996. This 50,000 square foot facility
currently contains one chemical reactor, which is designed to produce 30 million
pounds of polyaspartate products annually. The facility is large enough to
accommodate five such reactors and the Company anticipates adding the other four
reactors serially over the next several years as demand for its products
increases. This expansion process is essentially modular and is not expected to
involve substantial engineering or technical expenses or delays. The facility is
currently undergoing break-in and ramp-up leading to full operational activity
(80% of maximum capacity) for its one installed chemical reactor, which is
anticipated to be achieved by April 1, 1998. The Peru, Illinois parcel is
sufficient in size to accommodate the Company's planned L-aspartic acid
manufacturing facility. The Company has an option to purchase an 80 acre parcel
contiguous to its current parcel. The Peru facility is strategically located
near barge, rail and road transportation facilities.

The Company leases warehouse space in strategic locations in Texas,
Arizona, Kansas, Florida and Indiana in order to provide its customers with a
proximate supply of the Company's products. In addition, the Company has
allocated space on its Peru, Illinois parcel for the construction of a liquid
process and derivatives plant, the completion of which will be necessary in
order to enable the Company to fully commercialize products for certain
performance chemical applications. This plant has yet to be designed, and the
Company will require additional financing in order to construct this plant.

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<PAGE> 34

COMPETITION

In agricultural applications, TPA provides the end user with what the
Company believes to be a unique ability to realize improved economic returns
through the use of an environmentally friendly product, without the use of
genetic engineering or other similar techniques. However, competition in the
agricultural industry is intense. Competitors include major chemical and
pharmaceutical companies, as well as specialized biotechnology firms. Many of
these companies have considerably greater financial, technical and marketing
resources than the Company. In addition, universities and public and private
research organizations may develop competing technologies. However, the Company
knows of no existing technology that provides comparable benefits to
agricultural end users, and believes that its extensive portfolio of
agricultural patents provides a significant barrier to entry by potential
competitors.

In the performance chemicals field, the Company's TPA products compete
primarily with polyacrylates, the major producers of which are BASF and Rohm &
Haas. The Company believes that its TPA products currently are cost effective
substitutes for polyacrylates in oil field chemical and personal care
applications, in which the Company's products exhibit equal or superior
performance characteristics and also are environmentally friendly. However, the
Company will have to substantially lower its costs of production to be
competitive with polyacrylates in detergents and superabsorbents. The Company
believes it can substantially lower its production costs by constructing a
facility for the production of L-aspartic acid. The Company's patents do not
cover all possible applications of TPA in the specialty chemicals field. There
can be no assurance that a competitor will not develop patents on one or more
methods of use that will foreclose or limit the Company from introducing its TPA
products in a particular area of application, including those applications that
it has targeted for commercialization.

RESEARCH AND DEVELOPMENT

The Company's research and development department, consisting of 22
chemists and chemical engineers, including 9 Ph.D.'s and 10 others holding
advanced degrees, is organized into four groups as follows:

Corporate Research is responsible for developing new polyaspartate
technology and products as well as the processes to make them. These new
technology platforms include copolymers and derivatives. Additional
responsibilities of the Corporate Research group include the identification and
development of new raw materials and their sourcing.

The Pilot Plant Group is responsible for evaluating the commercial
viability and practicability of research laboratory developments on a commercial
production scale and scaling-up laboratory processes to a commercial level.

Two Applications Development Groups, one dedicated to the Company's
agricultural markets, and the other to the performance chemicals field, are
responsible for testing the efficacy in particular end uses of the technologies
developed by the other groups. The agricultural group evaluates the efficacy of
the Company's agricultural products in new applications. The performance
chemicals group simulates real world processes and tests the efficacy of the
Company's products against existing products.

PATENTS

The Company's TPA technology is protected through a family of patents and a
broad base of proprietary know-how. Donlar's United States patent portfolio
includes 26 issued patents, Notices of Allowance of Patentability for 3
additional patents, and 12 patents pending or in the process of being filed. The
Company holds 8 foreign patents and has numerous foreign patents pending or in
the process of being filed. These patents relate to the Company's manufacturing
techniques, composition of matter, and methods of use. Patents begin to expire
in the years 2008-2011. Donlar intends to continue to invest in research
necessary to extend and protect its patent portfolio.

The Company holds several different manufacturing and process-related
patents regarding polyaspartates. These include, but are not limited to,
processes involving a variety of starting raw materials, such as L-aspartic acid
and maleic anhydride, in both dry and solution processes, and with and without
catalysts. The Company's

33
<PAGE> 35

first patent was also the first U.S. issued patent covering the production of a
synthetic protein on a large scale or commodity basis. The Company holds patents
that specifically describe the composition of polyaspartates, including specific
structure and including its various salts, within a wide range of molecular
weights.

Method of use patents that pertain to performance chemicals include
dispersion and inhibition of mineral and metal oxide particulates in water-borne
systems used by the municipal and industrial process industry and oil and gas
production, as well as related applications found in detergents, personal care
and cosmetics, dispersants and pulp and paper making. Also included are
technologies that relate to the inhibition of corrosion of various metals,
representing the first use of a water-soluble polymer in typical water treatment
applications, and environmentally friendly superabsorbents for baby diapers,
adult incontinence products, medical fluids use, spill pickup and fire fighting
agents.

The Company holds several patents for various polyaspartates in the field
of agriculture, both in crop nutrition and crop protection. The crop nutrition
patents cover most plants, including grain and row crops, vegetables, fruits,
trees and ornamentals and methods, such as nutrient and seed coatings. The crop
protection patents cover all major classes of herbicides and insecticides.

The Company's joint development agreement with British Petroleum Co. Ltd.
("BP") provides that the Company will be the assignee for all technologies
developed in conjunction with BP in the water treatment area, including
corrosion inhibition and the formation of monomolecular films. Under its joint
development agreement with National Starch, National Starch owns all
intellectual property rights with respect to TPA product derivatives in the
fields of cosmetics, adhesives, textile pre-treatment, water treatment/corrosion
control, industrial dispersants, detergents and cleaning products for industries
and institutions, while the Company retains such rights and in the fields of
agriculture, oil field chemicals, superabsorbents. However, the parties
cross-license all such intellectual property rights. The Company and National
Starch share rights with respect to TPA product derivatives in the
pharmaceutical field.

GOVERNMENT REGULATION

All of the Company's products are registered, as all chemicals must be,
with the U.S. Environmental Protection Agency ("EPA") under the federal Toxic
Substances Control Act. However, EPA has determined that the Company's crop
nutrition products are not subject to regulation under the Federal Insecticide,
Fungicide and Rodenticide Act.

The Company's crop nutrition products are subject to approval by state
agricultural agencies prior to their distribution in the applicable state. The
Company has obtained approvals for such products from 45 states. Among the
states from which it has not received approval are California, Iowa and
Mississippi. The Company's performance data regarding its crop nutrition
products is currently under review by the agricultural agencies of such states,
and the Company knows of no reason why such approvals will not be granted once
sufficient data has been reviewed by the applicable agencies. As new crop
nutrition products are developed by the Company, such products may require
additional review and approval from state agricultural agencies. This process
takes up to three years.

Each foreign jurisdiction in which the Company anticipates marketing its
products maintains its own regulatory requirements governing the sale and use of
products such as those produced by the Company. The Company intends to rely to a
large degree on its strategic alliance partners to evaluate and effect
compliance with applicable regulations. In connection with its current European
marketing activities, the Company is relying on BASF to provide these services.

As the Company develops new formulations for its TPA products and combines
its TPA products with other products, such as herbicides and insecticides, those
products may become subject to additional review and approval requirements by
domestic and international regulatory authorities. However, the Company might
benefit from increased governmental regulation. Increased regulation of
fertilizers could benefit the Company, as the Company's AmiSorb(R) products
cause less fertilizer to remain in the soil, and increased regulation of
pesticides could benefit the Company, as the Company's products hold the
prospect of reducing the need for high volumes of pesticide.

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<PAGE> 36

EMPLOYEES

As of September 30, 1997, the Company had 56 full-time employees. These
include 27 full-time executive, sales and administrative employees, 20 full-time
research and development employees, and 9 full-time production employees. The
Company anticipates that its total number of employees will increase to
approximately 100 during fiscal year 1998, primarily as a result of bringing its
polyaspartate production facility on line and increasing commercialization of
its products. The Company's employees are not represented under any collective
bargaining agreement.

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The Company's executive officers, directors and key employees and their
respective ages and positions as of September 30, 1997 are as follows:

EXECUTIVE OFFICERS AND DIRECTORS

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry P. Koskan............ 54 Chief Executive Officer, President and Chairman of the
Board

Bernardo N. Rico........... 57 Executive Vice President, Secretary and Director

Gerald E. Noonan........... 52 Vice President, Finance, Chief Financial Officer and
Treasurer

Robert P. Pietrangelo...... 56 President, Performance Chemicals Division

Joseph F. Prochaska........ 51 President, Agricultural Products Division

Robert W. Cooper(1)(2)..... 68 Director

Daniel M. Gill(2).......... 33 Director

Richard C. Lee(1)(2)....... 47 Director

Dr. Robert G. Martin(2).... 55 Director

Dr. Donald R. Sanders(1)... 48 Director

John R. Willis............. 48 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Larry P. Koskan, the Company's founder, has served as a director, President
and Chief Executive Officer since its inception, and as Chairman of the Board
since 1992. Prior to founding the Company, Mr. Koskan held several research and
development and manufacturing positions during a 23 year career with Nalco
Chemical Company ("Nalco"). As Corporate Research Development Director for
Nalco, his duties included establishing large-volume market opportunities for
innovative, specialty polymers. He also served as Vice President of Research and
Development of Nalco's Water and Waste Treatment Division. Mr. Koskan holds a
B.S. in Education and Chemistry from the University of Kansas and an M.S. in
Organic Chemistry from Loyola University of Chicago and is the inventor or
co-inventor of over 20 U.S. patents.

Bernardo N. Rico joined the Company as Vice President of Sales and
Marketing in February 1993. In May 1993 he was elected a director, in September
1994 was appointed Executive Vice President and in 1995 was appointed Secretary.
Prior to joining the Company, Mr. Rico worked for Nalco for 23 years and held
various sales, marketing and management positions, including assignments in
Japan and as General Manager of Nalco's affiliate in Mexico (NalcoMex). Mr. Rico
holds a B.S. in Chemistry from the University of Madrid, Spain and an M.S. in
Environmental Engineering from Purdue University, where he was a Fulbright
Scholar.

Gerald E. Noonan joined the Company in April 1997 as Vice President Finance
and Administration and Treasurer and, in September 1997, was named Chief
Financial Officer. Prior to joining the Company,

35
<PAGE> 37

Mr. Noonan was Vice President Finance of the National Accounts Division of
ProSource Distribution Services, Inc., formerly a division of The Martin-Brower
Company. Prior to joining The Martin-Brower Company in 1984 as its controller,
Mr. Noonan was with Price Waterhouse for 10 years, where he was a senior audit
manager. Mr. Noonan has a B.S. in Accounting from Quincy University and is a
Certified Public Accountant.

Robert P. Pietrangelo joined the Company in April 1997 as Vice President,
Sales and Marketing of the Company's Performance Chemicals Division. Prior to
joining the Company, Mr. Pietrangelo held various management positions in the
performance chemicals industry, including marketing manager with CPS Chemical,
and Strategic Business Unit Manager with Rohm & Haas Company. Mr. Pietrangelo
has a B.A. in Chemistry and Mathematics from LaSalle University and an M.B.A. in
Marketing and Finance from Drexel University.

Joseph F. Prochaska joined the Company in June 1997 as Senior Vice
President of the Company's Agricultural Products Division and, in October 1997,
was named President of that division. Prior to joining the Company, Mr.
Prochaska was President and Chief Executive Officer of Willmar Manufacturing, a
manufacturer of agricultural application equipment. Prior to that time, Mr.
Prochaska held various sales and marketing positions with Ciba-Geigy Corp. Mr.
Prochaska has a B.S. in Forestry/Agriculture from Michigan State University, an
M.B.A. from Capital University and an M.A. in Management from Claremont Graduate
School.

Robert W. Cooper has served as a director since June 1992. He is a
principal of Cooper-Pruyn Architects, Ltd., and President and Chief Executive
Officer of R.W. Cooper and Associates, a company providing engineering and
management services to the food processing, chemical and building materials
industries. Mr. Cooper is a Registered Professional Engineer in Illinois and is
a member of ASCE and the Illinois Society of Professional Engineers.

Daniel M. Gill has served as a director of the Company since August 1996.
Mr. Gill is a founder and Managing Director of Willis Stein & Partners, L.P.
Prior to founding Willis Stein, Mr. Gill served as Managing Director of
Continental Illinois Venture Corporation from 1989 through 1994. From 1986
through 1988, Mr. Gill worked in the Corporate Finance Department of Kidder,
Peabody & Co., Incorporated. Mr. Gill also serves as a Director of Racing
Champions Corporation and a number of privately held companies. Mr. Gill
received an M.B.A. from the University of Chicago Graduate School of Business
and holds a B.A. degree in Economics from Bucknell University.

Richard C. Lee has served as a director since June 1992. He is President of
Affiliated Steam Equipment Company, a manufacturer, representative and
distributor of steam related industrial heating and processing equipment. Mr.
Lee is the past President of the Chemical Equipment Sales Engineers Association
of Chicago and the acting President of the Alsip, Illinois Industrial District
Association. Mr. Lee holds a B.S. in Business Administration from Carthage
College in Kenosha, Wisconsin.

Dr. Robert G. Martin has served as a director since June 1992. Dr. Martin,
a cataract surgeon, is a principal of Carolina Eye Associates, a 15-office
ophthalmic practice. He is Chairman of the Board of the Society for Excellence
in Eye Care and past president of the American Board of Eye Surgery. Dr. Martin
holds a B.S. in Chemistry and an M.D. from the University of North Carolina at
Chapel Hill.

Dr. Donald R. Sanders has served as a director and consultant to the
Company since June 1992. He was elected President of Donlar Pharmaceuticals
Corporation in 1997. He is also director of the Center for Clinical Research in
Chicago. Dr. Sanders has been actively involved with the design, implementation
and presentation of scientific studies for the medical profession and FDA
petitions. Dr. Sanders hold a B.S. in Biological Sciences, an M.D. and a Ph.D.
in Pharmacology from the University of Illinois. Dr. Sanders also serves as a
director of STAAR Surgical Company.

John R. Willis has served as a director of the Company since August 1996.
Mr. Willis is a founder and Managing Director of Willis Stein & Partners, L.P.
Prior to founding Willis Stein, Mr. Willis served as President of Continental
Illinois Venture Corporation from 1989 through 1994. Prior to his tenure at
CIVC, Mr. Willis founded and served as a Managing Director of Continental
Mezzanine Investment Group,

36
<PAGE> 38

following his service in various other senior lending positions at Continental
Bank, which he joined in 1974. Mr. Willis also serves as a Director of The
Petersen Companies, Inc. and a number of privately held companies. Mr. Willis
received an M.B.A. from the University of Chicago Graduate School of Business
and holds a B.S. degree in Agricultural Business Management from Purdue
University.

In addition, following the consummation of the Offering, the Company
intends to appoint at least one additional independent director.

KEY EMPLOYEES

Ronald P. Fister, age 49, joined the Company in June 1997 as Vice President
of Sales and Marketing for the Company's Agricultural Products Division. Prior
to joining the Company, Mr. Fister held a number of management positions in the
agriculture supply industry, including Vice President of Sales and Marketing of
Willmar Manufacturing, an agricultural application equipment manufacturer,
Director of Specialty Sales for Sandoz Agro, Inc., and various sales and
marketing positions with Ciba-Geigy Corp. Mr. Fister has a B.S. in Botany from
Georgetown College.

Dr. Larry Murphy, age 59, joined the Company in April 1996 as Vice
President of Global Research for the Company's Agricultural Products Division.
Prior to joining the Company, Dr. Murphy had served as Senior Vice President of
the Potash & Phosphate Institute. Dr. Murphy earned his B.S., M.S. and Ph.D.
degrees from the University of Missouri.

Dr. J. Larry Sanders, age 49, joined the Company as Vice President and
General Manager of its Agricultural Products Division in August 1995. He is
currently Vice President Research and Development of that division. Dr. Sanders
previously was Director of Marketing and Technical Services with American Plant
Food Corporation and worked for 13 years with the Potash and Phosphate Institute
of Canada, where he acted as Director of Eastern Canada and International
Coordinator (Asia). Dr. Sanders holds a PhD in soil fertility and plant
nutrition from the University of Arkansas and has authored over 150 articles and
papers.

BOARD OF DIRECTORS

The Company's directors are elected at the annual meeting of the Company's
shareholders to serve for one year terms. The Company's directors receive no
salaries or fees for their service in such capacity. From time to time the
Company has granted directors options to purchase shares of Series A Preferred
Stock pursuant to the Company's 1994 Plans. See "Long Term Incentive Plans --
The 1994 Plans." Pursuant to the 1997 Agreement, the Company and certain of its
principal shareholders (who together with the 1996 Investors, immediately prior
to the Offering, beneficially owned in excess if 66 2/3% of the outstanding
voting securities of the Company) have granted the 1996 Investors the right to
designate two members of the Company's Board of Directors and have agreed to
vote in favor of such designees. See "Management -- Principal Shareholders."

The Board of Directors has delegated certain of its authority to its Audit
and Compensation Committees. The members of the Audit Committee are Robert W.
Cooper, Daniel M. Gill, Richard C. Lee and Dr. Robert G. Martin. The Audit
Committee's responsibilities include making recommendations to the Board of
Directors regarding the selection of independent public accountants and
reviewing the plan and results of the audit performed by such accountants and
the adequacy of the Company's systems of internal accounting controls. The
members of the Compensation Committee are Dr. Donald R. Sanders, Robert W.
Cooper and Richard C. Lee. The Compensation Committee reviews the Company's
remuneration policies and practices, establishes the salaries and other
compensation of the Company's officers and administers the Company's stock
option plans and stock based incentive plan. The Company may from time to time
form other committees as circumstances warrant. Such committees will have
authority and responsibility delegated by the Board of Directors.

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<PAGE> 39

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information regarding the annual
compensation for services in all capacities to the Company for its fiscal years
ended December 31, 1996, 1995 and 1994, rendered by the Company's Chief
Executive Officer and the Company's other most highly compensated executive
officer (the "Named Executives").

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
---------------------------------------- SECURITIES UNDERLYING
OTHER OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (NO. OF SHARES)
<S> <C> <C> <C> <C> <C>
Larry P. Koskan,..................... 1996 $185,813 $40,000 $ -- 90,834
President & Chief 1995 142,986 10,000 -- 61,000
Executive Officer 1994 120,346 -- -- 94,555
Bernardo N. Rico,.................... 1996 180,122 30,000 -- 45,000
Executive Vice 1995 141,676 15,000 -- 31,000
President 1994 137,393 -- -- 702,501
</TABLE>

OPTIONS GRANTED IN LAST FISCAL YEAR

The following table summarizes certain information regarding options to
purchase Common Stock issued to the Named Executives during the Company's fiscal
year ended December 31, 1996.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
POTENTIAL
PERCENT OF REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM(1)
NAME GRANTED YEAR ($/SH) DATE -----------------
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Larry P. Koskan................. 55,834 24.29% $0.30 May 30, 2006
35,000(2) 26.88% 5.00 May 30, 2006
Bernardo N. Rico................ 15,000 6.53% 0.30 May 30, 2006
30,000(2) 23.04% 5.00 May 30, 2006
</TABLE>

- ------------------------------
(1) The dollar amounts under these columns represent the potential tangible
value, before income taxes, of each option assuming that the market price of
Common Stock appreciates in value from the fair market value at the date of
grant to the end of the option term at five percent and ten percent annual
rates and therefore are not intended to forecast possible future
appreciation, if any, of the price of Common Stock.

(2) Represents options originally issued for the equivalent number of shares of
the Company's Series A Preferred Stock.

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<PAGE> 40

OPTIONS EXERCISED IN LAST FISCAL YEAR; FISCAL YEAR END OPTION VALUES

No options were exercised in the fiscal year ended December 31, 1996. The
following table summarizes certain information regarding year end option values
of the Named Executives.

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT VALUE OF EXERCISABLE
DECEMBER 31, 1996 IN-THE-MONEY OPTIONS AT
(NO. OF SHARES) DECEMBER 31, 1996
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Larry P. Koskan............................. 181,389 -- $ 943,223 $ --
65,000(1) -- 92,500 --
Bernardo N. Rico............................ 503,167 225,334 2,643,225 1,183,217
50,000(1) -- 65,000 --
</TABLE>

- ------------------------------
(1) Represents options originally issued for the equivalent number of shares of
the Company's Series A Preferred Stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal year 1996, the Compensation Committee consisted of Dr. Donald
R. Sanders, Richard C. Lee, and Robert W. Cooper.

The following discussion of historical transactions describes the issuance
of shares of Series A Preferred Stock and securities exercisable for shares of
Series A Preferred Stock. Upon consummation of the Offering, all shares of
Series A Preferred Stock will be converted into the equivalent number of shares
of Common Stock, and all securities exercisable for shares of Series A Preferred
Stock will become exercisable for an equivalent number of shares of Common
Stock, in each case subject to the same vesting terms.

In 1995, the Individual Retirement Account of Dr. Donald R. Sanders
purchased an aggregate of $400,000 in principal amount of convertible promissory
notes of the Company in exchange for consideration in that amount. In connection
with the purchase of such promissory notes, Dr. Sanders was issued warrants for
the purchase of an aggregate of 25,000 shares of Common Stock, at an exercise
price of $0.30 per share.

On December 23, 1996, the Company prepaid various convertible promissory
notes in the aggregate principal amount of $700,000, together with accrued
interest in the amount of $147,199, held by the Individual Retirement Account of
Dr. Donald R. Sanders. At the time of their prepayment, such notes, including
both principal and interest, were convertible at various conversion prices into
an aggregate of 866,335 shares of Series A Preferred Stock.

On December 23, 1996, the Company issued to Dr. Donald R. Sanders warrants
to purchase 712,299 shares of the Company's Series A Preferred Stock at an
exercise price of $0.074 per share. These warrants expire on December 23, 2006.
Concurrently with the issuance of those warrants, Dr. Sanders purchased 154,036
shares of Series A Preferred Stock from the Company at a price of $5.50 per
share. Dr. Sanders paid for these shares with a non-interest bearing promissory
note in the principal amount of $847,199. Indebtedness of $412,199 remains
outstanding under this note. The Company expects this note to be repaid prior to
the end of 1997.

Dr. Donald R. Sanders is the owner of the Center for Clinical Research (the
"Center"). The Company has engaged the Center to perform consulting services
with respect to statistical analysis of research data. During 1996, the Company
paid the Center a total of $77,300 for such services and, in 1997, has paid the
Center a total of $45,000 for such services.

During 1996, Dr. Donald R. Sanders loaned the Company the sum of $100,000
and was issued warrants for the purchase of 53,846 shares of Series A Preferred
Stock. See "Certain Transactions."

39
<PAGE> 41

Peru, Illinois manufacturing facility. R.W. Cooper & Associates, Inc. charged
the Company a total of $730,000 for such services in 1996 and $1.1 million for
such services in 1997. The Company has paid $644,000 of this amount and, in
September 1997, R.W. Cooper & Associates, Inc. was issued 83,605 shares of
Series A Preferred Stock, at an agreed price of $5.50 per share, in satisfaction
of the Company's obligations to date. See "Certain Transactions."

LONG TERM INCENTIVE PLANS

In 1994, the Company adopted two separate but virtually identical stock
option plans (collectively, the "1994 Plans") for the purpose of (i) attracting
and retaining the best available personnel for positions of substantial
responsibility; (ii) providing additional incentives to employees and
consultants of the Company and its subsidiaries and (iii) to promote the success
of the Company's business. In October 1997, the Company adopted a stock based
incentive plan (the "ECP" and, together with the 1994 Plans, the "Plans"), to be
effective upon consummation of the Offering, covering the Company's five most
highly compensated executive officers and other executives of the Company. The
summaries of the Plans set forth below are qualified in their entirety by
reference to the text of the Plans, which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.

THE 1994 PLANS

The 1994 Plans (individually, "Plan I" and "Plan II") provide for the
issuance of options to purchase shares of the Company's Series A Preferred Stock
and Common Stock respectively. Upon consummation of the Offering, all options to
purchase shares of Series A Preferred Stock under Plan I will become options to
purchase the equivalent number of shares of Common Stock.

Administration. The Board of Directors is currently the administrator of
each Plan. Upon becoming subject to the Exchange Act, provision is made so that
administration is in compliance with Rule 16b-3 of the Exchange Act.

Eligibility. Employees, directors, consultants and advisors are eligible to
participate in the 1994 Plans. The administrator will select the individuals who
will participate in the 1994 Plans ("Participants") and determine the terms and
conditions of options granted, subject to the terms of the 1994 Plans.

Stock Options. Options granted under the 1994 Plans may be incentive stock
options ("ISOs") or nonqualified stock options. A stock option entitles a
Participant to purchase shares of Series A Preferred Stock under Plan I or
Common Stock under Plan II from the Company at the option price. Subject to
certain exceptions, the option price must be paid upon exercise in cash or cash
equivalent. The option price will be fixed by the Administrator at the time the
option is granted, but the price cannot be less than the fair market value of
the underlying share on the date of grant in the case of an ISO. The exercise
price of an ISO granted to any Participant who is a Ten Percent Shareholder (as
defined below) may not be less than 110% of the fair market value of the
underlying share on the date of grant. A Participant is a Ten Percent
Shareholder if he owns, or is deemed to own, more than ten percent of the total
combined voting power of all classes of stock of the Company or a related
entity. All options expire upon the date specified in any award agreement, which
may not exceed ten years from the date of grant, except that ISOs held by a Ten
Percent Shareholder may not be exercised after five years from the date of
grant.

Share Authorization. All awards made under the 1994 Plans will be evidenced
by written agreements between the Company and the Participant. A maximum of
1,000,000 shares of Series A Preferred Stock may be issued under Plan I and a
maximum of 3,000,000 shares of Common Stock may be issued under Plan II. The
number of shares covered by an option shall be adjusted, as the Board of
Directors deems appropriate, in the event of a stock dividend, stock split,
reverse stock spit, combination, reclassification or other similar event.

Outstanding Awards. The Company has outstanding options under Plan I
covering 630,226 shares of Series A Preferred Stock, at exercise prices ranging
from $0.44 to $5.50 per share. The Company has outstanding options under Plan II
covering 2,469,340 shares of Common Stock at exercise prices ranging from $0.23
to $0.30 per share.

40
<PAGE> 42

THE ECP

Awards granted under the ECP are based on shares of Common Stock. The ECP
is administered by a committee appointed by the Company's Board of Directors.
After the completion of the Offering, the ECP will be administered by the
Compensation Committee of the Board of Directors. The ECP provides for the grant
of incentive and nonqualified stock options, stock appreciation rights,
restricted stock, performance shares and performance units (individually, an
"Award" or collectively, "Awards"). Only officers or certain salaried employees
of the Company with potential to contribute to the future success of the Company
or its subsidiaries will be eligible to receive Awards under the ECP. The
administrator of the ECP has the discretion to select the employees to whom
Awards will be granted, to determine the type, size and terms and conditions
applicable to each Award and the authority to interpret, construe and implement
the provisions of the ECP. The administrator's decisions will be final and
binding.

One million (1,000,000) shares of Common Stock may be subject to Awards
under the ECP, all of which may be in the form of stock options.

The terms of the Awards will be set forth in award agreements ("Award
Agreements"). These Awards are described below:

Stock Options. Options (each an "Option") to purchase shares of Common
Stock, which may be incentive or nonqualified stock options, may be granted
under the ECP at an exercise price (the "Option Price") determined by the
administrator of the ECP in its discretion, provided that the Option Price for
an incentive stock option may be no less than the fair market value of a share
of Common Stock on the date of grant. Each Option represents the right to
purchase one share of Common Stock at the specified Option Price. Options will
expire not later than 10 years after the date on which they are granted and will
become exercisable at such times and in such installments as determined by the
administrator of the ECP.

Stock Appreciation Rights. An Award of a stock appreciation right ("SAR")
may be granted under the ECP. Generally, one SAR is granted with respect to one
share of Common Stock. The SAR entitles the participant, upon the exercise of
the SAR, to receive an amount equal to the appreciation in the underlying share
of Common Stock. The appreciation is equal to the difference between (i) the
"base value" of the SAR (which is determined with reference to the fair market
value of the Common Stock on the date the SAR is granted), and (ii) the fair
market value of the Common Stock on the date the SAR is exercised. Upon the
exercise of a vested SAR, the exercising participant will be entitled to receive
the appreciation in the value of one share of Common Stock as so determined,
payable at the discretion of the administrator in cash, shares of Common Stock,
or some combination thereof.

SARs will expire not later than 10 years after the date on which they are
granted. SARs become exercisable at such times and in such installments as
determined by the administrator of the ECP.

Tandem Option/SARs. An Option and an SAR may be granted "in tandem" with
each other (a "Tandem Option/SAR"). An Option and an SAR are considered to be in
tandem with each other because the exercise of the Option aspect of the tandem
unit automatically cancels the right to exercise the SAR aspect of the tandem
unit, and vice versa. The Option may be an incentive stock option or a
nonqualified stock option. Each Option shall be coupled with one SAR.
Descriptions of the terms of the Option and the SAR aspects of a Tandem
Option/SAR are provided above.

Restricted Stock. An Award of restricted stock ("Restricted Stock") is an
Award of Common Stock that is subject to such restrictions as the administrator
of the ECP deems appropriate, including forfeiture conditions and restrictions
against transfer for a period specified by the administrator of the ECP. Prior
to the expiration of the restricted period, except as and only if provided by
the administrator of the ECP, a grantee who has received a Restricted Stock
Award generally has the rights of a stockholder of the Company, including the
right to vote and to receive cash dividends on the shares subject to the Award.

Performance Shares and Performance Units. A performance share Award (a
"Performance Share") and/or a performance unit Award (a "Performance Unit") may
be granted under the ECP. Each Performance Unit will have an initial value that
is established by the administrator of the ECP at the time of

41
<PAGE> 43

grant. Each Performance Share will have an initial value equal to the fair
market value of one share of Common Stock on the date of grant. Such Awards may
be earned based upon satisfaction of certain specified performance criteria,
subject to such other terms and conditions as the administrator of the ECP deems
appropriate. Performance objectives will be established for the performance
period during which performance will be measured (the "Performance Period") and
may be based on net earnings, operating earnings or income, net income, absolute
and/or relative return on equity, capital invested or assets, earnings per
share, profits, earnings growth, revenue growth, comparisons to peer companies,
share price, total shareholder return, economic value added, customer
satisfaction, any combination of the foregoing and/or such other measures,
including individual measures of performance, as the administrator of the ECP
deems appropriate. Prior to the end of a Performance Period, the administrator
of the ECP, in its discretion, may adjust the performance objectives to reflect
an event that may materially affect the performance of the Company. The extent
to which a grantee is entitled to payment in settlement of such an Award at the
end of the Performance Period will be determined by the administrator of the
ECP, in its discretion, based on whether the performance criteria have been met
and payment will be made in cash or in shares of Common Stock in accordance with
the terms of the applicable Award Agreements.

Additional Information. Under the ECP, if there is any change in the
capitalization of the Company, a corporate transaction, a reorganization or a
partial liquidation of the Company, such proportionate adjustments as may be
necessary (in the form determined by the administrator of the ECP) to reflect
such change will be made to prevent dilution or enlargement of the rights with
respect to the aggregate number of shares of Common Stock for which Awards in
respect thereof may be granted under the ECP, the number of shares of Common
Stock covered by each outstanding Award and the price per share in respect
thereof. Unless otherwise provided in an Award Agreement, an individual's rights
under the ECP may not be assigned or transferred (except in the event of death).
An individual's rights under the ECP are subject to forfeiture for competitive
activity or activity that is inimical to the best interest of the Company.

The ECP will remain in effect until terminated by the Board of Directors
and thereafter until all Awards granted thereunder are satisfied by the issuance
of shares of Common Stock and/or the payment of cash or the ECP is otherwise
terminated pursuant to the terms of the ECP or under any Award Agreements.
Notwithstanding the foregoing, no Awards may be granted under the ECP after the
tenth anniversary of the effective date of the ECP. The Board of Directors may
at any time terminate, modify or amend the ECP; provided, however, that no such
amendment, modification or termination may materially adversely affect an
optionee's or grantee's rights under any Award theretofore granted under the
ECP, except with the consent of such optionee or grantee.

AGREEMENTS WITH EXECUTIVE OFFICERS AND KEY EMPLOYEES

On July 1, 1996, the Company entered into employment agreements with each
of Mr. Koskan and Mr. Rico, pursuant to which each has agreed to serve the
Company in his designated office for a period of five years, with an option on
the part of the executive officer to extend the term for an additional two
years. Under the terms of those employment agreements, Messrs. Koskan and Rico
are entitled to an annual base salary of $185,000 and $175,000, respectively,
subject to periodic review and potential increase by the Company. The employment
agreements provide that the respective officers are eligible for such cash bonus
and stock option plans as the Company may adopt, and provide for participation
in Company hospitalization, medical and term life insurance plans. Each
employment agreement provides that the officer will not compete with the Company
during employment and for a period of two years following termination of
employment and will maintain the confidentiality of the Company's proprietary
information.

Under the foregoing employment agreements, the officers are not entitled to
severance payments in the event of their voluntary termination of employment. In
the event of involuntary termination, death or disability, the officers are
entitled to receive a payment equal to their base compensation in the
immediately preceding twenty-four month period, and unvested options become
immediately vested.

The Company has engaged the services of Dr. J. Larry Sanders under the
terms of an employment agreement dated August 15, 1995. That agreement has a
stated term of five years and provides for a base

42
<PAGE> 44

salary to Dr. Sanders of $160,000 per year, subject to annual review and
potential increase by the Company. Dr. Sanders is also entitled to participate
in incentive cash bonuses to be based on performance of the Company's
Agricultural Products Division in realizing certain goals established by the
Company's Board of Directors from year to year, as well as such other
hospitalization, medical, disability and life insurance plans as the Company may
adopt from time to time. Under the terms of that employment agreement, Dr.
Sanders was granted options under the Company's 1994 Plans to purchase up to
50,000 shares of Common Stock at a price of $0.30 per share. The options vest at
a rate of 20% per year over the five-year term of the employment agreement,
subject to acceleration in full if Agricultural Products Division sales exceed
$10 million between August 15, 1997 and August 15, 1998. Dr. Sanders's
employment agreement provides for a two year non-competition period following
termination of employment and the continuing maintenance of the confidentiality
of the Company's proprietary information.

Under the foregoing employment agreement, Dr. Sanders is not entitled to
receive severance payments in the event of voluntary termination or termination
by the Company for cause. In any such event, unexercised stock options are
cancelled. In the event of death or disability, all obligations to Dr. Sanders
cease as of the date of such occurrence, but Dr. Sanders is entitled to receive
such severance benefits, if any, as may then be provided for under Company plans
or policies. Any unexercised and unvested portions of any stock options will be
governed by the terms of the plan under which they were issued.

CERTAIN TRANSACTIONS

The following discussion of historical transactions describes the issuance
of shares of Series A Preferred Stock and securities exercisable for shares of
Series A Preferred Stock. Upon consummation of the Offering, all shares of
Series A Preferred Stock will be converted into the equivalent number of shares
of Common Stock and all securities exercisable for shares of Series A Preferred
Stock will become exercisable for an equivalent number of shares of Common
Stock, in each case, subject to the same vesting terms.

During 1995, Dr. Donald R. Sanders' Individual Retirement Account loaned
funds to the Company in exchange for a convertible promissory note. In
connection with that transaction, the Company issued warrants to Dr. Sanders for
the purchase of Common Stock. See "Compensation Committee Interlocks and Insider
Participation."

During 1996, the Company borrowed an aggregate of $2,600,000 from various
employees, directors and shareholders and in connection therewith issued
promissory notes in that aggregate amount, as well as warrants to purchase an
aggregate of 553,847 shares of Series A Preferred Stock. In connection with this
transaction, Jerilyn K. Koskan, the record owner of in excess of 5% of the
Series A Preferred Stock, loaned the Company $75,000 and received warrants for
the purchase of 11,538 shares of Series A Preferred Stock, and Dr. Donald R.
Sanders loaned the Company $100,000 and received warrants for the purchase of
53,846 shares of Series A Preferred Stock. The warrants issued to Mrs. Koskan
and Dr. Sanders currently are exercisable at a price of $4.50 per share.

On December 23, 1996, the Company prepaid various convertible promissory
notes held by the Individual Retirement Account of Dr. Donald R. Sanders, a
director of the Company, and issued warrants to purchase the Company's Series A
Preferred Stock to Dr. Sanders. In addition, Dr. Sanders purchased shares of
Series A Preferred Stock and is the owner of an entity that the Company has
engaged to perform consulting services. See "Management -- Compensation
Committee Interlocks and Insider Participation."

Between September 1994 and November 1995, Robert G. Martin, a director of
the Company, advanced the Company sums in the aggregate amount of $2,100,340, in
exchange for various promissory notes, in response to the Company's capital
raising activities and, in connection therewith, was issued warrants for the
purchase of an aggregate of 118,930 shares of Series A Preferred Stock and
62,217 shares of Common Stock.

R.W. Cooper & Associates, Inc., a company owned and controlled by Robert W.
Cooper, acted as general contractor and provided engineering consulting services
with respect to the construction of the Peru, Illinois manufacturing facility.
See "Management -- Compensation Committee Interlocks and Insider Participation."

43
<PAGE> 45

On August 26, 1996, the Company entered into a Securities Purchase
Agreement and related documentation (collectively, the "1996 Investment") with
Willis Stein & Partners, L.P. ("Willis Stein"), Star Polymers, L.L.C. ("Star
Polymers") and RGM/BVM Limited Partnership, a partnership of which Robert G.
Martin is the general partner (the "Martin Partnership") (Willis Stein, Star
Polymers and the Martin Partnership are referred to collectively as the "1996
Investors"). Pursuant to the terms of the 1996 Investment, the 1996 Investors
purchased from the Company Convertible Subordinated Promissory Notes in the
aggregate principal amount of $26 million (the "1996 Notes"). The 1996 Notes
were convertible into 6,019,531 shares of the Company's Series A Preferred Stock
and 6,019,531 shares of the Company's Series B Preferred Stock. As part of the
1996 Investment, the 1996 Investors also received (i) warrants entitling them to
purchase additional shares of the Company's Series A Preferred Stock at a
nominal exercise price upon the failure of the Company to meet certain financial
goals during specified time periods (the "Shortfall Warrants"), (ii) 6,019,531
shares of the Company's Series C Preferred Stock and (iii) 12.5% of the
outstanding common stock of Agricultural Technologies, Inc., then a subsidiary
of the Company (the "Ag Tech Stock"). The 1996 Investment provided that, upon
the conversion of the 1996 Notes, the 1996 Investors would be entitled to
receive royalty interests entitling them to receive a percentage of the
Company's consolidated net revenues during certain future time periods (the
"Royalty Interests"). The 1996 Investors also received certain preemptive rights
with respect to the issuance by the Company of additional securities and the
right to appoint two members of the Company's Board of Directors.

On October , 1997, the Company and the 1996 Investors entered into an
Exchange and Amendment Agreement and related documentation (collectively, the
"1997 Agreement") pursuant to which, in order to facilitate the Offering, the
1996 Investors will relinquish their Convertible Subordinated Promissory Notes
and related rights and securities acquired by them pursuant to the 1996
Investment, including shares of all series of the Company's preferred stock,
Royalty Interests, Shortfall Warrants and Ag Tech Stock, in exchange for which
the Company will, upon completion of the Offering (a) pay the 1996 Investors an
aggregate of $12 million in cash from the proceeds of the Offering, (b) issue
the 1996 Investors senior notes, in the aggregate principal amount of $11
million, bearing interest at 12% per annum, (c) issue the 1996 Investors an
aggregate of 9,019,531 shares of Common Stock and (d) grant to the 1996
Investors registration rights with respect to their newly issued Common Stock.
Subsequently, Agricultural Technologies, Inc. will be dissolved and its assets
and liabilities will be distributed to the Company.

The Martin Partnership was a 3.85% participant in the transactions
contemplated by the 1996 Investment Documents and will participate to that
extent in the payments, rights and obligations reflected in the 1997 Agreement.

44
<PAGE> 46

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of the shares offered hereby, by: (i) each of the
Company's directors and executive officers, (ii) all directors and executive
officers of the Company as a group, and (iii) all persons known by the Company
to own beneficially more than 5% of the Company's Common Stock. Unless otherwise
indicated, the address of each of the persons and entities named below is in
care of the Company's executive offices.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
-------------------- --------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT
<S> <C> <C> <C> <C>

Larry P. Koskan(2)(3)................................... 5,981,912 21.0% %
Bernardo N. Rico(4)..................................... 629,209 2.2
Gerald E. Noonan........................................ -- *
Joseph F. Prochaska..................................... -- *
Robert P. Pietrangelo................................... -- *
Robert W. Cooper(5)..................................... 130,021 *
Daniel M. Gill(6)....................................... -- --
Richard C. Lee(7)....................................... 7,200 *
Dr. Robert G. Martin(8)(9).............................. 4,366,422 15.3
Dr. Donald R. Sanders(10)............................... 3,183,400 11.1
John R. Willis(6)....................................... -- --
Jerilyn K. Koskan(2)(11)................................ 5,981,912 21.0
James R. and Louise Sanderson, Trustees of the Koskan
Children's Trust(12).................................. 2,000,000 7.1
Willis Stein & Partners, L.P.(6)........................ 7,631,912 26.9
RGM/BVM Limited Partnership(8).......................... 346,904 1.2
All directors and officers as a group (11
persons)(13).......................................... 21,930,076 75.2
</TABLE>

- ------------------------------
* Less than one percent (1%)

(1) Applicable percentage of ownership prior to this Offering is based upon
28,356,364 shares of Common Stock outstanding after giving effect to the
Offering Related Transactions. For ownership after completion of this
Offering, applicable percentage ownership is based on shares of
Common Stock outstanding and assumes no exercise of the Underwriters'
overallotment option. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes voting
and investment power with respect to the shares shown as beneficially
owned. Number of shares of Common Stock deemed beneficially owned by any
person includes outstanding shares of Common Stock held by such person and
any shares of Common Stock issuable upon exercise of stock options,
warrants, convertible securities and similar rights held by such person
that are exercisable within 60 days.

(2) Larry P. Koskan and Jerilyn K. Koskan are husband and wife. Shares of
Common Stock owned of record by each are shown as beneficially owned by the
other. Each disclaims beneficial ownership of the shares held of record by
the other.

(3) Includes 2,910,456 shares of Common Stock and 119,555 shares of Common
Stock issuable pursuant to options that are exercisable within 60 days
after the date of this Prospectus held in the name of Larry P. Koskan.

(4) Includes 628,167 shares of Common Stock issuable pursuant to options that
are exercisable within 60 days after the date of this Prospectus.

45
<PAGE> 47

(5) Includes 106,383 shares of Common Stock owned of record by R.W. Cooper &
Associates, Inc., a company owned by Mr. Cooper, 2,000 shares of Common
Stock owned of record by Dawn M. Cooper, 3,000 shares of Common Stock owned
by Robert A. Cooper, Jr., and 8,778 shares of Common Stock owned by the
Robert Cooper Trust. Mr. Cooper disclaims beneficial ownership of all
shares of Common Stock not held of record by Mr. Cooper. Also includes
6,500 shares of Common Stock issuable pursuant to options that are
exercisable within 60 days after the date of this Prospectus and 3,360
shares of Common Stock issuable pursuant to warrants that are currently
exercisable.

(6) Mr. Gill and Mr. Willis are managing directors of Willis Stein & Partners,
L.L.C., the general partner of Willis Stein & Partners, L.P., an investment
partnership. To avoid duplication, shares of Common Stock owned of record
by Willis Stein & Partners L.P. are not shown as beneficially owned by
Messrs. Gill and Willis. Mr. Gill and Mr. Willis each disclaim beneficial
ownership of the shares of Common Stock of the Company owned, and to be
owned, by Willis Stein & Partners, L.P. The address for Mr. Gill, Mr.
Willis and Willis Stein & Partners, L.P. is 227 West Monroe Street, Suite
4300, Chicago, Illinois 60606. Messrs. Gill and Willis are the director
designees of the 1996 Investors. See "Management -- Board of Directors."

(7) Includes 6,500 shares of Common Stock issuable pursuant to options that are
exercisable within 60 days after the date of this Prospectus and 700 shares
of Common Stock issuable pursuant to warrants that are currently
exercisable.

(8) Dr. Martin is the general partner of RGM/BVM Limited Partnership. The
shares of Common Stock shown as beneficially owned by Dr. Martin include
the shares owned of record by RGM/BVM Limited Partnership. Dr. Martin
disclaims beneficial ownership of the shares of Common Stock of the Company
owned by RGM/BVM Limited Partnership.

(9) Includes 56,666 shares of Common Stock owned of record by Jonathan G.T.
Martin, 56,666 shares of Common Stock owned of record by the Robert M.
Martin Trust, and 56,666 shares of Common Stock owned of record by the Ryan
A. Martin Trust. Also includes 90,500 shares of Common Stock issuable
pursuant to options that are exercisable within 60 days after the date of
this Prospectus and 223,947 shares of Common Stock issuable pursuant to
warrants that are currently exercisable.

(10) Includes 41,333 shares of Common Stock owned of record by Dr. Sanders'
wife, Wanda G. Sanders, 7,000 shares of Common Stock issuable pursuant to
currently exercisable warrants owned of record by Wanda G. Sanders, 47,667
shares of Common Stock owned of record by Kendra Sanders, 47,667 shares of
Common Stock owned of record by Monica Sanders, 426,760 shares owned of
record by the Donald Sanders Trust, 1,392,328 shares of Common Stock owned
of record by the Donald R. Sanders and Wanda G. Sanders Limited Partnership
(the "Sanders Partnership") and 421,500 shares of Common Stock issuable
pursuant to options exercisable within 60 days after the date of this
Prospectus that are owned of record by the Sanders Partnership. Also
includes 5,000 shares of Common Stock issuable pursuant to options that are
exercisable within 60 days after the date of this Prospectus and 794,145
shares of Common Stock issuable pursuant to currently exercisable warrants.

(11) Includes 2,912,363 shares of Common Stock, 28,000 shares of Common Stock
issuable pursuant to options that are exercisable within 60 days after the
date of this Prospectus and 11,538 shares of Common Stock issuable pursuant
to currently exercisable warrants held in the name of Jerilyn K. Koskan.

(12) Does not include 3,352 shares of Common Stock owned of record by James R.
Sanderson, individually, 7,692 shares of Common Stock issuable pursuant to
currently exercisable warrants owned of record by James R. Sanderson,
individually, and 3,333 shares of Common Stock owned of record by Louise
Sanderson, individually.

(13) Includes the shares owned of record by Willis Stein & Partners, L.P. See
footnote (6) above.

46
<PAGE> 48

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, no par value per share. After completion of the Offering,
shares of Common Stock will be issued and outstanding, after giving
effect to the Offering Related Transactions.

The following description of the capital stock of the Company and certain
provisions of the Company's Amended Articles of Incorporation and Amended and
Restated Bylaws is a summary and is qualified in its entirety by the provisions
of the Amended Articles of Incorporation and Amended and Restated Bylaws, which
have been filed as exhibits to the Company's Registration Statement, of which
this Prospectus is a part.

COMMON STOCK

The issued and outstanding shares Common Stock are, and the shares of
Common Stock being offered hereby by the Company will be, upon payment therefor,
validly issued, fully paid and nonassessable. The holders of outstanding shares
of Common Stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the Board of Directors
may from time to time determine. See "Dividend Policy." The shares of Common
Stock are neither redeemable nor convertible, and holders have no preemptive or
subscription rights to purchase any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of shares Common Stock are
entitled to receive, pro rata, the assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities.
Each outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of shareholders. There is no cumulative voting in the
election of directors.

CERTAIN STATUTORY AND OTHER PROVISIONS

Illinois law and the Company's Amended Articles of Incorporation and
Amended and Restated Bylaws contain several provisions that may make the
acquisition of control of the Company by means of tender offer, open market
purchases, proxy contest or otherwise more difficult. Set forth below is a
description of those provisions.

ILLINOIS LAW

Following the Offering, the Company will be subject to Section 7.85 of the
Business Corporation Act of Illinois ("Section 7.85"). Section 7.85 prohibits a
publicly held Illinois corporation from engaging in a "business combination"
with an "interested shareholder," unless the proposed "business combination" (i)
receives the affirmative vote of the holders of at least 80% of the combined
voting power of the then outstanding shares of all classes and series of the
corporation entitled to vote generally in the election of directors (the "Voting
Shares") voting together as a single class, and the affirmative vote of a
majority of the combined voting power of the then outstanding Voting Shares held
by disinterested shareholders voting together as a single class, (ii) is
approved by at least two-thirds of the "disinterested directors," or (iii)
provides for consideration offered to shareholders that meets certain fair price
standards and satisfied certain procedural requirements. Such fair price
standards require that the fair market value per share of such consideration be
equal to or greater than the higher of (A) the highest price paid by the
"interested shareholder" during the two-year period immediately prior to the
first public announcement of the proposed "business combination" or in the
transaction by which the "interested shareholder" became such, and (B) the fair
market value per common share on the first trading date after the first public
announcement of the proposed "business combination" or on the trading date after
the date that the first public announcement that the "interested shareholder"
has become such. For purposes of Section 7.85, "disinterested director" means
any member of the board of directors of the corporation who (a) is neither the
"interested shareholder" nor an affiliate or associate thereof, (b) was a member
of the board of directors prior to the time that the "interested shareholder"
became such, or was recommended to succeed a "disinterested director" by a
majority of the "disinterested directors" then in office, and (c) was not
nominated for election as a director by the "interested shareholder" of any
affiliate or associate thereof. For purposes of Section 7.85 and Section 11.75
described below, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial

47
<PAGE> 49

benefit to the interested shareholder, and an "interested shareholder" is a
person who, together with affiliates and associates, owns (or within the prior
two years, did own) 10% or more of the combined voting power of the outstanding
Voting Shares.

The Company is also subject to Section 11.75 of the Business Corporation
Act of Illinois ("Section 11.75") which prohibits "business combinations" with
"interested shareholders" for a period of 3 years following the date that such
shareholder became an "interested shareholder," unless (i) prior to such date,
the Board of Directors approved the transaction that resulted in the shareholder
becoming an "interested shareholder," or (ii) upon consummation of such
transaction, the "interested shareholder" owned at least 85% of the Voting
Shares outstanding at the time such transaction commenced (excluding shares
owned by directors who are also officers, and shares owned by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer), or (iii) on or after such date, the "business
combination" is approved by the Board of Directors and authorized at a meeting
of the shareholders by 66 2/3% of the outstanding Voting Shares not owned by the
"interested shareholder." For purposes of Section 11.75, an "interested
shareholder" is a person who, together with affiliates and associates, owns (or
within the prior three years, did own) 15% of the Voting Shares.

Illinois law requires the affirmative votes of at least two-thirds of the
votes of the shares of the Company entitled to approve or authorize any (a)
merger or consolidation of the Company with or into another corporation, (b)
sale, lease or other disposition of all or substantially all of the assets of
the Company, (c) dissolution of the Company or (d) amendment of the Company's
Amended Articles of Incorporation. The two-thirds voting requirement may have
the effect of delaying, deterring or preventing a change of control of the
Company not favored by a shareholder or group of shareholders holding more than
one-third of the outstanding voting stock.

ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES

The Company's Amended Articles of Incorporation eliminate the liability of
the Company's directors to the Company or its shareholders for monetary damages
resulting from breaches of their fiduciary duties as directors. Directors remain
liable for breaches of their duty of loyalty to the Company or its shareholders,
as well as for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law and transactions from which a director
derives improper personal benefit. The Company's Amended Articles of
Incorporation also do not absolve directors of liability under Section 8.65 of
the Business Corporation Act of Illinois, which makes directors personally
liable for (i) unlawful dividends or unlawful stock repurchases or redemptions
if the director did not act in good faith, (ii) the barring of known claims
against the corporation after dissolution, or (iii) debts incurred by a
dissolved corporation in carrying on its business. The effect of this provision
is to eliminate the personal liability of directors for monetary damages for
actions involving a breach of their fiduciary duty of care, including any such
actions involving gross negligence. The Company believes that this provision
does not eliminate the liability of directors of the Company to the Company or
its stockholders for monetary damages under the Federal securities laws. The
Amended Articles of Incorporation and Amended and Restated By-laws also provide
indemnification for the benefit of directors and officers of the Company to the
fullest extent permitted by Illinois law as it may be amended from time to time,
including most circumstances under which indemnification otherwise would be
discretionary.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.

SHARES ELIGIBLE FOR FUTURE SALE

Immediately after completion of the Offering, the Company will have
shares of Common Stock outstanding, of which the shares of Common Stock
sold pursuant to the Offering will be freely tradeable without restriction or
further registration under the Securities Act, except those shares acquired by
"affiliates" of the Company as that term is defined under the Securities Act.
Holders of the remaining shares

48
<PAGE> 50

will be eligible to sell such shares pursuant to Rule 144 under the Securities
Act ("Rule 144") at prescribed times and subject to the manner of sale, volume,
notice and information restrictions of Rule 144.

The Company, its officers, directors and certain other shareholders who
collectively own shares and hold options and warrants to acquire an
aggregate of shares of Common Stock have agreed with the Underwriters,
except with the prior written consent of DLJ and subject to certain limited
exceptions, not to offer, sell, pledge, contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of directly or
indirectly any shares of Common Stock of the Company or any securities
convertible into or exercisable or exchangeable for Common Stock or in any other
manner transfer all or any portion of the economic consequences associated with
the ownership of any Common Stock for a period of 180 days after the date of
this Prospectus. Upon the expiration of such 180-day period, such holders will
in general be entitled to dispose of their shares, although the shares of Common
Stock held by affiliates of the Company or that constitute "restricted
securities" under Rule 144 will continue to be subject to the restrictions of
Rule 144.

In addition, the Company may issue shares of Common Stock (and may consider
filing a registration statement with respect to such shares) in connection with
potential future business acquisitions and resales of such shares by the
recipients. Shares so registered could be sold in the public market. No
predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for sale will have on the market price
for shares of Common Stock prevailing from time to time. Sales of substantial
amounts of shares of Common Stock in the public market following the Offering
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of equity
securities.

49
<PAGE> 51

UNDERWRITING

Subject to the terms and conditions of an Underwriting Agreement, dated ,
1997 (the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation and Schroder & Co. Inc. (the "Representatives"), have severally
agreed to purchase from the Company the respective number of shares of Common
Stock set forth opposite their names below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Schroder & Co. Inc..........................................

---------
Total..................................................
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.

The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of additional shares of Common Stock
at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Offering. To the extent that
the Underwriters exercise such option, each Underwriter will become obligated,
subject to certain conditions, to purchase its prorata portion of such
additional shares based on such Underwriter's percentage underwriting commitment
as indicated in the preceding table.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.

Each of the Company, its executive officers and directors and certain
shareholders of the Company has agreed, subject to certain exceptions, not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that

50
<PAGE> 52

transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain shareholders of the Company has agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without DLJ's prior written consent.

Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the prospects for future earnings of the Company, the
history of and the prospects for the industry in which the Company competes, the
past and present operations of the Company, the historical results of operations
of the Company, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
Offering.

Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the offering of the Common Stock and the distribution of this
Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.

In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.

The Company has granted certain shareholders the right to require the
Company to register their stock under the Securities Act. See "Certain
Transactions."

LEGAL MATTERS

The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Holleb & Coff, Chicago, Illinois. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Sidley & Austin, Chicago, Illinois. Members of Holleb & Coff hold options for
the purchase of 25,000 shares of Common Stock at an option price of $5.00 per
share.

EXPERTS

The consolidated balance sheet of Donlar Corporation and Subsidiaries as of
December 31, 1996, and the related consolidated statements of operations,
shareholders' deficit and cash flows for the year ended December 31, 1996,
included in this Prospectus and elsewhere in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report. The

51
<PAGE> 53

consolidated balance sheet of Donlar Corporation and Subsidiaries as of December
31, 1995 and the related consolidated statements of operations, shareholders'
deficit and cash flows for each of the two years in the period ended December
31, 1995, included in this Prospectus and elsewhere in this Registration
Statement have been audited by Mulcahy, Pauritsch, Salvador & Co. Ltd.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. As used herein, the term "Registration Statement" means the initial
Registration Statement and any and all amendments, exhibits, schedules and
supplements thereto. This Prospectus omits certain information contained in the
Registration Statement, as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, a copy of
which may be obtained from the Commission at its principal office in Washington,
D.C. upon payment of prescribed fees. Statements herein concerning the contents
of any contract or other document are not necessarily complete and in each
instance reference is made to such contract or other document filed with the
Commission as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.

As a result of the Offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith will file reports and other
information with the Commission. Reports, registration statements, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following regional offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, New York, New York 10048. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and will be available on the
Commission's Internet World Wide Web site at http://www.sec.gov.

52
<PAGE> 54

DONLAR CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Report of Mulcahy, Pauritsch, Salvador & Co. Ltd.,
Independent Public Accountants............................ F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (unaudited)............................. F-4
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997 (unaudited)........................ F-5
Consolidated Statements of Shareholders' Deficit............ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997 (unaudited)........................ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE> 55

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors

of Donlar Corporation:

We have audited the accompanying consolidated balance sheet of DONLAR
CORPORATION (an Illinois corporation) AND SUBSIDIARIES as of December 31, 1996,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for the year ended December 31, 1996. 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 audit.

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

Reference should be made to Note 2 of the accompanying Consolidated
Financial Statements for a discussion of the risks and uncertainties relative to
the Company's business.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donlar
Corporation and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
April 25, 1997 (except with

respect to the matters discussed in

Note 2 as to which the date is

October 15, 1997)

F-2
<PAGE> 56

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of Donlar Corporation:

We have audited the accompanying consolidated balance sheet of DONLAR
CORPORATION (an Illinois corporation) AND SUBSIDIARIES as of December 31, 1995,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

Reference should be made to Note 2 of the accompanying Consolidated
Financial Statements for a discussion of the risks and uncertainties relative to
the Company's business.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donlar
Corporation and Subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for each of the two years ended December 31,
1995, in conformity with generally accepted accounting principles.

MULCAHY, PAURITSCH, SALVADOR & CO. LTD.

Chicago, Illinois
February 12, 1996 (except with

respect to the matters discussed in

Note 2 as to which the date is

October 15, 1997)

F-3
<PAGE> 57

DONLAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
ASSETS 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 614,231 $ 2,322,134 $ 3,718,244
Short-term investments.................................... 1,948,812 12,470,926 3,859,948
Accounts receivable....................................... 80,300 845,282 817,682
Inventories............................................... 215,937 2,724,743 4,987,411
Prepaid expenses and other current assets................. 19,441 69,550 79,814
----------- ------------ ------------
Total current assets................................ 2,878,721 18,432,635 13,463,099
----------- ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 390,962 5,500,670 10,352,282
----------- ------------ ------------
OTHER ASSETS:
Deferred financing costs, net of accumulated amortization
of $0, $265,933 and $664,833 at December 31, 1995 and
1996, and June 30, 1997, respectively................... -- 2,127,466 1,728,566
Patents, net of accumulated amortization of $92,578,
$173,582 and $222,907 at December 31, 1995 and 1996, and
June 30, 1997, respectively............................. 919,617 1,244,352 1,318,637
Deposits.................................................. 3,500 46,389 92,778
----------- ------------ ------------
Total other assets.................................. 923,117 3,418,207 3,139,981
----------- ------------ ------------
$ 4,192,800 $ 27,351,512 $ 26,955,362
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of royalty obligation..................... $ -- $ -- $ 100,956
Note payable.............................................. 100,000 -- --
Revolving credit facility................................. -- 828,400 --
Accounts payable.......................................... 132,091 2,562,410 1,486,624
Accrued interest.......................................... 510,549 916,191 --
Accrued expenses.......................................... 9,857 81,152 541,671
----------- ------------ ------------
Total current liabilities........................... 752,497 4,388,153 2,129,251
----------- ------------ ------------
LONG-TERM LIABILITIES:
Convertible debt.......................................... 6,432,339 28,669,339 23,470,668
Royalty obligation, net of current maturities............. -- 3,850,000 4,214,870
----------- ------------ ------------
Total long-term liabilities............................... 6,432,339 32,519,339 27,685,538
----------- ------------ ------------
Total liabilities................................... 7,184,836 36,907,492 29,814,789
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, no par value, 25,000,000, 60,000,000 and
60,000,000 shares authorized at December 31, 1995 and
1996, and June 30, 1997, respectively; 4,400, 76,323,
and 188,323 shares issued and outstanding as of December
31, 1995 and 1996 and June 30, 1997, respectively....... 1,320 22,897 50,897
Series A convertible preferred stock, no par value;
20,000,000, 38,000,000 and 38,000,000 shares authorized
at December 31, 1995 and 1996, and June 30, 1997,
respectively; 14,120,775, 14,321,538, and 19,064,905
shares issued and outstanding as of December 31, 1995
and 1996, and June 30, 1997, respectively............... 2,762,206 3,831,195 16,536,471
Series B preferred stock, no par value, 6,020,000 shares
authorized at December 31, 1996, and June 30, 1997,
respectively; 0, issued and outstanding at December 31,
1995 and 1996 and June 30, 1997, respectively........... -- -- --
Series C preferred stock, no par value, 6,020,000 shares
authorized at December 31, 1996, and June 30, 1997; 0,
6,019,531 and 6,019,531 issued and outstanding at
December 31, 1995 and 1996 and June 30, 1997,
respectively............................................ -- 1,000 1,000
Additional paid-in capital................................ -- 6,035,452 6,488,910
Accumulated deficit....................................... (5,755,562) (18,599,325) (25,524,506)
Shareholder note receivable............................... -- (847,199) (412,199)
----------- ------------ ------------
Total shareholders' deficit......................... (2,992,036) (9,555,980) (2,859,427)
----------- ------------ ------------
$ 4,192,800 $ 27,351,512 $ 26,955,362
=========== ============ ============
</TABLE>

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

F-4
<PAGE> 58

DONLAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $ 9,610 $ 22,777 $ 2,142,467 $ 575,205 $ 1,386,761
Cost of products sold........... 8,140 19,702 2,067,163 686,610 1,146,324
----------- ----------- ------------ ----------- -----------
Gross profit (loss)...... 1,470 3,075 75,304 (111,405) 240,437
Selling, general and
administrative expenses....... 704,382 1,026,785 5,643,115 2,054,117 3,542,698
Research and development........ 721,053 1,000,795 5,038,080 751,628 1,053,654
----------- ----------- ------------ ----------- -----------
Loss from operations..... (1,423,965) (2,024,505) (10,605,891) (2,917,150) (4,355,915)
Other income (expense):
Interest income............... 14,646 100,277 409,722 69,611 271,432
Interest expense.............. (112,941) (366,860) (2,647,594) (1,313,128) (2,840,698)
Research income............... -- 510,322 -- -- --
----------- ----------- ------------ ----------- -----------
Total other income
(expense)............. (98,295) 243,739 (2,237,872) (1,243,517) (2,569,266)
----------- ----------- ------------ ----------- -----------
Loss before income
taxes................. (1,522,260) (1,780,766) (12,843,763) (4,160,667) (6,925,181)
Provision for income taxes...... -- -- -- -- --
----------- ----------- ------------ ----------- -----------
Net loss........................ $(1,522,260) $(1,780,766) $(12,843,763) $(4,160,667) $(6,925,181)
=========== =========== ============ =========== ===========
Net loss per common share....... $ (1.32) $ (1.67) $ (11.86) $ (3.87) $ (5.83)
=========== =========== ============ =========== ===========
Average common shares
outstanding................... 1,151,148 1,064,264 1,083,023 1,075,065 1,187,608
=========== =========== ============ =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 59

DONLAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------ ------------------------ --------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993....... 2,889,417 $ 1,433,350 -- $ -- -- $-- -- $ --
Stock conversion............... (2,889,417) (1,433,350) 14,447,085 1,433,350 -- -- -- --
Issuance of preferred stock.... -- -- 338,400 1,513,856 -- -- -- --
Retirement of preferred
stock........................ -- -- (669,710) (200,000) -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- -- --- --------- ------
BALANCE, December 31, 1994....... -- -- 14,115,775 2,747,206 -- -- -- --
Exercise of stock options...... 4,400 1,320 -- -- -- -- -- --
Issuance of preferred stock.... -- -- 5,000 15,000 -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- -- --- --------- ------
BALANCE, December 31, 1995....... 4,400 1,320 14,120,775 2,762,206 -- -- -- --
Exercise of stock options and
warrants..................... 71,923 21,577 800 2,400 -- -- -- --
Issuance of preferred stock.... -- -- 199,963 1,066,589 -- -- 6,019,531 1,000
Issuance of stock options and
warrants..................... -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- -- --- --------- ------
BALANCE, December 31, 1996....... 76,323 22,897 14,321,538 3,831,195 -- -- 6,019,531 1,000
Exercise of stock options and
warrants (unaudited)......... 112,000 28,000 86,960 47,297 -- -- -- --
Conversion of notes and related
interest (unaudited)......... -- -- 3,593,721 6,813,208 -- -- -- --
Issuance of warrants and vested
stock options (unaudited).... -- -- -- -- -- -- -- --
Issuance of preferred stock
(unaudited).................. -- -- 1,062,686 5,844,771 -- -- -- --
Repayment of notes
(unaudited).................. -- -- -- -- -- -- -- --
Net loss (unaudited)........... -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- -- --- --------- ------
BALANCE, June 30, 1997
(unaudited).................... 188,323 $ 50,897 19,064,905 $16,536,471 -- $-- 6,019,531 $1,000
========== =========== ========== =========== == === ========= ======

<CAPTION>
ADDITIONAL SHAREHOLDER TOTAL
PAID-IN ACCUMULATED NOTE SHAREHOLDERS'
CAPITAL DEFICIT RECEIVABLE DEFICIT
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993....... $ -- $ (2,452,536) $ -- $ (1,019,186)
Stock conversion............... -- --
Issuance of preferred stock.... -- -- -- 1,513,856
Retirement of preferred
stock........................ -- -- -- (200,000)
Net loss....................... -- (1,522,260) -- (1,522,260)
---------- ------------ --------- ------------
BALANCE, December 31, 1994....... -- (3,974,796) -- (1,227,590)
Exercise of stock options...... -- -- -- 1,320
Issuance of preferred stock.... -- -- -- 15,000
Net loss....................... -- (1,780,766) -- (1,780,766)
---------- ------------ --------- ------------
BALANCE, December 31, 1995....... -- (5,755,562) -- (2,992,036)
Exercise of stock options and
warrants..................... -- -- -- 23,977
Issuance of preferred stock.... -- -- (847,199) 220,390
Issuance of stock options and
warrants..................... 6,035,452 -- -- 6,035,452
Net loss....................... -- (12,843,763) -- (12,843,763)
---------- ------------ --------- ------------
BALANCE, December 31, 1996....... 6,035,452 (18,599,325) (847,199) (9,555,980)
Exercise of stock options and
warrants (unaudited)......... -- -- -- 75,297
Conversion of notes and related
interest (unaudited)......... -- -- -- 6,813,208
Issuance of warrants and vested
stock options (unaudited).... 453,458 -- -- 453,458
Issuance of preferred stock
(unaudited).................. -- -- -- 5,844,771
Repayment of notes
(unaudited).................. -- -- 435,000 435,000
Net loss (unaudited)........... -- (6,925,181) -- (6,925,181)
---------- ------------ --------- ------------
BALANCE, June 30, 1997
(unaudited).................... $6,488,910 $(25,524,506) $(412,199) $ (2,859,427)
========== ============ ========= ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 60

DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(1,522,260) $(1,780,766) $(12,843,763) $(4,160,667) $(6,925,181)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................ 95,740 112,478 874,211 96,731 1,138,201
Expense related to issuance of stock options and
warrants........................................... -- -- 6,035,452 941,540 1,265,729
Changes in operating assets and liabilities--
Accounts receivable................................ -- (80,300) (764,982) (37,912) 33,600
Inventories........................................ (37,788) (158,149) (2,508,806) (884,060) (2,262,668)
Prepaid expenses and other current assets.......... 7,192 (19,441) (50,109) (457,991) (10,263)
Deposits........................................... -- (3,500) (42,889) (42,889) (46,389)
Accounts payable................................... 14,050 (160,070) 2,430,319 958,049 (1,075,786)
Accrued interest and expenses...................... 81,030 353,555 826,937 384,047 1,041,123
----------- ----------- ------------ ----------- -----------
Net cash used in operating activities.......... (1,362,036) (1,736,193) (6,043,630) (3,203,152) (6,841,634)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.................... -- (1,948,812) (12,470,926) -- (3,859,948)
Redemption of short-term investments................... -- -- 1,948,812 1,948,812 12,470,926
Purchases of property, plant and equipment............. (68,980) (81,854) (5,046,467) (977,116) (4,958,021)
Investments in patents................................. (669,258) (172,532) (405,739) (157,593) (123,610)
----------- ----------- ------------ ----------- -----------
Net cash used in investing activities.......... (738,238) (2,203,198) (15,974,320) 814,103 3,529,347
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs............................... -- -- (2,393,399) -- --
Proceeds from issuance of convertible debt, Series C
preferred stock, royalty obligation, shares in a
subsidiary and warrants.............................. 1,017,071 4,807,339 26,050,000 50,000 --
Proceeds from issuance of Series A preferred stock..... 1,040,000 15,000 -- -- 5,032,500
Principal repayments of convertible debt............... (100,814) (307,342) (800,000) -- --
Proceeds from bridge financing......................... -- -- 2,600,000 2,600,000 --
Repayment of bridge financing.......................... -- -- (2,600,000) -- --
Net borrowings (repayments) under revolving credit
facility............................................. -- -- 828,400 -- (828,400)
Payment for retirement of preferred stock.............. (200,000) -- -- -- --
Proceeds from the exercise of stock options and
warrants............................................. -- 1,320 11,677 3,026 69,297
Other.................................................. -- -- 29,175 -- --
Loan to shareholder.................................... -- -- (55,000) -- --
Proceeds from repayment of shareholder loan............ 100,000 -- 55,000 -- 435,000
----------- ----------- ------------ ----------- -----------
Net cash provided by financing activities...... 1,856,257 4,516,317 23,725,853 2,653,026 4,708,397
----------- ----------- ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (244,017) 576,926 1,707,903 263,977 1,396,110
CASH AND CASH EQUIVALENTS, beginning of period........... 281,322 37,305 614,231 614,231 2,322,134
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period................. $ 37,305 $ 614,231 $ 2,322,134 $ 878,208 $ 3,718,244
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for--
Interest............................................. $ 18,966 $ 9,071 $ 286,924 $ -- $ 29,065
Taxes................................................ -- -- -- -- --
Noncash financing activities--
Issuance of 40,303 shares of Series A preferred stock
for the purchase of land........................... $ -- $ -- $ 201,515 $ 201,515 $ --
Issuance of 154,035 shares of Series A preferred
stock for note receivable from shareholder......... $ -- $ -- $ 847,199 $ -- $ --
Issuance of 5,625 shares of Series A preferred stock
for compensation................................... $ -- $ -- $ 17,875 $ -- $ --
Issuance of 3,741,407 shares of Series A preferred
stock for conversion of notes payable.............. $ -- $ -- $ -- $ -- $ 7,625,479
=========== =========== ============ =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE> 61

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE BUSINESS

Donlar Corporation, an Illinois corporation, and Subsidiaries (the
"Company") develop and market a new family of environmentally friendly
biodegradable polymers, known as thermal polyaspartates ("TPA"). During 1996,
the Company began manufacturing and distributing these polymers to agricultural
and industrial markets. In the agricultural market, the products increase a
plant's uptake of fertilizer from the soil and have been focused toward winter
wheat, corn and cotton. In the industrial markets, the products replace
nonbiodegradable polyacrylates and have been focused toward the oil and water
treatment, detergent and cleaners, and personal care fields. The Company sells
its products to distributors primarily in the United States and Europe. The
Company was formed on January 8, 1990, and was in the development stage through
December 31, 1994. The year ended December 31, 1995, was the first year during
which it was considered an operating company.

2. RISKS AND UNCERTAINTIES

a. Absence of Operating Profits -- The Company has incurred a net loss in
each year since its founding, and as of June 30, 1997, has an accumulated
deficit of $25,524,506. The Company expects to incur operating losses over the
near term. The Company's ability to achieve profitability will depend on many
factors including the Company's ability to develop, manufacture, introduce and
market commercially acceptable products. There can be no assurance that the
Company will ever achieve a profitable level of operations or if profitability
is achieved, that it can be sustained.

b. Early Stages of Development of the Company's Products -- The Company was
founded in 1990 and until 1996 was engaged principally in research and
development activities. Currently, the Company is in the early stages of
commercialization, has only a limited number of product offerings and potential
product applications are in the early stages of development. As a result, the
Company's TPA products have been sold in limited quantities and there can be no
assurance that a significant market will develop for such products. Therefore,
the Company's failure to develop, manufacture and commercialize TPA products on
a timely and cost-effective basis could have a material adverse effect on the
Company's financial results.

c. Limited Manufacturing Capacity and Experience -- The Company completed
construction of a manufacturing facility in Peru, Illinois during 1997. The
Company's success will depend in part on the Company's ability to manufacture
its products in significant quantities, with consistent quality, at acceptable
costs and on a timely basis. The Company has limited experience in high-volume
manufacturing. The Company also anticipates constructing an L-aspartic acid
manufacturing facility within the next one to three years. In addition, in order
to fully commercialize TPA products cost effectively in certain performance
chemical applications, the Company will need to construct an as yet undesigned
liquid process and derivatives manufacturing facility. No assurance can be given
that the Company can make the transition to high-volume production or construct
and operate an L-aspartic acid facility or a liquid process and derivatives
manufacturing facility on a timely or economical basis.

d. Financing Considerations -- Based on current projections (excluding
proceeds from the initial public offering), management believes there will be
sufficient cash generated from operations and borrowings under loan commitments
to enable the Company to operate for the foreseeable future. The Company has
been informed by its independent public accountants that in the event an initial
public offering is not consummated and the Company fails to meet its
projections, the independent public accountants would consider a going concern
report on the 1997 financial statements unless the Company were successful in
obtaining alternate financing.

F-8
<PAGE> 62

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation -- The consolidated financial statements
include the accounts of Donlar and all entities in which the Company exercises
unilateral control. All significant intercompany balances and transactions have
been eliminated.

b. Cash and Cash Equivalents -- Cash and cash equivalents include cash in
banks and investments with original maturities of up to three months.

c. Short-Term Investments -- The Company invests in Treasury Bills and
certificates of deposit with maturity periods ranging from six to nine months.
Short-term investments are valued at the lower of cost or market and at the
balance sheet date approximate fair market value.

d. Inventories -- Inventories are stated at the lower of cost or market
value, using the first-in, first-out method. Inventories consisted of the
following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>

Raw material................................. $193,240 $ 263,393 $ 871,480
Finished goods............................... 22,697 2,461,350 4,115,931
-------- ---------- ----------
$215,937 $2,724,743 $4,987,411
======== ========== ==========
</TABLE>

e. Property, Plant and Equipment -- Property, plant and equipment are
stated at cost less accumulated depreciation and amortization. Major
improvements are capitalized and depreciated over their useful lives. Repairs
and maintenance are charged to expense as incurred. Upon sale or retirement, the
related cost and accumulated depreciation are removed from the accounts, and any
gain or loss is recorded in the statement of operations. Depreciation is
determined using the straight-line method for financial reporting purposes.
Leasehold improvements are amortized over the shorter of the life of the asset
or the lease term.

During 1996, the Company changed the estimated useful lives of various
assets. The change in estimate had an immaterial effect on the consolidated
financial statements.

f. Deferred Financing Costs -- Financial costs related to the issuance of
convertible notes payable have been capitalized and are being amortized over the
three-year maturity periods of the debt.

g. Patents -- Costs incurred in patenting intellectual property are
capitalized and amortized over fifteen years using the straight-line method.

h. Revenue Recognition -- Revenues from product sales are recognized when
the product has been shipped.

i. Research and Development -- Costs associated with the research and
development of new products are expensed as incurred.

j. Accounting for Stock-Based Compensation -- In October, 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation."
The Company has adopted the disclosure-only provisions of Statement 123 with
respect to its employees' and directors' noncompensatory stock options and
warrants. The expense associated with stock options and warrants issued to
nonemployees and nondirectors is reflected in the consolidated financial
statements in accordance with Statement 123. As permitted by Statement 123, the
intrinsic value of compensatory stock options is reflected in the consolidated
financial statements in accordance with Accounting Principles Board Opinion No.
25.

k. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial

F-9
<PAGE> 63

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

l. Reclassifications -- Certain prior year amounts have been reclassified
to conform to June 30, 1997 presentation.

m. Income Taxes -- The Company provides for income taxes under the asset
and liability method. Under this method, deferred tax assets and liabilities are
recorded based on the differences between the financial statement amounts and
tax bases of assets and liabilities, considering the tax rates in effect when
these differences are expected to reverse.

n. Net Loss Per Common Share and Pro Forma Supplementary Net Loss Per
Common Share --

Net Loss Per Common Share -- Net loss per common share is based on the
weighted average number of shares of common stock and certain common stock
equivalents outstanding. Common stock equivalents are not included in the net
loss per share calculations, since the effect of their inclusion would be
anti-dilutive, except that certain common stock equivalents issued during the
twelve month period prior to the proposed public offering are included in the
net loss per share calculation, as if they had been outstanding for all periods
presented using the treasury stock method (assuming an initial public offering
price of $6.00 per share). Common stock equivalents represent options, warrants,
and convertible stock using the treasury stock method for all periods presented.

Pro Forma Supplementary Net Loss Per Common Share -- Pro forma
supplementary net loss per common share for the year ended December 31, 1996 and
the six months ended June 30, 1997 of ($7.24) and ($3.34), respectively, is
computed based upon (i) net income adjusted for the imputed interest on the
royalty obligation of $350,000 and $551,000 for the year ended December 31, 1996
and the six months ended June 30, 1997, respectively, resulting from the
application of the net proceeds from the contemplated initial public offering to
reduce indebtedness of the Company and (ii) the weighted average number of
shares of common stock outstanding (assuming an initial public offering price of
$6.00 per share) adjusted to reflect the sale by the Company of approximately
652,918 and 795,627 shares of common stock in the initial public offering
resulting in net proceeds sufficient to pay such indebtedness for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively.

In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("Statement 128"), "Earnings
per Share". Adoption of Statement 128 is required for all periods ending after
December 15, 1997, and early adoption is not permitted. This statement will not
have a material impact on the Company's results of operations.

o. Interim Financial Data -- The unaudited balance sheet as of June 30,
1997, the unaudited statement of shareholders' deficit for the six months ended
June 30, 1997, and the unaudited statements of operations and cash flows for the
six months ended June 30, 1996 and 1997, include, in the opinion of management,
all adjustments (consisting of normal and recurring adjustments) necessary to
present fairly the Company's financial position, results of operations and cash
flows. Operating results for the six months ended June 30, 1997, are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1997. The information included in these Notes to Consolidated
Financial Statements relating to the six months ended June 30, 1996 and 1997, is
unaudited.

4. CONCENTRATION OF CREDIT RISK

The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments and trade accounts receivable.

The Company places its cash and short-term investments with high quality
financial institutions. At times, such investments may be in excess of the FDIC
insurance limit.

F-10
<PAGE> 64

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company currently sells primarily to customers located in the United
States and Europe. The Company reviews a customer's credit history before
extending credit. In addition, the Company typically reviews the financial
strength of its customers and, as a consequence, believes that its trade
accounts receivable risk is limited. During 1996, certain customers had credit
terms such that 25% was due within 30 days and the remainder was due in 25%
increments as product was sold. During 1997 credit terms will be established in
accordance with industry standards. One customer in the agriculture industry
accounted for approximately 0%, 4.0% and 39.2% of net sales as of December 31,
1994, 1995 and 1996, and 38.7% and 29.5% of net sales for the six months ended
June 30, 1996 and 1997, respectively, and 0%, 45.3% and 34.2% of accounts
receivable at December 31, 1995 and 1996, and June 30, 1997, respectively.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, along with corresponding estimated useful
lives, consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
DESCRIPTION USEFUL LIFE 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Land............................ -- $ -- $ 566,782 $ 566,782
Building........................ 30 years -- -- 5,465,367
Laboratory and plant
equipment..................... 5-10 years 395,397 1,512,430 1,590,101
Furniture and fixtures.......... 5-7 years 51,821 201,884 300,527
Leasehold improvements.......... 4-10 years 22,060 102,701 103,920
Construction in progress........ -- 236,027 3,569,489 2,884,610
-------- ---------- -----------
Total property, plant and
equipment.................. 705,305 5,953,286 10,911,307
Less-- Accumulated depreciation
and amortization.............. 314,343 452,616 559,025
-------- ---------- -----------
Property, plant and equipment,
net........................ $390,962 $5,500,670 $10,352,282
======== ========== ===========
</TABLE>

6. REVOLVING CREDIT FACILITY

In February, 1996, the Company obtained a line of credit which allowed for
borrowings up to $1,000,000. The line of credit was personally guaranteed by
certain stockholders of the Company, bore interest at prime plus 1% (9.25% on
December 31, 1996) and expired on March 31, 1997. At December 31, 1996, the
Company had borrowings of $828,400 under the line of credit facility and unused
availability of $171,600. As of June 30, 1997, all borrowings under the line of
credit had been repaid. The Company is currently in negotiations with a
commercial bank for a new line of credit.

7. DEBT

a. Note Payable -- The note payable at December 31, 1995, of $100,000 was
due and paid in August, 1996. The interest rate was 5.25%.

F-11
<PAGE> 65

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

b. Convertible Debt -- Convertible debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Unsecured notes payable, due August 26,
1999, with a variable royalty payment
in lieu of interest, convertible into
6,019,531 shares of Series A and
6,019,531 shares of Series B preferred
stock at December 31, 1996 and June 30,
1997, net of unamortized debt discount
of $3,113,000 and $2,529,332
(unaudited) at December 31, 1996 and
June 30, 1997, respectively (see Note
18).................................... $ -- $22,887,000 $23,470,668
Unsecured notes payable, due June, 1997,
bearing interest at the bank's prime
interest rate (8.50% and 8.25% at
December 31, 1995 and 1996,
respectively), adjusted annually at
January 1, convertible into 2,277,900
and 1,640,707 shares at maturity,
respectively, of Series A preferred
stock (see Note 16).................... 1,000,000 700,000 --
Unsecured notes payable, due beginning
March, 1997, bearing interest at 8%,
convertible into 2,245,366 and
2,100,700 shares at maturity,
respectively, of Series A preferred
stock (see Note 16).................... 5,432,339 5,082,339 --
---------- ----------- -----------
$6,432,339 $28,669,339 $23,470,668
========== =========== ===========
</TABLE>

In August, 1996, the Company received $26,000,000 in exchange for (a)
unsecured notes payable which are convertible into shares of Series A and B
preferred stock (b) Series C preferred stock, (c) shares in one of the Company's
subsidiaries, (d) warrants to purchase common stock of the Company and (e)
future royalty payments. The proceeds were allocated to the equity instruments
and liabilities based upon estimated fair market value and resulted in recording
debt discount totaling $3,502,000. The debt discount is being amortized over the
three-year maturity period of the related debt (Note 18).

Included in unsecured notes payable above is $6,432,339, $27,720,339 and
$23,470,668 (unaudited) at December 31, 1995 and 1996, and June 30, 1997,
respectively, in notes which were issued to shareholders.

c. Bridge Financing -- During 1996, the Company obtained $2,600,000 in
bridge financing prior to consummation of the financing transaction described
above. The bridge financing lenders included certain employees, shareholders and
note holders. In connection with the bridge financing, the Company issued
warrants to purchase 553,847 shares of Series A preferred stock at $6.50 per
share. The number of shares and exercise price are subject to change based on
completion of future equity offerings by the Company; the exercise price will be
adjusted to equal the weighted average of all prices paid for future equity
issuances. The exercise price at June 30, 1997 was $4.50 (unaudited). The
warrants are exercisable for a 10-year period. The Company must give the holder
of the warrant ten days notice of the proposed effective date of a public
offering or merger, and, if the warrant has not been exercised by the effective
date of the transaction, it shall terminate.

The value of these warrants, totaling $941,540, has been included in
interest expense in the accompanying consolidated statement of operations in
1996.

F-12
<PAGE> 66

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

At December 31, 1996, and June 30, 1997, the Company had Federal tax net
operating loss carryforwards of approximately $10,750,000 and $17,074,000
(unaudited), respectively, which begin to expire in 2007. The provision for
income taxes consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -----------
1994 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Current--
Federal..................................... $ -- $ -- $ -- $ --
State....................................... -- -- -- --
--------- --------- ----------- ----------
Total current provision................ -- -- -- --
--------- --------- ----------- ----------
Deferred--
Federal..................................... 517,568 605,460 4,367,00 2,355,000
State....................................... 70,024 81,915 591,000 318,000
--------- --------- ----------- ----------
Total deferred provision............... 587,592 687,375 4,958,00 2,673,00
--------- --------- ----------- ----------
Valuation allowance........................... (587,592) (687,375) (4,958,000) (2,673,000)
--------- --------- ----------- ----------
Total provision for income taxes....... $ -- $ -- $ -- $ --
========= ========= =========== ==========
</TABLE>

A reconciliation of the statutory Federal tax rate to the actual effective
income tax rate for each of the three years ended December 31, 1994, 1995 and
1996, and the six months ended June 30, 1996 and 1997 (unaudited), is as
follows:

<TABLE>
<S> <C>
Statutory rate.............................................. 34.0%
State taxes, net of federal benefit and state credits....... 4.6
Valuation allowance......................................... (38.6)
-----
Effective rate....................................... --%
=====
</TABLE>

The components of the net deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets --
Net tax operating loss
carryforwards...................... $ 1,647,400 $ 4,156,000 $ 6,590,000
Stock options, warrants, and other.... -- 2,395,000 2,629,000
----------- ----------- -----------
Total deferred tax assets..... 1,647,400 6,551,000 9,219,000
----------- ----------- -----------
Deferred tax liabilities --
Property and equipment................ -- (14,000) (50,000)
----------- ----------- -----------
Total deferred tax
liabilities................. -- (14,000) (50,000)
----------- ----------- -----------
Valuation allowance..................... (1,647,400) (6,537,000) (9,169,000)
----------- ----------- -----------
Net deferred taxes............ $ -- $ -- $ --
=========== =========== ===========
</TABLE>

9. SHAREHOLDERS' EQUITY

During January, 1994, the Board of Directors authorized a 5-for-1
conversion of Series A preferred stock for common stock held by the shareholders
of record at that time.

F-13
<PAGE> 67

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1996, the Company increased the authorized shares of common stock
and Series A preferred stock to 60,000,000 and 38,000,000 shares, respectively.
In addition, the Company authorized 6,020,000 shares of Series B preferred stock
and authorized 6,020,000 and issued 6,019,531 shares of Series C preferred
stock. The Company has reserved 46,000,000 shares of common stock, 6,019,531
shares of Series A preferred stock, and 6,019,531 shares of Series B preferred
stock for the exercise of stock options and warrants and the conversion of notes
and Series A preferred stock.

Series A preferred stock is convertible into shares of common stock at a
rate of one to one, has voting privileges, a stated liquidation preference
amount of $2.25 per share and is entitled to noncumulative dividends which are
declared at the discretion of the Board of Directors. Series B preferred stock
does not have voting privileges or a stated dividend rate, but does have a
liquidation preference amount of $2.11 per share. Series B preferred stock is
retired at the time Series A preferred stock is converted to common stock.
Series C preferred stock has voting privileges, a liquidation preference amount
of $0.000167 per share, and no stated dividend rate. Series C preferred stock is
retired at the time certain convertible noteholders convert their notes to
Series A and Series B preferred stock.

In accordance with the Shareholders Agreement (see Note 18), the Company
has the right of first refusal on all dispositions of stock, except as described
below. All shareholders are required to give the Company 30 days written notice
of their intention to dispose of shares. The written notice must include the
terms and conditions of the proposed disposition. The Company has 30 days to
purchase all or a portion of the shares. If the Company chooses not to purchase
the shares, the shareholder must execute the transaction with the proposed
purchaser within 90 days of the written notice. The Company does not have the
right of first refusal if the shares are being transferred to family members,
family trusts or charitable, educational, fraternal or religious organizations.
In addition, 10% shareholders (as defined) may dispose of a portion of their
ownership without consent of the Company, as long as the fair market value of
the shares or the consideration to be received does not exceed $500,000, subject
to certain restrictions. Beginning in August, 1998, 10% shareholders may
transfer up to 25% of their ownership without the Company's consent, as long as
the prospective purchaser is not a competitor.

10. STOCK OPTIONS AND WARRANTS

a. Stock Options -- In 1994, the Company adopted incentive and nonstatutory
stock option plans (the "1994 Plans") for employees and consultants and has
reserved 3,000,000 shares of common stock and 1,000,000 shares of Series A
preferred stock for issuance under such plans. The plans are administered by the
Board of Directors and provide for the issuance of options to purchase shares of
common stock and Series A preferred stock. Terms of each option, including the
exercise price and vesting period, are determined by the Board of Directors, and
in no event can the life of an option exceed ten years from the date of grant.
Generally, the options vest either immediately or over a five-year period.

F-14
<PAGE> 68

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Activity of the stock option plans is as follows:

<TABLE>
<CAPTION>
SHARES UNDER OPTION
-------------------------------------------------------------------------
COMMON SERIES A PREFERRED
----------------------------------- ----------------------------------
WEIGHTED WEIGHTED
NUMBER EXERCISE AVERAGE NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE OF PRICE EXERCISE
SHARES RANGE PRICE SHARES RANGE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding as of December 31,
1993......................... 100,000 $.23-$.30 $.24 85,120 $ .44 $ .44
Issued.................... 1,994,676 $.23-$.30 $.28 73,333 $ 3.00 $3.00
Canceled.................. -- -- -- -- -- --
Exercised................. -- -- -- -- -- --
---------- --------
Outstanding as of December 31,
1994......................... 2,094,676 $.23-$.30 $.28 158,453 $.44-$3.00 $1.62
Issued.................... 262,267 $ .30 $.30 138,333 $ 3.00 $3.00
Canceled.................. (6,024) $ .30 $.30 -- -- --
Exercised................. (4,400) $ .30 $.30 -- -- --
---------- --------
Outstanding as of December 31,
1995......................... 2,346,519 $.23-$.30 $.28 296,786 $.44-$3.00 $2.27
Issued.................... 264,972 $ .30 $.30 297,200 $ 5.00 $5.00
Canceled.................. -- -- -- -- -- --
Exercised................. (69,423) $ .30 $.30 (800) $ 3.00 $3.00
---------- --------
Outstanding as of December 31,
1996......................... 2,542,068 $.23-$.30 $.28 593,186 $.44-$5.00 $3.64
Issued.................... 39,272 $ .30 $.30 111,818 $ 5.50 $5.50
Canceled.................. -- -- -- -- -- --
Exercised................. (112,000) $.23-$.30 $.23 (84,960) $ .44 $ .44
---------- --------
Outstanding as of June 30, 1997
(unaudited).................. 2,469,340 $.23-$.30 $.28 620,044 $.44-$5.50 $4.41
========== ========= ==== ======== ========== =====
Exercisable at December 31,
1996......................... 1,485,367 $.23-$.30 $.28 463,272 $.44-$5.50 $3.04
========== ========= ==== ======== ========== =====
Exercisable at June 30, 1997
(unaudited).................. 1,823,971 $.23-$.30 $.28 446,733 $.44-$5.50 $4.41
========== ========= ==== ======== ========== =====
</TABLE>

The fair value of each option granted in 1995 and 1996 was estimated on the
date of grant based on the Black-Scholes option pricing model assuming among
other things, no dividend yield, a risk-free interest rate of 6.8%, expected
volatility of 55% and expected life of 7 years.

The fair value of each option granted during the six months ended June 30,
1997 was estimated on the date of grant based on the Black-Scholes option
pricing model assuming among other things, no dividend yield, a risk-free
interest rate of 6.8%, expected volatility of 55% and expected life of 7 years.

The weighted average fair value of the options granted during 1995 under
the Company's stock option plan, was approximately $.19 and $1.91 for common
stock and Series A preferred stock, respectively. As of December 31, 1995 the
remaining contractual life of all options was approximately 8.6 years.

The weighted average fair value of the options granted during 1996 under
the Company's stock option plan, was approximately $4.82 and $3.21 for common
stock and Series A preferred stock, respectively. As of December 31, 1996, the
remaining contractual life of all options was approximately 7.9 years.

F-15
<PAGE> 69

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average fair value of the options granted during the six
months ended June 30, 1997 under the Company's stock option plan, was
approximately $5.31 and $3.52 (unaudited) for common stock and Series A
preferred stock, respectively. As of June 30, 1997, the remaining contractual
life of all options was approximately 7.1 years.

b. Warrants -- The Company issued warrants during 1996 in connection with
the issuance of convertible notes payable due in 1999. The warrants, if
exercisable, permit the holders to purchase additional shares of common stock,
which, when combined with shares issued and to be issued upon conversion of the
notes and other equity instruments, would equal 49.92% of the then outstanding
common stock. The warrants are exercisable if the Company does not achieve
certain earnings targets beginning in 1998, and on or before the first to occur
of the Royalty Termination Date or an initial public offering as defined in the
agreement. The warrants have no expiration date and are exercisable at $.00001
per share. The warrants terminate on the completion of a public offering as
defined in the Securities Purchase Agreement related to the August, 1996
financing. Management estimated that the warrants would not become exercisable.
Therefore, no value for the warrants was recorded in the accompanying
consolidated financial statements (see Note 18).

The Company has also issued other warrants to purchase common stock and
Series A preferred stock. Warrants to purchase common stock were issued together
with the convertible debt which is due beginning in 1997. During 1996, the
Company offered 147,686 shares of Series A preferred stock and warrants to
purchase 109,647 shares of Series A preferred stock with an exercise price of $5
per share as an incentive for convertible debt holders to convert their notes.
The Company must give the holder of the warrant ten days notice of the proposed
effective date of a public offering or merger, and, if the warrant has not been
exercised by the effective date of the transaction, it shall terminate.

During 1996, the Company also issued warrants for 712,299 shares of Series
A preferred stock at an exercise price of $.074 per share to one of its
Directors who is developing pharmaceutical applications for the Company's
products. The warrants expire in ten years. In addition, this Director purchased
154,036 shares of Series A preferred stock in exchange for an $847,199 note due
in March, 1998, collateralized by the shares. During the period ended June 30,
1997, the shareholder paid $435,000 of the note receivable.

F-16
<PAGE> 70

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Warrant activity is as follows:

<TABLE>
<CAPTION>
SHARES UNDER WARRANT
------------------------------------------------------------
COMMON SERIES A PREFERRED
-------------------- -------------------------------------
WEIGHTED
EXERCISE EXERCISE AVERAGE
NUMBER OF PRICE NUMBER OF PRICE EXERCISE
SHARES RANGE SHARES RANGE PRICE
<S> <C> <C> <C> <C> <C>
Outstanding as of December 31, 1994.... -- -- -- -- --
Granted.............................. 271,617 $.30 -- -- --
Canceled............................. -- -- -- -- --
Exercised............................ -- -- -- -- --
------- ----------
Outstanding as of December 31, 1995.... 271,617 $.30 -- -- --
Granted.............................. 2,500 $.30 18,093,909 $.00001-$6.50 $ .20
Canceled............................. -- -- -- -- --
Exercised............................ (2,500) $.30 -- -- --
------- ----------
Outstanding as of December 31, 1996.... 271,617 $.30 18,093,909 $.00001-$6.50 $ .20
Granted.............................. -- -- 1,173,735 $5.00 $5.00
Canceled............................. -- -- -- -- --
Exercised............................ -- -- (2,000) $5.00 $5.00
------- ----------
Outstanding as of June 30, 1997
(unaudited).......................... 271,617 $.30 19,265,644 $.00001-$6.50 $ .23
======= ==== ========== ============= =====
Exercisable at December 31, 1996....... 271,617 $.30 1,266,146 $.07-$6.50 $2.89
======= ==== ========== ============= =====
Exercisable at June 30, 1997
(unaudited).......................... 271,617 $.30 1,373,793 $.07-$6.50 $3.05
======= ==== ========== ============= =====
</TABLE>

The fair value of each warrant in 1996 was estimated on the date of grant
based on the Black-Scholes option pricing model assuming among other things, no
dividend yield, a risk-free interest rate of 6.3%, expected volatility of 55%
and expected life of 7 years.

The fair value of each warrant in 1997 was estimated on the date of grant
based on the Black-Scholes option pricing model assuming, among other things, no
dividend yield, a risk-free interest rate of 6.8%, expected volatility of 55%
and expected life of 7 years.

The weighted average fair value of the Series A preferred warrants granted
for the year ended December 31, 1996, was approximately $.27. As of December 31,
1996, the remaining contractual life of these warrants with an expiration date
was approximately 9.6 years. The weighted average fair value of the common
warrants for the year ended December 31, 1996, was approximately $3.13. As of
December 31, 1996, the remaining contractual life of these warrants was
approximately 7.9 years.

The weighted average fair value of the Series A preferred warrants granted
for the six months ended June 30, 1997 was approximately $.30 (unaudited). As of
June 30, 1997 the remaining contractual life of these warrants with an
expiration date was approximately 9.75 years.

c. Pro Forma Results -- Had the Company accounted for its options and
warrants in accordance with Statement 123, 1995, 1996 and June 30, 1997 pro
forma net loss would have been approximately $1,890,592 and $13,449,392, and
$7,126,976 (unaudited) respectively. Pro forma loss per share should have been
$(1.78), $(12.42) and $(6.00) (unaudited) for 1995, 1996 and June 30, 1997,
respectively. The pro forma disclosure is not likely to be indicative of pro
forma results which may be expected in future years because of the fact that
options vest over several years, compensation expense is recognized as the
options vest and additional awards may be granted.

F-17
<PAGE> 71

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. BENEFIT PLANS

On January 1, 1996, the Company adopted a 401(k) savings plan. Employees
meeting certain eligibility requirements, as defined, may contribute a
percentage of pretax gross wages up to the legally defined deferral limit. The
Company may make discretionary contributions. As of June 30, 1997, the Company
has not made any contributions to the plan.

12. OPERATING LEASES

The Company leases certain equipment and office space under noncancelable
operating leases that expire through February, 2000. Under the terms of the
leases, the Company is also responsible for the payment of property taxes and
other related expenses. Certain leases contain multiple renewal options covering
additional periods ranging from one to two years. The Company is currently
renegotiating its office space lease, which expired in July, 1997. The lessor
has extended the lease on a month-to-month basis, with monthly rent payments of
$21,981, until a new lease agreement is negotiated. Total rent expense was
$44,291, $52,684 and $160,772 for the years ended December 31, 1994, 1995 and
1996, respectively, and $60,100 and $133,205 (unaudited) for the six months
ended June 30, 1996 and 1997, respectively.

Future minimum lease commitments of the Company under noncancelable
operating leases are as follows at December 31, 1996:

13. COMMITMENTS AND CONTINGENCIES

In 1994, the Company entered into a licensing agreement with a shareholder
for the use of patent rights. The licensing agreement requires the Company to
pay $7,500,000 in cumulative royalties. Annual payments are based upon sales
volume of agricultural product except that minimum annual payments of $50,000
are required to be made the earlier of June 1, 1999, or when cumulative sales of
licensed products exceeds $5,000,000. Royalty payments, as a percentage of
sales, are 4% for the first $2,000,000 of royalties, decreasing one percentage
point to a floor of 1% for each $2,000,000 in royalties paid until $7,500,000 in
cumulative royalties is paid. As of June 30, 1997, while royalties have been
accrued, no royalties have been paid.

During 1996, the Company began construction of a new manufacturing facility
in Peru, Illinois. As of June 30, 1997, the Company expects to invest an
additional $1,600,000 to complete construction of the facility in 1997. The
general contractor for the project is a holder of preferred stock and
convertible debt of the Company.

During 1996, the Company entered into a royalty agreement with certain
convertible note holders in connection with the issuance of $26,000,000 (face
value) in convertible debt and other equity instruments. The agreement requires
annual royalty payments, beginning January 1, 1997, equal to 7.28% of net sales.
The royalty payments terminate on the first to occur of (a) an acceptable sale
or public offering as defined in the agreement or (b) any date after December
31, 2000, as of which the net present value of the sum of all royalty payments
plus a hypothetical final payment of $15,600,000, all discounted at a rate of
30%, equals $15,600,000. The estimated fair value of this obligation, plus
imputed interest at 30%, which is subject to adjustment, is included in the
accompanying consolidated balance sheet as a royalty obligation. Upon the

F-18
<PAGE> 72

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consummation of a Qualified Public Offering, as defined, the Company is
obligated to pay an Accelerated Royalty Payment, as defined. (see Note 18).

The Company is a party to a joint research and exclusive distribution
agreement to develop and commercialize technology relating to thermal
polyaspartate. Both parties are required to pay a royalty to the other, based
upon sales of products developed and marketed under the agreement. The
distribution agreement permits the other party to market the Company's existing
products under the other party's trade names and trademarks. The agreement
further commits the other party to the following purchases from the Company in
order to maintain exclusivity: $700,000 in 1997; $1,800,000 in 1998; $3,000,000
in 1999, and prior year's purchases plus 10% for the year 2000 and after.

The Company maintains employment agreements with certain key employees
providing for minimum aggregate annual payments of $520,000. Under the
agreements, the employees are also eligible for cash and stock bonuses. The
Company has also agreed to provide $550,000 in life insurance coverage each for
two of the key employees.

As of June 30, 1997, the Company had commitments to purchase approximately
$1.3 million (unaudited) in raw materials from two overseas suppliers prior to
December 31, 1997.

The Company and Dr. Gerald Gleich, Vice President of Research of its
subsidiary, Donlar Pharmaceuticals Corporation, entered into an agreement in May
1997 whereby the Company purchased certain patents relating to the use of
polyaspartates in a wide variety of allergic conditions. In return for those
patents, Dr. Gleich was granted a 10% interest in Donlar Pharmaceutical
Corporation and the right to receive royalties on sales of products based on
those patents at rates ranging from 0.5% to 2.0%, to a maximum aggregate of $10
million.

14. RELATED-PARTY TRANSACTIONS

One of the Company's common stockholders is a distributor for the Company.
Sales to this customer totaled approximately $0, $1,000 and $844,000 for the
years ended December 31, 1994, 1995 and 1996, and $222,000 and $412,000
(unaudited) for the six months ended June 30, 1996 and 1997, respectively.

Engineering services for the Company's new manufacturing facility in Peru,
Illinois, amounting to approximately $0, $0 and $730,000 as of December 31,
1994, 1995 and 1996, and $120,000 and $1,104,000 (unaudited) as of June 30, 1996
and 1997, respectively, were provided by a holder of convertible notes and
preferred stock. Of these amounts, approximately $0, $352,000 and $428,000
(unaudited) is included in accounts payable as of December 31, 1995 and 1996,
and June 30, 1997, respectively. In September 1997, this preferred shareholder
was issued 83,605 shares of Series A preferred stock in satisfaction of certain
obligations.

The Company paid approximately $0, $118,000, $636,000, $75,000 and $0
during 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997,
respectively, in fees to a law firm having a partner who has options to purchase
25,000 shares of Series A preferred stock and who is an officer of the Company.

Consulting services amounting to $0, $3,700, $77,000, and $45,000 as of
December 31, 1994, 1995, and 1996, and $1,500 and $45,000 (unaudited) for the
six months ended June 30, 1996 and 1997, respectively, were provided by a
Company in which a Shareholder is a director and owner.

15. SEGMENT INFORMATION

The Company manufactures and sells its TPA products in the agriculture and
performance chemical markets. Assets are not identifiable by segment as all
manufacturing has been done at the Company's pilot

F-19
<PAGE> 73

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

plant facility at Bedford Park, Illinois using the same production equipment.
Segment information by industry and geographic area is shown below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
INDUSTRY DATA 1994 1995 1996 1996 1997
------------- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales
Agriculture................ $ -- $ 906 $ 2,132,721 $ 565,459 $ 1,343,094
Performance Chemicals...... 9,610 21,871 9,746 9,746 43,667
Consolidated............... 9,610 22,777 2,142,467 575,205 1,386,761
Operating Profit
Agriculture................ -- (64,479) (10,571,570) (2,881,874) (4,074,508)
Performance Chemicals...... (1,423,965) (1,449,704) (34,321) (35,276) (281,407)
Consolidated............... (1,423,965) (1,514,183) (10,605,891) (2,917,150) (4,355,915)
Sales
United States.............. -- 906 2,132,721 565,459 1,351,481
Europe..................... 9,610 21,871 9,746 9,746 35,280
Consolidated............... 9,610 22,777 2,142,467 575,205 1,386,761
Operating Profit
United States.............. -- (64,479) (10,571,570) (2,881,874) (4,114,301)
Europe..................... (1,423,965) (1,449,704) (34,321) (35,276) (241,614)
Consolidated............... $(1,423,965) $(1,514,183) $(10,605,891) $(2,917,150) $(4,355,915)
</TABLE>

SUBSEQUENT EVENTS TO DECEMBER 31, 1996

16. SUBSEQUENT EVENT -- CONVERTIBLE NOTES

In March, 1997, unsecured notes payable totaling $5,782,339 and related
interest through the date of conversion totaling $1,030,685 were converted into
3,593,721 shares of Series A preferred stock. In addition, as an incentive to
the noteholders for early conversion, the Company granted warrants for 109,647
shares of Series A preferred stock and issued 147,686 shares of Series A
preferred stock. The value of these warrants and stock, totaling $1,163,141,
were expensed during the six months ended June 30, 1997, when the warrants and
stock were issued.

17. SUBSEQUENT EVENT -- ISSUANCE OF PREFERRED STOCK (UNAUDITED)

In April, 1997, the Company received $5,032,500 in exchange for 915,000
shares of Series A preferred stock.

SUBSEQUENT EVENTS TO JUNE 30, 1997

18. SUBSEQUENT EVENT -- 1997 FINANCING (UNAUDITED)

In October 1997, the Company and certain investors that provided the
$26,000,000 in financing in August 1996, entered into an Exchange and Amendment
Agreement, pursuant to which, in order to facilitate and in conjunction with the
initial public offering, these investors will relinquish their convertible
subordinated promissory notes and related rights, shares of all series of the
Company's preferred stock, royalty interests, performance based warrants and Ag
Tech Stock, in exchange for which the Company will (a) pay these investors an
aggregate of $12 million cash from the proceeds of the initial public offering,
(b) issue notes in the aggregate principal amount of $11 million bearing
interest at 12% per annum, (c) issue these investors an aggregate of 9,019,531
shares of common stock, and (d) grant to these investors registration rights
with

F-20
<PAGE> 74

DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respect to their newly issued common stock. As a result, upon consummation of
the initial public offering (1) the royalty obligation (currently estimated to
be approximately $4.8 million immediately prior to the Offering) will be
eliminated (2) additional paid in capital will be reduced by approximately $23.0
million to reflect the elimination of the warrant (3) inducement expense of
approximately $13.2 million will be recorded (4) a senior note obligation of $11
million will be recorded (5) $12 million in cash will be paid to the investors
(6) common stock will be increased by (a) approximately $18.0 million
representing the estimated fair value of the 3,000,000 additional shares to be
issued and (b) approximately $23.5 million representing the carrying amount of
the convertible note issued in 1996 that was convertible into 6,019,531 shares
of stock and (7) additional paid in capital will be reduced by the unamortized
deferred financing costs.

In connection with the Exchange and Amendment Agreement, the Shareholder
Agreement referred to in Note 9 will be terminated.

19. SUBSEQUENT EVENT -- STOCK COMPENSATION PLANS (UNAUDITED)

On October 3, 1997, the Company established a Long-Term Equity Compensation
Plan (the "1997 Plan"), which is effective as of the completion of an initial
public offering. The 1997 Plan permits the grant of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
performance shares, and performance units. The Company reserved 1,000,000 shares
of Series A preferred stock for issuance under the 1997 Plan. These Series A
Preferred Stock convert to common stock upon completion of an initial public
offering. Upon consummation of the initial public offering, all options to
purchase shares of Series A preferred stock under the 1994 Plans will become
options to purchase the equivalent number of shares of common stock.

20. SUBSEQUENT EVENT -- SUBSIDIARIES (UNAUDITED)

In October, 1997, the Company's Board of Directors authorized the
dissolution of three of the Company's subsidiaries, one of which is subject to
the Company completing an initial public offering. All of the assets and
liabilities of these subsidiaries were or will be distributed to the Company.

21. SUBSEQUENT EVENT -- REVERSE STOCK SPLIT (UNAUDITED)

The Company's Board of Directors intends to approve a reverse stock split
in the form of a stock dividend effective immediately prior to the offering
contemplated hereby. All common stock and per share amounts will be adjusted
retroactively to give effect to the stock split.

22. SUBSEQUENT EVENT -- IPO REGISTRATION (UNAUDITED)

In October 1997, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission
permitting the Company to sell common stock to the public. Upon consummation of
the initial public offering, all shares of Series A preferred stock will be
converted into the equivalent number of shares of common stock, and all
securities exercisable for Series A preferred stock will become exercisable for
an equivalent number of shares of common stock in each case, subject to the same
vesting terms.

F-21
<PAGE> 75

=========================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 7
Use of Proceeds............................. 14
Dividend Policy............................. 14
Capitalization.............................. 15
Dilution.................................... 16
Selected Consolidated Financial and
Operating Data............................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 18
Business.................................... 22
Management.................................. 35
Certain Transactions........................ 43
Principal Shareholders...................... 45
Description of Capital Stock................ 47
Shares Eligible for Future Sale............. 48
Underwriting................................ 50
Legal Matters............................... 51
Experts..................................... 51
Additional Information...................... 52
Index to Financial Statements............... F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

=========================================================
=========================================================

DONLAR CORPORATION LOGO

COMMON STOCK
------------------------

PROSPECTUS
------------------------

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

SCHRODER & CO.

, 1997

=========================================================
<PAGE> 76

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the Common Stock
pursuant to the Prospectus contained in this Registration Statement. The Company
will pay all of these expenses.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $20,910.00
NASD Filing Fee............................................. 7,400.00
Nasdaq National Market Application Fee...................... *
Accountants' Fees and Expenses.............................. *
Blue Sky Fees and Expenses.................................. 2,000.00
Legal Fees and Expenses..................................... *
Transfer Agent and Registrar Fees and Expenses.............. *
Printing and Engraving Expenses............................. *
Miscellaneous Expenses...................................... *
----------
Total.................................................. $
==========
</TABLE>

- -------------------------
* To be provided by amendment

All expenses other than the Securities and Exchange Commission Registration
Fee and NASD filing fee are estimated.

II-1
<PAGE> 77

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.** Form of Underwriting Agreement.
3.1* Articles of Incorporation dated January 8, 1990.
3.2* Articles of Amendment to Articles of Incorporation dated May
1, 1990.
3.3* Articles of Amendment to Articles of Incorporation dated
June 15, 1990.
3.4* Articles of Amendment to Articles of Incorporation dated
December 14, 1992.
3.5* Articles of Amendment to Articles of Incorporation dated
January 6, 1994.
3.6* Articles of Amendment to Articles of Incorporation dated
August 23, 1996.
3.7** Form of Articles of Amendment to Articles of Incorporation
dated , 1997.
3.8* Amended and Restated Bylaws.
3.9** Form of Amendment to Amended and Restated Bylaws, dated
, 1997.
4.1* Donlar Corporation 1994 Series A Preferred Stock Option
Plan.
4.2* Donlar Corporation 1994 Stock Option Plan.
4.3* Form of Donlar Corporation 1994 Stock Option Plan Stock
Option Agreement.
4.4* The Donlar Corporation Long-Term Equity Compensation Plan
established as of October 3, 1997.
4.5* Form of 1995 Common Stock Purchase Warrant
4.6* Form of 1997 Series A Convertible Preferred Stock Warrant
($5.00 exercise price)
4.7* Form of 1997 Series A Convertible Preferred Stock Warrant
($6.50 exercise price)
5** Opinion of Holleb & Coff as to the legality of the
securities being registered (including consent).
10.1* Employment Agreement between Donlar and J. Larry Sanders
dated August 15, 1995.
10.2* Employment Agreement between Donlar and Bernardo N. Rico
dated July 1, 1996.
10.3* Employment Agreement between Donlar and Larry Koskan dated
July 1, 1996.
10.4* Subscription Agreement among Dr. Gerald Gleich, Donlar, and
Donlar Pharmaceuticals Corporation dated May 23, 1997.
10.5* Agreement between BP Exploration Operating Company Limited
and Donlar dated February, 1996.
10.6* Market Development and Distributorship Agreement between
Donlar and FMC Corporation (UK) Limited dated January 31,
1996.
10.7* Cooperation Agreement between Donlar and BASF
Aktiengesellschaft dated April 3, 1997.
10.8* Joint Technology Agreement between National Starch and
Chemical Company and Donlar dated June 20, 1996.
10.9* Distributor Agreement between Donlar and National Starch and
Chemical Company dated June 20, 1996.
10.10* Vacant Land Option Agreement between Sumidi, Inc. and Donlar
dated April 23, 1996.
10.11* Office Lease between Illinois Institute of Technology and
Donlar dated August 1, 1992.
10.12* Lease Amendment between Illinois Institute of Technology and
Donlar dated August 1, 1992.
10.13** Exchange and Amendment Agreement among Donlar Corporation,
Willis Stein & Partners, L.P., Star Polymers, L.L.C.,
RGM/BVM Limited Partnership and the individual
securityholders named therein, dated as of October , 1997.
11.** Statement regarding computation of per share earnings.
21.* Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Mulcahy, Pauritsch, Salvador & Co., Ltd.
23.3** Consent of Holleb & Coff (contained in its opinion filed as
Exhibit 5 hereto).
24.* Power of Attorney (included on signature page of
Registration Statement).
27** Financial Data Schedule.
</TABLE>

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

* previously filed

** to be filed by amendment

II-2
<PAGE> 78

(B) FINANCIAL STATEMENT SCHEDULES

All schedules are omitted because of absence of conditions under which they
are required or because the required information is included in the Consolidated
Financial Statements or notes thereto.

II-3
<PAGE> 79

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 16, 1997, in
the City of Bedford Park, State of Illinois.

DONLAR CORPORATION

By: /s/ LARRY P. KOSKAN
------------------------------------
Larry P. Koskan, President, Chief
Executive Officer and Chairman of
the Board

Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities indicated on October 16, 1997:

<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>

/s/ LARRY P. KOSKAN President, Chief Executive Officer and Chairman of
- --------------------------------------------- the Board of Directors
Larry P. Koskan

/s/ BERNARDO N. RICO Executive Vice President, Secretary and Director
- ---------------------------------------------
Bernardo N. Rico

/s/ GERALD E. NOONAN Vice President, Finance, Chief Financial Officer
- --------------------------------------------- and Treasurer
Gerald E. Noonan

/s/ ROBERT W. COOPER* Director
- ---------------------------------------------
Robert W. Cooper

/s/ RICHARD C. LEE* Director
- ---------------------------------------------
Richard C. Lee

/s/ DR. ROBERT G. MARTIN* Director
- ---------------------------------------------
Dr. Robert G. Martin

/s/ DR. DONALD R. SANDERS* Director
- ---------------------------------------------
Dr. Donald R. Sanders

/s/ DANIEL M. GILL* Director
- ---------------------------------------------
Daniel M. Gill

/s/ JOHN R. WILLIS* Director
- ---------------------------------------------
John R. Willis

*By: /s/ LARRY P. KOSKAN
---------------------------------------
Larry P. Koskan, Attorney-in-fact
</TABLE>

<PAGE> 80

EXHIBIT INDEX

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

* previously filed

** to be filed by amendment

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report dated April 25, 1997 (except with respect to the matter discussed in Note
2 as to which the date is October 15, 1997) (and to all references to our Firm)
included in or made part of this Registration Statement on Form S-1
(Registration No. 333-37579).

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Chicago, Illinois

October 16, 1997

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report dated February 12, 1996 (except with respect to the matter discussed in
Note 2 as to which the date is October 15, 1997) (and to all references to our
Firm) included in or made part of this Registration Statement on Form S-1
(Registration No. 333-37579).

/s/ MULCAHY, PAURITSCH, SALVADOR & CO., LTD.

MULCAHY, PAURITSCH, SALVADOR & CO., LTD.

Orland Park, Illinois

October 16, 1997