ECOGEN INC
10-K405, 1998-02-13
AGRICULTURAL CHEMICALS
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   As filed with the Securities and Exchange Commission on February 13, 1998.

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

   [x]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

              For the Transition period from ________ to __________

                          COMMISSION FILE NUMBER 1-9579

                                   ECOGEN INC.
             (Exact name of registrant as specified in its charter)

      DELAWARE                                         22-2487948
(State or other Jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

2005 CABOT BOULEVARD WEST                              19047
LANGHORNE, PENNSYLVANIA                              (Zip Code)
(Address of Principal Executive Offices)

 Registrant's telephone number, including area code:           (215) 757-1590

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $.01 PAR VALUE


INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

                        [X]    YES                    NO [ ]

 THE APPROXIMATE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES
            OF THE REGISTRANT IS $11,394,063 OF JANUARY 15, 1998. (A)

                                    8,001,680

      (NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JANUARY 15, 1998)

                                     ------

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
<PAGE>   2
                     DOCUMENTS INCORPORATED BY REFERENCE

      Definitive Proxy Statement with respect to the Annual Meeting of
Stockholders scheduled to be held in April 2, 1998, to be filed by Ecogen Inc.
with the Commission (hereinafter the "Proxy Statement") is incorporated by
reference into Part III of this Form 10-K.


(A) Excludes 1,490,787 shares of common stock held of record by directors,
officers and stockholders known to the registrant to hold more than five percent
of the common stock outstanding as of January 15, 1998. Exclusion of shares held
by any person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the registrant, or that such person is controlled by or under common
control with the registrant.




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                                     PART I


ITEM 1.     BUSINESS

INTRODUCTION

            Ecogen Inc. ("Ecogen" or the "Company"), a Delaware corporation
incorporated in 1983, is a biotechnology company specializing in the development
and marketing of environmentally compatible products for the control of pests in
agricultural and related markets. Ecogen's product revenues are generated by
sales of biological insecticides derived from the bacterial microorganism
Bacillus thuringiensis ("Bt"), various pest control and crop pollination
products based on pheromone and related technologies, and biological fungicide
products for the control of powdery mildew and post-harvest rot disease. In
addition, Ecogen is developing for introduction into certain niche markets
insecticidal nematode-based products for the control of insect pests. Ecogen was
the first company to sell genetically enhanced biological pesticide products
which are registered with the United States Environmental Protection Agency (the
"U.S. EPA") for commercial sale. In addition, Ecogen is the only company to have
received U.S. EPA approvals to sell Bt insecticides incorporating a recombinant
Bt strain. The Company's fiscal year begins on November 1, and ends on October
31. Unless the context otherwise requires, all references in this document to a
particular year shall mean the Company's fiscal year.

TECHNOLOGY

            Many naturally-occurring organisms are either antagonistic to or
produce substances toxic to agricultural pests. These include a variety of
microorganisms such as bacteria, yeast, fungi, viruses and protozoans that
either directly kill or produce compounds that interfere with certain insects,
fungal pathogens or plant disease organisms. In addition, more complex organisms
such as insecticidal nematodes (microscopic round worms) that attack insect
pests have been long recognized as a potential source of pest control. Insect
pheromones, which are natural odors emitted by insects, are also a recognized
source of environmentally compatible, biorational insect pest control. All of
these natural agents when isolated and formulated as commercially useful
products are commonly called "biopesticides." A glossary of certain terms used
in this section is set forth at the end of this section.

      Bacillus thuringiensis ("Bt")

            Bt is a bacterium found in soil. The insecticidal activity of Bt
derives from production of spores and specific proteins in the form of crystals
found within the Bt bacteria. These insecticidal agents are produced by the
bacterial cells during a fermentation production process. They are then
formulated into products that are applied to plants by conventional ground and
aircraft spray equipment. When susceptible insects feed on plant foliage sprayed
with Bt-based products, the crystals are ingested and generate soluble proteins
that attack and destroy the insect's intestinal tract. The proteins produced by
various strains of Bt are highly active against specific, targeted insect pests.
Many insects are also susceptible to bacterial spores. Bt has no adverse
activity against non-target insects, fish, birds or mammals (including humans).
The genes for the insecticidal proteins reside on specific non-essential DNA
molecules termed plasmids. Bt bacteria in nature generally contain several
different genes that endow different insecticidal activities. Plasmids can
either be removed ("cured") from cells that harbor them or they can be
transferred between different strains by a natural mating process called
conjugal transfer that occurs in nature between Bt strains and that can be
replicated in the laboratory.

            Ecogen has developed, through genetic modification techniques, novel
Bt bioinsecticide products that have higher levels of effectiveness and that can
act against a broader array of significant insect pests than Bt products
previously in use. Ecogen has developed and characterized approximately 10,000
Bt strains and maintains one of the world's largest collections of Bt strains.
The Company uses strains from this collection to screen and test for
insecticidal activities. The characterization of the


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diversity of Bt insecticidal proteins found in Ecogen's strain collection,
coupled with the ability to transfer or cure plasmids that contain the genetic
code for those proteins, was the basis for Ecogen's early-stage development of
new Bt bioinsecticides. Potent insecticidal crystal proteins produced by new Bt
strains containing novel and desirable combinations, which are obtained by
plasmid curing and conjugal transfer techniques, have been the active
ingredients in Ecogen's Bt bioinsecticides.

            These natural genetic approaches to Bt bioinsecticide development
can be applied, however, only to those plasmids that can be transferred or
cured. Certain insecticidal proteins are encoded by plasmids that are not
transferable, and some plasmid combinations are unstable or yield undesired
insecticidal activities. Under these circumstances, the development of
genetically manipulated strains of Bt having novel activities against specific
insects is greatly facilitated by the application of recombinant DNA technology.
Ecogen has developed a proprietary Bt-based cloning vector system, its SSR
System(TM), that utilizes recombinant DNA technology to develop new Bt strains
having either increased potency or activity on a broader array of insect species
through protein engineering. Ecogen believes that the use of Bt (as opposed to
other microorganisms) as the host microorganism in which new Bt insecticidal
gene combinations are constructed facilitates regulatory review in obtaining
field trial permission and subsequent registrations for recombinant-derived
products. For example, in July, 1992, Ecogen received a generic approval from
the United States Environmental Protection Agency to field test recombinant Bt
insecticides using this approach. In February, 1996, the Company received U.S.
EPA approval to commercialize CRYMAX(R) Bioinsecticide and in December, 1996,
the Company received U.S. EPA approval to commercialize Lepinox(TM)
Bioinsecticide, each of which is a recombinant Bt product based on a Bt strain
into which protein genes from different Bt strains were combined. Ecogen's
genetically enhanced bioinsecticides contain multiple insecticidal genes and
have complex modes of action, and Ecogen therefore believes that pest
populations will have difficulty developing resistance to them.

            Ecogen has also developed technology to improve the insecticidal
capabilities of the Bt proteins through its work on the mechanisms involved in
the insecticidal activity. This technology, collectively referred to as
Mechanism Assisted Insecticidal Design, permits Ecogen to move beyond naturally
occurring proteins to identify new and commercially valuable proteins.

      Pheromone and Crop Pollination Technology

            Insect pheromones are natural odors emitted by insects that are
undetectable to humans. Pheromones and related technologies act as behavior
modifying agents that can be used to suppress insect mating by disrupting
communications between potential mates, to attract target insects or to
stimulate foraging by target insects.

            Pheromones can be used either alone to control insect populations or
in conjunction with biological or chemical insecticides in order to reduce the
amount of such insecticides required to control insect pests. Pheromone products
may be used to disrupt insect mating cycles. These products, which duplicate the
mating attractant emitted by female insects, control insect populations by
making it more difficult for male insects to find females with which to mate.
After application of the pheromone product, male insects become confused and are
attracted to the pheromone products rather than potential mates. In addition,
the mating attractant of the pheromone product camouflages the natural
attractant emitted by the female which also works to disrupt the mating cycle
and to control insect populations. Pheromones can also be used to attract
insects to trap devices for the purpose of monitoring insect populations or to
sources of chemical insecticides that are lethal to the target insects.

            Crop pollination technology is designed to attract honey bees to
crops to increase plant quality and grower yields through increased pollination.
Products incorporating this technology assist honey bees in finding plants,
thereby maximizing the number of visitations by such bees to the flowers of
various fruit and vegetable crops. Fruit and vegetable quality may be increased
and grower yields may be optimized through such increased pollination. Ecogen's
Bee-Scent(R) Attractant is based on this crop pollination technology.


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      Biofungicide Technologies

            Biofungicide technologies are based on naturally occurring organisms
such as fungi or yeast that can control harmful fungi that reduce crop yields or
infect crops after harvesting. Ecogen focuses biofungicide research and
development efforts on two biofungicide technologies: hyperparasitic fungi which
kill other fungi, such as powdery mildews that infect plant leaves, flowers and
fruit; and a yeast formulation which protects stored fruit from post-harvest rot
pathogens.

            A fungal hyperparasite, Ampelomyces quisqualis, has been identified
that infects most, if not all, types of powdery mildews harmful to agricultural
products. Ecogen has obtained an exclusive license to this hyperparasite.
Powdery mildew is a significant fungal disease affecting many crops. Special
structures of the mildew penetrate the plant epidermal cells and feed on
cellular tissue, causing dwarfing of the plant and fruit and cosmetic damage
which is particularly undesirable on fresh produce. Plants severely infected
with these pathogens have reduced yields. Historically, chemical fungicides have
been used for the control of these fungal pathogens, but these pathogens can
develop resistance to these chemical fungicides over time. In response to this
market need, the Company developed its AQ10(R) Biofungicide, which is based on
the fungal hyperparasite Ampelomyces quisqualis, for use in an integrated pest
management system with other fungicide products to control powdery mildew. AQ10
was the first biofungicide registered by the U.S. EPA to protect crops from
powdery mildew.

            Several non-antibiotic producing strains of yeast have been found to
control a number of post-harvest rot pathogens of citrus, pome fruits, grapes
and other fruits and vegetables. The Company has incorporated a selection of
these strains into its Aspire(TM) Biofungicide. Aspire, which may be applied by
processors and packers in a manner consistent with the method of application of
standard chemicals, provides control of post-harvest rot pathogens.

      Insecticidal Nematodes

            Insecticidal or entomopathogenic nematodes are microscopic
roundworms that attack insect pests in the soil or in plant stems. Insecticidal
nematodes are not directly responsible for insect mortality, but rather harbor
bacteria that are released into and cause an infection of the insect after
nematode entry into the pest. Normally, the insect dies within 48 hours after
infection. The natural characteristics of insecticidal nematodes give
nematode-based insecticides certain advantages over other insecticides. For
example, nematodes attack insect pests in the soil where approximately 90% of
insect pests spend at least a portion of their life cycle. In addition,
insecticides using nematodes, which cause no adverse effects to humans, animals
or plants, are currently exempt from U.S. EPA pesticide regulations and, unlike
other insecticides, including other bioinsecticides, are subject to
significantly lower levels of regulation or are exempt from registration by
state agencies.

            Nematode product development is dependent on the implementation of
production technology developed at a pilot scale, particularly to obtain higher
yields at larger commercial scale production and to reduce the costs of
production. In addition, current shelf life of the insecticidal nematode
products being developed by Ecogen is insufficient for widespread
commercialization. Ecogen is exploring methods of formulating and preserving the
nematodes to further increase shelf life while maintaining the nematodes'
insecticidal capabilities, including the development of formulations that would
be stable at various temperatures.

      Glossary

            The following Glossary of terms may be helpful in understanding the
technology described in this document.


           Ampelomyces quisqualis - A parasitic fungus with a host range that
                                    includes numerous powdery mildew species.


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Bacillus thuringiensis -           Spore-forming bacteria that produces
                                   insecticidal crystal proteins during
                                   sporulation. Many different varieties of Bt
                                   exist in nature producing crystal proteins
                                   with a wide range of insecticidal activity.

Conjugal transfer -                Natural genetic transfer system
                                   operating in bacteria that involves the
                                   exchange of plasmid DNA.

Gene -                             Smallest unit of inheritance occupying a
                                   specific site on a DNA molecule (chromosome).

Hyperparasite -                    A parasite of a parasitic organism, e.g. a
                                   fungus that lives off of a plant parasitic
                                   fungus.

Insecticidal crystal protein -     Proteins produced by sporulating Bacillus
                                   thuringiensis bacteria that form crystalline
                                   inclusions within the cell.

Insecticidal nematodes -           Microscopic round worms that penetrate,
                                   infect and kill insect pests.

Plasmid -                          Small, usually circular, DNA molecule that
                                   is separate from the bacterial chromosome and
                                   that is not absolutely required for cell
                                   viability.

Protein -                          Molecules composed of chains of amino
                                   acids. Examples of proteins are enzymes,
                                   hormones, and antibodies.

Protein engineering -              Technology of altering specific properties of
                                   protein by introducing structural changes in
                                   the protein molecule. Changes are introduced
                                   by making changes in the DNA encoding the
                                   protein using recombinant DNA technology.

Recombinant DNA -                  May also be referred to as genetic
                                   engineering and involves the in vitro cutting
                                   and splicing of DNA molecules. DNA encoding
                                   desired trait is joined to DNA molecule that
                                   is subsequently introduced into host
                                   organism.

SSR System(TM) -                   Ecogen's proprietary site
                                   specific recombination system for the
                                   construction of recombinant Bt strains
                                   lacking foreign DNA.

Transconjugant -                   Bacterial cell that is produced as a result
                                   of the conjugation process.

Vector -                           A genetic construct that can transfer
                                   genetic material from one host to another.


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RELATIONSHIP WITH MONSANTO

            On January 24, 1996, the Company closed a transaction with Monsanto
forming a strategic alliance for development of the Company's proprietary Bt
technology.

            Under the terms of the agreement, Monsanto purchased 943,397 shares
of Ecogen common stock for $10.60 per share for an aggregate purchase price of
$10 million. Monsanto is required to maintain its ownership position in Ecogen
stock during the term of the Research and Development Agreement between Ecogen
and Monsanto and Monsanto is prohibited, for three years after closing, from
acquiring more than a 25% aggregate equity interest in the Company without the
prior consent of the Company. These restrictions, however, terminate upon the
occurrence of certain defined events relating to a change of control of the
Company. Monsanto has certain registration rights with respect to the shares of
Company common stock. In addition, Monsanto has a right of first refusal to
purchase securities from the Company so as to maintain its percentage ownership
interest in the Company.

            In addition, Monsanto acquired for $5 million certain rights to
Ecogen's existing Bt strain library and insecticidal crystal protein gene
library, and the intellectual property rights associated with such libraries
including certain patents and patent applications (the "Bt Technology"). Ecogen
maintains rights to the Bt Technology for applications other than in-plant uses.
Monsanto did not acquire any rights to Ecogen's fermentation and formulation
technology, Ecogen's insectary technology or Ecogen's technology related to the
movement of Bt genes from Bt and back into Bt without foreign DNA.

            Monsanto and Ecogen are parties to a Research and Development
Agreement involving research and development focusing on Bt Technology (the "R &
D Program"). The results of the R & D Program are owned by Monsanto and licensed
to Ecogen for use outside of in-plant applications. Under the terms of the
agreements with Monsanto, Ecogen will also share in the commercialization
success of transgenic plants incorporating the Bt Technology. Monsanto shall pay
a commercialization success fee based on revenue received by Monsanto from
products which incorporate the Bt Technology or the results from the R & D
Program. The Company has received payments for contract research under the R & D
Program of $4.3 million, $2.8 million and $3.0 million in fiscal years 1998,
1997 and 1996, respectively.

            In January, 1998 the Research and Development Agreement was amended
by agreement of the parties. As a result of the amendment, the Company received
from Monsanto a cash payment in January, 1998 of $4.3 million. The Monsanto
Research and Development Agreement now terminates in January, 1999, one year
earlier than the original agreement, without a reduction in the total payment of
$10 million called for under the original agreement. Of the total payments
received from Monsanto, $2.0 million was recorded as deferred revenue and will 
be recognized as research contract revenue by the Company as research is 
performed under the agreement through January 1999. As part of the R&D
Program, the Company will continue to assist Monsanto in expanding Monsanto's
capabilities in the Bt area. The amendment does not affect the Company's right
to receive the commercialization success fees as Monsanto utilizes
Ecogen-developed technology in its future products.

ECOGEN TECHNOLOGIES I INCORPORATED

            Between November, 1992 and January, 1993, Ecogen Technologies I
Incorporated ("ETech"), a company incorporated by but not then affiliated with
Ecogen, completed a private placement of 300 ETech units, each unit consisting
of four shares of common stock of ETech and 2,000 warrants, each to purchase one
share of common stock of Ecogen at a per share purchase price of $43.75 as
adjusted for the Reverse Split (the "Ecogen Warrants"). The Ecogen Warrants
terminated on January 31, 1998.

            ETech was formed to initiate or accelerate research and development
of certain products using technology exclusively licensed or sublicensed by
Ecogen to the subsidiaries of ETech. The


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licensed rights include the right to develop and commercialize pesticide
products based on technology for: (i) the control of powdery mildew disease
(AQ10 Biofungicide); (ii) the control of post-harvest rot disease on
agricultural crops (Aspire Biofungicide); (iii) the control of the European corn
borer insect, which affects corn production (Condor(R) G Bioinsecticide); (iv)
the control of black vine weevil, citrus weevil, wireworm and black cutworm
utilizing insecticidal nematodes (Cruiser(R) Bioinsecticide); (v) the control of
corn rootworm; and (vi) the control of certain insects which cause damage to
turf. Ecogen has agreed to commercialize and market products on behalf of ETech
pursuant to various Marketing Agreements that provide for Ecogen to receive a
fee from ETech based on product sales for Ecogen's commercialization and
marketing activities. Ecogen is currently marketing AQ10 and Aspire and is
continuing work on the development of Cruiser. The other ETech projects have
been suspended.

            In January, 1995, the Company exchanged 822,400 shares of its common
stock for 854 shares of the common stock of ETech (approximately 70% of the
outstanding common stock of ETech). As a result of this exchange, ETech is a
majority-owned subsidiary of Ecogen and its financial condition and results of
operations are included in the Company's consolidated financial statements.

PRODUCTS

The following are Ecogen's current principal products:

            CRYMAX BIOINSECTICIDE - CRYMAX Bioinsecticide is a U.S. EPA
registered product that was developed by Ecogen using recombinant DNA and
protein engineering techniques. CRYMAX was introduced generally to the
marketplace in 1997 for the control of caterpillar pests on vegetable crops.

            LEPINOX BIOINSECTICIDE - Lepinox Bioinsecticide is a U.S. EPA
registered product that was developed by Ecogen using recombinant DNA and
protein engineering techniques for the control of fall armyworm on sweet corn
crops. Lepinox is being introduced generally to the marketplace in 1998.

            CONDOR XL BIOINSECTICIDE -- Condor XL Bioinsecticide is a U.S. EPA
registered genetically enhanced Bt product developed by Ecogen for the control
of caterpillar pests in cotton, soybean, corn and other row crops and tree and
nut crops, and forestry applications. Condor is marketed primarily in the
southern United States for use on cotton, soybeans and other row crops.

            CUTLASS(R) BIOINSECTICIDE -- Cutlass Bioinsecticide is a U.S. EPA
registered genetically enhanced Bt product developed by Ecogen for the control
of caterpillar pests that damage vegetable, tree, nut and vine crops. Cutlass is
sold primarily in international markets.

            NOMATE(R) PHEROMONE PRODUCTS -- Ecogen markets various U.S. EPA
registered NoMate pheromone products for the control of pink bollworm on cotton,
tomato pinworm, codling moth, as well as for other applications. NoMate products
are marketed primarily in the south-western United States, and in certain
international markets.

            BEE-SCENT(R) ATTRACTANT -- Bee-Scent Attractant directs honey bees
to treated blossoms to improve crop pollination, thereby increasing grower
yields and crop quality. Bee-Scent is marketed in various regions of the United
States, including California, the Pacific Northwest and the Great Lakes region.

            SCENTRY(R) TRAP & LURE PRODUCTS - Ecogen markets a variety of insect
trap and lure products for insect monitoring that are sold commercially and
pursuant to government contracts.

            AQ10 BIOFUNGICIDE -- AQ10 Biofungicide is the first biofungicide
registered by the U.S. EPA to protect crops from powdery mildew. Ecogen markets
AQ10 in California and other areas of the western United States for control of
powdery mildew on grapes and other crops.


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            ASPIRE BIOFUNGICIDE -- Aspire Biofungicide is the first biofungicide
registered by the U.S. EPA to protect crops from post-harvest rot pathogens.
Aspire is marketed for use by fruit packinghouses in the United States.

            CRUISER(R) INSECTICIDE -- Cruiser Insecticide contains the
Heterorhabditis bacteriophora nematode and is being developed for the control of
a variety of insect pests.

            During fiscal 1997, the foregoing products represented substantially
all of Ecogen's product sales. Product sales represented approximately 74% of
the Company's total revenues in fiscal 1997. Ecogen's Bt products, pheromone and
related products and biofungicide products represented approximately 44%, 36%,
and 20% respectively, of Ecogen's total product sales in 1997.

MARKETING

            Agricultural pesticides and related products are sold in the United
States primarily through traditional agricultural chemical distribution channels
consisting of large wholesale distributors and dealers which serve extensive
farm areas. Ecogen makes use of these traditional channels for the domestic
distribution of its current products. To coordinate these distribution
activities and generate grower interest in its products, the Company employs a
marketing staff including several domestic sales representatives who are located
in key agricultural chemical distribution locations, primarily in the southern
and western areas of the United States. In April, 1996, the Company entered into
a distribution agreement for its Aspire Biofungicide product with Decco, a
business unit of Elf Atochem North America, Inc. Under the terms of the
agreement, Decco will distribute Aspire to fruit packinghouses, primarily in the
United States. Ecogen's domestic product sales for fiscal 1997, 1996 and 1995
totaled $7.2 million, $7.0 million and $8.4 million respectively.

            For the international distribution of its products, Ecogen has
entered into several collaborations with companies that have a significant
presence in the markets covered by their respective agreements. In 1991, the
Company and Hoechst Schering AgrEvo, S.A. ("AgrEvo") entered into a distribution
and product supply agreement that grants to AgrEvo exclusive distribution rights
to certain of the Company's primary Bt products in Europe (except Germany, which
is excluded, and Spain, Portugal and Italy, where rights are co-exclusive),
Africa, the People's Republic of China, Australia, the Middle East and Latin
America (except Mexico). In addition to its agreement with AgrEvo, Ecogen has
international distribution agreements for certain of its products with a number
of other companies including: Green Marketing International (for the Republic of
South Africa), Nissan Chemical (for Japan), Intrachem (International) S.A. (for
Italy, Spain and Portugal), ISK Biotech Corporation (for Mexico), Jia Non
Enterprises (for Taiwan) and Incitec Ltd. (for Australia and New Zealand).
International product sales totaled $1.6 million in fiscal 1997, $1.6 million
for fiscal 1996, and $.7 million for fiscal 1995.

PRODUCTION

            The manufacturing process for Ecogen's Bt-based bioinsecticide and
biofungicide products involves fermentation of the desired microorganism. Upon
completion of this fermentation process, the pesticidal agent is recovered using
standard techniques, such as centrifugation, and is formulated into commercial
products. Ecogen operates a fermentation and formulation pilot plant to support
some product requirements for field trials and to facilitate the transition of
products from laboratory to large-scale manufacturing. For commercial production
of its products, Ecogen generally engages third party contract manufacturers to
perform one or more steps in the manufacturing process for the Company's
products. Ecogen believes that adequate fermentation, formulation and other
services are available from a number of third party contract manufacturers but
the engagement of contract manufacturers other than the Company's current
contract manufacturers may cause at least short-term disruptions of the
Company's manufacturing operations.

            Ecogen is a party to an agreement with Archer Daniels Midland
Company ("ADM") pursuant to which Ecogen's Bt-based insecticides as well as
Aspire Biofungicide will be fermented at ADM's facility in Decatur, Illinois.
The current agreement with ADM continues through December 31, 1999 and may be
extended upon the agreement of both


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parties. In addition, the agreement may be terminated annually by Ecogen prior
to December 31, 1999.

            The Company purchases the active ingredients for its pheromone
products from various suppliers and manufactures its pheromone products at its
facility in Billings, Montana. In addition, the Company obtains certain
manufacturing services from 3M Canada Company with respect to the formulation of
some of its NoMate products. The Company believes that its Billings, Montana
facility has sufficient capacity to meet its current and near-term anticipated
pheromone product needs.

            The most important raw materials needed by Ecogen to conduct its
product manufacturing and research and development activities include both
fermentation media components and formulation chemicals, which are readily
available from a variety of independent sources, and microbial strains that are
either proprietary to Ecogen or are licensed from outside parties. Ecogen does
not anticipate any shortages of these or other raw materials that would
materially affect product availability or cost.


RESEARCH AND PRODUCT DEVELOPMENT

            The Company's operating expenses to date have included costs
associated with the research and development of products for future
commercialization. Costs incurred by Ecogen under third-party funded research
and development programs aggregated approximately $1.2 million for fiscal 1997,
$1.0 million for fiscal 1996, and $1.7 million for fiscal 1995. Costs incurred
under Ecogen-funded research and development programs aggregated approximately
$3.8 million, $3.9 million and $7.3 million for fiscal 1997, 1996 and 1995,
respectively.

            During fiscal 1997, the Company derived approximately 25% of its
revenues from research and development contracts. This contrasts with
approximately 13% in 1996 and 19% in 1995.

      Bacillus thuringiensis Products

            Ecogen is developing Bt technology under its R&D Program with
Monsanto. This Program involves discovering, screening and developing new Bt
proteins and genes. The Company is also working on improving, through
recombinant DNA and other technologies, the efficacy of its bioinsecticides
already in the market, adapting such products for application to additional
uses, and developing new bioinsecticides. In addition, Ecogen is attempting to
improve its fermentation and formulation processes in order to increase product
yield and reduce the costs of product manufacturing.

      Pheromone and Related Products

            Ecogen is exploring additional formulations of its pheromone
products in order to develop alternative application techniques for such
products. Tests also are being conducted by the Company in order to expand its
pheromone product line for the control of additional pests.

      Yeast, Fungal and Other Products

            The Company is continuing to develop processes for the commercial
production by fermentation of AQ10 and Aspire Biofungicides. The Company is also
continuing to develop stable and efficacious formulations for these products.
With respect to Aspire Biofungicide, the Company is working to develop
formulations that provide Aspire with increased shelf life at room temperatures.
In addition, the Company is working on different types of bacteria that may be
used for the control of certain plant parasitic nematodes that feed on or enter
roots of growing plants causing damage and reduced crop yields. In laboratory
tests and greenhouse trials, Ecogen has identified bacterial isolates with
activity against root knot nematodes which attack a variety of crop plants.


                                       10
<PAGE>   11
      Insecticidal Nematodes

            The Company is working to implement at a commercial scale production
technology developed at a pilot scale so as to obtain higher yields and reduce
the costs of production. The Company is also investigating methods for
increasing the shelf life of nematode products (particularly at ambient
temperatures). In addition, the Company is continuing the development of
formulations that are designed to make the Company's products easier to use and
to increase product shelf life.

GEOGRAPHIC SEGMENT DATA

      Information regarding geographic segment data is provided in Note 14 to
Notes to Consolidated Financial Statements.

PATENT AND TRADE SECRETS

            Ecogen pursues a policy of seeking patent protection, both in the
United States and abroad, to protect its novel technologies, compositions of
matter and processes. With respect to the Company's two biofungicide products,
AQ10 Biofungicide and Aspire Biofungicide, and with respect to certain of its Bt
technology, the Company holds licenses to patents covering the base
technologies.

            There can be no assurance that patents or license rights under
patents for all of the Company's products and processes will be obtained, or
that issued patents will provide substantial protection or be of commercial
benefit to the Company. The issuance of a patent is not conclusive as to its
validity or enforceability, nor does it provide the patent holder with freedom
to operate without infringing the patent rights of others. A patent could be
challenged by litigation and, if the outcome of such litigation were adverse to
the patent holder, competitors could be free to use the subject matter covered
by the patent or the patent holder could be required to license the technology
to others.

            Because of the uncertainty concerning patent protection, the Company
relies, in certain cases, upon trade secret protection and continuing
technological innovation to maintain its competitive position. All Ecogen
employees and consultants sign confidentiality agreements under which they agree
not to use or disclose the Company's confidential information as long as that
information remains proprietary or, in other cases, for fixed time periods.
There can be no assurance, however, that such proprietary technology will not be
independently developed or that secrecy will not be breached. The Company's
research, development and commercialization partners, as well as its
biopesticide production subcontractors, are provided access to know-how under
confidentiality agreements. To the extent that such entities use this
technological information, disputes may arise as to the proprietary and patent
rights to such technological information and related developments.

            The Company is aware that substantial research efforts in
biotechnology are taking place at universities, government laboratories and
other corporations around the world and that numerous patent applications have
been filed, and patents have been issued, relating to fundamental technologies
and to specific biological pesticide products and processes. The Company may
have to obtain licenses under certain of these patents. No assurance can be
given concerning the terms on which such licenses would be available, if at all.

GOVERNMENTAL REGULATION

            Regulation by governmental authorities in the United States and
other countries is a significant factor affecting the success of products
resulting from biotechnological research.

            The pesticide industry is heavily regulated in the United States.
The U.S. EPA regulates pesticide products under the Federal Insecticide,
Fungicide and Rodenticide Act ("FIFRA"). Pesticides also are regulated by
various state agencies. Some states, such as California, have their own
extensive registration requirements. To develop and commercialize a pesticide
product, detailed and


                                       11
<PAGE>   12
complex procedures must be followed and federal approvals must be obtained under
FIFRA. Small-scale field testing usually may be conducted prior to product
registration to evaluate product efficacy. To conduct large-scale tests, a
company must obtain an Experimental Use Permit ("EUP"), which generally requires
satisfactory completion of certain toxicology and environmental studies.
Synthetic chemical pesticides require additional extensive toxicology and
environmental testing that typically is not required of biopesticides to
substantiate product safety prior to obtaining a product registration.
Commercial sale of a pesticide requires a registration for each pest and crop
for which the product is used. Registration requirements include submission and
U.S. EPA approval of the text of a label which must be included on every
pesticide product.

            The United States Congress has mandated under the Food Quality
Protection Act of 1996 that all U.S. EPA tolerances be reassessed using new
standards within 10 years. All tolerances will now be based on a "reasonable
certainty of no harm" and there will be a specific determination of risk to
infants and children.

            The U.S. EPA has recognized that biochemical and microbial
pesticides are distinguished from standard chemical pesticides and has
established different data requirements as part of its registration regulations.
These data requirements are set out in Subdivision M of the U.S. EPA's Pesticide
Assessment Guidelines. Biopesticides currently are subject to a three-tier
toxicology testing procedure and a four-tier environmental testing procedure. A
biopesticide product which satisfactorily completes both the Tier I toxicology
and environmental tests is not required to go through the tests specified in
subsequent tiers. This has been the case for product registration applications
filed by the Company to date. However, should questions arise during any tier of
testing, additional tests may be required. For a biopesticide product required
to complete only Tier I testing, approximately one year of laboratory testing is
required. Subsequent U.S. EPA registration generally takes approximately one
year. Although the process for obtaining regulatory approval to test and market
biopesticides that are genetically modified is designed to be less complex and
time-consuming than the regulatory approval process for synthetic chemical
pesticides, there can be no assurance that approvals will be granted on a timely
basis, if at all.

            Certain of Ecogen's products under development utilize recombinant
DNA technology. The Federal government regulates certain recombinant DNA
research activity through the National Institute of Health's Guidelines for
Research Involving Recombinant DNA Molecules ("NIH Guidelines"). The NIH
Guidelines, among other things, set laboratory procedures and establish levels
of biological and physical containment and other standards for recombinant DNA
molecules that must be met for various types of research. Ecogen believes that
it is in compliance with the NIH Guidelines. In August, 1992, Ecogen received
blanket permission from the U.S. EPA to conduct small-scale field trials of its
recombinant Bt strains without prior notice (generally required for small-scale
field testing of microbial pesticides).

            Pheromone and related products (other than trap and lure products)
generally require U.S. EPA and state registrations.

            Insecticidal nematodes are currently exempt from registration under
U.S. EPA pesticide regulations and, unlike other insecticides, including other
bioinsecticides, are subject to significantly lower levels of regulation or are
exempt from registration by state agencies.

            Ecogen's activities, including operation of its laboratories and
pilot-scale manufacturing facilities, are, or may be, subject to regulation (i)
under various other state and federal laws and regulations, including the
Occupational Safety and Health Act, the Toxic Substances Control Act, the
Federal Food, Drug and Cosmetic Act, the Solid Waste Disposal Act, the Resource
Conservation and Recovery Act, the Emergency Planning and Community
Right-to-Know Act, the Clean Air Act, the Clean Water Act, and other state and
federal laws regulating environmental quality, and the implementation of
regulations for all such laws; and (ii) by other state and federal agencies,
including the U.S. Department of Agriculture and the U.S. Food and Drug
Administration. In addition, the actions of federal agencies in reviewing
applications by Ecogen or issuing permits or other authorizations may be subject
to the


                                       12
<PAGE>   13
National Environmental Policy Act, and state or local agencies may be required
to comply with similar state laws. Historically, the cost of compliance with
such laws and regulations has not had a material impact on Ecogen's business.

            From time to time, governmental authorities review the need for
additional laws and regulations for biotechnology products and for pesticide
products that could, if adopted, apply to the business of Ecogen. Ecogen is
unable to predict whether any such new regulations will be adopted or whether,
if adopted, such regulations will adversely affect its business.

            Historically, the cost to Ecogen of compliance with federal, state
and local provisions enacted for the protection of the environment has not been
material. Toxicology testing, field development trials and related costs for
U.S. EPA registrations incurred to date by Ecogen have averaged under $500,000
for each product registration, while state registration and related costs per
product have been nominal. This does not mean that such costs are unlikely to
increase in the future, particularly if more restrictive approval requirements
are adopted by federal, state or local authorities. Also, delays in obtaining
necessary product registrations can have a significant impact upon Ecogen's
revenues and competitive position in the way of delayed product sales and lost
market opportunities.

            The regulation of field development and testing, as well as the
commercial sale, of Ecogen's biopesticides varies widely outside of the United
States. Some countries permit the field development testing and sale of
biopesticide products registered for commercial sale in the United States upon
the filing of certain notifications or other non-extensive documentation. In
other countries the regulation of biopesticides is not as well defined as in the
United States and in such countries, biopesticides are regulated like chemical
pesticides. These countries require significantly more toxicity and ecotoxicity
studies than are required in the United States for biopesticides, as well as a
minimum of two years field efficacy studies, for registration for commercial
sales. Due to the variety of regulatory structures in countries other than the
United States and the evolving nature of such regulatory schemes, the impact of
government regulation of biopesticides on Ecogen's international business can
not be assessed at this time.


COMPETITION

            Competition in the pesticide market is intense. Competition is based
principally on price and efficacy, but safety and ease of application are also
factors. Competitors of Ecogen include manufacturers and marketers of synthetic
chemical pesticides and biopesticides, including large chemical companies such
as Abbott Laboratories, Novartis and DowElanco, as well as specialized
biotechnology firms. Many of these companies have considerably greater financial
and marketing resources than Ecogen. Competitors with respect to research and
development activities also include universities and public and private research
organizations. In addition, Ecogen's bioinsecticide products compete with
certain transgenic seed and plant products that have insecticidal capabilities.

            Ecogen believes that its ability to compete in the pesticide market
may be enhanced by heightened concerns about the effects of chemical pesticides
upon the environment and, in some cases, by the increasing resistance of plant
pests to synthetic pesticides. However, Ecogen expects competition in the
agricultural pesticide industry to intensify as technical advances in the fields
of pesticides and pest-resistant plants are made. There can be no assurance that
developments by others will not render the Company's products or technology
obsolete or noncompetitive.

SEASONALITY

            The bulk of the Company's current products are presently marketed
for agricultural applications in the northern hemisphere, where the growing
season generally runs from spring until fall. Commercial introduction of the
Company's new products is contingent upon, among other factors, completion of
field testing and receipt of required regulatory approvals. Unusual weather
conditions


                                       13
<PAGE>   14
during field tests or failure to receive regulatory approvals prior to the
growing season may require additional field tests in subsequent growing seasons,
with resulting delays in product development and commercialization. In addition,
because of the seasonal nature of its business, the Company's product revenues
are likely to be concentrated in the fiscal quarters prior to and during a
particular growing season and may result in substantial variations in
quarter-to-quarter financial results. Product sales from year to year are also
affected by unusual weather conditions, such as droughts or floods, and the
level of insect infestation in grower areas.

EMPLOYEES

            As of January 15, 1998, Ecogen and its subsidiaries employed full
time 64 persons, of whom 11 hold Ph.D. degrees. Doctoral degrees held by
employees of Ecogen encompass the areas of biochemical engineering,
biochemistry, entomology, microbiology, molecular genetics, physiology and plant
pathology.

            Employees of the Company are required to enter into confidentiality
agreements with Ecogen. Pursuant to these agreements, the employees have agreed
not to disclose Ecogen's proprietary information and to assign to Ecogen all
rights to any inventions made during their employment or relating to Ecogen's
activities, and not to engage in activities similar to their activities at
Ecogen for any other person or entity during the term of their employment and
for one year thereafter. Ecogen believes that its relationship with its
employees is good.

                               EXECUTIVE OFFICERS

            The executive officers of the Company and their respective ages and
positions with the Company are as follows:

Name                          Age         Position
- ----                          ---         --------

James P. Reilly, Jr.          51          Chairman and Chief Executive Officer
                                          and Director

Richard A. Deak               43          Vice President, General
                                          Counsel and Secretary

Leigh H. English              42          Vice President, Research

Mary E. Paetzold              48          Vice President, Chief Financial
                                          Officer and Treasurer

            All executive officers are elected by the Board of Directors. There
is no family relationship among any of the officers or directors.

BUSINESS EXPERIENCE

            Mr. Reilly has served as Chairman since November 1, 1995 and as a
director of the Company since June, 1992. Since January, 1994, he has been the
Chief Executive Officer of the Company and since June, 1992, he has been the
Company's President. From June, 1992 to January, 1994, Mr. Reilly served as
Chief Operating Officer of the Company. From 1976 until he joined the Company,
Mr. Reilly was employed in various management capacities at Rhone-Poulenc, Inc.,
most recently, from April, 1991 to May, 1992, as Vice President and General
Manager of the Fine Chemicals Division. He received a B.S. in Business
Administration from Boston College.

            Mr. Deak has served as Vice President and General Counsel of the
Company since August, 1993 and as Secretary since May, 1995.  From January,
1993 to July, 1993, Mr. Deak served as General Counsel of the Company.  From
January, 1985 until he joined the Company, Mr. Deak was

                                       14
<PAGE>   15
employed by Unisys Corporation in various positions, including Associate General
Counsel, Corporate, Acquisitions and Finance. Prior to joining Unisys
Corporation, Mr. Deak practiced law with Mann & Ungar and Dechert Price &
Rhoads. Mr. Deak received a J.D. from the University of Pennsylvania Law School
and a BBA in Accountancy from the University of Notre Dame.

            Dr. English has served as Vice President, Research of the Company
since March, 1995.  From March, 1986 until March, 1995, Dr. English served
Ecogen in various positions including Principal Research Scientist and Team
Leader.  Prior to joining Ecogen, Dr. English was a Research Associate at
Tufts University School of Medicine.  Dr. English received a B.S. in
Entomology from Cornell University, a Ph.D in Membrane Biochemistry from
North Dakota State University and was an NIH postdoctoral fellow at Harvard
University Department of Biochemistry and Molecular Biology.

            Ms. Paetzold has served as Vice President, Chief Financial
Officer and Treasurer of the Company since she joined Ecogen in August,
1994.  Ms. Paetzold served as a director of the Company from March, 1996 to
September, 1997.  Prior to joining the Company, Ms. Paetzold was a partner
with KPMG Peat Marwick LLP, certified public accountants, where she worked
for over twenty years.  Ms. Paetzold received a B.A. in Mathematics from
Montclair State University and is a Certified Public Accountant.

ITEM 2.   PROPERTIES

            Ecogen currently occupies approximately 30,000 square feet of space
for its administrative offices and research and development operations in two
buildings located in the Bucks County Business Park, Langhorne, Pennsylvania.
The leases for these facilities expire on March 31, 2000 and Ecogen has renewal
options to March 31, 2005. Approximately 25,000 square feet of this space is
devoted to research and development facilities, including laboratories, an
insectary and a fermentation and formulation pilot plant. In addition, Ecogen
currently leases approximately 20,000 square feet of space in Billings, Montana
for its pheromone business, under a lease which expires December 31, 1998. The
Company believes that its leased space is sufficient for current needs.

ITEM 3.   LEGAL PROCEEDINGS

            The Company is a defendant in a patent infringement lawsuit brought
by Mycogen Corporation in which Mycogen alleges that Ecogen's Lepinox(TM)
Bioinsecticide infringes two Mycogen patents. The lawsuit was filed by Mycogen
in the United States District Court for the Southern District of California and
seeks damages and injunctive relief. The Company has denied the allegations made
by Mycogen in the lawsuit and is vigorously defending the action. The Company
does not expect that the outcome of the litigation will have a material adverse
effect on the Company's consolidated financial statements.

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

            Not Applicable.



                                       15
<PAGE>   16
                                     PART II


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

             A.         Market Information

            The Company's common stock trades under the NASDAQ symbol EECN and
is included in the National Market System. The high and low prices of the
Company's common stock during the years ended October 31, 1997 and 1996 were as
follows:

<TABLE>
<CAPTION>
                  --------------------------------------------------
                        1997                     HIGH          LOW
                  --------------------------------------------------
<S>                                             <C>         <C>
                  First Quarter                 $ 4         $ 2-1/2
                  Second Quarter                  4-1/8       2-5/8
                  Third Quarter                    4          2-1/2
                  Fourth Quarter                   3-7/8      2-1/2
</TABLE>

<TABLE>
<CAPTION>
                  --------------------------------------------------
                        1996                     HIGH          LOW
                  --------------------------------------------------
<S>                                             <C>         <C>
                  First Quarter                 $10         $5-5/16
                  Second Quarter                  7-1/2      4-3/8
                  Third Quarter                   6          3
                  Fourth Quarter                  4-3/4      2-5/8
</TABLE>


      A.    Holders

            On January 1, 1998, there were approximately 938 stockholders of
            record.

      B.    Dividends

            No cash dividends have ever been paid on the Company's Common Stock,
            and the Company is precluded from paying cash dividends under its
            convertible note agreement.




                                       16
<PAGE>   17
ITEM 6.  SELECTED FINANCIAL DATA

                Years ended October 31, 1997, 1996 and 1995, ten
                         months ended October 31, 1994,
                        and year ended December 31, 1993
                (all amounts in thousands, except per share data)

                   CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                               10 Months            Year
                                                                                 Ended              Ended
                                       Year Ended October 31,                   October 31,        Dec.31,
                                    1997            1996           1995(1)       1994(2)            1993
                                    ----            ----            ----          ----              ----

<S>                              <C>          <C>            <C>             <C>             <C>
Revenues:
   Product sales                 $  8,783        $ 8,600        $  9,135        $  8,550        $  7,151
   Other revenues                   3,028          7,825           2,855          11,275          12,501
Gross margins                       2,491          2,901           3,627           2,659           1,514
Expenses:
   Research & development           5,042          4,922           8,951           9,278          12,096
   Selling, general &
     administrative                 8,661          8,547          10,672           9,249           9,821
   Special charges:
     - Purchased technology            --             --           9,143              --             350
     - Restructuring                1,626             --           1,041              --              --
Net loss                          ($9,810)       ($2,743)       ($23,324)       ($ 4,593)       ($11,858)

Net loss per common
   share                          ($ 1.23)       ($ 0.40)       ($  4.34)       ($  1.24)       ($  3.39)
Weighted average common
   shares outstanding               7,958          7,178           5,373           3,715           3,495
</TABLE>


CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                                        At
                                            At October 31,                            Dec.31
                               1997          1996          1995          1994          1993
                             -------       -------       -------       -------       -------
<S>                          <C>           <C>           <C>           <C>           <C>
Cash, cash equivalents
   and temporary
   investments               $ 2,374       $ 9,611       $ 1,775       $ 8,828       $11,601
Total assets                  17,558        23,861        12,371        19,471        21,277
                                                                                            
Long-term debt                 3,916         1,297           620            --            --
Stockholders' equity           4,870        14,403         5,507         9,651         9,496
</TABLE>



No cash dividends have ever been paid on the Company's common stock, and the
Company does not intend to pay cash dividends in the foreseeable future.

(1)      During fiscal 1995, the Company acquired a controlling interest in
         Ecogen Technologies I Inc. (ETech) which was accounted for as a
         purchase with the operations of ETech consolidated from the date of
         acquisition. As a result of the acquisition, a special charge to
         operations was recorded in 1995 for purchased technology and the
         Company no longer recorded contract revenue from ETech in its
         consolidated financial statements.

(2)      In December, 1994, the Company changed from a calendar year end to a
         fiscal year ended October 31. Accordingly, results of operations in
         1994 represent the ten-month period ended October 31, 1994.


                                       17
<PAGE>   18
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

            The Company is an agricultural biotechnology company specializing in
the development and marketing of quality biorational products for the control of
pests in agricultural and related markets.

OVERVIEW

            Total revenues decreased 28% in fiscal 1997 to $ 11.8 million from $
16.4 million in fiscal 1996 when the Company recorded an upfront non-recurring
fee from Monsanto for certain rights to Bt technology. In fiscal 1997, product
sales increased 2% from $8.6 million in fiscal 1996 to $8.8 million in 1997.
Gross margins decreased to 28% in fiscal 1997 compared to 34% in fiscal 1996 due
principally to product mix and higher costs associated with the Company's new
products due to start-up costs relating to the new manufacturing process. Net
loss before special charges increased from ($2.7) million or ($.40) per share in
fiscal 1996 to ($8.2) million or ($1.03) per share in fiscal 1997 principally as
a result of lower margins on product sales and lower other revenue. Other
revenue in 1996 included $4.8 million in upfront payments from Monsanto for the
rights to certain Bt technology. Net loss in fiscal 1996 was ($2.7) million or
($.40) per share compared to ($9.8) million or ($1.23) per share in fiscal 1997.

The following is a summary of results as a percentage of total revenues, unless
otherwise indicated, as well as the percentage change in dollar amounts compared
to the prior period:

<TABLE>
<CAPTION>
                                      Year Ended October 31,  Increase
                                        1997        1996     (Decrease)
                                        ----        ----     ----------

<S>                                     <C>        <C>        <C>
Total Revenues                          100%       100%       (28%)
Product Sales                            74%        52%         2%
Other Revenues                           26%        48%       (61%)
Gross Margins on Product Sales           28%        34%       (14%)
Research & Development
  Expenses                               43%        30%         2%
Selling, General & Administrative
  Expenses                               73%        52%         1%
</TABLE>


                                       18
<PAGE>   19
RESULTS OF OPERATIONS - FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED
TO YEAR ENDED OCTOBER 31, 1996

   REVENUES

            Total revenues decreased 28% in fiscal 1997 from $16.4 million in
1996 to $11.8 million. In 1996, the Company recorded non-recurring revenue of
$4.8 million from the Company's strategic alliance with Monsanto for certain Bt
technology rights. Net product sales increased 2% or $.2 million in fiscal 1997
compared to fiscal 1996. Sales of the Company's Bt product line, representing
44% of Company product sales, decreased 1% in fiscal 1997 principally on lower
sales volume due principally to lower cotton acreage available for sprayable Bt
insecticides due to the continued acceptance of transgenic Bt cotton,
substantially offset by sales into the vegetable market of the Company's new
CRYMAX Bt insecticide. Sales of the pheromone product line, representing 36% of
total sales, decreased 26% primarily due to decreased volume, including lower
sales of the Company's NoMate PBW product for control of pink bollworm in the
cotton market due to the introduction of Bt transgenic cotton seed. Sales of
biofungicide products, representing 20% of total sales, increased 305% due to
increased sales volume of both Aspire and AQ10, the Company's new biofungicide
products.

            Research contract revenues increased 39% in fiscal 1997, due
primarily to the fact that the Company's research and development strategic
alliance with Monsanto, which was not effective until the second quarter of
fiscal 1996, was in effect for the full fiscal year of 1997. License fees and
other income decreased $5.0 million in fiscal 1997 principally as a result of
the non-recurring revenue from the Company's strategic alliance with Monsanto
recorded in fiscal 1996. Interest income decreased approximately $.6 million in
fiscal 1997 as a result of the decrease in funds available for investment.

   COSTS AND EXPENSES

            Gross margins decreased to 28% for fiscal 1997 compared to 34% in
fiscal 1996, primarily as a result of a change in product mix caused by lower
pheromone sales which carry high gross margins and the fact that the Company's
new Bt water dispersible granule ("WDG") products carried lower margins due to
higher production start-up costs in the WDG process.

            Research and development costs were substantially consistent with
fiscal 1996. Higher process development costs in the first half of fiscal 1997
were offset by lower research and development costs in Israel during the second
half of the year. The Company expects that research and development will
continue to trend downward in fiscal 1998. Selling, general and administrative
expenses in fiscal 1997 were substantially consistent with fiscal 1996 at
approximately $8.6 million.

            Net loss for fiscal 1997 was ($9.8) million, or ($1.23) per share,
compared with a net loss of ($2.7) million or ($.40) per share in the same
period in fiscal 1996 on weighted average shares of 7,958,000 and 7,178,000 in
1997 and 1996, respectively. Net loss, exclusive of special charges was ($8.2)
million or ($1.03) per share in fiscal 1997. The increase in the net loss,
exclusive of special charges, principally relates to lower gross margins and the
$4.8 million of other non-recurring revenue favorably impacting the 1996 fiscal
year.

            In fiscal 1997, the Company recorded a special charge of $1.6
million for the restructuring of its manufacturing process and the shut-down of
a research laboratory in Israel.



                                       19
<PAGE>   20
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED
OCTOBER 31, 1995

   REVENUES

            Total revenues increased 37% in fiscal 1996 from $12.0 million to
$16.4 million, principally as a result of the Company's research and development
strategic alliance with Monsanto. Net product sales decreased 6% or $.5 million
in fiscal 1996 compared to fiscal 1995. The Company's product sales did not
increase in fiscal 1996 at the levels expected, principally as a result of
manufacturing equipment design issues which delayed certain new product
introductions and lower insect pressure in the Mississippi Delta in late season
cotton and southern soybeans. Sales of the Company's Bt product line,
representing 15% of Company product sales, decreased 29% in fiscal 1996
principally on lower sales volume due principally to lower cotton acreage
available for sprayable Bt insecticides and low insect pressure in the Delta and
in southern soybeans. Bt product sales were ($.7) million in the fourth quarter
as a result of higher than expected returns of Condor XL from the cotton market.
Sales of the pheromone product line, representing 50% of total sales, increased
22% primarily due to increased volume, including initial international sales of
NoMate(R) CM for the control of codling moth on apple trees, and increased sales
of insect trap and lure products pursuant to contracts with governmental
entities. Sales of biofungicide products, representing 5% of total sales for
fiscal 1996, represented initial sales of the Company's first two biofungicide
products, AQ10 and Aspire, in fiscal 1996.

            Research contract revenues decreased 8% in fiscal 1996, due
primarily to the divestiture of Ecogen Europe S.r.l., the Company's former
majority-owned European research subsidiary, partially offset by research
contract revenues resulting from the Company's research and development
strategic alliance with Monsanto. License fees and other income increased $5.0
million principally as a result of the Company's strategic alliance with
Monsanto. Interest income increased approximately $.2 million in fiscal 1996 as
a result of the increase in funds available for investment.

   COSTS AND EXPENSES

            Gross margins decreased to 34% for 1996 compared to 40% in fiscal
1995, primarily as a result of a change in product mix caused by higher
pheromone sales pursuant to lower margin government contracts, and higher
international sales which carry lower margins and unabsorbed overhead charged to
costs of sales during the fourth quarter of 1996 as a result of a production
slow-down due to manufacturing equipment design issues.

            Research and development costs decreased $4.0 million or 45%
principally as a result of cost savings from restructuring decisions made by the
Company in 1995, including the divestiture of Ecogen Europe S.r.l., other
reductions of research and development personnel, and a reduction in outside
consulting expenditures. During the fourth quarter of 1996, the Company recorded
in research and development costs $.3 million in start-up expenses associated
with the scale-up of new products. Selling, general and administration expenses
decreased $2.1 million or 20% principally as a result of a reduction in
personnel and other cost saving measures.

            Net loss for fiscal 1996 was ($2.7) million, or ($.40) per share,
compared with a net loss of ($23.3) million or ($4.34) per share in the same
period in fiscal 1995. The 1995 fiscal year included special charges of $10.2
million principally due to the write-off of in-process research and development
as a result of the Company's acquisition of a controlling interest in ETech. Net
loss of ($2.7) million or ($.40) per share in fiscal 1996 represents a sharp
decline from the net loss exclusive of special charges of ($13.1) million or
($2.45) per share in 1995 on weighted average shares of 7,178,000 and 5,373,000
in 1996 and 1995, respectively, due principally to cost reductions of $6.2
million noted above and $5.0 million of other revenue.


                                       20
<PAGE>   21
SEASONALITY OF BUSINESS

            The bulk of the Company's current products are presently marketed
for agricultural applications in the northern hemisphere, where the growing
season generally runs from spring until fall. Commercial introduction of the
Company's new products is contingent upon, among other factors, completion of
field testing and receipt of required regulatory approvals. Unusual weather
conditions during field tests or failure to receive regulatory approvals prior
to the growing season may require additional field tests in subsequent growing
seasons, with resulting delays in product development and commercialization. In
addition, because of the seasonal nature of the Company's business, product
revenues are likely to be concentrated in the fiscal quarters prior to and
during a particular growing season and may result in substantial variations in
quarter-to-quarter financial results. Product sales from year to year are also
affected by unusual weather conditions, such as droughts, and the level of
insect infestation in grower areas.

INFLATION

            To date and for the foreseeable future, inflation has not had nor is
it anticipated to have a significant impact on revenues or costs and expenses of
the Company.

LIQUIDITY AND CAPITAL RESOURCES

            The Company has financed its working capital needs primarily through
private and public offerings of equity securities, research revenues and license
and other fees from research and development alliances and product sales.

            At October 31, 1997, the Company had cash, cash equivalents and
temporary investments of $2.4 million, a net decrease of $7.2 million from
October 31, 1996. Such decrease resulted primarily from cash expenditures during
the year of $9.2 million for operations, and $.5 million for the purchase of
plant and equipment, partially offset by $2.5 million received from financing
transactions in fiscal 1997. During the first quarter of fiscal 1998, the
Company received $4.3 million under an amendment to its research agreement with
Monsanto.

            To date, the Company has not generated positive cash flow from
operations. The Company believes that its existing working capital, including
approximately $4.3 million received from Monsanto in January 1998, and cash flow
generated from total revenues in 1998 should be sufficient to meet its capital
and liquidity requirements through the current fiscal year based on reduced
spending levels, if necessary. The Company continues to pursue additional
avenues to supplement its working capital, including, among other things,
through the possible sale of assets. The Company's working capital and working
capital requirements are affected by numerous factors and there is no assurance
that such factors will not have a negative impact on the Company's liquidity.
Principal among these are the success of its product commercialization and
marketing efforts and the efforts of its strategic partners in commercializing
and selling products based on the Company's technology, the technological
advantages and pricing of the Company's products, economic and environmental
considerations which impact agricultural crop production and the agricultural
sector generally, competitive conditions in the agricultural pest control
market, and access to capital markets that can provide the Company with the
resources necessary to fund its strategic priorities. Over the long term, the
Company's liquidity is dependent on market acceptance of its products and
technology.

            At October 31, 1997 the Company had no material commitments for
capital expenditures.

            Through October 31, 1997, the Company had available Federal net
operating loss carryforwards of approximately $68.9 million which expire at
various times through the year 2012. In addition, the Company had research and
experimentation tax credits of approximately $2.4 million, which credits expire
at various times through the year 2012.


                                       21
<PAGE>   22
            As a result of certain equity transactions, the Company experienced
ownership changes as defined by rules enacted with the Tax Reform Act of 1986
(the "Act"). Accordingly, the Company's ability to use its net operating loss
and research and experimentation credit carryforwards is subject to certain
limitations as defined by the Act. The Company believes that such limitations
should not have a significant impact in 1998 or 1999 since anticipated taxable
profits, if any, will not exceed the amount of the limitation. In addition, to
the extent that the Company recognizes gains, if any, on the disposition of
assets held on the date of the ownership change, the annual limitation is
increased by the amount of the "built-in" gains attributable to those assets.
The built-in gain on a particular asset is the excess of its fair market value
over its cost basis on the date of the ownership change.

OTHER ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY

            Inventory increased $1.5 million at October 31, 1997 when compared
to October 31, 1996 principally as a result of lower than expected sales.
Accounts receivable at October 31, 1997 were substantially consistent with
fiscal year end 1996 balances.

            Accounts payable, accrued expenses and deferred contract revenue at
October 31, 1997 were substantially consistent with fiscal year end 1996.

            Long-term debt and other long-term liabilities increased $3.5
million in fiscal 1997 principally as a result of the $3.0 million convertible
note issued in 1997 and prepaid commercialization success fees from Monsanto 
offset in part by payments on capital leases.

            Stockholders' equity decreased $9.5 million primarily as a result of
operating losses in fiscal 1997.

            In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share". SFAS 128 establishes standards for computing and presenting earnings per
share. In accordance with the effective date of SFAS 128, the Company will adopt
SFAS 128 as of December 31, 1997. This statement is not expected to have a
material impact on the Company's consolidated financial statements.

Discussions set forth by the Company in public documents including the Annual
Report contain forward looking statements that involve a number of risks and
uncertainties that could cause actual results to differ materially from expected
results. The Company intends to market and sell a number of newly introduced
products. Some of these products utilize new formulations which have not to date
been produced on a commercial scale or produced on a commercial scale that has
been replicated. Certain of the manufacturing processes for such products
include newly developed equipment and techniques which are being incorporated
into commercial scale manufacturing processes. Risks and uncertainties
associated with the successful commercialization of the products include: (i)
the successful scale-up of the Company's manufacturing process in time to meet
targeted sales opportunities; (ii) the market acceptance of the Company's
current and newly introduced products; (iii) the efficacy, pricing, ease of use
and performance of the Company's products; (iv) the successful development,
registration, commercialization and marketing of technologically advanced new
products; (v) the continued and uninterrupted supply of the Company's products
from third-party toll manufacturers and the continued financial viability of
such manufacturers; (vi) economic and environmental considerations which impact
agricultural crop production and agricultural crop protection, including the
number of acres of target crops planted, the cost and efficacy of competitive
products, weather conditions and the level of insect and disease infestation on
target crops, and (vii) the ability of the Company to fund its strategic
priorities through operations or access to capital markets.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            See Item 14 for an Index to Financial Statements and Financial
Statement Schedules.  Such Financial Statements and Schedules are
incorporated herein by reference.


                                       22
<PAGE>   23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

            None.
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      1.    The section labeled "Election of Directors" appearing in the
Proxy Statement is hereby incorporated herein by reference.

      2.    Information concerning the Company's Executive Officers is set
forth in Part I of this Form 10-K.

      3.    The section labeled "Election of Directors" appearing in the
Proxy Statement is hereby incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

            The section labeled "Executive Compensation" appearing in the Proxy
Statement is hereby incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The section labeled "Principal Stockholders" appearing in the Proxy
Statement is hereby incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The section labeled "Certain Transactions" appearing in the Proxy
Statement is hereby incorporated herein by reference.



                                       23
<PAGE>   24
                                     PART IV

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


(a)(1) and (2) Financial Statements and Financial Statement Schedules

The following consolidated financial statements of Ecogen Inc. and
Subsidiaries are included in Item 8:

                                                                      Page in
                                                                     Form 10-K
                                                                     ---------

Independent Auditors' Report                                            F-1

Consolidated Balance Sheets - October 31, 1997 and 1996                 F-2

Consolidated Statements of Operations - Years Ended
   October 31, 1997, 1996 and 1995                                      F-3

Consolidated Statements of Stockholders' Equity -
   Years Ended October 31, 1997, 1996 and 1995                          F-4

Consolidated Statements of Cash Flows - Years Ended
   October 31, 1997, 1996 and 1995                                      F-5

Notes to Consolidated Financial Statements -
   October 31, 1997, 1996 and 1995                                      F-7

Financial Statement Schedule: Valuation and Qualifying
   Accounts                                                            F-21

            All other schedules are omitted for the reasons that they are not
applicable or that equivalent information has been included in the consolidated
financial statements, and notes thereto, or elsewhere herein.


                                       24
<PAGE>   25
(a)(3)    Exhibits

Exhibit No.             Description
- -----------             -----------

3.1         Restated Certificate of Incorporation of Ecogen Inc. (Form 10-K for
            fiscal quarter ended January 31, 1996)*

3.8         By-laws of Ecogen Inc., as amended. (Form S-1 Registration
            Statement)*

4.3         Ecogen Inc. Stock Option Plan, as amended. (Form 10-K for fiscal
            year ended December 31, 1992)*

10.14       Form of Confidentiality Agreement between Ecogen Inc. and all Ecogen
            Inc. employees. (Form S-1 Registration Statement)*

10.30       Lease Agreement, dated June 4, 1985, between Linpro Bucks County II,
            Limited and Ecogen Inc. (Form S-1 Registration Statement)*

10.62       Distribution Agreement, dated March 26, 1991, by and between Ecogen
            Inc. and Roussel Uclaf. (Form 10-K for fiscal year ended December
            31, 1990)*

10.67       Bt Gene License Agreement, dated April 11, 1991, between Ecogen Inc.
            and Pioneer Hi-Bred International, Inc. (Form S-1 Registration
            Statement filed on May 1, 1991, as amended).*

10.87       Form of Services Agreement among Ecogen Inc., Ecogen Technologies I
            Incorporated and the Program Subsidiaries. (Form 10-K for fiscal
            year ended December 31, 1992)*

10.88       Form of Technology License Agreement between Ecogen-Bio Inc. and
            certain Program Subsidiaries. (Form 10-K for fiscal year ended
            December 31, 1992)*

10.89       Form of Research and Development Agreement between Ecogen Inc. and
            certain Program Subsidiaries. (Form 10-K for fiscal year ended
            December 31, 1992)*

10.90       Form of Marketing Option Agreement between Ecogen Inc. and certain
            Program Subsidiaries. (Form 10-K for fiscal year ended December 31,
            1992)*

10.94       Summary of Ecogen Inc. Deferred Compensation Plan. (Form 10-K for
            fiscal year ended December 31, 1992)*

10.101      Employment and Consulting Agreement, dated as of January 1, 1994, by
            and between Ecogen Inc. and John E. Davies. (Form 10-K for fiscal
            year ended December 31, 1993)*

10.119      Form of Incentive Stock Option Agreement, as amended. (Form 10-K for
            fiscal year ended October 31, 1994)*


- ----------------------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No. 1-9579,
File No. 33-14119 in the case of the Form S-1 Registration Statement and File
No. 33-40319 in the case of the Form S-1 Registration Statement filed on May
1, 1991, as amended) and are made part of this Report.


                                       25
<PAGE>   26
10.120      Master Settlement Agreement, dated October 23, 1995, among the
            Company, Ecogen Europe S.r.l. and 3A Parco Technologico
            Agroalimentare. (Form 10-K for fiscal year ended October 31, 1995)*

10.121      Research and Development Agreement, dated as of January 24, 1996,
            between the Company and Monsanto Company. (Form 10-Q for fiscal
            quarter ended January 31, 1996)*

10.122      Investment Agreement, dated as of January 24, 1996, between the
            Company and Monsanto Company. (Form 10-Q for fiscal quarter ended
            January 31, 1996)*

10.123      Technology Assignment Agreement, dated as of January 24, 1996,
            between the Company, Ecogen-Bio Inc. and Monsanto Company. (Form
            10-Q for fiscal quarter ended January 31, 1996)*

10.124      Form of Severance Compensation Agreement between the Company and its
            Executive Officers. (Form 10-Q for fiscal quarter ended January 31,
            1996)*

10.125      Form of Indemnification Agreement for Directors and Officers (Form
            10-Q for fiscal quarter ended January 31, 1997)*

10.126      Amendment No. 1 to Research and Development Agreement by and between
            Monsanto Company and Ecogen Inc. dated May 22, 1997. (Form 10-Q for
            fiscal quarter ended April 30, 1997)*

10.127      Amendment No. 1 to Technology Assignment by and between Monsanto
            Company and Ecogen Inc. dated September 15, 1997.

10.128      Convertible Note Purchase Agreement by and among Ecogen Inc., Ecogen
            Investment Inc., Ecogen-Bio Inc. and United Equities (Commodities)
            Company dated October 31, 1997.

10.129      8% Convertible Note due October 31, 2002 issued to United Equities
            (Commodities) Company dated October 31, 1997.

10.130      Security Agreement by and among Ecogen Inc., Ecogen Investment Inc.,
            Ecogen-Bio Inc. and United Equities (Commodities) Company dated
            October 31, 1997.


- ----------------------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No. 1-9579,
File No. 33-14119 in the case of the Form S-1 Registration Statement and File
No. 33-40319 in the case of the Form S-1 Registration Statement filed on May
1, 1991, as amended) and are made part of this Report.

                                       26
<PAGE>   27
21.      List of Subsidiaries

24.      Consent of KPMG Peat Marwick LLP

25.      Powers of attorney executed by certain officers of the Company and the
         individual members of the Board of Directors authorizing certain
         officers of the Company to file amendments to the Company's annual
         report on Form 10-K are located on the signature page to such Form
         10-K.

27.      Financial Data Schedule.

 (b)     Reports on Form 8-K.

         No reports on Form 8-K were filed by the Company during fiscal year
         1997.





- ----------------------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No. 1-9579,
File No. 33-14119 in the case of the Form S-1 Registration Statement and File
No. 33-40319 in the case of the Form S-1 Registration Statement filed on May
1, 1991, as amended) and are made part of this Report.


                                       27
<PAGE>   28
                         Independent Auditors' Report


The Board of Directors and Stockholders
Ecogen Inc.:


            We have audited the consolidated financial statements of
Ecogen Inc. and subsidiaries as listed in the accompanying index in Item 14. 
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index in Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

            We conducted our audits 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 audits provide a reasonable basis for our
opinion.

            In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Ecogen
Inc. and subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1997, in conformity with generally accepted accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.


                                                KPMG Peat Marwick LLP

Short Hills, New Jersey
December 15, 1997, except as to the 
last paragraph of note 8, which
is as of January 30, 1998





                                     F-1
<PAGE>   29
                          ECOGEN INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                           ASSETS
                           ------
                                                                                                October 31,
                                                                                        1997                   1996
                                                                                        ----                   ----

<S>                                                                                <C>                  <C>
Current assets:
  Cash and cash equivalents                                                        $   1,824,603        $   5,620,701
  Temporary investments                                                                  549,342            3,990,410
  Contract and trade receivables, less allowance for doubtful
     accounts of $77,769 in 1997 and $42,769 in 1996                                   1,769,514            1,783,605
  Inventory, net                                                                       8,356,767            6,854,472
  Prepaid expenses and other current assets                                              571,227              493,519
                                                                                   -------------        -------------
     Total current assets                                                             13,071,453           18,742,707
  Plant and equipment, net                                                             3,649,579            4,569,327
  Intangible and other assets, net                                                       837,020              549,210
                                                                                   -------------        -------------
                                                                                   $  17,558,052        $  23,861,244
                                                                                   =============        =============

            LIABILITIES AND STOCKHOLDERS' EQUITY
            ------------------------------------
Current liabilities:
  Accounts payable and accrued expenses                                                5,043,626            5,172,090
  Deferred revenue                                                                       957,794            1,101,367
                                                                                   -------------        -------------
      Total current liabilities                                                        6,001,420            6,273,457
                                                                                   -------------        -------------

Long-term debt                                                                         3,916,432            1,297,469
                                                                                   -------------        -------------
Other long-term obligations                                                            2,770,548            1,887,078
                                                                                   -------------        -------------

Stockholders' equity:
  Preferred stock, par value $.01 per share; authorized 7,500,000 shares                      --                   --

  Series B convertible preferred stock - 350,000 shares authorized; none and
       5,834 shares issued and outstanding in 1997 and
       1996, respectively (liquidation value $20 per share)                                   --                   58
  Common stock, par value $.01 per share; authorized 42,000,000
        shares; issued 8,118,573 and 7,928,171 in 1997 and 1996,
        respectively                                                                      81,186               79,282
  Additional paid-in capital                                                         117,861,372          117,548,065
  Accumulated deficit                                                               (111,552,038)        (101,741,946)
  Foreign currency translation adjustment                                                   --                161,536
  Net unrealized gain on securities                                                        7,239                9,742
  Treasury stock, at cost ( 116,893 and 126,648 shares in 1997
        and 1996, respectively )                                                      (1,528,108)          (1,653,497)
                                                                                   -------------        -------------
    Total stockholders' equity                                                         4,869,651           14,403,240
                                                                                   -------------        -------------
Commitments and contingencies
                                                                                   $  17,558,052        $  23,861,244
                                                                                   =============        =============
</TABLE>

See accompanying notes to consolidated financial statements


                                       F-2
<PAGE>   30
                          ECOGEN INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                   Year Ended October 31,
                                                                        1997                1996                1995
                                                                        ----                ----                ----
<S>                                                                <C>                 <C>                 <C>
Revenues:
  Product sales, net                                               $  8,783,461        $  8,599,582        $  9,135,203
  Contract revenue                                                    2,938,790           2,109,622           2,299,822
  License and other income                                                 --             5,000,000                --
  Interest income, net                                                   88,837             715,511             555,935
                                                                   ------------        ------------        ------------
   Total revenues                                                    11,811,088          16,424,715          11,990,960
                                                                   ------------        ------------        ------------

Costs and expenses, including related
  party amounts of $799,833, $1,044,121
  and $1,122,877:
    Cost of products sold                                             6,291,928           5,698,578           5,507,641
    Research and development:
      Funded by third parties                                         1,218,107             986,204           1,673,617
      Self funded                                                     3,823,503           3,936,484           7,277,224
    Selling, general and administrative                               8,661,750           8,546,793          10,671,572
          
    Special charges                                                   1,625,892                --            10,184,502
                                                                   ------------        ------------        ------------
   Total costs and expenses                                          21,621,180          19,168,059          35,314,556
                                                                   ------------        ------------        ------------


Net loss                                                           ($ 9,810,092)       ($ 2,743,344)       ($23,323,596)
                                                                   ============        ============        ============

Net loss per common share available
  to common stockholders                                                 ($1.23)             ($0.40)             ($4.34)
                                                                   ============        ============        ============

Weighted average common shares
  outstanding                                                         7,958,000           7,178,000           5,373,000
                                                                   ============        ============        ============
</TABLE>




See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>   31
                          ECOGEN INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                                   CONVERTIBLE                         ADDITIONAL  
                                                                 PREFERRED STOCK     COMMON STOCK   PAID-IN CAPITAL
                                                                 ---------------     ------------   ---------------
<S>                                                              <C>                 <C>            <C>             
BALANCE, OCTOBER 31, 1994                                                $ 2,600        $ 212,838      $ 86,033,915 
Issuance of 822,240 shares of common
  stock in connection with ETech exchange offer                               -            41,112        11,264,687 
Issuance of 129,015 shares of common stock
  upon exercise of stock options and warrants                                 -             6,451         1,240,139 
Issuance of 723,750 shares of common stock
  in connection with private placements, net                                  -            36,187         5,794,931 
Issuance of 5,517 shares of common stock
  in connection with a research agreement                                     -               275            96,279 
Conversion of 260,000 shares of Series A
  preferred stock to common stock                                         (2,600)           2,600                - 
Issuance of 35,000 shares of Series B convertible
  preferred stock  in connection with a private placement, net               350               -            673,815 
One-for-five reverse stock split                                              -          (239,678)          239,678 
Foreign currency translation                                                  -                -                 - 
Net loss                                                                      -                -                 - 
                                                                 ---------------     ------------   ---------------
BALANCE, OCTOBER 31, 1995                                                    350           59,785       105,343,444 
Issuance of 122,000 shares of Series C convertible
   preferred stock in connection with a private placement,net              1,220               -          2,792,723 
Issuance of 943,397 shares of common stock, net                               -             9,434         9,325,831 
Conversion of 29,166 shares of Series B convertible
   preferred stock to 122,313 shares of common stock                        (292)           1,223              (931)
Conversion of 122,000 shares of Series C convertible
   preferred stock to 851,308 shares of common stock                      (1,220)           8,513            (7,293)
Dividends on preferred stock                                                  -               327           109,675 
Purchase of 91,000 shares of common stock for Treasury                        -                -                 - 
Transfer of 1,508 shares of Treasury for Employee Benefits                    -                -            (15,384)
Foreign currency translation                                                  -                -                 - 
Net unrealized gain on securities                                             -                -                 - 
Net loss                                                                      -                -                 - 
                                                                 ---------------     ------------   ---------------
BALANCE, OCTOBER 31, 1996                                                     58           79,282       117,548,065 
Issuance of 5,793 shares of common stock
   for employee benefits                                                      -                58           (84,639)
Issuance of 136,000 shares of common stock
   in settlement of a royalty obligation                                      -             1,360           386,240 
Conversion of 5,834 shares of Series B convertible preferred  
  stock to 44,030 shares of common stock                                     (58)             440              (382)
Dividends on preferred stock                                                  -                46            12,088 
Foreign currency translation                                                  -                -                 - 
Net reduction in unrealized gain on securities                                -                -                 - 
Net loss                                                                      -                -                 - 
                                                                 ---------------     ------------   ---------------
BALANCE, OCTOBER 31, 1997                                                     -           $81,186      $117,861,372 
                                                                 ===============     ============   ===============
</TABLE>
<TABLE>
<CAPTION>
                                                                  ACCUMULATED       EQUITY         TREASURY                  
                                                                    DEFICIT       ADJUSTMENTS    STOCK AT COST       TOTAL   
                                                                  -----------     -----------    -------------    ---------- 
<S>                                                              <C>              <C>            <C>             <C>        
BALANCE, OCTOBER 31, 1994                                        ($75,554,683)     $ 244,904     ($1,288,780)    $ 9,650,794 
Issuance of 822,240 shares of common                                                                                         
  stock in connection with ETech exchange offer                             -             -               -       11,305,799 
Issuance of 129,015 shares of common stock                                                                                   
  upon exercise of stock options and warrants                               -             -               -        1,246,590 
Issuance of 723,750 shares of common stock                                                                                   
  in connection with private placements, net                                -             -               -        5,831,118 
Issuance of 5,517 shares of common stock                                                                                     
  in connection with a research agreement                                   -             -               -           96,554 
Conversion of 260,000 shares of Series A                                                                                     
  preferred stock to common stock                                           -             -               -               -  
Issuance of 35,000 shares of Series B convertible                                                                            
  preferred stock  in connection with a private placement, net              -             -               -          674,165 
One-for-five reverse stock split                                            -             -               -               -  
Foreign currency translation                                                -         25,963              -           25,963 
Net loss                                                          (23,323,596)            -               -      (23,323,596)
                                                                --------------    ----------    ------------    ------------ 
BALANCE, OCTOBER 31, 1995                                         (98,878,279)       270,867      (1,288,780)      5,507,387 
Issuance of 122,000 shares of Series C convertible                                                                           
   preferred stock in connection with a private placement,net               -             -               -        2,793,943 
Issuance of 943,397 shares of common stock, net                             -             -               -        9,335,265 
Conversion of 29,166 shares of Series B convertible                                                                          
   preferred stock to 122,313 shares of common stock                        -             -               -               -  
Conversion of 122,000 shares of Series C convertible                                                                         
   preferred stock to 851,308 shares of common stock                        -             -               -                  
Dividends on preferred stock                                         (120,323)            -               -          (10,321)
Purchase of 91,000 shares of common stock for Treasury                      -             -        (385,625)        (385,625)
Transfer of 1,508 shares of Treasury for Employee Benefits                  -             -          20,908            5,524 
Foreign currency translation                                                -       (109,331)             -         (109,331)
Net unrealized gain on securities                                           -          9,742              -            9,742 
Net loss                                                           (2,743,344)            -               -       (2,743,344)
                                                                --------------    ----------    ------------    ------------ 
BALANCE, OCTOBER 31, 1996                                        (101,741,946)       171,278      (1,653,497)     14,403,240 
Issuance of 5,793 shares of common stock                                                                                     
   for employee benefits                                                    -             -          125,389          40,808 
Issuance of 136,000 shares of common stock                                                                                   
   in settlement of a royalty obligation                                    -             -               -          387,600 
Conversion of 5,834 shares of Series B convertible preferred                                                                 
  stock to 44,030 shares of common stock                                    -             -               -              -  
Dividends on preferred stock                                                -             -               -           12,134 
Foreign currency translation                                                -       (161,536)             -         (161,536)
Net reduction in unrealized gain on securities                              -         (2,503)             -           (2,503)
Net loss                                                           (9,810,092)            -               -       (9,810,092)
                                                                --------------    ----------    ------------    ------------ 
BALANCE, OCTOBER 31, 1997                                       ($111,552,038)      $  7,239     ($1,528,108)    $ 4,869,651 
                                                                ==============    ==========    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>   32
                          ECOGEN INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                               Year Ended October 31,
                                                                     1997                1996                1995
                                                                     ----                ----                ----

<S>                                                              <C>                 <C>                 <C>          
Cash flows from operating activities:
 Net loss                                                        $ (9,810,092)       $( 2,743,344)       $(23,323,596)
  Adjustments to reconcile net loss
   to net cash used in operating activities:
     Noncash write-off of purchased technology                             --                  --           9,717,737
     Depreciation and amortization expense                          1,355,310             403,827             613,965
     Changes in operating assets and liabilities,
      net of effects from acquisitions/dispositions:
        (Increase) decrease in inventory                           (1,502,295)           (509,020)            250,501
        (Increase) decrease in contract
         and trade receivables, net                                    14,091          (1,050,459)            476,136
        Increase in prepaid expenses
         and other current assets                                     (77,708)           (347,749)           (344,130)
        Increase (decrease) in accounts payable and
         accrued expenses                                             (96,116)            285,789             382,756
        Increase (decrease) in deferred revenue                       856,427           1,057,817          (2,255,508)
        Decrease in other long-term obligations                      (116,530)           (236,411)                 --
        Other                                                         137,795              71,109             172,624
                                                                 ------------        ------------        ------------
  Net cash used in operating activities                            (9,239,118)         (3,068,441)        (14,654,763)
                                                                 ------------        ------------        ------------
Cash flows from investing activities:
  Proceeds from maturities of temporary
   investments                                                      3,441,068                  --             734,285
  Purchase of temporary investments                                        --          (3,990,410)                 --
  Purchase of plant and equipment                                    (520,144)           (488,326)           (930,852)
  Net cash change from disposition                                         --                  --          (3,270,274)
                                                                 ------------        ------------        ------------
  Net cash provided by (used in) investing activities               2,920,924          (4,478,736)         (3,466,841)
                                                                 ------------        ------------        ------------
Cash flows from financing activities:
  Proceeds from sale of common stock, warrants
   and convertible preferred stock, net of
   issuance costs                                                          --          12,129,209           7,751,873
  Repayment of capital lease obligation                              (476,089)           (389,528)                 --
  Purchase of treasury stock                                               --            (364,717)                 --
  Proceeds from issuance of convertible note                        3,000,000                  --             154,000
  Cash received from ETech investors                                       --                  --           4,015,732
                                                                 ------------        ------------        ------------
  Net cash provided by financing activities                         2,523,911          11,374,964          11,921,605
                                                                 ------------        ------------        ------------
</TABLE>


                                                                     (Continued)


                                      F-5
<PAGE>   33
                          ECOGEN INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED




<TABLE>
<CAPTION>
                                                                       Year Ended October 31,
                                                              1997               1996              1995
                                                              ----               ----              ----

<S>                                                        <C>                <C>               <C>
Effect of foreign exchange rate changes on cash                 (1,815)            17,701          (118,863)
                                                           -----------        -----------       -----------

Net increase (decrease) in cash and cash equivalents        (3,796,098)         3,845,488        (6,318,862)

Cash and cash equivalents, beginning of period               5,620,701          1,775,213         8,094,075
                                                           -----------        -----------       -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                     1,824,603        $ 5,620,701       $ 1,775,213
                                                           ===========        ===========       ===========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for:
     Interest                                              $   142,489        $   114,894       $     7,859
     Income taxes                                                   --                 --                --
</TABLE>

NON-CASH INVESTING AND FINANCING ACTIVITIES:

     In 1997, 1996 and 1995, debt totalling approximately $262,000, $1,540,000
     and $466,000, respectively, was incurred by the Company for the acquisition
     of equipment. At October 31, 1996, approximately $686,000 is included in
     accounts payable for construction in progress.

     In 1995, the Company issued 5,517 shares of common stock in connection with
     research and development and consulting agreements. In 1997, the Company
     issued 136,000 shares of common stock in satisfaction of future royalty
     obligations.

     In 1995, holders of the Company's Series A convertible preferred stock
     converted 260,000 shares of preferred stock to 260,000 shares of common
     stock. In 1997 and 1996, holders of the Company's Series B convertible
     preferred stock converted 5,834 and 29,160 shares of preferred stock to
     44,030 and 122,313 shares of common stock, respectively. In 1996, holders
     of the Company's Series C convertible preferred stock converted 122,000
     shares of preferred stock to 851,308 shares of common stock.

     In 1997, the Company transferred 9,755 shares of treasury stock to
     outstanding shares pursuant to certain employee benefit plans.




See accompanying notes to consolidated financial statements.



                                      F-6
<PAGE>   34
                          ECOGEN INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                         October 31, 1997, 1996 and 1995


(1) Basis of Presentation and Summary of Significant Accounting Policies

     Organization and business activities:
         The consolidated financial statements include the accounts of Ecogen
         Inc. ("Ecogen" or the "Company") and its wholly-owned and
         majority-owned subsidiaries. All intercompany accounts and transactions
         have been eliminated in consolidation.

         The Company is a biotechnology company specializing in the development
         and marketing of environmentally compatible products for the control of
         pests in agricultural and related markets. The Company has not yet
         achieved profitable operations and there is no assurance that
         profitable operations, if achieved, could be sustained on a continuing
         basis. Further, the Company's future operations are dependent on, among
         other things, the success of the Company's commercialization efforts
         and market acceptance of the Company's products.

         Since its inception in 1983, the Company's source of funds has been
         primarily dependent on private and public offerings of equity
         securities, revenues from research and development alliances and
         product sales. The Company believes that its existing working capital,
         including approximately $4.3 million received from Monsanto in January
         1998, and cash flow generated from total revenues in 1998 should be
         sufficient to meet its capital and liquidity requirements through the
         current fiscal year based on reduced spending levels, if necessary. The
         Company continues to pursue additional avenues to supplement its
         working capital, including, among other things, through the possible
         sale of assets. The Company continues to evaluate various alternatives
         for raising additional funds over the short term. At this time, the
         Company is unable to determine whether it will be successful in raising
         additional funds on terms satisfactory to the Company. If the Company
         is not successful in raising additional funding, the Company would take
         a number of steps to conserve cash including reducing costs to continue
         to fund its operations through fiscal 1998.

     Cash and cash equivalents:
         For purposes of the consolidated statements of cash flows, the Company
         considers all highly liquid temporary investments purchased with an
         original maturity of three months or less to be cash equivalents. Cash
         equivalents consist primarily of U.S. Government obligations,
         commercial paper and foreign money market accounts and are carried at
         cost which approximates market value.

     Temporary investments:
         Temporary investments consist of U.S. Government obligations and
         corporate debt securities with original maturities greater than three
         months. The Company's temporary investments are available for sale to
         fund operations.

         Effective November 1, 1995, the Company adopted SFAS No. 115,
         "Accounting for Certain Investments in Debt and Equity Securities." The
         effect of adopting this statement was not material. Under this new
         accounting standard, securities for which there is not the positive
         intent and ability to hold to maturity are classified as available for
         sale and are carried at fair value. At October 31, 1997, the Company
         held a U.S. debt security and a corporate debt security, both with
         contractual maturities of greater than one year, with costs of $243,780
         and $298,323, respectively and fair values of $250,890 and $298,452,
         respectively. Unrealized holding gains and losses on securities
         classified as available for sale are carried as a separate component of
         stockholders' equity. Pursuant to SFAS 115, a $7,239 unrealized holding
         gain has been recorded in a separate component of stockholders' equity
         as of October 31, 1997.


                                      F-7
<PAGE>   35
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.

     Fair value of financial instruments:
         The fair value of the long-term debt approximates its carrying value
         due to the interest rate approximating current market rates. For all
         other financial instruments, their carrying value approximates fair
         value due to the short maturity of those instruments.

     Inventory:
         Inventory is stated at the lower of cost, as determined by the average
         cost method, or net realizable value.

     Plant and equipment:
         Plant and equipment are recorded at cost. Depreciation is computed by
         utilizing an accelerated method over the estimated useful lives of the
         related assets which range from three to ten years. Amortization of
         leasehold improvements is computed using the straight-line method over
         the lesser of the estimated useful lives of the improvements or the
         remaining lease term.

     Research and development:
         All research and development costs are charged to operations as
         incurred.

     Revenue recognition:
         Revenue from research and development contracts is recognized in
         accordance with the terms of the respective contracts. Revenue from
         time and materials contracts is recognized in the period in which the
         related services have been rendered and costs incurred by the Company.
         Revenue from achievement of milestone events is recognized when all
         parties concur that the scientific results and/or milestones stipulated
         in the agreement have been met. Revenue from other contracts is
         recognized on a prorata basis over the life of the contract. Contract
         costs of such contracts are generally incurred ratably over the
         contract term. Revenue recognized in the accompanying consolidated
         statements of operations under these contracts is not subject to
         repayment. Revenue received that is related to future performance under
         such contracts is deferred and recognized as revenue when earned.

         Revenues from product sales are recognized upon shipment and passage of
         title to the customer.

     Concentration of credit risk:
         The Company's product sales are made primarily to distributors of
         agricultural products, located predominantly in North America. The
         Company does not generally require collateral or other security to
         ensure collection of trade receivables, except for certain
         international sales, where letters of credit are obtained.

     Intangible and other assets:
         Intangible and other assets include purchased proprietary technology,
         patents, license fees and cost in excess of net assets acquired.
         Amounts capitalized are amortized over their estimated useful lives
         which range from 2.5 years to 15 years. Technology acquired that is
         still in the research and development stage is charged to operations.
         Amortization expense on intangible assets amounted to $4,981, $26,550
         and $135,631 in fiscal 1997, 1996 and 1995, respectively.



                                      F-8
<PAGE>   36
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.

     Net loss per common share:
         Net loss per common share available to common stockholders, adjusted
         for preferred stock dividends of $1,815 and $116,700 in fiscal 1997 and
         1996, respectively, is computed using the weighted average number of
         shares outstanding during the period. Common stock equivalents are not
         included in the computation of weighted average shares outstanding
         since the effect would be anti-dilutive for both primary and fully
         diluted earnings per share using the treasury stock method.

     Foreign currency translation:
         Substantially all assets and liabilities of the Company's foreign
         subsidiaries are translated at fiscal year-end exchange rates, while
         related income and expenses are translated at rates which approximate
         the exchange rates prevailing during the year. The resulting
         adjustments are accumulated as a separate component of stockholders'
         equity. Foreign currency transaction gains (losses), which are
         immaterial, are charged to operations as incurred.

     Income Taxes:
         The Company accounts for income taxes under Statement of Financial
         Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
         Under the asset and liability method of SFAS 109, deferred tax assets
         and liabilities are recognized for the estimated future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and the benefits arising from the realization of
         operating loss and tax credit carryforwards. Deferred tax assets and
         liabilities are measured using enacted tax rates in effect for the year
         in which those temporary differences are expected to be recovered or
         settled. A valuation allowance is provided when it is more likely than
         not that some portion or all of the deferred tax assets will not be
         realized. Under SFAS 109, the effect on deferred tax assets and
         liabilities of a change in tax rates is recognized in income in the
         period that includes the enactment date of the tax rate change.

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

     Stock-Based Compensation:
         In October 1995, the Financial Accounting Standards Board (FASB) issued
         SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123
         presents companies with the alternative of retaining the current
         accounting for stock-based compensation or adopting a new accounting
         method based on the estimated fair value of equity instruments granted
         to employees during the year. Effective October 31, 1997, the Company
         elected not to change its method of accounting for stock options and
         therefore, adopted the disclosure provisions as required by SFAS No. 
         123. See note 12.



                                      F-9
<PAGE>   37
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.

     Long-Lived Assets:
         In accordance with SFAS No. 121, the Company reviews long-lived assets
         for impairment whenever events or changes in business circumstances
         occur that indicate that the carrying amount of the assets may not be
         recoverable. The Company assesses the recoverability of long-lived
         assets held and to be used and assets to be sold based on fair value.
         Adoption of SFAS No. 121 in fiscal 1997 did not have a material impact
         on the Company's financial position, operating results or cash flows.

(2) Inventory

         Inventory consists of the following components as of October 31, 1997
         and 1996:

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

<S>                                               <C>              <C>       
         Raw materials and packing supplies       $2,446,240       $2,121,123
         Work in process                           2,145,027        1,653,692
         Finished goods                            3,765,500        3,079,657
                                                  ----------       ----------
                                                  $8,356,767       $6,854,472
                                                  ==========       ==========
</TABLE>

(3) Plant and Equipment

         Plant and equipment consist of the following components as of October
         31, 1997 and 1996:

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

<S>                                                                <C>                 <C>         
         Manufacturing and laboratory equipment                    $  5,287,483        $  4,168,985
         Office furniture and equipment                                 857,465             910,750
         Leasehold improvements                                       3,101,418           2,032,169
         Construction in progress                                            --           2,929,057
                                                                   ------------        ------------
                                                                      9,246,366          10,040,961
              Less accumulated depreciation and amortization         (5,596,787)         (5,471,634)
                                                                   ------------        ------------
                                                                   $  3,649,579        $  4,569,327
                                                                   ============        ============
</TABLE>

         Included in plant and equipment is $108,000 and $76,000 of capitalized
         interest as of October 31, 1997 and 1996, respectively.



                                      F-10
<PAGE>   38
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(4) Accounts Payable and Accrued Expenses

         Accounts payable and accrued expenses consist of the following
         components as of October 31, 1997 and 1996:

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

<S>                                                    <C>              <C>       
         Trade accounts payable                        $3,965,880       $3,499,170
         Amounts due on construction in progress          210,000          686,012
         Payroll costs                                    108,106          259,719
         Other                                            759,640          727,189
                                                       ----------       ----------
                                                       $5,043,626       $5,172,090
                                                       ==========       ==========
</TABLE>

         Included in trade accounts payable are $616,000 of refunds due to
         customers for product returns recorded in the fourth quarter of 1996.

(5) Long-term Debt

         As of October 31, 1996 the Company borrowed approximately $143,000
         from an Israeli Bank. During fiscal 1997, the obligation to the Bank
         was settled as part of the shut-down of the Company's laboratory
         facility in Israel.

         During 1997, the Company sold, in a private placement, a $3.0 million
         8% convertible secured note (the "Note") to an institutional
         shareholder of the Company.  Assuming the conversion of the Note, such
         shareholder would have a 16% beneficial interest in the Company. The 
         Note is due in October 2002 and is convertible by the holder,
         at any time, into shares of the Company's common stock at $3.00 per
         share, subject to adjustment under certain circumstances. At the
         Company's option, interest on the Note may be payable in cash, common
         stock or a note.  The Company may redeem the Note, at its option, at
         any time provided the Company's stock trades at or above $4.50 per
         share for a certain period of time. Further, if the Company redeems
         the Note when the Company's common stock trades below $4.50 per share,
         the Company would be required to issue the holder a warrant to acquire
         1,000,000 shares of the Company's common stock at $3.00 per share. 
         Such warrant, if issued, would expire in October 2002. The Note is 
         secured by substantially all of the Company's assets. The holder of 
         the Note has certain demand and piggyback registration rights and 
         a right of first refusal under certain circumstances for certain 
         equity offerings.

(6) Commitments and Contingencies

     Leases:
         The Company leases its facilities and certain equipment and automobiles
         under various noncancelable operating and capital leases. Rental
         expense charged to operations aggregated approximately $574,000,
         $673,000 and $816,000 for fiscal 1997, 1996 and 1995, respectively.



                                      F-11
<PAGE>   39
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6) Commitments and Contingencies, cont.

     Leases, cont:

         Minimum lease payments under noncancelable long-term leases for the
         years subsequent to October 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                        Capital          Operating
                                                        Leases             Leases
                                                        ------             ------

<S>                                                  <C>                <C>        
                                    1998             $   733,000        $   469,000
                                    1999                 520,000            432,000
                                    2000                 200,000            193,000
                                    2001                      --             12,000
                                                     -----------        -----------
         Total minimum lease payments                   1,453,000       $ 1,106,000
                                                                        ===========
         Less: Interest                                 (207,000)
                                                     -----------
         Present value of net minimum
            lease payments                             1,246,000
         Less: Current portion of capital
            lease obligations (included in
            accounts payable and accrued
            expenses)                                   (412,000)
                                                     -----------
         Long-term capital obligations
            (included in long-term debt)             $   834,000
                                                     ===========
</TABLE>

         A sublease agreement was entered into effective October 1, 1997 for a 
         portion of the Company's corporate facility. This sublease extends
         through March 2000. Expected sublease income is $114,416 for fiscal
         1998 and 1999 and $28,605 for fiscal 2000.

         The Company is a defendant in a patent infringement lawsuit brought by
         Mycogen Corporation in which Mycogen alleges that Ecogen's Lepinox(TM)
         Bioinsecticide infringes two Mycogen patents. The lawsuit was filed by
         Mycogen in the United States District Court for the Southern District
         of California and seeks damages and injunctive relief. The Company has
         denied the allegations made by Mycogen in the lawsuit and is vigorously
         defending the action. The Company does not expect that the outcome of
         the litigation will have a material adverse effect on the Company's
         consolidated financial statements.

(7) Ecogen Technologies I Incorporated

         In 1992 Ecogen Technologies I Inc. ("ETech"), a corporation organized
         by but not affiliated with the Company, was formed to initiate or
         accelerate research and development of certain products using
         technology exclusively licensed or sublicensed by the Company to
         subsidiaries of ETech.

         During fiscal 1995, the Company acquired approximately 70% of the
         outstanding stock of ETech pursuant to an exchange offer. The Company
         issued 822,240 shares of its common stock having a market value of
         approximately $11.3 million. At the date of the Exchange offer,
         investors were still obligated under ETech Investor notes issued in
         connection with the prior sale of equity securities by ETech. The
         acquisition of approximately 70% of ETech was accounted for under the
         purchase method of accounting, and in fiscal 1995 the Company recorded
         approximately $9.1 million as a special charge to operations for the
         value of in-process research and development acquired from ETech.
         Market feasibility and acceptance has not yet been established with
         respect to the ETech research programs and there is no assurance that
         the Company will be successful in its commercialization efforts.


                                      F-12
<PAGE>   40
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(7) Ecogen Technologies I Incorporated, cont.

         As a result of the acquisition, effective January 1, 1995, ETech's
         consolidated financial statements are consolidated with those of the
         Company, resulting in the Company recording 100% of the research and
         development expenses of ETech programs and reflecting any payments from
         ETech investors, subsequent to the Exchange Offer, as a long-term
         obligation. (See note 9 for unaudited pro forma information as a result
         of the acquisition.)

         At October 31, 1995 approximately $1.6 million had been recorded as a
         long-term obligation for cash received from ETech investors not
         electing to exchange their ETech shares for the Company's shares.
         During fiscal 1995, prior to the Company's acquisition of ETech, 
         ETech collected from investors participating in the Exchange Offer and
         remitted to the Company approximately $3.0 million of payments under 
         the ETech Investor Notes.

(8) Research, Development and License Agreements

         During 1991 and 1992, the Company, through Ecogen Europe S.r.l.
         ("Ecogen Europe"), a majority-owned subsidiary of Ecogen Inc., entered
         into two long-term research and development agreements with 3A S.r.l.
         ("3A"), an Italian corporation. Ecogen Europe was owned 75% by the
         Company and 25% by 3A. On October 23, 1995 the Company terminated its
         European research and development agreements with 3A. As part of the
         transaction, Ecogen transferred its ownership interest in Ecogen Europe
         to 3A and Ecogen Europe changed its name to Bio Integrated Technology
         S.r.l. ("BIT").

         As a result of the transaction, Ecogen is released from the obligation
         to provide $5.6 million of funding to Ecogen Europe. Further, as part
         of the transaction, the Company received cash of approximately $1.0
         million and 683,202 of its common shares that had been held by Ecogen
         Europe. The Company licensed to BIT the Company's existing nematode
         technology for use solely in Europe, Africa and the Middle East ("BIT
         Territory") and agreed to provide BIT with improvements to certain of
         its nematode formulation technology. BIT licensed to the Company
         nematode technology for use outside of BIT Territory. The Company also
         licensed to BIT certain of its existing Bt technology, principally 12
         non-commercialized strains and process and formulation technology,
         solely for use in BIT Territory. The Company recorded a gain of
         approximately $.2 million on the transaction in fiscal 1995.

         The Company will also pay BIT until the year 2002 a royalty on net
         sales in BIT's Territory of certain biofungicide products. No royalties
         have been earned to date.

         Monsanto Transaction

         In January 1996, the Company entered into an agreement with Monsanto
         Company ("Monsanto") for an equity investment (see note 11), purchase
         of technology and joint research and development arrangement relating
         to the Company's proprietary Bacillus thuringiensis ("Bt") technology
         for in-plant applications (collectively, the "Monsanto Transaction").
         The transaction included (i) the acquisition by Monsanto of certain
         rights in the Company's Bt technology for an aggregate non-refundable
         purchase price of $5.0 million in cash which was recorded as license
         and other income in the first quarter of fiscal 1996, (ii) the sale by
         the Company to Monsanto of common stock for an aggregate purchase price
         of $10.0 million and (iii) a four year research and development ("R&D")
         collaboration arrangement with Monsanto for the further development of
         the Company's Bt gene library for a minimum of $10.0 million, of which
         $2.9 million and $3.0 million were received in fiscal 1997 and 1996,
         respectively, and recorded as deferred contract revenue until such
         revenue is earned under the terms of the agreement. Under this
         agreement,


                                      F-13
<PAGE>   41
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(8) Research, Development and License Agreements, cont.

         Monsanto Transaction, cont.

         the Company recognized as contract revenue approximately $2.9 million
         and $1.9 million in fiscal 1997 and 1996, respectively. During fiscal
         1997, Monsanto advanced $1.0 million of commercialization success fees
         which, under the agreement, are payable at such time as Monsanto
         commercializes a product with Ecogen's technology. The payment was
         recorded as deferred revenue in other long-term liabilities and will be
         recognized as revenue when earned under the contract.

         On January 30, 1998, the Company amended its Research and Development
         Agreement with Monsanto and received approximately $4.3 million which
         resulted in $2.6 million in other revenue in the first quarter of
         fiscal 1998 and $1.7 million in deferred revenue. Deferred contract
         revenue of approximately $2.0 million at January 30, 1998 will be 
         recognized as income when earned through January 1999, the remaining 
         term of the amended agreement.

(9) Preferred Stock

     Series A Convertible Preferred Stock
         During fiscal 1995, holders converted 260,000 shares of the Series A
         convertible preferred stock to common stock in accordance with its
         terms.

     Series B Convertible Preferred Stock
         In September 1995, the Company raised $.7 million, net of expenses,
         from two institutional investors in exchange for 35,000 shares of 8%
         Series B Convertible Preferred Stock (the "Series B Preferred Stock").
         During fiscal 1997 and 1996, 5,834 and 29,166 shares, respectively, of
         Series B Preferred Stock were converted into 44,030 and 122,313 shares,
         respectively, of the Company's common stock in accordance with its
         terms.

     Series C Convertible Preferred Stock
         In November 1995, the Company raised $2.8 million, net of expenses,
         from institutional investors in exchange for 122,000 shares of 8%
         Series C Convertible Preferred Stock (the "Series C Preferred Stock").
         During fiscal 1996, 122,000 shares of the Series C Preferred Stock were
         converted into 851,308 shares of the Company's common stock in
         accordance with its terms.

(10) Common Stock

         During fiscal 1995, the Company raised an aggregate of $7.1 million,
         net of issuance costs, in private placements to institutional investors
         in exchange for 723,750 shares of the Company's common stock.

         During fiscal 1996, Monsanto Company purchased 943,397 shares of the
         Company's common stock at $10.60 per share resulting in net proceeds of
         $9.3 million. Under the terms of the agreement, Monsanto has agreed to
         maintain its share ownership position during the term of the research 
         and development agreement and Monsanto is prohibited, during
         the first three years following the closing, from acquiring more than
         25% of the Company's voting stock without the Company's consent.
         Monsanto was granted certain demand and piggyback registration rights
         with respect to its shares. In addition, Monsanto has a right of first
         refusal to purchase securities of the Company so as to maintain its
         ownership percentage in the Company.


                                      F-14
<PAGE>   42
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(10) Common Stock, cont.

         On January 29, 1996 the shareholders approved an amendment to the
         Company's Restated Certificate of Incorporation (the "Amendment") which
         effected a one-for-five reverse split (the "Reverse Split") of the
         Company's outstanding shares of common stock.

(11) Warrants and Other Options

         As of October 31, 1997, the Company had the following warrants and
         options outstanding and exercisable into shares of the Company's common
         stock (excluding stock options issued under the Company's stock option
         plan - see note 13) as follows:

<TABLE>
<CAPTION>
                                                                       Price
                                              Shares of              Range Per      Expiration
                                             Common Stock           Share/Unit         Dates
                                             ------------           ----------         -----

<S>                                          <C>                 <C>                <C>
              Warrants                          828,516           $7.31 - 43.75     1998 - 2000
              Unit Purchase Options               8,364              $35.00            1998
              Other Options                      53,044          $11.70 - 63.00     1998 - 2003
                                               --------
                                                889,924
                                               ========
</TABLE>

         Warrants and options included above which had been exercisable into
         751,731 shares of common stock expired in January 1998.

 (12) Stock Option Plan

         The Company's stock option plan ("Option Plan") expired in October,
         1997. The Option Plan permitted the granting of both incentive stock
         options and nonstatutory stock options. The option price of the shares
         for incentive stock options could not be less than the fair market
         value of such stock at the grant date as determined under the Option
         Plan. Options are exercisable over a period determined by the Board of
         Directors, but not longer than ten years after the grant date.

         Effective November 1, 1996, Ecogen adopted SFAS No. 123, "Accounting
         for Stock-Based Compensation". As permitted by the standard, the
         Company has elected to continue following the guidance of Accounting
         Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
         to Employees," for measurement and recognition of stock-based
         transactions with employees. In accordance with APB No. 25, no
         compensation cost has been recognized for the Company's option plans.
         Had the determination of compensation cost for these plans been based
         on fair value at the grant dates for awards under these plans,
         consistent with the method under SFAS No. 123, the Company's net


                                      F-15
<PAGE>   43
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(12) Stock Option Plan, cont.

         loss and net loss per share would have been increased to the pro forma
         amounts indicated below:

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

<S>                                           <C>                 <C>         
               Net Loss:
                   As Reported                $(9,810,092)        $(2,743,344)
                   Pro Forma                  $(9,992,440)        $(2,864,265)

               Net Loss Per Share:
                   As Reported                     $(1.23)              $(.40)
                   Pro Forma                       $(1.25)              $(.42)
</TABLE>

         The resulting compensation expense may not be representative of
         compensation expense to be incurred on a pro forma basis in future
         years.

         The fair value of each option grant is estimated on the date of grant
         by using the Black-Scholes Option Pricing Model. The following
         weighted-average assumptions were used for grants in fiscal 1997 and
         1996:

<TABLE>
<S>                                                     <C>
               Expected Dividend Yield                   0%
               Expected Volatility                      70%
               Risk-Free Interest Rate                   8%
               Expected Option Lives (years)             3
</TABLE>

         A summary of the status of the Option Plan as of October 31, 1997, 1996
         and 1995 and charges during the years then ended are as follows:

<TABLE>
<CAPTION>
                                            Options Outstanding
                                            -------------------
                                                   Weighted-Average
                                         Shares     Exercise Price
                                         ------     --------------

<S>                                     <C>        <C>   
         Balance November 1, 1994        521,417        $35.57
              Granted                    408,919        $12.29
              Exercised                   (8,437)       $ 9.01
              Canceled                  (420,439)       $39.21
                                        --------

         Balance October 31, 1995        501,460        $13.98
              Granted                    227,960        $ 6.86
              Exercised                       --            --
              Canceled                  (125,192)       $15.11
                                        --------

         Balance October 31, 1996        604,228        $11.06
              Granted                    403,892        $ 4.17
              Exercised                  (11,096)       $ 2.56
              Canceled                  (305,703)       $12.58
                                        --------        ------

         Balance October 31, 1997        691,321        $ 6.50
                                        ========        ======
</TABLE>



                                      F-16
<PAGE>   44
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(12) Stock Option Plan, cont.

         The following table summarizes information about fixed stock options
         outstanding at October 31, 1997:

<TABLE>
<CAPTION>
                                        Options Outstanding                                Options Exercisable
            ----------------------------------------------------------------------    ---------------------------
                                                    Weighted-
                                    Number           Average           Weighted-        Number       Weighted-
               Range of           Outstanding       Remaining           Average       Exercisable     Average
            Exercise Price        at 10/31/97   Contractual Life    Exercise Price    at 10/31/97  Exercise Price
            --------------        -----------   ----------------    --------------    -----------  --------------

<S>                               <C>           <C>                 <C>               <C>          <C>   
           $ 2.56 to $ 3.25         374,134        7.7 Years            $ 2.88          63,004        $ 2.67
           $ 6.28 to $12.56         312,987        6.4 Years            $ 9.06         199,467        $10.00
           $18.13 to $53.06           4,200        3.5 Years            $33.31           4,200        $33.31
                                    -------                                            -------
           $ 2.56 to $53.06         691,321        7.1 Years            $ 6.50         266,671        $ 8.64
                                    =======                                            =======
</TABLE>

         During fiscal 1995, employees were given the right to exchange 290,079
         options at exercise prices from $32.30 to $65.88 for new options at an
         exercise price of $10.94, the fair market value at the grant date for
         the exchange right. The new options were not exercisable until the
         later of November 13, 1995 or the exercisable date of the option
         exchanged. Accordingly, options to purchase 290,079 shares were
         canceled and an equal number of new options were issued, which is
         reflected in the table above.

         During fiscal 1997, employees were given the right to exchange 254,392
         options at exercise prices from $2.88 to $35.25 for new options
         at exercise prices from $2.56 to $3.19, the fair market value at the
         grant date for the exchange right. The new options are exercisable
         according to a vesting schedule beginning on the new grant date,
         except for options that terminate during the new vesting period which
         are immediately vested.  Accordingly, options to purchase 254,392
         shares were canceled and an equal number of new options were issued,
         which is reflected in the table above.

(13)   Geographic Area and Related Information

         The Company's operations consist primarily of the research, development
         and marketing of biopesticide and related products, which constitutes
         one industry segment. Information with respect to the Company's
         operations by geographic area for fiscal years ended October 31, 1997,
         1996 and 1995 is as follows:

<TABLE>
<CAPTION>
                                                 1997                1996                1995
                                                 ----                ----                ----
<S>                                         <C>                 <C>                 <C>         
         Revenues:
         United States:
         Unaffiliated customers             $ 11,411,109        $ 16,209,900        $  9,940,018
         Transfers to other
            geographic areas                     413,849             102,978             826,537
                                            ------------        ------------        ------------
                                              11,824,958          16,312,878          10,766,555
                                            ------------        ------------        ------------
           Europe:
         Unaffiliated customers                       --                  --           1,810,710
                                            ------------        ------------        ------------

         Other:
         Unaffiliated customers                  399,979             214,815             240,232
         Eliminations and adjustments           (413,849)           (102,978)           (826,537)
                                            ------------        ------------        ------------
         Total revenues                     $ 11,811,088        $ 16,424,715        $ 11,990,960
                                            ============        ============        ============
</TABLE>


                                      F-17
<PAGE>   45
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(13)   Geographic Area and Related Information, cont.

<TABLE>
<CAPTION>
                                                 1997                1996                1995
                                                 ----                ----                ----
<S>                                         <C>                 <C>                 <C>          
         Operating income (loss):
         United States                      $( 9,188,902)       $( 1,713,209)       $(20,843,428)
         Europe                                       --                  --            (291,721)
         Other                                  (528,223)           (980,273)         (1,361,910)
         Eliminations and adjustments            (92,967)            (49,862)           (826,537)
                                            ------------        ------------        ------------
         Total operating loss               $( 9,810,092)       $( 2,743,344)       $(23,323,596)
                                            ============        ============        ============

         Identifiable assets:
         United States                      $ 17,509,332        $ 27,016,478        $ 14,567,805
         Other                                    48,720             333,715             482,590
         Eliminations and adjustments                 --          (3,488,949)         (2,678,896)
                                            ------------        ------------        ------------
         Total identifiable assets          $ 17,558,052        $ 23,861,244        $ 12,371,499
                                            ============        ============        ============
</TABLE>

         Of the United States revenues from unaffiliated customers included
         above, $1,605,247, $1,666,024 and $1,433,084 were export revenues in
         fiscal 1997, 1996 and 1995, respectively from the following geographic
         areas:

<TABLE>
<CAPTION>
                          1997             1996             1995
                          ----             ----             ----

<S>                   <C>              <C>              <C>       
         Europe       $  348,367       $  429,798       $  954,398
         Other         1,256,880        1,236,226          478,686
                      ----------       ----------       ----------
                      $1,605,247       $1,666,024       $1,433,084
                      ==========       ==========       ==========
</TABLE>

(14)   Income Taxes

         The tax effects of temporary differences that give rise to significant
         portions of deferred tax assets and deferred tax liabilities as of
         October 31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                               1997                1996
                                                               ----                ----
<S>                                                       <C>                 <C>         
         Deferred tax assets:
              Purchased research, development and
                investment in affiliated companies        $ 10,380,000        $ 10,380,000
              Net operating loss carryforwards              23,433,000          21,696,000

              Research experimentation credit
                carryforward                                 2,414,000           2,414,000
              Other                                          1,732,000             980,000
                                                          ------------        ------------
                  Total gross deferred tax assets           37,959,000          35,470,000
              Less valuation allowance                      37,724,000          35,237,000
                                                          ------------        ------------
                  Net deferred tax assets                      235,000             233,000
                                                          ------------        ------------
         Deferred tax liabilities:
                Furniture, equipment, and leasehold
                improvements, principally due to
                  differences in depreciations                (235,000)           (233,000)
                                                          ------------        ------------
                  Total gross deferred tax
                       liabilities                            (235,000)           (233,000)
                                                          ------------        ------------

                  Net deferred taxes                      $         --        $         --
                                                          ============        ============
</TABLE>



                                      F-18
<PAGE>   46
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(14)   Income Taxes, cont.

         The net change in the total valuation allowance for fiscal 1997 and
         1996 was an increase of approximately $2,487,000 and $900,000,
         respectively.

         At October 31, 1997, the Company has net operating loss carryforwards
         for Federal income tax purposes of approximately $68.9 million which
         are available to offset future Federal taxable income, if any, through
         2012. The Company also has research and experimentation tax credit
         carryforwards for Federal income tax purposes of approximately $2.4
         million which are available to reduce future Federal income taxes, if
         any, through 2012. The Company's ability to use such net operating loss
         and research and experimental credit carryforwards is subject to
         certain limitations due to ownership changes, as defined by rules
         enacted with the Tax Reform Act of 1986.

(15) Special Charges and Other Matters

      Special Charges:
         Special charges consist of the following components as of October 31,
         1997 and 1995:

<TABLE>
<CAPTION>
                                              1997              1995
                                              ----              ----

<S>                                       <C>               <C>        
    Purchased technology                  $        --       $ 9,143,002
    Restructuring costs                            --         1,041,500
    Realignment of manufacturing process    1,416,263                --
    Shut-down of research laboratory          209,629                --
                                          -----------       -----------
                                          $ 1,625,892       $10,184,502
                                          ===========       ===========
</TABLE>

         During the fourth quarter of fiscal 1997, the Company recorded
         a special charge of $1,416,263 for the realignment of the Company's
         manufacturing process involving its new water dispersable granular
         products, including the write-down of plant and equipment and other
         costs. During the third quarter of fiscal 1997, the Company recorded 
         a charge of $209,629 relating to the shut-down of a research 
         laboratory in Israel. Severance payments included in these charges 
         are not significant, and there are no future payouts associated with 
         these special charges.

         In fiscal 1995, the Company recorded a special charge for purchased
         technology resulting from the acquisition of a majority interest in
         ETech. Also in fiscal 1995, a special charge was recorded for
         restructuring costs incurred in connection with the shutdown of Ecogen
         Australia and personnel reductions at the Company Headquarters,
         including agreements with a former officer and director of the Company
         and a former officer and current director. Included in restructuring
         costs is $.7 million of severance costs, of which $165,000 and
         $281,000, respectively, were paid in fiscal 1997 and 1996 and $165,000
         is due in fiscal 1998. Such amounts are included in accounts payable
         and accrued expenses and other long-term obligations in the
         accompanying consolidated balance sheet at October 31, 1996 and 1995.

     Other:
         Sales derived from one customer aggregated 13% of total revenues in
         fiscal 1997. Sales derived from another customer aggregated 15% of
         total revenues in fiscal 1995. Contract revenues derived from one
         entity aggregated 25% and 12% of total revenues in fiscal 1997 and
         1996, respectively. Contract revenues derived from another entity
         aggregated 11% of total revenues in fiscal 1995.



                                      F-19
<PAGE>   47
                          ECOGEN INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(16) Profit Sharing 401(k) Plan

         Effective January 1, 1988, the Company established a 401(k) Profit
         Sharing Plan (the "401(k) Plan") which covers substantially all
         full-time U.S. employees. All eligible employees may elect to
         contribute a portion of their wages to the 401(k) Plan, subject to
         certain limitations. The Company contributes 75% (50% prior to July 1,
         1996) of the employees' contributions, subject to a maximum equal to 6%
         of the employees' compensation. The matching company contribution vests
         over a five-year period. Effective July 1, 1996, employees may elect to
         have the Company matching contribution in Ecogen common stock. The
         Company contributed approximately $161,000, $124,000 and $126,000 to
         the 401(k) Plan in fiscal 1997, 1996 and 1995, respectively.

(17) Related Party Transactions

         A director, elected during fiscal 1996, is a partner of a law firm that
         has acted as legal counsel to the Company. The Company recorded fees
         and costs of approximately $51,000 and $233,000 to this law firm during
         fiscal 1997 and 1996, respectively. 

         The Company has engaged an advertising agency whose principal is the
         son of a former director of the Company. Fees to this agency aggregated
         approximately $749,000, $811,000 and $932,000 in fiscal 1997, 1996 and
         1995, respectively. 

         Management believes that all transactions with related parties were
         conducted on an arm's-length basis.



                                      F-20
<PAGE>   48
                                                                     Schedule II

                          ECOGEN INC. AND SUBSIDIARIES

                        Valuation and Qualifying Accounts

                  Years ended October 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
            Column A                        Column B                 Column C               Column D         Column E

                                                                     Additions              Deductions
                                            Balance at       Charged to     Charged to                       Balance at
                                            Beginning        Costs and         Other                           End of
                                            of Period        Expenses        Accounts                          Period

<S>                                        <C>              <C>             <C>            <C>              <C>       
1997:
  Allowance for doubtful accounts          $   42,769       $   35,000      $     --       $       --       $   77,769
  Reserve for inventory obsolescence          675,894          500,000            --          169,468        1,006,426
                                           ==========       ==========      ========       ==========       ==========

1996:                                                                            
  Allowance for doubtful accounts          $   80,000       $       --      $     --       $   37,231       $   42,769
  Reserve for inventory obsolescence          695,820          500,000            --          519,926          675,894
                                           ==========       ==========      ========       ==========       ==========
                                                                                 
1995:                                                                            
  Allowance for doubtful accounts          $   90,000       $       --      $     --       $   10,000       $   80,000
  Reserve for inventory obsolescence          332,941          575,000            --          212,121          695,820
                                           ==========       ==========      ========       ==========       ==========
</TABLE>


                                      F-21
<PAGE>   49
                                    SIGNATURE

              In accordance with Section 13 or 15(d) of the Exchange Act, the 
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                  ECOGEN INC.

                                  By:/s/ Mary E. Paetzold
                                     --------------------
                                     Mary E. Paetzold
                                     Vice President, Chief Financial Officer and
                                     Treasurer
Date:  February 12, 1998


                                POWER OF ATTORNEY

              KNOW ALL MEN BY THESE PRESENTS, that each person whose signature 
appears below constitutes and appoints James P. Reilly, Jr. and Mary E.
Paetzold, or any of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
or her substitute or substitutes, may do or cause to be done by virtue hereof.

              Pursuant to the requirements of the Securities Exchange Act of 
1934, this report has been signed by the following persons in the capacities
indicated as of February 12, 1998.

<TABLE>
<CAPTION>
Signature                          Title                                 Date
- ---------                          -----                                 ----

<S>                                <C>                                   <C> 
/s/ James P. Reilly, Jr.           Chairman, Chief Executive             February 12, 1998
- --------------------------         Officer and Director (Principal 
James P. Reilly, Jr.               Executive Officer)              

/s/ Mary E. Paetzold               Vice President, Chief Financial       February 12, 1998
- --------------------------         Officer and Treasurer (Principal
Mary E. Paetzold                   Financial and Accounting        
                                   Officer)                        

/s/ Esteban A. Ferrer              Director                              February 12, 1998
- --------------------------
Esteban A. Ferrer, Esquire

/s/ Lowell N. Lewis                Director                              February 12, 1998
- --------------------------
Lowell N. Lewis

/s/ John R. Sutley                 Director                              February 12, 1998
- --------------------------
John R. Sutley
</TABLE>


                                       29

<PAGE>   1
Exhibit No 10.127


                               AMENDMENT NO. 1 TO
                         TECHNOLOGY ASSIGNMENT AGREEMENT




         This Amendment No. 1 to the Technology Assignment Agreement
("Amendment") is made as of September 15, 1997 by and among Monsanto Company, a
Delaware corporation, with its general offices at 800 North Lindbergh Boulevard,
St. Louis, Missouri 63167 ("Monsanto"), Ecogen Inc., a Delaware corporation,
with its principal office at 2005 Cabot Boulevard West, Langhorne, Pennsylvania
19047 ("Ecogen") and Ecogen-Bio Inc., a Delaware corporation, with its principal
place of business at 222 Delaware Avenue, Wilmington, Delaware 19899
("Ecogen-Bio").


                                   WITNESSETH


         WHEREAS, Monsanto, Ecogen and Ecogen-Bio are parties to that certain
Technology Assignment Agreement dated as of January 24, 1996 (the "Original
Agreement"); and

         WHEREAS, the parties wish to amend the Original Agreement as set forth
herein;

         NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:

         1. Capitalized terms used herein but not defined herein shall have the
respective meanings ascribed thereto in the Original Agreement. Except as
specifically set forth herein, this Amendment shall have no other effect on the
Original Agreement, the terms and conditions of which shall continue to remain
in effect as set forth in the Original Agreement.

         2. On the date hereof, Monsanto is transferring to Ecogen the amount of
$1,000,000 (the "Funds") by wire transfer of immediately available funds to an
account designated by Ecogen.

         3. The Funds, and accrued interest thereon at the rate of 12% per annum
based on a 360 day year, shall be repaid to Monsanto in the form of a credit
against the initial fees or other amounts due to Ecogen by Monsanto pursuant to
Paragraph 3.2(b) of the Technology Assignment Agreement. Notwithstanding the
foregoing sentence, Ecogen may, at its sole option and election and in full
satisfaction of its obligations under this Amendment, repay the Funds and any
accrued interest thereon in cash to Monsanto at any time prior to the time that
any fees or other amounts become due to Ecogen under Paragraph 3.2(b) of the
Technology Assignment Agreement. In the event that Ecogen makes the cash payment
described in the immediately preceding sentence, Monsanto shall not be entitled
to any credit against the fees or other amounts due Ecogen under Paragraph
3.2(b) of the Technology Assignment Agreement.

         4. In the event that prior to November 1, 2002 (i) no fees or other
amounts become due to Ecogen under Paragraph 3.2(b) of the Technology Assignment
Agreement and (ii) Ecogen has not elected to repay in cash to Monsanto the Funds
and all accrued interest thereon, the Funds and all accrued interest thereon
shall on November 1, 2002 be due and payable to Monsanto by Ecogen.
<PAGE>   2
         IN WITNESS WHEREOF, each party has caused this Amendment to be executed
by its duly authorized representative effective on the date set forth first
above.



ECOGEN INC.                                      MONSANTO COMPANY




By:  /s/ James P. Reilly, Jr.                    By:  /s/ Derek K. Rapp
     ------------------------                         ----------------------



ECOGEN-BIO INC.



By:  /s/ Mary E. Paetzold
     ------------------------


<PAGE>   1
EXHIBIT NO. 10.128

                       CONVERTIBLE NOTE PURCHASE AGREEMENT

      THIS CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is entered into
on this 31st day of October, 1997, by and among ECOGEN INC., a Delaware
corporation (the "Company"), ECOGEN INVESTMENTS INC., a Delaware corporation
("E-Investments"), and ECOGEN-BIO INC., a Delaware corporation ("E-BIO"), and
UNITED EQUITIES (COMMODITIES) COMPANY, a New York general partnership (the
"Purchaser"). The Company, E-Investments and E-Bio are sometimes herein
individually called an "Issuer" and collectively called the "Issuers."


      Whereas, the Issuers and the Purchaser are parties to (i) that certain
Convertible Senior Subordinated Note Purchase Agreement dated July 10, 1997 (the
"Original Purchase Agreement") and (ii) that certain 8% Convertible Senior
Subordinated Note due July 10, 2002 (the "Original Note"); and

      Whereas,  the  Original  Note  (including  accrued but unpaid  interest)
currently has an outstanding balance of $1,537,333.33; and

      Whereas, the Issuers will issue and sell to the Purchasers, $3,037,333.33
in principal amount of the Company's 8% Convertible Note due October 31, 2002
(the "New Note") and the Purchasers intend to tender the Original Note in
partial consideration of the purchase price of the New Note;

      Now, therefore, for and in consideration of, and in reliance upon, the
mutual agreements, undertakings, representations, warranties and covenants
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:

            1. Purchase and Sale. Subject to the terms and conditions contained
in this Agreement, on the date hereof, the Issuers shall issue and sell to the
Purchaser, and the Purchaser shall purchase and acquire from the Issuers, the
New Note, which shall be in the form attached to this Agreement as Exhibit A,
and the terms of which are hereby incorporated herein by reference. The Issuer's
obligations under the New Note shall be secured by a first lien and security
interest in and to certain of the Issuers' assets as set forth in that certain
Security Agreement (the "Security Agreement") of even date herewith, in the form
attached hereto as Exhibit B. Unless the context otherwise requires, as
hereinafter used in this Agreement (including, but not limited to paragraphs 3
and 5 hereof): the term (A) "New Note" shall be deemed to include any so-called
"pay-in-kind" promissory notes which are issued in accordance with the
provisions hereof in lieu of cash payments of interest ("PIK Notes"); (B)
"Conversion Shares" shall be deemed to include any shares of Common Stock, par
value $.01 per share, of the Company ("Common Stock") which are issuable or
issued upon conversion of any New Note; and (C) "Warrant Shares" shall mean the
shares of Common Stock issued or issuable upon exercise of a Warrant (as
hereinafter defined) in accordance with its terms.

            2. Consideration. In consideration of the issuance of the New Note,
the Purchaser shall pay to the Company, on behalf of the Issuers, the purchase
price of $3,037,333.33 as follows: (A) the cash sum of $1,500,000.00, which sum
shall be wire transferred on the date
<PAGE>   2
hereof to an account of the Company designated by the Company to the Purchaser
in writing on or prior to the date hereof and (B) the surrender of the Original
Note for cancellation by the Issuer. Notwithstanding any provision contained in
the Original Agreement to the contrary, upon surrender and cancellation of the
Original Note, the Original Agreement shall be terminated and of no force and
effect.

            3. Representations and Warranties of the Company. To induce the
Purchaser to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, each Issuer jointly and severally hereby makes
the following representations and warranties to the Purchaser:

                  a. Organization. Each Issuer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has all requisite corporate power and authority to own and lease its
properties and to conduct its business as presently conducted. E-Investments,
E-Bio and Ecogen Technologies I Inc., a Delaware corporation ("ETech"), comprise
all of the entities which would be deemed "significant subsidiaries" of the
Company, as such term is defined in Rule 1-02(w) of Regulation S-X promulgated
under the Securities Exchange Act of 1934, as amended. The Company is the owner
of all of the issued and outstanding capital stock of E-Investments and E-Bio,
and is the owner of no less than 70% of the issued and outstanding common stock
of ETech, free and clear of any and all liens, claims, charges or encumbrances
of any nature whatsoever.

                  b. Validity and Enforceability. This Agreement, the New Note
and the Security Agreement and all documents and instruments delivered pursuant
hereto and thereto have been (and when executed and delivered in accordance
therewith, each PIK Note will have been) duly authorized, validly executed and
delivered to the Purchaser by each Issuer and are (or will be, in the case of
any PIK Notes) legal, valid and binding obligations of each Issuer, enforceable
in accordance with their respective terms, except as such enforcement may be
limited by bankruptcy, insolvency or other laws of general application relating
to or affecting the rights of creditors generally, and except that the remedy of
specific performance or injunctive relief is subject to the discretion of the
court before which such a proceeding may be brought.

                  c. Validity and Enforceability of Warrants. Any Warrant issued
hereunder, upon its issuance will be duly authorized, validly executed and
delivered by the Company, and will be the legal, valid and binding obligation of
the Company, enforceable in accordance with its respective terms, except as such
enforcement may be limited by bankruptcy, insolvency or other laws of general
application relating to or affecting the rights of creditors generally, and
except that the remedy of specific performance or injunctive relief is subject
to the discretion of the court before which such a proceeding may be brought.

                  d. Conversion Shares and Warrant Shares. (i) The Conversion
Shares issuable upon conversion of the New Note (or any PIK Note) to be issued
on the date hereof and any Warrant Shares issuable upon exercise of a Warrant
are duly and validly authorized and have been reserved for issuance, and (ii)
upon issuance in accordance with the terms of the New Note (or any PIK Note) or
a Warrant, as the case may be, the Conversion Shares and the Warrant Shares will
be duly and validly issued, fully paid and non-assessable. Upon issuance and
delivery of the Conversion Shares or the Warrant Shares, the Purchaser shall
obtain full and legal title to the



                                      -2-
<PAGE>   3
Conversion Shares or the Warrant Shares, as the case may be, free and clear of
any lien, charge or other encumbrance of any nature.

                  e. No Conflict. The execution and delivery by each Issuer (or
the Company only, in the case of a Warrant) of this Agreement, the New Note, a
PIK Note, a Warrant and the Security Agreement and the performance by each
Issuer (or the Company only, in the case of a Warrant) of all of its respective
obligations hereunder and thereunder will not: (a) violate or be in conflict
with (i) any law, order, rule or regulation of any court or other governmental
authority applicable to such Issuer or (ii) such Issuer's Certificate of
Incorporation or Bylaws; (b) constitute a default (with or without the giving of
notice or the passage of time or both) under any indenture, agreement or other
instrument to which such Issuer is a party or by which it or any of its
properties or assets is or may be bound; or (c) other than as contemplated by
this Agreement or the Security Agreement, result in the creation or imposition
of any lien, security interest, charge or encumbrance of any nature upon any of
such Issuer's properties or assets, which violation or conflict under clause (a)
or default under clause (b) would have a material adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries taken as a whole.

                  f. No Consent. No consent, approval or authorization of, or
registration, declaration or filing with, any governmental authority or other
third party is required as a condition to, or in connection with, the due and
valid execution and delivery by the Issuers of this Agreement, the New Note, a
PIK Note, a Warrant or the Security Agreement or the performance by the Issuers
of their respective obligations hereunder or thereunder, other than such
consents, approvals, authorizations and registrations as have been obtained or
made, or any filings required to perfect the Purchaser's first lien and security
interest under the Security Agreement.

                  g. Capitalization. The authorized capital stock of the Company
consists of 42,000,000 shares of Common Stock, par value $.01 per share, of
which 7,995,452 shares were issued and outstanding as of October 29, 1997, and
7,500,000 shares of Preferred Stock, consisting in part of 350,000 shares
designated as Series B Convertible Preferred Stock, none of which are
outstanding. As of October 29, 1997, (i) 2,224,970 shares of Common Stock were
issuable by the Company upon the exercise or conversion of outstanding options,
warrants and convertible securities, and (ii) no shares of the Company's
Preferred Stock were issuable upon exercise or conversion of any such
securities. The outstanding shares of the Company's Common Stock have been duly
authorized and validly issued, and are fully paid and non-assessable, free of
preemptive rights and with no personal liability attached thereto.

                  h. SEC Filings. The Company has previously furnished the
Purchaser with true and correct copies of the following documents which have
been filed by Company with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"): (i) its Annual Report on Form 10-K for the fiscal year ended October 31,
1996, as amended; (ii) its Proxy Statement with respect to the Company's annual
meeting of stockholders held March 5, 1997, (iii) its Quarterly Reports on Form
10-Q for the fiscal quarters ended January 31, 1997, April 30, 1997, as amended,
and July 31, 1997; and (iv) all Currents Reports filed on Form 8-K filed by the
Company with the SEC during the period from and after October 31, 1996 (all of
which filings are herein called the "Company SEC Filings"). The Company SEC
Filings constitute all reports the Company was required to file under



                                      -3-
<PAGE>   4
the Exchange Act since October 31, 1996. At the time of filing with the SEC, the
Company SEC Filings were prepared in all material respects in accordance with
the applicable requirements of the Exchange Act and the rules and regulations
thereunder, did not contain any untrue statement of a material fact, and did not
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The audited and unaudited consolidated financial
statements contained in the Company SEC Filings are true and correct in all
material respects and present fairly in all material respects the consolidated
financial condition and results of operations and changes in stockholders'
equity and cash flows of the Company and its consolidated subsidiaries as of the
dates and for the periods indicated, in each case in accordance with generally
accepted accounting principles consistently applied during the periods
presented, except as may otherwise be stated in such financial statements. For
purposes of this Agreement, all financial statements of the Company shall be
deemed to include the notes to such financial statements. None of the Issuers
has any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on, or reserved
against in, a consolidated balance sheet of the Company or in the notes thereto,
prepared in accordance with generally accepted accounting principles
consistently applied except for (A) liabilities or obligations that were
reserved on or reflected in the consolidated balance sheet of the Company at
October 31, 1996 (and notes thereto) included in the Company SEC Filings, (B)
liabilities or obligations arising in the ordinary course of business since
October 31, 1996, (C) liabilities or obligations which are not, individually or
in the aggregate, material to the Company and its subsidiaries taken as a whole,
or (D) liabilities and obligations described in the Company SEC Filings or in
the Form S-3 (as defined in subparagraph 3(h) below).

                  i. Litigation. Except as described in: (i) the Company SEC
Filings; (ii) the Company's Registration Statement on Form S-3 (File No.
333-27175) declared effective by the SEC on August 11, 1997 (the "Form S-3"); or
(iii) the Company's press release dated January 24, 1997 (the "Press Release"),
there are no current actions, claims, suits, proceedings or, to the Issuers'
knowledge, investigations, pending against any Issuer or its properties before
any court, governmental agency, arbitration board or other tribunal, nor has any
Issuer received any written notice of any threat thereof, which if adversely
determined, would have a material adverse effect on the Company and its
subsidiaries taken as a whole. Each Issuer and its business is being conducted
in compliance with all applicable laws, rules and regulations of governmental
authorities, except for such non-compliance as would not have a material adverse
effect on the Company and its subsidiaries taken as a whole.

                  j. No Material Adverse Change. Since the date of the
consolidated balance sheet of the Company included in the Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 1997, and except as set forth in
the Form S-3 or the Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1997: (i) there has been no change materially adversely affecting
the business, assets, liabilities, financial condition or operations of the
Company and its subsidiaries taken as a whole; (ii) each Issuer has operated its
business in the usual and ordinary course consistent with past practices; and
(iii) each Issuer has maintained its books and records in the customary, usual
and ordinary course.

            4. Representations and Warranties of the Purchaser. To induce the
Issuers to execute and deliver this Agreement and to consummate the transactions
contemplated hereby, the Purchaser hereby makes the following representations
and warranties to each Issuer:



                                      -4-
<PAGE>   5
                  a.    Organization.    The    Purchaser    is   a    general
partnership,  duly organized,  validly existing and in good standing under the
laws of the State of New York.  The Purchaser  has all  requisite  partnership
power and  authority  to own and  lease  its  properties  and to  conduct  its
business as presently conducted.

                  b. Validity and Enforceability. This Agreement and the
Security Agreement have been duly authorized, validly executed and delivered to
the Issuers by the Purchaser and are a legal, valid and binding obligation of
the Purchaser, enforceable against the Purchaser in accordance with their terms,
except as such enforcement may be limited by bankruptcy, insolvency or other
laws of general application relating to or affecting the rights of creditors
generally, and except that the remedy of specific performance or injunctive
relief is subject to the discretion of the court before which such a proceeding
may be brought.

                  c. No Conflict. The execution and delivery by the Purchaser of
this Agreement and the performance by the Purchaser of all of its obligations
hereunder will not (a) violate or be in conflict with: (i) any law, order, rule
or regulation of any court or other governmental authority applicable to the
Purchaser or (ii) the Partnership Agreement of the Purchaser; or (b) constitute
a default (with or without the giving of notice or the passage of time or both)
under any indenture, agreement or other instrument to which the Purchaser is a
party or by which the Purchaser or any of its properties or assets is or may be
bound; or (c) result in the creation or imposition of any lien, security
interest, charge or encumbrance of any nature upon any of the Purchaser's
properties or assets, which violation or conflict under clause (a), default
under clause (b), or lien, security interest, charge or encumbrance under clause
(c) would have a material adverse effect on the Purchaser's business, assets,
liabilities or financial condition.

                  d. No Consent. No consent, approval or authorization of, or
registration, declaration or filing with, any governmental authority or other
third party is required as a condition to, or in connection with, the due and
valid execution and delivery by the Purchaser of this Agreement, or the
performance by the Purchaser of its obligations hereunder, other than such
consents, approvals, authorizations and registrations as have been obtained or
made.

                  e. Need for Additional Funding. Purchaser acknowledges that
the proceeds of the New Note will not satisfy the Company's need for additional
funding and that the Issuers are currently seeking additional bank or other
institutional senior financing. Purchaser agrees to negotiate in good faith
customary modifications to the Purchase Documents and, if requested, a customary
intercreditor agreement to enable the Company to complete such a senior
financing on customary terms. Purchaser further acknowledges that the Issuers
are also seeking strategic arrangements with one or more agricultural/chemical
companies. Purchaser agrees to release such of the Collateral (as defined in the
Security Agreement) as may be required to consummate any such arrangements.

                  f. Accredited Investor. The Purchaser is an "accredited
investor" as such term is defined in Rule 501 promulgated under the Securities
Act of 1933, as amended (the "Securities Act"). The Purchaser's state of
organization is as set forth in the preamble of this Agreement, and the
Purchaser's principal executive offices are located in the State of New York.
The Purchaser is acquiring the New Note and, if issued, any Warrant for
investment and for the



                                      -5-
<PAGE>   6
Purchaser's own account and not with a view to, or for resale in connection
with, any distribution. The Purchaser understands that the New Note, any PIK
Notes issued in respect hereof, the Conversion Shares, any Warrant and the
Warrant Shares have not been registered under the Securities Act or registered
under any state securities or blue sky laws, and, as a result thereof, are
subject to substantial restrictions on transfer. The Purchaser acknowledges that
the New Note, any PIK Note issued in respect hereof, the Conversion Shares, any
Warrant and the Warrant Shares must be held indefinitely unless subsequently
registered under the Securities Act and any applicable state securities or blue
sky laws, or exemptions from registration under the Securities Act or such laws,
and that the Company has no obligation to register the New Note, any PIK Notes
issues in respect hereof, the Conversion Shares, any Warrant or the Warrant
Shares other than as set forth in this Agreement.

                  g. Access to Information. The Purchaser has been provided with
a copy of and has reviewed the Company SEC Filings, the Form S-3, and the Press
Release. The Purchaser acknowledges that the Purchaser is a stockholder of the
Company, and further acknowledges that the Purchaser and the Purchaser's
advisors have been provided with or been given access to all the financial and
other information requested by them or deemed by them to be necessary or
material for the Purchaser to make the investment decision to purchase the New
Note and the Warrant in consideration for the Purchase Price, and that the
Purchaser has based such investment decision solely on such information.

            5.    Issuance of Warrants.

                  a.    Certain  Definitions.  As used in this  Section 5, the
following terms shall have the following respective meanings:


                        (i)   "Market  Price"  means,   as  of  any  day,  the
closing sales price of the Common Stock on such day on the New York Stock
Exchange or the American Stock Exchange (or if the Common Stock shall not then
be listed on either such exchange, such closing sales price on the principal
(determined by highest volume averaged for a period of twenty consecutive
business days prior to the day as to which "Market Price" is being determined)
national securities exchange (as defined in the Securities Exchange Act of 1934,
as amended) on which the Common Stock may then be listed) or, if the Common
Stock shall not be listed on such exchange or exchanges, the closing bid price
at the end of such day as quoted by each of three independent market makers as
reported by the Nasdaq Stock Market or, if the Common Stock shall not be listed
or included for quotation on the Nasdaq Stock Market, the closing bid price at
the end of the day as quoted by each of three independent market makers in the
over-the-counter market as reported by the National Quotation Bureau, Inc. or by
any successor organization.
                        (ii)  "Redemption  Event"  shall  occur if the Company
redeems the New Note in whole or in part at any time other than when the Market
Price of the Common Stock on each of 20 consecutive trading days ending within
15 days from the date on which the notice of redemption is given to the holder
of the New Note equals or exceeds 150% of the "Conversion Price" (as defined in
the New Note) then in effect. A Redemption Event shall occur only with respect
to any portion of a New Note that is actually redeemed by the Company under the
circumstances provided in the previous sentence and shall not be deemed to occur
with respect to any portion of a New Note that is converted into Conversion
Shares.



                                      -6-
<PAGE>   7
                        (iii) "Redemption  Event  Date"  means  the date  upon
which the Company redeems all or any portion of a New Note with respect to which
there is a Redemption Event.

                        (iv)  "Redemption  Shares"  means,  with  respect to a
Redemption Event, the number of shares of Common Stock into which the New Note
(in the case of a total redemption) or, in the case of a partial redemption,
such portion of the New Note then being redeemed, together in each case with any
accrued but unpaid interest with respect to the New Note or portion thereof
being then being redeemed, as the case may be, which interest is not paid in
cash on the Redemption Event Date, is then convertible, based on the applicable
Conversion Price on the Redemption Event Date.

                  b. Issuance of Warrants. Upon each Redemption Event Date, the
Company shall issue to the holder of the New Note with respect to which there is
a Redemption Event a warrant, substantially in the form attached to this
Agreement as Exhibit C (the "Warrant"), to purchase such number of shares of
Common Stock as equals the number of Redemption Shares with respect to such
Redemption Event. The purchase price for each Warrant Share for which such
Warrant is exercisable shall initially be the Conversion Price on the relevant
Redemption Event Date, subject to adjustment as set forth in the Warrant (which
adjustment provisions are intended to be substantially the same as those which
apply to the conversion of the New Notes).

            6.    Registration Rights.

                        a.    Certain  Definitions.  As used  in this  Section
6, the following terms shall have the following respective meanings:


                        (i)   "SEC"   means  the   Securities   and   Exchange
Commission, or any other federal agency at the time administering the Securities
Act.

                        (ii)  "Exchange  Act"  means the  Securities  Exchange
Act of 1934 or any successor federal statute, and the rules and regulations of
the SEC issued under such Exchange Act, as they each may, from time to time, be
in effect.

                        (iii)  "Registration  Statement"  means a registration
statement filed by the Company with the SEC for a public offering and sale of
equity securities of the Company (other than a registration statement on Form
S-8 or Form S-4, or their successors, or any other form for a limited purpose,
or any registration statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation).

                        (iv)  "Registration   Expenses"   means  the  expenses
described in subsection 6(e) hereof.

                        (v)   "Registrable   Shares"   means  the   Conversion
Shares and the Warrant Shares and any other shares of Common Stock of the
Company issued in respect of such


                                      -7-
<PAGE>   8
shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon any
sale pursuant to a Registration Statement or upon the date when such Registrable
Shares may be sold or transferred without restriction pursuant to Rule 144 under
the Securities Act or any similar provision then in force.

                  b.    Piggy-Back Registration.

                        (i)   If at any  time  and  from  time  to  time,  the
Company proposes to file a Registration Statement, it will, prior to such
filing, give written notice to the Purchaser of its intention to do so and, upon
the written request of the Purchaser given within 20 days after the Company
provides such notice (which request shall specify the Registrable Shares
intended to be disposed of by the Purchaser and the intended method of
disposition thereof), the Company, subject to the provisions hereof, shall use
its best efforts to cause all Registrable Shares which the Company has been
requested by the Purchaser to register to be registered under the Securities Act
to the extent necessary to permit their sale or other disposition in accordance
with the intended methods of distribution specified in the request of the
Purchaser; provided that the Company shall have the right to postpone or
withdraw any registration effected pursuant to this subsection 6(b) hereof
without obligation to the Purchaser; and, provided further, that the Company
shall not be obligated to include any Registrable Shares in a Registration
Statement filed at the request of another holder of securities of the Company to
whom the Company has previously granted registration rights which would not
permit or otherwise limit the number of Registrable Shares which may be included
therein.

                        (ii)  In  connection  with  any  offering  under  this
subsection 6(b) involving an underwriting, the Company shall not be required to
include any Registrable Shares in such underwriting unless the Purchaser accepts
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not, in the
opinion of the underwriters, jeopardize the success of the offering by the
Company. If, in the opinion of the managing underwriter, the registration of
all, or part of, the Registrable Shares which the Purchaser has requested to be
included would materially and adversely affect such public offering of shares
for the account of the Company or any other person on whose behalf shares are
being included in the registration pursuant to an obligation which is superior
in right or preference to the registration obligation to the Purchaser arising
hereunder ("Senior Registration Rights"), then the Company shall be required to
include in the underwriting only that number of Registrable Shares, if any,
which the managing underwriter believes may be sold without causing such adverse
effect. If the number of Registrable Shares to be included in the underwriting
in accordance with the foregoing is less than the total number of Registerable
Shares which the Purchaser has requested to be included, then the Purchaser and
other holders of securities entitled to include securities in such registration
shall participate in the underwriting pro rata based upon the relative number of
shares of Common Stock the Purchaser and each holder of such other securities
has requested to be included in such registration, subject to any "cut-back"
priority having previously been granted to a holder of Senior Registration
Rights.

                  c. Demand Registration Rights. Upon the request of the
Purchaser and, subject to the provisions hereof, the Company will use its best
efforts to cause such of the Registrable Shares as may be requested by the
Purchaser to be registered under the Securities Act as expeditiously as
possible; provided, however, that any such request for registration must be made
with respect to at least 50% of the Registrable Shares then outstanding. The
Company shall not be


                                      -8-
<PAGE>   9
required to effect more than one registration pursuant to this subsection 6(c).
The Company will be entitled to include in any registration statement referred
to in this subsection 6(c) for sale in accordance with the method of disposition
specified above, securities to be sold by the Company for its own account and
securities of any other holder having registration rights, unless such inclusion
would adversely affect the marketing of the Registrable Shares to be sold.

                  d.    Registration  Procedures.  If and whenever the Company
is required by the  provisions  of this  Agreement  to use its best efforts to
effect the registration of any of the Registrable  Shares under the Securities
Act, the Company shall:

                  (i) prepare and file with the SEC a Registration Statement on
an appropriate form with respect to such Registrable Shares and use its best
efforts to cause that Registration Statement to become and remain effective,
provided, however, that the Company may discontinue any registration of its
securities which is being effected pursuant to subsection 6(b) herein at any
time prior to the effective date of the Registration Statement relating thereto;

                  (ii) prior to filing a Registration Statement or prospectus or
any amendment or supplement thereto, furnish to the Purchaser and to its
counsel, and to each underwriter, if any, of Registrable Shares covered by such
Registration Statement, copies of such Registration Statement, prospectus,
amendment or supplement, together with exhibits thereto, for review by the
foregoing;

                  (iii) as soon as reasonably practicable prepare and file with
the SEC any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to keep
the Registration Statement effective until the earlier of (i) the second
anniversary of the effective date thereof, or (ii) the date on which there are
no longer any Registrable Shares covered thereby (including when such shares no
longer constitute Registrable Shares);

                  (iv) as soon as reasonably practicable furnish to the
Purchaser two copies of the Registration Statement and each amendment thereto as
filed with the SEC, and such reasonable numbers of copies of the prospectus,
including a preliminary prospectus and any supplements thereto, in conformity
with the requirements of the Securities Act, and such other documents as the
Purchaser may reasonably request in order to facilitate the public sale or other
disposition of the Registrable Shares owned by the Purchaser;

                  (v) as soon as reasonably practicable, to the extent required,
use its best efforts to register or qualify the Registrable Shares covered by
the Registration Statement under the securities or Blue Sky laws of states
within the United States as the Purchaser shall reasonably request; provided,
however, that the Company shall not be required in connection with this
subsection 6(d)(v) to (A) qualify as a foreign corporation in any jurisdiction
where, but for the requirements of this subsection 6(d), it would not be
obligated to be so qualified, (B) execute a general consent to service of
process in any jurisdiction, (C) subject itself to taxation in any such
jurisdiction, or (D) register in any state requiring, as a condition to
registration, escrow or surrender of any Company securities held by any security
holder other than the Purchaser;

                  (vi) use its best efforts to cause all Registrable Shares
included in such Registration Statement to be listed on each securities exchange
on which the Common Stock is then listed, or to be admitted for trading on the
Nasdaq Stock Market National Market if the Common


                                      -9-
<PAGE>   10
Stock is then admitted for trading; and

                  (vii) if an underwritten public offering, obtain a comfort
letter from the Company's independent public accountants in customary form and
covering such matters of the type customarily covered by comfort letters and an
opinion from the Company's counsel in customary form and covering such matters
of the type customarily required to be included in an opinion filed as an
exhibit to the Registration Statement, in each case addressed to the Purchaser.

            If the Company has delivered a preliminary or final prospectus to
the Purchaser and after having done so the prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Purchaser and, if requested, the Purchaser shall immediately cease making offers
of Registrable Shares and return all prospectuses to the Company. The Company
shall promptly provide the Purchaser with revised prospectuses and, following
receipt of the revised prospectuses, the Purchaser shall be free to resume
making offers of the Registrable Shares.

            Notwithstanding any other provisions of this Agreement, upon receipt
by the Purchaser of a written notice signed by the Chief Executive Officer,
Chief Operating Officer or Chief Financial Officer of the Company, to the effect
set forth below, the Company shall not be obligated during a reasonable period
of time thereafter to effect any registrations pursuant to this Agreement, and
the Purchaser agrees that it will immediately suspend sales of shares under any
effective Registration Statement for a reasonable period of time, in either case
not to exceed 90 days, at any time during which, in the Company's reasonable
judgment, (i) there is a development involving the Company or any of its
affiliates which is material but which has not yet been publicly disclosed or
(ii) sales pursuant to the Registration Statement would materially and adversely
affect an underwritten public offering for the account of the Company and any
other material financing project where a proposed or pending material merger or
other material acquisition or material business combination or material
disposition of the Company's assets, to which the Company or any of its
affiliates is, or is expected to be, a party. In the event a registration is
postponed or sales by the Purchaser pursuant to an effective Registration
Statement are suspended in accordance with this paragraph, there shall be added
to the period during which the Company is obligated to keep a registration
effective the number of days for which the registration was postponed or sales
were suspended.

                  e. Expenses of Registration. The Company will pay all
Registration Expenses of all registrations under this Agreement. For purposes of
this Agreement, the term "Registration Expenses" shall mean all expenses
incurred by the Company in complying with this Agreement, including without
limitation, all registration and filing fees, exchange listing fees, printing
expenses, the fees and disbursements of the Company's counsel and accountants,
state Blue Sky fees and expenses, and the expense of any special audits incident
to or required by any such registration, but excluding underwriting discounts
and selling commissions.


                                      -10-
<PAGE>   11
                  f.          Indemnification.

                        (i)   Indemnification  of the Purchaser.  In the event
of any registration of any of the Registrable Shares under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless the
Purchaser, each of its directors, partners, agents and officers and each other
person, if any, who controls the Purchaser within the meaning of the Securities
Act or the Exchange Act against any losses, claims, damages or liabilities to
which the Purchaser or controlling person may become subject under the
Securities Act, the Exchange Act, Blue Sky laws or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement under which such
Registrable Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained in the Registration Statement, or any
amendment or supplement to such Registration Statement, or arise out of or are
based upon the omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; and the Company will
reimburse the Purchaser and each such controlling person for any legal or any
other expenses reasonably incurred by the Purchaser or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of the Purchaser or
controlling person specifically for use in the preparation thereof; and provided
further, however, that any indemnification contained in this paragraph with
respect to any preliminary prospectus shall not inure to the benefit of any
person who otherwise is entitled to indemnification hereunder on account of any
loss, liability, claim, damage or expense if a copy of an amended or
supplemental preliminary prospectus, or the final prospectus, shall have been
delivered or sent to such person within the time required by the Securities Act,
and the untrue statement or omission of a material fact was corrected in such
amended or supplemental preliminary prospectus or final prospectus and provided
that such person did not deliver such amended or supplemental preliminary
prospectus or final prospectus on a timely basis. The Company shall also
indemnify any person or entity which may be deemed to be an "underwriter" for
purposes of the Securities Act with respect to the Registrable Shares covered by
the Registration Statement, and such entity's directors, partners, agents and
officers, and each other person, if any, who controls such "underwriter" within
the meaning of the Securities Act, on the same basis as that of the
indemnification of the Purchase pursuant to this subparagraph 5(f)(1).

                        (ii)  Indemnification  of the  Company.  In the  event
of any registration of any of the Registrable Shares under the Securities Act
pursuant to this Agreement, the Purchaser will indemnify and hold harmless the
Company, each of its directors and officers and each person, if any, who
controls the Company within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages or liabilities, joint or several, to
which the Company, such directors and officers or controlling persons may become
subject under the Securities Act, Exchange Act, Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the


                                      -11-
<PAGE>   12
Registration Statement, or arise out of or are based upon any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, but only if the statement or omission was made
in reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of the Purchaser or controlling person, specifically for
use in connection with the preparation of such Registration Statement,
prospectus, amendment or supplement.

                        (iii) Notice  of  Claim.   Each  party   entitled   to
indemnification under this subsection 6(f) (the "Indemnified Party") shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom;
provided that counsel for the Indemnifying Party, who shall conduct the defense
of such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not be unreasonably withheld); and, provided, further, that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this subsection 6(f)
unless the failure to provide such notice materially prejudices the defense by
the Indemnifying Party against such claim. The Indemnified Party may participate
in such defense at such party's expense (provided that the counsel of the
Indemnifying Party shall control the defense of such claim or proceeding);
provided, however, that the Indemnifying Party shall pay such expense if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would, in the opinion of counsel of the Indemnified Party, be
inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding, it being understood, however, that in such event, the Indemnifying
Party shall be liable for the reasonable fees and expenses of only one counsel
for the Indemnified Parties. No Indemnifying Party, in the defense of any such
claim or litigation shall as to an Indemnified Party, except with the consent of
such Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party shall
consent to entry of any judgment or settle such claim or litigation without the
prior written consent of the Indemnifying Party (which consent shall not be
unreasonably withheld).

                  g. Underwriting Agreement. In the event that Registrable
Shares are sold pursuant to a Registration Statement in an underwritten
offering, the Purchaser agrees to enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for the
underwriting (together with the Company and other holders of securities
distributing their shares through such underwriting), containing customary
representations and warranties with respect to the Purchaser, including without
limitation, customary provisions with respect to indemnification by the
Purchaser of the underwriters of such offering.

                  h. Cooperation. The Purchaser shall furnish to the Company
such information regarding the Purchaser and the distribution proposed by the
Purchaser as the Company may from time to time request in writing, and shall do
such reasonable acts and things as the Company may from time to time request,
with respect to any registration, qualification or compliance referred to in
this Agreement and in order to permit the Company to comply with the
requirements of law. Any failure by the Purchaser to make available such
information or to do such acts and things shall constitute a waiver by the
Purchaser of its rights to include the Purchaser's Registrable Shares in any
such registration.


                                      -12-
<PAGE>   13
                  i. Lock-Up Agreement. The Purchaser, if requested by the
Company and an underwriter of Common Stock or other securities of the Company,
shall agree not to sell or otherwise transfer or dispose of any Registrable
Shares or other securities of the Company held by the Purchaser for a specified
period of time (not to exceed 90 days) following the effective date of a
Registration Statement. Such agreement shall be in writing in a form
satisfactory to the Company and such underwriter. The Company may impose stop
transfer instructions with respect to the Registrable Shares or other securities
subject to the foregoing restriction until the end of the lock-up period.

                  j. Assignment of Registration Rights to Transferees. The
rights granted under this Section 6 shall be exercisable by the Purchaser and
may be assigned by the Purchaser to: (i) a transferee of the Purchaser of all or
any portion of the principal obligation represented by the New Note (or a
related PIK Note) in accordance with the terms of the New Note (or such PIK
Note), (ii) a transferee of the Purchaser of all or any portion of a Warrant in
accordance with its terms; (iii) a transferee of the Purchaser of Conversion
Shares, or (iv) a transferee of the Purchaser of Warrant Shares (in each case, a
"Permitted Transferee"), but shall not thereafter be assignable or otherwise
exercisable by a transferee of a Permitted Transferee. In the event of any
assignment or other transfer of the rights under this Section 6, each Permitted
Transferee shall agree as a condition of exercise of such rights, that: (A) the
Purchaser shall act as the sole representative of all Permitted Transferees and
that the Company shall be obligated to communicate or otherwise send notices
required under this Section 6 only to the Purchaser on behalf of all Permitted
Transferees; and that (B) the Company shall be obligated to comply with
subsection 6(c) on only one occasion regardless of the number of holders of
Registrable Shares.

            7.    Right of First Refusal.

                  a. If, at any time during which at least twenty-five percent
of the original principal amount of this New Note (plus any PIK Notes) shall be
outstanding and held by Purchaser, the Company desires to sell shares of its
Common Stock or other voting securities or notes or other evidences of
indebtedness which by their terms are convertible into Common Stock or other
voting securities of the Company ("Ecogen Equity Securities") in an offering,
excluding (i) an underwritten public offering; or (ii) a traditional financing
with a nationally recognized investment banking firm or banking institution to
raise gross proceeds of at least $10,000,000 (excluding the proceeds to be
received by the Company upon payment of any exercise price upon the exercise or
conversion of any convertible security into shares of Common Stock); or (iii) an
offering which represents an investment by a strategic partner of the Company or
which constitutes part of a joint venture, partnership or similar alliance with
a strategic partner of the Company, (a "Private Offering"), then the Company
shall provide to the Purchaser written notice of such Private Offering (an
"Offer Notice") no less than twenty business days prior to the earlier of (A)
the commencement of the Private Offering or (B) the execution of an agreement
concerning the Private Offering, whether a purchase or similar agreement with a
third party purchaser, or a placement, solicitation or offering agreement with a
placement agent, broker or similar party. The Offer Notice shall set forth the
type and number of Ecogen Equity Securities being offered, the offering price,
the manner of payment and the other principal terms of the Private Offering.

                  b. The Purchaser shall have the right to elect to purchase
all, but not less than all, of the Ecogen Equity Securities on the terms of the
Private Offering, which election shall be made by the Purchaser providing
written notice to the Company of its irrevocable election 


                                      -13-
<PAGE>   14
to purchase the Ecogen Equity Securities which written notice shall be delivered
on or prior to the expiration of ten business days from the date of the Offer
Notice (the "Election Notice"). Upon failure by the Company to receive the
Election Notice within the prescribed ten business day period, the Purchaser
shall be deemed to have irrevocably waived its right of first refusal to
purchase the Ecogen Securities in the Private Offering, and the Company may
proceed with the Ecogen Private Offering or negotiate the terms of the Private
Offering with any other third party, subject to subsection 7(c) hereof. If the
Company receives an Election Notice within the prescribed ten business day
period, the Purchaser shall purchase the Ecogen Equity Securities on the same
terms and conditions as the Private Offering (and the Purchaser shall provide to
the Company such documentation and representations as the Company shall deem
necessary to ensure compliance with applicable securities laws), and closing
shall occur on or prior to the closing date set forth in the Offer Notice or, in
the absence of a closing date specified in the Offer Notice, within thirty days
from the date of the Election Notice.

                  c.    If the Purchaser fails to timely provide the Election
Notice and the Company subsequently modifies the material terms of the Private
Offering in a manner which makes the terms of the Private Offering, taken as a
whole, more favorable to the proposed purchaser of the Ecogen Equity Securities,
then the Private Offering shall be deemed to become a new Private Offering and
Company shall not be permitted to consummate the new Private Offering without
again complying with this Section 7.

                  d.    Notwithstanding anything herein to the contrary: (i) the
rights granted to the Purchaser by this Section 7 may not be assigned or
transferred without the prior written consent of the Company, which consent may
be withheld for any reason, and (ii) the rights granted in this Section 7 shall
not limit, impair or otherwise prevent the Company from complying with any other
right of first refusal or preemptive right previously granted by the Company to
any other party, and the Purchaser's rights hereunder shall be subject to such
prior rights of first refusal or preemptive rights.

            8.    Closing. The Closing of the transactions contemplated hereby
(the "Closing") shall take place on such date, and at such time and place, as
may be mutually agreed upon by the Purchaser and the Issuers (the "Closing
Date").

                  a.    Actions by Issuers. At the Closing, the Issuers shall:

                  (i)   deliver the New Note, duly completed and executed, to
the Purchaser;

                  (ii)  deliver the Security Agreement, duly completed and
executed, to the Purchaser; and

                  (iii) deliver UCC-1 Financing Statements and such other
similar documents as the Purchaser may have theretofore requested, duly
completed and executed by the Purchaser.

                  b.    Actions by Purchaser. At the Closing, the Purchaser
shall:

                  (i)   deliver to the Issuers, the sum of $1,500,000; and


                                      -14-
<PAGE>   15
                  (ii)  surrender the Original Note to the Issuers marked
"cancelled".

            9.    Miscellaneous.

                  a.    Entire Agreement. This Agreement, the New Note and the
Security Agreement and the other documents and instruments executed and
delivered pursuant hereto, and, if issued, any PIK Notes constitute the entire
Agreement between the Issuers and the Purchaser with respect to the subject
matter hereof and thereof, and supersede all prior Agreements, understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or use or trade inconsistent with any of the terms hereof.

                  b.    Waivers and Amendments. No waiver by either party of any
condition, or the breach of any term or covenant contained in this Agreement,
the Security Agreement, the New Note or any PIK Note, whether by conduct or
otherwise, in one or any more instances, shall be deemed or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition. Neither this Agreement nor any provision hereof may be changed,
waived, discharged or terminated other than by an agreement in writing signed by
the Company (on behalf of the Issuers) and either the Purchaser or the holders
of a majority of the principal amount of the New Notes and any PIK Notes then
outstanding, and except that the provisions of paragraph 6 hereof may be amended
by a written instrument executed by the Company and the holders of a majority of
Registrable Shares.

                  c.    Governing Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement shall be governed
by and construed in accordance with the laws of the Commonwealth of
Pennsylvania, notwithstanding any conflict of law provisions to the contrary.

                  d.    Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the Issuers and the Purchaser and, subject to
subsection 6(j), their respective heirs, personal representatives, successors
and assigns and, as to subparagraph 6(f) those persons defined herein as
"Indemnified Parties."

                  e.    Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly made and received when personally served,
or when mailed by first class mail or overnight, by courier service such as
Federal Express, postage prepaid, or telecopied with answer back receipt and
hard copy sent in the manner set forth above, addressed to the party as provided
in the New Note.

                  f.    Severability. If any provision of this Agreement shall
be held invalid under any applicable laws, such invalidity shall not affect any
other provision of this Agreement that can be in effect without the invalid
provisions and, to this end, the provisions hereof are severable. Any such
invalid provision shall be enforceable to the extent permissible under
applicable law.

                  g.    Counterparts. This Agreement may be executed in two or
more 


                                      -15-
<PAGE>   16
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute but one and the same instrument. This Agreement shall
become effective when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatory.

                  h. Further Assurances. Each Issuer and the Purchaser agree to
execute and deliver all such other instruments and to take all such other action
as any party may reasonably request from time to time before and after the date
hereof and without payment of further consideration in order to effectuate the
transactions provided for herein. The parties shall cooperate fully with each
other and with their respective counsel in connection with any steps required to
be taken as part of their respective obligations under this Agreement.

                  i. Expenses. The Issuers shall be responsible for, and shall
pay, the reasonable costs and expenses of counsel for the Purchaser in
connection with the preparation, execution and delivery of this Agreement, the
New Note, the Security Agreement and the documents and instruments pursuant
hereto or thereto and the consummation of the transactions contemplated hereby
and thereby.

                  j. Survival. The representations and warranties of the Issuers
and the Purchaser contained herein and in the New Note shall survive the
consummation of the transactions contemplated hereby and shall terminate on the
second anniversary of the date hereof.

                  k. Headings. The headings contained herein are for the sole
purpose of convenience of reference, and shall not affect the interpretation of
any of the provisions hereof.

                  l. Rule 144. The Company shall use its best efforts to file,
on a timely basis, all reports which are required to be filed by it under the
Securities Act and the Exchange Act, and shall take all such other actions as
are reasonably necessary in order for Rule 144 under the Securities Act (or any
successor Rule) to be available with respect to a sale of Conversion Shares
without registration under the Securities Act. The Company hereby agrees that
upon the receipt by it of a written opinion, to the reasonable satisfaction of
the Company, from counsel for a holder of Conversion Shares or Warrant Shares,
as the case may be, reasonably acceptable to the Company, to the effect that
said Conversion Shares or Warrant Shares, as the case may be, are eligible for
sale pursuant to the provisions of subparagraph (k) of Rule 144 it will promptly
take such actions as are necessary to provide said holder with unlegended
certificates representing the Conversion Shares which are the subject of said
opinion, and that it will promptly remove all stop transfer instructions with
respect thereto.

         IN WITNESS WHEREOF, the Purchaser and the Company each has caused its
authorized representative to execute and deliver this Agreement on the date
first written above.

                                            ECOGEN INC.


                                            By:  /s/ James P. Reilly, Jr
                                                 -----------------------


                                      -16-
<PAGE>   17
                                            ECOGEN INVESTMENTS INC.


                                            By:  /s/ Mary E. Paetzold
                                                 -----------------------

                                            ECOGEN-BIO INC.

                                            By:  /s/ Mary E. Paetzold
                                                 -----------------------

                                            UNITED EQUITIES (COMMODITIES)
                                            COMPANY


                                            By:  M. Marx
                                                 -----------------------
                                                 General Partner


                                      -17-

<PAGE>   1
Exhibit No. 10.129

                                 $3,037,333.33

                                  ECOGEN INC.
                            ECOGEN INVESTMENTS INC.
                                ECOGEN-BIO INC.

                    8% Convertible Note due October 31, 2002



                                October 31, 1997


Number SSNB-1

         SECTION 1. General. ECOGEN INC., a Delaware corporation (the "Company),
ECOGEN INVESTMENTS INC., a Delaware corporation, and ECOGEN-BIO INC., a Delaware
corporation (hereinafter individually called a "Borrower" and collectively,
"Borrowers") ), for value received, hereby jointly and severally promise to pay
to the order of UNITED EQUITIES (COMMODITIES) COMPANY, a New York general
partnership ("Payee"), on October 31, 2002 (the "Maturity Date") the principal
amount of THREE MILLION THIRTY SEVEN THOUSAND THREE HUNDRED THIRTY THREE DOLLARS
AND THIRTY-THREE CENTS ($3,037,333.33), together with interest thereon from the
date hereof at the rate of eight percent (8%) per annum, and to pay interest at
the rate of twelve percent (12%) per annum (the "Default Rate") on any overdue
principal, and on any overdue interest, from the due date thereof until the
obligation of the Borrowers with respect to the payment thereof shall be
discharged in full. Interest at the Default Rate shall accrue both before and
after judgment. Interest on the unpaid principal amount shall be payable in
arrears on a semi-annual basis commencing April 30, 1998. Interest hereon for
any period other than a full quarterly period shall be computed on the basis of
a 360-day year of twelve 30-day months and the actual number of days elapsed.

         This Note has been issued pursuant to a Convertible Note Purchase
Agreement dated October 31, 1997 by and among the Borrowers and the Purchaser
(the "Purchase Agreement"). This Note and any other similar notes (including
without limitation any PIK Notes (as hereinafter defined)) that are issued
pursuant to the Purchase Agreement are hereinafter sometimes referred to as the
"Offering Notes."

         SECTION 2. Payment of Principal and Interest.

                  2.1 Payment of Principal. Payment of all or any portion of the
principal amount due hereunder shall be made in such coin or currency of the
United States of America as at the time of payment shall be legal tender therein
for the payment of public and private debts.

                  2.2 Payment of Interest. The Borrowers may, at their sole
option, pay the interest due hereunder either (i) in such coin or currency of
the United States of America as at the time of payment shall be legal tender
therein for the payment of public and private debts, or (ii) by the issuance to
the Holder of an additional note of like tenor with this Note (a "PIK Note") and
in 
<PAGE>   2
the principal amount equal to the amount of interest then due and payable for
which the additional PIK Note is being issued, and which PIK Note shall be dated
the date on which such interest payment is due and shall mature on the Maturity
Date.

                  2.3 Payments in Coin, etc. All payments of principal, and all
payments of interest on this Note which are made in coin or currency as
aforesaid, shall be paid by wire transfer in immediately available funds no
later than 2:00 P.M. on the due date of such payment to a deposit account with a
New York City bank designated by the Holder from time to time.

                  2.4 Payments in Notes. All payments of interest on this Note
which are made by the issuance to the Holder shall be paid by delivery to the
Holder of a PIK Note of like tenor with this Note, registered in the name of the
Holder, in the face amount determined in accordance with Section 2.2(ii) hereof
with interest thereon commencing to accrue on and as of the interest payment
date for which such Note is being issued.

                  2.5 Limitation on Interest. In no event shall the Holder be
entitled to receive interest, however characterized, at an effective rate in
excess of the maximum rate permitted by law. In the event that a court of
competent jurisdiction shall finally determine that such amounts paid or agreed
to be paid by the Borrowers in connection with this Note causes the effective
interest rate on this Note to exceed the maximum rate permitted by law, such
interest or other consideration shall automatically be reduced to a rate which
results in an effective interest rate under this Note equal to the maximum rate
permitted by law over the term hereof, and, in such event, the Borrowers shall
apply to the reduction of the unpaid principal balance of this Note any amounts
received by it deemed to constitute excessive interest.

         SECTION 3. The Note. As used herein, the term "Note" refers to this 8%
Convertible Note and to any PIK Note or PIK Notes executed and delivered by the
Borrowers in payment of interest pursuant to Section 2.2(ii) above or in
exchange or replacement hereof or thereof pursuant to Section 9 hereof. Unless
the context otherwise requires, the term "Holder" is used herein to mean Payee
or any other person who shall at the time be the Holder or assignee of this
Note. This Note, the Security Agreement (as defined in Section 4 hereof), the
Purchase Agreement and all other documents executed and delivered by Borrowers
pursuant to the Purchase Agreement are hereinafter collectively referred to as
the "Purchase Documents."

         SECTION 4. Security Interest. The obligations of the Issuers hereunder
shall be secured by a first lien and security interest in and to certain assets
of the Issuers pursuant to the terms of that certain Security Agreement in the
form attached as Exhibit B to the Purchase Agreement.


                                      -2-
<PAGE>   3
            SECTION 5.  Conversion of Note.

                  5.1 Right to Convert. Subject to and upon compliance with the
provisions hereof, the Holder shall have the right, at such Holder's option, at
any time and from time to time, to convert all or any portion of the unpaid
principal amount hereof and the accrued but unpaid interest thereon into the
Company's Common Stock, par value $0.01 per share ("Common Stock") at the price
of $3.00 per share, or, in case an adjustment of such price has taken place
pursuant to the further provisions of this Section 5, then at the price as last
adjusted and in effect on the date this Note or portion hereof is presented for
conversion (such price or such price as last adjusted, as the case may be, being
referred to herein as the "Conversion Price"). Upon any conversion of this Note,
or any portion hereof, the conversion shall also be deemed to include the
accrued and unpaid interest on the principal portion of the Note tendered for
conversion, whether or not then due; provided, however, that the Company shall
have the option, at its election and in lieu of converting such interest, to
make an appropriate cash adjustment for or on account of any such accrued and
unpaid interest accrued. Upon any conversion of all or a portion of the unpaid
principal amount hereof, the principal obligation due hereunder shall be deemed
reduced to the extent of the value of the aggregate Conversion Price of the
Common Stock acquired thereby. Upon any conversion of a portion (but less than
all) of the unpaid principal amount hereof, the reduction of the principal
obligation hereunder shall be applied to the principal payment due hereunder.

                  5.2 Exercise of Conversion Privilege. In order to exercise the
conversion privilege, the Holder shall present the Note to the Company, on
behalf of the Borrowers, at the office of the Company, accompanied by written
notice to the Company that the Holder elects to convert this Note, or, if less
than the entire unpaid principal amount hereof is to be converted, the portion
hereof to be converted. Such notice shall also state the name or names (with
address and taxpayer identification number) in which the certificate or
certificates for shares which shall be issuable on such conversion shall be
issued. As soon as practicable after the receipt of such notice and the
presentation of this Note, the Company shall issue and deliver, or shall cause
its registrar and transfer agent to issue, countersign and deliver, to the
Holder a certificate or certificates for the number of full shares issuable upon
the conversion of this Note (or portion hereof). Such conversion shall be deemed
to have been effected immediately prior to the close of business on the date on
which such notice shall have been received by the Company and this Note shall
have been presented as aforesaid, and conversion shall be at the Conversion
Price in effect at such time, and at such time the rights of the Holder as a
Holder shall cease (to the extent this Note is so converted) and the person or
persons in whose name or names any certificate or certificates for shares shall
be issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby. Upon conversion of only a
part of the unpaid principal amount of this Note, appropriate notation shall be
made on this Note of the principal amount so converted, and this Note shall be
retained by the Holder following such notation. Upon conversion of the balance
of the principal amount of this Note, the Holder shall surrender this Note to
the Company on behalf of all the Borrowers. No fractional share or scrip shall
be issued upon conversions of the Note. The number of full shares issuable upon
conversion shall be computed on the basis of the aggregate unpaid principal
amount of the Note (or portion thereof) so surrendered and the amount of
interest thereon being converted.

                  5.3 Adjustment of Conversion Price. The Conversion Price shall
be subject to adjustment from time to time as hereinafter provided. Upon each
adjustment of the Conversion 


                                      -3-
<PAGE>   4
Price, the Holder shall thereafter be entitled to receive, at the Conversion
Price resulting from such adjustment, the number of shares of Common Stock
obtained by multiplying the Conversion Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable upon conversion of
that portion of the principal amount of this Note surrendered for conversion
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Conversion Price resulting from such adjustment.

                  (a) Conversion Price Adjustment Formulas. If and whenever
after the date of this Note, the Company shall issue or sell any shares of
Common Stock (except as provided in subsection 5.3.(d)) for a consideration per
share less than the lower of (x) 90% of the Market Price or (y) the Conversion
Price, determined on the date of such issue or sale, then forthwith the
Conversion Price shall be reduced to the price (calculated to the nearest tenth
of a cent) determined by multiplying the Conversion Price in effect immediately
prior to the time of such issue or sale by a fraction, the numerator of which
shall be (i) the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale (assuming the conversion of all
securities convertible into shares of Common Stock) multiplied by 90% of the
Market Price or by the Conversion Price, as the case may be, immediately prior
to such issue or sale, and (B) the consideration, if any, received and deemed
received by the Company upon such issue or sale, divided by (ii) the total
number of shares of Common Stock outstanding and deemed outstanding immediately
after such issue or sale, and the denominator of which shall be (aa) 90% of the
Market Price or (bb) the Conversion Price, as the case may be, immediately prior
to such issue or sale.

No adjustment of the Conversion Price, however, shall be made in an amount less
than 5% of the Conversion Price immediately prior to the adjustment, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which together with any
adjustments so carried forward shall amount to 5% or more of the Conversion
Price.

                  (b) Constructive Issuances of Stock; Convertible Securities;
Rights and Options; Stock Dividends. For the purposes of subsection 5.3(a), the
following provisions (i) to (viii), inclusive, shall also be applicable, and the
adjustment provided in subsection 5.3(a), if required, shall be made:

                         (i) In case at any time subsequent to the date hereof,
                  the Company shall in any manner grant any rights to subscribe
                  for or to purchase, or any options for the purchase of, shares
                  of Common Stock or any stock or securities convertible into or
                  exchangeable for shares of Common Stock (such convertible or
                  exchangeable stock or securities being hereinafter called
                  "Convertible Securities"), whether or not such rights or
                  options or the right to convert or exchange any such
                  Convertible Securities are immediately exercisable, and the
                  consideration per share for which shares of Common Stock are
                  issued or sold upon the exercise of such rights, options or
                  Convertible Securities (determined by dividing (A) the total
                  amount, if any, received or receivable by the Company as
                  consideration for the granting of such rights or options, plus
                  the minimum aggregate amount of additional consideration, if
                  any, payable to the Company upon the exercise of such rights
                  or options, plus, in the case of any such rights or  


                                      -4-
<PAGE>   5
                  options which relate to such Convertible Securities, the
                  minimum aggregate amount of additional consideration, if any,
                  payable upon the issue or sale of such Convertible Securities
                  (and, if such Convertible Securities constitute obligations of
                  the Company, the principal amount of such obligations so
                  convertible) and upon the conversion or exchange thereof, by
                  (B) the total maximum number of shares of Common Stock
                  issuable upon the exercise of such rights or options or upon
                  the conversion or exchange of all such Convertible Securities
                  issuable upon the exercise of such rights or options) shall be
                  less than the lower of (x) 90% of the Market Price or (y) the
                  Conversion Price, determined as of the date of granting such
                  rights or options, as the case may be, then the total maximum
                  number of shares of Common Stock issuable upon the exercise of
                  such rights or options (or upon conversion or exchange of the
                  total maximum amount of such Convertible Securities issuable
                  upon the exercise of such rights or options) shall be deemed
                  to be outstanding and to have been issued for such price per
                  share. Except as provided in subsection 5.3(b)(iii) below, no
                  further adjustments of the Conversion Price shall be made upon
                  the actual issuance of such shares of Common Stock or of such
                  Convertible Securities upon exercise of such rights or options
                  or upon the actual issue of such shares of Common Stock upon
                  conversion or exchange of such Convertible Securities.

                        (ii)  In case at any time the Company shall in any 
                  manner issue or sell any Convertible Securities, whether or
                  not the rights to exchange or convert thereunder are
                  immediately exercisable, and the price per share for which
                  shares of Common Stock are issuable upon such conversion or
                  exchange (determined by dividing (A) the total amount received
                  or receivable by the Company as consideration for the issue or
                  sale of such Convertible Securities, plus the minimum
                  aggregate amount of additional consideration, if any, payable
                  to the Company upon the conversion or exchange thereof, by (B)
                  the total maximum number of shares which would be issuable
                  upon the conversion or exchange of all such Convertible
                  Securities) shall be less than the lower of (x) 90% of the
                  Market Price or (y) the Conversion Price, determined as of the
                  date of such issue or sale, then the total maximum number of
                  shares of Common Stock issuable upon conversion or exchange of
                  all such Convertible Securities shall (as of the date of the
                  issue or sale of such Convertible Securities) be deemed to be
                  outstanding and to have been issued for such price per share.
                  Except as otherwise specified in subsection 5.3(b)(iii) below,
                  no further adjustments of the Conversion Price shall be made
                  upon the actual issuance of such shares of Common Stock upon
                  conversion or exchange of such Convertible Securities.

                        (iii) If the purchase price provided for in any right or
                  option referred to in subsection 5.3(b)(i), or the additional
                  consideration, if any, payable upon the conversion or exchange
                  of any Convertible Securities referred to in subsection
                  5.3(b)(ii), or the rate at which any Convertible Securities
                  referred to in subsections 5.3(b)(i) or (ii) are convertible
                  into or exchangeable for 


                                      -5-
<PAGE>   6
                  shares of Common Stock, shall change or a different purchase
                  price or rate shall become effective at any time or from time
                  to time (other than under or by reason of provisions designed
                  to protect against dilution) then, upon such change becoming
                  effective, the Conversion Price in effect at the time of such
                  event shall forthwith be increased or decreased to such
                  Conversion Price as would have obtained had the rights,
                  options or Convertible Securities still outstanding provided
                  for such changed purchase price, additional compensation or
                  rate of conversion or exchange, as the case may be, at the
                  time initially granted, issued or sold. On the expiration of
                  any such option or right or the termination of any such right
                  to convert or exchange such Convertible Securities, the
                  Conversion Price then in effect hereunder shall forthwith be
                  increased to such Conversion Price as would have obtained at
                  the time of such expiration or termination had such option,
                  right or convertible securities never been issued. If the
                  purchase price provided for in any right or option referred to
                  in subsection 5.3(b)(i), or the additional consideration
                  payable upon the exchange or conversion of any Convertible
                  Securities referred to in subsections 5.3(b)(i) or (ii), or
                  the rate at which any Convertible Securities referred to in
                  subsections 5.3(b)(i) or (ii) are convertible into or
                  exchangeable for shares of Common Stock, shall decrease at any
                  time under or by reason of provisions with respect thereto
                  designed to protect against dilution, then in the case of the
                  delivery of shares of Common Stock upon the exercise of any
                  such right or option or upon conversion or exchange of any
                  such right or option or upon conversion or exchange of any
                  such Convertible Securities, the Conversion Price then in
                  effect hereunder shall forthwith be decreased to such
                  Conversion Price as would have obtained had the adjustments
                  made upon issuance of such right or option or Convertible
                  Securities been made upon the basis of the issuance of (and
                  the total consideration computed in accordance with
                  subsections 5.3(b)(i) or (ii), as the case may be, received
                  for) the shares of Common Stock delivered as aforesaid.

                           (iv)     In case of the issuance of shares of Common
                  Stock or Convertible Securities of the Company as a dividend
                  or distribution upon any shares of Common Stock of the
                  Company, such shares of Common Stock or Convertible
                  Securities, as the case may be, issuable in payment of such
                  dividend or distribution shall be deemed to have been issued
                  or sold without consideration.

                           (v)      In case at any time any shares of Common
                  Stock or Convertible Securities or any rights or options to
                  purchase any such shares of Common Stock or Convertible
                  Securities shall be issued or sold for cash, the consideration
                  received therefor shall be deemed to be the amount payable to
                  the Company therefor, without deduction therefrom of any
                  expenses incurred or any underwriting or selling commissions
                  or concessions paid by the Company in connection therewith. In
                  case any shares of Common Stock or Convertible Securities or
                  any rights or options to purchase any such shares of Common
                  Stock or Convertible Securities shall be issued or sold for 


                                      -6-
<PAGE>   7
                  a consideration other than cash, the amount of the
                  consideration other than cash payable to the Company shall be
                  deemed to be the fair value of such consideration as
                  determined in good faith by the Board of Directors of the
                  Company, without deduction therefrom of any expenses incurred
                  or any underwriting or selling commissions or concessions paid
                  by the Company in connection therewith. In case any shares of
                  Common Stock or Convertible Securities shall be issued in
                  connection with any merger of another corporation into the
                  Company, the amount of consideration therefor shall be deemed
                  to be the fair value, as determined in good faith by the Board
                  of Directors of the Company, of such portion of the assets of
                  such merged corporation as such Board shall determine to be
                  attributable to such shares of Common Stock, Convertible
                  Securities, rights or options, as the case may be.

                           (vi)     In case at any time the Company shall take a
                  record of the holders of its Common Stock for the purpose of
                  entitling them (A) to receive a dividend or other distribution
                  payable in shares of Common Stock or in Convertible
                  Securities, or (B) to subscribe for or purchase shares of
                  Common Stock or Convertible Securities, then such record date
                  shall be deemed to be the date of the issue or sale of the
                  shares of Common Stock deemed to have been issued or sold upon
                  the declaration of such dividend or the making of such other
                  distribution or the date of the granting of such right or
                  subscription or purchase, as the case may be.

                           (vii)    "Market Price" means, as of any day, the
                  closing sales price of the Common Stock on such day on the New
                  York Stock Exchange or the American Stock Exchange (or if the
                  Common Stock shall not then be listed on either such exchange,
                  such closing sales price on the principal (determined by
                  highest volume averaged for a period of twenty consecutive
                  business days prior to the day as to which "Market Price" is
                  being determined) national securities exchange (as defined in
                  the Securities Exchange Act of 1934, as amended) on which the
                  Common Stock may then be listed) or, if the Common Stock shall
                  not be listed on such exchange or exchanges, the closing bid
                  price at the end of such day as quoted by each of three
                  independent market makers as reported by the Nasdaq Stock
                  Market or, if the Common Stock shall not be listed or included
                  for quotation on the Nasdaq Stock Market, the closing bid
                  price at the end of the day as quoted by each of three
                  independent market makers in the over-the-counter market as
                  reported by the National Quotation Bureau, Inc. or by any
                  successor organization.

                           (viii)   The number of shares of Common Stock
                  outstanding at any given time shall not include shares owned
                  or held by or for the account of the Company which are not
                  entitled to be voted on matters for which stockholders may
                  otherwise vote, and the cancellation of any such shares shall
                  not be considered an issue or sale of shares of Common Stock
                  for the purposes of subsection 5.3(a).


                                      -7-
<PAGE>   8
                  (c) Effect of Certain Dividends. In case at any time the
Company shall declare a dividend upon the shares of Common Stock payable
otherwise than out of earnings or earned surplus (other than in a total
liquidation or dissolution of the Company) and otherwise than in shares of
Common Stock or Convertible Securities, the Conversion Price in effect
immediately prior to the declaration of such dividend shall be reduced by an
amount equal, in the case of a dividend in cash, to the amount thereof payable
per share of Common Stock or, in the case of any other dividend, to the fair
value thereof per share of Common Stock as determined in good faith by the Board
of Directors of the Company. For the purposes of the foregoing, a dividend other
than in cash shall be considered payable out of earnings or earned surplus only
to the extent that such earnings or earned surplus are charged an amount equal
to the fair value of such dividend as determined in good faith by the Board of
Directors of the Company. Such reductions shall take effect as of the date on
which a record is taken for the purpose of such dividend, or if a record is not
taken, the date as of which the holders of record of shares of Common Stock
entitled to such dividends are to be determined. As used in this subsection
5.3(c), the term "dividend" shall mean any distribution to the holders of shares
of Common Stock. Except as provided in this subsection 5.3(c), no adjustment in
the Conversion Price and no change in the number of shares of Common Stock so
issuable shall be made pursuant to this Section 5.3 as a result of or by reason
of any such dividend.

                  (d) No Adjustments Required. Notwithstanding anything herein
to the contrary, there shall be no adjustment in the Conversion Price in
connection with (i) the grant of any option, or the exercise of any option
granted under an employee benefit plan or stock option plan or (ii) upon the
exercise of any option, warrant or Convertible Security outstanding on the date
of this Note.

                  5.4 Stock Dividends; Splits; Subdivisions, etc. If the Company
shall issue Common Stock as a dividend upon Common Stock or in payment of a
dividend thereon, shall subdivide the number of outstanding shares of its Common
Stock into a greater number of shares or shall contract the number of
outstanding shares of its Common Stock into a lesser number of shares, the
Conversion Price then in effect shall be adjusted, effective at the close of
business on the record date for the determination of stockholders entitled to
receive such dividend or be subject to such subdivision or contraction, to the
price (computed to the nearest cent) determined by dividing (A) the product
obtained by multiplying the Conversion Price in effect immediately prior to the
close of business on such record date by the number of shares of Common Stock
outstanding prior to such dividend, subdivision or contraction, by (B) the sum
of the number of shares of Common Stock outstanding immediately after such
dividend, subdivision, or contraction.

                  5.5 Consolidation or Merger. If any consolidation or merger of
the Company with another corporation shall be effected, then, as a condition of
such consolidation or merger, lawful and adequate provision shall be made
whereby the Holder shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of
Common Stock immediately theretofore receivable upon the conversion of this
Note, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares equal to the
number of shares of Common Stock immediately theretofore so receivable by such
Holder had such consolidation or merger not taken place, and in any such case
appropriate provision shall be made with respect to the rights and interests of
such 


                                      -8-
<PAGE>   9
Holder to the end that the provisions hereof (including without limitation,
provisions for adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise of such conversion rights.
The Company shall not consummate any such consolidation or merger unless prior
to or simultaneously with the consummation thereof, the successor corporation
(if other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument the
obligation to deliver to such Holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such Holder may be entitled to
receive. Except as expressly set forth in this Section 5.4, however, nothing
contained herein will be deemed to restrict the Company from entering into a
consolidation or merger.

                  5.6 Notice of Adjustment of Conversion Price. Upon any
adjustment of the Conversion Price, then and in each such case the Company shall
give written notice thereof in the manner provided in Section 11 to the Holder,
which notice shall state the Conversion Price resulting from such adjustment,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.

                  5.7  Notice of Certain Actions.  In case at any time:

                       (1)      the Company shall declare any dividend upon
                  shares of its capital stock payable in securities or make any
                  special dividend or other distribution;

                       (2)      the Company shall offer for subscription pro
                  rata to the holders of any class of its capital stock any
                  additional securities of any class or other rights;

                       (3)      there shall be any capital reorganization, or 
                  reclassification of the capital stock of the Company, or
                  consolidation or merger of the Company with, or sale of all or
                  substantially all its assets to, another corporation; or

                       (4)      there shall be a voluntary or involuntary
                  dissolution, liquidation or winding-up of the Company;

then, in any one or more of said cases, the Company shall give written notice in
the manner provided in Section 11 to the Holder hereof, of the date on which (a)
the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights, or (b) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of shares of record shall participate in such
dividend, distribution or subscription rights, or shall be entitled to exchange
their shares for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding-up, as the case may be. Such written notice shall be
given at least 30 days prior to the action in question and not less than 30 days
prior to the record date or the date on which the Company's transfer books are
closed in respect thereto.


                                      -9-
<PAGE>   10
                  5.8 Reservation of Shares. The Company will at all times
reserve and keep available out of its authorized capital, solely for the purpose
of issuance upon the conversion of this Note as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of the
outstanding principal balance due under the Note. The Company covenants that all
shares which shall be so issuable shall, upon the conversion of the Note as
herein provided, be duly and validly issued and fully paid and nonassessable by
the Company.

                  5.9 Registration and Listing. If any shares required to be
reserved for purposes of conversions of this Note hereunder require, as a
condition to issuance to the Holder upon conversion of all or any portion of the
principal amount represented hereby, registration with or approval of any
governmental authority under any federal (other than the Securities Act of 1933
or similar federal statute then in force) or state law, or listing on any
national securities exchange, before such shares may be issued upon conversion,
the Company will, at its expense, as expeditiously as possible cause such shares
to be duly registered or approved or listed on the relevant national securities
exchange, as the case may be.

                  5.10 Taxes. The issuance of certificates for shares upon
conversion of this Note shall be made without charge to the Holder for any
issuance tax in respect thereto, provided that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder.

            SECTION 6.  Redemption of Note.

                  6.1 Redemption by the Borrowers; Redemption Amount. Provided
that on the date fixed for redemption the shares of Common Stock issuable upon
conversion of this Note or, if applicable under the terms of the Purchase
Agreement, the Warrant Shares (as defined in the Purchase Agreement) are covered
by an effective registration statement under the Securities Act of 1933 with
respect to the resale thereof, this Note shall be redeemable at the option of
the Borrowers in whole at any time or in part from time to time from and after
the date of its issuance, at a redemption price equal to that portion of the
principal amount for which the redemption is being made together with accrued
interest to the date fixed for redemption (such amount being the "Redemption
Amount").

                  6.2 Notice of Redemption. Not less than 30 days nor more than
60 days prior to the date fixed by the Borrowers for redemption of this Note or
any portion hereof, the Borrowers shall deliver to the Holder, in the manner
provided in Section 10 hereof at the Holder's last address appearing on the
books of the Company, a notice of redemption. Such notice of redemption shall
advise the Holder of the principal amount of this Note to be so redeemed, and
shall state: (i) the date fixed for redemption; (ii) the Redemption Amount;
(iii) that interest accrued to the date fixed for redemption will be paid as
specified in said notice; (iv) that on the date fixed for redemption (unless the
Borrowers shall default in the payment of the Redemption Amount) the Redemption
Amount will become due and payable, and after said date interest thereon shall
cease to accrue; (v) that the Borrowers so elect to redeem such Note or portion
thereof at the office of the Company or at such other location designated upon
presentation and surrender of such Debentures; and (vi) the Conversion Price
then in effect and that the right of conversion will terminate at the close of
business on the date fixed for redemption.


                                      -10-
<PAGE>   11

                  6.3 Issuance of Replacement Note on Partial Redemptions. In
case less than the entire principal amount of this Note shall be redeemed, then,
upon surrender of this Note by the Holder for redemption in the manner specified
in the notice of redemption provided pursuant to Section 6.2, a new Note in the
principal amount equal to the unredeemed portion of the principal amount of this
Note will be issued and delivered to and registered in the name of the Holder at
the Holder's last address appearing on the books of the Company.

                  6.4 Status of Note Following Redemption. From and after the
date fixed for redemption (unless the Company shall default in the payment of
the Redemption Amount), the principal amount called for redemption shall no
longer be deemed to be outstanding for any purpose, including, but not limited
to, the calculation of interest on the principal amount not called for
redemption, and the Holder shall cease to have any rights in respect thereof,
including the right to convert the principal amount called for redemption
pursuant to Section 6 hereof, from and after the date fixed for redemption,
other than the right to receive the Redemption Amount upon surrender of the Note
in the manner designated in the notice of redemption delivered in accordance
with Section 6.2.

         SECTION 7. Affirmative Covenants. Borrowers, jointly and severally,
covenant that, until the principal of, and interest on, this Note and all other
monetary obligations to the Holder under the other Purchase Documents have been
indefeasibly paid in full, each will, and the Company will cause each other
Borrower, to:

     7.1 Maintenance of Existence. Do all things material to its business
necessary to preserve and keep in full force and effect its existence (corporate
or other) and existing name, rights and franchises, and qualify and remain
qualified to do business in each jurisdiction in which the failure so to qualify
would have a material adverse effect on its business, operating results, assets
or condition (financial or otherwise).

         7.2 Payment and Performance of Obligations. Duly and punctually pay or
cause to be paid all of its material liabilities and obligations, including,
without limitation, taxes, liabilities and all other charges imposed upon or
levied or leviable against it, its assets or income prior to the date on which
such taxes or other charges become delinquent, or on which penalties attach or
interest accrues, as well as all material claims for labor, materials or
supplies which, if unpaid when due might, by law or agreement, become a Lien.

         7.3 Furnish to the Holder:

                  (a) Promptly after the sending or filing thereof, copies of
all proxy statements, financial statements and reports which the Company send to
its stockholders, and copies of all regular and periodic reports, all
registration statements (other than a Form S-8) the Company files with the
Securities and Exchange Commission (the "Commission"). All such reports
containing unaudited financial information of the Company and its subsidiaries
shall be certified by the Company's Chief Financial Officer as (i) having been
prepared in conformity with generally acceptable accounting principles
consistently applied during the periods presented ("GAAP"), subject to normal
year-end audit adjustments, (ii) being complete and correct, and (iii)
presenting fairly in all material respects the financial condition, results of
operations, changes in stockholders'


                                      -11-
<PAGE>   12
equity and cash flows which they purport to present.

                  (b) Together with (i) each report on Form 10-K or Form 10-Q
which the Company furnishes to the Holder, there shall be delivered to the
Holder a certificate signed by the Chief Executive Officer and Chief Financial
Officer of the Company stating that they have caused a review of the affairs of
the Borrowers to be made and that based thereon nothing has come to their
attention which would lead them to believe that any Event of Default or any
event which, with the lapse of time or the giving of notice or both, could
become an Event of Default has occurred or exists hereunder or, if such is not
the case, specifying the nature thereof an what action has been taken or is
being taken or is proposed to be taken with respect thereto.

                  (c) Promptly after any Borrower discovers the occurrence of
any Event of Default or event which, with the lapse of time or the giving of
notice or both, could become an Event of Default, a statement setting forth
details of such Event of Default or other event and the action taken, or
proposed to be taken, with respect thereto by such Borrower.

                  (d) Promptly after any Borrower has knowledge thereof, notice
of any action, suit or proceeding against any Borrower known to such Borrower to
be pending before any court or governmental authority, domestic or foreign,
which might reasonably be expected to have a material adverse effect on the
business, earnings, assets or condition (financial or other) of such Borrower;

                  (e) Promptly after any Borrower has knowledge thereof, notice
of any judgment against any Borrower which might reasonably be expected to have
a material adverse effect on the business, operating results, assets or
condition (financial or other) of any Borrower, entered by any court or other
governmental authority, domestic or foreign, against such Borrower, such notice
to include the amount of any such judgment.

                  (f) Such other information respecting the business, operating
results, assets, condition (financial or other) of any Borrower as the Holder
may reasonably request from time to time.

         7.4 Insurance. Maintain (i) insurance coverage on its assets against
risks in an amount consistent with commercially reasonable practice; provided
that such insurance coverage shall include business interruption insurance, fire
and extended coverage on inventory, equipment and on any building or other
facility owned or leased by it, (ii) comprehensive general liability coverage
against liability for injuries to persons or property and product liability
insurance, in such amounts as are at all times reasonably prudent in the
judgment of the Borrowers, and (iii) workers' compensation insurance coverage
required by law. Each policy of insurance insuring the inventory, equipment and
real property improvements of any Borrower shall, until this Note is paid in
full, have a standard mortgagee's or secured party's noncontributory loss
payable clause in favor of the Holder as its interest may appear and shall
provide for not less than 30 days' prior written notice to the Holder of
cancellation of or intended change in coverage. The Company will file with the
Holder promptly following its request therefor, a detailed list of all insurance
then in effect for Borrowers, stating the name of each insurer, the name of the
insured, the amounts of insurance issued by each such insurer, the expiration
dates of each policy and the property and risks covered thereby.


                                      -12-
<PAGE>   13
         7.5 Keeping of Records and Books of Account. Keep records and books of
account which are true and correct in all material respects.

         7.6 Visitation Right. Upon reasonable notice, at any reasonable time,
and from time to time, permit the representative or representatives of the Payee
to examine and make copies of and abstracts from its records and books of
account and visit its properties and to discuss its affairs, finances and
accounts with its Chief Executive Officer and Chief Financial Officer.

     7.7 Filing of Reports.

                  (a) Comply with the applicable requirements of all laws
(including the Employee Retirement Income Security Act of 1978, as amended) and
all rules, regulations and orders of any governmental authority, other than
Environmental Laws (as defined in Section 7.7(b)), as to which the compliance
requirements are set forth in Section 7.7(b), the violation of which might be
reasonably expected to have a material adverse effect on its business, operating
results, assets, condition (financial or other), or prospects.

                  (b) Each Borrower shall furnish to the Holder immediately
following receipt, copies of any correspondence, notice, pleading, citation,
indictment, complaint, order, decree, or other document from any source
asserting or alleging a circumstance or condition which requires or may require
a financial contribution by such Borrower or a cleanup, removal, remedial
action, or other response by or on the part of such Borrower under Environmental
Laws, or which seeks damages or civil, criminal or punitive penalties from such
Borrower for an alleged violation of Environmental Laws, and inform the Holder
in writing as soon as such Borrower becomes aware of any condition or
circumstance which makes the environmental representations or warranties
contained in this Agreement incomplete or inaccurate. "Environmental Laws" means
federal, state and local laws or regulations, codes, plans, orders, decrees,
judgments, injunctions, notices or demand letters issued, promulgated or entered
thereunder relating to pollution or protection of the environment, including
laws relating to reclamation of land and waterways and laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes
into the environment (including, without limitation, ambient air, surface water,
ground water, land surface, or subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemical, or industrial,
toxic or hazardous substances or wastes, or otherwise relating to worker health
and safety or public health and safety.

         7.8 Further Assurances. Promptly, upon the request of the Holder, (i)
correct any material defect or error that may be discovered in this Note, any
PIK Note any other Purchase Document to which it is a party or in the execution,
acknowledgement or recordation thereof; and/or (ii) execute, acknowledge,
deliver, file, re-file, register and re-register any and all such further
agreements, instruments, documents, certificates, financing statements, as the
Holder may reasonably require from time to time in order (i) to carry out more
effectively the purposes of this Note or any other Purchase Document, (ii) to
subject to the Lien created by the Security Agreement, any of such Person's
assets, rights or interests (now owned or hereafter acquired) covered or now or
hereafter intended to be covered by any of the Purchase Documents, (iii) to
perfect and maintain the validity, effectiveness and priority of any of the
Security Agreement and


                                      -13-
<PAGE>   14
the Lien intended to be created thereby, and (iv) to better assure, assign,
transfer, preserve, protect and confirm to Holder the rights granted or now or
hereafter to be granted to Holder under this Note and any other Purchase
Document to which it is a party or under any other instrument executed in
connection with any Document to which such Borrower is or may become a party.

     8. Negative Covenants. Borrowers, jointly and severally, covenant that
until the principal of, and interest on, this Note, and all other monetary
obligations to the Holder under the other Purchase Documents to which each
Borrower is party have been paid in full, each will not, and will cause each
other Borrower not to:

         8.1 Indebtedness. Directly or indirectly, incur, create, assume,
suffer, allow to exist or guarantee, or become or remain obligated or liable in
any manner with respect to any Indebtedness, except:

                  (a) Indebtedness under this Note, any PIK Note and each other
Purchase Document, together with any refinancings and replacements thereof;

                  (b) Indebtedness incurred on account of the acquisition of
capital assets, by purchase or under a Capital Lease. "Capital Lease" shall mean
a lease under which the obligation of the lessee would, in accordance with GAAP,
be included in determining total liabilities as shown on the liability side of a
balance sheet of lessee;

                  (c) Indebtedness subordinated to the Indebtedness described in
clause (a) above (as to the principal of, and interest on, such Indebtedness) on
terms and conditions satisfactory to the Holder (in its sole discretion),
provided that subordinated Indebtedness permitted hereby shall not exceed an
aggregate principal amount of $5,000,000 at any one time outstanding;

                  (d) Indebtedness of the Company or any Borrower as of July 31,
1997;

                  (e) Indebtedness between or among the Borrowers; and

                  (f) Indebtedness not to exceed an aggregate of $5,000,000 at
any one time outstanding.

         8.2 Negative Pledge. Incur, create or assume, or suffer to allow to be
incurred, created, assumed or to exist, any Liens upon any of the Collateral,
except:

                  (a) Liens in favor of the Holder.

                  (b) Deposits or pledges in connection with, or to secure the
payment of, contracts or leases entered into in the ordinary course of business,
utilities or similar services, workers' compensation laws, social security and
unemployment insurance laws or other similar statutory obligations; deposits on
account of insurance premiums; Liens imposed by law such as carriers'
warehousemen's and artisan's liens, provided the Indebtedness secured thereby is
not overdue for more than 90 days; and easements, restrictions and minor
irregularities of title which do not materially impair the use of its assets in
the normal operation of its business;


                                      -14-
<PAGE>   15
                  (c) Liens securing the payment of any tax or other similar
charge which is not delinquent or which (or the basis of which) is being
diligently contested by appropriate proceedings in good faith and for which
appropriate reserves have been established in accordance with GAAP consistently
applied, provided enforcement of any such Lien is duly stayed pending the final
determination of such proceedings;

                  (d) Liens securing Indebtedness permitted by Section 8.1
incurred to finance the acquisition of capital assets, provided that (A) such
Liens shall be created concurrently with the acquisition of such assets, (B)
such Liens do not at any time encumber property other than the asset financed by
such Indebtedness and (C) the amount of Indebtedness secured thereby is not
increased;

                  (e) Any and all other Liens securing collateral having a value
not exceeding $100,000 in the aggregate.

         8.3 Impair Value of Security. Take any action which results in a
material impairment of the value of the Collateral taken as a whole

             8.4 Dividends. Directly or indirectly, declare or pay dividends in
respect of any of its capital stock or capital shares or otherwise make any
distribution in respect of its capital stock or capital shares, or redeem or
repurchase any shares of its capital stock or capital shares, provided that any
Borrower other than the Company may make dividend payments or other
distributions to the Company and may redeem or repurchase any shares of their
capital stock held by the Company provided the purchase or redemption price
thereof is paid solely to the Company.

         8.5 Maintenance of Reporting Status. Not terminate the Company's status
as an issuer required to file reports under the Exchange Act, even if the
Exchange Act thereunder would permit such termination.

             8.6 Transactions with Affiliates and/or Associates. Enter into any
transactions (including, without limitation, the sale, purchase, or exchange of
property, the rendition of services or the payment of management fees) in any
transactions with Affiliates and/or Associates of any of the Borrowers, except
for a valid business purpose and in good faith.

Definitions:

             "Indebtedness" means: (a) all indebtedness of such Borrower for
borrowed money or for the deferred purchase price of property or services (other
than accounts payable or trade payables and other accrued liabilities incurred
in the ordinary court of business and payable in accordance with customary
practices); (b) any other indebtedness of such Borrower which is evidenced by a
note, bond, debenture or similar instrument; (c) all obligations of such
Borrower in respect of acceptances issued or created for the account of such
Borrower; and (d) all liabilities secured by any Lien on any property owned by
such Borrower in circumstances where such Borrower has not assumed or otherwise
become liable for the payment thereof.

             "Lien" means any mortgage, pledge, hypothecation, assignment,
security interest, encumbrance, lien, attachment or other charge of any kind
(including any agreement to give any of the foregoing, any lease in the nature
thereof and any conditional sale or other title retention


                                      -15-
<PAGE>   16
agreement and any sale of accounts receivable), or any other arrangement
pursuant to which any Person is entitled to any preference or priority with
respect to the property or assets of another or the income or profits of such
other Person, whether consensual or non-consensual and whether arising by way of
agreement, operation of law, legal process or otherwise.

         SECTION 9. Events of Default; Remedies.

                  9.1 Events of Default. The following shall constitute events
of default under this Note ("Events of Default"):

                           (1) The Borrowers, jointly or severally, shall fail
                  to pay when due (any principal amount of this Note, whether at
                  the Maturity Date, or with respect to the Redemption Amount on
                  the redemption date, or upon acceleration as permitted
                  hereunder or otherwise, or (b) any interest or other sums
                  (other than principal of this Note) due under this Note or any
                  Purchase Document and such default in the payment of interest
                  or other sums shall not have been remedied within ten (10)
                  days after the date such sum is due; or

                           (2) The Borrowers, jointly or severally, shall
                  default in any material respect in the observance or
                  performance of any covenant contained in Section 8 hereof or
                  in Section 3 of the Security Agreement and shall not have been
                  remedied such default within ten (10) days (or such longer
                  period as may be agreed to in writing by Borrowers and Payee)
                  after written notice of such default has been given by the
                  Holder to the Borrowers; or

                           (3) The Borrowers, jointly or severally, shall
                  default in any material respect in the observance or
                  performance of any covenant contained in any Purchase Document
                  (other than those referred to in clauses (1) and (2) above)
                  and shall not have remedied the default within thirty (30)
                  days after written notice of such default has been given by
                  the Holder to the Borrowers; or

                           (4) Any warranty or representation of the Borrowers
                  contained in any Purchase Document shall have been false in
                  any material respect; or

                           (5) Any Borrower shall (a) make an assignment for the
                  benefit of creditors, or file a voluntary petition under the
                  Federal Bankruptcy Code, as amended (the "Code"), or any other
                  Federal or state insolvency law, or (b) apply for or consent
                  to institution of, or fail to contest in a timely and
                  appropriate manner, any proceeding or the filing of any
                  petition described in clause (5) below, (c) consent to the
                  appointment of a receiver, trustee, custodian or similar
                  official of all or part of its property, (d) be or become
                  insolvent, however, evidenced, or (e) file an answer admitting
                  the material allegations of a petition filed against it in any
                  such proceeding; or

                           (6) An involuntary proceeding shall be commenced or
                  an involuntary petition shall be filed in a court of competent
                  jurisdiction seeking


                                      -16-
<PAGE>   17
                  (a) relief in respect of any Borrower, or of a substantial
                  part of its assets, under the Code, as now constituted or
                  hereafter amended or any other Federal or state bankruptcy,
                  insolvency, receivership or similar law, (b) the appointment
                  of a receiver, trustee, custodian or similar official for any
                  Borrower or for a substantial part of its assets, or (c) the
                  winding-up or any liquidation of any Borrower; and such
                  proceeding or petition shall continue undismissed for 60 days
                  or an order or decree approving or ordering any of the
                  foregoing shall be entered; or

                           (7) Any Borrower shall (a) fail to pay any principal
                  or interest due in respect of any indebtedness of such
                  Borrower in a principal amount in excess of $1,000,000, when
                  and as the same shall become due and payable, and such failure
                  shall continue beyond any applicable grace period, or (b) fail
                  to observe or perform any other term, covenant, condition or
                  agreement contained in any agreement or instrument evidencing
                  or governing any such indebtedness if the effect of any
                  failure referred to in this clause (b) is to cause, or to
                  permit the holder or holders of such indebtedness or a trustee
                  on its or their behalf (with or without the giving of notice,
                  the lapse of time or both) to cause, such indebtedness to
                  become due in its entirety prior to its stated maturity;

                           (8) One or more judgments for the payment of money in
                  an aggregate amount in excess of $1,000,000 shall be rendered
                  against any one or more of the Borrowers, and the same shall
                  remain undischarged for a period of 30 consecutive days during
                  which execution shall not be effectively stayed; or

                           (9) Other than as contemplated by the Security
                  Agreement, the lien created by the Security Agreement shall
                  cease to be a valid and enforceable lien on the Collateral (as
                  defined in the Security Agreement) with such priority as
                  provided in the Security Agreement or any material provision
                  of any Purchase Document shall, after execution and delivery
                  thereof, cease to be valid and binding on any party thereto
                  (other than the Holder), or any such other party shall so
                  state in writing or shall contest the validity and
                  enforceability thereof, and, in any such case, the Holder
                  shall be materially adversely affected as a result thereof.

                  9.2 Remedies. If an Event of Default shall occur and be
continuing then, in the sole discretion of the Holder and without further notice
to the Borrowers, the unpaid principal amount and the accrued interest hereunder
at the applicable rate specified above until full payment of all amounts due
hereunder, and all other sums due by the Borrowers under this Note shall become
immediately due and payable without presentment, demand, protest or other
requirements of any kind, all of which are hereby expressly waived by the
Borrowers. In addition, in each case, the Holder may recover all costs of suit
and other expenses incurred by the Holder (including reasonable attorneys' fees)
in connection with the collection of any sums due hereunder. The remedies set
forth herein shall be in addition to, and not in lieu of, any other additional
rights or remedies the Holder may have at law or in equity.


                                      -17-
<PAGE>   18
         SECTION 10. Exchange or Replacement of Note.

                  10.1 Exchange. The Holder, at its option, may in person or by
duly authorized attorney surrender the Note for exchange at the office of the
Company, and at the expense of the Company receive in exchange therefor a new
Note in the same aggregate principal amount as the aggregate unpaid principal
amount of the Note so surrendered and bearing interest at the same annual rate
as the Note so surrendered, each such new Note to be dated as of the date to
which interest has been paid on the Note so surrendered and to be in such
principal amount and payable to such person or persons, or order, as such Holder
may designate in writing; provided, however, that the Borrowers shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any new Note in a name other than that of the
Holder of the Note surrendered in exchange therefor. Five days prior written
notice of the Holder's intention to make such exchange shall be given to the
Company.

                  10.2 Replacement. Upon receipt by the Borrowers of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Note
and (in case of loss, theft or destruction) of indemnity satisfactory to it, and
upon reimbursement to the Borrowers of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Note if mutilated, the
Borrowers will make and deliver a new Note of like tenor in lieu of this Note.
Any Note made and delivered in accordance with the provisions of this Section
9.2 shall be dated as of the date to which interest has been paid on this Note.

         SECTION 11. Communications. All notices, requests, consents, reports
and demands shall be deemed properly given when received, and shall be in
writing and shall be hand delivered, sent by facsimile or other electronic
medium with answer back receipt, mailed by certified or registered mail, postage
prepaid, or sent by overnight courier, to the Borrower or to the Holder at the
address set forth below or to such other address as may be furnished in writing
to the other parties hereto:

                                           Any Borrower :

                                    c/o Ecogen Inc.
                                    2005 Cabot Boulevard
                                    Langhorne, PA  19047
                                    Telecopy: (215) 757-2956
                                    Attention:  President

                                           The Payee:

                                    United Equities (Commodities) Company
                                    160 Broadway
                                    New York, NY 10038
                                    Telecopy (212) 227-3208

         SECTION 12. Severability. Should any part but not the whole of this
Note for any reason be declared invalid, such decision shall not affect the
validity of any remaining portion,


                                      -18-
<PAGE>   19
which remaining portion shall remain in force and effect as if this Note had
been executed with the invalid portion thereof eliminated, and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Note without including therein any such part which
may, for any reason, be hereafter declared invalid.

         SECTION 13. Transfers.

                  13.1 Restriction on Transfer. By its acceptance of this Note,
the Holder acknowledges that neither this Note, any PIK Note issued with respect
hereto nor the Common Stock issuable upon conversion hereof have registered
under the securities laws of the United States of America or any state thereof
and represents that this Note has been acquired for investment and, neither this
Note, any PIK Note issued with respect thereto, nor any portion hereof or
thereof, nor any interest in this Note (including the Common Stock issuable upon
conversion hereof) may be offered for sale, sold, delivered after sale,
transferred, pledged, or hypothecated in the absence of registration of this
Note, as the case may be, under applicable federal and state securities laws or
the receipt by the Company of an opinion of counsel of the Holder, as the case
may be, reasonably satisfactory to the Company that such registration is not
required by reason of an available exemption from registration under such
securities laws.

                  13.2 Manner of Transfer. Subject to Section 13.1 above, the
transfer of this Note is registrable by the Borrowers, and the registered Holder
hereof, in person or by his attorney duly authorized in writing, on the books of
the Company to be kept for that purpose at the office of the Company, upon
surrender and cancellation of this Note and upon presentation of a duly executed
written instrument of transfer in form satisfactory to the Borrowers, and
thereupon a new Note or Notes in aggregate principal amounts of not less than
$500,000 will be issued to the transferee or transferees in exchange herefor
with payment by the Holder of any stamp or other tax or governmental charge in
connection therewith; provided, however, this Note or any PIK Note issues with
respect hereto may not be transferred other than to an affiliate of United
Equities (Commodities) Company. Prior to due presentment of this Note for
registration of transfer, the Borrowers may deem and treat the person in whose
name this Note is registered as the absolute owner hereof for the purpose of
receiving payment hereof or on account hereof or of interest hereon (subject to
the provisions of the first paragraph on the face hereof) and for all other
purposes.

         SECTION 14. Captions. The descriptive headings of the various Sections
or parts of this Note are for convenience only and shall not affect the meaning
or construction of any of the provisions hereof.

         SECTION 15. Successors and Assigns. This Note shall be binding upon the
parties and their respective successors and assigns.

         SECTION 16. Governing Law. This Note shall be governed by the laws of
the Commonwealth of Pennsylvania.


                                      -19-
<PAGE>   20
         SECTION 17. Consent to Jurisdiction; Waiver of Jury Trial.

                  (a) BORROWERS, JOINTLY AND SEVERALLY, AGREE THAT ANY LEGAL
ACTION OR PROCEEDING AGAINST ANY BORROWER WITH RESPECT TO THIS NOTE MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK (NEW YORK COUNTY), OR THE FEDERAL
COURTS FOR THE SOUTHERN DISTRICT OF NEW YORK, AS HOLDER MAY ELECT IN ITS SOLE
DISCRETION, AND, BY EXECUTION AND DELIVERY OF THIS NOTE, EACH BORROWER HEREBY
ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. BORROWERS, JOINTLY
AND SEVERALLY, WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OUT OF ANY OF SUCH COURTS IN ANY
SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY EXPRESS,
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO EACH BORROWER AT ITS ADDRESS
FOR NOTICES AS SPECIFIED HEREIN, SUCH SERVICE TO BECOME EFFECTIVE FIVE BUSINESS
DAYS AFTER SUCH MAILING. EACH BORROWER WAIVES, AT THE OPTION OF HOLDER, ANY
OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY
ACTION OR PROCEEDING INSTITUTED UNDER THIS NOTE AND CONSENTS TO THE GRANTING OF
SUCH LEGAL OR EQUITABLE REMEDY AS IS DEEMED APPROPRIATE BY THE COURT. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF HOLDER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR THE RIGHT OF HOLDER TO BRING LEGAL ACTION OR PROCEEDING IN
ANY OTHER COMPETENT JURISDICTION. BORROWERS, JOINTLY AND SEVERALLY, AGREE THAT
ANY ACTION COMMENCED BY BORROWERS (OR ANY OF THEM) ASSERTING ANY CLAIM OR
COUNTERCLAIM ARISING UNDER OR IN CONNECTION WITH THIS NOTE OR ANY OTHER PURCHASE
DOCUMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK (NEW YORK
COUNTY), OR IN THE FEDERAL COURTS FOR THE SOUTHERN DISTRICT OF NEW YORK AND THAT
SUCH COURTS SHALL HAVE EXCLUSIVE JURISDICTION WITH RESPECT TO ANY SUCH ACTION.

                  (b) BORROWERS AND HOLDER, BY ITS ACCEPTANCE HEREOF, HEREBY
WAIVE TRIAL BY JURY IN CONNECTION WITH ANY ACTION OR PROCEEDING OF ANY NATURE
WHATSOEVER ARISING UNDER, OUT OF OR IN CONNECTION WITH THIS NOTE AND IN
CONNECTION WITH ANY CLAIM, COUNTERCLAIM, OFFSET OR DEFENSE ARISING IN CONNECTION
WITH SUCH ACTION OR PROCEEDING, WHETHER ARISING UNDER STATUTE (INCLUDING ANY
FEDERAL OR STATE CONSTITUTION) OR UNDER THE LAW OF CONTRACT, TORT OR OTHERWISE
AND INCLUDING, WITHOUT LIMITATION, ANY CHALLENGE TO THE LEGALITY, VALIDITY,
BINDING EFFECT OR ENFORCEABILITY OF THIS PROVISION OR THIS NOTE.

                  (c) BORROWERS HEREBY, JOINTLY AND SEVERALLY, CONSENT AND AGREE
THAT ANY JUDGMENT ENTERED AGAINST ANY OF THEM IN ANY SUCH ACTION OR PROCEEDING
COMMENCED AGAINST IT (A "NY JUDGMENT") IN ANY SUCH COURT OF THE STATE OF NEW
YORK OR OF THE UNITED STATES OF AMERICA (A "NY COURT") MAY BE ENTERED, FILED,
RECORDED OR DOCKETED IN ANY COURT WITH RESPECT TO BORROWER OF THE STATE WHERE
THE PRINCIPAL OFFICES OF SUCH BORROWER IS LOCATED (A "STATE COURT") WITH THE
SAME FORCE AND EFFECT AS IF THE NY JUDGMENT WAS A FINAL JUDGMENT AGAINST
BORROWERS OF THE STATE COURT (A
<PAGE>   21
"RECORDED FOREIGN JUDGMENT") AND, FOR SUCH PURPOSE, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, EACH BORROWER ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE STATE COURT.
EACH BORROWER HEREBY IRREVOCABLY (A) WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON IT (INCLUDING THE SERVICE OF POST-JUDGMENT SUBPOENAS,
INTERROGATORIES, NOTICES OF DEPOSITION OR ANY OTHER POST-JUDGMENT ORDER OR
NOTICE) IN CONNECTION WITH ANY ACTION OR PROCEEDING TO ENFORCE OR COLLECT THE NY
JUDGMENT AND/OR THE RECORDED FOREIGN JUDGMENT, AND (B) CONSENTS TO THE SERVICE
OF PROCESS, INCLUDING, WITHOUT LIMITATION, ANY SUCH POST-JUDGMENT SUBPOENAS,
INTERROGATORIES, NOTICES AND ORDERS, OUT OF THE NY COURT OR THE STATE COURT IN
ANY ACTION OR PROCEEDING TO ENFORCE OR COLLECT A NY JUDGMENT OR A RECORDED
FOREIGN JUDGMENT, BY THE MAILING OF COPIES THEREOF BY EXPRESS, REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO BORROWERS AT THEIR ADDRESS FOR NOTICES AS
SPECIFIED IN THIS NOTE, SUCH SERVICE TO BECOME EFFECTIVE FIVE BUSINESS DAYS
AFTER SUCH MAILING. EACH BORROWER HEREBY WAIVES, AT THE OPTION OF HOLDER, ANY
OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE OF ANY ACTION
OR PROCEEDING INSTITUTED TO ENFORCE OR COLLECT A NY JUDGMENT OR ANY RECORDED
FOREIGN JUDGMENT, AND CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE REMEDY
AS IS DEEMED APPROPRIATE BY THE STATE COURT. EACH BORROWER HEREBY IRREVOCABLY
WAIVES THE RIGHT TO CONTEST THE SUFFICIENCY OF ANY SUCH SERVICE AND FURTHER
AGREES THAT ANY SUCH SUPPLEMENTARY PROCEEDINGS OR POST-JUDGMENT DEPOSITIONS MAY
BE CONDUCTED AT THE OFFICES OF THE HOLDER'S ATTORNEYS IN NEW YORK CITY OR
ELSEWHERE, AS HOLDER MAY ELECT IN ITS SOLE DISCRETION. NOTHING HEREIN SHALL
AFFECT THE RIGHT OF HOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW
OR THE RIGHT OF HOLDER TO BRING JUDGMENT, ENFORCEMENT OR COLLECTION ACTIONS OR
PROCEEDINGS IN ANY OTHER COMPETENT JURISDICTION. BORROWERS HEREBY, JOINTLY AND
SEVERALLY, IRREVOCABLY WAIVE ANY RIGHT (X) TO INTERPOSE ANY DEFENSE,
COUNTERCLAIM, SETOFF OR RECOUPMENT CLAIM AGAINST HOLDER IN ANY ACTION OR
PROCEEDING TO ENTER, FILE, RECORD OR DOCKET THE NY JUDGMENT IN THE STATE COURT
OR TO ENFORCE OR COLLECT THE RECORDED FOREIGN JUDGMENT AND/OR (Y) TO CHALLENGE,
APPEAL, MOVE TO VACATE OR MOVE TO REOPEN ANY NY JUDGMENT OR ANY RECORDED FOREIGN
JUDGMENT.

         SECTION 18. Amendments. This Note may only be amended by a written
instrument executed by the Borrowers and either: (i) the Holder; or (ii) the
holders of 51% of the Offering Notes outstanding at such time.

                                         ECOGEN INC.

                                         By:  /s/ James P. Reilly, Jr.
                                              ---------------------------------

                                         ECOGEN INVESTMENTS INC.

                                         By:  /s/ Mary E. Paetzold
                                              ---------------------------------

                                         ECOGEN-BIO INC.

                                         By:  /s/ Mary E. Paetzold
                                              ---------------------------------
<PAGE>   22
                                   ECOGEN INC.
                             ECOGEN INVESTMENTS INC.
                                 ECOGEN-BIO INC.

                    8% CONVERTIBLE NOTE DUE OCTOBER 31, 2002

                                CONVERSION NOTICE


Ecogen Inc.
Ecogen Investments Inc.
Ecogen-Bio Inc.

         The undersigned Holder of this Note hereby irrevocably exercises the
option to convert this Note, or such portion hereof as is specified below into
shares of Common Stock of Ecogen, Inc. in accordance with the terms of this
Note, and directs that the shares issuable and deliverable upon the conversion
be issued in the name of an delivered to the undersigned unless a different name
has been indicated below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay transfer taxes payable with
respect thereto. If this conversion involves fractional shares, please issue
this related check to the same person entitled to receive the shares.


Dated:____________________  Principal Amount to be converted, and any interest:

                                                $____________________________


If shares are to be issued other wise than to owner:

Tax Identification
Number of Transferee_________           _____________________________________
                                                Signature of Owner

________________________________
________________________________
________________________________

Please print name and address of Transferee (including zip code)


<PAGE>   1
Exhibit No. 10.130


                  SECURITY AGREEMENT dated October 31, 1997 made by ECOGEN INC.,
a Delaware corporation (the "Company"), ECOGEN INVESTMENTS INC., a Delaware
corporation ("E-Investments"), and ECOGEN-BIO INC., a Delaware corporation
("E-BIO, and together with the Company and E-Investments, the "Debtors" and
individually, a "Debtor") , in favor of UNITED EQUITIES (COMMODITIES) COMPANY, A
New York general partnership ("Secured Party").

                                 R E C I T A L S

                  A. Debtors are parties to a certain Convertible Note Purchase
Agreement dated October 31, 1997 (the "Purchase Agreement") among Debtors and
Secured Party, under which Debtors have agreed to issue and sell to Secured
Party a $3,037,333.33 on 8% convertible promissory note due October 31, 2002
(the "Note"). The Purchase Agreement, the Note, this Agreement and any PIK Notes
issued from time to time pursuant to the terms of the note and each other
agreement and instrument to be issued to or entered into by Debtors under the
Purchase Agreement are hereinafter collectively referred to as the "Purchase
Documents" and individually as a "Purchase Document."

                  B. It is a condition precedent of the purchase of the Note by
Secured Party pursuant to the Purchase Agreement that Debtors execute and
deliver this Security Agreement to Secured Party, to secure the obligations of
Debtor to Secured Party under the Purchase Documents.

                     Accordingly, in consideration of the foregoing Recitals and
the purchase of the Note by Secured Party pursuant to the Purchase Agreement,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by Debtors, Debtors hereby, jointly and severally
agree, with Secured Party as follows:

                  1.       DEFINED TERMS.

                           (a)      As used in this Security Agreement, the
following terms shall have the following meanings:

                           "Accounts" means any "accounts," as such term is
defined in Section 9-106 of the Code, now or hereafter owned, acquired or held
by any Debtor and, in any event, shall mean and include, but not be limited to,
any and all accounts, accounts receivable, contract rights, book debts, notes,
drafts, acceptances and other forms of obligations now owned, acquired or held
or hereafter received or acquired by or belonging or owing to such Debtor
(including under any trade names, styles or divisions thereof), whether arising
out of goods sold, rented or leased and/or services rendered by such 
<PAGE>   2
Debtor or from any other transaction, whether or not the same involves the sale
of goods or services by such Debtor (including, without limitation, any such
obligation which might be characterized as an account or contract right under
the Code in effect in any jurisdiction) and each and all of the rights in, to
and under all purchase orders, instruments, receipts and other documents now
owned, acquired or held or hereafter acquired or received by such Debtor
evidencing obligations for or in respect of goods sold or leased and/or services
rendered, and all of such Debtor's rights in and to any goods represented by any
of the foregoing (including unpaid seller's rights of rescission, replevin,
reclamation and stopping in transit and rights to returned, reclaimed or
repossessed goods), and all monies due or to become due to such Debtor under all
contracts for the sale, rental or lease of goods and/or the performance of
services by such Debtor (whether or not yet earned by performance on the part of
such Debtor) or in connection with any other transaction, now in existence or
hereafter arising, including, without limitation, the right to receive the
Proceeds of such purchase orders and contracts, and all collateral security and
guarantees of any kind given by any person with respect to any of the foregoing.

                  "Capitalized Equipment" shall mean Equipment subject to a
Capital Lease (as defined in the Note) including, without limitation, Equipment
subject to the Master Equipment Lease Agreement between the Company and FINOVA
Technology Finance Inc. f/k/a Financing for Science International, Inc. dated
April 14, 1995.

                  "Chattel Paper" means any "chattel paper," as such term is
defined in Section 9-105(1) (b) of the Code, now or hereafter owned, acquired or
held by an Debtor.

                  "Code" means the Uniform Commercial Code as the same may be in
effect in the State of New York from time to time.

                  "Collateral" means collectively, (i) all present and after
acquired personal property of any Debtor, including, without limitation, all
money now or hereafter in the possession of such Debtor, all monetary deposit
accounts of Debtor with banks and other Persons at any time established or
maintained and all credit balances at any time outstanding in such accounts, all
insurance policies and contracts now or hereafter owned, acquired or held by
such Debtor and any interest in policies or contracts as owner, insured or
beneficiary at any time owned, acquired or held, all Accounts, Chattel Paper,
Documents, Equipment, General Intangibles, Instruments, Inventory and Records
and (ii) all products and Proceeds of or under any of the foregoing; provided,
however, that notwithstanding the foregoing, the term "Collateral" shall not
include the Excluded Assets.

                  "Designated Technology" shall mean any rights the Debtors may
have with respect to United States Patent Application No. 08/087,388 relating to
the Bacillus thuringiensis Cry 1F gene and its related international
counterparts and any proceedings related to such patent application including,
without limitation, any patent interference proceeding before the United States
Patent and Trademark Office.


                                       2
<PAGE>   3
         "Documents" means any "documents," as such term is defined in Section
9-105(1) (f) of the Code, now or hereafter owned by an Debtor and, in any event,
shall mean and include, but shall not be limited to, all documents of title now
or hereafter owned, acquired or held by such Debtor.

         "Equipment" means any "equipment, " as such term is defined in Section
9-109(2) of the Code, now or hereafter owned by an Debtor and, in any event,
shall mean and include, but shall not be limited to, all machinery, equipment,
furnishings and motor vehicles now or hereafter owned by such Debtor, including,
without limitation, all items or machinery and equipment of any kind, nature and
description, including, without limitation, electronic data processing equipment
and peripheral equipment, laboratory, scientific and analytical equipment,
whether affixed to real property or not, and all office furnishings and
furniture, and any and all additions to, substitutions for, accessions to and
replacements of any of the foregoing, wherever located, together with all
attachments, components, parts (including spare parts), equipment and
accessories installed thereon or affixed thereto and all fuel for any thereof.

         "Excluded Assets" shall mean the Capitalized Equipment, Designated
Technology, First Union Collateral, and Pheromone Assets.

         "First Union Collateral" shall mean the property which is subject to
the Pledge and Security Agreement between Ecogen Investments Inc. and First
Union National Bank dated July 17, 1996.

         "General Intangibles" means any "general intangibles," as such term is
defined in Section 9-106 of the Cod, now or hereafter owned by any Debtor and,
in any event, shall mean and include, but not be limited to, all customer lists,
trademarks, service marks, copyrights, computer software and manuals, trade
secrets, proprietary information, microbiological information and data, chemical
formulae and compounds, scientific documents, technology, know-how, research and
development information and data, whether recorded on paper or on electronic
data processing media, biological specimens, the rights of such Debtor as Lessee
under capital and operating leases (but not the obligations or liabilities under
such leases), tax refunds, patents, patent, trademark and copyright
applications, rights in intellectual property, licenses, partnership and other
ownership interests in a general or limited partnership and/or a limited
liability company, limited liability partnership, joint venture or other Person
not represented or evidenced by a certificate, including an uncertificated
security and permits now or hereafter owned, acquired or held by such Debtor.

         "Instruments" means any "instrument," as such term is defined in
Section 9-105(i) of the Code, now or hereafter owned, acquired or held by an
Debtor of record and/or beneficially, and, in any event, shall mean and include,
but not be limited to, all checks, drafts, negotiable instruments and securities
(certificated and uncertificated) now or hereafter owned, acquired or held by
any or all of Debtors.


                                       3
<PAGE>   4
         "Inventory" means any "inventory," as such term is defined in Section
9-109(4) of the Code, now or hereafter owned by an Debtor and, in any event,
shall mean and include, but not be limited to, all inventory, merchandise, goods
and other personal property now or hereafter owned by such Debtor which is held
for sale, rental or lease or is furnished or is to be furnished under a contract
of service or which constitutes raw materials, work in process or materials used
or consumed or to be used or consumed in business of any of Debtors, or the
processing, packaging, delivery or shipping of the same, and all finished goods.

         "Obligations" means (i) all liabilities, obligations, covenants,
agreements, representations and warranties of Debtors, jointly and/or severally,
to Secured Party under or pursuant to each and all of the Purchase Documents, as
any such Purchase Document may be, modified, amended, supplemented, extended,
renewed, refunded or refinanced from time to time, whether or not such
liabilities or obligations are now outstanding or are hereafter incurred or
suffered, and whether or not absolute, contingent, due or to become due, matured
or unmatured, liquidated or unliquidated; (ii) all future advances made by
Secured Party for the maintenance, protection, preservation or enforcement of,
or realization upon the Collateral or any portion thereof, together with
interest at the Default Rate accrued thereon; and (iii) any and all reasonable
costs and expenses, including costs and expensed of collection, paid or incurred
by Secured Party in connection with the collection of the liabilities and
obligations referred to in clauses (i) and (ii) above and in connection with the
enforcement of realization upon any or all of the Collateral or the security
interests of Secured Party therein or in connection with the taking of any other
action permitted by this Agreement.

         "Pheromone Assets" shall mean all property of the Debtors, including,
without limitation, all Accounts, Chattel Paper, Documents, Equipment, General
Intangibles, Instruments, Inventory and Records relating to: (a) the Debtors'
insect pheromone business, operations, products or technology including, without
limitation, the Debtors' (i) NoMate product line and technology, (ii) BeeScent
product line and technology, (iii) Scentry insect trap and lure product line and
technology, and (iv) Compel product line and insect feeding stimulant
technology; and (b) the assets acquired by the Company from Scentry, Inc. on or
about September 16, 1997.

         "Proceeds" shall mean all "proceeds," as such term is defined in
Section 9-306(1) of the Code and, in any event, shall mean and include, but not
be limited to, the following at any time whatsoever arising or receivable: (i)
whatever is received upon any collection, exchange, sale, rental, lease, license
or other disposition of any of the Collateral, and any property into which any
of the Collateral is converted, either cash or non-cash proceeds; (ii) any and
all proceeds of any insurance, indemnity, warranty or guaranty payable to any or
all of Debtors from time to time with respect to any of the Collateral; (iii)
any and all payments (in any form whatsoever) made or due and payable to Debtors
from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental authority or any person acting under color of any governmental
authority); (iv) any claim


                                       4
<PAGE>   5
of any or all of Debtors against third parties (A) for past, present or future
infringement of or dilution of any patent, copyright or other intellectual
property right or any license of any such rights, or (B) for past, present or
future infringement of or dilution of any trademark or service mark or any
trademark or service mark license or for injury to the goodwill associated with
any trademark, trademark or service mark registration or trademark or service
mark licensed under any trademark or service mark license; and (v) any and all
other amounts from time to time paid or payable under or in connection with any
of the Collateral.

                  "Records" means all files, books, records and data of Debtors
now existing or hereafter created in any way pertaining to or reflecting
Accounts, Chattel Paper, Documents, Equipment, General Intangibles, Instruments
and Inventory and the products and Proceeds of or under any of the foregoing,
and however recorded or maintained, whether maintained on paper or electronic
data processing media.

                  (b) Capitalized terms used in this Agreement without
definition will have the definitions assigned to those terms in the Purchase
Agreement or the Note. Any defined terms used herein in the singular shall
include the plural, and vice versa.

         2.       GRANT OF SECURITY INTEREST. To secure the full and timely
payment, observance and performance when due of the Obligations in accordance
with the terms thereof and of the respective instruments or agreements now or
hereafter evidencing the Obligations or pursuant to which the Obligations are
issued, each Debtor hereby grants, assigns, conveys and transfers to, and
creates in favor of, Secured Party a continuing security interest in, and Lien
upon, all of such Debtor's right, title and interest in, to and under the
Collateral.

         3.       COVENANTS OF DEBTOR. Debtors hereby, jointly and severally,
covenant with Secured Party, as follows:

                  (a) This Agreement creates in favor of Secured Party a valid
and enforceable security interest in and to the Collateral. Each Debtor has
executed and delivered to Secured Party one or more financing statements
pursuant to the Code. At the written request of Secured Party one or more
additional financing statements pursuant to the Code to perfect Secured Party's
security interest in the Collateral. Consistent with the foregoing, Secured
Party may prepare and file financing statements and continuation statements
signed only be Secured Party covering the Collateral and, in jurisdictions where
a Debtor's signature is required, may execute such financing statements in the
name of such Debtor. Debtors, jointly and severally, promise to pay to Secured
Party, on demand, all reasonable fees and expenses paid or incurred or to be
incurred by Secured Party in connection with filing such statements, which fees
and expenses until so paid by Debtors shall be part of the Obligations. The
addresses listed on Schedule A are all the locations where Collateral (including
the Records) is located.



                                       5
<PAGE>   6
         (b) Upon the filing of the financing statements referred to in Section
3(a) in the public offices and jurisdictions set forth in Schedule A, the
security interest created by this Security Agreement will constitute a valid and
continuing perfected security interest in all of right, title and interest of
each and all of the Debtors in all the Collateral located in such jurisdictions
which is of the type for which filing such a financing statement can perfect
such a security interest described in such financing statements in favor of
Secured Party and prior to all other Liens, and is enforceable as such as
against creditors of and purchasers from Debtor and as against any owner of any
real property where any Equipment is located and as against any purchaser of
such real property and any present or future creditor obtaining a Lien on such
real property. All action reasonably necessary or desirable to protect and
perfect such security interest in each item of the Collateral has been or
promptly will be duly taken.

         (c) Each Debtor has, and will have, until the Obligations have been
fully and indefeasibly paid and discharged, good and valid title to the
Collateral purported to be owned by it form time to time, free and clear of all
Liens, except for the Liens created hereby and Liens permitted by the Note.
Until the Obligations have been fully and indefeasibly paid and discharged,
Debtors will not create or suffer to exist any further Liens, on or with respect
to any of the Collateral; will execute and deliver any and all such further
instruments and documents and take such further action as Secured Party may
reasonably request to obtain the full benefit of this Security Agreement and of
the rights and powers granted herein; will defend the Collateral against all
claims and demands adverse to Secured Party, and will furnish further assurance
of title and do any other acts reasonably requested by Secured Party to maintain
the security interests created hereby in the Collateral as perfected security
interests therein.

         (d) Except for any item of Collateral as to which a security interest
therein may be perfected by only by filing, and prior to the occurrence of an
Event of Default, Debtors may retain possession of the Collateral. Until the
Obligations have been fully paid and discharged, Debtors will not lease, rent,
sell, exchange, assign, loan or otherwise dispose f the Collateral or any part
thereof, without the prior written consent of Secured Party, except for a
disposition which, taken together with all prior dispositions, does not have a
material adverse effect on the value of the Collateral taken as a whole, and
provided, as to any such disposition, that no Event of Default or event which
with the lapse of time or the giving of notice or both would constitute such an
Event has occurred and is continuing prior to such disposition or would result
from the making of such disposition. Debtor will not move the Collateral to a
jurisdiction as to which Secured Party has not previously received, or in which
there is not on file in the appropriate public offices, duly executed and
completed financing statements, without giving Secured Party at least 60 days'
prior written notice thereof, provided that a Debtor may remove Inventory or
Equipment having an aggregate book value not in excess of $200,000 to such a
jurisdiction provided that such Debtor gives Secured Party notice thereof within
10 days after the date of removal and promptly delivers to Secured Party such
documents as Secured Party may reasonably request in order to subject such
removed Collateral to the Lien of this Security Agreement.


                                       6
<PAGE>   7
         (e) Debtors will not utilize any trade name, or change their respective
corporate names without giving Secured Party at least 60 days' prior written
notice thereof. The executive offices of the Company are located at 2005 Cabot
Boulevard, Langhorne, Pennsylvania 19047, and the executive offices of the other
Debtors is 222 Delaware Avenue, Wilmington, Delaware 19899. Each Debtor will
give Secured Party at least 60 days' prior written notice of any change in
location of its executive office. The original Records of each Debtor are, and
will continue to be, kept at such executive office, as the same may be changed
from time to time, subject to notification to Secured Party as aforesaid. Each
debtor will keep and maintain, at its own cost and expense, Records in form and
substance reasonably satisfactory to Secured Party, and will include in the
Records, without limitation, a record of all payments received and all credits
granted with respect to the Collateral and all other dealings with the
Collateral. If an Event of Default shall have occurred and be continuing, upon
demand by Secured Party, each Debtor shall turn over a duplicate set of the
Records pertaining to its business to Secured Party or its authorized
representative. Each Debtor shall permit any authorized representative of
Secured Party to inspect the Records during normal business hours and will, if
requested, provide photocopies thereof to Secured Party.

         (f) Each Debtor will not (i) amend, modify, terminate or waive any
provision of any Receivable in any manner which could reasonably be expected to
materially adversely affect the value of the Collateral in the aggregate; or
(ii) fail to exercise promptly and diligently each and every material right
which it may have under each Receivable (other then any right of termination)
which could reasonably be expected to materially adversely affect the value of
the Collateral as a whole. If an Event of Default shall have occurred and be
continuing, such Debtor will not, without Secured Party's Prior written consent,
grant any extension of time of payment of any of the Receivables; compromise,
compound or settle the same for less than the full amount thereof; release,
wholly or partly, any Person liable for the payment thereof; or allow any credit
or discount whatsoever thereon, other than discounts, adjustments and allowances
and customary extensions granted in the normal course of business. Secured Party
authorizes each Debtor to collect the Receivables owned by it provided that such
collection is performed in a prudent and businesslike manner, and if a default
or Event of Default shall have occurred and be continuing, Secured Party may
curtail or terminate such authority at any time. Secured Party may at any time
following upon or following the occurrence of an Event of Default which is
continuing, notify account debtors with respect to Receivables and parties
obligated with respect to Instruments, that such Receivables and Instruments
have been assigned to Secured Party and that payments in respect thereof shall
be made directly to Secured Party. Upon the prior written request of Secured
Party upon or following the occurrence of an Event of Default which is
continuing, Debtor will so notify such account debtors and obligated parties.
Secured Party may at any time, in its own name or in the name of others,
communicate with account debtors and parties obligated on Receivables and
Instruments in order to verify with them, to Secured Party's satisfaction, the
existence, amount and terms of such Receivables and Instruments. If an Event of
Default shall have occurred and be continuing, Secured Party may require that
any Proceeds, when collected


                                       7
<PAGE>   8
by a Debtor, whether consisting of checks, notes, drafts, bills of exchange,
money orders, commercial paper of any kind whatsoever, of other documents,
received in payment of any Account or in payment for any Instrument, Inventory
or other Collateral, shall be promptly delivered by such Debtor to Secured Party
in precisely the form received, except for such Debtor's endorsement when
required, to be held as additional cash Collateral hereunder or to be applied to
repayment of the Obligations as hereinafter provided, in the discretion of
Secured Party, and until so turned over shall be deemed to be held in trust by
such Debtor for and as Secured Party's property and shall not be commingled with
such Debtor's other funds.

                  (g) Each Debtor will furnish, in reasonable detail, to Secured
Party, upon prior request of Secured Party from time to time, statements and
schedules further identifying and describing the Collateral and other reports in
connection with the Collateral.

                  (h) Each Debtor will advise Secured Party promptly after
learning of any of the following, in reasonable detail, (i) of any Lien made or
asserted against any or all of the Collateral; (ii) of any material adverse
change in the composition of the Collateral; and (iii) of the occurrence of any
other event which would have an adverse effect on the aggregate value of the
Collateral or on the security interests created hereunder.

         4.       POWER OF ATTORNEY. Secured Party shall have the power, upon
and following the occurrence of an Event of Default which is continuing, to take
any action and to execute any instrument which Secured Party may deem necessary
or advisable to accomplish the purposes of this Security Agreement, including
but not limited to the following acts:

                  (a) To ask, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral; and

                  (b) To receive, endorse and collect any drafts, checks, notes
or other instruments for the payment of moneys due under any Collateral; and

                  (c) To file any claims, take any action or institute any
proceedings which Secured Party may deem necessary for the collection of any of
the Collateral or otherwise to enforce the rights of Secured Party with respect
to any of the Collateral.

                      Each Debtor hereby irrevocably appoints Secured Party, any
each of its officers, as such Debtor's attorney-in-fact, with full power of
substitution, with full authority in the name of such Debtor, in the name of the
Secured Party or otherwise and in the place and stead of such Debtor, from time
to time in Secured Party's discretion, to do any and all things required to be
done to carry out the terms and accomplish the


                                       8
<PAGE>   9
purposes of this Security Agreement as fully and effectually as such Debtor
could do, including, but not limited to, (x) the powers set forth above in
clauses (a) through (c), inclusive, of this Section 4 and (y) the power to sign
such Debtor's name to and to file any financing or continuation statements under
the Code with respect to the Collateral. The foregoing power of attorney is
coupled with an interest, shall be irrevocable until all of the Obligations are
indefeasibly paid and performed in full, and shall survive the winding-up,
dissolution, liquidation or other termination of existence of such Debtor. The
powers conferred upon Secured Party and its officers hereunder are solely to
protect its interests and shall not impose any duty upon it to exercise any
liability with respect thereto.

         5.       DEBTORS' FAILURE TO PERFORM. If any Debtor fails to perform
any covenant or agreement contained herein, Secured Party may, upon notice to
such Debtor, perform or cause performance of such covenant or agreement, but
shall be under no obligation to do so, and the reasonable expenses incurred by
Secured Party, by Debtors, on demand, together with interest thereon at the
Default Rate until full paid, and shall be deemed to be part of the Obligations
until so paid.

         6.       REMEDIES OF SECURED PARTY. Upon and following the occurrence
of an Event of Default which is continuing, Secured Party shall have the
following rights and remedies (to the extent permitted by applicable Law), in
addition to all rights and remedies of a secured party after default under the
Code, or in any evidence of indebtedness or agreement, whether existing on the
date hereof or hereafter entered into, between such Debtor and Secured Party,
Secured Party may at any time and from time to time, with or without judicial
process or the aid and assistance of others, enter upon any premises in which
any Collateral may be located and without resistance or interference by Debtors
take possession of the Collateral, and/or dispose of any Collateral on any such
premises, and/or require Debtors to assemble and make available to Secured Party
at the expense of Debtors any Collateral at any place and time designated by
Secured Party which is reasonably convenient to all parties, and/or remove any
Collateral from any such premises for the purpose of effecting sales or other
disposition thereof in accordance with the terms of this Agreement, and/or sell,
resell, lease, assign and deliver, grant options for or otherwise dispose of any
Collateral in its then condition or following any commercially reasonable
preparation or processing, at public or private sale or proceedings or otherwise
by one or more contracts, in one or more parcels, at the same or different
times, with or without having the Collateral at the place of sale or other
disposition, for cash and/or credit and upon any terms, at such place(s) and
time(s) and to such person(s), and with respect to each of the foregoing, in a
commercially reasonable manner as Secured Party deems best, all without demand,
notice or advertisement whatsoever, except where an applicable statute requires
commercially reasonable notice of sale or other disposition. Except where an
applicable statute requires a longer notification period, Debtors hereby agree
that the sending of five days' notice to the address of Debtors set forth in
this Security Agreement shall be deemed commercially reasonable notice thereof.
If any Collateral is sold by Secured Party upon credit or for future delivery,
Secured Party shall not be liable for the failure of the purchaser to pay for
same and in such event Secured


                                       9
<PAGE>   10
Party may resell such Collateral. Secured Party may buy and Collateral at any
public sale, and if Collateral is of a type customarily sold in a recognized
market or is of a type which is the subject of widely distributed standard price
quotations, Secured Party may buy any Collateral at a private sale, and in each
case may make payment therefor by any means. Secured Party may apply the cash
proceeds actually received from any sale or other disposition of the Collateral
hereunder to the reasonable expenses of taking, holding, preparing for sale,
selling, leasing and the like; to reasonable attorneys' fees and all reasonable
legal, travel and other expenses which may be incurred by Secured Party in
attempting to enforce this Security Agreement; or in the prosecution or defense
of any action or proceeding related to the subject matter of this Security
Agreement; and then to the Obligations in such order and as to principal or
interest as Secured Party may desire. The Debtor shall remain liable for and
will pay Secured Party, on demand, any deficiency remaining, together with
interest thereon (which shall accrue at the Default Rate) and the balance of any
expenses unpaid, with any surplus to be paid to the Person entitled by law to
receive the same.

         7.       ELECTION OF REMEDIES; WAIVER. Secured Party's prior recourse
to any Collateral shall not constitute a condition of any demand, suit or
proceeding for payment or collection under the Obligations. No single or partial
waiver by Secured Party of any right, power or remedy which Secured Party may
have, shall operate as a waiver of any other right, power or remedy or of the
same right, power or remedy on a future occasion.

         8.       NO IMPAIRMENT OF OBLIGATIONS BY CERTAIN ACTIONS. Without the
necessity of any reservation of rights against Debtors, and without notice to or
further assent by any or all of the Debtors, the taking of any action referred
to in section 8(a) through (d) below shall not release or otherwise impair the
Obligations or the obligations of any or all of the Debtors hereunder:

                  (a) any demand for payment of any of the Obligations made by
Secured Party may be rescinded by Secured Party and any of the Obligations
continued;

                  (b) the Obligations, or the liability of any or all of the
Debtors or any other party upon of for any part thereof, or any collateral
security therefor held other than pursuant to this Security Agreement, or any
guaranty thereof, or right of offset with respect thereto, may, from time to
time, in whole or in part, be renewed, extended, amended, modified, compromised,
waived, surrendered or released by Secured Party;

                  (c) the Purchase Documents, or any of them, and any other
collateral security documents or guaranties or documents in connection therewith
may be amended, modified, supplemented or terminated, in whole or in part, by
Secured Party from time to time in accordance with their respective terms; and

                  (d) upon and following the occurrence of an Event of Default
which is continuing, any Collateral at any time held by Secured Party for the
payment of



                                       10
<PAGE>   11
the Obligations may be sold, exchanged, waived, surrendered or released in
accordance with the terms hereof.

                  Secured Party shall have no obligation to protect, secure,
perfect or insure any Document, Instrument or Chattel Paper included in the
Collateral or any tangible property subject thereto at any time held as security
for the Obligations, other than the obligation to use reasonable care in the
custody of Collateral in its possession, but in respect of an Instrument or
Chattel Paper, Secured Party shall have no obligation to take any steps to
preserve rights against prior parties and no liability for failure to meet an
obligation imposed by Section 9-207(2) of the Code. Debtors hereby, jointly and
severally, waive any and all notice of the creation, renewal, extension or
accrual of any of the Obligations and notice of or proof of reliance by any
Debtor upon this Security Agreement. The Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred in reliance
upon this Security Agreement. All dealings between Debtors or any of them
(whether direct or indirect), and Secured Party, shall likewise be conclusively
presumed to have been had or consummated in reliance upon this Security
Agreement. Debtors hereby, jointly and severally, waive diligence, presentment,
protest, demand for payment and notice of default or nonpayment to or upon any
of them (whether direct or indirect) with respect to the Obligations or any of
the Collateral, or to or upon any other Person who is or may be obligated on or
with respect to the Obligations or any of the Collateral, with respect to the
same, except as otherwise specifically provided in the Purchase Documents.

         9.       AMENDMENT. No amendment, modification or waiver of any
provision of this Security Agreement, nor consent to any departure by Debtors,
or any of them herefrom shall in any event be effective unless the same shall be
in writing and signed by Secured Party and then such amendment, waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.

         10.      POSSESSORY LIEN. As additional security for the payment and
performance of the Obligations, each Debtor hereby pledges to Secured Party, and
grants to Secured Party, a continuing security interest in, Lien upon and right
of setoff against, all right, title and interest of Debtor in an to all property
(including cash and securities) and the proceeds thereof, which shall come into
Secured Party's possession, custody or control for any purpose or which shall be
in transit to Secured Party to or for the account of such Debtor, including,
without limitation, for safekeeping, custody, pledge, transmission, collection
or otherwise, and in and to credits of such Debtor with Secured Party, and any
and all other claims, rights and demands of Debtor against Secured Party, now or
at any time hereafter existing. Upon the occurrence of an Event of Default which
is continuing, and at any time and from time to time thereafter so long as the
Event of Default is continuing, Secured Party is hereby expressly authorized,
without notice to Debtor, to setoff, appropriate and apply any and all of the
items described above to payment of all or any of the obligations, in such order
as Secured Party in its sole discretion shall determine.


                                       11
<PAGE>   12
         11.      NOTICES. All notices and other communications given to or made
upon any party hereto in connection with this Security Agreement shall, except
as otherwise expressly herein provided, be in writing (including facsimile
transmission) and mailed, telecopied, sent overnight courier providing next
business day delivery service, or personally delivered to the respective parties
as follows:

                                    if to all or any of the Debtors, to:

                                    c/o Ecogen Inc.
                                    2005 Cabot Boulevard West
                                    Langhorne, Pennsylvania  19047
                                    Attention:  Chief Financial Officer
                                    Telecopier:  (215) 757-2956

                                    if to Secured Party, to:

                                    United Equities (Commodities) Company
                                    160 Broadway
                                    New York, New York  10038
                                    Attention:  Mr. Moses Marx
                                    Telecopier:  (212) 227-3208

                                    with a copy to:

                                    Tenzer Greenblatt LLP
                                    405 Lexington Avenue
                                    New York, New York  10174
                                    Attention:  Harold L. Schneider, Esq.
                                    Telecopier:  (212) 885-5001

or in accordance with any subsequent written direction from the recipient party
to the sending party. All such notices and other communications shall, except as
otherwise expressly herein provided, be effective upon delivery if delivered by
hand, two days after deposit in the mail, postage prepaid, in the case of mail,
and in the case of telecopy, when received, or in the case of an overnight
courier, on the next business day.

         12.      GOVERNING LAW. THIS SECURITY AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF DEBTOR AND THE SECURED PARTY HEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO THE CHOICE OF LAWS PRINCIPLES THEREOF, EXCEPT
WHERE THE NATURE OR LOCATION OF COLLATERAL REQUIRES THE APPLICATION OF THE LAWS
OF ANY OTHER JURISDICTION, IN WHICH CASE,


                                       12
<PAGE>   13
THE LAWS OF SUCH OTHER JURISDICTION SHALL GOVERN TO THE EXTENT APPLICABLE.

         13.      SEVERABILITY. If any provision hereof or if any of the written
instruments evidencing part or all of the Obligations is invalid or
unenforceable in any jurisdiction, the other provisions hereof or of such
written instruments shall remain in full force and effect in such jurisdiction
and the remaining provisions hereof shall be liberally construed in favor of
Secured Party in order to carry out the provisions hereof. The invalidity or
unenforceability of any provision of this Security Agreement in any jurisdiction
shall not affect the validity or enforceability of any such provision in any
other jurisdiction.

         14.      REMEDIES CUMULATIVE. Each and every right, power and remedy
herein given to Secured Party hereunder or by law shall be cumulative and not
exclusive, and each and every right, power and remedy whether specifically
herein given or otherwise existing may be exercised or enforced from time to
time and as often and in such order as may be deemed expedient by Secured party,
and the exercise or the beginning of the exercise of any such right, power or
remedy shall not be deemed a waiver of the right to exercise, at the time or
thereafter, any other right, power or remedy shall impair any such right, power
or remedy then or thereafter existing.

         15.      CAPTIONS. The headings of the Sections of this Security
Agreement have been inserted solely for convenience of reference and shall not
modify, define or limit the express provisions of this Security Agreement.

         16.      CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.

                  (a) DEBTORS, JOINTLY AND SEVERALLY, AGREE THAT ANY LEGAL
ACTION OR PROCEEDING AGAINST ANY DEBTOR WITH RESPECT TO THIUS SECURITY AGREEMENT
MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK (NEW YORK COUNTY), OR THE
FEDERAL COURTS FOR THE SOUTHERN DISTRICT OF NEW YORK, AS SECURED PARTY MAY ELECT
IN ITS SOLE DISCRETION, AND, BY EXECUTION AND DELIVERY OF THIS SECURITY
AGREEMENT, EACH DEBTOR HEREBY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF SUCH COURTS.
DEBTORS, JOINTLY AND SEVERALLY, WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS
UPON IT, AND IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OUT OF ANY OF SUCH
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
EXPRESS, REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH DEBTOR AT ITS
ADDRESS FOR NOTICES AS SPECIFIED HEREIN, SUCH SERVICE TO BECOME EFFECTIVE FIVE
BUSINESS DAYS AFTER SUCH MAILING. EACH DEBTOR WAIVES, AT THE OPTION OF SECURED
PARTY, ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO


                                       13
<PAGE>   14
VENUE OF ANY ACTION OR PROCEEDING INSTITUTED UNDER THIS SECURITY AGREEMENT AND
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE REMEDY AS IS DEEMED
APPROPRIATE BY THE COURT. NOTHING HEREIN SHALL AFFECT THE RIGHT OF SECURED PARTY
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR THE RIGHT OF SECURED
PARTY TO BRING LEGAL ACTION OR PROCEEDING IN ANY OTHER COMPETENT JURISDICTION.
DEBTORS, JOINTLY AND SEVERALLY, AGREE THAT ANY ACTION COMMENCED BY DEBTORS (OR
ANY OF THEM) ASSERTING ANY CLAIM OR COUNTERCLAIM ARISING UNDER OR IN CONNECTION
WITH THIS SECURITY AGREEMENT OR ANY OTHER PURCHASE DOCUMENT SHALL BE BROUGHT IN
THE COURTS OF THE STATE OF NEW YORK (NEW YORK COUNTY), OR IN THE FEDERAL COURTS
FOR THE SOUTHERN DISTRICT OF NEW YORK AND THAT SUCH COURTS SHALL HAVE EXCLUSIVE
JURISDICTION WITH RESPECT TO ANY SUCH ACTION.

                  (b) DEBTORS AND SECURED PARTY, BY ITS ACCEPTANCE HEREOF,
HEREBY WAIVE TRIAL BY JURY IN CONNECTION WITH ANY ACTION OR PROCEEDING OF ANY
NATURE WHATSOEVER ARISING UNDER, OUT OF OR IN CONNECTION WITH THIS SECURITY
AGREEMENT AND IN CONNECTION WITH ANY CLAIM, COUNTERCLAIM, OFFSET OR DEFENSE
ARISING IN CONNECTION WITH SUCH ACTION OR PROCEEDING, WHETHER ARISING UNDER
STATUTE (INCLUDING ANY FEDERAL OR STATE CONSTITUTION) OR UNDER THE LAW OF
CONTRACT, TORT OR OTHERWISE AND INCLUDING, WITHOUT LIMITATION, ANY CHALLENGE TO
THE LEGALITY, VALIDITY, BINDING EFFECT OR ENFORCEABILITY OF THIS PROVISION OR
THIS SECURITY AGREEMENT.


                  (c) DEBTORS HEREBY, JOINTLY AND SEVERALLY, CONSENT AND AGREE
THAT ANY JUDGMENT ENTERED AGAINST ANY OF THEM IN ANY SUCH ACTION OR PROCEEDING
COMMENCED AGAINST ANY OF THEM (A "NY JUDGMENT") IN ANY SUCH COURT OF THE STATE
OF NEW YORK OR OF THE UNITED STATES OF AMERICA (A "NY COURT") MAY BE ENTERED,
FILED, RECORDED OR DOCKETED IN ANY COURT WHERE THE PRINCIPAL OFFICE OF SUCH
DEBTOR IS LOCATED ("STATE COURT") WITH THE SAME FORCE AND EFFECT AS IF THE NY
JUDGMENT WAS A FINAL JUDGMENT AGAINST DEBTORS OF THE PENNSYLVANIA COURT (A
"RECORDED FOREIGN JUDGMENT") AND, FOR SUCH PURPOSE, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, EACH DEBTOR ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE STATE COURT. EACH DEBTOR
HEREBY IRREVOCABLY (A) WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT
(INCLUDING THE SERVICE OF POST-JUDGMENT SUBPOENAS, INTERROGATORIES, NOTICES OF
DEPOSITION OR ANY OTHER POST-JUDGMENT ORDER OR NOTICE) IN


                                       14
<PAGE>   15
CONNECTION WITH ANY ACTION OR PROCEEDING TO ENFORCE OR COLLECT THE NY JUDGMENT
AND/OR THE RECORDED FOREIGN JUDGMENT, AND (B) CONSENTS TO THE SERVICE OF
PROCESS, INCLUDING, WITHOUT LIMITATION, ANY SUCH POST-JUDGMENT SUBPOENAS,
INTERROGATORIES, NOTICES AND ORDERS, OUT OF THE NY COURT OR THE STATE COURT IN
ANY ACTION OR PROCEEDING TO ENFORCE OR COLLECT A NY JUDGMENT OR A RECORDED
FOREIGN JUDGMENT, BY THE MAILING OF COPIES THEREOF BY EXPRESS, REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO DEBTORS AT THEIR ADDRESS FOR NOTICES AS
SPECIFIED IN THIS SECURITY AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE FIVE
BUSINESS DAYS AFTER SUCH MAILING. EACH DEBTOR HEREBY WAIVES, AT THE OPTION OF
SECURED PARTY, ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO
VENUE OF ANY ACTION OR PROCEEDING INSTITUTED TO ENFORCE OR COLLECT A NY JUDGMENT
OR ANY RECORDED FOREIGN JUDGMENT, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE REMEDY AS IS DEEMED APPROPRIATE BY THE STATE COURT. EACH DEBTOR HEREBY
IRREVOCABLY WAIVES THE RIGHT TO CONTEST THE SUFFICIENCY OF ANY SUCH SERVICE AND
FURTHER AGREES THAT ANY SUCH SUPPLEMENTARY PROCEEDINGS OR POST-JUDGMENT
DEPOSITIONS MAY BE CONDUCTED AT THE OFFICE OF THE SECURED PARTY'S ATTORNEYS IN
NEW YORK CITY OR ELSEWHERE. AS SECURED PARTY MAY ELECT IN ITS SOLE DISCRETION.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF SECURED PARTY TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR THE RIGHT OF SECURED PARTY TO BRING JUDGMENT
ENFORCEMENT OR COLLECTION ACTIONS OR PROCEEDINGS IN ANY OTHER COMPETENT
JURISDICTION. DEBTORS HEREBY, JOINTLY AND SEVERALLY, IRREVOCABLY WAIVE ANY RIGHT
(X) TO INTERPOSE ANY DEFENSE, COUNTERCLAIM, SETOFF OR RECOUPMENT CLAIM AGAINST
SECURED PARTY IN ANY ACTION OR PROCEEDING TO ENTER, FILE, RECORD OR DOCKET THE
NY JUDGMENT IN THE STATE COURT OR TO ENFORCE OR COLLECT THE RECORDED FOREIGN
JUDGMENT AND/OR (Y) TO CHALLENGE, APPEAL, MOVE TO VACATE OR MOVE TO REOPEN ANY
NY JUDGMENT OR ANY RECORDED FOREIGN JUDGMENT.

         17.      DEFEASANCE. At such time as all Obligations have been
indefeasibly paid in full, the Collateral shall be released from the Lien
created hereby, all without delivery of any instrument or performance of any act
by any party, and all rights to the Collateral shall revert to the Debtors or to
such other person or persons as by law shall be entitled thereto. At the request
of the Debtors following any such termination, Secured Party shall, at the sole
cost and expense of Debtors, promptly assign, transfer and deliver to the
respective Debtors any Collateral held by Secured Party and execute and deliver
to such Debtor such documents as such Debtor shall reasonably request to
evidence such termination, unless another person or persons shall be legally
entitled thereto, in which


                                       15
<PAGE>   16
case such Collateral or documents shall be delivered to the person or persons so
entitled thereto or as a court of competent jurisdiction shall direct.




                  IN WITNESS WHEREOF, Debtor have caused this Security Agreement
to be executed and delivered on its behalf on the date first written above.

                                   Debtors:


                                   ECOGEN INC.

                                   By:        /s/ James P. Reilly, Jr.
                                      ------------------------------------------
                                   Name:  James P. Reilly, Jr.
                                        ----------------------------------------
                                   Title:     Chairman & Chief Executive Officer
                                         ---------------------------------------


                                   ECOGEN INVESTMENTS, INC.

                                   By:        /s/ Mary E. Paetzold
                                      ------------------------------------------
                                   Name:  Mary E. Paetzold
                                        ----------------------------------------
                                   Title:     Vice President & Chief
                                              Financial Officer
                                         ---------------------------------------

                                   ECOGEN-BIO, INC.

                                   By:        /s/ Mary E. Paetzold
                                      ------------------------------------------
                                   Name:  Mary E. Paetzold
                                        ----------------------------------------
                                   Title:     Vice President & Chief
                                              Financial Officer
                                         ---------------------------------------

<PAGE>   1
                                   EXHIBIT 21

                              LIST OF SUBSIDIARIES*



<TABLE>
<CAPTION>
                                                STATE OR OTHER JURISDICTION OF
NAME OF SUBSIDIARY                               INCORPORATION OR ORGANIZATION

<S>                                             <C> 
Ecogen-Bio Inc.                                             Delaware

Ecogen Investments Inc.                                     Delaware

Ecogen-Jerusalem Inc.                                       Delaware

Ecogen-Israel Inc.                                          Delaware

Ecogen Technologies I Incorporated                          Delaware

Ecogen-Bio Germany GmbH                                     Germany

Ecogen Biotechnologies Israel Ltd.                          Israel

Ecogen Israel International Inc.                            Delaware
</TABLE>



* All of the subsidiaries listed above are wholly-owned subsidiaries with the
exception of Ecogen Technologies I Incorporated of which Ecogen Inc. owns
approximately 70% of the outstanding common stock.


                                       30

<PAGE>   1
                                   EXHIBIT 24

                          INDEPENDENT AUDITORS' CONSENT



The Board of Directors

Ecogen Inc.:


We consent to the incorporation by reference in the registration statement (No.
33-23767) on Form S-8/S-3, registration statements (No. 33-39687, No. 33-50478
and No. 33-70538) on Form S-8, and registration statements (No. 33-87510, No.
33-45975, No. 33-48020 and No. 33-71854) on Form S-3, of Ecogen Inc. of our
report dated December 15, 1997, except as to the last paragraph of note 8,
which is as of January 30, 1998, relating to the consolidated balance sheets of
Ecogen Inc. and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows and
related schedule for each of the years in the three-year period ended October
31, 1997, which report appears in the October 31, 1997 annual report on Form 10K
of Ecogen Inc.


                                                           KPMG Peat Marwick LLP


Short Hills, New Jersey
February 13, 1998




                                       31

<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          OCT-31-1997
<PERIOD-START>                             NOV-01-1996
<PERIOD-END>                               OCT-31-1997
<CASH>                                       1,824,603
<SECURITIES>                                   549,342
<RECEIVABLES>                                1,847,283
<ALLOWANCES>                                    77,769
<INVENTORY>                                  8,356,767
<CURRENT-ASSETS>                            13,071,453
<PP&E>                                       9,246,366
<DEPRECIATION>                               5,596,787
<TOTAL-ASSETS>                              17,558,052
<CURRENT-LIABILITIES>                        6,001,420
<BONDS>                                      3,916,432
                                0
                                          0
<COMMON>                                        81,186
<OTHER-SE>                                   4,788,465
<TOTAL-LIABILITY-AND-EQUITY>                17,558,052
<SALES>                                      8,783,461
<TOTAL-REVENUES>                            11,811,088
<CGS>                                        6,291,912
<TOTAL-COSTS>                               79,995,288
<OTHER-EXPENSES>                             1,625,892
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                            (9,810,092)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                        (9,810,092)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                            (9,810,092)
<CHANGES>                                            0
<NET-INCOME>                               (9,810,092)
<EPS-PRIMARY>                                  ($1.23)
<EPS-DILUTED>                                  ($1.23)
        

</TABLE>


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