ERGO SCIENCE CORP /DE/ - 10-K Annual Report

Back to GetFilings.com

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

----------

FORM 10-K

(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

-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 NO. 0-26988

----------

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

DELAWARE 04-3565746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
790 TURNPIKE STREET
NORTH ANDOVER, MASSACHUSETTS 01845
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (978) 689-0333

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

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

COMMON STOCK, $.01 PAR VALUE
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No/ /

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes / / No /X/

The aggregate market value of our common stock held by non-affiliates
(without admitting that any person whose shares are not included in such
calculation is an affiliate), based on closing sale price as reported on the
NASD's OTC Bulletin Board as of June 28, 2002, was approximately $10,129,358. As
of February 27, 2003, there were 7,149,578 outstanding shares of the
registrant's common stock.

PART I

ITEM 1. BUSINESS

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS OF THE COMPANY WHICH
INVOLVE RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS. THE REGISTRANT'S ACTUAL
RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED,
ESTIMATED OR OTHERWISE INDICATED. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, WITHOUT LIMITATION, THE FACTORS SET FORTH
BELOW IN "RISK FACTORS."

IN CONNECTION WITH THE IMPLEMENTATION OF TRANSFER RESTRICTIONS ON OUR
SHARES OF COMMON STOCK THAT BECAME EFFECTIVE ON OCTOBER 19, 2001, THE
OUTSTANDING SHARES OF OUR COMMON STOCK WERE REVERSE SPLIT ON A ONE-FOR-TWO
BASIS. UNLESS OTHERWISE INDICATED, ALL OF THE SHARE AND PER SHARE DATA IN THIS
REPORT REFLECT THE EFFECT OF THIS REVERSE STOCK SPLIT.

OVERVIEW

Ergo Science is a company in transition. From our incorporation through
March 2001, we were engaged in the development of ERGOSET(R) tablets for the
treatment of type 2 diabetes. We are now working to sell our drug assets and to
pursue other strategic alternatives.

In March 2001, we decided that the next phase of the development of
ERGOSET(R) would be better undertaken by a company that has more experience
with human drug development and more resources for regulatory approval and
marketing than we do. We have substantial unrecognized tax benefits and
approximately $25 million in cash and cash equivalents. We are currently
evaluating strategic alternatives for these assets. We are also in the
process of attempting to sell or license our interests in ERGOSET(R)
including our intellectual property rights and other human drug related
assets. If we enter into an agreement to dispose of any of our human
drug-related assets, we will seek stockholder approval for that transaction
only if it is required by Delaware or other applicable law or our board of
directors determines it is advisable to seek such approval.

At our Annual Meeting of Stockholders held on October 15, 2001,
stockholders approved the imposition of transfer restrictions on our common
stock. These transfer restrictions were implemented on October 19, 2001. At
that annual meeting, stockholders also approved an arrangement by which we
may issue and sell up to 3,750,000 shares of our common stock to Court Square
Capital Limited, our largest stockholder, at a per share price of $2.30.
Unless extended, the agreement with Court Square Capital Limited expires in
May 2003. During our transition period, we intend to continue to conserve our
cash and other assets.

The Investment Company Act of 1940 ("40 Act") requires registration as an
investment company for companies that are engaged primarily in the business of
investing, reinvesting, owning, holding or trading securities. Unless an
exclusion applies, a company is an investment company if it owns "investment
securities" with a value exceeding 40% of the value of its total assets on an
unconsolidated basis, excluding government securities and cash items. We have
relied on different exclusions available under the Act to avoid being regulated
as an investment company. However, since the third quarter of 2001, the only
securities we have held are U.S. Government obligations with original maturities
of 90 days or less. Since these are not "investment securities" within the
meaning of the Act, we do not meet the general definition of an investment
company. The board of directors may also evaluate the possibility of registering
as a 40 Act Company.

2

HUMAN RESOURCES

As of February 27, 2003, we had two part-time employees. Neither of our
employees is covered by a collective bargaining agreement.

RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND
ALL OTHER SEC REPORTS OF THE COMPANY, YOU SHOULD CONSIDER THE FOLLOWING FACTORS
IN EVALUATING THE COMPANY, ITS BUSINESS AND THE STRATEGIC DIRECTION THE COMPANY
MAY HEAD IN THE FUTURE.

WE HAVE RELIED ON AN EXCLUSION FROM THE DEFINITION OF "INVESTMENT COMPANY" THAT
MAY NOT HAVE BEEN AVAILABLE TO US. WE COULD THEREFORE POSSIBLY BE SUBJECT TO
ENFORCEMENT ACTION BY THE SEC AND COULD BE REQUIRED TO REGISTER AS AN INVESTMENT
COMPANY WITH SIGNIFICANT RESTRICTIONS ON OUR BUSINESS.

The Investment Company Act of 1940 requires registration as an investment
company for companies that are engaged primarily in the business of investing,
reinvesting, owning, holding or trading securities. Unless an exclusion applies,
a company is an investment company if it owns "investment securities" with a
value exceeding 40% of the value of its total assets on an unconsolidated basis,
excluding government securities and cash items. We currently are not an
investment company under this test because none of our assets are such
investment securities.

However, from the time of our initial public offering through March 2001,
we relied on an exclusion available to companies that are engaged primarily in a
business other than investing. The SEC has established specific criteria by
which companies that are primarily engaged in research and development, not
investing, qualify for this exclusion. When we sold our pre-clinical research
assets in the second quarter of 1999 and moved to conserve our assets for the
development of ERGOSET through the FDA process, it raised a regulatory issue as
to whether we might need to register as an investment company. There is a risk
that the SEC could take the position that we did not meet the requirements for
this exclusion from the second quarter of 1999 through March 2001. The
Investment Company Act also provides a one-year temporary exclusion for
companies that are in transition and which have a bona fide intent to be engaged
primarily in a business other than investing in securities as soon as possible,
but in any event within one year. We relied on this temporary exclusion since we
decided to sell our human drug-related assets in March 2001 through the third
quarter of 2001. There is a risk that the SEC may take the position that we are
not entitled to rely on this temporary exclusion. In the event that we were not
entitled to rely on the exclusion prior to March 2001 or we were not entitled to
rely on the temporary exclusion beginning in March 2001, our failure to register
as an investment company not only raises the possibility of an enforcement
action by the SEC, but also threatens the validity of corporate actions and
contracts entered into by us during the period of violations. Since the third
quarter of 2001, the only securities we have held are U.S. government
obligations with maturities of 90 days or less, which provides a separate
exclusion under the 40 Act.

If we are determined to have been an unregistered investment company when
we entered into the purchase agreement with Court Square, that agreement may not
be enforceable by us against Court Square. If we are or become an unregistered
investment company, we may be limited in our ability to issue any securities,
whether to Court Square under the purchase agreement, or pursuant to the 2001
Employee, Director and Consultant Stock Plan.

3

WE ARE A COMPANY IN TRANSITION.

We may not successfully make the transition from developing human drug
products to pursuing other strategic alternatives. Over the past few years, we
have terminated nearly all of our employees, including nearly all of our key
employees. We may not have adequate capital, human or other resources to pursue
other strategic alternatives. Capital, human and other resources may not be
available from other sources and, even if available, may not be available on
terms that are acceptable to us. Until we decide on a strategic direction to
pursue, we cannot predict the nature or intensity of the competition that we
will face.

OUR COMMON STOCK IS SUBJECT TO RULES RELATING TO LOW-PRICED OR PENNY STOCK WHICH
MAY MAKE IT MORE DIFFICULT FOR YOU TO BUY OR SELL SHARES AND FOR US TO ENTER
INTO FUTURE EQUITY FINANCINGS.

Our common stock was delisted from the Nasdaq Stock Market effective with
the open of business on May 24, 2001. Our common stock currently is quoted on
the NASD's OTC Bulletin Board and may be adversely affected by an SEC rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
which are generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our common stock and also may affect the ability of holders of our common
stock to resell their shares of common stock. In addition, the continued
delisting of our common stock may make our stock less attractive to third
parties, which could adversely affect our ability to enter into future equity
financing transactions.

THE TRANSFER RESTRICTIONS IMPLEMENTED IN THE MERGER MAY DELAY OR PREVENT
TAKEOVER BIDS BY THIRD PARTIES AND MAY DELAY OR FRUSTRATE ANY ATTEMPT BY
STOCKHOLDERS TO REPLACE OR REMOVE THE CURRENT MANAGEMENT.

The new shares of common stock issued by the Company in the merger are
subject to the transfer restrictions described in the proxy statement/prospectus
filed by the Company. These transfer restrictions will require any person
attempting to acquire a significant interest in the Company to negotiate with
the Company's board of directors. The transfer restrictions also may make it
more difficult to effect a merger or similar transaction perceived by
stockholders to be favorable to the Company by requiring any person seeking to
enter into such a transaction with the Company to negotiate with our Board of
Directors. Finally, the transfer restrictions may make it more difficult for
stockholders to replace current management because no single stockholder may
cast votes for more than 5% of the Company's outstanding shares of common stock,
unless that stockholder held more than 5% of our common stock before the merger.

IF THE TRANSFER RESTRICTIONS ARE NOT EFFECTIVE IN PREVENTING AN OWNERSHIP
CHANGE FROM OCCURRING, OUR ABILITY TO USE THE TAX NET OPERATING LOSS ("NOL")
CARRYFORWARDS WILL BE SEVERELY LIMITED.

Although the transfer restrictions are expressly permitted under Delaware
law, we are not aware of any published court decisions enforcing similar
transfer restrictions. Even if a court did enforce our transfer restrictions in
the case of such a transfer, the Internal Revenue Service might not agree that
the transfer restrictions provide a sufficient remedy with respect to any
ownership change resulting from the prohibited transfer. In either of these
cases, despite the implementation of the transfer restrictions, an ownership
change could occur that would severely limit merger sub's ability to use the tax
benefits associated with our NOL carryforwards.

4

WE MAY NOT BE ABLE TO REALIZE THE BENEFITS OF OUR NOL CARRYFORWARDS.

Our ability to use our potential tax benefits in future years will depend
upon the amount of our otherwise taxable income. If we do not have sufficient
taxable income in future years to use the tax benefits before they expire, we
will lose the benefit of those NOL carryforwards permanently.

In addition, the amount of NOL carryforwards that we have claimed has not
been audited or otherwise validated by the U.S. Internal Revenue Service. The
IRS could challenge our calculation of the amount of our NOLs or our
determinations as to when a prior change in ownership occurred and other
provisions of the Internal Revenue Code may limit our ability to carry forward
our NOLs to offset taxable income in future years. If the IRS were successful
with respect to any such challenge, the potential tax benefit of the NOL
carryforwards to us could be substantially reduced.

BECAUSE OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED, CERTAIN STOCKHOLDERS CAN
EXERT SIGNIFICANT INFLUENCE OVER STOCKHOLDERS' DECISIONS.

As of December 31, 2002, we believe that our largest stockholder, Court
Square, beneficially owned and had the right to vote approximately 22.9% of our
outstanding shares of common stock. If the maximum number of shares of common
stock are issued to Court Square under the purchase agreement, Court Square will
beneficially own and have the right to vote approximately 49.5% of our
outstanding shares. Accordingly, Court Square will have a significant influence
on the outcome of stockholder votes, including votes concerning, among other
things, the election of directors; the adoption or amendment of provisions in
our Certificate of Incorporation; and the approval of other significant
corporate transactions, including mergers, and reorganizations. This level of
concentrated ownership by a single entity may have the effect of delaying or
preventing a change in the management or voting control of the Company.

ANTI-TAKEOVER PROVISIONS COULD IMPAIR THE MARKET PRICE OF ERGO COMMON STOCK.

We have adopted certain anti-takeover measures. Our Certificate of
Incorporation:

- provides for staggered terms of office for directors;

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

- prohibits stockholders from calling special meetings of
stockholders; and

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

These provisions, alone or in combination with each other and with the matters
described in "Risk Factors--Concentrated Ownership of our Common Stock Results
in Significant Influence Over Stockholders' Decisions," may discourage
transactions involving actual or potential changes of control. Such transactions
may include those that otherwise could involve payment of a premium over
prevailing market prices to holders of our common stock. Except with respect to
Court Square, we also are subject to provisions of the Delaware General
Corporation Law that may make some business combinations more difficult. We have
taken steps to help preserve our net operating loss carryforwards and reduce,
but not eliminate, the risk of the occurrence of an ownership change. These
steps under consideration may have the incidental effect of impeding the attempt
of a person or entity from acquiring a significant or controlling interest in
the Company, render it difficult to effect a merger or similar transaction even
if the transaction is favored by a majority of independent stockholders, and
entrenching management.

5

FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS

This Annual Report on Form 10-K contains forward-looking statements with
respect to our financial condition, results of operations and business. You can
find many of these statements by looking for such words as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may" or similar expressions. These statements reflect our current views with
respect to future events and financial performance and involve numerous
assumptions, risks and uncertainties, including without limitation, the risks
described in "Risk Factors." Because these forward-looking statements are based
upon assumptions and are subject to risks and uncertainties, actual results may
vary materially and adversely from those anticipated, believed, estimated,
assumed or otherwise indicated. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
us.

ITEM 2. PROPERTIES

FACILITIES

The Company currently leases approximately 600 square feet of shared office
space as our principal office in Jefferson Office Park, North Andover,
Massachusetts. The space is leased on a month to month basis.

ITEM 3. LEGAL PROCEEDINGS

None.

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

Our 2002 Annual Meeting of Stockholders was held on November 15, 2002. The
following matters were voted upon at the annual meeting:

(1) William T. Comfort III and Charles E. Finelli were elected to serve as
Directors to hold office for a term of three years until the 2005 annual meeting
of stockholders and until successors are chosen and qualified. Thomas F.
McWilliams and J. Warren Huff will serve as Directors until the annual meeting
of stockholders in 2003 and David R. Burt will serve as a Director until the
annual meeting of stockholders in 2004.

(2) Our stockholders also ratified the appointment of PricewaterhouseCoopers LLP
as our independent public accountants for the fiscal year ending December 31,
2002. This proposal was approved with 3,400,283 votes for the proposal, 334,737
votes against the proposal, 19,450 abstentions and 0 broker non-votes.

6

PART II

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

Our common stock was quoted on the Nasdaq Stock Market through May 23, 2001
under the symbol "ERGO." Since that date, after a brief transition period during
which our common stock was quoted on the NASD's OTC Bulletin Board under the
symbol "ERGG," our common stock has been quoted on the NASD's OTC Bulletin Board
under the symbol "ERGO." At February 27, 2003, the number of record holders of
our common stock was approximately 252. The following table sets forth, for the
periods indicated, the high and low sale price or bid information for our common
stock as reported on the Nasdaq Stock Market or the NASD's OTC Bulletin Board,
as applicable. Please note that the bid information relating to over-the-counter
market quotations of our common stock reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

DIVIDENDS

We have not paid dividends to our stockholders since our inception. We
currently intend to retain earnings, if any, to finance our growth. The terms of
our series D exchangeable preferred stock prohibit us from paying dividends on
our common stock.

EQUITY COMPENSATION PLAN INFORMATION

The following table furnishes information with respect to compensation
plans under which equity securities of the Company are authorized for issuance
as of December 31, 2002.

7

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

(1) Relates to revenue received from Johnson & Johnson in 1998 in
accordance with the Joint Collaboration and License Agreement.

(2) Includes adjustments to estimates of amounts required to settle
ERGOSET(R) related obligations in 2000, offset by a $2 million charge
as part of the LSU settlement. See Note 9 of Notes to Consolidated
Financial Statements.

(3) Includes a charge in 1998 of $1,042,290 related to an asset write-down
of equipment and leasehold improvements.

(4) Includes a loss on the disposal of equipment in 2001 and 1999 in the
amount of $3,201 and $157,000, respectively.

(5) We have never paid cash dividends on our common stock.

(6) Share amounts reflect the 1 for 2 reverse stock split that occurred on
October 19, 2001.

8

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

THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS REFLECT ERGO'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS. ACTUAL
RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED,
ASSUMED, ESTIMATED OR OTHERWISE INDICATED. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, WITHOUT LIMITATION:

- WE ARE A COMPANY IN TRANSITION;

- OUR COMMON STOCK IS SUBJECT TO RULES RELATING TO LOW-PRICED OR PENNY
STOCK, WHICH MAY MAKE IT MORE DIFFICULT FOR OUR STOCKHOLDERS TO BUY OR
SELL SHARES AND FOR US TO ENTER INTO FUTURE EQUITY FINANCINGS;

- THE TRANSFER RESTRICTIONS IMPLEMENTED IN THE MERGER MAY DELAY OR
PREVENT TAKEOVER BIDS BY THIRD PARTIES AND MAY DELAY OR FRUSTRATE ANY
ATTEMPT BY OUR STOCKHOLDERS TO REPLACE OR REMOVE THE CURRENT
MANAGEMENT; AND

- WE BELIEVE THAT WE HAVE QUALIFIED FOR EXCLUSIONS FROM THE DEFINITION
OF "INVESTMENT COMPANY"' UNDER THE INVESTMENT COMPANY ACT OF 1940 AT
ALL RELEVANT TIMES SINCE OUR INCORPORATION; HOWEVER, IF THE SECURITIES
AND EXCHANGE COMMISSION TAKES A CONTRARY POSITION AND PREVAILS, WE
WOULD BE SUBJECT TO SIGNIFICANT RESTRICTIONS ON OUR BUSINESS AND ON
OUR ABILITY TO PURSUE OTHER STRATEGIC ALTERNATIVES.

OVERVIEW

Ergo Science is a company in transition. From our incorporation through
March 2001, we were engaged in the development of ERGOSET(R) tablets for the
treatment of type 2 diabetes. We are now working to sell our drug assets and to
pursue other strategic alternatives.

In March 2001, we decided that the next phase of the development of
ERGOSET(R) would be better undertaken by a company that has more experience
with human drug development and more resources for regulatory approval and
marketing than we do. We are currently seeking to acquire one or more
established businesses. We have substantial unrecognized tax benefits and
approximately $25 million in cash and cash equivalents. We are currently
evaluating strategic alternatives for these assets. We are also in the
process of attempting to sell or license our interests in ERGOSET(R)
including our intellectual property rights and other human drug related
assets. If we enter into an agreement to dispose of any of our human
drug-related assets, we will seek stockholder approval for that transaction
only if it is required by Delaware or other applicable law or our board of
directors determines it is advisable to seek such approval.

At our Annual Meeting of Stockholders held on October 15, 2001,
stockholders approved the imposition of transfer restrictions on our common
stock. These transfer restrictions were implemented on October 19, 2001. At that
annual meeting, stockholders also approved an arrangement by which we may issue
and sell up to 3,750,000 shares of our common stock to Court Square Capital
Limited, our largest stockholder, at a per share price of $2.30. During our
transition period, we intend to continue to conserve our cash and other assets.
The only securities we currently hold are U. S. government obligations with
maturities of 90 days or less. We expect to continue to hold similar securities
exclusively until we acquire an operating business.

From our inception through 2002, the Company has been unprofitable.

9

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are discussed in Note 1 of our
audited financial statements, which are included in this Form 10-K. We
believe that the most significant judgements involve the establishment of
accruals at each balance sheet date. The Company has recorded an accrued
liability representing an estimated amount for drug development related
expenses. The amount the Company ultimately pays to settle this liability may
differ from the amount accrued and the difference may result in a charge or
credit to income in the future.

The Chief Executive Officer of the Company spends a portion of his time
dealing with FDA related issues and therefore, the Company records a portion of
the CEO's salary as a Research and Development expense in the statement of
operations.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2002

Research and development expenses decreased from $55,454 to $39,278 in 2001
and 2002, respectively. The decrease in costs in 2002 was primarily a result of
less FDA related consulting services incurred by the Company in 2002.

General and administrative expenses decreased from $2,456,332 to
$973,497 in 2001 and 2002, respectively. The decrease was principally due to
reduced legal costs of approximately $1,050,000 and reduced professional fees
of approximately $460,000 incurred in evaluating our strategic alternatives,
in preparing a proxy statement for our annual meeting of stockholders and in
undertaking efforts to implement our strategic plan. In particular, in 2001
we incurred legal costs and professional fees related to our effort to remain
listed on the Nasdaq Stock Market, adoption of a new stock option plan,
negotiating a common stock purchase agreement with Court Square Capital
Limited, attempting to sell or license our interest in ERGOSET(R) and our
other human drug related assets and implementing the stock transfer
restrictions.

Interest and other income decreased from $1,260,964 to $426,493 in 2001 and
2002, respectively. The decrease in interest income is primarily due to a
general reduction of market interest rates and a decrease of cash available for
investment.

Net loss decreased from $1,250,822 to $586,282 in 2001 and 2002,
respectively. The decrease in net loss was mainly due to decreased legal and
other professional fees incurred by us in preparing the Proxy with the SEC, in
evaluating our strategic alternatives and the process of attempting to sell or
license our interest in ERGOSET(R) and our other human drug related assets. Net
loss per common share decreased from $0.18 to $0.08 in 2001 and 2002,
respectively.

YEARS ENDED DECEMBER 31, 2000 AND 2001

Research and development expenses increased from ($163,834) to $55,454 in
2000 and 2001, respectively. The increase in costs in 2001 was primarily a
result of the reversal of accrued ERGOSET(R) related development costs of
$2,230,000 in the third quarter of 2000, which were offset by the effect of the
discontinuation of pre-clinical programs. These development costs were
originally accrued in 1998 and were reversed in 2000 because we no longer
believed we would have to pay them, resulting in a negative charge to research
and development expenses. Also, in the third quarter of 2000, we recorded a $2
million charge to research and development expenses as a result of the
settlement with LSU.

General and administrative expenses increased from $1,748,301 to $2,456,332
in 2000 and 2001, respectively. The increase was principally due to legal costs
and professional fees incurred in evaluating our strategic alternatives, in
preparing a proxy statement for our annual meeting of stockholders and in
undertaking efforts to implement our strategic plan. In particular, in 2001 we
incurred legal costs and

10

professional fees related to our effort to remain listed on the Nasdaq Stock
Market, adoption of a new stock option plan, negotiating a common stock purchase
agreement with Court Square Capital Limited, attempting to sell or license our
interest in ERGOSET(R) and our other human drug related assets and implementing
the stock transfer restrictions.

Interest and other income decreased from $1,920,922 to $1,260,964 in 2000
and 2001, respectively. The decrease in interest income is primarily due to the
decrease of cash available for investment. Interest income also decreased due to
a general reduction in market interest rates.

Net (loss) income decreased from $336,455 to ($1,250,822) in 2000 and 2001,
respectively. The decrease in net income was mainly due to increased legal and
other professional fees incurred by us in preparing the Proxy with the SEC, in
evaluating our strategic alternatives and the process of attempting to sell or
license our interest in ERGOSET(R) and our other human drug related assets. Net
income (loss) per common share decreased from $0.05 to ($0.18) in 2000 and 2001,
respectively.

NET OPERATING LOSS CARRYFORWARDS

At December 31, 2002, we reported federal net operating loss and research
and experimentation carryforwards of approximately $81 million. If not used, the
tax loss carryforwards will begin to expire in 2006. Our ability to use these
carryforwards is subject to limitations resulting from, among other things, an
ownership change as defined in the Internal Revenue Code sections 382 and 383.
See Note 5 of Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

RESOURCES

Since our inception, our primary source of cash has been from financing
activities, which have consisted of private placements of equity securities, two
public offerings, and the sale of common stock in conjunction with the Joint
Collaboration Agreement. Private placements of equity securities provided us
with aggregate proceeds of $42,999,000 through 1998.

On May 23, 2001, we entered into a common stock purchase agreement with
Court Square Capital Limited, the Company's largest stockholder, to provide
us with additional capital for general corporate purposes or to pursue other
strategic alternatives. Subject to certain conditions, including stockholder
approval, the agreement provides for us to issue and sell to Court Square
3,750,000 shares at a per share price of $2.30, subject to adjustment. Unless
extended, the agreement expires on May 23, 2003.

Cash and cash equivalents were $25,808,028 and $24,938,233 at December 31,
2001 and 2002, respectively. The overall decrease in cash and cash equivalents
at December 31, 2002 compared to one year prior was due primarily to general
operating costs of the company.

Our primary source of cash in 2002 was interest income generated by our
investment of cash and cash equivalents. Barring unforeseen circumstances, we
expect interest income to continue to be our primary source of cash until we
decide upon, and implement steps to pursue, a new future strategic direction.
The only securities we currently hold are U.S. government obligations with
maturities of 90 days or less. We expect to continue to hold similar securities
exclusively until we choose our new strategic direction.

We have concentrated our efforts on conserving our cash while we have been
considering our strategic alternatives. However, our use of cash has fluctuated
significantly from quarter to quarter and we anticipate that this pattern may
continue.

11

REQUIREMENTS

Our primary use of cash to date has been in operating activities to fund
research and development, including preclinical studies and clinical trials, and
general and administrative expenses and in evaluating and implementing strategic
alternatives.

As described above, we are in a period of transition and our board of
directors is considering strategic alternatives with a view towards
re-positioning us so as to preserve and enhance shareholder value.

We expect that (in the absence of a strategic change) our available cash
and expected interest income will fund our current operations for the
foreseeable future. Our capital requirements will depend, in part, on our
ability to sell our interests in our human drug related assets and the amount of
proceeds realized by us from any such sale or license.

Depending on the decisions that are made, our capital requirements may
exceed our current resources. In such a case, we would have to seek additional
debt or equity financing from private or public sources. To the extent we raise
additional capital by issuing equity securities, ownership dilution to existing
stockholders will result, and future investors may be granted rights superior to
those of existing stockholders. To the extent that we borrow funds, the lenders
of such funds will have claims to our assets before there can be any
distribution to our stockholders. There can be no assurance, however, that
additional financing, either debt or equity, will be available from any source
or, if available, will be available on terms acceptable to us.

The terms of our series D exchangeable preferred stock prohibit us from
paying dividends on our common stock.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations be accounted for under the purchase method
only and that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS No. 142 requires that ratable
amortization of goodwill be replaced with periodic tests of the goodwill's
impairment and that intangible assets other than goodwill be amortized over
their useful lives. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for
by the purchase method for which the date of acquisition is after June 30,
2001. The provisions of SFAS No. 142 were effective for fiscal years
beginning after December 15, 2001, and thus were adopted by us, as required,
as of January 1, 2002. SFAS No. 141 and SFAS No. 142 did not affect our
financial position or results of operations upon adoption.

In August 2001, FASB issued SFAS 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. We have determined that the adoption of
SFAS 143 will not have an impact on our financial position and results of
operations.

In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires one method of accounting for
long lived assets disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. SFAS 144
did not affect our financial position or results of operations upon adoption.

In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires companies to recognize
costs associated with exit or disposal activities

12

when they are incurred rather than at the date of a commitment to an exit or
disposal plan and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. We have determined that the adoption of SFAS 146 will
not have an impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure - An Amendment of FAS No. 123. SFAS
148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for those companies who voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of FAS 123 to require prominent disclosures in both the annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition and annual disclosure provision of FAS 148 are effective for
fiscal years ending after December 15, 2002. We have not adopted the fair
value method of accounting for stock-based compensation, and will continue to
apply APB 25 for our stock-based compensation plans. We have incorporated the
disclosure requirements of SFAS 148 at December 31, 2002, which requires a
tabular pro forma presentation of net income had FAS 123 been adopted by us,
in the "Summary of Significant Accounting Policies" footnote of the financial
statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB
STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34. FIN
45 elaborates on the disclosures to be made by a guarantor in our interim and
annual financial statements about our obligations under certain guarantees that
it has issued. It requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value for the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statement periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on our consolidated financial
statements. See Note 5, "Commitments and Contingencies," to our consolidated
financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 is not expected to
have a material effect on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are not subject to market risk associated with risk sensitive
institutions as we do not invest in institutions that are not United States
government institutions and do not enter into hedging transactions.

13

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

14

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Ergo Science
Corporation and its subsidiaries (the "Company") at December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 21, 2003

15

ERGO SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS

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

16

ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

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

17

ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

18

ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

19

ERGO SCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

IN CONNECTION WITH THE IMPLEMENTATION OF TRANSFER RESTRICTIONS ON OUR
SHARES OF COMMON STOCK THAT BECAME EFFECTIVE ON OCTOBER 19, 2001, THE
OUTSTANDING SHARES OF OUR COMMON STOCK WERE REVERSE SPLIT ON A ONE-FOR-TWO
BASIS. UNLESS OTHERWISE INDICATED, ALL OF THE SHARE AND PER SHARE DATA IN THIS
REPORT REFLECT THE EFFECT OF THIS REVERSE STOCK SPLIT.

BACKGROUND AND RECENT EVENTS

Ergo Science is a company in transition. From our incorporation through
March 2001, we were engaged in the development of ERGOSET(R) tablets for the
treatment of type 2 diabetes. We are now working to sell our drug assets and to
pursue other strategic alternatives.

In March 2001, we decided that the next phase of the development of
ERGOSET(R) will be better undertaken by a company that has more experience
with human drug development and more resources for regulatory approval and
marketing than we do. We are currently seeking to acquire one or more
established businesses. We have substantial unrecognized tax benefits and
approximately $25 million in cash and cash equivalents. We are currently
evaluating strategic alternatives for these assets. We are also in the
process of attempting to sell or license our interests in ERGOSET(R)
including our intellectual property rights and other human drug related
assets. If we enter into an agreement to dispose of any of our human
drug-related assets, we will seek stockholder approval for that transaction
only if it is required by Delaware, or other applicable law or our board of
directors determines it is advisable to seek such approval.

At our Annual Meeting of Stockholders held on October 15, 2001,
stockholders approved the imposition of transfer restrictions on our common
stock. These transfer restrictions were implemented on October 19, 2001. At
that annual meeting, stockholders also approved an arrangement by which we
may issue and sell up to 3,750,000 shares of our common stock to Court Square
Capital Limited, our largest stockholder, at a per share price of $2.30.
Unless extended, the agreement with Court Square Capital Limited expires in
May 2003. During our transition period, we intend to continue to conserve our
cash and other assets. The only securities we currently hold are U. S.
Government obligations with original maturities of 90 days or less. We expect
to continue to hold similar securities exclusively until we acquire an
operating business. The board of directors may also evaluate the possibility
of registering as a 40 Act company.

ORGANIZATION

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

20

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. The Company
includes in research and development expense costs related to the handling of
matters with the U.S. Food and Drug Administration.

CASH EQUIVALENTS AND INVESTMENTS

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

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

At December 31, 2002 and 2001, the Company's cash equivalents consisted
only of investments in cash money market accounts and U.S. government
obligations that mature within 90 days of purchase.

USE OF ESTIMATES

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

NET LOSS PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings per common share is computed by dividing net income by
the sum of the weighted average number of common shares outstanding for the
period plus the assumed exercise of all dilutive securities, such as stock
options. For the year ended December 31, 2000, a total of 35,571 stock option
shares, were included in the weighted average number of common shares
outstanding calculation.

The diluted loss per common share calculated for the years ended December
31, 2002 and 2001, excludes the effects of 213,625 and 214,375 options
outstanding, respectively. These amounts are excluded, as their inclusion would
be anti-dilutive.

STOCK BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
or loss and earnings or loss per share in the notes to the financial statements.
The Company follows the disclosure provisions of SFAS 123 and applies APB
Opinion 25 and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock option plans. The effects
of applying SFAS 123 in this pro forma disclosure are not likely to be
representative of the effects on reported income or loss for future years. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
years ended December 31, 2002, 2001 and 2000 would have been increased to the
pro forma amounts indicated below:

YEARS ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----

Net income (loss):
As reported $ (586,282) $(1,250,822) $336,455
Pro forma (723,069) (1,438,007) 268,527

Net income (loss) per share--basic
As reported $ (0.08) $ (0.18) $ 0.05
Pro forma
(0.10) (0.20) 0.04
Net income (loss) per share--diluted
As reported $ (0.08)$ (0.18) $ 0.05
Pro forma
(0.10) (0.20) 0.04

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

2002 2001 2000
---- ---- ----

Expected Life 5 years 5 years 5 years
Expected Volatility 50% 50% 95%
Dividend Yield 0% 0% 0%
Weighted Average Risk-free Interest Rate 4.77% 4.77% 5.02%

EQUIPMENT

Equipment is stated at cost. Depreciation is calculated using straight-line
basis over a 2 to 7 year estimated useful life. Repairs and maintenance costs
are charged to expense as incurred. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the determination of net
income.

INCOME TAXES

Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement basis and tax basis of assets and
liabilities using current statutory tax rates. A valuation allowance against net
deferred tax assets is established if, based on the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. (See Note 5).

21

COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements.
Comprehensive income (loss) includes only net income (loss) at December 31, 2002
and 2001.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year's presentation. Such reclassifications had no effect on the Company's
results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations be accounted for under the purchase method
only and that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS No. 142 requires that ratable
amortization of goodwill be replaced with periodic tests of the goodwill's
impairment and that intangible assets other than goodwill be amortized over
their useful lives. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for
by the purchase method for which the date of acquisition is after June 30,
2001. The provisions of SFAS No. 142 were effective for fiscal years
beginning after December 15, 2001, and thus were adopted by us, as required,
as of January 1, 2002. SFAS No. 141 and SFAS No. 142 did not affect our
financial position or results of operations upon adoption.

In August 2001, FASB issued SFAS 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. We have determined that the adoption of
SFAS 143 will not have an impact on our financial position and results of
operations.

In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires one method of accounting for
long lived assets disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. SFAS 144
did not affect our financial position or results of operations upon adoption.

In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. We have determined that the adoption of SFAS 146 will not have an
impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure - An Amendment of FAS No. 123. SFAS 148
amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for those companies who voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of FAS 123 to require
prominent disclosures in both the annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The transition and annual disclosure
provision of FAS 148 are effective for fiscal years ending after December 15,
2002.

22

We have not adopted the fair value method of accounting for stock-based
compensation, and will continue to apply APB 25 for our stock-based compensation
plans. We have incorporated the disclosure requirements of SFAS 148 at December
31, 2002, which requires a tabular pro forma presentation of net income had FAS
123 been adopted by us, in the "Summary of Significant Accounting Policies"
footnote of the financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB
STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34. FIN
45 elaborates on the disclosures to be made by a guarantor in our interim and
annual financial statements about our obligations under certain guarantees that
it has issued. It requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value for the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statement periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on our consolidated financial
statements. See Note 5, "Commitments and Contingencies," to our consolidated
financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 is not expected to
have a material effect on our financial statements.

2. EQUIPMENT

Equipment consists of the following at December 31:

Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $4,537, $9,857, and $25,231, respectively. The Company disposed of furniture
and equipment in the third quarter of 2001, resulting in a loss of $3,201, which
is included in general and administrative expense on the statement of
operations.

3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

The accrued drug development related expense represents an amount
estimated by management for costs incurred in prior years pertaining to drug
development related expenses.

23

4. LEASES

The Company leases office space under lease arrangements, which originally
expired in June 2002. The office space lease currently renews on a monthly
basis. The lease for the Company's office space includes payment terms that are
subject to increases due to taxes and other operating costs of the lessor.
Minimum lease payments under this lease for 2003 are approximately $3,000.

Rent expense for the years ending on December 31, 2002, 2001 and 2000
amounted to $31,171, $36,616 and $45,526, respectively.

5. INCOME TAXES

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

The change in the total valuation allowance was a increase of $234,000 for
the year ended December 31, 2002 and an increase of $97,000 for the year ended
December 31, 2001.

As of December 31, 2002, the Company had federal net operating losses
("NOL") and research and experimentation credit carryforwards of approximately
$78,371,000 and $2,554,000, respectively, which may be available to offset
future federal income tax liabilities and expire at various dates from 2006
through 2022. Approximately $29,000 of the gross deferred tax asset represents
the benefit of deductions from the exercise of stock options, which have been
fully reserved. The benefit from the $29,000 tax asset will be recorded as a
credit to additional paid-in capital when realized. As required by Statement of
Financial Accounting Standards No. 109, management of the Company has evaluated
the positive and negative evidence bearing upon the realizability of its
deferred tax assets, which are comprised principally of net operating loss and
research and experimentation credit carryforwards. Management has determined
that, at this time, it is more likely than not that the Company will not realize
the benefits of federal and state deferred tax assets and, as a result, a
valuation allowance of $34,728,000 has been established at December 31, 2002.

Ownership changes, as defined in the Internal Revenue Code, may have
limited the amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income. Subsequent ownership changes could
further affect the limitation in future years.

6. CAPITAL STOCK

On May 23, 2001, we entered into a common stock purchase agreement with
Court Square Capital Limited, our largest stockholder, to provide us with
additional capital for general corporate purposes or to pursue other strategic
alternatives. Subject to certain conditions, including stockholder approval, the
agreement provides for us to issue and sell to Court Square and its affiliates
up to 3,750,000 shares of our common stock at a per share price of $2.30,
subject to adjustment. The agreement expires on May 23, 2003.

See Note 7 for a description of series D preferred stock.

24

On October 15, 2001, the stockholders of the Company voted to approve the
merger of Ergo Science Corporation with and into its wholly-owned subsidiary,
ESC Merger Sub, Inc. On October 19, 2001, the merger became effective and ESC
Merger Sub. Inc. was renamed Ergo Science Corporation. Also at this time, each
share of the pre-merger Common Stock was converted into the right to receive .5
shares of the post-merger Common Stock, plus cash in lieu of any fractional
shares. The total paid by the Company for cash in lieu of fractional shares was
approximately $30. Shares of the post-merger Common Stock are subject to certain
transfer restrictions. These restrictions are intended to help preserve our
substantial tax net operating loss carryforwards for use in offsetting future
taxable income. In general, these restrictions will prohibit, without the prior
approval of the board of directors, the direct or indirect disposition or
acquisition of any of the Company's stock by or to any holder who owns or would
so own upon the acquisition (either directly or through the tax attribution
rules) 5% or more of the Company's stock.

7. LICENSE AGREEMENTS AND SUPPLIER CONTRACTS

On April 27, 1995 in conjunction with a redesigned plan for
commercialization of the Company's products, the Company effectively canceled
the previous existing partnership sublicenses by acquiring all the partners'
interests. The Company issued 278,875 shares of common stock and 5,618 shares of
series D exchangeable preferred stock (the "series D preferred stock"), par
value $0.01 per share. At the time, the Company ascribed a value of $16 per
share to the common stock issued and $584 per share to the series D preferred
stock.

The holders of series D preferred stock are entitled to receive quarterly
dividends at a rate of 6% per annum compounded semiannually on the stated value.
Such dividends shall be cumulative, commencing on the date of original issue,
and shall only be payable to holders of record when and as declared by the board
of directors. The Company will have the option to convert the series D preferred
stock into common stock during the 90 days after the Company receives FDA
approval to market its first product, if it receives that approval. If the
Company does not exercise its option to convert the series D preferred stock
into common stock within the 90 days, after FDA approval, the series D preferred
stock will automatically be exchanged for subordinated debt securities at the
end of the 90 days. The terms of the Company's series D preferred stock prohibit
the Company from paying dividends on the common stock. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of series D preferred stock then outstanding will be entitled to receive an
amount of cash equal to the stated value of series D preferred stock (including
any accrued by unpaid dividends) after any distribution is made on any senior
securities and before any distribution is made on any junior securities,
including common stock. The liquidation preference amount for the series D
preferred stock as of December 31, 2002 was $10,862,192.

The Company is party to certain other license agreements, which require the
Company to pay a royalty on product sales and to make specific payments on the
completion of certain milestones. No amounts have been accrued related to these
requirements as of December 31, 2002 or 2001.

8. STOCK OPTIONS AND INCENTIVE PLAN

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

25

The weighted average fair value of the options granted during 2001 was
$1.72. No stock options were granted in 2002 or 2000.

During 2001, the Company granted to its directors options to purchase
50,000 shares of common stock at exercise prices ranging from $1.25 to $1.56.
Also during 2001, the Company granted an option to purchase 27,500 shares of
common stock to its Chief Executive Officer at an exercise price of $2.05. All
options issued in 2001 were issued at prices equal to the market price on the
grant dates.

Information related to stock option activity for the period from December
31, 1999 through December 31, 2002 is as follows:

26

The following table summarizes information about stock options outstanding
at December 31, 2002:

Effective as of November 1, 1994, the board of directors adopted the Ergo
Science Development Corporation Long-Term Incentive Plan (the "Incentive Plan")
pursuant to which certain officers, directors, and key employees may be granted
awards with respect to shares of the Company's common stock. The awards that
could be granted under the Incentive Plan included incentive stock options,
nonstatutory options, stock appreciation rights (SARs) and restricted stock
awards. Awards of options to purchase 35,000 shares at an exercise price of
$1.562 per share, were granted under the Incentive Plan in 2001. No awards were
made in 2002 or 2000. These amounts are included in the tables above. At the
time that the stockholders approved the 2001 Stock Plan, the Incentive Plan was
closed and no new grants will be made under this Plan.

On May 15, 1996, the board of directors approved, subject to stockholder
approval, a proposal to adopt a Stock Option Plan for Non-Employee Directors of
the Company (the "Director Stock Plan"). The Director Stock Plan provided for an
initial grant of an option to purchase 5,000 shares of common stock to each
eligible non-employee director upon first being elected or appointed to serve on
the board of directors. Those eligible directors already serving at the time the
Director Stock Plan was approved by the stockholders of the Company were each
granted a stock option to purchase 5,000 shares of common stock with a deemed
date of grant of May 15, 1996. Each director that remained eligible to receive
stock options under the Director Stock Plan on the second anniversary of the
date that such director was first granted a stock option under the Director
Stock Plan was granted a second stock option to purchase 5,000 shares of common
stock. Stock options granted under the Director Stock Plan vest and become
exercisable in equal increments on the first and second anniversary of their
date of grant, but no stock option may be exercised more than ten years after
the date of its grant. The Director Stock Plan was approved by the stockholders
at the Company's 1996 Annual Meeting of Stockholders that took place on June 25,
1996. Awards of options to purchase 15,000 shares at exercise prices of
$1.25-$1.562 per share were granted under the Director Stock Plan in 2001. There
were no awards granted in 2002 or 2000. These amounts are included in the tables
above. At the time that the stockholders approved the 2001 Stock Plan, the
Company's Director Stock Plan was closed and no new grants will be made under
this Plan.

On October 15, 2001, the stockholders of the Company approved the Ergo
Science Corporation 2001 Employee, Director and Consultant Stock Plan (the "2001
Stock Plan") pursuant to which certain officers, directors, and key employees
may be granted awards with respect to shares of the Company's common stock. The
awards that may be granted under the 2001 Stock Plan include incentive stock
options under section 422 of the Internal Revenue Code, non-qualified stock
options, stock appreciation rights (SARs) and restricted stock awards. A total
of 1,600,000 shares of our common stock were reserved for issuance pursuant to
options and other awards granted under this plan. This plan provides for an
initial grant of an option to purchase 5,000 shares of common stock to each
eligible non-employee director upon first being elected or appointed to serve on
the board of directors. Stock options granted to directors under the 2001 Stock
Plan vest and become exercisable in equal increments on the first five
anniversaries of their date of grant, but no stock option may be exercised more
than ten years after the date of its grant. Awards of options to purchase 27,500
shares at an exercise price of $2.05 per share

27

were granted under the 2001 Stock Plan in 2001. There were no awards granted in
2002 or 2000. As of December 31, 2002, 1,572,500 shares were available to be
granted under the 2001 Stock Plan.

At the time that the stockholders approved the 2001 Stock Plan, the
Company's Long-Term Incentive Stock and Director Stock Plan were closed and no
new grants will be made under either the Long-Term Incentive Plan or the
Director Plan.

9. LSU SETTLEMENT

The Company has a Royalty Agreement with LSU under which the Company is
required to pay LSU a royalty based upon gross sales in the United States and a
percentage revenues the Company receives outside of the United States.

On May 1, 1995, Ergo Research Corporation, a wholly owned subsidiary of the
Company, entered into a Novated License and Royalty Agreement with LSU that
replaces the Royalty Agreement with LSU described in the prior paragraph. The
agreement requires the Company to pay LSU $350,000 for the first and $500,000
for all subsequent administrative approvals of licensed pharmaceutical products.
The Company must pay LSU a royalty based upon gross sales in the United States
with minimum royalties due.

In 1998, a dispute arose between the Company and LSU concerning whether the
Company owed LSU royalties because of certain payments the Company received from
Johnson & Johnson. LSU sought payment of $4,138,000. Following mediation
required under the LSU Agreement, the dispute was submitted to binding
arbitration. In February 2000, the Company announced that the arbitrator
rendered a preliminary decision that, contrary to the Company's position,
royalties are due to LSU because of a $10 million payment received from Johnson
& Johnson for the purchase of common stock. Following the arbitrator's
preliminary decision against the Company, the Company settled its dispute with
LSU in October 2000. As part of the settlement, the Company paid LSU
approximately $3 million, of which $1 million had been accrued as of December
31, 1999. Additionally, during the year ended December 31, 2000, the Company
adjusted its estimates of amounts required to settle other ERGOSET(R) related
obligations. These adjustments were recorded as reductions of research and
development expenses in 2000, resulting in a negative research and development
expense of $163,834.

10. EMPLOYEE BENEFIT PLANS

Effective February 1, 1997, the Company implemented a defined contribution
plan under Section 401(k) of the Internal Revenue Code (the "401k Plan"). Under
the 401k Plan, eligible employees are permitted to contribute, subject to
certain limitations, up to 20% of their gross salary. The Company makes a
matching contribution, which currently totals 50% of the employee's
contribution, up to a maximum amount equal to the lesser of $2,500 or 6% of the
employee's gross salary. The employer matching contribution vests over a four
year period, 25% for each year of service. Years of service prior to the
implementation of the 401k Plan are excluded from the vesting period. In 2002,
2001 and 2000, the Company's contributions to the 401k Plan amounted to $0,
$2,230 and $2,475, respectively. The Company terminated the 401k Plan effective
December 31, 2001.

11. QUARTERLY RESULTS (UNAUDITED)

The following table sets forth unaudited selected financial information for
the periods indicated. This information has been derived from unaudited
consolidated financial statements, which, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future period.

28

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

None.

29

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth the ages, principal occupation and present
position of each of the Directors and the executive officer of the Company.

DAVID R. BURT, Age 39, Class III Director, joined us as Vice President,
Corporate Development, in March 1993. He was appointed our Secretary in March
1997. In March 1999, Mr. Burt joined our board of directors. He was appointed
our President and Chief Executive Officer in March 1999. He was elected Chairman
of our Board of Directors in March 2001. Mr. Burt also serves as the President
and Chief Executive Officer and a Director of J.L. Halsey Corporation, formerly
NAHC, Inc. and NovaCare, Inc., a company traditionally in the healthcare
industry. From 1990 until 1993, Mr. Burt practiced corporate and securities law
at Johnson & Gibbs, P.C., a law firm in Dallas, Texas. Mr. Burt's practice
involved representing issuers and underwriters in financing transactions in a
variety of high technology industries. Mr. Burt received a B.A. in government
from Dartmouth College and a J.D. from the University of Maryland Law School.
Before attending law school, Mr. Burt worked on the staff of United States
Senator Paul S. Sarbanes.

WILLIAM T. COMFORT, III, Age 36, Class I Director, joined our board of
directors in January 2001. Mr. Comfort was a private equity investor with CVC
Capital Partners, a leading private equity firm based in London, England from
1995 to 2000. Mr. Comfort serves as the Chairman of the Board of J.L. Halsey
Corporation since November 2002 and as a director since June 2002. Mr.
Comfort also serves on the boards of other public and private companies. Mr.
Comfort received his J.D. and L.L.M. in tax from New York University School
of Law.

CHARLES E. FINELLI, Age 39, Class I Director, joined our Board of
Directors in March 2001. Mr. Finelli has been in the private practice of law
for seven years specializing in litigation. He is a Director of J.L. Halsey
Corporation. He is a graduate of the University of Arkansas School of Law.

J. WARREN HUFF, Age 49, Class II Director, joined our board of directors in
February 2001. Mr. Huff is a Venture Partner with StarTech Medical Ventures and
is the Founding Chief Executive Officer of Reata Discovery, Inc., a
biopharmaceutical company based in Dallas, Texas. From 1998 until 2001, Mr. Huff
was President and Chief Executive Officer of OpenPages, Inc. a privately-held
company in the content production software industry. From 1997 to 1998, Mr. Huff
was President and Chief Executive Officer of InLight, Inc., a privately held
medical education software company that he founded. From 1992 until 1997, Mr.
Huff was our President. Mr. Huff received his J.D. from the Southern Methodist
University School of Law and graduated magna cum laude with a B.A. in business
administration from University of Texas at Austin.

THOMAS F. MCWILLIAMS, Age 60, Class II Director, joined our board of
directors during September 1992 in connection with the purchase of our
convertible securities by Citicorp Venture Capital Ltd. ("CVC"). Mr.
McWilliams is Managing Director of CVC, where he has been employed since
1983. He is a director of MMI Products, Inc., a company engaged in the
manufacture and distribution of products used in the commercial,
infrastructure and residential construction industries, Hydrochem Industrial
Services, Inc., a company engaged in providing industrial cleaning services,
Royster-Clark Group, a distributor of agricultural products and a number of
other privately owned companies. Mr. McWilliams received his A.B. from Brown
University and his M.B.A. from the Wharton School, University of Pennsylvania.

Our executive officers hold office at the pleasure of the board of
directors. The board of directors is divided into three classes. Directors in
each class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single class are elected at each annual
meeting of

30

stockholders. David R. Burt is a Class III director whose term of office expires
at the annual meeting of stockholders to be held in 2004. William T. Comfort,
III and Charles E. Finelli are Class I directors whose terms of office expire at
the annual meeting of stockholders to be held in 2005. J. Warren Huff and Thomas
F. McWilliams are Class II directors whose terms of office expire at the annual
meeting of stockholders to be held in 2003.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires that our
executive officers, directors, and persons who beneficially own more than 10% of
a registered class of our equity securities file with the Securities and
Exchange Commission initial reports of ownership and reports of any changes in
ownership of our common stock and our other equity securities. Based on our
review of forms furnished to us and written representations from reporting
persons, we believe that all filing requirements applicable to our executive
officers, directors, and 10% beneficial owners were complied with during 2001
except that an initial report of ownership was filed late by a new director.

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes all compensation awarded to, earned by, or
paid to David R. Burt, our Chief Executive Officer throughout 2002, for services
rendered in all capacities during the years ended December 31, 2002, 2001 and
2000 (the "Named Executive Officer").

(1) All other compensation in 2001 and 2000 consists of matching
contributions made under the Company's 401(k) plan. The $20,673 in
2002 represents an amount received by Mr. Burt as a result of
forfeitures due to the termination of the Company's 401(k) plan.

OPTION GRANTS IN 2001

During 2001, we granted to directors options to purchase 100,000 shares of
common stock at exercise prices ranging from $.625 to $.781, prior to the effect
of the reverse stock split approved by our stockholders on October 15, 2001. The
effect of the reverse stock spit resulted in a reduction of the options to
50,000 shares at prices ranging from $1.25 to $1.562. Also during 2001, we
granted options to purchase 27,500 shares of common stock to our CEO at an
exercise price of $2.05. All options issued in 2001 were issued at prices equal
to the market price on the grant dates. No Options were granted in 2002.

31

The following table shows grants of stock options that we made during 2001
to the Named Executive Officer.

(1) The options were granted pursuant to our 2001 Employee, Director and
Consultant Stock Plan. The options granted to the above Named Executive
Officer are non-qualified stock options and vest annually in four equal
installments commencing on March 1, 2002.

OPTION EXERCISES AND YEAR-END OPTION VALUES

The following table provides information about the number of shares
issued upon option exercises by the Named Executive Officer during 2001,
and the value realized by the Named Executive Officer. The table also
provides information about the number and value of options held by the
Named Executive Officer at December 31, 2002.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

(1) Amounts shown in this column do not necessarily represent actual value
realized from the sale of the shares acquired upon exercise of the
option because in many cases the shares are not sold on exercise but
have continued to be held by the executive officer exercising the
option. The amounts shown represent the difference between the option
exercise price and the market price on the date of exercise, which is
the amount that would have been realized if the shares had been sold
immediately upon exercise.

(2) The value of unexercised in-the-money options at fiscal year end
assumes a fair market value for the Company's common stock of $1.65,
the closing sale price per share of the Company's common stock as
reported in the OTC Bulletin Board on Monday, December 31, 2002.

COMPENSATION OF DIRECTORS

In general, our policy is to pay no compensation to members of the board of
directors for attending meetings of the board of directors and its committees.
However, we do reimburse directors for the expenses incurred in attending
meetings of the board of directors and its committees. In June 1996, our
shareholders approved a Stock Option Plan for Non-Employee Directors, which we
refer to as the Director Stock Plan. The Director Stock Plan provided for an
initial grant of a non-qualified stock option for 5,000 shares of common stock
to each non-employee director upon first being elected or appointed to serve on
the board of directors. Mr. McWilliams who was serving as a non-employee
director when the

32

Director Stock Plan was approved, received an initial grant of
a stock option for 5,000 shares of common stock with a deemed grant date of May
15, 1996. In addition, on May 15, 1997 Mr. McWilliams was granted a second
non-qualified stock option for 5,000 shares of common stock. Messrs. Comfort,
Finelli and Huff each received an initial grant of a stock option for 5,000
shares of common stock upon first being elected or appointed to serve on the
board of directors during 2001. Each option under the Director Stock Plan has an
exercise price equal to the fair market value of the common stock on the grant
date. These options will become exercisable in equal increments on the first and
second anniversary of their date of grant and will expire ten years after the
grant date if not exercised. If a change in control occurs, all stock options
granted under the Director Stock Plan will become fully exercisable. The
Director Stock Plan was terminated in 2001, however that termination had no
effect on options already outstanding.

In October 2001, our shareholders approved our 2001 Employee, Director and
Consultant Stock Plan, which we refer to as the 2001 Plan. The 2001 Plan
provides for an initial grant of a non-qualified stock option for 22,500 shares
of common stock to each future non-employee director upon first being elected or
appointed to serve on the board of directors. Each such option will have an
exercise price equal to the fair market value of the common stock on the grant
date. These options will become exercisable in equal increments on the first
five anniversaries of their date of grant and will expire ten years after the
grant date if not exercised.

In March 2001, Messrs. Comfort and Huff each received an additional
non-qualified stock option for 17,500 shares of common stock under our 1995
Long-term Incentive Plan. Each of these options has an exercise price equal to
the fair market value of the common stock on the grant date. These options will
become exercisable in equal increments on each of the first five anniversaries
of their date of grant if the grantee participates in 75% or more of the
meetings of the board of directors held during the year ending on that
anniversary and will expire ten years after the grant date if not exercised. If
a change in control occurs, these stock options will become fully exercisable.
In May 2002, we made a cash payment of $15,000 to Mr. Finelli in consideration
of his service on the board of directors.

EMPLOYMENT CONTRACTS

The Named Executive Officer is an employee-at-will as the Company did not
renew the employment agreement with its Named Executive Officer in October 1998.
The current base salary amount is $150,000 to Mr. Burt. The Compensation
Committee may increase the base amounts at its discretion.

DIRECTOR AND OFFICER INDEMNIFICATION

We have entered into indemnification agreements with each of our directors
and executive officer, agreeing to indemnify the director or officer to the
fullest extent permitted by law, and to advance expenses, if the director or
officer becomes a party to or witness or other participant in any threatened,
pending or completed action, suit or proceeding by reason of any occurrence
related to the fact that the person is or was a director, officer, employee,
agent or fiduciary of ours or a subsidiary of ours or another entity at our
request, unless a reviewing party, either outside counsel or a committee
appointed by the board of directors, determines that the person would not be
entitled to indemnification under applicable law. In addition, if a
change-in-control or a potential change-in-control occurs, and if the person
indemnified so requests, we will establish a trust for the benefit of the
indemnitee and fund the trust in an amount sufficient to satisfy all expenses
reasonably anticipated at the time of the request to be incurred in connection
with any claim relating to such an event. The reviewing party will determine the
amount deposited in the trust. An indemnitee's rights under the indemnification
agreement are not exclusive of any other rights under the restated certificate
of incorporation or bylaws, as amended, or applicable law.

33

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee are Thomas F. McWilliams, J.
Warren Huff and William T. Comfort III. None of these members is or has been an
employee of Ergo Science, other than Mr. Huff, who was an officer as recently as
1996. Mr. Comfort is also the Chairman of the Compensation Committee for J.L.
Halsey Corporation. None of our executive officers of the Company serve as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or Compensation Committee, except Mr. Comfort who is also a member of the
Compensation Committee of J.L. Halsey Corporation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the shares of the our common stock as of February 27, 2003, by (i)
each person we know to be the beneficial owner of 5% or more of the outstanding
shares of our common stock, (ii) the Named Executive Officer, (iii) each of our
directors, and (iv) all of our executive officers and directors as a group.
Except as indicated in the footnotes to the table, we believe that the persons
named in the table have sole voting and investment power with respect to the
shares of common stock indicated.

* Represents beneficial ownership of less than 1% of the Company's
outstanding shares of Common Stock.

** Addresses are given for beneficial owners of more than 5% of our
outstanding common stock only.

(1) The number of shares of common stock issued and outstanding on February 27,
2003, was 7,149,578. The calculation of percentage ownership for each
listed beneficial owner is based upon the number of shares of our common
stock issued and outstanding at February 27, 2003, plus shares of our
common stock subject to options held by such person at February 27, 2003,
and exercisable within 60 days thereafter. The persons and entities named
in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them, except as noted below.

(2) This information, except the percentage beneficially owned, is based solely
on a Schedule 13D filed on September 11, 2000 with the Securities and
Exchange Commission by Citigroup, Inc. ("Citigroup"). Consists of 1,639,955
shares held by Court Square Capital Limited ("Court Square"). Court Square,
Citicorp Banking Corporation ("Citicorp Banking"), Citicorp ("Citicorp"),
Citigroup Holdings Company ("Citigroup Holding") and Citigroup, Inc.
("Citigroup") may be deemed to share the voting and dispositive power of
the 1,639,955 shares of our common stock directly beneficially owned by
Court Square by virtue of, Citicorp Banking's 100% ownership interest in
Court Square, Citicorp's 100% ownership interest in Citicorp Banking,
Citigroup Holdings'100% ownership interest in Citicorp and Citigroup's 100%
interest in Citigroup Holdings. Citigroup may also be deemed to share the
voting and dispositive power of the 3,000 shares of our common stock
directly beneficially owned by certain

34

subsidiaries of Citigroup. Does not include 3,750,000 shares of common
stock which may be issued pursuant to a common stock purchase agreement
between us and Court Square.

(3) Includes 84,625 shares of common stock subject to stock options held by Mr.
Burt on February 27, 2003 and exercisable within 60 days thereafter, and 50
shares of our common stock owned by Mr. Burt's daughter.

(4) Includes 10,000 shares of common stock subject to stock options held by Mr.
McWilliams on February 27, 2003 and exercisable within 60 days thereafter.
Includes shares owned by Court Square.

(5) Includes 5,000 shares of Common Stock subject to exercisable stock options.
Excludes shares owned by Court Square, as to which Mr. Comfort disclaims
beneficial ownership.

(6) Consists of shares of common stock subject to stock options held by Mr.
Finelli on February 27, 2003 and exercisable within 60 days thereafter.

(7) Consists of shares of common stock subject to stock options held by Mr.
Huff on February 27, 2003 and exercisable within 60 days thereafter.

(8) Includes 130,875 shares of common stock subject to stock options held by
the directors and executive officer on February 27, 2003, and exercisable
within 60 days thereafter. See note 4 for further details concerning shares
as to which Mr. McWilliams disclaims beneficial ownership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have entered into a common stock purchase agreement with Court Square
Capital Limited. Mr. McWilliams, one of our directors is also a Managing
Director of Court Square. Subject to a number of conditions, we may issue, and
Court Square and its affiliates may purchase, up to 3,750,000 shares of its
common stock, at a per share price of $2.30, subject to adjustment.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

As required by new Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our management,
including Mr. David R. Burt, our Chief Executive Officer and Acting Chief
Financial Officer, of the effectiveness of the design and operation of our
company's disclosure controls and procedures. In designing and evaluating our
disclosure controls and procedures, we and our management recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon the required
evaluation, our Chief Executive Officer and Acting Chief Financial Officer
believes that, as of the date of completion of the evaluation, our company's
disclosure controls and procedures were effective to ensure that information we
are required to disclose in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms. In
connection with the new rules, we currently are in the process of further
reviewing and documenting our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.

(b) Changes in internal controls

None.

35

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) -- The financial statements filed as part of this Report at
Item 8 are listed in the Index to Consolidated Financial
Statements on page 25 of this Report.
(a)(2) -- None.
(a)(3) -- The following documents are filed or incorporated
by reference as exhibits to this Report:

EXHIBIT DOCUMENT DESCRIPTION
NUMBER --------------------
- -------

3.1 -- Amended and Restated Certificate of Incorporation of
the Registrant. Filed as exhibit 3.1 to the Registrant's
registration statement on Form S-4 (File No. 333-69172) filed
with the Commission on September 7, 2001, and incorporated by
reference herein.
3.2 -- By-Laws of the Registrant. Filed as exhibit 3.2 to the
Registrant's registration statement on Form S-4 (File No.
33-98162) filed with the Commission on September 7, 2001, and
incorporated by reference herein.
4.1 -- Form of Stock Certificate of the Registrant's Common
Stock, par value $.01 per share. Filed as Exhibit 4.1 to the
Registrant's registration statement on Form S-4 (File No.
333-69172) filed with the Commission on September 7, 2001, and
incorporated by reference herein.
10.1 -- Novated License and Royalty Agreement dated May 1,
1995, between the Board of Supervisors of Louisiana State
University and Agricultural and Mechanical College, the
Registrant, E. Science Incorporated, a Delaware corporation
formerly known as Ergo Science Incorporated that is a
subsidiary of the Registrant ("Ergo Science Incorporated"),
and Ergo Research Corporation, a Delaware corporation that is
a subsidiary of the Registrant. Filed as exhibit 10.2 to the
Registrant's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
10.2 -- Indemnification Agreement dated October 6, 1995,
between the Registrant and Manuel Cincotta, Jr., together with
a schedule identifying substantially identical documents and
setting forth the material details in which those documents
differ from the foregoing document. Filed as exhibit 10.18 to
the Registrant's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
10.3 -- Form of Indemnification Agreement between the
Registrant and each of David R. Burt, Thomas F. McWilliams,
William T. Comfort III, J. Warren Huff and Charles E. Finelli.
Filed as exhibit 10.1 to the Registrant's registration
statement on Form S-4 (File No. 333-69172) filed with the
Commission on September 7, 2001, and incorporated by reference
herein.
10.4 -- Ergo Science Corporation 2001 Employee, Director and
Consultant Stock Plan. Filed as Exhibit 10.3 to the
Registrant's registration statement on Form S-4 (File No.
333-69172) filed with the Commission on September 7, 2001, and
incorporated herein by reference.
10.5 -- Ergo Science Corporation Stock Option Plan for
Non-Employee Directors. Filed as Exhibit 99.2 to the
Registrant's registration statement on Form S-8 (File No.
333-73222) filed with the Commission on November 13, 2001, and
incorporated herein by reference.
10.6 -- Ergo Science Corporation Amended and Restated 1995
Long-Term Incentive Plan. Filed as Exhibit 99.3 to the
Registrant's registration statement on Form S-8 (File No.
333-73222) filed with the Commission on November 13, 2001, and
incorporated herein by reference.

36

10.7 -- Amended and Restated Option Agreement, dated October
12, 1993, between Ergo Science Incorporated and Albert H.
Meier, Ph.D.; First Amendment to Amended and Restated Option
Agreement, dated April 27, 1995, among the Registrant, Ergo
Science Incorporated and Albert H. Meier, Ph.D.; and Second
Amendment to Amended and Restated Option Agreement, dated
November 6, 1995, between the Registrant and Albert H. Meier,
Ph.D. Filed as Exhibit 99.4 to the Registrant's registration
statement on Form S-8 (File No. 333-73222) filed with the
Commission on November 13, 2001, and incorporated herein by
reference.
10.8 -- Option Agreement, dated March 1, 1993, between Ergo
Science Incorporated and David R. Burt; First Amendment to
Option Agreement, dated April 27, 1995, among the Registrant,
Ergo Science Incorporated and David R. Burt; Second Amendment
to Option Agreement, dated October 6, 1995, between the
Registrant and David R. Burt; and Third Amendment to Option
Agreement, dated November 6, 1995, between the Registrant and
David R. Burt. Filed as Exhibit 99.5 to the Registrant's
registration statement on Form S-8 (File No. 333-73222) filed
with the Commission on November 13, 2001, and incorporated
herein by reference.
10.9 -- License Agreement effective as of February 1, 1997,
between The General Hospital Corporation and Ergo Science
Corporation and Ergo Research Corporation. Filed as Exhibit
10.1 to the Registrant's quarterly filing on Form 10-Q filed
with the Commission on May 15, 1997 and incorporated by
reference herein. [Portions of this exhibit have been omitted
and filed separately with the Commission in accordance with
Rule 406 of the Securities Act and the Registrant's request
for confidential treatment.]
10.10 -- Amended and Restated Supply Agreement dated October
31, 1997, by and among Ergo Science Corporation, Ergo Research
Corporation and Geneva Pharmaceuticals, Inc. Filed as exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q filed
with the Commission on November 14, 1997 and incorporated by
reference herein. [Portions of this exhibit have been omitted
and filed separately with the Commission in accordance with
Rule 406 of the Securities Act and the Registrant's request
for confidential treatment.]
10.11 -- Settlement Agreement dated as of October 6, 2000
between the Registrant and Louisiana State University. Filed
as Exhibit 10.17 to the Registrant's Annual Report on Form
10-K (File No. 000-26988) filed with the Commission on April
2, 2001, and incorporated herein by reference.
21.1 -- Subsidiaries of registrant.
(b) -- Reports filed on Form 8-K. None

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of North
Andover and Commonwealth of Massachusetts on March 27, 2003.

ERGO SCIENCE CORPORATION

By: /s/ David R. Burt
---------------------------------------------
David R. Burt
President and Chief Executive Officer

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

/s/ David R. Burt President, Chief Executive Officer and Director March 27, 2003
- --------------------------------------------------
(David R. Burt) (Principal Executive and Financial Officer)

/s/ Thomas F. Mcwilliams Director
- -------------------------------------------------- March 27, 2003
(Thomas F. McWilliams)

/s/ William T. Comfort, III Director
- -------------------------------------------------- March 27, 2003
(William T. Comfort, III)

/s/ J. Warren Huff Director
- -------------------------------------------------- March 27, 2003
(J. Warren Huff)

/s/ Charles E. Finelli Director
- -------------------------------------------------- March 27, 2003
(Charles E. Finelli)

38

CERTIFICATION

I, David R. Burt, certify that:

1. I have reviewed this annual report on Form 10-K of Ergo Science
Corporation;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and I have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. I have indicated in this quarterly report whether or not there were
significant changes innternal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.

/s/ David R. Burt
----------------------------------
Chief Executive Officer and acting
Chief Financial Officer

Date: March 27, 2003

39