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

                                    FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996      COMMISSION FILE NUMBER 0-23156

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

           OREGON                                     93-0874480 
  (State or other jurisdiction of                  (I.R.S. employer 
   incorporation or organization)                identification number)

                            213 S.W. COLUMBIA STREET
                               BEND, OREGON 97702
          (Address of principal executive offices, including zip code)

                                 (541) 388-3688
              (Registrant's telephone number, including area code)
                       -----------------------------------

        Securities registered pursuant to Section 12(b) of the Act: None

    Securities registered pursuant to Section 12(g) of the Act: Common Stock

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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

As of March 3, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant based upon the last reported sales price was
$21,271,038. There were 9,444,078 shares of Common Stock of the Registrant
outstanding at March 3, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be used in connection with the Annual Meeting
of Shareholders to be held on May 22, 1997, are incorporated by reference into
Part III of this report.


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                                           PART I

ITEM 1.  BUSINESS

GENERAL

       Consep, Inc. ("Consep" or the "Company") develops, manufactures and
markets environmentally safe pest control products for the commercial
agriculture and consumer home, lawn and garden markets. The Company also owns
and operates full-line agrichemical distributors located principally in
California. Products manufactured by the Company employ proprietary controlled
release technologies to enhance the effectiveness and duration of biorational
pest control agents by protecting them from natural degradation and controlling
their release over planned periods of time. Biorational pest control products
use naturally occurring agents and biochemicals, such as pheromones, to control
pest populations. The Company's principal commercial agriculture products,
marketed under the CheckMate label, release synthetic pheromones to suppress
population levels of insects by disrupting their mating. Unlike most
conventional insecticides, the Company's products are non-toxic to humans and
animals, leave no harmful residues, do not contaminate soil or groundwater and
do not disrupt beneficial insect populations. The majority of the Company's
commercial agriculture products are sold through independent distributors. In
addition, the Company owns and operates full-line agrichemical distributors in
major agricultural regions of California and in the Connecticut River Valley. In
addition to selling the Company's commercial agriculture products, the Company's
agrichemical distributors also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies. Consep also sells a broad line of non-toxic
consumer pest control products under its SureFire and Insectigone labels through
a network of cooperative buying groups and distributors who in turn resell to
lawn and garden centers, hardware stores and retail chains. The Company has
begun distributing for the 1997 season a line of consumer products, based on
natural oils, to repel biting insects. These insect repellent products, which
are manufactured by, and are the proprietary products of, a third party, are
being marketed on an exclusive basis in the United States, Canada and Mexico
under the Company's Bite Blocker label. References herein to the "Company" or
"Consep" shall include Consep, Inc. and each of its subsidiaries.

MARKETS

      Worldwide sales of insecticides for commercial agriculture were estimated
by Chemical Marketing Reporter to be $7.8 billion annually in 1991, with
biorational pest control products accounting for approximately $350 million of
such worldwide sales. Management estimates the current market for insect control
products to be $1.5 billion in the United States alone. Conventional toxic
insecticides continue to dominate this market. However, regulatory limitations
on the use, growing concern over the safety and effectiveness of, and increasing
insect resistance to toxic insecticides have created an increasing demand for
alternative insect control products. Biorational insect control products have
significant advantages over conventional toxic insecticides in several important
areas. The principal problems associated with the use of toxic insecticides and
the comparative advantages of biorational insect control products include:

             Regulatory. Under federal law, all insecticide products registered
      prior to November 1984 must be re-registered with the U.S. Environmental
      Protection Agency (the "EPA") by 1997. The cost of re-registration is high
      and entails the risk that new testing will lead to adverse results and
      mandatory withdrawal of toxic insecticides from the market. As a result,
      many insecticides are not being re-registered for application in specialty
      crops such as fruits and vegetables. In contrast to toxic chemicals,
      biorational products can be registered with the EPA in less time and at
      substantially lower costs due to the reduced level of toxicity testing
      required. In addition, in 1994 the EPA established its Biopesticides and
      Pollution Prevention Division, whereby companies developing safer and
      less-toxic alternatives to conventional pesticides are able to have new
      products reviewed and registered by a staff dedicated to this new
      division.

             Residues. Public concern over the adverse environmental and health
      consequences of toxic insecticides continues to grow. These chemicals can
      leave unacceptable levels of residues in food and can contaminate soil and
      groundwater. Biorational insect control products use naturally produced or
      occurring compounds and do not leave toxic residues in treated crops, soil
      or groundwater.

             Resistance. One of the limitations of toxic insecticides is the
      tendency of insects to develop resistance to the active compound. Over 500
      insect species have developed resistance to one or more classes of toxic
      chemical insecticides. When resistance occurs, growers are forced to
      increase the amount of toxic insecticide necessary to control the target
      insects, which increases environmental and health risks and reduces the
      economic viability of the toxic chemical. Insects are less likely to


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      develop resistance to biorational products, particularly
      behavior-modifying pheromone-based products such as those produced by
      Consep.

             Resurgence. Toxic insecticides often destroy beneficial insects
      which help to naturally control primary and secondary insect populations.
      As beneficial insect populations are suppressed, there are fewer natural
      enemies against primary and secondary pests and growers must use
      escalating dosages and more frequent applications of toxic insecticides.
      This increased application exacerbates environmental and health risks and
      decreases the cost-effectiveness of the toxic insecticides. Biorational
      products target specific insects and do not adversely affect beneficial
      insect populations. As a result, beneficial insects remain in the field
      and continue to help control detrimental insect populations.

      In response to these concerns regarding conventional toxic insecticides,
commercial growers are increasingly adopting more sophisticated and
environmentally safer methods of pest control which focus on ecosystem
management, collectively identified as Integrated Pest Management ("IPM"), to
control insects in their fields. IPM involves the use of a combination of crop
selection, cultivation practices and biorational pest control measures to reduce
or eliminate toxic chemical applications. The Company's primary focus is on
fruits, nuts, vegetables and selected row crops where growers are generally more
concerned with residues in harvested products or resistance of insects to
chemical insecticides and are thus more likely to adopt biorational insect
control as an alternative to conventional toxic chemicals. The Company's
products are ideally suited to IPM practices because, unlike most conventional
insecticides, the Company's products are non-toxic to humans and animals, leave
no harmful residues, do not contaminate soil or groundwater and do not disrupt
beneficial insect populations. The Company believes that IPM and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of insect control products to the
commercial agriculture market. This trend is most developed in California where
state licensed PCAs are the only individuals who are authorized to recommend the
application of any pesticide, including insect control products.

      Management estimates the market in which its consumer pest control
products compete in the United States and Canada to be approximately $1 billion.
The Company believes that, although biorational products currently represent
less than 30% of this market, consumers are becoming increasingly aware of the
health risks associated with many of the conventional toxic products used to
control pests in and around the home and that non-toxic products will represent
an increasing portion of the consumer pest control market. In general, non-toxic
products for the consumer market do not require a time-consuming registration
process, which permits faster and less expensive introduction of new products.

STRATEGY

      Management believes that regulatory limitations on the use of, and
increasing insect resistance to, conventional toxic pesticides, together with
growing concern over the safety of those products have created substantial
opportunities to expand the use of Consep's alternative biorational pest control
products. The key components of the Company's strategy are set forth below.

      Continue to Develop and Acquire Proprietary Biorational Pest Control
Products, Technologies or Businesses. The Company's strategy includes continuing
to develop new products and technologies through both its own research and
development efforts and its ongoing research and development relationship with
Bend Research, Inc. ("Bend Research"), an independent research and development
firm specializing in membrane-based controlled release and materials separation
technologies. Consep also intends to meet this objective by continuing to
acquire complementary product lines, technologies or businesses to further
expand the Company's product lines both in the commercial agriculture and
consumer markets. During the past six years, Consep has completed eight
acquisitions of complementary businesses and product lines. Management believes
such acquisition opportunities will continue.

      Focus Commercial Agriculture Products on High-Value Crops. The Company's
primary focus is on selected high-value fruit, nut and vegetable crops where
growers are generally more concerned with residues in harvested products and are
thus more likely to adopt biorational insect control as an alternative to
conventional toxic chemicals. Additionally, given the high cost of
re-registering conventional toxic chemicals with the EPA, the Company believes
market opportunities will expand for biorational products as agrichemical
companies find it uneconomical to re-register their products for these selected
crop markets.

      Utilize Company Owned Distributors to Introduce and Promote the Company's
Products. The Company believes that owning and operating agrichemical
distributors accelerates the market acceptance and penetration of its
proprietary agricultural products, provides direct access to growers and field
research personnel and facilitates rapid evaluation and introduction of new
products. The Company may acquire additional agrichemical distributors in
strategic locations to facilitate grower adoption of IPM practices and
biorational pest control products.




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      Expand Presence and Distribution in Selected International Markets. The
Company believes it has the opportunity to significantly expand its
international presence. Management's strategy is to control the registration,
introduction and distribution of its products in selected international markets
and, as a result, has retained control over worldwide manufacturing and
marketing rights to its products. To effectively market its products abroad, the
Company is staffing an international sales and registration organization to
support the introduction of its products through established distributors in key
international markets.

      Expand Presence and Distribution Channels in Consumer Markets. The Company
is focused on expanding its consumer product distribution channels by increasing
its retail account base and penetrating additional locations in existing
accounts. Through a combination of trade show attendance, promoting
relationships with independent manufacturers' representatives and direct selling
efforts, Consep's strategy is to expand into additional co-operative buying
groups, distributors and retail chains, including grocery and drug store chains.
The Company is also focusing on increasing the range of products sold within the
existing retail base through a combination of special display advertising and
co-operative promotional programs. The Company will continue its efforts to
expand its product line through product development, acquisitions and
distribution of biorational products manufactured by other manufacturers.

TECHNOLOGY

      The Company believes it is well positioned to take advantage of
opportunities for biorational pest control products as a result of its
proprietary controlled release technologies. The Company's principal commercial
agricultural products combine proprietary controlled release delivery systems
with synthesized pheromones to provide effective biorational pest control.
Consep has devoted considerable resources to investigating the chemical makeup
of pheromones, their reaction with the Company's delivery systems, and their
behavior in a variety of environmental conditions.

      Pheromones are natural compounds produced by insects, which, when released
and detected by other insects of the same species, will elicit a specific
response. Over 1,600 insect pheromones have been identified in the scientific
literature and identification of additional insect pheromones continues to
occur. Consep has focused its efforts on one class of pheromones, sex
pheromones, most of which are produced by female insects in order to attract
males of the same species. Males are able to locate the females by using sensors
on their antennae to follow the pheromone trail to its source. These compounds
can be used to control specific insect populations if released in sufficient
quantities to overwhelm the males so that they are unable to locate females.
This system of control, called "mating disruption," produces a substantial
population drop of the target insect. The crop is thereby protected from feeding
larvae, which are the primary source of crop damage.

      The key to an efficacious and economically feasible trapping or mating
disruption product is to determine the optimum release rate and to successfully
store, protect, and control the release of pheromones. Most pheromones are
highly unstable compounds which break down quickly when exposed to normal
environmental conditions. The proprietary controlled release systems used in the
Company's products protect the pheromones from the environment and delay their
degradation. The Company designs these devices to release pheromones at a
planned rate over periods ranging from a few weeks to a few months, depending on
the targeted pest and crop. The Company believes that by providing a steady rate
of release over time, the Company's controlled release technologies allow the
Company to use lower quantities of pheromones in its products, as compared to
competitive pheromone products, to achieve the same degree of pest control. The
controlled release technologies used in the Company's products include
membrane-based reservoirs, microporous beads and dispersed (flowable)
microcapsules.

      Membrane-Based Reservoir System. The patented, membrane-based reservoir
system used in certain of the Company's products consists of a reservoir
containing the active ingredient, a rate-controlling membrane through which the
active ingredient diffuses and a protective impermeable backing. By varying the
surface area, membrane thickness and type of membrane materials, the Company is
able to adapt this technology to a variety of applications. Membrane-based
reservoir systems are used in the CheckMate and BioLure product lines, and in
certain products within the SureFire product line.

      Microporous Bead System. A microporous bead is a polymeric bead with an
internal pore structure encased in a rate-controlling outer surface. The
microporous nature of the beads permits a high loading of active ingredient,
with up to 80% of the bead weight consisting of biorational agents. By
comparison, only 5% to 30% of the weight of conventional micro-encapsulated
systems is represented by biorational agents. The microporous beads are
compatible with a wide range of active ingredients and can be readily mixed with
water and applied by ground or aerial spray equipment. By controlling the size
of the beads and their microporous structure, optimum rates of release can be
achieved. Microporous bead systems are used in current and development-stage
CheckMate products.



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      Dispersed (Flowable) Microcapsule System. A dispersed (flowable)
microcapsule system is a method of encapsulating biorational agents by
polymerizing a protective wall around the colloidal size particles of the active
agent. The release rate of the active biorational product is adjusted by
controlling the size of the microcapsule as well as the degree of polymer
crosslinking in the capsule wall. Dispersed (flowable) microcapsule systems are
used in certain current and development-stage CheckMate products.

PRODUCTS

      The Company develops, manufactures and markets three lines of non-toxic
pest control products: (i) pheromone-based mating disruption products used to
control insect populations in commercial agriculture; (ii) pheromone-based traps
used to monitor and trap insects in commercial agriculture; and (iii) consumer
products used to trap or otherwise control pests in homes, lawns and gardens.
The Company's proprietary product line also includes specialty chemicals
produced by its wholly-owned subsidiary, Farchan Laboratories, Inc. ("Farchan").
The Company also owns and operates full-line agrichemical distributors located
principally in California which, in addition to selling the Company's commercial
agriculture products, also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies.

      Commercial Mating Disruption Products. The Company's commercial mating
disruption products, marketed under the CheckMate label, are used to suppress
population levels of insects by disrupting their mating cycles. CheckMate
products employ either microporous or microcapsule beads, which are applied by
aerial or ground spray equipment, or membrane-based reservoir dispensers, which
are attached by hand to the branches or stems of plants in crops which they
protect. As of December 31, 1996, Consep offers mating disruption products for
six species of insects. Revenues from the sale of the Company's commercial
mating disruption products for the years ended December 31, 1996, 1995 and 1994
were $3.0 million, $2.9 million and $1.7 million, or 9.1%, 9.5% and 6.8% of the
Company's total revenues for such periods, respectively.

      Commercial Monitoring and Trapping Products. The Company's monitoring and
trapping products for the commercial agriculture market are sold under the
BioLure label. A monitoring product typically consists of a trap and a lure
loaded with either pheromones or food bait to attract the target insect species.
Growers use monitoring products to identify the emergence of target species,
pinpoint infestation levels, and project insect population size and crop damage,
thereby facilitating more efficient control measures. The monitoring systems are
used in conjunction with pest control products to correctly time the application
of these control products and to monitor the effectiveness of insect control
programs. The system used in most of the Company's monitoring and trapping
products is a pheromone-based lure which incorporates the Company's controlled
release membrane-based technology to provide for uniform release of the active
ingredient over a longer period of time than competitors' products. Monitoring
and trapping systems which do not incorporate a lure use food bait or a color
spectrum as the attractant. Consep currently offers trapping and monitoring
systems for over 20 species of insects. Revenues from the sale of the Company's
monitoring and trapping products for the years ended December 31, 1996, 1995 and
1994 were $833,000, $621,000 and $462,000, or 2.5%, 2.0% and 1.8% of the
Company's total revenues for such periods, respectively.

      Consumer Products. The Company's consumer product line, marketed under the
SureFire and Insectigone labels, is comprised of a broad group of non-toxic
products which trap or otherwise control pests found in and around the home. In
addition, the Company markets, under its SureFire label, hummingbird and
butterfly feeders. Products in the Company's consumer product line generally
incorporate Consep's proprietary technologies, which include the controlled
release of attractants that lure insects into traps, proprietary Teflon-coated
surfaces which prevent insects from crawling across vertical surfaces, and
insecticide powders composed of patented baits and diatomaceous earth, which
kill crawling insects coming into contact with products incorporating this
technology. Consep currently offers pest control products for over 20 species of
household and garden pests. The Company has begun distributing for the 1997
season a line of consumer products, based on natural oils, to repel biting
insects. These insect repellent products, which are manufactured by, and are the
proprietary products of, a third party, are being marketed on an exclusive basis
in the United States, Canada and Mexico under the Company's Bite Blocker label.
The Company holds exclusive distribution rights to these insect repellent
products in the United States, Canada and Mexico, subject to certain performance
requirements. Revenues from the sale of the Company's consumer products for the
years ended December 31, 1996, 1995 and 1994 were $5.3 million, $4.6 million and
$3.6 million, or 15.8%, 15.0% and 14.2% of the Company's total revenues for such
periods, respectively.

      Specialty Chemicals. In February 1995, the Company acquired Farchan, a
Florida-based specialty chemicals manufacturer. Prior to its primary
manufacturing facility being destroyed by fire in October 1996, Farchan supplied
certain pheromones to the Company for use in certain of its mating disruption
products. In addition, Farchan supplies high quality specialty chemicals,
including organic acetylenes, to research organizations, pharmaceutical
companies and the agricultural industry. Revenues from Farchan's operations
(excluding pheromone sales to the Company) for the years ended December 31, 1996
and 1995 were $1.3 million and $1.2



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million, or 3.9% and 3.9% of the Company's total revenues for such periods,
respectively. As mentioned above, in October 1996, Farchan's primary
manufacturing facility was destroyed by fire. The Company currently plans to
build a specialty chemical facility to produce pheromones and other specialty
chemicals in Bend, Oregon. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

      Distribution Operations. The Company owns and operates full-line
agrichemical distributors which, in addition to selling the Company's commercial
agriculture products, also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies. Revenues from the Company's distribution
operations (which exclude sales of the Company's proprietary commercial
agriculture products through these distribution operations) for the years ended
December 31, 1996, 1995 and 1994 were $22.8 million, $21.5 million and $19.4
million, or 68.6%, 69.6% and 77.2% of the Company's total revenues for such
periods, respectively.

SALES, MARKETING AND DISTRIBUTION

      The Company's sales, marketing and distribution strategies differ for each
of the major markets in which its products are sold.

      The Company's sales in the commercial agriculture market are made
principally through agrichemical distributors. These distributors employ crop
protection professionals who consult for growers and recommend appropriate
insect control programs. The Company believes that IPM and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of insect control products to the
commercial agriculture market. This trend is most developed in California, where
state licensed PCAs are the only individuals who are authorized to recommend the
application of any pesticide, including insect control products. The Company's
strategy focuses on improving the PCAs' and growers' understanding of IPM and
how the Company's proprietary products can be integrated into insect control
programs. Consep markets its insect control products to this group through the
Company's 10-person technical sales organization.

      As part of Consep's strategy to use Company-owned distributors to
introduce and promote its products, the Company has acquired agrichemical
distribution subsidiaries in strategic market locations. These acquisitions,
which took place in 1990 and 1994, have allowed Consep to employ crop protection
professionals, including PCAs, and obtain direct access to growers in order to
facilitate the exchange of information and more effectively introduce IPM
practices in general, and the Company's products in particular. The Company
currently operates agrichemical distribution outlets in five locations in the
Central Valley of California and in one location in the Connecticut River
Valley. The Company believes these distribution operations, and the 22 PCAs
which they employ, provide a continuous source of valuable information with
respect to new product needs, performance of products in the field and the
competitive position of those products.

      The Company supports the sales efforts of the independent and subsidiary
agrichemical distributors through the organization of grower meetings, direct
grower contact and education of other influential groups such as university pest
management specialists and researchers, government agricultural personnel and
independent PCAs. The Company's CheckMate and BioLure product lines are promoted
through the dissemination of brochures, corporate communications, an on-line Web
page and advertising targeted at product awareness in the agricultural trade
press, in addition to direct contact with influential groups including
distributors, retailers, PCAs and growers. Agricultural trade shows and certain
industry conferences, such as the California Agricultural Production Consultants
Conference, are other venues for promotion of the Company's CheckMate and
BioLure product lines.

      The Company sells its SureFire, Insectigone and Bite Blocker products
through a network of cooperative buying groups and distributors who in turn
resell to lawn and garden centers, hardware stores and retail chains. These
products are also sold directly to retailers and through mail-order catalogs.
Promotion of the Company's consumer products is achieved primarily by
co-operative advertising, media participation and trade shows. In addition, the
Company intends to use television advertising in 1997 to promote its Bite
Blocker product line. The Company works directly with over 40 independent sales
representatives who are engaged in various sales and marketing activities
related to the Company's consumer product lines. These independent sales
representatives are overseen by the Company's 8-person consumer sales group. The
Company's sales and marketing efforts for its consumer products are directed
towards increasing the number of new retail and distribution accounts and
increasing the range of products carried by certain existing retail accounts.

      The Company's commercial agriculture and consumer products are also sold
through independent distributors in certain international markets. In addition,
the Company has established joint testing and marketing programs with these
distributors to introduce and sell its commercial agriculture products in
certain international markets. The Company also manufactures and sells




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products on a private label basis to customers in the industrial pest control
market. The Company's revenue attributable to export sales and sales occurring
outside of the United States of both commercial agriculture and consumer
products for the years ended December 31, 1996, 1995 and 1994 were $2,522,164,
$2,217,266 and $1,327,744, respectively. The Company also sells certain BioLure
products to the United States Department of Agriculture (the "USDA") and various
state and international departments of agriculture.

      The Company's business is highly seasonal, with its highest revenues being
recognized in the second quarter of each year and its lowest revenues being
recognized in the fourth quarter of each year. This seasonality coincides with
the commercial growing season in the Northern Hemisphere and, to a lesser
extent, the consumer home, lawn and garden buying season.

MANUFACTURING

      The Company manufactures the membrane-based reservoir dispensers,
microporous beads and dispersed (flowable) microcapsules used in its products at
its facility in Bend, Oregon. Products containing diatomaceous earth are
manufactured at the Company's wholly-owned subsidiary located in Kirkland,
Quebec, Canada. Prior to its primary manufacturing facility in Gainesville,
Florida being destroyed by fire in October 1996, Farchan produced pheromones
used in certain of the Company's commercial agriculture products. Specialty
chemicals continue to be manufactured on a limited basis at Farchan's research
and development laboratory. The Company plans to build a new specialty chemical
facility to produce pheromones and other specialty chemicals adjacent to its
headquarters and manufacturing facility in Bend, Oregon. The Company believes
the new facility can be operational by the end of September 1997 and should be
able to produce pheromones for the 1998 season. The Company believes it has
alternative sources of supply of pheromones for the 1997 season which it would
otherwise have purchased from Farchan. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources." As of March 1, 1997, Consep employed 43 people in manufacturing and
quality control relating to the production of its proprietary products.

      Active ingredients, including pheromones and food baits, are purchased
from specialty chemical supply companies or are produced by Consep. The Company
has historically relied upon on a limited number of suppliers to provide
pheromones for its products. During February 1995, the Company acquired Farchan,
a Florida-based specialty chemicals manufacturer, in order to reduce the cost of
certain pheromones, provide assurance of consistent quality, and provide a
stable supply of these materials. The interruption of certain sources of supply
or the failure of suppliers, including Farchan, to adapt their products to the
Company's changing technological requirements could result in delays in product
shipments, adversely affecting the Company's financial condition and results of
operations.

      During 1997, the Company anticipates spending an additional $200,000 to
$500,000 for new manufacturing equipment for its existing manufacturing facility
in Bend, Oregon.  The Company expects to finance at least fifty percent of such
expenses through bank loans and/or equipment leasing arrangements.  In addition,
the Company anticipates spending $1.3 to $1.6 million to construct and equip
a new specialty chemicals manufacturing facility to meet anticipated pheromone
supply requirements for the 1998 season.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".  Other than these planned expenditures, the Company has no
current plans to expand its manufacturing facilities or equipment. Subject to
construction of the new specialty chemicals manufacturing facility described
above, the Company believes that it has adequate production capacity to meet 
its foreseeable needs.

RESEARCH AND DEVELOPMENT

      Consep believes that considerable investment in new product development
will continue to be necessary to remain competitive in the biorational pest
control market. The Company's product development projects generally begin with
the identification of major insect infestation problems which the Company
believes can be addressed with biorational agents and which provide sufficient
market opportunity. Once a potential product is identified, the Company's
research and development personnel study the intended biorational agent and make
a determination as to whether the Company's existing controlled release
technologies are likely to work with the biorational agent. If it appears that
the controlled release technologies may need to be modified to work effectively
with the intended biorational agent, the Company's research and development
personnel work with scientists at Bend Research to adapt the existing controlled
release technologies to suit the requirements of the particular biorational
agent. Once the controlled release technology has been selected and the active
ingredient has been tentatively formulated, the development effort continues
with laboratory studies and eventual field testing of prototypes in order to
arrive at the final form of the product. Field testing of products is generally
conducted on a collaborative basis with academic, governmental and corporate
entities in the United States, including the USDA and numerous universities. In
international markets, field testing is generally conducted in collaboration
with the Company's international distributors and government researchers.
Through these collaborative efforts, the Company gains access to individuals
within the collaborating organization who have particular expertise in dealing
with the targeted pest and crop and whose opinions are generally widely
accepted. 



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Collaborative field testing also provides independent verification of product
efficacy which is critical to convincing commercial growers to adopt new
biorational products.

      In addition to the product development efforts described above, the
Company's research and development personnel also work with scientists at Bend
Research to define research projects which support the adaptation of licensed
technologies to new products and to new uses of existing products. In general,
basic research related to these projects takes place at Bend Research with the
resulting technology being transferred to Consep for applied research, product
development and commercialization. Ongoing projects with Bend Research include
the adaptation of new controlled release systems to existing pheromone products,
application of controlled release technologies to new types of active
ingredients and the identification and refinement of procedures for
manufacturing pheromones used in the Company's product lines.

      Pursuant to a license agreement with Bend Research, the Company is able to
participate in joint funding with various government agencies to develop
improvements to existing technologies. The license agreement also provides the
Company with license rights to agricultural applications of Bend Research
technologies, including technologies which are developed by Bend Research
pursuant to third party funded research and development efforts. See "--
Proprietary Rights." The license agreement also obligates the Company to request
Bend Research to perform research and development services budgeted at not less
than $600,000 a year, at least $400,000 of which must be directed towards
development of biorational products. For 1995 and 1996, the annual commitment
under the license agreement was reduced from $600,000 to $350,000 and $191,500,
respectively. For 1997, the annual commitment under the license agreement has
been reduced from $600,000 to $125,000. For years subsequent to 1997, the
$600,000 annual commitment will be reinstated. The license agreement continues
until the later of 2012 or the expiration of the last patent licensed under it.
The Company may terminate the license agreement on sixty days' notice. The
license agreement provides that if it were to be terminated for any reason, the
Company would retain rights to all Bend Research technologies incorporated in
then current products and in products then under development. If the Company
were to lose the services of Bend Research for any reason, the Company may
experience delays in the development and introduction of new products and would
be required to make alternative arrangements for the services performed by Bend
Research. Any such alternative arrangements could delay development efforts,
could substantially increase the cost of the Company's research and development
efforts and could adversely affect the Company's results of operations.

      The Company is currently developing and expanding its CheckMate line of
insect control products. Field testing for the products under development is in
various stages of completion. The Company also plans to develop and introduce
additional products for its SureFire and Insectigone lines of consumer pest
control products. Additions to the consumer product lines will occur through new
product development and possible acquisitions of compatible product lines,
technologies or businesses.

GOVERNMENT REGULATION AND PRODUCT REGISTRATION

      The pesticide industry is heavily regulated worldwide. In the United
States, the EPA regulates pesticide products under the Federal Insecticide,
Fungicide and Rodenticide Act ("FIFRA"). Pesticides are also subject to state
and foreign regulations. Some states, such as California, have their own
extensive registration requirements, as do certain foreign governments. To
develop and commercialize a pesticide product, detailed and complex procedures
must be completed prior to obtaining approvals through FIFRA, state and foreign
regulatory agencies. Small scale field testing usually can be conducted prior to
product registration to evaluate product efficacy. Unusual weather conditions
during field tests may require additional field testing requirements in
subsequent growing seasons, resulting in delays in product registration
submissions and approvals.

      Chemical pesticides require extensive toxicology and environmental testing
to substantiate product safety prior to obtaining a product registration.
Commercial sale of a pesticide requires a product registration for each pest and
crop for which the product is used. Initial EPA registration for a new chemical
pesticide can take seven years or longer, and cost $10 million or more. In
addition, the U.S. Congress has mandated that the EPA require that all pesticide
products registered prior to November 1984 be re-registered by 1997 using
today's stricter testing protocols. In contrast to conventional toxic chemicals,
biorational products have fewer regulatory requirements before commercial use is
permitted. For example, substantially fewer toxicity studies are required for
biorational insect control products than for conventional toxic insecticides.
Due to differences such as this, registration costs for biorational insect
control products are significantly less than for toxic insecticides, and
registration of biorational products requires considerably less time to
complete. However, there can be no assurance that additional requirements will
not be added by the EPA which could make registration procedures more
time-consuming and costly or require further testing and review of previously
registered products.

      Government regulations have been enacted in recent years to encourage the
development and introduction of non-toxic alternatives to conventional
insecticides, including the streamlined registration of alternative pest control
products under the EPA's 



                                       8
<PAGE>   9

"Safer Pesticide Policy." In September 1993, the EPA, the FDA and the USDA
released a joint summary of the principles guiding their legislative and
regulatory agenda including: (i) a firm commitment to reducing risks to people
and the environment that may be associated with toxic pesticides while ensuring
the availability of cost-effective pest management techniques; (ii) recognition
of the need to work with growers to develop and implement improved means of pest
control, reduce use of higher-risk toxic pesticides and promote greater use of
IPM techniques; and, (iii) implementation of regulatory reforms and incentives
for the development of pesticides that will eliminate or reduce health and
environmental risks. Further, in 1994, the EPA established its Biopesticides and
Pollution Prevention Division, whereby companies developing safer and less-toxic
alternatives to conventional pesticides are able to have new products reviewed
and registered by a staff dedicated to this new division. Such product reviews
and registrations are generally completed over a shorter time period and at less
expense than conventional insecticide reviews and registrations. Based upon the
above actions, coupled with cost and timing advantages of registering
biorational products relative to conventional toxic chemicals, the Company
believes biorational products have significant advantages in the commercial
agriculture insect control market. Field testing, manufacture and sale of the
Company's products outside the United States may be subject to regulatory
approval by other jurisdictions which may be more or less rigorous than in the
United States.

COMPETITION

      The pest control industry is highly competitive and is dominated by
multinational chemical companies that have financial, technical and marketing
resources substantially greater than those of the Company. Currently,
biorational products account for only a small fraction of aggregate sales of
pest control products, and can require insect control practices, such as timing
and method of application, which are different from those typically associated
with toxic chemical products. As a result, in order for biorational products to
successfully compete with toxic chemicals, they must not only be cost
competitive but must also provide other advantages over conventional pesticides.
The Company believes that its products are cost competitive with conventional
toxic insecticides and, because they are non-toxic and leave no harmful residue
in food, soil or groundwater, provide sufficient advantages over conventional
toxic insecticides to compete effectively against such products.

      The Company believes that many of the large chemical pesticide companies
are developing chemical pesticides which are less-toxic to man and the
environment, as well as new products based upon biorational agents. While Consep
believes that the emphasis of these companies has been on genetic engineering of
micro-organisms and insect-resistant plants and has been primarily directed
towards commodity crops such as wheat, corn, cotton, and soybeans, there can be
no assurance that these companies will not direct significant development
resources to either biorational products or less-toxic chemical products that
would compete directly with those of the Company.

      In addition to the large chemical pesticide companies, the Company is
aware of at least six other companies using biorational control agents,
including pheromones, to produce alternative insect control products. The
Company believes that other companies are currently developing biorational
insect control products. The Company believes that none of these competing
companies has delivery systems that perform as effectively and efficiently as
the proprietary controlled release membrane-based reservoir, dispersed
(flowable) microcapsule and microporous bead systems used in Consep's CheckMate
products and that the Company is therefore in a strong competitive position with
respect to these companies.

      The Company expects competition within the biorational pest control
segment to intensify as regulatory pressures on conventional toxic pesticides
increase and as advances in the field are made and become more widely known.
There can be no assurance that the Company will be able to compete successfully
against its current competitors or that these competitors or new market entrants
will not develop products that compete directly with the Company's products and
are more effective, less expensive or more widely accepted than those of the
Company.

PROPRIETARY RIGHTS

      Proprietary protection of the Company's products is important to its
business. Consep relies upon patents, trade secrets, unpatented know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company maintains a policy of seeking patents on its inventions,
acquiring licenses under selected patents or patent applications from third
parties and entering into invention and proprietary information agreements with
its key employees and consultants with respect to technology which it considers
important to its business.

      As more specifically described below, the Company has obtained
manufacturing and marketing rights in agriculture to certain proprietary rights
of Bend Research, including patents, patent applications, trade secrets and
unpatented know-how which relate to 



                                       9
<PAGE>   10

existing and development-stage technologies and products. In addition, the
Company has filed patent applications with respect to its own inventions which
relate to existing and development-stage technologies and products. There can be
no assurance that patents will issue from any pending or future patent
applications or, if patents are issued, that they will be of sufficient scope or
strength to provide meaningful protection of the Company's technologies. In
addition, there can be no assurance that any of the current patents issued or
licensed to the Company or future patents issued or licensed to the Company will
not be challenged or circumvented by competitors, or be found to be invalid or
non-infringed in judicial or administrative proceedings should a dispute arise.
Moreover, notwithstanding the scope of the patent protection available to the
Company, there can be no assurance that such patent rights will provide
commercial advantage to the Company as competitors could develop controlled
release technologies which are not covered by the Company's issued or licensed
patents or future patents issued or licensed to the Company.

      Pursuant to an agreement with Bend Research, the Company has obtained a
license to all agricultural applications of technologies developed by Bend
Research, other than certain animal health and agricultural applications
unrelated to the Company's current or contemplated products. The license
includes rights to certain patents, patent applications, trade secrets and
unpatented know-how owned by Bend Research, and covers aspects of the Company's
membrane-based reservoir system, microporous bead system and dispersed
(flowable) microcapsule system technologies. The license agreement provides the
Company exclusive worldwide rights to all agricultural applications (except as
noted above) of the licensed patents, patent applications, trade secrets and
know-how. The membrane-based reservoir system technology used in many of the
Company's CheckMate, BioLure and SureFire products is the subject of a United
States patent owned by Bend Research expiring in 2002. Such technology is not
patented outside the United States, other than in Japan where the patent is held
by a third party. Neither the Company nor Bend Research has rights with respect
to the Japanese patent. The microporous bead system technology used in certain
current and development-stage CheckMate products is the subject of a pending
United States patent application owned by Bend Research. The license agreement
provides the Company exclusive, worldwide rights to agricultural applications
(except as noted above) of the microporous bead system technology. The dispersed
(flowable) microcapsule system technology used in certain current and
development-stage CheckMate products is not patented in any country. The license
agreement provides the Company exclusive, worldwide rights to agriculture
applications (except as noted above) of the dispersed (flowable) microcapsule
system technology.

      The foregoing licenses are royalty-free as to certain of the Company's
existing controlled-release products. Certain existing products are, and
products resulting from existing and future development efforts may be, royalty
bearing at rates ranging from 2.5% to 5.0% of the Company's direct gross margin,
as defined in the license agreement, on such products. During January 1995,
royalties related to certain products incorporating technology provided by Bend
Research for the term of the license agreement were prepaid by the Company. Such
prepaid royalties totaled $121,000 and are being amortized as the related
products are sold by the Company. The license agreement continues until the
later of 2012 or the expiration of the last patent licensed under it. The
Company may terminate the license agreement on sixty days' notice. The license
agreement provides that if it were to be terminated for any reason, the Company
would retain rights to all Bend Research technologies incorporated in then
current products and any products then under development.

      The Company's Teflon-based barrier technology for control of insects used
in certain current and development-stage SureFire products is the subject of two
United States patents (both expiring in 2013), one Australian patent (expiring
in 2014), two pending U.S. patent applications and three pending foreign patent
applications. Of the three pending foreign patent applications, one is pending
before the European Patent Office and, if issued, will provide protection in
most European countries. All of these patents and patent applications covering
the Teflon-based barrier technology are owned by the Company. In addition, a
U.S. patent owned by the Company has recently issued, which relates to its
controlled release technology for control of aphids. This technology is
currently under development for use in the Company's CheckMate product line.

      The Company's technology relating to its diatomaceous earth products
includes a patented bait formulation. These patents provide protection in Canada
and Australia.

      Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of certain scientific and technical
personnel. To protect its rights to its proprietary information and technology,
the Company requires key employees, consultants, advisors and collaborators to
enter into confidentiality agreements which prohibit the disclosure of
confidential information to persons unaffiliated with the Company and require
disclosure and assignment to the Company of ideas, developments, discoveries and
inventions made by such persons. There can be no assurance that these agreements
will prevent disclosure of the Company's confidential information or will
provide meaningful protection for the Company's confidential information if
there is an unauthorized use or disclosure. In the absence of patent protection,
the Company's business may be adversely affected by competitors who develop
substantially equivalent technology.



                                       10
<PAGE>   11

      Proprietary rights litigation, which could result in substantial cost to
and diversion of effort by the Company, may be necessary to enforce patents
issued or licensed to the Company, to protect trade secrets or know-how owned by
the Company or to defend the Company against claimed infringement of the rights
of others and to determine the scope and validity of the proprietary rights of
the Company and others. Adverse determinations in litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is not currently a party to any patent litigation or
other litigation regarding intellectual property rights and is not aware of any
challenge to its patents or proprietary rights.

EMPLOYEES

      As of March 1, 1997, Consep had 143 employees, with 18 involved in sales
of proprietary products, 22 employed as PCAs in its distribution subsidiaries, 8
involved in product development and registration, 43 involved in manufacturing
and quality control of proprietary products, 18 involved in finance and
administration and 34 involved in operations at its distribution subsidiaries.

ITEM 2.  PROPERTIES

      The Company is headquartered in Bend, Oregon where it leases a 28,800
square foot facility under a lease that expires in February 2004. In addition to
administrative offices, the headquarters facility contains research and
development, manufacturing, warehouse and sales operations for certain of the
Company's proprietary products. The Company is currently in negotiations with
the owners of the Company's headquarters and manufacturing facility in Bend,
Oregon to acquire the property and building for a purchase price of
approximately $1.5 million.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."  In addition, the Company, through its Chemfree subsidiary, leases
an office, manufacturing, sales, and warehousing facility in Kirkland, Quebec,
Canada on a month-to-month basis while it negotiates a five-year extension of a
lease which expired in July 1996. The Company believes it could replace this
facility in a timely manner on terms acceptable to the Company, if such
negotiations are unsuccessful. Total lease expenditures related to all of the
Company's proprietary product-related facilities in 1996, 1995 and 1994 were
$147,407, $150,461 and $135,019, respectively.

      As of September 30, 1996, the Company also owned, through its Farchan
subsidiary, two buildings located in Gainesville, Florida, and one building
located in Alachua, Florida, with a combined capacity of approximately 11,000
square feet used for this subsidiary's manufacturing, sales, research and
development and warehousing functions. In October 1996, one of Farchan's two
buildings located in Gainesville, Florida with a capacity of approximately 3,000
square feet, which was used as a manufacturing facility, was destroyed by fire.
As an indirect result of the fire at the Farchan facility, the Company believes
it is not feasible to proceed with plans to finish and occupy its proposed plant
in Alachua, Florida. The Company plans to remove all of its equipment from the
Alachua facility and sell the land and building. The Company has also decided
not to rebuild the manufacturing facility at its Gainesville site. At the
present time, the Company plans to build a specialty chemical facility to
produce pheromones and other specialty chemicals adjacent to its headquarters
and manufacturing facility in Bend, Oregon. Site permit applications have been
submitted to the City of Bend and design work is ongoing. The Company believes
the new facility can be operational by the end of September 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

      The Company, through certain of its distribution subsidiaries, also owns
office and warehousing facilities for its agrichemical distribution operations
in Sacramento, Fresno, and Patterson, California. The Company's distribution
operations also lease sales and distribution facilities in Livingston and
Escalon, California, which expire on December 31, 1999 and 2001, respectively.
The Company's distribution operations also leases a sales and distribution
facility in Chicopee, Massachusetts on a month-to-month basis. The Company
believes that it could replace this facility in a timely manner, if required to
do so. Total lease expenditures related to all of the Company's distribution
facilities in 1996, 1995 and 1994 were $93,820, $83,340 and $81,540,
respectively.

      The Company believes that its existing facilities will be adequate to
serve its needs at least through 1997.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is not a party to any legal proceedings other than various
claims and lawsuits which the Company believes are not individually or
collectively material to its business.

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

      No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year.



                                       11
<PAGE>   12

                                     PART II

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

      Shares of the Company's Common Stock commenced trading in the
over-the-counter market on the Nasdaq National Market System on February 9,
1994, under the symbol CSEP. As of March 3, 1997, there were approximately 175
shareholders of record and approximately 2,875 beneficial owners of Common 
Stock.

      The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for future growth
and, therefore, does not anticipate declaring or paying any cash dividends in
the foreseeable future. The following table sets forth, for the fiscal periods
indicated, the range of high and low closing prices for the Company's Common
Stock on the Nasdaq National Market System.

<TABLE>
<CAPTION>
                                                             HIGH         LOW
                                                             ----         ---
 <S>                                                       <C>         <C>  
      1995
        First Quarter                                        3.000       2.125
        Second Quarter                                       4.125       2.125
        Third Quarter                                        4.375       3.000
        Fourth Quarter                                       3.375       2.375

      1996
        First Quarter                                        3.750       2.625
        Second Quarter                                       5.125       3.375
        Third Quarter                                        4.000       2.625
        Fourth Quarter                                       3.875       3.250

      1997
        First Quarter (through March 3, 1997)                3.625       2.875
</TABLE>

      During 1996, the Company sold securities without registration under
the Securities Act of 1993, as amended (the "Securities Act") in the
transactions described below. In the case of the exercise of stock options
pursuant to Company's 1992 Stock Incentive Plan described in paragraphs (a)
through (d) and (f) below, these transactions were effected in reliance on Rule
701 promulgated pursuant to authority granted under Section 3(b) of the
Securities Act. In the case of the stock warrant issuance described in paragraph
(e) below, this transaction was effected in reliance on Section 4(2) of the
Securities Act as not involving any public offering.

      (a)   On April 18, 1996, Roger Long, a consultant to the Company,
            exercised a previously issued Nonqualified Stock Option to purchase
            12,000 shares of Common Stock for an aggregate cash consideration of
            $21,000.

      (b)   On May 3 and May 30, 1996, Janice Gillespie, an employee of the
            Company, exercised previously issued Incentive Stock Options to
            purchase 7,800 and 3,200 shares of Common Stock, respectively, for
            an aggregate cash consideration of $13,650 and $5,600, respectively.

      (c)   On May 8, 1996, Mark Landers, an employee of the Company, exercised
            a previously issued Nonqualified Stock Option to purchase 2,000
            shares of Common Stock for an aggregate cash consideration of $500.

      (d)   On May 13, 1996, Howard Allred, an employee of the Company,
            exercised previously issued Incentive Stock Options to purchase
            28,000 shares of Common Stock for an aggregate cash consideration of
            $49,000.

      (e)   On October 29, 1996, the Company issued warrants to purchase 175,556
            shares of Common Stock at an exercise price of $3.60 per share for
            an aggregate cash consideration of $100. These warrants were issued
            to Value Investing Partners, Inc. in connection with underwriting
            services rendered to the Company with respect to its follow-on
            public offering in October 1996.



                                       12
<PAGE>   13

      (f)   On November 20, 1996, Curt Rymer, an employee of the Company,
            exercised a previously issued Nonqualified Stock Option to purchase
            8,000 shares of Common Stock for an aggregate cash consideration of
            $2,000.

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                               FISCAL YEAR
    (In thousands,     --------------------------------------------------------
  except per share)       1996        1995        1994        1993        1992
                       --------    --------    --------    --------    --------
<S>                    <C>         <C>         <C>         <C>         <C>     
OPERATIONS
Revenues               $ 33,229    $ 30,844    $ 25,120    $ 21,274    $ 17,830
Net loss                 (2,483)     (1,286)     (5,850)*    (4,126)     (3,257)
Net loss per share        (0.31)      (0.19)      (0.97)      (1.01)        N/M

BALANCE SHEET
Working capital          10,433       8,784       6,862       1,973       7,435
Total assets             23,411      21,559      19,653      13,840      16,003
Long-term debt,
 excluding current
 maturities               1,191         951         689       1,273       1,496
Shareholders' equity     17,010      14,681      12,440       6,489      10,636
                       --------    --------    --------    --------    --------
</TABLE>

* The net loss for 1994 includes restructure costs of $866.



                                       13
<PAGE>   14

ITEM_7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

      This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Report of Form 10-K contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that are based on current expectations, estimates
and projections about the markets in which Consep operates, management's beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements due to numerous
factors including, but not limited to, those discussed in the following
discussion and analysis of financial condition and results of operations, as
well as those discussed elsewhere herein and in the Company's other filings that
are made from time to time with the Securities and Exchange Commission.

OVERVIEW

      Consep derives its revenues from the sale of its proprietary products to
the commercial agriculture and consumer home, lawn and garden markets and from
sales by its distribution subsidiaries of products produced by other
manufacturers, including both biorational insect control products and
conventional toxic pesticides as well as fertilizers and farm supplies. The
Company's primary focus is the development of proprietary products and expansion
of the markets for those products. A significant element of the Company's
strategy for the commercialization of its proprietary commercial agriculture
products has been to acquire distribution operations in key agricultural regions
and to introduce its proprietary products through those operations.

      Continued growth in proprietary product revenues was offset by lower gross
margins and higher operating expenses that contributed to a greater loss in 1996
than incurred by the Company in 1995. The growth in proprietary revenue was
primarily attributable to higher revenues from increased sales of the Company's
consumer products and to a lesser extent increased sales of specialty chemicals
by its Farchan subsidiary.

      Since its inception, Consep has funded its growth primarily through equity
financings. Funds from these financings have allowed the Company to build its
organization, develop and register proprietary products for both the commercial
agriculture and consumer home, lawn and garden markets, acquire distribution
operations for the introduction of its commercial agriculture products and
expand its sales efforts through both domestic and international channels of
distribution. The Company completed a follow-on public offering of its common
stock in October 1996, which provided equity of approximately $4.6 million after
deducting costs associated with the offering.

      The Company has incurred annual operating losses since its inception in
1984. The Company believes its future annual profitability is dependent upon
continued revenue growth, maintained or strengthened gross margins, and
controlled growth of operating expenses. There can be no assurance that the
Company will become profitable on an annual basis.

      The Company's business is seasonal with its highest revenues historically
being recognized in the second quarter of each year and its lowest revenues
being recognized in the fourth quarter of each year. This seasonality coincides
with the commercial growing season in the Northern Hemisphere and, to a lesser
extent, the consumer home, lawn and garden buying season. The Company
anticipates this seasonal profile will continue with a slight shift to third and
fourth quarter revenues as sales to international markets increase. In contrast
to revenues, many of the Company's operating expenses are largely independent of
the quarterly selling cycles. As a result, operating expenses will generally
represent a higher percentage of revenues in the third and fourth quarters as
compared to the first two quarters, and the Company may experience a loss in the
third and fourth quarters of an otherwise profitable year.



                                       14
<PAGE>   15

RESULTS OF OPERATIONS

      The following table sets forth, for the periods indicated, the percentage
of net revenues of certain items in the Company's Consolidated Financial
Statements. The table and the discussion below should be read in conjunction
with the Consolidated Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
                                             FISCAL YEAR ENDED DECEMBER 31,
                                          1996            1995            1994
                                         ------          ------           ----
<S>                                     <C>             <C>              <C>  
      REVENUES
        Proprietary products              31.4%           30.4%            22.8%
        Distribution                      68.6            69.6             77.2
                                         -----           -----            -----
           Total revenues                100.0           100.0            100.0
      COST OF REVENUES
        Proprietary products              20.1            17.8             14.1
        Distribution                      55.9            57.1             64.8
                                         -----           -----            -----
           Total cost of revenues         76.0            74.9             78.9
                                         -----           -----            -----
      GROSS MARGIN                        24.0            25.1             21.1
      OPERATING EXPENSES
        Research and development (1)       4.4             3.4              6.9
        Selling, general and 
           administrative (1)             17.1            15.0             19.5
        Distribution (2)                  10.1            10.9             14.5
        Restructure costs                  --              --               3.4
                                          -----           -----            -----
           Total operating expenses       31.6            29.3             44.3
                                         -----           -----            -----
      OPERATING LOSS                      (7.6)           (4.2)           (23.2)
      OTHER INCOME (EXPENSE), NET          0.1             0.0             (0.1)
                                        ------          ------            -----
      NET LOSS
        Proprietary products              (9.9)           (5.6)           (20.7)
        Distribution                       2.4             1.4             (2.6)
                                        ------          ------           -------
           Total net loss                 (7.5)%          (4.2)%          (23.3)%
                                          ====          ======            =====
</TABLE>

      (1)   Research and development and selling, general and administrative
            expenses are allocated to the Company's proprietary product
            operations.

      (2)   Distribution expenses consist entirely of selling, general and
            administrative expenses of the Company's distribution operations.

      Revenues. Total revenues increased to $33.2 million in 1996 from $30.8
million in 1995 and $25.1 million in 1994. Revenues from the Company's
proprietary products increased to $10.4 million in 1996 from $9.4 million in
1995 and $5.7 million in 1994, while revenues from distribution operations
increased to $22.8 million in 1996 from $21.5 million in 1995 and $19.4 million
in 1994.

      The growth in proprietary product revenues for the year ended December 31,
1996 was attributable to growth in sales of the Company's consumer products and
commercial agriculture products, as well as increased sales of specialty
chemicals to third parties by the Company's Farchan subsidiary. The acquisition
of Farchan occurred during February 1995, and accordingly, results from the year
ended December 31, 1995 included only eleven months of Farchan's operations.

      In 1996, revenues from the sale of commercial agriculture products
increased approximately $157,000, or 4.8%, as compared to 1995. The increase in
sales of commercial agriculture products was primarily attributable to the
introduction of newly registered formulations of products for which registration
approvals were obtained during the year. In 1996, the Company received
registration approval for its new flowable micro-encapsulated product for the
control of the Pink Bollworm in cotton ("CheckMate PBW-F"), which contributed to
a 118.4% growth in revenues from the sale of CheckMate PBW products. Also
contributing to the increase in commercial agriculture product revenues were
increased sales of other CheckMate PBW products in Mexico and increased
international sales of CheckMate products to control Codling Moth ("CheckMate
CM") and Oriental Fruit Moth. These revenue increases were offset by (i) a
reduction in revenues in Mexico from the sale of the Company's product to
control Tomato Pinworm ("CheckMate TPW"), and (ii) a reduction in revenues in
California from the sale of the Company's CheckMate CM product. The Company
believes the decrease in revenues in Mexico from the sale of CheckMate TPW was
due to increased competition in Mexico and has responded by strengthening its
sales organization in that market. The Company believes the decrease in revenues
in California from the sale of CheckMate CM was due to a delay in receiving
registration of a new warm weather formulation of CheckMate CM from the State of
California which caused 



                                       15
<PAGE>   16

the Company to sell its cool weather formulation that did not perform adequately
in the hotter weather experienced in the spring of 1996. As a result, many
growers used alternatives to the Company's cool weather formulation of CheckMate
CM. Applications of the Company's new warm weather formulation of CheckMate CM
were made after registration was received and performed as expected. Revenues
from the sale of commercial agriculture products increased $1.3 million, or
69.6%, in 1995 as compared to 1994. This revenue growth was attributable
primarily to increased market penetration of the Company's existing CheckMate
products, certain product enhancements and revenues from the sale of the
CheckMate product to control the Peach Twig Borer ("CheckMate PTB"), a new
product in 1995.

      In 1996, revenues from the sale of consumer products from the Company's
SureFire product line in the United States and Insectigone products in Canada
increased $765,000, or 15.5%, from 1995 levels. Revenues from the sale of
consumer products increased 29.3%, or $1.1 million during 1995 as compared to
1994. This growth in consumer product revenues was generated by the Company's
continued efforts to increase the number of retail outlets through which its
products are sold while also increasing the number of products carried by the
individual retail operations.

      Farchan, which was acquired in February 1995, contributed approximately
$111,000 to the growth in proprietary product revenues for the year ended
December 31, 1996. The increase in specialty chemical sales was primarily
attributable to an increase in the number of products offered by Farchan and the
inclusion of only eleven months of results in 1995. Offsetting this increase, in
October 1996, a fire destroyed the primary manufacturing facility for Farchan
causing a significant reduction in sales in the fourth quarter of 1996.

      Distribution revenues increased $1.4 million, or 6.3%, during the year
ended December 31, 1996, as compared to 1995. The increase was primarily
attributable to continued growth of the Company's California-based subsidiaries
as well as to favorable weather conditions in the Central Valley of California,
the Company's principal distribution market. The distribution revenue growth in
1995 was primarily attributable to the May 1994 acquisition of California-based
agrichemical distributor Richard Hunt, Inc., d.b.a. Sierra Ag Chemical ("Sierra
Ag"). Revenues from Sierra Ag's distribution operations represented
approximately 15.5% of the Company's distribution revenue during 1995 as
compared to 11.0% for 1994.

      Gross Margin. The consolidated gross margin for the Company decreased to
24.0% in 1996 from 25.1% in 1995 and 21.1% in 1994. The decrease in gross margin
in 1996 was primarily attributable to lower gross margins on the Company's
commercial agriculture products. The increase in gross margins in 1995 was
primarily attributable to the increasing percentage of total revenues from
higher-margin proprietary products. During 1995 and 1994, revenues from the
Company's higher-margin proprietary products represented 30.4% and 22.8% of the
Company's total revenues, respectively.

      Proprietary gross margins decreased to 35.8% in 1996 from 41.6% in 1995.
The gross margin percentage for the Company's commercial agriculture products
decreased to 27.9% in 1996 from 43.7% in 1995. This decrease in margin
percentage was primarily attributable to differences in product sales mix and
higher than expected production and raw material costs incurred in connection
with the introduction of the Company's new warm weather CheckMate CM
formulation. In addition, the CheckMate CM product has been redesigned and
tested for the 1997 season, with favorable results. As a result of the new
design of the CheckMate CM product, approximately $260,000 of CheckMate CM
product was written off in the fourth quarter. This inventory write-off lowered
the gross margin percentage on commercial agriculture products by 7.6%.

      Sales of consumer products during 1996 resulted in a gross margin of
37.5%, the same percentage achieved in 1995. The increase in consumer gross
margin percentage to 37.5% in 1995 from 34.8% in 1994 is attributable to 1995
including a full year of higher-margin consumer products sold by Chemfree
Environment, Inc. ("Chemfree"), which was acquired in April 1994.

      Proprietary product margins on specialty chemical sales by Farchan in 1996
decreased to 49.0% from 53.0% in 1995. The decrease was primarily the result of
differences in the product sales mix for specialty chemicals. The 1994 results
did not include this subsidiary, which was acquired in February 1995.

      Proprietary gross margins improved to 41.6% in 1995 from 38.3% in 1994.
The gross margin percentage for the Company's commercial agriculture products
decreased to 43.7% in 1995 from 45.1% in 1994. This decrease in margin
percentage was largely attributable to the Company's product mix, whereby its
lower-margin CheckMate CM and PTB products represented a significantly higher
percentage of the Company's commercial agriculture product sales during 1995 as
compared to 1994. In addition, the selling price of CheckMate CM was lowered in
1995 in an effort to further penetrate the market for this product, and
CheckMate PTB, a new product in 1995, was competitively priced to broaden market
acceptance during its introductory year.




                                       16
<PAGE>   17

      The distribution operations' margin was 18.6% for 1996, compared to 17.9%
in 1995 and 16.0% in 1994. During the second quarter the Company changed the
timing for recognition of manufacturers' rebates for purchases of bulk
chemicals. Rather than recognizing these rebates when received, typically in the
fourth and first quarters of each year, the Company determined that recognition
should occur at the time the rebates are earned. This change improved
distribution margins by approximately 0.8% in 1996. The 1995 increase in
distribution gross margin was primarily attributable to decreased wholesale
sales occurring during that year which carried a lower margin than retail sales.

      Research and Development. During 1996, research and development costs
increased $395,000, or 37.3%, from the level incurred during 1995. This increase
was primarily attributable to (i) increased costs associated with the
development of new, lower cost synthesis routes to be used in the production of
pheromones by the Company's Farchan subsidiary; (ii) costs associated with the
development of the Company's new dispersed (flowable) microcapsule products;
(iii) increased amortization relating to technology purchased from Bend Research
in 1995; and (iv) additional costs associated with the development of other new
products. Research and development costs decreased 38.6% from 1994 to 1995. This
decrease was primarily attributable to a reduced research and development
spending commitment during 1995 with Bend Research, Inc., tightened control over
various product development field testing programs and the implementation of
certain cost saving measures associated with the Company's 1994 restructuring
plan.

      Selling, General and Administrative. In 1996, selling, general and
administrative costs associated with the Company's proprietary product
operations increased 22.8% from 1995. The principal sources of this increase
were (i) sales and marketing costs associated with both proprietary consumer
products and commercial agriculture products increased due to increased
personnel, increased commissions on higher sales of consumer products and
expanded international operations for commercial agriculture products; (ii)
additional marketing costs related to the introduction of the Company's Bite
Blocker line of insect repellent products; (iii) additional expenses for
complimentary product given to growers in California who encountered
difficulties with the CheckMate CM product described above and (iv) 1996 results
included a full twelve months of Farchan operations while 1995 included only
eleven months of operating expense for that subsidiary acquired in February
1995. Selling, general and administrative costs associated with the Company's
proprietary product operations decreased 5.7% from 1994 to 1995. This decrease
is primarily attributable to the implementation of cost saving measures
associated with the Company's 1994 restructuring plan, partially offset by
increased costs due to the acquisitions of Chemfree and Farchan in April 1994
and February 1995, respectively. In addition, certain accounting and
administrative functions performed by the Company's distribution operations in
1994 were relocated to corporate headquarters in January 1995. The impact of
this relocation further offset decreases in selling, general and administrative
costs resulting from the 1994 restructuring.

      Distribution. During 1996, total operating costs related to the Company's
distribution operations remained approximately the same as 1995. Although
selling and administrative costs increased 5.6% in 1996, the Company was able to
offset these increases with a reduction in bad debt reserves as a result of
improved collections. Operating costs related to the Company's distribution
operations decreased 7.3% from 1994 to 1995. This decrease is attributable
primarily to the relocation of certain accounting and administrative functions
performed by the Company's distribution operations discussed above. In addition,
the results from the first half of 1994 include approximately $78,000 of
operating costs of a distribution location which is no longer an operation of
the Company, further contributing to the decreased distribution operating costs
in 1995. Partially offsetting these decreases are increased operating costs
associated with the acquisition of Sierra Ag, which occurred in May 1994. Sierra
Ag operating costs totaled 23.5% and 14.6% of total distribution operating costs
for 1995 and 1994, respectively.

      Restructure Costs. In November 1994, the Company recorded a charge of
approximately $866,000 associated with a restructuring plan aimed at reducing
operating expenses by refocusing Company resources. This charge consisted of
approximately $203,000 in severance costs related to ten employees who held
positions which were eliminated as a result of the restructuring. In addition,
approximately $523,000 of the restructuring charge relates to the write-off of
catalog rights, certain goodwill and purchased technology. This write-off was a
result of the Company's decision to focus the marketing efforts of its consumer
products more directly towards its existing SureFire and Insectigone labels. The
catalog rights, goodwill and purchased technology which were impaired due to the
restructuring were related to product lines which will not be actively marketed
given the Company's tighter marketing focus. Additionally, approximately
$140,000 in inventory related to the product lines associated with the impaired
goodwill and purchased technology was written off pursuant to the Company's
restructuring plan. At December 31, 1994, accrued liabilities included $180,000
of accrued restructure costs, all related to severance charges. These severance
liabilities were paid in 1995. In conjunction with the restructuring plan, the
Company also instituted several other cost saving measures, including 10% pay
reductions during 1995 for certain salaried employees, reduced employee benefit
costs including elimination of employer matching contributions to the Company's
401(k) plan, consolidation of certain accounting and administrative functions
for certain of its distribution operations, and reduced 




                                       17
<PAGE>   18

marketing and product development spending. Operating expenses during 1995 were
reduced by approximately $1.5 million as a result of the restructuring.

      Other Income and Expense. For the year ended December 31, 1996, the
Company recorded net other income of approximately $35,000 compared to
approximately $20,000 in 1995. The increase was primarily attributable to (i) a
$227,000 gain relating to the insurance proceeds exceeding the book value of the
property destroyed at the Farchan subsidiary and (ii) a $63,000 estimated
reimbursement from the insurance company for the business interruption coverage
in 1996 relating to the Farchan fire. These increases were substantially offset
by (i) increased interest expense; (ii) reduced interest income; (iii) increased
foreign currency exchange losses relating to the Company's Canadian subsidiary
and (iv) the reversal of an accrued contingent liability and the gain on the
sale of property, both of which had a positive impact on the 1995 results.
During 1995, the Company recorded net other income of approximately $20,000
compared to approximately $18,000 of net other expense during 1994. The change
was due primarily to a gain realized upon the 1995 sale of a warehouse owned by
one of the Company's distribution subsidiaries, together with a charge recorded
in 1994 stemming from the anticipated settlement of a European distribution
dispute. Partially offsetting this increase, interest income was lower in 1995
as compared to 1994 due to lower average outstanding cash balances during 1995.
In addition, the Company incurred slightly higher interest costs in 1995 due to
higher outstanding borrowings during the year.

QUARTERLY RESULTS OF OPERATIONS

      The following table sets forth unaudited consolidated statements of
operations data for each of the Company's last eight quarters. This quarterly
financial data has been prepared on the same basis as the annual financial
information presented elsewhere in this Form 10-K and, in management's opinion,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations for each such
quarter. The operating results for any quarter are not necessarily indicative of
the results which may be expected for any future period.

<TABLE>
<CAPTION>
                                                                                QUARTER ENDED
                                            DEC. 31,   SEP. 30,   JUNE 30,   MAR. 31,   DEC. 31,   SEP. 30,   JUNE 30,   MAR. 31,
                                              1996       1996       1996       1996       1995       1995       1995       1995
                                            -------    -------    -------     ------     ------    -------    -------     ------
                                                                               (IN THOUSANDS)
<S>                                        <C>         <C>        <C>        <C>       <C>        <C>        <C>         <C>    
Revenues:
  Proprietary products                     $    895    $ 2,226    $ 3,723    $ 3,575   $  1,272   $  1,461   $  3,366    $ 3,286
  Distribution                                3,073      6,142      7,961      5,634      2,730      6,297      7,379      5,053
                                            -------    -------    -------     ------     ------    -------    -------     ------
         Total revenues                       3,968      8,368     11,684      9,209      4,002      7,758     10,745      8,339
Cost of revenues                              3,531      6,515      8,744      6,452      2,975      6,115      8,090      5,914
                                            -------    -------    -------     ------     ------    -------    -------     ------
         Gross margin                           437      1,853      2,940      2,757      1,027      1,643      2,655      2,425
Operating expenses                            2,787      2,578      2,749      2,391      2,183      2,272      2,377      2,224
                                            -------    -------    -------     ------     ------    -------    -------     ------
Operating income (loss)                      (2,350)      (725)       191        366     (1,156)      (629)       278        201
Other income (expense), net                     205        (73)       (85)       (12)        (6)        70         (3)       (41)
                                            -------    -------    -------     ------     ------    -------    -------     ------
         Net income (loss)                 $ (2,145)  $   (798)  $    106   $    354   $ (1,162)  $   (559)  $    275    $   160
                                             ======    =======    =======     ======     ======    =======    =======     ======
</TABLE>

      The Company's business is seasonal, with its highest revenues being
recognized in the second quarter of each year and its lowest revenues being
recognized in the fourth quarter of each year. This seasonality coincides with
the commercial growing season in the Northern Hemisphere and, to a lesser
extent, the consumer home, lawn and garden buying season. The Company
anticipates this seasonal profile to continue with a slight shift to third and
fourth quarter revenues as sales to international markets increase.

      In contrast to revenues, operating expenses tend to be largely independent
of the quarterly selling cycles. As a result, operating expenses will generally
represent a higher percentage of revenues in the third and fourth quarters as
compared to the first two quarters of the year, and the Company may experience a
loss in the third and fourth quarters of an otherwise profitable year.

LIQUIDITY AND CAPITAL RESOURCES

      Since its inception, the Company has used funds generated from operations,
equity financings and bank borrowings to fund its research and development,
marketing, acquisition of capital equipment, acquisitions of other business
operations and working capital requirements. During the fourth quarter of 1996,
the Company completed a follow-on public offering of its common stock which
raised $4.6 million net of related offering costs. This offering increased the
amount of net equity capital raised through financings by the 



                                       18
<PAGE>   19

Company since its inception to approximately $44.4 million as of December 31,
1996. In addition to equity financing, the Company operates under a bank line of
credit with a maximum borrowing capacity of $7.5 million to support the working
capital requirements of both its principal proprietary product and distribution
operations. This credit line matures in September 1997 and is secured by
substantially all of the Company's current assets.

      At December 31, 1996, the Company had cash, cash equivalents and
short-term investments of approximately $2.5 million and working capital of
approximately $10.4 million. Borrowings under revolving lines of credit were
approximately $1.2 million. The Company believes that cash and cash equivalents
at December 31, 1996, funds generated from operations and funds available from
existing bank lines of credit will be sufficient to fund the Company's
operations through at least 1997. The Company's capital needs may increase
depending upon several factors, including future acquisitions, changes to
planned research and development activities, expanded manufacturing and
commercialization programs, additional technological, regulatory and competitive
developments and the timing of regulatory approvals for new products. As a
result, the Company may need to raise additional funds. There can be no
assurance that additional financing would be available and, if available, that
the terms would be acceptable to the Company.

       In January 1996, the Company, through its Farchan subsidiary, acquired
land and a building to facilitate expansion of its specialty chemicals
manufacturing capacity. The facility, which is located in Alachua, Florida, was
acquired to provide increased manufacturing capacity to produce additional
pheromones for use in the Company's proprietary commercial agriculture products,
as well as to expand Farchan's capacity to supply specialty chemicals to third
party customers. This facility, which was acquired for approximately $396,000,
was financed primarily by a term loan secured by Farchan's land and buildings,
including the new facility.

       On October 16, 1996, one of two buildings in Gainesville, Florida, owned
by Consep's Farchan subsidiary was destroyed by fire. The building served as a
manufacturing facility for certain pheromones used in certain of the Company's
commercial agriculture products, as well as specialty chemicals sold to research
organizations, pharmaceutical companies and the agricultural industry. At the
direction of the EPA, the Company conducted chemical analysis tests of the fire
debris. Although the chemical analysis of the fire debris resulted in findings
that substantially all of the debris contained contaminants below EPA-allowed
limits, a limited amount of ash was declared hazardous due to elevated levels of
cyanide and was disposed of accordingly. As a result of the chemical analysis of
the fire debris, and at the EPA's direction, Farchan is working with an EPA
approved consultant to test the Farchan site for potential soil and groundwater
contamination resulting from the fire. Initial results of the soil and
groundwater testing indicate contaminate levels below EPA-allowed limits. Based
on the results of the initial testing, the Company believes that the EPA will
lift all restrictions on the Farchan site in the near term. All expenses related
to the cleanup, sampling and laboratory analysis have been covered by the
Company's insurance and the Company believes that the total cleanup costs will
not exceed the insurance coverage limits of $250,000. Cleanup and testing costs
incurred through March 3, 1997 are estimated to be approximately $150,000.

       Although the Company believes it has adequate insurance to cover all
losses, settlement negotiations with the insurer are still ongoing with respect
to several aspects of the Company's claim for business interruption losses. In
December 1996, the Company received a $435,000 settlement related to the Farchan
fire for lost property, plant and equipment resulting in a $227,000 gain in the
fourth quarter. The Company has recorded an estimated $63,000 receivable due
from the insurance company relating to the business interruption coverage for
losses from the date of the fire through December 31, 1996. The largest portion
of the Company's claim relates to additional expenses incurred by the Company in
1996 and 1997 for the purchase of pheromones from third party manufacturers at
substantially higher costs than would have been incurred if the pheromones had
been manufactured by Farchan. The Company's claim for such additional expenses
totaling $630,000 is currently being analyzed by the insurance company. The
Company expects the business interruption insurance coverage to terminate at or
near the end of the second quarter of 1997.

       As an indirect result of the fire at the Farchan facility, the Company
believes it is not feasible to proceed with plans to finish and occupy its
proposed plant in nearby Alachua, Florida. The Alachua city council has recently
approved the Company's site permit application, but with attached conditions
that the Company feels are not acceptable. The Company plans to remove all of
its equipment from the Alachua facility and sell the land and building. The
Company has also decided not to rebuild the manufacturing facility at its
Gainesville site. At the present time, the Company plans to build a specialty
chemical facility to produce pheromones and other specialty chemicals adjacent
to its headquarters and manufacturing facility in Bend, Oregon. Site permit
applications have been submitted to the City of Bend and design work is ongoing.
The Company believes the cost of the new facility will range from $1.0 to $1.1
million. The Company is currently in negotiations with the owners of the
Company's headquarters and manufacturing facility in Bend, Oregon to acquire the
property and building for a purchase price of approximately $1.5 million. The
Company is also currently in negotiations with a bank to provide approximately
$2.5 million in debt financing to fund the purchase of the Company's
headquarters and manufacturing facility and the construction of the new
specialty chemicals manufacturing facility. The cost of the additional equipment
needed to complete the new facility is estimated to range 



                                       19
<PAGE>   20

from $300,000 to $500,000. The Company expects to finance at least fifty percent
of the additional equipment through bank loans and/or equipment leasing
arrangements. The Company believes the new facility can be operational by the
end of September 1997 and should be able to produce pheromones for the 1998
season. 

       The Company does not expect the Farchan fire and the resulting loss of
the manufacturing facility to have a material adverse effect on the Company's
business, financial condition or results of operations, since the Company (i)
has property damage, environmental remediation and business interruption
insurance which covers the destroyed facility, its contents, the underlying
property and the associated manufacturing operations, (ii) the Company is
proceeding with its plans to build a specialty chemical manufacturing facility
in Bend, Oregon, which it believes can be operational in sufficient time to
produce pheromones for the 1998 season and (iii) the Company believes it has
alternative sources of supply of pheromones for the 1997 season which it would
otherwise have purchased from Farchan.

       The statements set forth above regarding expected insurance recoveries
and anticipated results of environmental cleanup efforts related to the fire at
the Company's Farchan subsidiary, as well as the statements regarding the
Company's plans for replacing the destroyed specialty chemicals manufacturing
facility, are forward-looking statements which involve risks and uncertainties
that could cause actual results to differ materially from the forward-looking
statements, including, without limitation, delays or difficulties in receiving
business interruption insurance proceeds, discovery of unanticipated soil or
groundwater contamination upon completion of pending EPA tests, environmental
remediation expenses in excess of the Company's insurance coverage limits and
unanticipated delays or difficulties in (i) reaching a definitive agreement with
the current owners to sell the Company its headquarters and manufacturing
facility, (ii) securing the necessary debt financing to fund the purchase of the
Company's headquarters and manufacturing facility and the construction of the
new specialty chemical manufacturing facility or (iii) obtaining regulatory
approvals needed to construct the new manufacturing facility. The
forward-looking statements should be considered in light of these risks and
uncertainties.



                                       20
<PAGE>   21

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS:

<TABLE>
      <S>                                                                    <C>
      Independent Auditors' Report                                            22

      Consolidated Balance Sheets                                             23

      Consolidated Statements of Operations                                   24

      Consolidated Statements of Shareholders' Equity                         25

      Consolidated Statements of Cash Flows                                   26

      Notes to Consolidated Financial Statements                              27
</TABLE>

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

      None.




                                       21
<PAGE>   22

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
Consep, Inc. and Subsidiaries:

      We have audited the accompanying consolidated balance sheets of Consep,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consep, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations, and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.


                                KPMG PEAT MARWICK LLP


Portland, Oregon
February 5, 1997



                                       22
<PAGE>   23
                                  CONSEP, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                           --------------------------------
                                                                                1996                1995
                                                                           -------------       ------------
<S>                                                                         <C>                <C>         
                                    ASSETS
Current assets:
  Cash and cash equivalents                                                 $  2,443,508       $  2,069,595
  Short-term investments                                                         103,167            136,501
  Accounts receivable, net                                                     3,601,912          3,797,425
  Other receivables                                                              296,358             27,315
  Inventories, net (note 4)                                                    7,993,706          8,012,430
  Prepaid expenses                                                               966,102            389,402
                                                                            ------------       ------------
         Total current assets                                                 15,404,753         14,432,668
Property, plant and equipment, net (note 5)                                    4,020,456          3,215,841
Notes receivable and other assets                                                258,865             71,790
Intangible assets, net (note 6)                                                1,545,246          1,526,602
Goodwill, net (notes 2 and 3)                                                  2,181,901          2,311,673
                                                                           -------------       ------------
          Total assets                                                     $  23,411,221       $ 21,558,574
                                                                           =============       ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank lines (note 7)                                                      $   1,170,000      $   1,710,997
  Accounts payable                                                             2,526,325          2,458,120
  Current portion of notes payable (note 8)                                      312,821            401,005
  Current portion of obligations under capital lease (note 12)                    34,369             43,420
  Accrued liabilities                                                            646,135            584,179
  Customer deposits                                                              282,581            451,226
                                                                           -------------       ------------
         Total current liabilities                                             4,972,231          5,648,947
Notes payable, excluding current portion (note 8)                              1,153,553            879,120
Obligations under capital lease, excluding current portion (note 12)              17,516             51,885
Deferred gain on sale of property (note 12)                                      238,075            277,642
Mandatory stock warrant obligation (note 9)                                       19,500             19,500
                                                                           -------------       ------------
         Total liabilities                                                     6,400,875          6,877,094
                                                                           -------------       ------------

Commitments and contingencies (notes 12,13 and 14)

Shareholders' equity (note 9):
  Preferred stock, $.01 par value.  Authorized 3,000,000 shares, no
     shares issued or outstanding at 1996 and 1995                                    --                 --
  Common stock, non-voting, $.01 par value.  Authorized
     657,601 shares, no shares issued or outstanding at 1996 and 1995                 --                 --
  Common stock, $.01 par value.  Authorized 15,000,000 shares,
     issued and outstanding 9,431,203 and 7,569,537 shares at 1996
     and 1995, respectively                                                       94,312             75,695
  Additional paid-in capital                                                  44,256,367         39,467,701
  Accumulated deficit                                                        (27,355,600)       (24,872,713)
  Foreign currency translation adjustment                                         15,267             10,797
                                                                           -------------       ------------
         Total shareholders' equity                                           17,010,346         14,681,480
                                                                           -------------       ------------
         Total liabilities and shareholders' equity                        $  23,411,221       $ 21,558,574
                                                                           =============       ============
</TABLE>


See accompanying notes to consolidated financial statements.




                                       23
<PAGE>   24

                                  CONSEP, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                          --------------------------------------------
                                                              1996            1995            1994
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>         
Revenues (note 16)                                        $ 33,229,229    $ 30,843,734    $ 25,119,627
Cost of revenues (note 16)                                  25,241,986      23,094,064      19,815,988
                                                          ------------    ------------    ------------
Gross margin                                                 7,987,243       7,749,670       5,303,639
                                                          ------------    ------------    ------------
Operating expenses:
  Research and development (note 13)                         1,454,180       1,059,048       1,725,635
  Selling, general and administrative                        9,051,036       7,996,758       8,543,836
  Restructure costs (note 2)                                      --              --           865,987
                                                          ------------    ------------    ------------

         Total operating expenses                           10,505,216       9,055,806      11,135,458
                                                          ------------    ------------    ------------

Operating loss                                              (2,517,973)     (1,306,136)     (5,831,819)
                                                          ------------    ------------    ------------
Other income (expense):
  Interest expense                                            (324,017)       (284,283)       (269,428)
  Interest income                                              159,024         245,403         336,027
  Other, net                                                   200,079          58,537         (84,615)
                                                          ------------    ------------    ------------

         Net other income (expense)                             35,086          19,657         (18,016)
                                                          ------------    ------------    ------------

         Net loss                                         $ (2,482,887)   $ (1,286,479)   $ (5,849,835)
                                                          ============    ============    ============

  Pro forma net loss per common and common
     equivalent share (note 1)                                                            $      (0.97)
                                                                                          ============

  Proforma weighted average number of
     common and common equivalent shares
     outstanding (note 1)
                                                                                             6,001,863
                                                                                          ============
  Net loss per common and common
     equivalent  share (note 1)                           $      (0.31)   $      (0.19)
                                                          ============    ============
  Weighted average number of
    common and common equivalent
    shares outstanding (note 1)                              7,963,358       6,761,623
                                                          ============    ============
</TABLE>



See accompanying notes to consolidated financial statements.



                                       24
<PAGE>   25

                                  CONSEP, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                    Preferred Stock                  Common Stock
                                             ----------------------------    ---------------------------
                                                Shares          Amount           Shares         Amount
                                             ------------    ------------    ------------   ------------
<S>                                          <C>             <C>             <C>            <C>
Balance at December 31, 1993                    3,606,700    $     36,067         387,141   $      3,871

   Common stock issued in
        initial public offering                      --              --         2,150,000         21,500
   Conversion of preferred stock
        upon initial public offering           (3,606,700)        (36,067)      3,636,485         36,365
   Exercise of stock options                         --              --             4,200             42
   Business acquisitions (note 3)                    --              --            85,827            858
   Foreign currency translation
        adjustment                                   --              --              --             --   
   Net loss                                          --              --              --             --   
                                             ------------    ------------    ------------   ------------


Balance at December 31, 1994                         --              --         6,263,653         62,636

   Common stock issued in
        secondary public offering                    --              --         1,100,000         11,000
   Exercise of stock options                         --              --            34,213            342
   Business acquisitions (note 3)                    --              --           171,671          1,717
   Foreign currency translation
        adjustment                                   --              --              --             --   
   Net loss                                          --              --              --             --   
                                             ------------    ------------    ------------   ------------


Balance at December 31, 1995                         --              --         7,569,537         75,695

   Common stock issued in
        secondary public offering                    --              --         1,755,563         17,556
   Exercise of stock options                         --              --            85,698            857
   Common stock issued under
        Employee Stock Purchase
         Plan                                        --              --            20,405            204
   Foreign currency translation
        adjustment                                   --              --              --             --   
   Net loss                                          --              --              --             --   
                                             ------------    ------------    ------------   ------------


Balance at December 31, 1996                         --      $       --         9,431,203   $     94,312
                                             ============    ============    ============   ============
</TABLE>


<TABLE>
<CAPTION>
                                                                              Foreign
                                              Additional                      Currency           Total
                                                Paid-In       Accumulated     Translation     Shareholders' 
                                                Capital        Deficit        Adjustment         Equity
                                             ------------    ------------    ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
Balance at December 31, 1993                 $ 24,185,953    $(17,736,399)    $      --      $  6,489,492

   Common stock issued in
        initial public offering                11,179,750            --              --        11,201,250
   Conversion of preferred stock
        upon initial public offering                 (298)           --              --              --
   Exercise of stock options                        2,808            --              --             2,850
   Business acquisitions (note 3)                 610,462            --              --           611,320
   Foreign currency translation
        adjustment                                   --              --           (15,131)        (15,131)
   Net loss                                          --        (5,849,835)           --        (5,849,835)
                                             ------------    ------------    ------------    ------------


Balance at December 31, 1994                   35,978,675     (23,586,234)        (15,131)     12,439,946

   Common stock issued in
        secondary public offering               3,078,375            --              --         3,089,375
   Exercise of stock options                       58,297            --              --            58,639
   Business acquisitions (note 3)                 352,354            --              --           354,071
   Foreign currency translation
        adjustment                                   --              --            25,928          25,928
   Net loss                                          --        (1,286,479)           --        (1,286,479)
                                             ------------    ------------    ------------    ------------


Balance at December 31, 1995                   39,467,701     (24,872,713)         10,797      14,681,480

   Common stock issued in
        secondary public offering               4,587,399            --              --         4,604,955
   Exercise of stock options                      152,686            --              --           153,543
   Common stock issued under
        Employee Stock purchase
         Plan                                      48,581            --              --            48,785
   Foreign currency translation
        adjustment                                   --              --             4,470           4,470
   Net loss                                          --        (2,482,887)           --        (2,482,887)
                                             ------------    ------------    ------------    ------------


Balance at December 31, 1996                 $ 44,256,367    $(27,355,600)   $     15,267    $ 17,010,346
                                             ============    ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       25
<PAGE>   26

                                  CONSEP, INC.

                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                      --------------------------------------------------------- 
                                                                           1996                  1995                  1994
                                                                      ------------           ------------          ------------ 
<S>                                                                   <C>                    <C>                   <C>
OPERATING ACTIVITIES:
  Net loss                                                            $ (2,482,887)          $ (1,286,479)         $ (5,849,835)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
     Depreciation and amortization                                       1,071,925                881,784               815,820
     Provision for bad debts                                                40,171                164,544               142,791
     Inventory reserve                                                     383,307                148,042               156,500
     (Gain) loss on disposal of equipment                                   16,526                (50,467)               20,353
     Other non-cash items                                                  (10,890)               (31,507)              630,154
    Changes in assets and liabilities, net of amounts acquired:
         Short-term investments                                             33,332              1,514,864            (1,518,032)
         Accounts receivable                                              (292,239)              (244,658)              (64,642)
         Other receivables                                                 (77,379)                58,210                56,111
         Inventories                                                      (450,769)            (2,097,823)           (1,449,137)
         Prepaid expenses                                                 (580,053)                46,091               (35,953)
         Accounts payable                                                   85,409               (460,477)           (1,366,780)
         Accrued liabilities                                                63,070               (324,627)              264,181
         Other assets                                                       (3,000)                66,667               586,499
         Customer deposits                                                (168,646)              (110,866)               16,323
                                                                      ------------           ------------          ------------
              Net cash used in operating activities                     (2,372,123)            (1,726,702)           (7,595,647)
                                                                      ------------           ------------          ------------

INVESTING ACTIVITIES:
  Acquisition of intangible assets                                        (289,818)              (396,915)             (335,068)
  Acquisition of property, plant and equipment                          (1,077,473)              (477,404)             (719,502)
  Acquisition of subsidiary companies, net of cash acquired                     --                (74,136)             (982,477)
  Net proceeds from sale of property, plant and equipment                    8,350                 88,050             1,150,755
  (Increase) decrease in notes receivable, net of payments received        273,265                (34,900)             (133,861)
                                                                      ------------           ------------          ------------
              Net cash used in investing activities                     (1,085,676)              (895,305)           (1,020,153)
                                                                      ------------           ------------          ------------

FINANCING ACTIVITIES:
  Increase (decrease) in bank lines                                       (541,533)               233,897              (271,203)
  Increase in notes payable                                                215,000                141,516                67,596
  Principal payments on notes payable and capital
    lease obligations                                                     (650,149)              (584,997)           (1,262,098)
  Proceeds from sale of common stock, net                                4,807,283              3,148,014            11,204,100
                                                                      ------------           ------------          ------------
             Net cash provided by financing activities                   3,830,601              2,938,430             9,738,395
                                                                      ------------           ------------          ------------

  Effect of exchange rate changes on cash and cash equivalents               1,111                   (613)                2,379
                                                                      ------------           ------------          ------------

             Net increase in cash and cash equivalents                     373,913                315,810             1,124,974

Cash and cash equivalents at beginning of period                         2,069,595              1,753,785               628,811
                                                                      ------------           ------------          ------------
Cash and cash equivalents at end of period                            $  2,443,508           $  2,069,595          $  1,753,785
                                                                      ============           ============          ============
Supplemental disclosures of cash flow information:
  Cash paid during the period for interest                            $    324,818           $    295,915          $    290,807
                                                                      ============           ============          ============
  Cash paid during the period for taxes                               $     10,446           $    12,403           $      7,542
                                                                      ============           ============          ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>   27

                                  CONSEP, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Cash Equivalents and Short-term Investments

      For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Similar investments with original maturities beyond
three months are considered short-term investments and are carried at cost,
which approximates market value. In May 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Effective
January 1, 1994, the Company adopted SFAS No. 115. The adoption of SFAS No. 115
did not materially impact the Company due to fair values of investments held by
the Company being substantially consistent with the underlying costs and
carrying values of such investments.

(b) Principles of Consolidation

      The consolidated financial statements include the accounts of Consep, Inc.
and its wholly-owned subsidiaries, Pacoast, Inc. (Pacoast), Valley Green Center,
Inc., Consep de Mexico, S.A. de C.V. (CdM), Chemfree Environment Inc.
(Chemfree), Richard Hunt, Inc., d.b.a. Sierra Ag Chemical (Sierra Ag), Consep
GmbH, and Farchan Laboratories, Inc. (Farchan). All significant intercompany
transactions and balances have been eliminated in consolidation.

(c) Accounts Receivable

      Accounts receivable are shown net of allowance for doubtful accounts of
$857,775 and $834,128 at December 31, 1996 and 1995, respectively. The Company
sells its products through agribusiness distributors, consumer products
distributors and retailers and to agricultural growers, primarily in the Central
Valley of California. The Company performs continuing credit evaluations of its
customers and generally does not require collateral.

(d) Inventories

      Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.

(e) Property, Plant and Equipment

      Property, plant and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the assets ranging
from three to twenty years. Leasehold improvements are amortized over the
shorter of the estimated life of the asset or the term of the related lease.

(f) Patents, Trademarks, Technology and Registrations

      Patents are amortized over seventeen years, technology over five to ten
years, catalog rights over five years, and trademarks and product registrations
over their useful lives, all using the straight-line method.

(g) Goodwill

      Goodwill, which represents the excess of the purchase price over the fair
value of net assets acquired, is amortized over periods ranging from twenty to
twenty-five years using the straight-line method. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
discounted projected future cash flows of the operations or assets from which
the goodwill arose. Amortization charged to operations was $123,641, $125,571
and $129,740 for the years ended December 31, 1996, 1995 and 1994, respectively.



                                       27
<PAGE>   28

(h) Income Taxes

      Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and has credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(i) Net Loss and Pro Forma Net Loss Per Common and Common Equivalent Share

      Pro forma net loss per common and common equivalent share for the year
ended December 31, 1994 is presented reflecting the Company's capital structure
as if all outstanding preferred stock had been converted into common stock as of
the beginning of each such period. As a result of the Company's initial public
stock offering which occurred in February 1994, such preferred stock was
converted into common stock.

      Net loss and pro forma net loss per common and common equivalent share for
all periods presented is computed using the weighted average number of common
and dilutive common equivalent shares assumed to be outstanding for each such
period. Common equivalent shares consist of options and warrants to purchase
shares of the Company's common stock.

      Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common and common equivalent shares which were issued or became
issuable during the twelve months immediately preceding the initial public
offering have been included in the calculation as if they were outstanding for
all periods presented prior to the closing of the initial public offering, using
the treasury stock method and the initial public offering price. Subsequent to
the closing of the initial public offering, the weighted average number of
common and common equivalent shares includes only common and dilutive common
equivalent shares outstanding. For the loss periods presented in the
accompanying statements of operations, common equivalent shares outstanding
subsequent to the initial public offering are excluded from the calculation due
to the anti-dilutive effects given the net losses incurred by the Company for
such periods.

(j) Foreign Currency Translation

      The Canadian dollar is the functional currency of Chemfree, the Company's
Canadian subsidiary. Assets and liabilities of Chemfree are translated to U.S.
dollars at current exchange rates, and revenues and expenses are translated
using weighted average rates of exchange. Adjustments arising from foreign
currency translation are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included as a
component of other income and expense and arise primarily from U.S.-dollar-based
amounts held by Chemfree and Mexican-peso-based amounts held by CdM, the
Company's Mexican subsidiary. There are no foreign currency translation effects
arising from CdM as the U.S. dollar is the functional currency of this
subsidiary.

(k) Use of Estimates

      Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

(l) Reclassifications

      Certain reclassifications have been made in the accompanying consolidated
financial statements for 1994 and 1995 to conform with the 1996 presentation.

(m) Stock Option Plan

      Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996 the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 



                                       28
<PAGE>   29

No. 123 also allows entities to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1994 and 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

(n) Financial Instruments

      The carrying amounts of cash equivalents, short-term investments, trade
receivables, accounts payable, customer deposits and short-term borrowings
approximate fair value because of the short-term nature of these instruments.
The fair market value of the Company's long-term debt approximates its carrying
value as the interest rates on borrowings are based on floating rate or the
interest rates approximate the current market interest rate.

(2) RESTRUCTURING

      In November 1994, the Company recorded a charge of approximately $866,000
associated with a restructuring plan aimed at reducing operating expenses by
refocusing Company resources. This charge consists of approximately $203,000 in
severance costs related to ten employees who held positions which were
eliminated as a result of the restructuring. In addition, approximately $523,000
of the restructuring charge relates to the write-off of catalog rights, certain
goodwill and purchased technology. This write-off was a result of the Company's
decision to focus the marketing efforts for its consumer products more directly
towards its existing SureFire and Insectigone labels. The catalog rights,
goodwill and purchased technology which were impaired due to the restructuring
were related to product lines which will not be actively marketed given the
Company's more direct focus on existing brand names. Additionally, approximately
$140,000 in inventory related to the brand names associated with the impaired
goodwill and purchased technology was written off pursuant to the Company's
restructuring plan.

(3) ACQUISITIONS

      Effective April 1, 1994, the Company acquired all of the outstanding
capital stock of Chemfree for approximately $996,000, including approximately
$535,000 in cash and 85,827 shares of the Company's common stock, valued at
approximately $461,000. Chemfree is a manufacturer and distributor of non-toxic
insect control products which are marketed through major retail and commercial
outlets throughout North America. The aggregate purchase price, plus the fair
market value of net liabilities assumed over assets acquired of approximately
$245,000, was recognized as goodwill and is being amortized over 20 years on a
straight-line basis. The operating results of Chemfree are included in the
Company's consolidated results from April 1, 1994.

      Effective May 1, 1994, the Company acquired all of the outstanding capital
stock of Sierra Ag, a California-based distributor of agricultural products, for
approximately $908,000, including approximately $558,000 in cash, promissory
notes of $200,000, and $150,000 in guaranteed stock options. The guaranteed
stock options represent options to purchase 12,000 shares of the Company's
common stock at an exercise price of $3.75 per share with a guaranteed per share
value of $16.25. If the fair value of the Company's common stock does not reach
$16.25 prior to May 15, 1998, the Company is obligated to pay the option holder
the difference between the guaranteed price and the fair value of the Company's
common stock at that date. The $150,000 difference between the exercise price
and the guaranteed price of these options has been included in the purchase
price of Sierra Ag as described above. The aggregate purchase price, less the
fair market value of net assets acquired of approximately $396,000, has been
recognized as goodwill and is being amortized over 20 years on a straight-line
basis. The operating results of Sierra Ag are included in the Company's
consolidated results from May 1, 1994.

      In February 1995, the Company acquired all of the outstanding capital
stock of Farchan, a Florida-based specialty chemicals manufacturer which is
currently supplying pheromones, a major raw material used in the Company's
proprietary products, to the Company. The purchase price of the acquisition was
approximately $589,000, consisting of 171,671 shares of the Company's common
stock valued at $354,000, a non-competition agreement with the former majority
shareholder of Farchan valued at approximately $161,000, and direct costs of the
acquisition of approximately $74,000.

      Pursuant to the Agreement and Plan of Merger, the Company covenants that
the 171,671 shares issued to effect the merger (the "Original Shares") will have
an aggregate market value of at least $1 million (the "Guaranteed Value") for at
least three consecutive trading days during the period from February 1, 1997 to
January 31, 1998. If the Original Shares do not reach the Guaranteed Value
during the period specified, then the following shall apply: (i) if as of
January 31, 1998, the Original Shares have an aggregate market value of less
than the Guaranteed Value but more than $950,000, then the Company shall issue
additional shares of its common stock to the extent necessary to make the
aggregate value of the Original Shares, plus the additional shares, equal to $1
million; (ii) if as of 




                                       29
<PAGE>   30

January 31, 1998, the Original Shares have an aggregate market value of less
than $950,000 but more than $500,000, then the Company shall, at the Company's
option, either (a) issue additional shares of its common stock, up to a maximum
of 171,670 additional shares, to the extent necessary to make the aggregate
value of the Original Shares, plus the additional shares, equal to $1 million,
or (b) deliver the acquired Farchan shares to the previous Farchan shareholders
in exchange for the Original Shares; (iii) if as of January 31, 1998, the
Original Shares have an aggregate market value of less than $500,000, then
either (a) the Company shall issue an additional 171,670 shares of its common
stock to the previous Farchan shareholders, or (b) if the Company does not elect
to deliver such additional shares by February 15, 1998, then the previous
Farchan shareholders shall have the option to elect between the remedies
provided in (ii)(a) and (ii)(b) above. Such election by the previous Farchan
shareholders must occur before March 1, 1998.

      The aggregate purchase price, less the fair market value of net asset
acquired of approximately $482,000, has been recognized as goodwill and is being
amortized over 20 years on a straight-line basis. The operating results of
Farchan are included in the Company's consolidated results from February 1,
1995.

      All of the above acquisitions were accounted for as purchases.

(4) INVENTORIES

      Inventories consist of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                     ---------------------------
                                                        1996            1995
                                                     -----------     -----------
<S>                                                  <C>             <C>        
      Raw materials                                  $ 2,196,006     $ 1,760,833
      Work in process                                     44,963         208,807
      Finished goods--proprietary                      3,528,880       3,329,485
      Finished goods--distribution                     2,717,836       2,975,188
                                                     -----------     -----------
                                                       8,487,685       8,274,313
               Less reserve for obsolescence             493,979         261,883
                                                     -----------     -----------
                                                     $ 7,993,706     $ 8,012,430
                                                     ===========     ===========
</TABLE>

(5) PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                  -----------------------------
                                                      1996             1995
                                                  ------------     ------------
<S>                                               <C>              <C>         
         Land                                     $    502,481     $    432,481
         Buildings                                   1,308,625          865,203
         Machinery and equipment                     2,860,568        2,410,488
         Furniture and fixtures                      1,088,977          957,945
         Vehicles                                      927,892          775,159
         Leasehold improvements                        314,876          180,529
                                                  ------------     ------------
                                                     7,003,419        5,621,805
           Less accumulated depreciation
              and amortization                       2,982,963        2,405,964
                                                  ------------     ------------
                                                  $  4,020,456     $  3,215,841
                                                  ============     ============
</TABLE>




                                       30
<PAGE>   31

(6)  INTANGIBLE ASSETS

         Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                               -------------   --------------------------
                                                USEFUL LIVES       1996           1995
                                               -------------   -----------   ------------

<S>                                            <C>             <C>           <C>         
   Patents, technology and trademarks           5 - 20 years   $   928,939   $    719,164
   Product registrations                       10 - 20 years       798,466        750,909
   Other                                        3 - 10 years       436,946        428,153
                                                               -----------   ------------
                                                                 2,164,351      1,898,226
            Less accumulated amortization                          619,105        371,624
                                                               -----------   ------------
                                                               $ 1,545,246    $ 1,526,602
                                                               ===========    ===========
</TABLE>

(7)  BANK LINES

      In September 1996, the Company secured a $7.5 million bank line of credit
which matures September 23, 1997 and is secured by substantially all of the
Company's current assets. Maximum borrowings under the credit line cannot exceed
70% of eligible accounts receivable and 40% of eligible inventory from certain
of the Company's distribution operations. Interest is payable monthly at the
bank's prime rate (8.25% at December 31, 1996) plus 1.5%. At December 31, 1996,
the Company had $1.2 million outstanding under this line.

      In addition to the $7.5 million bank line of credit, the Company's
Chemfree subsidiary has a working capital bank line of credit of approximately
$37,000. Interest is payable monthly at the bank's prime rate (6.75% at December
31, 1996) plus 2.0%. At December 31, 1996, there were no borrowings outstanding
under this line.

      Under the terms of the credit agreements, the Company is required to
maintain certain financial ratios and other financial conditions. At December
31, 1996, the Company was in compliance with, or had obtained waivers for, all
covenants related to these credit agreements.

(8)  NOTES PAYABLE

         Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                   -----------------------------
                                                                                      1996               1995
                                                                                   ----------         ----------
<S>                                                                                <C>                <C>       
    Mortgages payable at interest rates ranging from prime plus 1.5% to
       8.85%, secured, payable in monthly installments through January, 2001       $  595,160         $  443,899
    Various notes payable at interest rates ranging from 7.4% to 12.9%,
       secured by equipment and vehicles, payable in monthly installments
       with various maturity dates through July, 2001                                 411,122            506,335
    Note payable at an interest rate of prime plus 1.5%, secured by
       substantially all of the Company's current assets with the
       outstanding balance reducing the amount available under the
       $7.5 million bank line of credit, payable in monthly installments 
       through  July, 2000                                                            206,042                 --
    Notes payable at an interest rate of 10%, unsecured, payable
       upon demand                                                                     39,917             40,139
    Notes payable to former shareholders of Sierra Ag and Farchan, interest
       ranging from 8% to 9%, payable semi-monthly or in annual
       installments with maturity dates through 2000 (The former
       shareholders of Sierra Ag and Farchan are currently employed by those 
       subsidiaries.)                                                                 214,133            289,752
                                                                                   ----------         ----------
                                                                                    1,466,374          1,280,125
    Less current maturities                                                           312,821            401,005
                                                                                   ----------         ----------
    Notes payable, excluding current maturities                                    $1,153,553         $  879,120
                                                                                   ==========         ==========
</TABLE>

      The aggregate maturities of notes payable for the five years ending after
December 31, 1996 are as follows: 1997-$312,821; 1998-$260,959; 1999-$239,112;
2000-$339,151; and 2001-$314,331.



                                       31
<PAGE>   32

(9) SHAREHOLDERS' EQUITY

(a) Common Stock

      In October 1995, the Company completed a secondary public offering of its
common stock. This offering resulted in net proceeds to the Company of
approximately $3.1 million upon the sale of 1,100,000 shares of common stock.

      In October 1996, the Company completed a follow-on public offering of its
common stock. This offering resulted in net proceeds to the Company of
approximately $4.6 million upon the sale of 1,755,563 shares of common stock.

(b) Stock Option Plans

      Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"), options
may be granted to employees and certain other individuals to purchase a maximum
of 339,267 shares of common stock. Both incentive and nonqualified stock options
may be granted under the 1992 Plan. Options granted pursuant to the 1992 Plan
become exercisable in various increments determined at the time of grant and
generally expire ten years from the date of grant.

      Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), options
may be granted to employees and certain other individuals to purchase a maximum
of 370,000 shares of common stock. Both incentive and nonqualified stock options
may be granted under the 1993 Plan. Options granted pursuant to the 1993 Plan
become exercisable in various increments determined at the time of grant and
generally expire ten years from the date of grant. In 1996, the number of shares
reserved for future issuance under the 1993 Plan was increased by 100,000.

      Under the Company's 1993 Stock Option Plan for Nonemployee Directors (the
"1993 Director Plan"), options are automatically granted to certain nonemployee
directors immediately following the Company's annual shareholders' meetings.
Annually, each eligible nonemployee director receives an option to purchase
2,000 shares of the Company's common stock under the 1993 Director Plan. Options
granted under the 1993 Director Plan are exercisable upon grant and expire ten
years from date of grant. The annual number of shares of common stock for which
options may be granted under the 1993 Director Plan is limited to 24,000.

      In February 1997, the Company's Board of Directors approved the adoption
of the Company's 1997 Stock Incentive Plan (the "1997 Plan"), subject to
shareholder approval. Under the 1997 Plan, options may be granted to employees
and certain other individuals to purchase a maximum of 300,000 shares of common
stock. Both incentive and nonqualified stock options may be granted under the
1997 Plan. Options granted pursuant to the 1997 Plan become exercisable in
various increments determined at the time of grant and generally expire ten
years from the date of grant.

      At December 31, 1996, the Company has reserved an aggregate of 685,156 of
its common stock for future issuance upon exercise of stock options pursuant to
the 1992 Plan, the 1993 Plan and the 1993 Director Plan. Options under the
Company's four plans specified above are generally granted at no less than the
market value of the Company's common stock at the date of grant.



                                       32
<PAGE>   33

         Stock options outstanding and transactions involving the Company's
stock option plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                      AGGREGATE        EXERCISE
                                                                      EXERCISE         PRICE PER
                                                      NUMBER            PRICE            SHARE
                                                     -------       ------------     --------------
         <S>                                         <C>           <C>              <C>
         Balance at December 31, 1993                339,267       $    636,717     $   0.25-10.00
           Options granted                           191,182            675,572         2.75- 5.25
           Options canceled                          (96,520)          (417,848)        1.75-10.00
           Options exercised                          (4,200)            (2,850)        0.50- 1.75
                                                     -------       ------------     --------------

         Balance at December 31, 1994                429,729       $    891,591     $  0.25-  5.25
           Options granted                           140,749            406,591        2.63-  3.00
           Options canceled                           (7,900)           (22,550)       2.25-  3.25
           Options exercised                         (34,213)           (58,639)       0.25-  2.25
                                                     -------       ------------     --------------

         Balance at December 31, 1995                528,365        $ 1,216,993     $  0.25-  5.25
           Options granted                           181,566            589,599        2.25-  4.25
           Options canceled                          (92,200)          (288,702)       1.75-  5.25
           Options exercised                         (85,698)          (153,543)       0.25-  3.25
                                                     -------       ------------     --------------

         Balance at December 31, 1996                532,033        $ 1,364,347     $  0.25-  4.63
                                                     =======        ===========     ===============
</TABLE>

         At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $0.25 - $4.63 and 7.82
years, respectively. At December 31, 1996 and 1995, the number of options
exercisable was 280,712 and 333,062, respectively, and the weighted average
exercise price of those options was $2.06 and $1.97, respectively.

         The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, net loss and loss per share would have been increased to the
pro forma amounts indicated in the table below:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                               --------------------------------
                                                   1996                1995
                                               -------------      -------------
<S>                                            <C>                <C>           
Net loss - as reported                         $  (2,482,887)     $  (1,286,479)
Net loss - pro forma                              (2,577,593)        (1,324,853)
Net loss per share - as reported               $       (0.31)     $       (0.19)
Net loss per share - pro forma                         (0.32)             (0.20)
</TABLE>


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

<TABLE>
           <S>                                              <C>  
           Expected dividend yield                           0.00%
           Expected stock price volatility                  92.15%
           Risk-free interest rate                           5.57%
           Expected life of options                          7 years
</TABLE>

      The weighted average fair value of options granted during 1996 is $3.25
per share.

(c) Stock Warrants

      In 1988, the Company issued warrants for $250,000 to purchase 28,571
shares of its preferred stock. The warrants carry a mandatory repurchase element
which converts to term debt if the Company is unable to meet the repurchase
schedule. The repurchase price of the warrants exceeded the initial issuance
price, therefore, the difference has been accreted to additional paid-in capital
over the term of the warrants. As of December 31, 1996, the Company has
repurchased 25,571 of these warrants. The remaining 3,000 warrants, which were
converted into warrants to purchase common stock in conjunction with the
Company's IPO in February 1994, carry an exercise price of $6.50 per share and
are required to be repurchased by the Company in April 1999 for $19,500.



                                       33
<PAGE>   34

      The Company has also issued warrants to purchase 48,000 shares of its
preferred stock, which were converted into warrants to purchase 48,000 shares of
the Company's common stock upon the closing of the Company's February 1994 IPO.
The exercise price of these warrants is $6.25 per share. Warrants to purchase
19,200 shares of the Company's common stock expired unexercised on February 1,
1995. Of the remaining warrants to purchase 28,800 shares of the Company's
common stock, 16,000 expire October 20, 1999 and 12,800 expire February 1, 2000.
All such remaining warrants were exercisable as of December 31, 1996.

      In addition, the Company issued warrants to purchase 6,000 shares of its
Series E preferred stock, which were converted into warrants to purchase 7,692
shares of the Company's common stock upon the closing of the Company's February
1994 IPO. These warrants carry an exercise price of $9.75 per share and expire
February 1, 1997. As of December 31, 1996, no such warrants had been exercised
and all were exercisable.

      In December 1993, the Company issued warrants to purchase 50,001 shares of
its common stock at an exercise price of $6.00 per share. These warrants were
issued in conjunction with a $3 million loan commitment provided by certain of
the Company's shareholders. The loan commitment expired unused upon the closing
of the Company's IPO in February 1994. The warrants, all of which were
outstanding and none of which had been exercised as of December 31, 1996, expire
December 20, 1998.

      In October 1996, the Company issued warrants to purchase 175,556 shares of
common stock to an investment banking firm in connection with underwriting
services rendered to the Company with respect to its follow-on public offering
in October 1996. These warrants carry an exercise price of $3.60 per share and
expire October 23, 2001. These warrants become exercisable on October 23, 1997.

(d) Employee Stock Purchase Plan

      During 1995, the Company established an employee stock purchase plan (the
"Plan") whereby eligible employees are able to purchase shares of the Company's
common stock at prices no less than 85% of the fair market value of the
Company's common stock determined at certain specified dates. At December 31,
1996, the Company has reserved 150,000 shares of its common stock for issuance
under the Plan. During 1996, 20,405 shares were purchased pursuant to the Plan.
During 1995, there were no shares purchased under this plan.

(10)  INCOME TAXES

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets and liabilities
at December 31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                     --------------------------
                                                         1996         1995
                                                     -----------   ------------
   Deferred tax assets:
<S>                                                  <C>           <C>         
     Inventories                                     $   707,000   $    700,000
     Allowance for doubtful accounts                     206,000        171,000
     Tax credit carryforwards                            283,000        224,500
     Net operating loss carryforwards                  8,459,000      7,556,000
     Valuation allowance                              (9,256,000)    (8,209,500)
     Other                                               106,000        109,000
                                                     -----------   ------------
            Total deferred tax assets                    505,000        551,000
                                                     -----------   ------------
   Deferred tax liabilities:
     Tax basis depreciation and amortization             505,000        551,000
                                                     -----------   ------------
            Total deferred tax liabilities               505,000        551,000
                                                     -----------   ------------
            Net deferred tax assets                  $       --    $        --
                                                     ===========   ============
</TABLE>

      The valuation allowance for deferred tax assets as of January 1, 1995 was
$8,903,000. The net change in total valuation allowance for the years ended
December 31, 1996 and 1995 was an increase (decrease) of $1,046,500 and
$(693,500), respectively.



                                       34
<PAGE>   35

         The Company has available at December 31, 1996 unused investment
credits, research and development tax credits, and operating loss carryforwards,
which may reduce taxable income in future periods and expire as follows:

<TABLE>
<CAPTION>
                                           STATE                             FEDERAL
                                       ------------       ----------------------------------------------
                                                                            RESEARCH
                                         OPERATING                             AND          OPERATING
 YEAR OF                                   LOSS           INVESTMENT       DEVELOPMENT        LOSS
EXPIRATION                             CARRYFORWARDS        CREDITS          CREDITS      CARRYFORWARDS
----------                             -------------      ----------       ------------   --------------
<S>                                    <C>                <C>              <C>              <C>         
  1997-1998                               $  2,545,000    $       --       $       --       $    200,000
  1999                                       1,035,000           600           18,000          1,540,000
  2000                                         180,000        14,000           50,000          1,696,000
  2001                                         390,000         3,600           31,000            971,000
  2002                                              --            --               --            789,000
  2003                                         394,000            --               --          1,076,000
  2004                                       1,028,000            --               --          1,240,000
  2005                                         603,000            --           39,000            484,000
  2006                                         417,000            --           16,000          1,614,000
  2007                                         784,000            --           39,000          2,776,000
  2008                                       1,219,000            --               --          4,074,000
  2009                                       1,133,000            --           43,000          3,471,000
  2010                                         200,000            --           10,000            710,000
  2011                                         409,000            --           37,000          1,430,000
                                        --------------    ----------        ---------       ------------
                                          $ 10,337,000    $   18,200        $ 283,000       $ 22,071,000
                                        ==============    ==========        =========       ============
</TABLE>

      A provision of the Tax Reform Act of 1986 required the utilization of net
operating losses and credits be limited when there is a change of more than 50%
in ownership of the Company. Such a change occurred with the sales of stock in
1988, 1989, 1992 and 1996. Accordingly, the utilization of the net operating
loss carryforwards generated from periods prior to March 25, 1988, the period
March 26, 1988 to November 14, 1989, the period November 15, 1989 to July 15,
1992 and the period July 16, 1992 to October 29, 1996 is limited; the amounts
subject to the limitation are approximately $4,600,000, $1,500,000, $5,000,000
and $10,700,000, respectively.

(11)  EMPLOYEE SAVINGS PLAN

      The Company sponsors a defined contribution plan (the "Plan") covering all
full-time domestic employees. Employees may contribute up to 15% of their
compensation to the Plan. Through December 31, 1994, the Company matched 50% of
employee contributions up to a maximum of 3% of the employee's total
compensation to the Plan for the year. Company matching contributions vest over
six years. The Company may also make discretionary contributions to the Plan for
the benefit of all eligible employees. Contributions charged to expense was
$83,793 for the year ended December 31, 1994. Effective January 1, 1995, the
Company discontinued its 50% matching of employee contributions.

(12)  LEASES

      The Company leases certain assets under various capital leasing
arrangements. Included in property, plant and equipment in the accompanying
consolidated balance sheets are $128,810 and $136,749 of assets under capital
lease at December 31, 1996 and 1995, respectively, net of related accumulated
amortization of $67,910 and $72,295, respectively.




                                       35
<PAGE>   36

         Capital lease obligations are summarized as follows:

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                           ----------------------
                                                                               1996       1995
                                                                           ---------     --------
        <S>                                                                <C>           <C>
        Lease of certain manufacturing equipment with lease period
           expiring in August 1998, at interest of 15.0%                   $  49,650     $ 77,337
        Lease of certain office and computer equipment with lease
           period expiring in March 1997, at interest of 13.7%.                2,235       17,968
                                                                           ---------     --------
        Total obligations under capital lease                                 51,885       95,305
           Less current portion                                               34,369       43,420
                                                                           ---------     --------
        Obligations under capital lease, less current portion              $  17,516     $ 51,885
                                                                           =========     ========
</TABLE>

      During February 1994, the Company sold and leased back the Company's
headquarters building. The selling price was $1,250,000 and the lease term for
the lease-back is ten years. The sale/lease-back transaction resulted in a
deferred gain of approximately $396,000, which is being amortized as an offset
to operating expenses over the term of the lease on a straight-line basis. The
lease includes annual payments of approximately $140,000 for the initial three
years of the lease, with three percent increases in years four, seven, and ten
of the lease. In conjunction with the sale of the building, the Company retired
debt of approximately $483,000 formerly secured by the building. The Company
also leases certain office and operating facilities, and certain other equipment
under operating leases with remaining terms ranging from one to five years.
Rental expense for all operating leases, net of the deferred gain amortization
related to the sale/lease-back transaction discussed above, amounted to
$288,685, $296,369 and $250,153 for the years ended December 31, 1996, 1995 and
1994, respectively.

      Minimum lease payments under leases expiring subsequent to December 31,
1996 with original terms of one year or more are as follows:

<TABLE>
<CAPTION>
 YEAR ENDING DECEMBER 31,                                           CAPITAL LEASES     OPERATING LEASES
 ------------------------                                           --------------     ----------------
           <S>                                                       <C>               <C>         
           1997                                                        $   40,722       $   241,362
           1998                                                            18,715           227,275
           1999                                                                --           223,069
           2000                                                                --           175,859
           2001                                                                --           172,860
           Thereafter                                                          --           314,457
                                                                       ----------       -----------
              Total minimum lease payments                                 59,437       $ 1,354,882
                                                                                        ===========
           Less amount representing interest                               (7,552)
                                                                       ----------
              Present value of net minimum lease payments              $   51,885
                                                                       ==========
</TABLE>

(13)  COMMITMENTS

      In November 1993, the Company entered into a License Agreement ("the
Agreement") with Bend Research, Inc. (Bend Research) whereby the Company will
fund certain research performed by Bend Research and will obtain exclusive
licenses to sell products utilizing the technology developed through the
research provided under the Agreement. Under the terms of the Agreement, the
Company is to fund a minimum of $600,000 of research annually through the term
of the Agreement, which is twenty years. The Agreement can be terminated upon 60
days prior notice by the Company. Bend Research invoiced the Company $246,804,
$375,565 and $542,578 for research and development work performed during the
years ended December 31, 1996, 1995 and 1994, respectively. For certain products
sold by the Company utilizing technology provided under the Agreement, the
Company is required to pay royalties to Bend Research based upon a percentage of
product margins attributable to the provided technology as defined in the
Agreement. During January 1995, royalties for the term of the Agreement related
to certain products incorporating technology provided by Bend Research were
prepaid by the Company. Such prepaid royalties totaled $121,000 and are being
amortized as the related products are sold by the Company. In addition, Bend
Research and the Company agreed to reduce the annual commitment described above
from $600,000 to $350,000 in 1995 and from $600,000 to $191,500 in 1996. During
1997, the annual commitment was reduced to $125,000. For years subsequent to
1997, the $600,000 annual commitment will again be in effect.

         The Company was incorporated by Bend Research in 1984. Bend Research
owns less than 5% of the Company's common stock as of December 31, 1996. Walter
C. Babcock, the President, Chief Executive Officer, and Chairman of the Board of
Bend Research, is also a director of the Company and serves on the Company's
Scientific Advisory Board. Dr. Babcock is also a shareholder 




                                       36
<PAGE>   37

of Bend Research and the Company. Volker G. Oakey, the President, Chief
Executive Officer, and Chairman of the Board of the Company is also a director
of Bend Research and is a shareholder of the Company.

      In April 1996, the Company entered into a five-year purchase agreement
with a supplier in exchange for exclusive selling rights to this product in
the United States, Canada and Mexico. The agreement requires the Company to
purchase approximately $200,000 per year of this product for five years. The
agreement automatically renews every three years thereafter for an additional
three-year term.

      During October 1994, the Company entered into a license agreement to make,
use, and sell certain consumer products. Pursuant to this license agreement, the
Company is required to pay the licensor guaranteed minimum royalties of $25,000
per year through September 1999.

      During 1993, the Company entered into a non-compete agreement with a
previous shareholder of a business acquired by the Company. Pursuant to this
non-compete agreement, the Company is required to make quarterly payments of
$5,000 through January 2000.

(14) CONTINGENCIES

      In October 1996, a building owned by the Company's Farchan subsidiary was
destroyed by fire. As a result of the fire, the Company was directed by the U.S.
Environmental Protection Agency (the "E.P.A.") to perform tests at the site for
potential soil and groundwater contamination resulting from the fire. Based on
the results of the initial testing, the Company believes that the EPA will lift
all restrictions on the Farchan site in the near term. The Company estimates
that all possible losses, including property damage, environmental remediation
and business interruption will be adequately covered by the Company's insurance
policies.

(15)  NON-CASH INVESTING AND FINANCING ACTIVITIES

      The following is a summary of non-cash investing and financing activities
for the three years ended December 31, 1996, 1995 and 1994:

   December 31, 1996:

      During the year ended December 31, 1996, the Company acquired a building
        for $396,055 and acquired vehicles for $182,045 through the issuance of
        notes payable. Also, during 1996, the Company converted $499,959 of
        trade accounts receivable to notes receivable.

   December 31, 1995:

      Effective February 1, 1995, the Company acquired all of the outstanding
        capital stock of Farchan as follows:

<TABLE>
<S>                                                                                            <C>         
        Fair value of assets acquired                                                          $  1,135,684
        Issuance of 171,671 shares of the Company's common stock                                    354,071
        Issuance of notes payable in conjunction with non-compete agreement                         160,816
        Cash paid                                                                                    74,136
                                                                                               ------------
           Liabilities  assumed                                                                $    546,661
                                                                                               ============
</TABLE>

      During the year ended December 31, 1995, the Company also acquired
        $103,088 of equipment through the issuance of notes payable.
  


                                       37
<PAGE>   38

   December 31, 1994:

      In February 1994, 3,606,700 shares of the Company's convertible preferred
        stock were converted into 3,636,485 shares of the Company's common stock
        upon the closing of the Company's initial public offering.

      Effective April 1, 1994, the Company acquired all of the outstanding
        capital stock of Chemfree as follows:

<TABLE>
<S>                                                                         <C>         
      Fair value of assets acquired                                         $  1,664,112
      Issuance of 85,827 shares of the Company's common stock                    461,320
      Cash paid                                                                  534,662
                                                                            ------------
         Liabilities assumed                                                $    668,130
                                                                            ============
</TABLE>

      Effective May 1, 1994, the Company acquired all of the outstanding capital
        stock of Sierra Ag as follows:

<TABLE>
<S>                                                                         <C>         
      Fair value of assets acquired                                         $  2,112,519
      Issuance of notes payable                                                  200,000
      Issuance of guaranteed stock options                                       150,000
      Cash paid                                                                  558,441
                                                                            ------------
         Liabilities assumed                                                $  1,204,078
                                                                            ============
</TABLE>

      During 1994, the Company acquired certain equipment totaling $162,641
        through capital leasing arrangements and the issuance of certain notes
        payable.

(16)  BUSINESS SEGMENT INFORMATION

      The Company's operations have been classified into three business
segments: domestic proprietary products, foreign proprietary products and
distribution operations. Proprietary products include products manufactured by
the Company, and distribution operations include the distribution and sale of
agrichemicals and other agricultural products by the Company's distribution
subsidiaries. Proprietary products manufactured by the Company which are sold
through the Company's wholly-owned distribution subsidiaries are included in
proprietary products in the following table. Summarized financial information by
business segment for the years ended December 31, 1996, 1995 and 1994 is as
follows:

<TABLE>
<CAPTION>
                                                                PROPRIETARY PRODUCTS       
                                                          -------------------------------        DISTRIBUTION
                                                            DOMESTIC             FOREIGN         OPERATIONS (1)         TOTAL
                                                          ------------       ------------        ------------       ------------
<S>                                                       <C>                <C>                 <C>                <C>         
December 31, 1996:
  Revenues                                                $  8,431,056       $  1,987,476        $ 22,810,697       $ 33,229,229
  Cost of revenues                                           5,278,965          1,406,346          18,556,675         25,241,986
  Operating income (loss)                                   (2,654,365)          (839,605)            975,997         (2,517,973)
  Transfers                                                  1,414,402            231,003               3,925          1,649,330
  Total assets                                              11,764,452          3,374,907           8,271,862         23,411,221
  Depreciation and amortization                                610,226             89,612             372,087          1,071,925
  Capital expenditures                                       1,245,375             91,024             304,616          1,641,015

December 31, 1995:
  Revenues                                                $  7,611,108        $ 1,774,004        $ 21,458,622       $ 30,843,734
  Cost of revenues                                           4,467,421          1,011,406          17,615,237         23,094,064
  Operating income (loss)                                   (1,866,238)           (29,204)            589,306         (1,306,136)
  Transfers                                                  1,093,833             99,644               3,957          1,197,434
  Total assets                                              10,395,536          2,486,026           8,677,012         21,558,574
  Depreciation and amortization                                414,909             82,282             384,593            881,784
  Capital expenditures                                         398,247             34,864             147,382            580,493
</TABLE>



                                       38
<PAGE>   39

<TABLE>
<CAPTION>
                                                                PROPRIETARY PRODUCTS                        
                                                          -------------------------------        DISTRIBUTION
                                                            DOMESTIC             FOREIGN         OPERATIONS (1)         TOTAL
                                                          ------------       ------------        ------------       ------------
<S>                                                       <C>                <C>                 <C>                <C>         
December 31, 1994:
  Revenues                                                $  4,868,794         $  868,989        $ 19,381,844       $ 25,119,627
  Cost of revenues                                           3,045,169            497,546          16,273,273         19,815,988
  Operating loss                                            (5,127,472)          (155,316)           (549,031)        (5,831,819)
  Transfers                                                    887,065              1,558               2,273            890,896
  Total assets                                               9,129,992          2,276,237           8,246,402         19,652,631
  Depreciation and amortization                                392,920             61,551             361,349            815,820
  Capital expenditures                                         576,854             14,523             290,766            882,143
</TABLE>

(1)   The distribution operations business segment consists only of domestic
      distribution operations.

      During the years ended December 31, 1996, 1995 and 1994, export sales of
the Company's proprietary products and sales of proprietary products occurring
outside of the United States totaled $2,522,164, $2,217,266 and $1,327,744,
respectively.

(17) VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                   ADDITIONS
                                                BALANCE AT        CHARGED TO                                          BALANCE AT
                                                 BEGINNING         COSTS AND                                              END
                                                 OF PERIOD         EXPENSES        DEDUCTIONS           OTHER          OF PERIOD
                                                 ---------         --------        ----------           -----          ---------
<S>                                              <C>              <C>              <C>                <C>          <C>    
         Year ended December 31, 1996:
            Allowance for doubtful accounts      $ 834,128           40,171            16,524 (1)          --            857,775
            Inventory valuation reserve            261,883          383,307           151,211 (2)          --            493,979
            Product warranty reserve                58,292           52,329           102,787 (4)          --              7,834

         Year ended December 31, 1995:
            Allowance for doubtful accounts      $ 681,198          164,544            11,614 (1)          --            834,128
            Inventory valuation reserve            227,239          148,042           113,398 (2)          --            261,883
            Product warranty reserve                82,179           83,494           107,381 (4)          --             58,292

         Year ended December 31, 1994:
            Allowance for doubtful accounts      $ 630,439          142,791           101,359 (1)        9,327(3)        681,198
            Inventory valuation reserve             36,610          296,330           105,701 (2)          --            227,239
            Product warranty reserve                44,397           73,286            35,504 (4)          --             82,179
</TABLE>

(1)   Deductions primarily represent accounts written off during the period.

(2)   Deductions primarily represent inventory scrapped during the period.

(3)   Represents reserves of companies acquired during the period as of the
      respective dates of acquisition. 

(4)   Deductions primarily represent warranty credits given to customers for
      products returned under warranty.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item regarding Directors is included in
the section of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 22, 1997 (the "1997 Proxy Statement") captioned
"Election of Directors" and is incorporated herein by reference.

      The information required by this item regarding Executive Officers is
included in the section of the Company's 1997 Proxy Statement captioned
"Management" and is incorporated herein by reference.


                                       39
<PAGE>   40


ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this item is included in the section of the
Company's 1997 Proxy Statement captioned "Executive Compensation" and is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this item is included in the section of the
Company's 1997 Proxy Statement captioned "Stock Owned by Management and
Principal Shareholders" and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is included in the section of the
Company's 1997 Proxy Statement captioned "Certain Transactions and
Relationships" and is incorporated herein by reference.

                                     PART IV

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

(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

      The financial statements of Consep, Inc. as set forth under Item 8 are
filed as part of this report.

      Supplemental Schedule II - Valuation and Qualifying Accounts is included
in the Notes to the Consolidated Financial Statements as Note 17 on page 39.
Financial statement schedules other than those listed above have been omitted
since the information called for is not present in amounts sufficient to require
submission of the schedules.

      The independent auditors' report with respect to the above-listed
financial statements and financial statement schedule appears on page 22 of this
report.

(B) REPORTS ON FORM 8-K

      No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.

  (C)  EXHIBITS

<TABLE>
<CAPTION>
    NUMBER                            DESCRIPTION
    ------                            -----------

      <S>   <C>                                                          
      2.1   Share Purchase Agreement Respecting Chemfree Environment Inc.
            (Incorporated by reference to the Company's Quarterly Report on Form
            10-Q for the quarter ended June 30, 1994, filed on August 12, 1994)

      2.2   Agreement for Purchase and Sale of Stock of Richard Hunt, Inc.
            d.b.a. Sierra Ag Chemical (Incorporated by reference to the
            Company's Quarterly Report on Form 10-Q for the quarter ended June
            30, 1994, filed on August 12, 1994)

      2.3   Agreement and Plan of Merger with Farchan Laboratories, Inc.** 

      3.1   Third Restated Articles of Incorporation of Consep, Inc.*** 

      3.2   Amended provisions of Article II of Third Restated Articles of 
            Incorporation of Consep, Inc.****

      3.3   Second Restated Bylaws of Consep, Inc.***

      4.0   Form of Stock Certificate***

      10.1  Form of Indemnity Agreement between Consep, Inc. and each of its
            executive officers and directors***

      10.2  1992 Stock Incentive Plan***

      10.3  1993 Stock Incentive Plan, as amended (Incorporated by reference to
            the Company's Registration Statement on Form S-8 dated August 8,
            1996, File No. 333-09759)

      10.4  1993 Stock Option Plan for Nonemployee Directors***

      10.5  Registration Rights Agreement, as amended***
</TABLE>

                                       40
<PAGE>   41

<TABLE>
<CAPTION>
    NUMBER                            DESCRIPTION
    ------                            -----------
      <S>   <C>                                                          
      10.6  License Agreement with Bend Research, Inc.***

      10.7  Commercial Lease for Bend, Oregon facility****

      10.8  Loan and Security Agreement with Silicon Valley Bank, as amended***

      10.9  Fourth Amendment to Registration Rights Agreement***

      10.10 Fifth Amendment to Registration Rights Agreement****

      10.11 Master Equipment Lease Agreement with Financing for Science
            International, Inc., including Rental Schedule No. 1 and Schedules A
            and B thereto (Incorporated by reference to the Company's Quarterly
            Report on Form 10-Q for the quarter ended September 30, 1994, filed
            on November 14, 1994)

      10.12 Amendment to License Agreement with Bend Research, Inc.**

      10.13 Amendment No. 2 to License Agreement with Bend Research, Inc.,
            including Paid-Up License Schedule 1 thereto**

      10.14 Loan Modification Agreement with Silicon Valley Bank**

      10.15 Schedule to Loan and Security Agreement with Silicon Valley Bank**

      10.16 Loan Modification Agreement with Silicon Valley Bank (Incorporated
            by reference to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1995, filed on August 14, 1995) 

      10.17 Schedule to Loan Modification Agreement with Silicon Valley Bank
            (Incorporated by reference to the Company's Quarterly Report on Form
            10-Q for the quarter ended June 30, 1995, filed on August 14, 1995)
           
      10.18 Sixth Amendment to Registration Rights Agreement (Incorporated
            by Reference to the Company's Registration Statement on Form S-1
            dated September 12, 1995, File No. 33-96002)

      10.19 1995 Employee Stock Purchase Plan (Incorporated by reference to the
            Company's Registration Statement on Form S-8 dated July 28, 1995,
            File No. 33-95130)

      10.20 Amendment No. 3 to License Agreement with Bend Research, Inc.*

      10.21 Seventh Amendment to Registration Rights Agreement*

      10.22 Loan Modification Agreement with Silicon Valley Bank*

      10.23 Amended and Restated Schedule to Loan Modification Agreement with
            Silicon Valley Bank*

      10.24 Eighth Amendment to Registration Rights Agreement*

      10.25 Amendment No. 4 to License Agreement with Bend Research, Inc.

      21.0  List of Subsidiaries of Consep, Inc. (Incorporated by reference to
            the Company's Registration Statement on Form S-1 dated September 12,
            1995, File No. 33-96002)

      23.0  Consent of KPMG Peat Marwick LLP

      24.0  Power of Attorney (included in signature page)

      27.0  Financial Data Schedule
</TABLE>

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

      *     Incorporated by reference to the Company's Registration Statement on
            Form S-1 dated October 23, 1996, File No. 33-11827

      **    Incorporated by reference to the Company's Annual Report on Form
            10-K for the year ended December 31, 1994, filed on March 30, 1995

      ***   Incorporated by reference to the Company's Registration Statement on
            Form S-1 dated February 3, 1994, File No. 33-71846

      ****  Incorporated by reference to the Company's Annual Report on Form
            10-K for the year ended December 31, 1993, filed on March 30, 1994



                                       41
<PAGE>   42

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.


                                             CONSEP, INC.

         March 26, 1997                   By: /s/  LARRY KATZ
                                              -------------------------------- 
                                              Larry Katz
                                              Vice President, Finance
                                              Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Larry Katz and Volker G. Oakey, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been duly
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURES                              TITLE                                                                  DATE
<S>                                     <C>                                                                    <C> 
 /s/ VOLKER G. OAKEY                    President, Chief Executive Officer and Chairman                        March 26, 1997
------------------------------------    of the Board of Directors (Principal Executive Officer)
     Volker G. Oakey                


 /s/ LARRY KATZ                         Vice President, Finance and Chief Financial Officer                    March 26, 1997
------------------------------------    (Principal Financial and Accounting Officer)
     Larry Katz                     


/s/ WALTER C. BABCOCK                   Director                                                               March 26, 1997
------------------------------------
    Walter C. Babcock


 /s/ PETER H. GLEASON                   Director                                                               March 26, 1997
------------------------------------
     Peter H. Gleason


/s/ PHILIP E. BARAK                     Director                                                               March 26, 1997
------------------------------------
    Philip E. Barak
</TABLE>



                                       42