**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM10-K**

 

| **(Mark One)**                                        | ** ** | ** **                                                                                    |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| **ý**                                            | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                  |       |                                                                                          |
| **For the  fiscal year ended December 31, 2005** |
|                                                  |       |                                                                                          |
| **-OR-**                                              |
|                                                  |       |                                                                                          |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from              to              **

 

**Commission File No. 333-69172**

 

----

 

**ERGOSCIENCE CORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                     | ** ** | **04-3565746**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                             |       |                                     |
| **790  Turnpike Street  North Andover, Massachusetts**           |       | **01845**                                |
| (Address of principal  executive offices)                        |       | (Zip Code)                               |

 

Registrant’s telephonenumber, including area code: **(978) 688-8833**

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(b) OF THE ACT:

**None**

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT:

**Common Stock, $.01 Par Value**

(Title of Class)

 

**Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ****o****    No  ****ý**

 

**Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ****o****    No  ****ý**

 

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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. **Yes  ****ý****    No  ****o**

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is**a largeaccelerated filer,** an accelerated filer**, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):**

 

**Large accelerated filer****o****   Acceleratedfiler****o****   Non-acceleratedfiler****ý**

 

**Indicate by check mark whether the registrant is ashell company** (as defined in Rule 12b-2 of the Act**)**.**Yes  ****o****    No  ****ý**

 

The aggregate market value of our common stock held bynon-affiliates (without admitting that any person whose shares are not includedin such calculation is an affiliate), based on closing sale price as reportedon the NASD’s OTC Bulletin Board as of June 30, 2005 was $13,053,198.

 

As of February 28, 2006, there were 5,813,856outstanding shares of the registrant’s common stock.

 

Documents incorporated by reference:  None.

 

 

----

 

**ERGO SCIENCE CORPORATION AND SUBSIDIARIES**

 

**FORM 10-K – FISCAL YEAR ENDED DECEMBER 31, 2005**

 

**Contents and Cross Reference SheetFurnished Pursuant to General Instruction G(4) of Form 10-K**

 
| **Item No.** | ** ** | **Description**                                                                                                    |   |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|         |       |                                                                                                               |   |
|         |       | PART I                                                                                                             |   |
|         |       |                                                                                                               |   |
| Item 1.      |       | Business                                                                                                           |   |
| Item 1A.     |       | Risk Factors                                                                                                       |   |
| Item 1B.     |       | Unresolved  Staff Comments                                                                                         |   |
| Item 2.      |       | Properties                                                                                                         |   |
| Item 3.      |       | Legal Proceedings                                                                                                  |   |
| Item  4.     |       | Submission  of Matters to a Vote of Security Holders                                                               |   |
|         |       |                                                                                                               |   |
|         |       | PART II                                                                                                            |   |
|         |       |                                                                                                               |   |
| Item 5.      |       | Market for Registrant’s Common  Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |   |
| Item  6.     |       | Selected  Consolidated Financial Data                                                                              |   |
| Item 7.      |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                        |   |
| Item 7A.     |       | Quantitative and Qualitative  Disclosures about Market Risk                                                        |   |
| Item  8.     |       | Consolidated  Financial Statements                                                                                 |   |
| Item 9.      |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosures                             |   |
| Item 9A.     |       | Controls and Procedures                                                                                            |   |
| Item 9B.     |       | Other Information                                                                                                  |   |
|         |       |                                                                                                               |   |
|         |       | PART III                                                                                                           |   |
|         |       |                                                                                                               |   |
| Item 10.     |       | Directors and  Executive Officers of the Registrant                                                                |   |
| Item 11.     |       | Executive  Compensation                                                                                            |   |
| Item 12.     |       | Security  Ownership of Certain Beneficial Owners and Management                                                    |   |
| Item 13.     |       | Certain  Relationships and Related Transactions                                                                    |   |
| Item 14.     |       | Principal  Accountant Fees and Services                                                                            |   |
|         |       |                                                                                                               |   |
|         |       | PART IV                                                                                                            |   |
|         |       |                                                                                                               |   |
| Item 15.     |       | Exhibits and  Financial Statement Schedules                                                                        |   |
|         |       |                                                                                                               |   |
| Signatures   |       |                                                                                                               |   |

 

2

----

 

## **PART I**

 

**Forward-Looking Information**

 

***This Annual Report includesforward-looking statements related to future events and our future performancewithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities and Exchange Act of 1934, as amended. Allstatements other than statements of historical fact, including statementsregarding industry prospects and future results of operations or financialposition, made in this Annual Report are forward looking. We use words such as “anticipates,”“believes,” “expects,” “future” and “intends” and similar expressions toidentify forward-looking statements. Forward-looking statements reflectmanagement’s current expectations, plans or projections and are inherentlyuncertain. Our actual results may differ significantly from management’sexpectations, plans or projections. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof. Certain risks and uncertainties that could cause our actual results todiffer significantly from management’s expectations are described in Item 1A,Risk Factors. Item 1A, along with other sections of this Annual Report,describes some, but not all, of the factors that could cause actual results todiffer significantly from management’s expectations and have a material adverseeffect on the business, financial condition and common stock of the Company. Weundertake no obligation to publicly release any revisions to theseforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.Readers are urged, however, to review the factors set forth in reports that wefile from time to time with the Securities and Exchange Commission. Unless thecontext requires otherwise in this Annual Report the terms “Ergo,” the “Company,”“we,” “us” and “our” refer to Ergo Science Corporation and its subsidiaries.***

 

# **ITEM 1. BUSINESS**

# ** **

## **Overview**

## ** **

Ergo Science Corporation (the “Company” or “Ergo”),through its wholly owned subsidiary, Nexus Media Communications (“Nexus Media”),is a business information provider serving key markets from defense andcommunications to travel and horticulture, using an increasing range of media.In each market we seek to provide clients with a comprehensive range ofproducts through which to service their customers. In addition to core magazinebrands, we also provide services which include exhibitions, conferences, awardsceremony events and online services.

 

***Our products and services***

 

Nexus Media, is comprised of eight wholly-ownedsubsidiaries which provide information across a diverse range of marketsincluding printed magazines, web sites, data services and directories, stagedexhibitions, conferences and award ceremony events.

 

Our businessincludes: 13 trade names (including: Checkout, Electrical Times; IndependentGrocer; The Motor Ship; World Travel Guide and Motor Trader); 150 domain names(including columbusguides.com; groweroftheyear.com; harpers-wine.com; motorship.com;motortrader.com; travel-guide.com; and worldfish.com); approximately 50 printedmagazines and directories (including: Motor Trader; Harpers Wines &Spirits, The Grower, Independent Retail News, World Fishing; The World TravelGuide and Electrical Review) and approximately 30 Events including exhibitions,awards evenings and conferences such as the International Wine & SpiritCompetition; the Undersea Defence Technology Conference & Exhibition; theMotor Trader Awards and the Grower of the Year Awards.

 

Our revenue is derived from a number of sourcesincluding the following:

 

•      magazine advertising, whichaccounted for 52% of revenue in 2005;

•      exhibitors, exhibition sponsors andattendees, which accounted for 15% of revenue in 2005;

•      sponsors/entrants/attendees atawards evenings and competitions, which accounted for 15% of revenue in 2005;

•      subscriptions/copy sales ofmagazines, which accounted for 7% of revenue in 2005;

•      sales of books, which accounted for4% of revenue in 2005;

 

3

----

 

•      sales of content for third partyuse, primarily data related to the travel industry, which accounted for 3% ofrevenue in 2005;

•      internet advertising, whichaccounted for 2% of revenue in 2005; and

•      conference attendees and sponsors,which accounted for 2% of revenue in 2005.

 

***Customers***

 

Our customersconsist primarily of corporations, although we also have a small number ofcustomers in government, academic and non-profit organizations as well as somesubscribers to our magazines who are individuals. Our customers are principallylocated in the United Kingdom, but we also have customers located in otherparts of Western Europe and the United States.

 

***Strategy***

 

Our primary goal is to create value for our shareholdersby creating and delivering efficiently a leading set of products and servicesto our customers. We hope to offer products and services at quality and pricepoints that deliver value for our customers. We intend to reposition ourselves as a businessinformation provider rather than a business magazine publisher. In order toaccomplish this goal, we are putting in place an infrastructure that will allowus to increase the product range we offer to clients in each of the businesssectors in which we operate. In particular, we are looking to increase theproportion of revenue derived from on line services and events and to becomesignificantly less dependant on magazine advertising revenue. This strategyreflects trends already evident in our markets where clients wish to be offereda range of solutions to their marketing needs. In addition to internal changes,we may be able to expand our customer base through acquisitions.

 

***Sales & Marketing***

 

As of December 31,2005, Nexus Media employed 74 people in its sales and marketing organization.The vast majority of these employees (70) operate out of the Nexus Mediaheadquarters in Swanley, Kent in the United Kingdom. Nexus Media also has onesalesperson in Leicester, United Kingdom and another in Braunschweig, Germanyas well as two marketing employees who operate in Dunsford Park, Surrey in theUnited Kingdom. Sales are principally driven via telephone calls and directcontact with potential customers. Marketing is principally driven by directmail and email.

 

***Client Service and Support***

 

It is our beliefthat customer service and support play an important part in the success of ourbusiness. Our sales group is available to our customers to provide day-to-dayinformation and marketing advice to our clients as needed. Our production,studio and web teams provide ongoing information and marketing advice to ourcustomers as needed. The events operations department also provides on siteinformation support at all of our exhibitions and other events.

 

***Operations***

 

We currently ownthe office space of our United Kingdom headquarters in Swanley, Kent in theUnited Kingdom, where we employ approximately 220 individuals as of December31, 2005. We also have smaller operations performed from offices in Surrey inthe United Kingdom as well as in Braunschweig, Germany.

 

The office inSurrey is used to produce and administer the International Wine and SpiritsCompetition (“IWSC”). The various travel publications receive assistance inproduction and language translation from an employee in the Braunschweig,Germany office.

 

***Competition***

 

Competition in ourmarket place comes from a number of areas, including major media publiccompanies such as EMAP, Reed Elsevier and United Business Media, all of whomhave significant business to business operations including magazines, eventsand online services.

 

We also havecompetitors who are significant business to business media companies such asIncisive, 

 

4

----

 

Centaur, William Reed andInforma, as well as a wide range of smaller business to business companies,such as Datateam Publishing Ltd and Metropolis International (UK) Ltd, whichnormally specialize in a relatively narrow range of market sectors. In additionthere is competition from Pro-Talk Ltd, a company that is a provider of on-lineinformation which includes email newsletters in addition to publishing.

 

We believe that thekey factor in protecting and growing our revenue will be to continue thedevelopment of new and diversified products which we offer through thelaunching of new events and on line services.

 

***Human resources***

 

As of February 1, 2006, the Company had approximately 240 full timeemployees worldwide, of which approximately 230 were employed in the UnitedKingdom, 5 in the United States and 5 in Germany. The Company’s employees arenot represented by any labor union and the Company is not aware of any currentactivity to organize any of its employees.

 

***Insurance***

 

The Company currently purchases insurance policies for property andliability risks arising out of current operations.

 

***CorporateBackground***

 

***CorporateHistory Prior to the Acquisition of Nexus Media Communications***

 

**Ergo Science DevelopmentCorporation (“ESDC”) was incorporated on January 23, 1990. ESDC operatedas an S Corporation from inception to September 10, 1992, when itconverted to a C Corporation. In April 1995, ESDC went through arecapitalization whereby all the stock of ESDC was exchanged on a one-for-onebasis for an equal amount of stock in Ergo Science Holdings, Incorporated,which previously was a wholly owned subsidiary of ESDC. Subsequent to therecapitalization, Ergo Science Holdings, Incorporated changed its name to ErgoScience Corporation.**

 

**From our incorporationthrough March 2001, we were engaged in the development of ERGOSET® tablets forthe treatment of type 2 diabetes. In March 2001, we decided that the next phaseof the development of ERGOSET® would be better undertaken by a company that hasmore experience with human drug development and more resources for regulatoryapproval and marketing than we do.**

 

**On November 24, 2003 wesold all of our scientific and research assets and certain other intellectualproperty assets to Pliva d.d., a company organized under the laws of Croatia (“Pliva”).At the time of the sale, we received $5,498,000 in cash. In addition, Pliva hasassumed our future obligations under the royalty agreement with Louisiana StateUniversity (“LSU”). If Pliva is successful in obtaining approval from the Foodand Drug Administration (“FDA”) they would be required to make certain royaltypayments to LSU based on sales of the potential product. Also as part of theagreement, Pliva has agreed to make payments to one of our wholly-ownedsubsidiaries, Ergo Texas, to cover certain payments required to be made in theevent that Ergoset® or another specified drug is approved by the FDA. ErgoTexas may under some circumstances remain liable for some payments but theywould have legal remedies available to them against Pliva.**

 

**From our inception through2005, the Company has been unprofitable every year except 2003. We wereprofitable in 2003****solely because of the sale of the Company’sscience assets to Pliva.**

 

**From November 2003 untilFebruary 2005, the Company had been reviewing and evaluating potentialacquisitions.**

 

***Acquisition of Nexus Media Communications***

 

Ergo acquired Nexus Media, the business to businesspublishing division of Highbury House Communications plc (“Highbury House”) acompany organized under the laws of the United Kingdom, on April 1, 2005. Thepurchase price of GBP £12,500,000 (approximately $23,712,000) was subject to aGBP £1,041,000 (approximately $1,958,000) working capital adjustment. Atclosing therefore, the Company paid Highbury House GBP £11,459,000(approximately $21,754,000).  After completion the final working capitalamount was confirmed and an additional working capital adjustment was made tothe Company in the amount of GBP £464,000 (approximately $873,000), which wereceived in the third quarter of 2005. In addition, Ergo received an additionalGBP £320,000 (approximately $603,000) as reimbursement for warranty claims. Asof December 31, 2005, Ergo had paid a total $20,918,000 related to theacquisition, which includes $640,000 in capitalized acquisition costs. Theacquisition was funded by Ergo from its own cash and cash equivalents. NexusMedia is comprised of eight wholly-owned subsidiaries, provides informationacross a diverse range of sectors including printed and web-based magazines,data services and directories, staging exhibitions, conferences and awardceremonies.

 

5

----

 

***StockTransfer Restrictions***

 

At Ergo’s Annual Meeting of Stockholders held onOctober 15, 2001, stockholders approved the imposition of transfer restrictionson its common stock **(the “Transfer Restrictions”), which are contained in Article XII of theCompany’s Certificate of Incorporation (the “Certificate”). The TransferRestrictions** were implemented on October 19, 2001 **topreserve certain valuable tax benefits (the “Tax Benefits”) to which theCompany is entitled.**

 

**Effective May 18, 2005, the Board of Directors (the “Board”)of the Company, acting by unanimous consent (the “Unanimous Consent”), andtaking into consideration that the Tax Benefits will not begin to expire until2008, that the Company’s ability to retain the Tax Benefits is subject tolimitations resulting from, among other things, an ownership change (an “OwnershipChange”) as defined in Sections 382 and 383 of the Internal Revenue Code of1986, as amended from time to time, or any successor statute (collectively, the“Code”), that the value of the Tax Benefits could be reduced if an OwnershipChange occurs, and that the Transfer Restrictions likely decrease thepossibility of an Ownership Change, determined (the “Determination”) thatmodifying the definition of “Expiration Date” set forth in Article XII.(1) ofthe Certificate and extending that date through 2007 was in the best interestsof the Company and both reasonably necessary and desirable to preserve the TaxBenefits.**

 

**As a result of the Determination, the Board modifiedthe text of Article XII. (1) of the Certificate to read as follows:**

 

**the following restrictions shall apply untilthe earlier of (x) the day after the sixth (6th)  anniversary of the effective time of themerger of the Corporation’s parent corporation, a Delaware corporation, withand into the Corporation pursuant to Section 253 of the Delaware GeneralCorporation Law (the “Merger”)  (y) therepeal of Section 382 of the Code if the Board of Directors determines that therestrictions in this Article XII are no longer necessary for the preservationof the Tax Benefits, and (z) the beginning of a taxable year of the Corporationto which the board of directors determines that no Tax Benefits may be carriedforward, unless the Board of Directors shall fix an earlier or later date inaccordance with Section 5 of this Article XII (the date on which therestrictions of this Article XII expire hereunder is sometimes referred toherein as the “Expiration Date”).**

** **

**The day after the sixthanniversary of the effective date of the merger is October 20, 2007.Additionally, the Board extended the Expiration Date until October 20, 2007.**

 

## **ITEM1A. RISK FACTORS**

## ** **

*Inaddition to the other information in this Annual Report on Form 10-K andall of our other SEC reports, you should consider the following factors inevaluating us, our business and the strategic direction we may head in thefuture.*

* *

**The market for NexusMedia’s products and services is competitive.**

** **

**The competition for Nexus Media’s products andservices is highly fragmented by product offering and by geography. On a globallevel, larger international firms operate in many geographic markets and havebroad product offerings in trade shows, conferences, publications and directmarketing products and other.**

 

**Within each particular industry sector, Nexus Mediaalso competes with a large number of small to medium-sized firms. While mostsmall to medium-sized firms operate in a single geographic market or industrysector, in some cases, its competitors operate in several geographic marketsand/or industry sectors. Its trade shows and conferences compete with tradeassociations and, in several markets, with exposition hall owners andoperators. Its publications typically have between two and five directcompetitors that target the same industry sector, and it also has many indirectcompetitors that define niche markets differently than it does and thus mayprovide alternatives for readers and/or advertisers.**

 

**Nexus Media has not previously acted as a stand-alonecompany.**

 

**Prior to April 1, 2005, Nexus Media had no historyof operating as a stand-alone company, and it may be unable to make the changesnecessary to operate as a stand-alone company, or it may incur greater costs asa stand-alone company that may cause its profitability to decline. Nexus Mediahad been operated by Highbury House as a**

** **

**6**

----

** **

**division of its broader publishing organizationrather than as a separate stand-alone company. Highbury House assisted NexusMedia by performing various corporate functions, including public relations,employee relations, financing and legal and tax functions. Following theacquisition, Highbury House had no obligation to provide these functions toNexus Media. If Nexus Media is unable to implement its own systems and businessfunctions or if it does not have agreements with other providers of theseservices, Nexus Media may not be able to effectively operate its business andits profitability may decline.**

 

**Trade Show exhibit space and ad pagescould decline as a result of an economic slowdown in the United Kingdom, futureterrorist attacks, or geopolitical concern.**

** **

Nexus Media’scustomers typically reduce their marketing and advertising budgets during ageneral economic downturn or a recession in the United Kingdom or in any othermarket where Nexus Media conducts a significant amount of business. The longera recession or economic downturn continues the more likely it becomes thatNexus Media’s customers may significantly reduce their marketing andadvertising budgets. Any material decrease in marketing budgets could reducethe demand for exhibition space and also reduce attendance at Nexus Media’strade shows and conferences. In addition, any material decrease in advertisingbudgets could reduce the demand for advertising space in Nexus Media’spublications. As a result, Nexus Media’s revenue and its cash flow fromoperations could decrease significantly. In addition, Nexus Media’s integratedmarketing strategy could be materially adversely affected if advertisingrevenue cannot support one or more of its important publications or if declinesin its customers’ marketing and advertising budgets require it to discontinueone or more of its important trade shows or conferences.

 

Furtherterrorist attacks and continued geo-political concern (including conflict inthe Middle East) may significantly affect Nexus Media’s future results ofoperations or financial condition, whether as a result of (1) reducedattendance at, or curtailment or cancellation of, trade shows due to travelfears, (2) further reduction in economic activity and a related reduction inmarketing expenditures on publications or trade shows, or (3) othercircumstances that could result from these or subsequent attacks.

 

**Nexus Media depends on securingdesirable dates and locations for its trade shows and conferences, which it maynot be able to secure.**

** **

The date andlocation of a trade show or a conference can impact Nexus Media profitabilityand prospects. The market for desirable dates and locations is highlycompetitive. If Nexus Media cannot secure desirable dates and locations for itstrade shows and conferences, profitability and future prospects would suffer,and its financial condition and results of operations would be materiallyadversely affected. In general, Nexus Media maintains multi-year reservationsfor its trade shows and conferences. Consistent with industry practice, it doesnot pay for these reservations, and these reservations are not binding on thefacility owners until Nexus Media executes a contract with the owner. NexusMedia typically signs contracts that guarantee the right to venues or dates foronly one year. Therefore, multi-year reservations may not lead to bindingcontracts with facility owners. In addition, because trade shows andconferences are held on pre-scheduled dates at specific locations, the successof a particular trade show or conference depends upon events outside NexusMedia’s control, such as natural catastrophes, labor strikes and transportationshutdowns.

 

**Nexus Media’s trade shows, conferencesand publishing revenues vary due to the movement of annual events orpublication mailing dates and the timing of its customers’ product launches.**

** **

Nexus Media’strade shows, conferences and publishing revenues are seasonal, due primarily tothe timing of its large trade shows and conferences and the mailing dates ofits magazines and industry directories. Because event revenues are recognizedwhen a particular event is held and publication revenues are recognized in themonth publications are mailed, Nexus Media may also experience fluctuations inquarterly revenues based on the movement of annual events or mailing dates fromone quarter to another.

 

In addition,Nexus Media’s trade show and conference revenues may fluctuate from period toperiod based on the spending patterns of its customers. Many of its largecustomers concentrate their trade show participation around major productlaunches. Because it cannot always know or predict when its large customersintend to launch new products, it is difficult to anticipate any relatedfluctuations in trade show and conference revenues.

 

7

----

 

**Nexus Media depends in part on newproduct introductions, and the process of researching, developing, launchingand establishing profitability for a new event or publication is inherentlyrisky and costly.**

** **

Nexus Media’s successdepends in part upon its ability to monitor rapidly changing market trends andto adapt events and publications to meet the evolving needs of existing andemerging target audiences. Future success will depend in part on Nexus Media’sability to continue to adapt existing events and publications and to offer newevents and publications by addressing the needs of specific audience groupswithin its target markets. The process of researching, developing, launchingand establishing profitability for a new event or publication is inherentlyrisky and costly. Nexus Media generally incurs initial operating losses when itintroduces new events and publications. Efforts to introduce new events orpublications may not ultimately be successful or profitable. In addition, costsrelated to the development of new events and publications are accounted for asexpenses, so year-to-year results may be materially adversely affected by thenumber and timing of new product launches.

 

**Nexus Media’s overall operations may beadversely affected by risks associated with international operations.**

** **

Nexus Media’sprimary operations are in the United Kingdom. The following risks ininternational markets could have a material adverse effect on Nexus Media’sfuture international operations and, consequently, on its business, results ofoperations and financial condition:

 

•      generaleconomic and political uncertainties and potential for social unrest;

•      limitations onour ability to enforce legal rights and remedies;

•      state-imposedrestrictions on the repatriation of funds;

•      potentiallyadverse tax consequences; and

•      foreigncurrency exchange rate fluctuations.

 

**Reliance on principal vendors couldadversely affect business.**

** **

Nexus Mediarelies on principal vendors (principally paper and print vendors anddistributors) and their ability or willingness to sell products to it onfavorable price and other terms. Many factors outside of Nexus Media’s controlmay harm these relationships and the ability or willingness of these vendors tosell these products to it on such terms. If any of its principal vendorsdiscontinues or temporarily terminates its services and it is unable to findadequate alternatives, Nexus Media may experience increased prices,interruptions and delays in services. These factors could adversely affectbusiness.

 

**Increases in paper or postage costscould cause Nexus Media’s expenses to increase and may adversely affectbusiness.**

** **

Paper andpostage are necessary expenses relating to print products and magazinedistribution. Significant increases in paper prices or in postage prices mayhave an adverse effect on business. Nexus Media does not use forward contracts,and all of its paper supply vendor arrangements provide for price adjustmentsto reflect prevailing market prices. If Nexus Media cannot pass significantincreases in paper and postage costs through to its customers, its financialcondition and results of operations could be materially adversely affected.

 

**Ourfuture capital requirements may exceed our current capital resources.**

 

Depending on thedecisions that are made, our capital requirements may exceed our currentresources. In such event, we would have to seek additional debt or equityfinancing from private or public sources. To the extent we raise additionalcapital by issuing equity securities, ownership dilution to existingstockholders will result, and future investors may be granted rights superiorto those of existing stockholders. To the extent that we borrow funds, thelenders of such funds will have claims to our assets before there can be anydistribution to our stockholders. There can be no assurance, however, thatadditional financing, either debt or equity, will be available from any sourceor, if available, will be available on terms acceptable to us.

 

**Nexus Media may not be able to protectits intellectual property.**

** **

Nexus Mediarelies on copyright and trademark rights to protect its publishing products.Effective trademark and copyright protection may be unavailable or limited, orNexus Media may not have applied for such 

 

8

----

 

protection in the United States or abroad. In addition, Nexus Media has been, and mayin the future be, notified of claims that its publishing products may infringetrademarks, copyrights, patents and/or other intellectual property rights ofothers. Such claims, including any related litigation, could result insignificant expense to Nexus Media and adversely affect its cash flow, whetheror not such litigation is resolved in its favor.

 

**A material weakness in the Company’s internal controls couldhave a material adverse effect on the Company.**

 

In connection with the audit of the financialstatements of the Company for the period ended December 31, 2005, the Companyand Deloitte & Touche LLP, our independent registered public accountingfirm, identified certain material weaknesses in the Company’s internalcontrols.

 

The Company discovered **during the****thirdquarter of 2005**that the lack of controls in factresulted in errors under U.S. GAAP in the timing of recognition principally ofcertain sales and marketing costs relating to future events or publicationsduring fiscal year 2004 and fiscal year 2005 by Nexus Media**,resulting in a restatement of certain financial statements of Ergo as filed onForm 10-Q/A on November 22, 2005.**This was determinedby the Company during a review of its capitalized costs and sales and marketingexpenses in the third quarter. Further, during the preparation of this annualreport, it came to the Company’s attention that certain costs (principallyeditorial overheads), which should be classified as part of costs of revenues,were classified previously as general and administrative expenses in thefinancial statements for the years ended December 31, 2004 and 2003 as filed onForm 8-K/A on June 17, 2005. This error arose because Nexus Media’s annualfinancial statements for the years ended December 31, 2004 and 2003 were preparedby adjusting historic predecessor statutory financial information prepared inaccordance with generally accepted accounting principles in the United Kingdomto generally accepted accounting principles in the United States of America. Bycontrast our quarterly financial statements have been derived from ourmanagement accounts. As a result, in this annual report the Company hasreclassified $5,437,000 and $6,460,000 from general and administrative expensesto cost of revenues in relation to the years ended December 31, 2004 and 2003respectively. The quarterly financial information already filed is classifiedcorrectly and requires no such reclassification.

 

As we do not currently have effective internalcontrols over financial reporting we may not be able to prevent or detectmaterial misstatements. If we fail to establish the adequacy of our internalcontrols, including any failure to implement required new or improved controls,or if we experience difficulties in their implementation, our business andresults of operations could be harmed, we could fail to be able to providereasonable assurance as to our financial results or meet our reportingobligations, and there could be a material adverse effect on the price of oursecurities.

 

**ITEM 1B. UNRESOLVED STAFFCOMMENTS**

 

Not applicable.

 

**ITEM 2.PROPERTIES**

 

**Facilities**

 

Ergo’s principal US office is located at 790 TurnpikeSt, Suite 202, North Andover, Massachusetts, where it 

 

9

----

 

leases approximately 250 square feet of office space on a month tomonth basis. Nexus Media’s primary operations are located at Media House,Azalea Drive, in Swanley, Kent in the United Kingdom.

 

A summary of our office facilities are as follows:

 
| **Location**                                 | ** ** | **Approximate Number of   Square Feet Leased** | ** ** | **Expiration of Lease** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|-------------------------|------------|
|                                         |       |                                           |       |                    |       |
| Swanley, Kent (United Kingdom)               |       | 24,800                                         |       | Owned by the Company    |       |
| Dunsford Park, Surrey (United Kingdom)       |       | 4,500                                          |       | November 2009           |       |
| Braunschweig (Germany)                       |       | 1,100                                          |       | Month to month basis    |       |
| Manchester (United Kingdom)                  |       | 460                                            |       | Month to month basis    |       |
| Leicester (United Kingdom)                   |       | 260                                            |       | Month to month basis    |       |
| North Andover, Massachusetts (United States) |       | 250                                            |       | Month to month basis    |       |

 

**ITEM 3.LEGAL PROCEEDINGS**

 

None

 

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Our 2005 Annual Meetingof Stockholders was held on December 30, 2005. The following matters were votedupon at the annual meeting:

 

(1)     WilliamT. Comfort, III was elected to serve as a Director to hold office for a term ofthree years until the 2008 annual meeting of stockholders and until hissuccessor is chosen and qualified. This matter was approved with 5,053,377votes for the election of Mr. Comfort, 230,513 votes were withheld and 0 brokernon-votes.

 

(2)     CharlesE. Finelli was elected to serve as a Director to hold office for a term ofthree years until the 2008 annual meeting of stockholders and until hissuccessor is chosen and qualified. This matter was approved with 5,031,858votes for the election of Mr. Finelli, 252,032 votes were withheld and 0 brokernon-votes.

 

(3)     Ourstockholders also ratified the appointment of Deloitte & Touche LLP as ourindependent registered public accounting firm for the fiscal year endingDecember 31, 2005. This proposal was approved with 5,265,340 votes for theproposal, 15,850 votes against the proposal, 2,700 abstentions and 0 broker non-votes.

 

In addition to Mr.Comfort and Mr. Finelli, Ling S. Kwok and Nadim Nsouli continued as directorsafter the 2005 Annual Meeting of Stockholders.

 

10

----

 

## **PART II**

## ** **

**ITEM 5.****                  MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

Our common stock wasquoted on the Nasdaq Stock Market through May 23, 2001 under the symbol “ERGO.”  Since that date, after a brief transitionperiod during which our common stock was quoted on the NASD’s OTC BulletinBoard under the symbol “ERGG,” our common stock has been quoted on the NASD’sOTC Bulletin Board under the symbol “ERGO.” At February 17, 2006, the number of record holders of our common stockwas 258. The following table sets forth, for the periods indicated, the highand low sale price or bid information for our common stock as reported on theNASD’s OTC Bulletin Board, as applicable. Please note that the bid informationrelating to over-the-counter market quotations of our common stock reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot necessarily represent actual transactions.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| 2005           |       |     |       |    |       |
| First Quarter  |       | $        | 3.25       |    | $          | 2.21 |   |
| Second Quarter |       | $        | 3.00       |    | $          | 2.10 |   |
| Third Quarter  |       | $        | 2.39       |    | $          | 1.14 |   |
| Fourth Quarter |       | $        | 1.35       |    | $          | 0.71 |   |
|           |       |     |       |    |       |
| 2004           |       |     |       |    |       |
| First Quarter  |       | $        | 2.65       |    | $          | 1.95 |   |
| Second Quarter |       | $        | 2.80       |    | $          | 2.10 |   |
| Third Quarter  |       | $        | 2.30       |    | $          | 1.95 |   |
| Fourth Quarter |       | $        | 2.47       |    | $          | 1.97 |   |

 

**Dividends**

 

We have not paid dividends to our stockholders sinceour inception. We are unable to pay dividends on our common stock without firstobtaining the written consent of the holders of a majority of our outstandingseries D exchangeable preferred stock. We do not anticipate asking thepreferred shareholders to approve a dividend in the foreseeable future.

 

11

----

 

**ITEM 6. SELECTED CONSOLIDATEDFINANCIAL DATA**

 

This section includes selected financial data from theconsolidated balance sheet (Ergo and Nexus Media) as of December 31, 2005 andfor Nexus Media (its Predecessor) as of March 31, 2005, December 31, 2004 andDecember 31, 2003. The statements of operations and cash flows includesselected data for the nine month period ended December 31, 2005 (Ergo and NexusMedia) and for comparative purposes includes the Nexus Media stand alonecombined statement of operations for the three month period ended March 31,2005 and the years ended December 31, 2004 and 2003. This section also includesa separate table which sets forth the selected financial data for Ergo Scienceprior to its acquisition of Nexus Media on April 1, 2005.

 

The Company hasbeen unable to obtain selected financial data for years 2002 and 2001 for NexusMedia, the predecessor company and therefore has not presented thatinformation. Prior to the acquisition by Ergo, the entitiescomprising Nexus Media were operated by Highbury House as a division of itsbroader publishing organization rather than as a separate stand-alone company. HighburyHouse assisted Nexus Media by performing various corporate functions, includingby managing accounts payable and by providing subscription management services,cash management, finance, legal and tax functions for Nexus Media. Thefinancial records of Highbury House were designed principally for ease ofproducing consolidated Highbury House management information rather than forproducing individual accounts for each of the Highbury House legal entities.

 

Followingthe acquisition of Nexus Media by Ergo, the process of deriving the 2004 and2003 financial data for purposes of Ergo’s Form 8-K/A filing on June 17, 2005required Ergo to extractthe data principally from the accounting records of Highbury House. The processrequired significant assistance from Highbury House employees, in particular toextract the historical accounting information with respect to the businessesacquired by Ergo, to allocate the appropriate Highbury House corporate overheadto Nexus Media and to obtain necessary reconciliations of intercompany balances.Additionally, the records of Highbury House were not kept in accordance withgenerally accepted accounting principles in the United States (“U.S. GAAP”),and Ergo required significant assistance from Highbury House employees toobtain the detailed supporting financial data and analysis necessary in orderto convert the financial information to U.S. GAAP.

 

In order toderive the 2002 and 2001 selected financial data of Nexus Media, Ergo wouldhave needed access to the accounting records of Highbury House and theassistance of Highbury House employees. However, on January 20, 2006, HighburyHouse went into receivership, and was administered by a receiver. The receiverimmediately sold all of the assets of Highbury House, and all Highbury Houseemployees have since left Highbury House. The offices of Highbury House havesince been closed. Without the assistance of Highbury House employees, Ergo isnot able to obtain all the detailed supporting financial data necessary inorder to properly report the appropriate information in accordance with U.S.GAAP. For the reasons stated above, it is not possible for Ergo to include theselected financial data for 2002 and 2001 without unreasonable effort andexpense.

 

The business ofNexus Media has significantly changed since 2001 and 2002. In 2003, HighburyHouse entered into an internal restructuring that affected Nexus Media byconsolidating the physical operations of Nexus Media from four operating sitesinto one. The restructuring resulted in significant changes in overhead costsand management costs of Nexus Media. In addition, the business-to-businesspublishing industry has changed significantly from 2001 and 2002 by moving awayfrom printed magazines toward web-based publications. In 2001 and 2002, NexusMedia principally derived revenue from printed magazines, but in 2005, printedmagazines accounted for approximately half of the revenues of Nexus Media. Forthe reasons stated above, the Company believes that the omission of financialdata for 2002 and 2001 would not have a material impact on a reader’sunderstanding of the financial results and conditions and related trends of theCompany and its predecessor.

 

The followingtable sets forth selected consolidated financial data for the Company as of thedates and for the periods indicated. The data should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the consolidated financial statements and related notesthereto included elsewhere in this report. 

 

12

----

 
| ** **                                     | ** ** | **Ergo  Nine months   ended   December 31,   2005** | ** ** | ** ** | **Predecessor   Nexus Media  Three months   ended  March 31,   2005** | ** ** | **Predecessor   Nexus Media  Year ended   December 31,  2004** | ** ** | **Predecessor   Nexus Media  Year ended   December 31,  2003** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                          | ** ** | ** ** | ** **                                                            | ** ** | **Restated (6)**                                               | ** ** | **Restated (6)**                                               | ** ** |
| **Consolidated Statement of Operations Data:** | ** ** | ** **                                          | ** ** | ** ** | ** **                                                            | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** |
| Net revenue                                    |       | $                                                   | 28,399,449 |       |                                                                  | $          | 6,584,877                                                      |       | $                                                              | 36,947,862 |   | $ | 39,595,643 |   |
| Cost of revenue                                |       | 18,765,679                                          |       |       | 5,922,761                                                             |       | 27,936,671                                                     |       | 33,761,814                                                     |       |
| Gross Profit                                   |       | 9,633,770                                           |       |       | 662,116                                                               |       | 9,011,191                                                      |       | 5,833,829                                                      |       |
| Operating expenses                             |       | 12,222,332                                          |       |       | 2,486,022                                                             |       | 8,036,032                                                      |       | 11,396,217                                                     |       |
| Net operating  (loss) income                   |       | (2,588,562                                          | )          |       | (1,823,906                                                            | )          | 975,159                                                        |       | (5,562,388                                                     | )          |
| Interest and other income                      |       | 155,324                                             |       |       | 69,971                                                                |       | 245,623                                                        |       | 2,758,942                                                      |       |
| Net (loss)  income before income taxes         |       | (2,433,238                                          | )          |       | (1,753,935                                                            | )          | 1,220,782                                                      |       | (2,803,446                                                     | )          |
| Income tax expense (benefit)                   |       | 200,640                                             |       |       | (353,536                                                              | )          | 625,054                                                        |       | (220,730                                                       | )          |
| Net (loss)  income                             |       | $                                                   | (2,633,878 | )          |                                                                  | $          | (1,400,399                                                     | )          | $                                                              | 595,728    |   | $ | (2,582,716 | ) |
| **Per Share Data (1):**                        |       |                                                |       |       |                                                                  |       |                                                           |       |                                                           |       |
| Net loss per  share – basic and diluted:  |       | (0.45                                               | )          |       | —                                                                |       | —                                                         |       | —                                                         |       |
| Weighted average  shares outstanding           |       | 5,813,856                                           |       |       | —                                                                |       | —                                                         |       | —                                                         |       |
| **Statements of Cash Flow Data:**              |       |                                                |       |       |                                                                  |       |                                                           |       |                                                           |       |
| Net cash flows from operating activities       |       | 2,183,890                                           |       |       | (1,575,573                                                            | )          | 925,669                                                        |       | 3,932,261                                                      |       |
| Net cash flows from investing activities (2)   |       | (21,121,509                                         | )          |       | (112,438                                                              | )          | (42,159                                                        | )          | 3,427,034                                                      |       |
| Net cash flows from financing activities       |       | —                                              |       |       | —                                                                |       | —                                                         |       | (7,606,183                                                     | )          |

 
| ** **                             | ** ** | **Ergo  As of   December 31,   2005** | ** **       | ** ** | **Predecessor   Nexus Media  As of   March 31,   2005** | ** **       | **Predecessor   Nexus Media  As of   December 31,   2004** | ** ** | **Predecessor   Nexus Media  As of   December 31,   2003** |            |
|----------------------------------------|------------|---------------------------------------|------------------|------------|---------------------------------------------------------|------------------|------------------------------------------------------------|------------|------------------------------------------------------------|-----------------|
| **Consolidated Balance Sheet Data:**   | ** ** | ** **                            | ** **       | ** ** | ** **                                              | ** **       | ** **                                                 | ** ** | ** **                                                 | ** **      |
| Cash and cash equivalents              |       | $                                     |  7,220,399  |       |                                                    | $                |  —                                               |       | $                                                          |  1,710,235 |   | $ |  733,306 |   |
| Receivable from Highbury House plc (3) |       | —                                |             |       | 50,180,862                                              |             | 50,903,501                                                 |       | 47,402,626                                                 |            |
| Working capital                        |       | 3,045,449                             |             |       | (1,384,600                                              | )                | (3,112,028                                                 | )          | (4,260,670                                                 | )               |
| Total assets                           |       | 32,091,880                            |             |       | 86,557,042                                              |             | 89,941,683                                                 |       | 87,045,765                                                 |            |
| Long-term liabilities (4)              |       | —                                |             |       | 31,580,736                                              |             | 32,035,520                                                 |       | 29,831,824                                                 |            |
| Total stockholders’ equity        |       | $                                     |  21,481,228 |       |                                                    | —           |                                                       | —     |                                                       | —          |   |
| Owners net investment (5)              |       | —                                |             |       | $                                                       |  21,911,952 |                                                       | $          |  43,488,610                                           |            | $ | 39,917,907 |   |

 

----

(1)   Net income (loss) per common share is not calculated for thepredecessor periods since the predecessor did not comprise a stand aloneentity. Nexus was a part of Highbury House prior to being acquired by Ergo andtherefore had no outstanding shares of its own on which earnings per sharecould be calculated.

 

(2)   Includes amounts paid for the acquisition of Nexus Media on April 1,2005.

 

(3)   Representsamount due from Highbury House Communications plc, Nexus Media’s former parentcompany in the UK.

 

(4)   Represents amount due to Highbury House Communications plc, Nexus Media’sformer parent company in the UK.

 

(5)   Prior to the acquisition of Nexus by Ergo Science, Nexus was part ofHighbury House and therefore these amounts represent the “Owners net investment”in the business.

 

(6)   Asdiscussed in Note 15 to the consolidated financial statements these amountshave been restated to reclassify $5,437,000 and $6,460,000 from general andadministrative expenses to cost of revenues for the years ended December 31,2004 and 2003.

 

13

----

 

The following table setsforth selected consolidated financial data for Ergo Science prior to itsacquisition of Nexus Media as of the dates and for the periods indicated.

 
| ** **                                      | ** ** | **Three months  ended March 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** | **Year ended  December 31,  2002** | ** ** | **Year ended  December 31,  2001** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **Consolidated  Statement of Operations Data:** |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Operating  expenses:                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Research and  development (1)                   |       | $                                       | —     |                               | $          | —                             |       | $                                  | (467,294   | )                                  | $          | 39,278 |   | $ | 55,454 |   |
| General and  administrative (2)                 |       | 180,049                                 |       | 1,114,360                          |       | 1,377,728                          |       | 973,497                            |       | 2,456,332                          |       |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Total operating  expenses                       |       | 180,049                                 |       | 1,114,360                          |       | 910,434                            |       | 1,012,775                          |       | 2,511,786                          |       |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Other Income:                                   |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Interest income                                 |       | 136,630                                 |       | 326,904                            |       | 263,607                            |       | 426,493                            |       | 1,260,964                          |       |
| Other income (3)                                |       | 198,403                                 |       | —                             |       | 5,598,000                          |       | —                             |       | —                             |       |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Total other  income                             |       | 335,033                                 |       | 326,904                            |       | 5,861,607                          |       | 426,493                            |       | 1,260,964                          |       |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Net income  (loss) before income taxes          |       | 154,984                                 |       | (787,456                           | )          | 4,951,173                          |       | (586,282                           | )          | (1,250,822                         | )          |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Income tax  expense (4)                         |       | —                                  |       | —                             |       | 94,000                             |       | —                             |       | —                             |       |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Net income  (loss)                              |       | $                                       | 154,984    |                               | $          | (787,456                           | )          | $                                  | 4,857,173  |                               | $          | (586,282 | ) | $ | (1,250,822 | ) |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Net income  (loss) income per share             |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| basic                                           |       | $                                       | 0.03       |                               | $          | (0.14                              | )          | $                                  | 0.74       |                               | $          | (0.08 | ) | $ | (0.18 | ) |
| assuming  dilution                              |       | $                                       | 0.03       |                               | $          | (0.14                              | )          | $                                  | 0.74       |                               | $          | (0.08 | ) | $ | (0.18 | ) |
|                                            |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| Weighted average  common shares outstanding     |       |                                    |       |                               |       |                               |       |                               |       |                               |       |
| basic                                           |       | 5,813,856                               |       | 5,813,856                          |       | 6,589,673                          |       | 7,149,578                          |       | 7,149,578                          |       |
| assuming  dilution                              |       | 5,813,856                               |       | 5,813,856                          |       | 6,603,389                          |       | 7,149,578                          |       | 7,149,578                          |       |

 
| ** **                            | ** ** | **March 31,   2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** | **December 31,  2001** | ** ** |
|---------------------------------------|------------|----------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| **Consolidated  Balance Sheet Data:** |       |                 |       |                   |       |                   |       |                   |       |                   |       |
| Cash and cash  equivalents            |       | $                    | 26,334,449 |                   | $          | 26,453,190             |       | $                      | 27,102,617 |                   | $          | 24,938,233 |   | $ | 25,808,028 |   |
| Investments                           |       | —               |       | —                 |       | —                 |       | —                 |       | —                 |       |
| Working capital                       |       | 26,116,428           |       | 25,961,444             |       | 26,748,428             |       | 24,307,106             |       | 24,888,851             |       |
| Total assets                          |       | 27,036,931           |       | 26,463,727             |       | 27,117,258             |       | 24,997,675             |       | 25,823,201             |       |
| Total  stockholders’ equity      |       | $                    | 26,116,428 |                   | $          | 25,961,444             |       | $                      | 26,748,900 |                   | $          | 24,309,384 |   | $ | 24,895,666 |   |

 

----

(1)   Includesa $500,000 credit to expense in 2003 to reflect an adjustment to an ERGOSET®related obligation.

 

(2)   Includesa loss on the disposal of equipment in 2001 in the amount of $3,201.

 

(3)   Includesa gain in 2003 from the sale of the Company’s science assets in the amount of$5,498,000 and a gain from the sale of the domain name ergo.com in the amountof $100,000. Includes a foreign exchange gain in 2005 in the amount of$198,403.

 

(4)   Representsan estimated amount owed for Federal income taxes due to limitations onalternative minimum tax net operating loss carryforwards in 2003.

 

14

----

 
| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

**Overview**

 

From our incorporation through March 2001, we wereengaged in the development of ERGOSET® tablets for the treatment of type 2diabetes. In March 2001, we decided that the next phase of the development ofERGOSET® would be better undertaken by a company that has more experience withhuman drug development and more resources for regulatory approval and marketingthan we do.

 

**On November 24, 2003 wesold all of our scientific and research assets and certain other intellectualproperty assets to Pliva d.d., a company organized under the laws of Croatia (“Pliva”).At the time of the sale, we received $5,498,000 in cash. Upon the occurrence ofcertain events outlined in the asset purchase agreement, we would have receivedan additional $500,000. Pliva has assumed our future obligations under the LSURoyalty agreement. Also as part of the agreement, Pliva has agreed to makepayments to one of our wholly-owned subsidiaries, Ergo Texas, to cover certainpayments required to be made in the event that Ergoset® or another specifieddrug is approved by the Food and Drug Administration.**

 

After the sale of the Company’s scientific andresearch assets on November 24, 2003, the Company had been reviewing andevaluating potential acquisitions.

 

Ergo acquired Nexus Media, the business to businesspublishing division of Highbury House Communications plc, a company organizedunder the laws of the United Kingdom, on April 1, 2005. The purchase price ofGBP £12,500,000 (approximately $23,712,000) was subject to a GBP £1,041,000(approximately $1,958,000) working capital adjustment. At closing therefore,the Company paid Highbury House GBP £11,459,000 (approximately $21,754,000). After completion the final working capital amount was confirmed and anadditional amount of GBP £464,000 (approximately $873,000) was paid to theCompany in the third quarter. In addition, the Company received an additionalGBP £320,000 (approximately $603,000) as reimbursement for warranty claims. Asof December 31, 2005, the Company had paid a total $20,918,000 related to theacquisition, which includes $640,000 in capitalized acquisition costs. Theacquisition was funded by the Company from its own cash and cash equivalents.Nexus Media is comprised of eight wholly-owned subsidiaries, providesinformation across a diverse range of sectors including printed and web-basedmagazines, data services and directories, staging exhibitions, conferences andaward ceremonies.

 

*Our products and services*

 

Our wholly owned subsidiary, Nexus Media is comprisedof eight wholly-owned subsidiaries which provide information across a diverserange of markets including printed magazines, web sites, data services anddirectories, staging exhibitions, conferences and award ceremony events.

 

Our businessincludes: 13 trade names (including: Checkout, Electrical Times; IndependentGrocer; The Motor Ship; World Travel Guide and Motor Trader); 150 domain names(including columbusguides.com; groweroftheyear.com; harpers-wine.com;motorship.com; motortrader.com; travel-guide.com; and worldfish.com); approximately50 printed magazines and directories (including: Motor Trader; Harpers Wines& Spirits, The Grower, Independent Retail News, World Fishing; The WorldTravel Guide and Electrical Review) and approximately 30 Events includingexhibitions, awards evenings and conferences such as the International Wine& Spirit Competition; the Undersea Defence Technology Conference &Exhibition; the Motor Trader Awards and the Grower of the Year Awards.

 

Our revenue is derived from a number of sourcesincluding the following:

 

•      magazine advertising, whichaccounted for 52% of revenue in 2005;

•      exhibitors, exhibition sponsors andattendees, which accounted for 15% of revenue in 2005;

•      sponsors/entrants/attendees atawards evenings and competitions, which accounted for 15% of revenue in 2005;

•      subscriptions/copy sales ofmagazines, which accounted for 7% of revenue in 2005;

•      sales of books, which accounted for4% of revenue in 2005;

 

15

----

 

•      sales of content for third partyuse, primarily data related to the travel industry, which accounted for 3% ofrevenue in 2005;

•      Internet advertising, whichaccounted for 2% of revenue in 2005; and

•      conference attendees and sponsors,which accounted for 2% of revenue in 2005.

 

*CriticalAccounting Policies*

 

Our financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States, or GAAP. The application of GAAP requires thatwe make estimates that affect our reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. We evaluate our estimates and assumptions on an ongoing basis. Ouractual results may differ significantly from these estimates.

 

*Revenue recognition*

 

Revenue recognition policies, while an area ofmanagement focus, are generally straightforward in application as the timing ofproduct or service delivery for the various revenue streams can be readilydetermined. The Company recognizes revenue from the following primary sources(1) business publications (2) event revenue and (3) subscription revenue.

 

•      Subscriptionrevenue

 

Nexus publishes some magazines that readers subscribeto on an annual basis. These magazines are specialized and therefore are notdistributed to the general public.  Revenue is received yearly in advanceand the revenue is deferred and released on a monthly basis. A third partyservice organization is used to control the subscriptions.

 

•      Advertisingrevenue

 

Nexus sell advertising space within its publishedmagazines.  Revenue is received in advance of the publication beingissued. Revenue is recognized at the time the magazine is published which isthe mailing date.

 

•      Exhibitions/Conferences/Competitionsrevenue

 

Most revenue is received in advance of the eventoccurring and constitutes the majority of the deferred income balance at anygiven period end. Contracts are drawn up in advance and signed by thecustomer.  The revenue is then recognized in the month the event occursand until that time is deferred.

 

We believe thatof our significant accounting policies, which are described in Note 2 to ourfinancial statements, the following accounting policies involve a greaterdegree of judgment and complexity. Accordingly, these are the policies webelieve are the most critical to aid in fully understanding and evaluating ourfinancial condition and results of operations.

 

•      cost recognition

•      accounting for acquisitions

•      impairment of long lived assets

•      income taxes

 

*Costrecognition*

 

At December 31, 2005, prepaid and other current assetsincluded $410,000 of direct and incremental costs relating to events andmagazines. The amount of such costs deferred requires an estimate of theproportion of each dedicated employees’ time on event organization, which isdeferred, as compared to marketing and promoting such events to potentialattendees, which is expensed as incurred. Management also monitors whether anyevents are 

 

16

----

 

likelyto result in a loss and provides for such losses in the period when adetermination is made that a loss is likely. At December 31, 2005, no provisionfor anticipated losses was recorded.

 

***Accounting for Acquisitions***

 

Significant judgment isrequired to estimate the fair value of purchased assets and liabilities at thedate of acquisition, in particular the fair value of intangible assets. Werecognized intangible assets and goodwill of $19,630,000 upon the acquisitionof Nexus Media. Our process to determine the fair value of the trademarkedtitles, unregistered titles and contractual events involved calculatingestimated future discounted cash flows which were based on estimates of thefuture revenue and operating costs as well as general market conditions.

 

Changes to the assumptions used would have resulted indifferent amounts being recorded for such intangible assets, with aconsequential adjustment to goodwill. Any adjustment to the amount recorded forintangible assets that are amortized would lead to different amortizationexpense post-acquisition.

 

*Impairment of long-lived assets*

 

Weassess the impairment of goodwill and indefinite life intangibles at leastannually. The potential impairment of finite life intangibles is assessedwhenever events or a change in circumstances indicate the carrying value maynot be recoverable. Factors we consider important which could trigger animpairment review include the following:

 

•      significantunderperformance relative to historical or expected projected future operatingresults;

•      significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

•      significantnegative industry or economic trends;

•      significantdecline in our stock price for a sustained period of time; and

•      our market capitalization relative to netbook value.

 

Whenwe determine that the carrying value of intangible assets, long-lived assets orgoodwill may not be recoverable based upon the existence of one or more of theabove indicators of impairment, we measure any potential impairment based on aprojected discounted cash flow method using a discount rate determined by ourmanagement to be commensurate with the risk inherent in our current businessmodel.

 

Asdiscussed in Notes 4 and 5 to the consolidated financial statements, in thequarter ended December 31, 2005, we recorded impairments of $2,973,000 and$151,000 against goodwill and intangible assets, respectively. Future changesin the Company’s strategy and other changes in the operations of the Companycould impact the projected future operating results that are inherent in theCompany’s estimates of fair value, resulting in further impairments in thefuture. Additionally, other changes in the estimates and assumptions, includingthe discount rate and expected long-term growth rate, which drive the valuationtechniques employed to estimate the fair value of long-lived assets andgoodwill could change and, therefore, impact the assessments of impairment inthe future.

 

***Income Taxes***

** **

TheCompany accounts for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes.” The objectives of accounting for income taxes are torecognize the amount of taxes payable for the current 

 

17

----

 

year anddeferred tax assets and liabilities for future tax consequences of events thathave been recognized in the Company’s financial statements or tax returns. TheCompany performs periodic evaluations of recorded tax assets and liabilitiesand maintains a valuation allowance if deemed necessary. The determination oftaxes payable for the current year includes estimates. In the event that actualresults differ materially from management’s expectations, the estimated taxespayable could materially change, directly impacting the Company’s financialposition or results of operations.

 

AtDecember 31, 2005, we reported federal net operating loss and research andexperimentation carryforwards of approximately $77 million. If not used,the tax loss carryforwards will begin to expire in 2008. Ownership changes, asdefined in the Internal Revenue Code sections 382 and 383 may have limited theamount of net operating loss carryforwards that can be utilized to offsetfuture taxable income. Subsequent ownership changes could further affect thelimitation in future years. See Note 10 of Notes to Consolidated FinancialStatements. **The realization of anybenefit of these loss carryforwards is dependent on future results and theactual amount of these loss carryforwards may change over time. The netoperating tax loss carryforwards cannot be used to offset any taxable income ofNexus, as it is a foreign corporation.  Managementhas determined that, as of the balance sheet date, it is more likely than notthat the Company will not realize the benefits of federal and state deferred taxassets and, as a result, a valuation allowance of $33,721,000 has beenestablished at December 31, 2005.**

 

# **Resultsof Operations**

# ** **

*Prior to the acquisition of Nexus Media on April 1,2005, Ergo had no operations, having ceased its previous operations in November2003. As a result, Nexus Media is considered to be the predecessor company. Toassist in the understanding of the results of operations, management haspresented supplemental historical results of Nexus Media. For the purpose ofmanagement’s discussion and analysis of financial condition and results ofoperations, management have combined the Company’s results for the nine monthsended December 31, 2005 with that of Nexus Media for the three months endedMarch 31, 2005 and compared that to the results of Nexus Media for the yearended December 31, 2004. The table represents an aggregation of the predecessorand successor results of operations. It has not been prepared in the samemanner as pro forma financial information prepared in accordance with the SEC’srules and regulations and is found preceding the discussion of the results ofoperations for the twelve months ended December 31, 2005. Managementbelieves that this provides the most meaningful analysis of the Company’sresults for the year ended December 31, 2005.*

 

As discussed in Note 15 of the financial statements,the Company has restated its financial statements for the years ended December31, 2004 and 2003 in order to reclassify $5,437,000 and $6,460,000 from generaland administrative expenses to cost of revenues respectively.

 

*For the years ended December 31, 2005 and 2004*

 

**Statement of Operations (Summary):**

 
| ** **                    | ** ** | **Ergo  Consolidated**                      | ** ** | ** ** | **Predecessor  Nexus Media**               | ** ** | ** **          | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|------------|--------------------------------------------|------------|---------------------|------------|
| ** **                    | ** ** | **Nine months  ended  December 31,   2005** | ** ** | ** ** | **Three months   ended  March 31,   2005** | ** ** | **Combined  Total** | ** ** |
|                          |       |                                        |       |       |                                       |       |                |       |
| Net revenues                  |       | $                                           | 28,399,449 |       |                                       | $          | 6,584,877           |       | $ | 34,984,326 |   |
| Cost of revenues              |       | 18,765,679                                  |       |       | 5,922,761                                  |       | 24,688,440          |       |
| Gross profit                  |       | 9,633,770                                   |       |       | 662,116                                    |       | 10,295,886          |       |
|                          |       |                                        |       |       |                                       |       |                |       |
| Operating expenses            |       |                                        |       |       |                                       |       |                |       |
| General and administrative    |       | 8,945,754                                   |       |       | 2,433,071                                  |       | 11,378,825          |       |
| Amortization of  intangibles  |       | 152,616                                     |       |       | 52,951                                     |       | 205,567             |       |
| Impairment of  goodwill       |       | 2,973,000                                   |       |       | —                                     |       | 2,973,000           |       |
| Impairment of  intangibles    |       | 150,962                                     |       |       | —                                     |       | 150,962             |       |
| Total operating  expenses     |       | 12,222,332                                  |       |       | 2,486,022                                  |       | 14,708,354          |       |
|                          |       |                                        |       |       |                                       |       |                |       |
| Interest and  other income    |       | 155,324                                     |       |       | 69,971                                     |       | 225,295             |       |
|                          |       |                                        |       |       |                                       |       |                |       |
| Net loss before  taxes        |       | (2,433,238                                  | )          |       | (1,753,935                                 | )          | (4,187,173          | )          |
| Income tax  expense (benefit) |       | 200,640                                     |       |       | (353,536                                   | )          | (152,896            | )          |
| Net loss                      |       | $                                           | (2,633,878 | )          |                                       | $          | (1,400,399          | )          | $ | (4,034,277 | ) |

 

18

----

 

*Revenue*decreased to $34,984,000 in 2005 from$36,948,000 in 2004, a decrease of 5.3%. The decrease of approximately$1,964,000 was primarily the result of declines in advertising revenue of$3,270,000 and circulation revenues of $94,000, offset by increases in eventrevenues of $1,400,000.

 

Eventsrevenues increased by approximately $1,400,000 primarily due to the Icelandic Fisheries Exhibition (an event whichoccurs every three years) with revenues of approximately $2,100,000. This wasoffset by a decline in ECOC (European Conference and Exhibition onOptical Communications)revenues of $325,000 due to the event being poorly located in Glasgow,Scotland. There was also a decline in revenues of $360,000 related to UDTP(Undersea Defence Technology conference and Exhibition in the Pacific) as thisevent was held in 2004, but did not take place in 2005.

 

Advertisingrevenues declined by approximately $3,270,000, which was primarily the resultof market declines in advertising volume in fiscal year 2005. The Nexus MediaCommunications advertising revenue in 2005 was approximately 44% lower than2004. Nexus Media has been transitioning its core business towards revenue fromevents, sponsorships and on-line advertising. The increased revenue from itsnon-traditional areas of events, sponsorships and on-line advertising did notgrow at the same rate as the decrease in traditional print advertising in 2005.

 

*Grossprofit* percentage**increased to 29% in 2005 from 24% in2004. This increase is primarily the result of management initiatives to reducecost of revenues, primarily through the pagination of the various magazines inorder to match the costs to produce publications with the appropriate revenueearned from publications. This has resulted in costs savings in regards toprinting, paper and distribution costs to the Company of approximately$900,000. Additionally gross profits increased as a result of the Icelandic Fisheries Exhibition, which recorded a gross profit ofapproximately $737,000 (35%) in 2005. As this event was not held in the prioryear, there was no gross profit contribution related to this event in 2004.

 

*Generaland Administrative Expenses*. General and administrative expenses consist primarily of compensationfor personnel, professional services, which include consultants, legal fees andaccounting, audit and tax fees, and administrative expenses associated withoperating as a public company.

 

Generaland administrative expenses increased to $11,379,000 in 2005 from $7,629,000 in2004, an increase of 49%. The increase of approximately $3,750,000 was due tocosts of approximately $800,000 as a result of Nexus’ former parent company,Highbury House being put into receivership in the United Kingdom and Nexusassuming primary liability on two building leases. Receivership in the UnitedKingdom is similar to having a trustee in bankruptcy court in the UnitedStates. As result, Nexus was forced to accrued for these costs that otherwisewould have been the responsibility of Highbury House. The Company also hadincreases in legal and professional fees of approximately $1,300,000,increases in personnel costs of approximately $400,000 and general andadministrative costs of the US parent company of approximately $900,000. Theprimary reason for the increase in general and administrative costs was theresult of additional compliance requirements that became necessary as a resultof being acquired by a US public company.

 

*Impairment of goodwill* was $2,973,000 in 2005 and none in 2004.In 2005 an impairment was recorded in relation to the acquisition of NexusMedia, primarily due to the additional pre-acquisition liabilities arising as aresult of Highbury House plc entering receivership on January 20, 2006, asdiscussed in Note 16 of the financial statements, and the underperformance ofthe Nexus Media business compared to our expectations at the time ofacquisition.

 

*Impairment of intangibles*was $151,000 in 2005, as the result of the recording of an impairment chargerelated to two of the Company’s trademarked titles (Checkout and IndependentRetail News), two of its unregistered titles (Grower and Television World), andone of its non-annual events (World Fishing Exhibition) for the nine months 

 

19

----

 

ended December 31, 2005. The impairment was the result of adetermination by the Company that the expected future net cash flows of theseintangible assets were likely to be lower than previously anticipated. Theimpairment was recorded due to decreases in revenue related to each of thesetitles and a continuing decrease in revenue for the World Fishing Exhibition.

 

*Incometax expense (benefit)* was a benefit of ($153,000) in 2005compared to an expense of $625,000 in 2004. The expense decrease ofapproximately $800,000 was primarily due to a reduction in the taxable profitsof Nexus from 2004 to 2005, less unutilized losses, resulting in a net benefitof $950,000 as well as the recording of a $250,000 tax benefit related to anadjustment to deferred tax assets for the US operations. These amounts wereoffset by an adjustment in the quarter ended June 30, 2005 pertaining to thecarrying value of the deferred tax asset of Nexus in the amount of a $400,000.The adjustment for the Nexus deferred asset was the result of a determinationby the Company that the recovery of  thedeferred tax asset was no longer more likely than not due to interest chargesarising on an intercompany loan established on April 1, 2005.

 

*Netincome (loss)*decreased to a net loss of ($4,034,000) in 2005 from a net income of $596,000in 2004. The decrease in net income was primarily due to the impairment ofgoodwill in the amount of $2,973,000 related to the acquisition of Nexus Media,as well as the reduction of revenue and increases in general and administrativeexpenses.

 

*For the years ended December 31, 2004 and 2003*

 

*Revenue*decreased to $36,948,000 in 2004 from$39,596,000 in 2003, a decrease of 7%. The decrease of approximately $2,648,000was primarily the result of declines in advertising revenues of $500,000 andevents revenues of $2,600,000, offset by increases in internet related revenuesof $450,000.

 

Eventsrevenues decreased by approximately $2,600,000 primarily due to The Vigo Exhibition in 2003 (an event whichtakes place once every six years) with revenues of approximately $3,125,000which was not repeated in 2004. This was offset by increases in IWSC(International Wine and Sprit Competition) revenues of approximately $285,000and ECOC (European Conference and Exhibition on Optical Communications) revenues of approximately $240,000.

 

Advertisingrevenue declined by approximately $500,000, which was primarily the result of adecrease in volume and was not a result of price related issues. This wasoffset by anincrease in internet revenues of approximately $450,000. Nexus Media Communications revenue fromadvertising was approximately 53% of total revenue in 2003. Management has beentransitioning its core business toward revenue from events, sponsorships andon-line advertising. Management has not yet increased revenues enough from itsnon-traditional areas to cover the decreases it has sustained from itstraditional advertising and circulation revenue bases.

 

*Gross profit* percentage increased to 24% in 2004 from15% in 2003. The increase in gross profit was due to increases related to mostparts of the Company’s businesses, primarily an increase in gross profit forthe Harpers Wines and Spirits magazine which increased to 35% in 2004 from 23%in 2003. 

 

*Generaland Administrative Expenses*. General and administrative expenses consist primarily of compensationfor personnel, professional services, which include consultants, legal fees andaccounting, audit and tax fees, and administrative expenses associated withoperating as a public company.

 

Generaland administrative expenses decreased to $7,629,000 in 2004 from $7,854,000 in2003. The decrease of approximately $225,000 was primarily due to the reductionof overhead costs as a result of the decision to relocate the UK business fromtwo leased offices into one owned facility.

 

*Amortizationof intangibles*decreasedto $205,000 in 2004 from $355,000 in 2003. The decrease of approximately$150,000 was primarily due to the reduction made to the value of the Company’sintangible assets as the result of an impairment made by Nexus in 2003, whichis further detailed in the following paragraph.

 

20

----

 

*Impairmentof intangibles*was$202,000 in 2004 and $3,187,000 in 2003. In 2004, the Company recordedan impairment in the amount of $202,000 related to its Television Worldmagazine title. The impairment was recorded to reflect the significant decreasein revenue and profitability due to a decrease in the popularity of thetelevision repair industry. In 2003, the Company recorded an impairment in theamount of $3,187,000 for itsintangible assets for World Travel Guide titles, the European Conference onOptical Communications, and Euro Communications. The printed versions of theWorld Travel Guides had decreased significantly due to the changing delivery ofbusiness to business information from conventional formats to electronic andinternet related formats. The impairments related to the European Conference onOptical Communications and Euro Communications was the direct result of adownturn in the communications industry.

 

*Gain on sale of fixed asset*was $2,555,505 in 2003. The gain was the result of the sale of a building byNexus in June 2003 which resulted in gross proceeds of $3,901,194 and a costbasis of $1,345,689 resulting in a gain of $2,555,505 which was recorded in thestatement of operations in 2003.

 

*Income tax expensein*creased to $625,000 in 2004 from a benefit of ($221,000) in 2003. Theincrease of approximately $850,000 was primarily the result of a profitableyear in 2004 as opposed to a net loss in 2003.

 

*Netincome (loss)*increased to a net income of $596,000 in 2004 from a net loss of $2,583,000 in2003. The increase in net income was primarily due to higher gross profitmargin in 2004 as compared to 2003 as well as reductions in impairment ofintangibles in 2004 compared to 2003.

 

**Liquidity and Capital Resources**

 

*For the reasons outlined above,for the purpose of management’s discussion and analysis of liquidity andcapital resources, in the table below management have combined the Company’scash flows for the nine months ended December 31, 2005 with that of Nexus Mediafor the three months ended March 31, 2005 and compared that to the cash flowsof Nexus Media for the year ended December 31, 2004. Management believes thatthis provides the most meaningful analysis of the Company’s cash flows for thenine months ended December 31, 2005.*

 

**Statement of Cash Flows (Summary):**

 
| ** **                                             | ** ** | **Ergo  Consolidated**                    | ** ** | ** ** | **Predecessor  Nexus Media**            | ** ** | ** **         | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|------------|-----------------------------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **Nine months ended   December 31, 2005** | ** ** | ** ** | **Three months ended   March 31, 2005** | ** ** | **Combined Total** | ** ** |
| ** **                                             | ** ** | ** **                                | ** ** | ** ** | ** **                              | ** ** | ** **         | ** ** |
| Net cash provided by (used in) operating activities    |       | $                                         | 2,183,890  |       |                                    | $          | (1,575,573         | )          | $ | 608,317 |   |
| Net cash used in investing activities                  |       | (21,121,510                               | )          |       | (112,438                                | )          | (21,233,948        | )          |
| Net decrease in cash and cash equivalents              |       | (18,937,620                               | )          |       | (1,688,011                              | )          | (20,625,631        | )          |
| Effect of exchange rates on cash and cash  equivalents |       | 21,973                                    |       |       | (22,224                                 | )          | (251               | )          |
|                                                   |       |                                      |       |       |                                    |       |               |       |
| Cash and cash equivalents at beginning of period       |       | 26,136,046                                |       |       | 1,710,235                               |       | 27,846,281         |       |
|                                                   |       |                                      |       |       |                                    |       |               |       |
| Cash and cash equivalents at end of period             |       | $                                         | 7,220,399  |       |                                    | —     |               | $          | 7,220,399 |   |
|                                                        |            |                                           |            |            |                                         |            |                    |            |  |  |  |

 

*Resources*

 

On April 1, 2005,the Company used $21,754,000 of its own cash to complete the transaction ofacquiring Nexus Media. The Company also incurred approximately $640,000 oftransaction costs related to the acquisition, of which $519,000 was paid as ofDecember 31, 2005. This was offset by the working capital adjustment of$873,000 favorable to the Company received in the third quarter and a warrantyclaim refund of approximately $603,000. As of December 31, 2005, the Companyhad $7,220,399 of cash and cash equivalents.

 

***Cash and cash equivalents***

 

Cash and cash equivalents were $7,220,399 and$1,710,235 at December 31, 2005 and 2004, respectively. The overallincrease in cash and cash equivalents was due to the separation of Nexus fromHighbury House after the 

 

21

----

 

acquisition by Ergo on April 1, 2005. Prior to the acquisition Nexuswas making cash payments for various management and facility expenses to itsformer parent company, Highbury House.

 

*For the years ended December 31, 2005 and 2004*

 

***Net Cash Flow from Operating Activities***

 

Cash provided by operating activities was $608,000during the year ended December 31, 2005 compared to $926,000 during the yearended December 31, 2004, a decrease of $318,000. The decrease in cash providedby operations in 2005 was primarily due to increases in cash payments made forgeneral operating expenses of the Company.

 

***Net Cash Flow from Investing Activities***

 

Cash used in investing activities was $21,234,000during the year ended December 31, 2005 compared to $42,000 during the yearended December 31, 2004. The cash used in investing activities in 2004consisted of the purchase of property and equipment in the amount of $46,000reduced by the proceeds on the disposal of property and equipment of $4,000.The cash used in investing activities in 2005 consisted of the acquisition ofNexus Media by Ergo in the amount of $20,918,000 and the purchase of computerequipment and furniture, fixtures and equipment in the amount of $316,000.

 

*Requirements*

 

The Company expects thatcash generated from our newly acquired operating business will fund our currentoperations for at least the next 12 months. In the event that the Companypurchases an additional business, the Company may require additional capital tocomplete the acquisition.

 

Depending on the decisions that are made, our capitalrequirements may exceed our current resources. In such event, we would have toseek additional debt or equity financing from private or public sources. To theextent we raise additional capital by issuing equity securities, ownershipdilution to existing stockholders will result, and future investors may begranted rights superior to those of existing stockholders. To the extent thatwe borrow funds, the lenders of such funds will have claims to our assetsbefore there can be any distribution to our stockholders. There can be noassurance, however, that additional financing, either debt or equity, will beavailable from any source or, if available, will be available on termsacceptable to us.

 

The Company cannot paydividends on our common stock without first obtaining the written consent ofthe holders of a majority of our outstanding series D exchangeable preferredstock. The Company currently expects to reinvest all earnings to grow anddevelop the business.

 

***Off-Balance SheetArrangements***

 

**The Company has no off-balance sheet arrangements.**

 

***Long-Term ContractualObligations***

 

**As of December 31, 2005, the Company had contractual obligationsrelated to operating leases for equipment, office space and automobiles. Thefollowing are our contractual commitments and obligations as of December 31,2005:**

*** ***
| ** **                      | ** ** | **Payments due by period** | ** **  |
|---------------------------------|------------|----------------------------|-------------|
| **Contractual Obligations**     | ** ** | **Total**                  | ** **  | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                      | ** ** | ** **                 | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating Lease Obligations** | ** ** | **$**                      | **516,845** | ** ** | **$** | **346,118** | ** ** | **$** | **170,727** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
|                                 |            |                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Included in the less than 1 yearamount is a property lease obligation of approximately $284,000, which is aresult of**Highbury House plc being placed intoreceivership in the United Kingdom on January 20, 2006. Pursuant to thePurchase Agreement Highbury House would have been obligated to indemnify NexusHoldings for any and all 

 

22

----

 

IndemnifiedObligations, and the indemnification amount would not have been limited to theamount remaining in the escrow account.  However, the Company believesthat as a result of Highbury House being placed into receivership, HighburyHouse will not have sufficient funds available to be able to meet itsindemnification obligations to Nexus Holdings under the Purchase Agreement.

 

*Recent Accounting Pronouncements Not Yet Adopted*

 

In December 2004,the FASB revised SFAS 123 (“SFAS 123(R)”). SFAS 123(R), *Share-Based Payment*, requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values. Proforma disclosure is no longer an alternative to financial statementrecognition. SFAS 123(R) is effective for periods beginning after December15, 2005. The financial statement impact is not expected to be materiallydifferent from that shown in the existing pro forma disclosure required underthe original SFAS 123. The issuance of additional stock options in thefuture could cause SFAS 123(R) to have a greater impact on our financialstatements.

 

In May 2005, the FASBissued SFAS 154, *Accounting Changes and Error Correction*s,which requires retrospective application to the financial statements of priorperiods to reflect changes in accounting principle and redefines the term “restatement”as the revising of previously issued financial statements to reflect thecorrection of an error. Under retrospective application, the new accountingprinciple is applied as at the beginning of the first period presented as ifthat principle had always been used. The cumulative effect of the change isreflected in the carrying value of assets and liabilities as at the beginningof the first period presented and the offsetting adjustments are recorded toopening retained earnings. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.The Company does not expect the adoption of SFAS 154 to have a material effecton its consolidated financial position, results of operations or cash flows.

 

23

----

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Foreign Currency Exchange Risks***

 

TheCompany’s operations are conducted principally in the United Kingdom and mostof the entities in the group have a functional currency of British Pounds.

 

Thereare principally two types of foreign exchange risk: transaction risks andtranslation risks. Transaction risks may impact the results of operations andtranslation risks may impact comprehensive income. These are discussed morefully below.

 

*Transactionrisks*

 

Transactionsin currencies other than the functional currency are translated at either theexchange rate in effect at the end of the month in which the transaction occursor in some cases the rate in effect at the date of the transaction. Differencesin exchange rates during the period between the date a transaction denominatedin a foreign currency is consummated and the date on which it is settled ortranslated, are recognized in the consolidated statements of operations.

 

NexusMedia’s cash balances consist of Euros, Icelandic Krona, British Pounds andU.S. Dollars. This exposes the Company to foreign currency exchange rate riskin the Statement of Operations. The change in exposure from period to period isrelated to the change in the balance of the bank accounts based on timing ofevent receipts and payments. The Company attempts to use natural hedging inrespect of overseas events by holding advance revenues in the relevant foreigncurrency to the extent that local currency costs are anticipated. At December31, 2005, the Company held approximately 7 million Icelandic Krona (approx$105,000), 42,000 Euros (approximately $50,000) and $147,000 U.S Dollars in thecash accounts and remains exposed to changes in the foreign currency rate. Asof December 31, 2005, a 10% increase or decrease in the level of the IcelandicKrona exchange rate against the British Pound with all other variables held constantwould result in a realized gain or loss of approximately $10,000. A 10%increase or decrease in the level of the Euro exchange rate against the BritishPound with all other variables held constant would result in a realized gain orloss of approximately $5,000. As the date of events approach, exchange ratefluctuations are anticipated to have a decreasing impact on the Company’sfinancial statements, as costs are being incurred the Company will reduce cashbalances collected in advance of the event. Even including the IcelandicFishing event, which took place in September and will take place again in 2008,approximately 87% of our 2005 revenue was in sterling.

 

NexusMedia’s transaction risks as they pertain to cash balances were similar in theyear ended December 31, 2004.

 

*Translationrisks*

 

Thefinancial statements of Nexus Media with a functional currency of BritishPounds are translated into U.S. dollars using the current rate method.Accordingly, assets and liabilities are translated at period-end exchange rateswhile revenue and expenses are translated at the period’s average exchangerates. Adjustments resulting from these translations are accumulated andreported as a component of other comprehensive loss in stockholders’ equity.

 

Thefluctuation in the exchange rates resulted in foreign currency translationlosses reflected as a component of comprehensive loss in stockholders’ equityof $2,001,322 at December 31, 2005. Future changes in the value of the USdollar to British Pound could have a material impact on our financial position.

 

NexusMedia’s translation risks as they pertain to the presentation of conversion ofthe Nexus financial statements from their functional currency of British Poundsinto U.S. dollars were similar in the year ended December 31, 2004.

 

24

----

 

**ITEM 8. CONSOLIDATED FINANCIALSTATEMENTS**

 

In accordance withRule 405 of Securities and Exchange Commission (“SEC”) Regulation C, thehistorical statements of Nexus Media have become the historical financialstatements of Ergo, the registrant. As such, the financial statements includedin this Form 10-K consist of consolidated balance sheets (Ergo and Nexus Media)as of December 31, 2005 and for Nexus Media stand alone as of March 31, 2005,December 31, 2004 and December 31, 2003. The statements of operations and cashflows consist of consolidated amounts for the nine month period ended December31, 2005 (Ergo and Nexus Media) and the Nexus Media stand alone combinedstatement of operations for the three month period ended March 31, 2005 and theyears ended December 31, 2004 and 2003.

 

The Company hasalso included in this section the historical audited financial statements ofErgo Science Corporation for 2004 and 2003 as filed with the SEC on Form 10-Kon March 30, 2005.

 
| **Index  to Consolidated Financial Statements**                                                                                                                                                                                                                         |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                              |       |
| Report of Independent  Registered Public Accounting Firm – Deloitte & Touche LLP                                                                                                                                                                               |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated Balance  Sheet as of December 31, 2005 and the Nexus Media (Predecessor)  Consolidated Balance Sheet as of December 31, 2004                                                                                                                          |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated  Statements of Operations for the nine months ended December 31, 2005 and  the Nexus Media (Predecessor) Statements of Operations for the three months  ended March 31, 2005 and the years ended December 31, 2004 and 2003                      |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated  Statements of Cash Flows for the nine months ended December 31, 2005 and  the Nexus Media (Predecessor) Statements of Cash Flows for the three months  ended March 31, 2005 and the years ended December 31, 2004 and 2003                      |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated  Statements of Stockholders’ Equity for the nine months ended December 31,  2005 and the Nexus Media (Predecessor) Statements of Stockholders’ Equity for  the three months ended March 31, 2005 and the years ended December 31, 2004  and 2003 |       |
|                                                                                                                                                                                                                                                                    |       |
| Notes to the  Consolidated Financial Statements                                                                                                                                                                                                                         |       |
|                                                                                                                                                                                                                                                                    |       |
| **Index  to Ergo Science Audited Financial Statements for the years 2004 and 2003**                                                                                                                                                                                     | ** ** |
|                                                                                                                                                                                                                                                                    |       |
| Report of  Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP                                                                                                                                                                              |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated Balance  Sheets as of December 31, 2004                                                                                                                                                                                                               |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated  Statements of Operations for the years ended December 31, 2004  and 2003                                                                                                                                                                        |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004  and 2003                                                                                                                                                                        |       |
|                                                                                                                                                                                                                                                                    |       |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2004  and 2003                                                                                                                                                         |       |
|                                                                                                                                                                                                                                                                    |       |
| Notes to  Consolidated Financial Statements                                                                                                                                                                                                                             |       |

 

25

----

 

### **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

### ** **

Tothe Board of Directors and Stockholders of Ergo Science Corporation

 

We have audited the accompanying consolidated balance sheets of ErgoScience Corporation and subsidiaries (“Ergo”) as of December 31, 2005 and NexusMedia and subsidiaries (“Predecessor”) as of December 31, 2004 respectively,and the related consolidated statements of income, stockholder’s equity, andcash flows of Ergo for the nine months ended December 31, 2005, and of thePredecessor for the three months ended March 31, 2005, and the years endedDecember 31, 2004 and 2003. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Ergo as of December 31, 2005 andthe Predecessor as of December 31, 2004, and the results of Ergo’s operationsand cash flows for the nine months ended December 31, 2005 and of thePredecessor’s results of operations and cash flows for the three months endedMarch 31, 2005, and the years ended December 31, 2004 and 2003 in conformitywith accounting principles generally accepted in the United States of America.

 

Asdiscussed in Note 15, the accompanying Predecessor consolidated financialstatements for the years ended December 31, 2004 and 2003 have been restated.

 
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| London, United Kingdom        |
| March 31, 2006                |

 

26

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                                                                          | ** ** | ** **            | ** ** | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                          | ** ** | **Ergo**              | ** ** | ** ** | **Nexus Media**  | ** ** |
| ** **                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                          | ** ** | **2005**              | ** ** | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                     |       |                  |       |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                           |       | $                     | 7,220,399  |       |                  | $          | 1,710,235 |   |
| Trade receivables (net of allowance of  doubtful accounts at December 31, 2005: $175,252 and December 31, 2004:  $275,904)                                                                                          |       | 4,700,303             |       |       | 6,851,599             |       |
| Inventory                                                                                                                                                                                                           |       | 273,470               |       |       | 554,818               |       |
| Deferred taxes                                                                                                                                                                                                      |       | 525,993               |       |       | 422,836               |       |
| Prepaid and other current assets                                                                                                                                                                                    |       | 935,936               |       |       | 1,618,505             |       |
| Total current assets                                                                                                                                                                                                |       | 13,656,101            |       |       | 11,157,993            |       |
| Property & equipment, net                                                                                                                                                                                       |       | 3,800,299             |       |       | 4,217,589             |       |
| Intangible assets, net                                                                                                                                                                                              |       | 6,528,140             |       |       | 7,146,680             |       |
| Goodwill                                                                                                                                                                                                            |       | 8,107,340             |       |       | 16,368,388            |       |
| Receivable from Highbury House plc                                                                                                                                                                                  |       | —                |       |       | 50,903,501            |       |
| Deferred taxes                                                                                                                                                                                                      |       | —                |       |       | 147,532               |       |
| Total assets                                                                                                                                                                                                        |       | $                     | 32,091,880 |       |                  | $          | 89,941,683 |   |
| ** **                                                                                                                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** **            | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                       |       |                  |       |       |                  |       |
| Current liabilities:                                                                                                                                                                                                |       |                  |       |       |                  |       |
| Accounts payable and accrued expenses                                                                                                                                                                               |       | $                     | 5,860,815  |       |                  | $          | 7,182,762 |   |
| Deferred revenue                                                                                                                                                                                                    |       | 3,456,656             |       |       | 3,394,882             |       |
| Other creditors                                                                                                                                                                                                     |       | 402,858               |       |       | 426,793               |       |
| Payable to Highbury House plc                                                                                                                                                                                       |       | —                |       |       | 3,413,116             |       |
| Income taxes payable                                                                                                                                                                                                |       | 890,323               |       |       | —                |       |
| Total current liabilities                                                                                                                                                                                           |       | 10,610,652            |       |       | 14,417,553            |       |
|                                                                                                                                                                                                                |       |                  |       |       |                  |       |
| Other long-term liabilities (Highbury House  plc)                                                                                                                                                                   |       | —                |       |       | 32,035,520            |       |
|                                                                                                                                                                                                                |       |                  |       |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                       |       | —                |       |       | —                |       |
|                                                                                                                                                                                                                |       |                  |       |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                          |       |                  |       |       |                  |       |
| Preferred stock, $.01 par value, 10,000,000  shares authorized; 6,903 shares of Series D preferred stock issued and  outstanding at December 31, 2005 (liquidation preference of $12,970,020 at  December 31, 2005) |       | 4,306,520             |       |       | —                |       |
| Common stock, $.01 par value, 50,000,000  shares authorized; 7,149,578 shares issued and 5,813,856 outstanding at  December 31, 2005                                                                                |       | 71,496                |       |       | —                |       |
| Additional paid-in capital                                                                                                                                                                                          |       | 111,880,321           |       |       | —                |       |
| Cumulative dividends on preferred stock                                                                                                                                                                             |       | (2,296,953            | )          |       | —                |       |
| Accumulated deficit                                                                                                                                                                                                 |       | (88,061,177           | )          |       | —                |       |
| Treasury stock (at cost), 1,335,722 shares  at December 31, 2005                                                                                                                                                    |       | (2,417,657            | )          |       | —                |       |
| Cumulative translation adjustment                                                                                                                                                                                   |       | (2,001,322            | )          |       | —                |       |
| Owner’s net investment                                                                                                                                                                                         |       | —                |       |       | 43,488,610            |       |
| Total stockholders’ equity                                                                                                                                                                                     |       | 21,481,228            |       |       | 43,488,610            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                     |       | $                     | 32,091,880 |       |                  | $          | 89,941,683 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

27

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                  | ** ** | ** **                                          | ** ** | ** ** | **Predecessor**                                        | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|------------|--------------------------------------------------------|------------|
| ** **                                  | ** ** | **Ergo  Nine months   ended   December 31,   2005** | ** ** | ** ** | **Nexus Media  Three months   ended  March 31,  2005** | ** ** | **Nexus Media  Year ended December 31,   2004** | ** ** | **Nexus Media  Year ended December 31,   2003** | ** ** |
| ** **                                  | ** ** | ** **                                          | ** ** | ** ** | ** **                                             | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                        |       |                                                |       |       |                                                   |       |   |   |   |   |
| Net revenues                                |       | $                                                   | 28,399,449 |       |                                                   | $          | 6,584,877 |   | $ | 36,947,862 |   | $ | 39,595,643 |   |
| Cost of  revenues                           |       | 18,765,679                                          |       |       | 5,922,761                                              |       | 27,936,671 |   | 33,761,814 |   |
| Gross profit                                |       | 9,633,770                                           |       |       | 662,116                                                |       | 9,011,191 |   | 5,833,829 |   |
|                                        |       |                                                |       |       |                                                   |       |   |   |   |   |
| Operating  expenses:                        |       |                                                |       |       |                                                   |       |   |   |   |   |
| General and administrative                  |       | 8,945,754                                           |       |       | 2,433,071                                              |       | 7,629,106 |   | 7,854,731 |   |
| Amortization of intangibles                 |       | 152,616                                             |       |       | 52,951                                                 |       | 205,296 |   | 354,803 |   |
| Impairment of goodwill                      |       | 2,973,000                                           |       |       | —                                                 |       | — |   | — |   |
| Impairment of intangibles                   |       | 150,962                                             |       |       | —                                                 |       | 201,630 |   | 3,186,683 |   |
| Gain on sale of fixed asset                 |       | —                                              |       |       | —                                                 |       | — |   | (2,555,505 | ) |
| Total operating expenses                    |       | 12,222,332                                          |       |       | 2,486,022                                              |       | 8,036,032 |   | 8,840,712 |   |
| Net operating income (loss)                 |       | (2,588,562                                          | )          |       | (1,823,906                                             | )          | 975,159 |   | (3,006,883 | ) |
| Other  Income:                              |       |                                                |       |       |                                                   |       |   |   |   |   |
| Interest and other income                   |       | 155,324                                             |       |       | 69,971                                                 |       | 245,623 |   | 203,437 |   |
| Net income (loss) before taxes              |       | (2,433,238                                          | )          |       | (1,753,935                                             | )          | 1,220,782 |   | (2,803,446 | ) |
| Income tax expense (benefit)                |       | 200,640                                             |       |       | (353,536                                               | )          | 625,054 |   | (220,730 | ) |
| Net income (loss)                           |       | $                                                   | (2,633,878 | )          |                                                   | $          | (1,400,399 | ) | $ | 595,728 |   | $ | (2,582,716 | ) |
|                                        |       |                                                |       |       |                                                   |       |   |   |   |   |
| Net loss per  common share:                 |       |                                                |       |       |                                                   |       |   |   |   |   |
| Basic                                       |       | $                                                   | (0.45      | )          |                                                   |       |   |   |   |   |   |
| Diluted                                     |       | $                                                   | (0.45      | )          |                                                   |       |   |   |   |   |   |
| Weighted average common shares outstanding: |       |                                                |       |       |                                                   |       |   |   |   |   |
| Basic                                       |       | 5,813,856                                           |       |       |                                                   |       |   |   |   |   |
| Diluted                                     |       | 5,813,856                                           |       |       |                                                   |       |   |   |   |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

28

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                      | ** ** | ** **                                                              | ** ** | ** ** | **Predecessor**                                             | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **Ergo Science   Consolidated  Nine months  ended  December 31,  2005** | ** ** | ** ** | **Nexus Media   Three   Months   ended   March 31,   2005** | ** ** | **Nexus Media   Year ended   December   31, 2004** | ** ** | **Nexus Media   Year ended   December   31, 2003** | ** ** |
| Cash flows from operating activities:                                                           |       |                                                                    |       |       |                                                        |       |   |   |   |   |
| Net (loss) income                                                                               |       | $                                                                       | (2,633,878 | )          |                                                        | $          | (1,400,399 | ) | $ | 595,728 |   | $ | (2,582,716 | ) |
| Adjustments to reconcile net (loss) income  to cash provided by (used in) operating activities: |       |                                                                    |       |       |                                                        |       |   |   |   |   |
| Depreciation                                                                                    |       | 221,959                                                                 |       |       | 73,976                                                      |       | 295,114 |   | 887,824 |   |
| Amortization of intangibles                                                                     |       | 152,616                                                                 |       |       | 52,951                                                      |       | 205,296 |   | 354,803 |   |
| Impairment of goodwill                                                                          |       | 2,973,000                                                               |       |       | —                                                      |       | — |   | — |   |
| Impairment of intangibles                                                                       |       | 150,962                                                                 |       |       | —                                                      |       | 201,630 |   | 3,186,683 |   |
| Bad debt expense                                                                                |       | 313,548                                                                 |       |       | 116,600                                                     |       | 204,090 |   | 140,575 |   |
| Deferred income taxes                                                                           |       | 218,752                                                                 |       |       | (348,809                                                    | )          | 87,984 |   | (330,277 | ) |
| Gain on sale of fixed asset                                                                     |       | —                                                                  |       |       | —                                                      |       | — |   | (2,555,505 | ) |
| Other non-cash                                                                                  |       | (29,235                                                                 | )          |       | —                                                      |       | — |   | 766,137 |   |
| Changes in operating assets and  liabilities:                                                   |       |                                                                    |       |       |                                                        |       |   |   |   |   |
| Accounts receivable                                                                             |       | (443,489                                                                | )          |       | 1,611,211                                                   |       | 914,042 |   | (1,193,538 | ) |
| Inventory                                                                                       |       | 83,288                                                                  |       |       | 56,540                                                      |       | 663,547 |   | (230,540 | ) |
| Payable to parent company                                                                       |       | —                                                                  |       |       | —                                                      |       | (7,421,833 | ) | 4,986,857 |   |
| Prepaid expenses and other current assets                                                       |       | 1,809,603                                                               |       |       | (1,022,749                                                  | )          | 1,734,022 |   | (1,028,437 | ) |
| Accounts payable                                                                                |       | 943,111                                                                 |       |       | (2,335,763                                                  | )          | 3,893,302 |   | (71,940 | ) |
| Accrued expenses and deferred revenue                                                           |       | (1,794,011                                                              | )          |       | 2,047,033                                                   |       | (109,980 | ) | 1,378,335 |   |
| Other creditors                                                                                 |       | 217,664                                                                 |       |       | (426,164                                                    | )          | (337,273 | ) | 224,000 |   |
| Net cash provided by (used in) operating  activities                                            |       | 2,183,890                                                               |       |       | (1,575,573                                                  | )          | $ | 925,669 |   | $ | 3,932,261 |   |
| Cash flows from investing activities:                                                           |       |                                                                    |       |       |                                                        |       |   |   |   |   |
| Purchase of property and equipment                                                              |       | (203,714                                                                | )          |       | (112,438                                                    | )          | (45,825 | ) | (474,160 | ) |
| Proceeds on disposal of property and  equipment                                                 |       | —                                                                  |       |       | —                                                      |       | 3,666 |   | 3,901,194 |   |
| Acquisition of Nexus Media                                                                      |       | (20,917,796                                                             | )          |       | —                                                      |       | — |   | — |   |
| Net cash (used in) provided by investing  activities                                            |       | (21,121,510                                                             | )          |       | (112,438                                                    | )          | (42,159 | ) | 3,427,034 |   |
| Cash flows from financing activities:                                                           |       |                                                                    |       |       |                                                        |       |   |   |   |   |
| Dividends paid to Highbury House                                                                |       | —                                                                  |       |       | —                                                      |       | — |   | (7,606,183 | ) |
| Net cash used in financing activities                                                           |       | —                                                                  |       |       | —                                                      |       | — |   | (7,606,183 | ) |
| Net (decrease) increase in cash and cash  equivalents                                           |       | (18,937,620                                                             | )          |       | (1,688,011                                                  | )          | 883,510 |   | (246,888 | ) |
| Effect of exchange rates on cash and cash  equivalents                                          |       | 21,973                                                                  |       |       | (22,224                                                     | )          | 93,418 |   | 61,305 |   |
| Cash and cash equivalents at beginning of  period                                               |       | 26,136,046                                                              |       |       | 1,710,235                                                   |       | 733,307 |   | 918,890 |   |
| Cash and cash equivalents at end of period                                                      |       | $                                                                       | 7,220,399  |       |                                                        | $          | — |   | $ | 1,710,235 |   | $ | 733,307 |   |

 

The accompanying notes are an integral partof the consolidated financial statements

 

29

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 
| ** **                                                                    | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Cumulative  Dividends  on  Preferred** | ** ** | **Accumulated** | ** ** | **Treasury Stock** | ** ** | **Owner’s Net** | ** ** | **Cumulative   Translation** | ** ** | **Total Invested** | ** ** | **Total  Stockholders’** | ** ** | **Other  Comprehensive** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|-------------------------|------------|------------------------------------------|------------|-----------------|------------|--------------------|------------|----------------------|------------|------------------------------|------------|--------------------|------------|-------------------------------|------------|--------------------------|------------|
| ** **                                                                    | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**              | ** ** | **Amount**                               | ** ** | **Capital**     | ** ** | **Stock**          | ** ** | **Deficit**          | ** ** | **Shares**                   | ** ** | **Amount**         | ** ** | **Investment**                | ** ** | **Adjustment**           | ** ** | **Equity** | ** ** | **Equity** | ** ** | **Income (loss)** | ** ** |
| **Predecessor:**                                                              |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Balance at  January 1, 2003                                              |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | $                             | 45,284,892 |                     | —     |   | $ | 45,284,892 |   | $ | — |   | $ | — |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Net loss                                                                      |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | (2,582,716                    | )          | —                   |       | (2,582,716 | ) | — |   | (2,582,716 | ) |
| Dividends to  Highbury House                                                  |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | (7,606,183                    | )          | —                   |       | (7,606,183 | ) | — |   | — |   |
| Capital  contribution by Highbury House                                       |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | 766,833                       |       | —                   |       | 766,833 |   | — |   | — |   |
| Cumulative  translation adjustment                                            |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | —                        |       | 4,055,776                |       | 4,055,776 |   | — |   | 4,050,776 |   |
| Total  comprehensive income                                                   |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   | — |   | 1,473,060 |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Balance at  December 31, 2003                                            |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | 35,862,826                    |       | 4,055,776                |       | 39,918,602 |   | — |   | — |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Net income                                                                    |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | 595,728                       |       | —                   |       | 595,728 |   | — |   | 595,728 |   |
| Cumulative translation  adjustment                                            |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | —                        |       | 2,974,280                |       | 2,974,280 |   | — |   | 2,974,280 |   |
| Total  comprehensive income                                                   |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   | — |   | 3,570,008 |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Balance at  December 31, 2004                                            |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | 36,458,554                    |       | 7,030,056                |       | 43,488,610 |   | — |   | — |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Net loss                                                                      |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | (1,400,399                    | )          | —                   |       | (1,400,399 | ) | — |   | (1,400,399 | ) |
| Dividends to  Highbury House                                                  |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | (28,216,359                   | )          | —                   |       | (28,216,359 | ) | — |   | — |   |
| Capital  contribution by Highbury House                                       |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | 8,631,901                     |       |                     |       | 8,631,901 |   | — |   | — |   |
| Cumulative  translation adjustment                                            |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | —                        |       | (591,803                 | )          | (591,803 | )  | — |   | (591,803 | ) |
| Total  comprehensive loss                                                     |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   | — |   | (1,992,202 | ) |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Balance at  March 31, 2005                                               |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       | 15,473,697                    |       | 6,438,253                |       | 21,911,950 |   | — |   |   |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| **Ergo:**                                                                     |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Balance at  April 1, 2005                                                |       | 6,903               |       | 4,306,520        |       | 7,149,578               |       | 71,496                                   |       | 111,880,321     |       | (2,296,953         | )          | (85,427,299          | )          | 1,335,722                    |       | (2,417,657         | )          | —                        |       | —                   |       | — |   | $26,116,428 |   | $ | — |   |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Net consolidated loss  for the nine month period ended December 31, 2005 |       |                |       |             |       |                    |       |                                     |       |            |       |               |       | (2,633,878           | )          |                         |       |               |       |                          |       |                     |       |   |   | (2,633,878 | ) | (2,633,878 | ) |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
| Cumulative  translation adjustment                                            |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       | (2,001,322               | )          |   |   | (2,001,322 | ) | (2,001,322 | ) |
| Total  comprehensive loss                                                     |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   | — |   | (4,635,200 | ) |
|                                                                          |       |                |       |             |       |                    |       |                                     |       |            |       |               |       |                 |       |                         |       |               |       |                          |       |                     |       |   |   |   |   |   |   |
|                                                                               |            |                     |            |                  |            |                         |            |                                          |            |                 |            |                    |            |                      |            |                              |            |                    |            |                               |            |                          |            |  |  |  |  |  |  |  |  |  |  |
| Balance at  December 31, 2005 |   | 6,903 |   | $ | 4,306,520 |   | 7,149,578 |   | $ | 71,496 |   | $ | 111,880,321 |   | $ | (2,296,953 | ) | $ | (88,061,177 | ) | 1,335,722 |   | $ | (2,417,657 | ) | (2,001,322 | ) | (2,001,322 | ) | — |   | $ | 21,481,228 |   |   |   |
|------------------------------------|--------|-------|--------|---|-----------|--------|-----------|--------|---|--------|--------|---|-------------|--------|---|------------|---|---|-------------|---|-----------|--------|---|------------|---|------------|---|------------|---|--------|--------|---|------------|--------|--------|--------|

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

30

----

 

**ERGO SCIENCE CORPORATION**

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****                                        Overview**

 

*Background*

* *

Ergo Science Corporation (the “Company” or “Ergo”) acquired thebusiness to business publishing division (“Bcom” or “Nexus Media Communications”or “Nexus Media” or the “Predecessor”) of Highbury House Communications plc (“HighburyHouse”), a company organized under the laws of the United Kingdom on April 1,2005. The purchase price of GBP £12,500,000 (approximately $23,712,000) wassubject to a GBP £1,041,000 (approximately $1,958,000) working capitaladjustment. At closing therefore, the Company paid Highbury House GBP£11,459,000 (approximately $21,754,000).  After completion the finalworking capital amount was confirmed and an additional working capitaladjustment was made to the Company in the amount of GBP £464,000 (approximately$873,000), which we received in the third quarter. In addition, the Companyreceived an additional GBP £320,000 (approximately $603,000) as reimbursementfor warranty claims. As of December 31, 2005, the Company had paid a total $20,918,000related to the acquisition, which includes $640,000 in capitalized acquisitioncosts. The acquisition was funded by the Company from its own cash and cashequivalents. Nexus Media is comprised of eight wholly-owned subsidiaries,provides information across a diverse range of sectors including printed andweb-based magazines, data services and directories, staging exhibitions,conferences and award ceremonies.

 

The Company’s business includes:13 trade names (including: Checkout, Electrical Times; Independent Grocer; TheMotor Ship; World Travel Guide and Motor Trader); 150 domain names (includingcolumbusguides.com; groweroftheyear.com; harpers-wine.com; motorship.com;motortrader.com; travel-guide.com; and worldfish.com); approximately 50 printedmagazines and directories (including: Motor Trader; Harpers Wines &Spirits, The Grower, Independent Retail News, World Fishing; The World TravelGuide and Electrical Review) and approximately 30 Events including exhibitions,awards evenings and conferences such as the International Wine & SpiritCompetition; the Undersea Defence Technology Conference & Exhibition; theMotor Trader Awards and the Grower of the Year Awards.

 

**2.****                                        Summaryof significant accounting policies**

 

*Basis of presentation*

 

Thesefinancial statements include a consolidated balance sheet (Ergo and NexusMedia) as of December 31, 2005 and a Nexus Media stand alone combined balancesheet as of December 31, 2004. The statement of operations includes aconsolidated statement for the nine month period ended December 31, 2005 (Ergoand Nexus Media) and for comparative purposes includes the Nexus Media standalone combined statement of operations for the three month period ended March31, 2005 and the years ended December 31, 2004 and 2003. The statement of cashflows includes a consolidated statement for the nine month period endedDecember 31, 2005 and for comparative purposes includes the Nexus Media standalone combined statement of cash flows for the three months ended March 31,2005 and the Nexus Media stand alone combined statement of cash flows for theyears ended December 31, 2004 and 2003.

 

The Companyhas included condensed consolidated financial statements for Ergo ScienceCorporation (prior to the acquisition of Nexus Media) for the three monthperiod ended March 31, 2005 as a footnote to these financial statements (SeeNote 17).

 

The combined financialstatements of the Predecessor have been derived from the aggregation of thefinancial statements of the individual Nexus Media entities and the accountingrecords of Highbury House and reflect the historical basis of assets andliabilities of the Nexus Media entities under US GAAP.

 

The combined financialstatements include allocations of certain Highbury House expenses including theitems described below:

 

*General corporate expenses*

 

Highbury House allocatedgeneral corporate expenses for each fiscal year based on head count. These allocations are reflected in the general and administrative expenses linein the Combined Statement of Operations.

 

The allocation based onheadcount is primarily for treasury, purchase ledger processing and audit feesand amounted to $708,000 and $2,204,000 for 2004 and 2003 respectively. The decrease relates to the reduction in services provided by Highbury House followinga reorganization in 2003 and Nexus Media undertaking more of these servicesthemselves.  Management believes the costs of these services charged downare a reasonable representation of the costs that would have incurred if NexusMedia had performed these functions as a stand-alone company.

 

*Income taxes*

 

Nexus Media’s income taxesare calculated on a separate tax return basis.  Valuation allowances arerecorded when it is more likely than not that some portion or all of thedeferred tax assets will not be realized in the future.  The deferred taxassets recorded in the historical combined financial statements represent theestimated amount of deferred tax assets that would have been recorded had NexusMedia not had the benefit of tax sharing arrangements to other Highbury Houseentities.  Where unrecognized deferred tax assets were transferred toHighbury House the consideration received has been recorded as a capitalcontribution.

 

*Cash and cash equivalents*

 

The Company considers all highly liquid investments with maturity of90 days or less at the date of purchase to be cash equivalents. AtDecember 31, 2005 and 2004, the Company’s cash equivalents consisted only ofinvestments in cash accounts.

 

31

----

 

*Revenue recognition*

 

The Company recognizes revenue from the following primary sources (1)business publications (2) event revenue and (3) subscription revenue. TheCompany considers amounts to be earned from the sale of goods and services onlyonce evidence of an arrangement has been obtained, delivery of goods andservices has occurred, fees are fixed or determinable and collection isreasonably assured. For business publication all criteria are deemed to be meton the mailing date of the publication. Similarly, Competition or Event revenueis recognized on the date the actual event takes place. Any income received inadvance is deferred until such dates. Subscription revenue is recognized overthe period of the subscription.

 

*Cost recognition*

 

Prepaid expenses consist primarily of prepaid event expenses andprepaid publication production costs plus direct and incremental costs,including salary costs for employees dedicated to planning events and producingmagazines. Deferred costs are charged to expenses at the time of the relatedevent or when the magazine is mailed to the customer. Where it is anticipatedthat an event will be loss making, the total anticipated loss is recognizedwhen management consider a loss likely.

 

*Advertising costs*

 

Costs related to advertisingand service promotion are charged to operating expense as incurred. Advertisingexpense was $118,000, for the nine months ended December 31, 2005. Advertisingexpense for Nexus Media (Predecessor) for the three months ended March 31, 2005and the years ended December 31, 2004 and 2003 was $101,000, $510,000, and$399,000, respectively.

 

*Use of estimates*

 

When applying the Company’s accounting policies, management must makeassumptions and estimates concerning the future that affect the carryingamounts of assets and liabilities at the balance sheet date, the disclosure ofcontingencies that existed at the balance sheet date and the amounts of revenueand expenses recognized during the accounting period. Estimates and assumptionsare particularly important in accounting for impairment of long-lived assets,deferred revenue and costs and income taxes. Estimates and assumptions used arebased on factors such as historical experience, the observance of trends in theindustry in which the Company operates and information available from theCompany’s customers and other outside sources. Due to the inherent uncertaintyinvolved in making assumptions and estimates, actual outcomes could differ fromthose assumptions and estimates.

 

*Stock based compensation*

 

Stockbased compensation is provided to employees, directors and consultants underthe Company’s 2001 Employee, Director and Consultant Stock Plan.

 

Statementof Financial Accounting Standards 123, “Accounting for Stock-Based Compensation”(“SFAS 123”) requires that companies either recognize compensation expensefor grants of stock, stock options, and other equity instruments based on fairvalue, or provide pro forma disclosure of net income or loss and earnings orloss per share in the notes to the financial statements. The Company followsthe disclosure provisions of SFAS 123 and accounts for its stock basedawards in accordance with the provisions set forth within Accounting PrinciplesBoard Opinion 25 (“APB 25”) and related interpretations. Accordingly, nocompensation cost has been recognized for its stock option plans as all optionshave been issued for a fixed number of shares and had fixed exercise pricesequal to the fair market value of the common stock on the grant date. Theeffects of applying SFAS 123 in this pro forma disclosure are not likelyto be representative of the effects on reported income or loss for futureyears. Had compensation cost for the Company’s stock-based compensation plansbeen determined based on the fair value at the grant dates as calculated inaccordance with SFAS 123, the Company’s net loss and loss per share forthe nine months ended December 31, 2005 would have been increased to thepro forma amounts indicated below:

 

32

----

 
| ** **                                                | ** ** | **For the nine months  ended December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| Net loss:                                                 |       |                                              |       |
| As reported                                               |       | $                                                 | (2,633,878 | ) |
| Deduct: Pro forma stock compensation  expense, net of tax |       | (6,554                                            | )          |
| Pro forma                                                 |       | $                                                 | (2,640,432 | ) |
| Net loss per share—basic                             |       |                                              |       |
| As reported                                               |       | $                                                 | (0.45      | ) |
| Pro forma                                                 |       | (0.45                                             | )          |
| Net loss per share—diluted                           |       |                                              |       |
| As reported                                               |       | $                                                 | (0.45      | ) |
| Pro forma                                                 |       | (0.45                                             | )          |

 

**During 2005, the Company granted 22,500 options topurchase common stock to a Director of the Company at an exercise price of$2.40. These options were issued at prices equal to the market price on thegrant dates and a fair value of $1.22 per share.**

** **

**The fair value of each stock option is estimated on thedate of grant using the Black-Scholes option pricing model with the followingassumptions:**

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

** **

No stock options were granted in 2004 or 2003.

 

Nexus Media had no stock based compensation, therefore pro-forma netincome is identical to the amounts disclosed within the income statement forthe three months ended March 31, 2005 and the years ended December 31, 2004 and2003.

 

*Net income (loss) per common share*

 

Basic earnings (loss) per common shareare computed by dividing net income (loss) by the weighted average number ofcommon shares outstanding for the period. Diluted earnings per common share iscomputed by dividing net income (loss) by the sum of the weighted averagenumber of common shares outstanding for the period plus the assumed exercise ofall dilutive securities, such as stock options using the treasury stock method.The diluted loss per common share calculated for the nine months ended December31, 2005 excludes the effect of 50,875 options outstanding since theirinclusion would be anti-dilutive. Net income (loss) per common share is notcalculated for the predecessor periods since the predecessor did not comprise astand alone entity. Nexus was a part of Highbury House and therefore had nooutstanding shares of its own on which earnings per share could be calculated.

 

***Allowancefor doubtful accounts***

 

The Company regularly assesses itsability to collect outstanding customer invoices and in so doing must makeestimates of the Company’s ability to collect outstanding accounts receivable. TheCompany provides an allowance for doubtful accounts when it determines that thecollection of an outstanding customer receivable is no longer probable. Managementspecifically analyzes accounts receivable and historical bad debts experience,and changes in customer payment history when evaluating the adequacy of theallowance for doubtful accounts. If any of these factors change, estimates maychange as well, which could affect the level of future provisions for doubtfulaccounts.

 

*Inventory*

 

Inventory is stated at the lower-of-cost, includingappropriate overheads, or market, determined on the first in first out basis.

 

*Property and equipment, net*

 

Property and equipment are stated at cost, less accumulateddepreciation. Depreciation is calculated using the straight-line basis over theestimated useful life of the various asset classes. Repairs and maintenancecosts are charged to expense as incurred. Upon retirement or sale, the cost ofthe assets disposed of and the related accumulated depreciation are removedfrom the accounts and any resulting gain or loss is included in thedetermination of net income and recorded in the statement of operations.

 

33

----

 

The estimated useful lives of items of property and equipment are inthe following ranges:

 
| **Asset type**                     | ** ** | **Estimated Lives** | ** ** |
|------------------------------------|------------|---------------------|------------|
| Computer  equipment                |       | 2 – 4 years    |       |
| Furniture,  fixtures and equipment |       | 6 – 7 years    |       |
| Buildings                          |       | 40 years            |       |

 

***Loss contingencies***

 

**The Company records estimated loss contingencies when information isavailable that indicates that it is probable that an asset has been impaired ora liability has been incurred and the amount of the loss can be reasonablyestimated. When no accrual is made for a loss contingency because one or bothof these conditions are not met, or if an exposure to loss exists in excess ofthe amount accrued, the Company discloses such contingencies when there is atleast a reasonable possibility that a loss or an additional loss may have beenincurred. Determining the likelihood of incurring a liability and estimatingthe amount of the liability involves significant judgment. If the Company hadused different assumptions, the amount of loss contingencies recorded couldhave differed materially.**

 

*Concentration of credit risk*

 

It is theCompany’s policy to single source its paper, printing and distribution in orderto realize economies of scale.  Management considers that alternativesuppliers could be found in the medium term.  However, the loss of apaper, printing or distribution supplier could, in the short term, adverselyaffect the Company’s business until alternative supply arrangements aresecured.

 

*Fair value of financial instruments*

 

The carryingamounts of certain of the Company’s financial instruments, including cash andcash equivalents, accounts receivable, accounts payable, accrued expenses andother liabilities approximate fair value due to their short maturities.

 

*Leases*

 

Leases that confer rights and obligations similar to those that attachto owned assets and meet the conditions specified by SFAS 13 “Accounting forLeases” are classified as capital leases. All other leases are classified asoperating leases. Operating lease rentals, and any incentives receivable, arerecognized in expense on a straight-line basis over the term of the lease. Allof the Company’s and Predecessor’s leases have been classified as operatingleases throughout all periods presented within these financial statements.

 

*Goodwill*

 

Goodwill arises on the acquisition of subsidiaries and associates andrepresents the excess of the cost of the acquired entity over the Company’sinterest in the fair value of the entity’s identifiable assets, liabilities andcontingent liabilities determined at the date of acquisition. Goodwill is notamortized but is tested at least annually for impairment and carried at costless any recognized impairment losses.

 

*Intangible assets, net*

 

An intangible resource acquired in a business combination is recognizedas an intangible asset if it is separable from the acquired business or arisesfrom contractual or other legal rights. Intangible assets are stated at costless accumulated amortization and any recognized impairment losses.

 

(I) Finite Lived Intangible assets acquired in business combinations

 

An acquired intangible asset is amortized on a straight-line basis soas to charge its cost, which represents its fair value at the date ofacquisition, to expense over its expected useful life. Acquired intangibleassets mainly comprise trademarks, magazine title and contractual events. Theexpected useful lives of these assets are in the range of 10 to 30 years andthe weighted average expected useful life is 20 years.

 

(II) Indefinite lived intangible assets

 

Indefinite life assets are comprised primarily of trademarked titles andunregistered titles. As the life of these assets is indefinite, the companyreviews these assets at least annually for impairment and to asses if theuseful life has become determinable. The asset will then be amortized over thefinite useful life that has been determined.

 

*Impairment of long-lived assets*

 

(a) Finite lived

 

Long-lived assets to be held and used, including finite livedintangible assets, are reviewed for impairment when events or circumstancesindicate that the carrying amount of the asset or asset group may not berecoverable. 

 

34

----

 

The carrying value of a long-lived asset or asset group is consideredto be impaired when the undiscounted expected future cash flows from the assetor asset group are less than its carrying amount. In that event, an impairmentloss is recognized to the extent that the carrying amount of the asset or assetgroup exceeds its fair value. Fair value is estimated using either the presentvalue of the expected future cash flows from the asset or asset groupdiscounted at a rate commensurate with the risk involved or the relief fromroyalty method.

 

(b) Indefinite lived

 

Indefinite lived assets are tested for impairment at least annually ormore frequently if an impairment indicator exists. The Company compares thefair value of the asset, estimated through discounted anticipated future cashflows, to its book value, with any impairment recorded to the income statement.Discount rates used are commensurate with the risk involved.

 

(c) Goodwill

 

The Company assesses the impairment of goodwill at least annually forimpairment and whenever events or a change in circumstances indicate thecarrying value may not be recoverable.

 

Firstly, to identify potential impairment of thegoodwill, the fair value of the reporting unit to which the goodwill isallocated is compared with its carrying amount. Fair value is determined basedon quoted market prices, where available, or is estimated as the present valueof the expected future cash flows from the reporting unit discounted at a ratecommensurate with the risk involved.

 

Secondly, if the carrying amount of the reportingunit including the goodwill exceeds its fair value, the goodwill is tested forimpairment based on its implied fair value. The implied fair value of goodwillrepresents the excess of the fair value of the reporting over the fair value ofits identifiable assets, liabilities and contingent liabilities at the date ofthe impairment test. An impairment loss is recognized if and to the extent thatthe carrying amount of the goodwill exceeds its implied fair value.

 

*Income taxes*

 

Current tax is the amount of tax payable or recoverable in respect ofthe taxable profit or loss for the period. Taxable profit differs from accountingprofit because it excludes items of income or expense recognized for accountingpurposes that are either not taxable or deductible for tax purposes or aretaxable or deductible in other periods. Current tax is calculated using taxrates that have been enacted at the balance sheet date.

 

The Company recognizes provisions in respect of uncertain tax positionswhereby additional current tax may become payable in future periods followingthe audit by the tax authorities of previously filed tax returns. Provisionsfor uncertain tax positions are based upon management’s assessment of thelikely outcome of issues associated with assumed permanent differences,interest that may be applied to temporary differences, the possibledisallowance of tax credits and penalties and are classified as currentliabilities. Provisions for uncertain tax positions are reviewed regularly andare adjusted to reflect events such as the expiry of limitation periods forassessing tax, administrative guidance given by the tax authorities and courtdecisions.

 

Deferred tax is tax expected to be payable or recoverable ondifferences between the carrying amount of an asset or a liability and its taxbase used in the computation of taxable profit. Deferred tax is accounted forusing the liability method, whereby deferred tax assets and liabilities aregenerally recognized for all temporary differences based on enacted tax rates.Deferred tax assets are reduced through the establishment of a valuationallowance at such time as, based on available evidence, it is more likely thannot that the deferred tax asset will not be realized.

 

Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilitiesand when they relate to income taxes levied by the same taxation authority andthe Company intends to settle its current tax assets and liabilities on a netbasis. (SeeNote 10).

 

35

----

 

*Foreign currency translation*

 

At entity level, transactions denominated in currencies other than theentity’s functional currency are translated into the entity’s functionalcurrency at the exchange rate ruling on the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies are retranslated atthe exchange rate ruling on the balance sheet date. Currency translationdifferences are recognized in the statement of income for the period. Theoperating entities use GBP as the functional currency.

 

On consolidation, the results of operations and cash flows of entitieswhose functional currency is other than the US dollar are translated into USdollars at the average exchange rate for the period and their assets andliabilities are translated into US dollars at the exchange rate ruling on thebalance sheet date. Currency translation differences are recognized withinother comprehensive income as a separate component of shareholders’ equity. Inthe event that such an operation is sold, the cumulative currency translationdifferences that are attributable to the operation are reclassified to income.

 

*Segment reporting*

 

The Company is currently managed based as a singleoperating segment for the purpose of making operating decisions and assessingperformance. This assessment is based on the information provided to, andreviewed by the Company’s Chief Operating Decision Maker (CODM), the ErgoBoard. On a regular basis, the Company’s CODM reviews the operations of Nexusmedia, and uses this information to determine the allocation of Companyresources. Accordingly, the Company currently reports only applicableenterprise-wide disclosures as prescribed within SFAS 131 (See Note 13).

 

*Recent accounting pronouncements not yet adopted*

 

In December 2004, the FASB revised SFAS123 (“SFAS 123(R)”). SFAS 123(R), *Share-BasedPayment*, requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values. Pro forma disclosure is no longer an alternative tofinancial statement recognition. SFAS 123(R) is effective for periodsbeginning after December 15, 2005. The financial statement impact is notexpected to be materially different from that shown in the existing pro formadisclosure required under the original SFAS 123. The issuance ofadditional stock options in the future could cause SFAS 123(R) to have agreater impact on our financial statements.

 

In May 2005, the FASB issued SFAS 154, *AccountingChanges and Error Correction*s, which requires retrospectiveapplication to the financial statements of prior periods to reflect changes inaccounting principle and redefines the term “restatement” as the revising ofpreviously issued financial statements to reflect the correction of an error.Under retrospective application, the new accounting principle is applied as atthe beginning of the first period presented as if that principle had alwaysbeen used. The cumulative effect of the change is reflected in the carryingvalue of assets and liabilities as at the beginning of the first periodpresented and the offsetting adjustments are recorded to opening retainedearnings. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. The Company doesnot expect the adoption of SFAS 154 to have a material effect on itsconsolidated financial position, results of operations or cash flows.

 

**3.**     **Acquisition of Nexus MediaCommunications**

 

On April 1, 2005, the Company acquired Nexus Media Communications fromHighbury House as a wholly owned subsidiary, with a purchase price of GBP£12,500,000 (approximately $23,713,000), subject to a GBP £1,041,000(approximately $1,958,000) working capital adjustment. At closing therefore,the Company paid Highbury House GBP £11,459,000 (approximately $21,754,000). After completion the final working capital amount an additional amount ofGBP £464,000 (approximately $873,000) was paid to the Company in the thirdquarter. In addition, the Company received an additional GBP £320,000(approximately $603,000) as reimbursement for 

 

36

----

 

warranty claims. As of December 31, 2005, the Company had paid a total$20,918,000 related to the acquisition, which includes $640,000 in capitalizedacquisition costs. The acquisition was funded by the Company from its own cashand cash equivalents. Nexus Media, comprising eight wholly-owned subsidiaries,enables the Company to provide information across a diverse range of sectorsincluding printed and web-based magazines, data services and directories,staging exhibitions, conferences and award ceremonies

 

The operations of Nexus Media have been included within the income statement of the combined entity from the date of acquisition; April 1, 2005 through the end of the nine month reporting period ended December 31, 2005. No in process research and development was acquired or written off in conjunction with this acquisition.

 

The purchase price allocation is as follows:

 
| **Description**                       | ** ** | **April 2005** | ** **       |
|---------------------------------------|------------|----------------|------------------|
| Assets:                               |       |           |             |
| Trade receivables                     |       | $              |  5,002,271  |   |
| Inventory                             |       | 386,020        |             |
| Other current assets                  |       | 3,539,759      |             |
| Property and equipment                |       | 4,174,136      |             |
| Goodwill                              |       | 12,171,097     |             |
| Intangible assets                     |       | 7,458,481      |             |
| Total assets acquired                 |       | $              |  32,731,764 |   |
| Liabilities:                          |       |           |             |
| Accounts payable                      |       | $              |  1,714,581  |   |
| Deferred revenue and accrued expenses |       | 9,228,890      |             |
| Deferred taxes                        |       | 870,498        |             |
| Total liabilities                     |       | 11,813,969     |             |
| Net assets acquired                   |       | $              |  20,917,795 |   |
|                                  |       |           |             |
| Represented  by:                      |       |           |             |
| Cash paid at closing                  |       | $              |  21,753,670 |   |
| Acquisition costs                     |       | 640,604        |             |
| Working capital adjustment refund     |       | (873,000       | )                |
| Warranty claim refund                 |       | (603,479       | )                |
|                                  |       | $              |  20,917,795 |   |

 

The unaudited pro forma financial information in the table belowsummarizes the combined results of Nexus Media and Ergo for the years endedDecember 31, 2005 and 2004 as though the companies had been combined as ofJanuary 1, 2004. The pro forma financial information is presented forinformation purposes only and is not indicative of the results of operationsthat would have been achieved if the acquisition had taken place at thebeginning of each period, or that may result in the future.

 
| ** **             | ** ** | **2005**   | ** ** | **2004** | ** ** |
|------------------------|------------|------------|------------|----------|------------|
| Revenue                |       | $          | 34,984,326 |     | $          | 36,947,862 |   |
| Net loss               |       | (4,034,277 | )          | (191,728 | )          |
| Loss per  common share |       | $          | (0.69      | )        | $          | (0.03 | ) |

 

**4.****             ****Impairment of goodwill**

 

At December 31, 2005, upon completion of a teston the carrying value of goodwill in accordance with SFAS 142, the Companyrecorded an impairment of $2,973,000 to the goodwill related to the acquisitionof Nexus Media.

 

The fair value of the reporting units calculated asof December 31, 2005 was based on a discounted cash flow model withappropriate market and business risk factored in based upon the Company’s Boardapproved budgets. As a part of the process of creating the discounted cash flowmodel, the Company’s management was 

 

37

----

 

required to make estimates and assumptions regarding future revenues,costs and cash flows. In addition, the use of a discounted cash flow modelrequires management to make estimates and assumptions about the discountfactor, timing of cash flows, terminal values and future growth rates. Theassumptions made in calculating the impairment charges represent management’sbest estimates based on currently available information. Changes to any ofthese assumptions can have a material impact on the discounted cash flows andthe outcome of the impairment review.

 

Management believes this impairment has becomenecessary as a result of the additional pre-acquisition liabilities that havearisen as a result of Highbury House plc entering receivership on January 20,2006, as discussed in Note 16, and the underperformance of the Nexus Mediabusiness compared to the Company’s expectations at the time of acquisition.

 

**5.****             ****Intangible assets, net**

 

**All intangible assets wereacquired in conjunction with the acquisition of Nexus Media on April 1, 2005(See Note 3).**

 

Intangibleassets consist of the following at December 31:

 
| ** **                               | ** ** | **Weighted   average   amortization** | ** ** | **Ergo**  | ** ** | ** ** | **Predecessor******Nexus Media**** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|-----------|------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **period**                            | ** ** | **2005**  | ** ** | ** ** | **2004**                           | ** ** |
| **Finite  Lived Intangible Assets:**     |       |                                  |       |      |       |       |                               |       |
| Trademarked titles                       |       | 19 years                              |       | $         | 1,624,266  |       |                               | $          | 2,324,108 |   |
| Unregistered titles                      |       | 18 years                              |       | 1,873,492 |       |       | 3,245,704                          |       |
| Contractual events                       |       | 29 years                              |       | 504,970   |       |       | 319,972                            |       |
| Total                                    |       | 20 years                              |       | 4,002,728 |       |       | 5,889,784                          |       |
| Less:  accumulated amortization          |       |                                  |       | (152,616  | )          |       | (1,425,504                         | )          |
|                                     |       |                                  |       | 3,850,112 |       |       | 4,464,280                          |       |
| **Indefinite  Lived Intangible assets:** |       |                                  |       |      |       |       |                               |       |
| Trademarked titles                       |       | N/A                                   |       | 1,503,950 |       |       | 1,676,500                          |       |
| Unregistered titles                      |       | N/A                                   |       | 1,174,078 |       |       | 1,005,900                          |       |
| Total intangible assets                  |       |                                  |       | $         | 6,528,140  |       |                               | $          | 7,146,680 |   |

 

Amortization expense was $152,616, $52,951 (Predecessor), $205,296(Predecessor) and $354,803 (Predecessor) for the nine months ended December 31,2005, the three months ended March 31, 2005 and the years ended December 31,2004 and 2003, respectively.

 

An impairment review of the Company’s intangible assets was performedand resulted in the following impairment losses as of December 31, 2005:

 
| Trademarked titles   |   | $      | 62,160  |   |
|----------------------|--------|--------|---------|--------|
| Unregistered  titles |   | 76,369 |    |
| Contractual  events  |   | 12,433 |    |
| Total                |   | $      | 150,962 |   |

 

The fair value of the intangible assets weremeasured based on a projected discounted cash flow method using a discount ratedetermined by management to be commensurate with the risk inherent in ourcurrent business model. The Company recorded an impairment chargerelated to two of its trademarked titles (Checkout and Independent RetailNews), two of its unregistered titles (Grower and Television World), and one ofits non-annual events (World Fishing Exhibition) for the nine months endedDecember 31, 2005 in the amount of $150,962. The impairment was the result of adetermination by the Company that the fair values of these intangible assets,principally determined using the relief from royalty method, were likely to belower than previously anticipated. In 2004, the Company recorded an impairmentin the amount of $202,000 related to its Television World magazine title. Theimpairment was recorded to reflect the significant decrease in revenue andprofitability as a result of the decrease in the popularity of the televisionrepair industry. In 2003, the Company recorded an impairment in the amount of$3,187,000 for its intangible assetsfor World Travel Guide titles, the European Conference on OpticalCommunications, and Euro Communications. The printed versions of the WorldTravel Guides had decreased significantly due to the changing delivery ofbusiness to business information from conventional formats to electronic and internetrelated formats. The impairments related to the European Conference on OpticalCommunications and Euro Communications was the direct result of a downturn inthe communications industry.

 

38

----

 

The estimated future amortization expense related to intangible assets,assuming no future impairment of the underlying assets as of December 31, 2005is as follows:

 
| **Fiscal Year** | ** ** | **Trademarks** | ** ** | **Unregistered  Titles** | ** ** | **Contractual  Events** | ** ** | **Total** | ** ** |
|-----------------|------------|----------------|------------|--------------------------|------------|-------------------------|------------|-----------|------------|
| 2006            |       | $              | 79,065     |                     | $          | 101,409                 |       | $         | 16,765     |   | $ | 197,239 |   |
| 2007            |       | 79,065         |       | 101,409                  |       | 16,765                  |       | 197,239   |       |
| 2008            |       | 79,065         |       | 101,409                  |       | 16,765                  |       | 197,239   |       |
| 2009            |       | 79,065         |       | 101,409                  |       | 16,765                  |       | 197,239   |       |
| 2010            |       | 79,065         |       | 101,409                  |       | 16,765                  |       | 197,239   |       |
| thereafter (a)  |       | 1,161,908      |       | 1,294,482                |       | 407,527                 |       | 2,863,917 |       |
| Total           |       | $              | 1,557,233  |                     | $          | 1,801,527               |       | $         | 491,352    |   | $ | 3,850,112 |   |

 

----

(a) Trademarks will be fully amortized in the year 2025, unregisteredtitles will be fully amortized in the year 2030 and contractual events will befully amortized in the year 2035.

 

**6.****              Inventory**

 

As of December 31, inventory consisted of the following:

 
| ** **        | ** ** | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
|-------------------|------------|------------|------------|------------|-----------------|------------|
| ** **        | ** ** | **Ergo**   | ** ** | ** ** | **Nexus Media** | ** ** |
| ** **        | ** ** | **2005**   | ** ** | ** ** | **2004**        | ** ** |
| Raw  Materials    |       | $          | 83,843     |       |            | $          | 111,074 |   |
| Work in  progress |       | —     |       |       | 74,199          |       |
| Finished  goods   |       | 189,627    |       |       | 369,545         |       |
| Total             |       | $          | 273,470    |       |            | $          | 554,818 |   |

 

**7.****             ****Property and****equipment, net**

 

Propertyand equipment consists of the following at December 31:

 
| ** **                                 | ** ** | ** **     | ** ** | ** ** | **Predecessor**       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **Ergo  2005** | ** ** | ** ** | **Nexus Media  2004** | ** ** |
| Computer  equipment                        |       | $              | 315,371    |       |                  | $          | 2,200,177 |   |
| Furniture,  fixtures and equipment         |       | 549,994        |       |       | 827,712               |       |
| Land                                       |       | 1,289,100      |       |       | 1,437,000             |       |
| Building and  improvements                 |       | 1,877,785      |       |       | 2,544,312             |       |
|                                       |       | 4,032,250      |       |       | 7,009,201             |       |
| Accumulated  depreciation and amortization |       | (231,951       | )          |       | (2,791,612            | )          |
| Equipment,  net                            |       | $              | 3,800,299  |       |                  | $          | 4,217,589 |   |

 

Depreciation expense for the nine months ended December 31, 2005for Consolidated Ergo was $221,959. Depreciation expense for Nexus Media(Predecessor) for the three months ended March 31, 2005 and for the years endedDecember 31, 2004 and 2003 was $73,976, $295,114, and $887,824, respectively.

 

**8.****          ****Accounts****payable andaccrued expenses**

 

Accounts payable and accrued expenses consist of the following atDecember 31,

 

39

----

 
| ** **                                  | ** ** | ** **     | ** ** | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **Ergo  2005** | ** ** | ** ** | **Nexus Media  2004** | ** ** |
| Accounts  payable                           |       | $              | 2,314,376  |       |                  | $          | 4,114,947 |   |
| Accrued  legal & professional           |       | 1,024,455      |       |       | 180,104               |       |
| Accrued  other expenses                     |       | 2,521,984      |       |       | 2,887,711             |       |
| Total accounts payable and accrued expenses |       | $              | 5,860,815  |       |                  | $          | 7,182,762 |   |

 

**9.     Ope**r**ating leases**

 

**The Company has various non-cancelableoperating leases for office space, equipment and automobiles that expire atvarious times through 2009. The total minimum annual lease payments by year areas****follows****:**

** **
| **2006**  | ** ** | **$** | **346,118** | ** ** |
|-----------|------------|-------|-------------|------------|
| **2007**  | ** ** | **$** | **58,535**  | ** ** |
| **2008**  | ** ** | **$** | **58,535**  | ** ** |
| **2009**  | ** ** | **$** | **53,657**  | ** ** |
| **Total** | ** ** | **$** | **516,845** | ** ** |

 

Rent expense for the nine months ended December 31, 2005 for Ergowas $87,000. Rent expense for Nexus Media (Predecessor) for the three monthsended March 31, 2005, and the years ended December 31, 2004 and 2003 totaled $26,000,$83,000 and $73,000, respectively.

 

**Included in the 2006 amount is a propertylease obligation of approximately $284,000, which is a result of**HighburyHouse being placed into receivership in the United Kingdom on January 20, 2006.See Note 16.

 

**10.****       Income taxes**

 

The provision for income taxes consisted ofthe following:

 
| ** **                      | ** ** | **Ergo**                                   | ** ** | ** ** | **Predecessor   Nexus Media**             | ** ** | **Predecessor  Nexus Media**                  | ** ** | **Predecessor  Nexus Media**                  | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **Nine months ended   December 31,  2005** | ** ** | ** ** | **Three months   ended March 31,   2005** | ** ** | **Twelve months   ended December 31,   2004** | ** ** | **Twelve months   ended December 31,   2003** | ** ** |
| Income tax  provision (benefit) | ** ** | ** **                                 | ** ** | ** ** | ** **                                | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| Current:                        |       |                                       |       |       |                                      |       |                                          |       |                                          |       |
| Federal                         |       | $                                          | —     |       |                                      | $          | —                                        |       | $                                             | —     |   | $ | — |   |
| State                           |       | —                                     |       |       | —                                    |       | —                                        |       | —                                        |       |
| Foreign                         |       | (18,112                                    | )          |       | (4,728                                    | )          | 537,070                                       |       | 109,547                                       |       |
| Total current                   |       | (18,112                                    | )          |       | (4,728                                    | )          | 537,070                                       |       | 109,547                                       |       |
|                            |       |                                       |       |       |                                      |       |                                          |       |                                          |       |
| Deferred:                       |       |                                       |       |       |                                      |       |                                          |       |                                          |       |
| Federal                         |       | (250,000                                   | )     |       | —                                    |       | —                                        |       | —                                        |       |
| State                           |       | —                                     |       |       | —                                    |       | —                                        |       | —                                        |       |
| Foreign                         |       | 468,752                                    |       |       | (348,808                                  | )          | 87,984                                        |       | (330,277                                      | )          |
| Total deferred                  |       | 218,752                                    |       |       | (348,808                                  | )          | 87,984                                        |       | (330,277                                      | )          |
|                            |       | $                                          | 200,640    |       |                                      | $          | (353,536                                      | )          | $                                             | 625,054    |   | $ | (220,730 | ) |

 

Net income (loss) before income taxes bygeographic region is as follows:

 
| ** **      | ** ** | **Ergo**                                   | ** ** | ** ** | **Predecessor   Nexus Media**             | ** ** | **Predecessor  Nexus Media**                  | ** ** | **Predecessor  Nexus Media**                  | ** ** |
|-----------------|------------|--------------------------------------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **      | ** ** | **Nine months ended   December 31,  2005** | ** ** | ** ** | **Three months   ended March 31,   2005** | ** ** | **Twelve months   ended December   31, 2004** | ** ** | **Twelve months   ended December   31, 2003** | ** ** |
| ** **      | ** ** | ** **                                 | ** ** | ** ** | ** **                                | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| United  Kingdom |       | $                                          | (2,993,248 | )          |                                      | $          | (1,753,935                                    | )          | $                                             | 1,220,782  |   | $ | (2,803,446 | ) |
| United  States  |       | 560,010                                    |       |       | —                                    |       | —                                        |       | —                                        |       |
|            |       | $                                          | (2,433,238 | )          |                                      | $          | (1,753,935                                    | )          | $                                             | 1,220,782  |   | $ | (2,803,446 | ) |

 

40

----

 

Significant components of the Company’s deferred tax assets andliabilities as of December 31 are as follows:

 
| ** **                                  | ** ** | ** **  | ** ** | ** ** | **Predecessor**                                                  | ** ** |
|---------------------------------------------|------------|-------------|------------|------------|------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Ergo**    | ** ** | ** ** | **Nexus Media  For the three  months ended** | ** ** | **Nexus Media** | ** ** |
| ** **                                  | ** ** | **2005**    | ** ** | ** ** | **March 31, 2005**                                     | ** ** | **2004** | ** ** |
| Deferred tax assets:                        |       |        |       |       |                                                             |       |   |   |
| Research and development credits            |       | $           | 2,554,000  |       |                                                             | $          | — |   | $ | — |   |
| Deferred compensation                       |       | 79,000      |       |       | —                                                           |       | — |   |
| Net operating loss and AMT credits          |       | 27,235,344  |       |       | 703,544                                                          |       | — |   |
| Intangible assets                           |       | 4,585,778   |       |       | 4,547,286                                                        |       | 4,483,525 |   |
| Property and equipment                      |       | 334,011     |       |       | 406,578                                                          |       | 489,412 |   |
| Other                                       |       | —      |       |       | 160,961                                                          |       | 263,953 |   |
| Total deferred tax assets                   |       | 34,788,133  |       |       | 5,818,369                                                        |       | 5,236,890 |   |
| Valuation allowance for deferred tax assets |       | (33,720,817 | )          |       | (4,698,435                                                       | )          | (4,465,783 | ) |
| Deferred tax assets                         |       | 1,067,316   |       |       | 1,119,934                                                        |       | 771,107 |   |
| Deferred tax liabilities:                   |       |        |       |       |                                                             |       |   |   |
| Intangible assets                           |       | (415,090    | )          |       | (354,717                                                         | )          | (348,271 | ) |
| Other                                       |       | (126,233    | )          |       | —                                                           |       | — |   |
| Net deferred tax assets                     |       | $           | 525,993    |       |                                                             | $          | 765,217 |   | $ | 422,836 |   |

 

As of December 31, 2005, the Company had United States NOL and researchand experimentation credit carryforwards remaining of approximately,$74,398,000 and $2,554,000, respectively, which may be available to offsetfuture federal income tax liabilities and expire at various dates from 2008through 2023. The Company also has United Kingdom NOL carryforwards which donot have an expiration date. Approximately $29,000 of the gross deferred tax assetrepresents the benefit of deductions from the exercise of stock options, whichhave been fully reserved. The benefit from the $29,000 tax asset will berecorded as a credit to additional paid in capital when realized. As requiredby Statement of Financial Accounting Standards No. 109, management of theCompany has evaluated the positive and negative evidence bearing upon therealizability of its deferred assets, which are comprised principally of netoperating loss and research and experimentation credit carryforwards.Management has determined that, as of the balance sheet date, it is more likelythan not that the Company will not realize the benefits of federal and statedeferred tax assets and, as a result, a valuation allowance of $33,721,000 hasbeen established at December 31, 2005. $4,698,000 of the valuation allowance is in respect deferred tax assetsof Nexus Media at the date of acquisition.  Any subsequent reduction inthis valuation allowance will not be recorded in the statement of operationsbut will result in an adjustment to the goodwill recognized upon acquisition.

 

In addition to US federal and UK NOL carryforwards, the Company hadapproximately $4,846,000 of Massachusetts NOL carryforwards which expire atvarious amounts and times from 2006 through 2020.

 

Ownershipchanges, as defined in the Internal Revenue Code, may have limited the amountof net operating loss carryforwards that can be utilized to offset futuretaxable income. Subsequent ownership changes could further affect the limitationin future years.

 

**The reconciliation of the expected tax (benefit) expense(computed by applying the federal statutory tax rate to income before incometaxes) to actual tax (benefit) expense was as follows:**

 

41

----

 
| ** **                                                                  | ** ** | **Ergo  For the nine   months ended   December 31,   2005** | ** ** | ** ** | **Predecessor  Nexus Media  For the three  months ended  March 31,   2005** | ** ** | **Predecessor  Nexus Media  For the year   ended  December 31,   2004** | ** ** | **Predecessor  Nexus Media  For the year   ended  December 31,   2003** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| Expected federal income tax expense  (benefit) @35% rate                    |       | $                                                                                              | (851,637   | )          |                                                                                                      | $          | (613,878                                                                                              | )          | $                                                                                                     | 427,701    |   | $ | (904,175 | ) |
| Effect of valuation allowance on current  year losses                       |       | (197,298                                                                                       | )          |       | 91,109                                                                                                    |       | 173,219                                                                                               |       | 722,959                                                                                               |       |
| Non-deductible expenses                                                     |       | 227,597                                                                                        |       |       | 82,021                                                                                                    |       | 119,756                                                                                               |       | 87,747                                                                                                |       |
| Adjustment to goodwill                                                      |       | 1,074,657                                                                                      |       |       | —                                                                                                    |       | —                                                                                                |       | —                                                                                                |       |
| Prior-year adjustment                                                       |       | —                                                                                         |       |       | 33,805                                                                                                    |       | 8,554                                                                                                 |       | (253,703                                                                                              | )          |
| Explanation of state net operating loss  carry forward                      |       | 21,324                                                                                         |       |       | —                                                                                                    |       | —                                                                                                |       | —                                                                                                |       |
| Other                                                                       |       | 1,545                                                                                          |       |       | (5,516                                                                                                    | )          | —                                                                                                |       | 89,654                                                                                                |       |
| Impact of income tax rate differential of  the US @ 35% versus the UK @ 30% |       | (75,548                                                                                        | )          |       | 58,923                                                                                                    |       | (104,176                                                                                              | )          | 36,788                                                                                                |       |
| Totals                                                                      |       | $                                                                                              | 200,640    |       |                                                                                                      | $          | (353,536                                                                                              | )          | $                                                                                                     | 625,054    |   | $ | (220,730 | ) |

 

**11.  Capitalstock**

 

The Company’s authorized capital stock consists of50,000,000 shares of $0.01 par value common stock and 10,000,000 shares of$0.01 par value preferred stock.

 

*Common stock*

 

As of December 31, 2005 the Company has issued 7,149,578 shares ofCommon stock, of which 1,335,722 are held in Treasury by the Company.

 

Atthe Company’s Annual Meeting of Stockholders held on October 15, 2001,stockholders approved the imposition of transfer restrictions on its commonstock **(the “TransferRestrictions”), which are contained in Article XII of the Company’s Certificateof Incorporation (the “Certificate”). The Transfer Restrictions**were implemented on October 19, 2001 **to preserve certain valuable tax benefits(the “Tax Benefits”) to which the Company is entitled.**

 

**EffectiveMay 18, 2005, the Board of Directors (the “Board”) of the Company, acting byunanimous consent (the “Unanimous Consent”), and taking into consideration thatthe Tax Benefits will not begin to expire until 2008, that the Company’sability to retain the Tax Benefits is subject to limitations resulting from,among other things, an ownership change (an “Ownership Change”) as defined inSections 382 and 383 of the Internal Revenue Code of 1986, as amended from timeto time, or any successor statute (collectively, the “Code”), that the value ofthe Tax Benefits could be reduced if an Ownership Change occurs, and that theTransfer Restrictions likely decrease the possibility of an Ownership Change,determined (the “Determination”) that modifying the definition of “ExpirationDate” set forth in Article XII.(1) of the Certificate and extending that datethrough 2007 was in the best interests of the Company and both reasonablynecessary and desirable to preserve the Tax Benefits.**

 

**As aresult of the Determination, the Board modified the text of Article XII. (1) ofthe Certificate to read as follows:**

 

**the followingrestrictions shall apply until the earlier of (x) the day after the sixth (6th)  anniversary of the effective time of themerger of the Corporation’s parent corporation, a Delaware corporation, withand into the Corporation pursuant to Section 253 of the Delaware GeneralCorporation Law (the “Merger”)  (y) therepeal of Section 382 of the Code if the Board of Directors determines that therestrictions in this Article XII are no longer necessary for the preservationof the Tax Benefits, and (z) the beginning of a taxable year of the Corporationto which the board of directors determines that no Tax Benefits may be carriedforward, unless the Board of Directors shall fix an earlier or later date inaccordance with Section 5 of this Article XII (the date on which therestrictions of this Article XII expire hereunder is sometimes referred toherein as the “Expiration Date”).**

** **

**The day afterthe sixth anniversary of the effective date of the merger is October 20, 2007.Additionally, the**

** **

**42**

----

** **

**Board extendedthe Expiration Date until October 20, 2007.**

 

*Preferred stock*

 

There are 6,903 shares of Series D preferred stock outstanding as ofDecember 31, 2005.

 

The holders of series D preferred stock are entitled to receivequarterly dividends at a rate of 6% per annum, compounded semiannually, on thestated value. Such dividends are cumulative and shall only be payable toholders of record when and as declared by the board of directors. The Companycannot pay dividends on its common stock without first obtaining the writtenconsent of the holders of a majority of the outstanding series D preferredstock. Upon any voluntary or involuntary liquidation, dissolution or winding upof the Company, the holders of series D preferred stock then outstandingwill be entitled to receive an amount of cash equal to the stated value ofseries D preferred stock (including any accrued but unpaid dividends)after any distribution is made on any senior securities and before anydistribution is made on any junior securities, including common stock. Theliquidation preference amount for the series D preferred stock as ofDecember 31, 2005 was $12,970,020, or $1,878.90 per share.

 

**12.  Stockoptions and incentive plan**

 

Effective as of November 1, 1994, the board of directors adoptedthe Ergo Science Development Corporation Long-Term Incentive Plan (the“Incentive Plan”) pursuant to which certain officers, directors, and keyemployees were granted awards with respect to shares of the Company’s common stock.The awards that could be granted under the Incentive Plan included incentivestock options, nonstatutory options, stock appreciation rights (SARs) andrestricted stock awards. Awards of options to purchase 35,000 shares at anexercise price of $1.562 per share were granted to directors under theIncentive Plan in 2001. These amounts were subsequently reduced to 17,500 as aresult of the reverse stock split in October of 2001. These amounts areincluded in the tables above. At the time that the stockholders approved the2001 Stock Plan, the Incentive plan was closed and no new grants will be madeunder this plan. There are 875 shares outstanding related to this plan as ofDecember 31, 2005.

 

On May 15, 1996, the board of directors approved, subject tostockholder approval, a proposal to adopt a Stock Option Plan for Non-EmployeeDirectors of the Company (the “Director Stock Plan”). The Director Stock PlanProvided for an initial grant of an option to purchase 5,000 shares of commonstock to each eligible non-employee director upon first being elected orappointed to serve on the board of directors. Awards of options to purchase15,000 shares at exercise prices of $1.25-$1.562 per share were granted underthe Director Stock Plan in 2001. These amounts were subsequently reduced to7,500 as a result of the reverse stock split in October of 2001 These amountsare included in the tables above. At the time that the stockholders approvedthe 2001 Stock Plan, the Company’s Director Stock Plan was closed and no newgrants will be made under this Plan. There are 27,500 option shares outstandingrelated to this plan as of December 31, 2005.

 

**On October 15, 2001, the stockholders of the Companyapproved the Ergo Science Corporation 2001 Employee, Director and ConsultantStock Plan pursuant to which certain officers, directors, key employees andconsultants may be granted awards with respect to shares of the Company’scommon stock. The awards that may be granted under the 2001 Stock Plan includeincentive stock options under section 422 of the Internal Revenue Code,non-qualified stock options, stock appreciation rights (SARs) and restrictedstock awards. A total of 1,600,000 shares of our common stock were reserved forissuance pursuant to options and other awards granted under this plan. Thisplan provides for an initial grant of an option to purchase 5,000 shares ofcommon stock to each eligible non-employee director upon first being elected orappointed to serve on the board of directors. Stock options granted todirectors under the 2001 Stock Plan vest and become exercisable in equalincrements on the first five anniversaries of their date of grant, but no stockoption may be exercised more than ten years after the date of its grant.**During 2005, the Company granted22,500 options to purchase common stock to a Director of the Company at anexercise price of $2.40. These options were issued at prices equal to themarket price on the grant dates. There were no awards granted in 2004 or 2003. As ofDecember 31, 2005, 1,577,500 shares were available to be granted under the 2001Stock Plan.

** **

Information related to stock option activity for the period from April1, 2005 through December 31, 2005 is as follows:

 
| ** **                        | ** ** | **Shares** | ** ** | **Weighted   Average  Option   Price** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding  at April 1, 2005     |       | 28,375     |       | $                                      | 1.81       |   |
| Granted                           |       | 22,500     |       | 2.40                                   |       |
| Outstanding  at December 31, 2005 |       | 50,875     |       | 2.07                                   |       |
| Exercisable  at December 31, 2005 |       | 24,875     |       | $                                      | 1.84       |   |

 

Thefollowing table summarizes information about stock options outstanding atDecember 31, 2005:

 
| **Options Outstanding**       | ** **    | **Options Exercisable** | ** ** |
|-------------------------------|---------------|-------------------------|------------|
| **Range of  Exercise Prices** | ** **    | **Number  Outstanding** | ** ** | **Weighted   Average  Remaining  Contractual   Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $                             | 0.00 to 1.562 |                    | 27,500     |   | 5.7 years |   | $ | 1.56 |   | 24,000 |   | $ | 1.56 |   |
| $                             | 1.563 to 6.50 |                    | 23,000     |   | 9.5 years |   | $ | 2.49 |   | 500 |   | $ | 6.50 |   |
| $                             | 6.51 to 13.42 |                    | 375        |   | 0.2 years |   | $ | 13.42 |   | 375 |   | $ | 13.42 |   |
| $                             | 0.00 to 13.42 |                    | 50,875     |   |   |   | $ | 2.07 |   | 24,875 |   | $ | 1.84 |   |

 

43

----

 

**13.  Segmentand geographic area information**

 

The Company’s revenues are primarily derived fromwithin the United Kingdom. A breakout of revenue by geographic region andrevenue type is as follows:

 
| ** **                     | ** ** | **Ergo**                                     | ** ** | ** ** | **Nexus Media**                              | ** ** | ** **                                       | ** ** | ** **                                       | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                     | ** ** | **Nine months   ended  December   31, 2005** | ** ** | ** ** | **Three months ended  March 31,  2005** | ** ** | **Nexus Media  Year ended  December 31,   2004** | ** ** | **Nexus Media  Year ended  December 31,   2003** | ** ** |
|                           |       |                                         |       |       |                                         |       |                                             |       |                                             |       |
| Revenue by  geographic region: |       |                                         |       |       |                                         |       |                                             |       |                                             |       |
| United Kingdom                 |       | $                                            | 20,135,606 |       |                                         | $          | 4,333,892                                        |       | $                                                | 26,722,612 |   | $ | 28,637,624 |   |
| Rest of Europe                 |       | 5,871,598                                    |       |       | 1,660,681                                    |       | 7,054,282                                        |       | 7,559,811                                        |       |
| Other countries                |       | 2,392,245                                    |       |       | 590,304                                      |       | 3,170,968                                        |       | 3,398,208                                        |       |
|                           |       |                                         |       |       |                                         |       |                                             |       |                                             |       |
| Total                          |       | $                                            | 28,399,449 |       |                                         | $          | 6,584,877                                        |       | $                                                | 36,947,862 |   | $ | 39,595,643 |   |
|                           |       |                                         |       |       |                                         |       |                                             |       |                                             |       |
| Revenue by  product:           |       |                                         |       |       |                                         |       |                                             |       |                                             |       |
| Publications                   |       | $                                            | 18,975,774 |       |                                         | $          | 2,974,867                                        |       | $                                                | 25,201,990 |   | $ | 27,008,032 |   |
| Events                         |       | 8,989,474                                    |       |       | 3,153,114                                    |       | 10,117,866                                       |       | 10,842,938                                       |       |
| Internet                       |       | 434,201                                      |       |       | 456,896                                      |       | 1,628,006                                        |       | 1,744,673                                        |       |
|                           |       |                                         |       |       |                                         |       |                                             |       |                                             |       |
| Total                          |       | $                                            | 28,399,449 |       |                                         | $          | 6,584,877                                        |       | $                                                | 36,947,862 |   | $ | 39,595,643 |   |

 

All of the Company’s long lived assets are locatedin the United Kingdom.

 

In no period has the Company or the Predecessor hadany customers who account for 10% or more of revenue or 10% of the Company’s orPredecessor’s accounts receivable balances at either December 31, 2005 or 2004.

 

**14.****      ****Valuation and qualifying accounts**

 

**For the nine months ended December 31, 2005, the three months endedMarch 31, 2005 and the years ended December 31, 2004 and 2003**

** **
| **Description**                      |   | **Balance At  Beginning of  Period** | ** ** | **Bad Debt******Expenses**** | ** ** | **Write off of   Bad Debts** | ** ** | **Effects of******Foreign   Currency   Exchange (1)**** | ** ** | **Balance At   End of   Period** |   |
|--------------------------------------|--------|------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------|--------|
|                                 |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| **Ergo:**                            |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Nine months ended December 31, 2005: |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Allowance for uncollectible accounts |   | $                                              | —     |                              | $          | 313,548                                          |       | $                                                                           | (130,307   | )                                                    | $      | (7,989 | ) | $ | 175,252 |   |
|                                 |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| **Nexus  Media (Predecessor):**      |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Three months ended March 31, 2005:   |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Allowance for uncollectible accounts |   | $                                              | 275,904    |                              | $          | 116,600                                          |       | $                                                                           | (118,205   | )                                                    | $      | (3,915 | ) | $ | 270,384 |   |
|                                 |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Year ended December 31, 2004:        |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Allowance for uncollectible accounts |   | $                                              | 549,857    |                              | $          | 204,090                                          |       | $                                                                           | (505,035   | )                                                    | $      | 26,992 |   | $ | 275,904 |   |
|                                 |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Year ended December 31, 2003:        |   |                                           |       |                              |       |                                             |       |                                                                        |       |                                                 |   |
| Allowance for uncollectible accounts |   | $                                              | 942,530    |                              | $          | 140,575                                          |       | $                                                                           | (594,172   | )                                                    | $      | 60,924 |   | $ | 549,857 |   |

 

44

----

 

----

(1)Represents the difference as a result of the provision and write-off amountsrecorded at an average exchange rate and the ending balance being recorded atthe exchange rate as the last day of the Company’s fiscal year end of December31.

 

**15.****                               Restatementof financial statements for the years ended December 31, 2004 and 2003**

 

During the preparation of the Form 10-K for the year ended December 31,2005, it was determined that certain costs (principally editorial overheads),previously classified within general and administrative expenses should be classifiedas part of costs of revenues within the Predecessor consolidated financialstatements for the years ended December 31, 2004 and 2003 as filed on Form8-K/A on June 17, 2005. This error arose because Nexus Media’s annualconsolidated financial statements for the years ended December 31, 2004 and2003 were derived by adjusting historic predecessor statutory financialinformation prepared in accordance with generally accepted accountingprinciples in the United Kingdom to generally accepted accounting principles inthe United States of America. By contrast these consolidated financialstatements have been derived from our management accounts. As a result, theCompany has reclassified $5,437,000 and $6,460,000 from general andadministrative expenses to cost of revenues in relation to the years endedDecember 31, 2004 and 2003, respectively.

 

The restatement did not have any impact on the Predecessor’sconsolidated net income, balance sheet, statements of cash flows or statementof stockholders’ equity.

 

The effect on the Predecessor’s cost of revenues, gross profit andgeneral and administrative expenses is set out below:

 
| ** **                           | ** ** | **Nexus Media  Year ended December 31, 2004** | ** ** | **Nexus Media  Year ended December 31, 2003** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **As Previously   Reported**                  | ** ** | **As Restated**                               | ** ** | **As Previously   Reported** | ** ** | **As Restated** | ** ** |
| Cost of revenues                     |       | $                                             | 22,500,124 |                                          | $          | 27,936,671 |   | $ | 27,301,814 |   | $ | 33,761,814 |   |
| Gross profit                         |       | 14,447,738                                    |       | 9,011,191                                     |       | 12,293,829 |   | 5,833,829 |   |
| General and  administrative expenses |       | 13,065,653                                    |       | 7,629,106                                     |       | 14,314,731 |   | 7,854,731 |   |
|                                      |            |                                               |            |                                               |            |  |  |  |  |  |  |  |  |

 

**16.****       Subsequent events**

 

On January 20, 2006, the Company was notified that Highbury House Communicationsplc was placed into receivership in the United Kingdom when certain lenders ofHighbury House appointed an administrative receiver to distribute HighburyHouse’s assets to its secured creditors. An administrative receiver performssimilar functions of a US bankruptcy trustee upon appointment from a bankruptcycourt.

 

In accordance with the share purchase agreement between Nexus HoldingsLimited, Ergo’s wholly-owned subsidiary (“Nexus Holdings”) and Highbury House,Nexus Holdings was to be indemnified by Highbury House with respect to certainclaims and obligations that remained with Nexus Media after the acquisition,including obligations under certain real property leases, certain royaltyobligations and certain tax liabilities (collectively, the “IndemnifiedObligations”).  At the time of the acquisition, Highbury House and NexusHoldings set aside £750,000 (approximately $1,409,000) of the purchase price inescrow for a certain period after closing, in order to partially satisfy suchIndemnified Obligations, as well as any claims under the representations andwarranties made in the purchase agreement and claims for any agreed adjustmentsto the purchase price.

 

Highbury House had distributed to Nexus Holdings £321,020(approximately $571,000) of the escrow amount in relation to an adjustment tothe purchase price on September 23, 2005, and a further £320,000 (approximately$603,000) in settlement of a claim under a warranty contained within thePurchase Agreement on January 13, 2006.  Prior to Highbury House beingplaced in receivership, Nexus Holdings negotiated with Highbury House to settlethe warranty claim, enabling Nexus Holdings to receive a total of £641,000(approximately $1,125,000), as detailed above, with the balance being releasedto Highbury House.

 

Pursuant to the purchase agreement, Highbury House would have beenobligated to indemnify Nexus Holdings for any and all Indemnified Obligations,and the indemnification amount would not have been limited to 

 

45

----

 

the amountremaining in the escrow account.  However, **the**Company believes that as a result of Highbury House being placed into receivership,Highbury House will not have sufficient funds available to be able to meet itsindemnification obligations to Nexus Holdings under the PurchaseAgreement.  Therefore, the Company considers Highbury House’s placementinto receivership to be a triggering event that increases a direct financialobligation of Nexus Media, being subsidiaries of the Company.

 

As a result, Nexus Holdings estimates that it is likely to incuradditional costs of approximately £970,000 (approximately $1,700,000) forcertain real property lease obligations ($700,000), certain royalty obligations($200,000), and for certain tax liabilities ($800,000).

 

The real property lease obligations relate to rental payments andreinstatement costs expected to be incurred through September 2006 forproperties that had been vacated by Nexus Media in 2003. Since that timeHighbury House was paying the rental obligations and under the terms of thePurchase Agreement these leases were to be formally assigned to Highbury House.As a result of Highbury House being placed into receivership, Nexus Media willbe required to meet these pre-acquisition obligations.

 

The royalty obligations relate to further purchase considerationpayable by Nexus Media pursuant to a pre-existing acquisition agreement. Thepurchase price allocation has been adjusted based on the Company’s bestestimate of the further amounts that will be payable. Any subsequent adjustmentto the amounts paid will be reflected in the statement of operations.

 

The estimated tax liabilities relate to UK corporation taxes of NexusMedia with respect to fiscal 2004. Pursuant to EITF 93-7, *UncertaintiesRelated to Income Taxes in a Purchase Business Combination,*thepurchase price allocation has been adjusted to reflect the best estimate of theseadditional liabilities. Any subsequent adjustment to the amounts paid willresult in further adjustments to the purchase price allocation with aconsequential adjustment to goodwill.

 

**17.    Financialinformation of Ergo Science prior to the acquisition of Nexus Media**

 

The acquisition of Nexus Media by Ergo is being treated as a purchasebusiness combination for accounting purposes. We have nonetheless included the condensedconsolidated financial information of Ergo prior to the acquisition of Nexus Mediaincluding the condensed consolidated balance sheet at March 31, 2005, the condensedconsolidated statement of operations and the condensed consolidated statementof cash flows for the three month period ended March 31, 2005.

 

46

----

 

**Condensed Consolidated Balance Sheet**

 
| ** **                                                                                                                                                                                 | ** ** | **March 31, 2005** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| **ASSETS**                                                                                                                                                                                 |       |               |       |
|                                                                                                                                                                                       |       |               |       |
| Current  assets:                                                                                                                                                                           |       |               |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                  | 26,334,449 | (2) |
| Prepaid and other current assets                                                                                                                                                           |       | 61,878             |       |
| Capitalized acquisition costs                                                                                                                                                              |       | 640,604            | (1)        |
| Total current assets                                                                                                                                                                       |       | 27,036,931         |       |
|                                                                                                                                                                                       |       |               |       |
| Total assets                                                                                                                                                                               |       | $                  | 27,036,931 |   |
| ** **                                                                                                                                                                                 | ** ** | ** **         |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |               |       |
|                                                                                                                                                                                       |       |               |       |
| Current  liabilities:                                                                                                                                                                      |       |               |       |
| Accounts payable and accrued expenses                                                                                                                                                      |       | $                  | 826,503    | (1) |
| Income taxes                                                                                                                                                                               |       | 94,000             |       |
| Total current liabilities                                                                                                                                                                  |       | 920,503            |       |
|                                                                                                                                                                                       |       |               |       |
| Stockholders’  equity:                                                                                                                                                                |       |               |       |
| Preferred stock, $.01 par value, 10,000,000  shares authorized; 6,903 shares of Series D preferred stock issued and  outstanding at March 31, 2005 (liquidation preference of $12,407,054. |       | 4,306,520          |       |
| Common stock, $.01 par value, 50,000,000  shares authorized; 7,149,578 shares issued and 5,813,856 outstanding at March  31, 2005.                                                         |       | 71,496             |       |
| Additional paid-in capital                                                                                                                                                                 |       | 111,880,321        |       |
| Cumulative dividends on preferred stock                                                                                                                                                    |       | (2,296,953         | )          |
| Accumulated deficit                                                                                                                                                                        |       | (85,427,299        | )          |
| Treasury stock (at cost), 1,335,722 shares  at March 31, 2005 and December 31, 2004                                                                                                        |       | (2,417,657         | )          |
| Total stockholders’ equity                                                                                                                                                            |       | 26,116,428         |       |
|                                                                                                                                                                                       |       |               |       |
| Total liabilities and stockholders’ equity                                                                                                                                            |       | $                  | 27,036,931 |   |

 

47

----

 

### **CondensedConsolidated Statement of Operations**

 
| ** **                                   | ** ** | **For the three months  ended March 31, 2005** |    |
|----------------------------------------------|------------|------------------------------------------------|---------|
| Operating  expenses:                         |       |                                           |    |
| General and administrative                   |       | $                                              | 180,049 |   |
| Net operating loss                           |       | (180,049                                       | )       |
| Other  Income:                               |       |                                           |    |
| Interest                                     |       | 136,630                                        |    |
| Foreign exchange gain                        |       | 198,403                                        | (2)     |
| Net income                                   |       | $                                              | 154,984 |   |
| Net income  per common share:                |       |                                           |    |
| Basic and Diluted                            |       | $                                              | 0.03    |   |
| Weighted  average common shares outstanding: |       |                                           |    |
| Basic and Diluted                            |       | 5,813,856                                      |    |

 

48

----

 

### **CondensedConsolidated Statement of Cash Flows**

 
| ** **                                                                 | ** ** | **Three Months   Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|
| Cash flows  from operating activities:                                     |       |                                     |       |
| Net income                                                                 |       | $                                        | 154,984    |   |
| Adjustments to reconcile net income to cash  used in operating activities: |       |                                     |       |
| Foreign exchange gain                                                      |       | (198,403                                 | )          |
| Changes in operating assets and  liabilities:                              |       |                                     |       |
| Prepaid and other current assets                                           |       | (51,341                                  | )          |
| Accounts payable and accrued expenses                                      |       | (205,203                                 | )          |
| Net cash  used in operating activities                                     |       | (299,963                                 | )          |
| Cash flows  from investing activities:                                     |       |                                     |       |
| Payments for acquisition costs                                             |       | (17,181                                  | )          |
| Net cash  used in investing activities                                     |       | (17,181                                  | )          |
| Net decrease  in cash and cash equivalents                                 |       | (317,144                                 | )          |
| Effect of  exchange rates on cash and cash equivalents                     |       | 198,403                                  |       |
| Cash and  cash equivalents at beginning of period                          |       | 26,453,190                               |       |
| Cash and  cash equivalents at end of period                                |       | $                                        | 26,334,449 |   |

 

----

(1)                                  These amounts differfrom those disclosed on Form 10-Q for the period ended March 31, 2005 ascertain costs were less than originally accrued when the acquisition of NexusMedia was finalized.

 

(2)                                  These amounts differfrom those previously disclosed on Form 10-Q for the period ended March 31,2005 due to the correction of an error in order to recognize a foreign exchangegain in the amount of $198,403 on non US dollar denominated cash balancesestablished shortly before the acquisition of Nexus Media.

 

**18.    Quarterlyresults (unaudited)**

 

Thefollowing table sets forth unaudited selected financial information for theperiods indicated. With the exception of the first quarter 2005, this informationhas been derived from unaudited consolidated financial statements, which, inthe opinion of management, include all adjustments (consisting only of normalrecurring adjustments) necessary for a fair presentation of such information.The results of operations for any quarter are not necessarily indicative of theresults to be expected for any future period. The amounts for each of thequarterly periods in 2004 and the first quarter of 2005 reflect amounts ofNexus Media only, prior to its acquisition by Ergo Science. The amounts for thesecond, third and fourth quarters of 2005 reflect consolidated amounts for ErgoScience and Nexus. Net income (loss) per share was calculated only for thesecond, third and fourth quarters of 2005. It was not calculated for thepredecessor periods because Nexus was a part of Highbury House and thereforehad no outstanding shares of its own on which earnings per share could becalculated. All amounts from Nexus Media were converted into US dollars usingthe average exchange rate for each quarter.

 
| ** **                   | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| **2005**                     |       |              |       |               |       |              |       |               |       |
| Revenue                      |       | $                 | 6,584,877  |               | $          | 8,403,095         |       | $                  | 10,907,195 |   | $ | 9,089,159 |   |
| Gross profit                 |       | 662,116           |       | 2,394,423          |       | 3,250,016         |       | 3,989,331          |       |
| Net income  (loss)           |       | (1,400,349        | )          | (831,582           | )          | 296,529           |       | (2,098,825         | )          |
| Net income  (loss) per share |       |              |       |               |       |              |       |               |       |
| Basic and diluted            |       | N/A               |       | $                  | (0.14      | )                 | $          | 0.05               |       | $ | (0.36 | ) |
|                              |            |                   |            |                    |            |                   |            |                    |            |  |  |  |  |

 

49

----

 

The amountspresented above for the quarter ended March 31, 2005 are different from thosepreviously reported in the Form 10-Q filed on August 19, 2005 as a result ofpost balance sheet adjusting events that have arisen since August 19, 2005.These principally relate to the fact that Highbury House was placed in toadministrative receivership in January 2006 as described in Note 16 to thefinancial statements for the year ended December 31, 2005.

 
| ** **         | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|--------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| **2004**           |       |                   |       |                    |       |                   |       |                    |       |
| Revenue            |       | $                      | 7,672,471  |                    | $          | 9,196,130              |       | $                       | 10,219,151 |   | $ | 9,860,110 |   |
| Gross profit       |       | 1,554,622              |       | 2,868,520               |       | 2,054,726              |       | 2,533,323               |       |
| Net income  (loss) |       | (303,699               | )          | 460,377                 |       | 316,558                |       | 122,492                 |       |
|                    |            |                        |            |                         |            |                        |            |                         |            |  |  |  |  |

 

50

----

 

### **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of Ergo Science Corporation

 

In our opinion, the accompanying consolidated balance sheet and therelated consolidated statements of operations, cash flows and stockholders’equity present fairly, in all material respects, the financial position of ErgoScience Corporation and its subsidiaries at December 31, 2004 and the resultsof their operations and their cash flows for each of the two years in theperiod ended December 31, 2004 in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
|                           |
| Boston, Massachusetts          |
| March 31, 2006                 |

 

51

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **2004**              | ** ** |
|                                                                                                                                                                                                                             |       |                  |       |
| **ASSETS**                                                                                                                                                                                                                       |       |                  |       |
| Current assets:                                                                                                                                                                                                                  |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                       |       | $                     | 26,453,190 |   |
| Prepaid and  other current assets                                                                                                                                                                                                |       | 10,537                |       |
| Total current  assets                                                                                                                                                                                                            |       | 26,463,727            |       |
| Equipment, net                                                                                                                                                                                                                   |       | —                |       |
| Total assets                                                                                                                                                                                                                     |       | $                     | 26,463,727 |   |
|                                                                                                                                                                                                                             |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                    |       |                  |       |
|                                                                                                                                                                                                                             |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                            |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                                                                                           |       | $                     | 408,283    |   |
| Income taxes  payable                                                                                                                                                                                                            |       | 94,000                |       |
| Total current  liabilities                                                                                                                                                                                                       |       | 502,283               |       |
|                                                                                                                                                                                                                             |       |                  |       |
| Commitments and  contingencies (Notes 8 and 11)                                                                                                                                                                                  |       | —                |       |
|                                                                                                                                                                                                                             |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                      |       |                  |       |
| Preferred stock,  $.01 par value, 10,000,000 shares authorized; 6,903 shares of series D  exchangeable preferred stock issued and outstanding at December 31, 2004  (liquidation preference of $12,225,487 at December 31, 2004) |       | 4,306,520             |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized at December 31, 2004; 7,149,578  shares issued at December 31, 2004                                                                                                  |       | 71,496                |       |
| Additional  paid-in capital                                                                                                                                                                                                      |       | 111,880,321           |       |
| Cumulative  dividends on preferred stock                                                                                                                                                                                         |       | (2,296,953            | )          |
| Accumulated  deficit                                                                                                                                                                                                             |       | (85,582,283           | )          |
| Treasury stock  (at cost), 1,335,722 shares at December 31, 2004                                                                                                                                                                 |       | (2,417,657            | )          |
| Total  stockholders’ equity                                                                                                                                                                                                 |       | 25,961,444            |       |
| Total liabilities  and stockholders’ equity                                                                                                                                                                                 |       | $                     | 26,463,727 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

52

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                         |       |                                        |       |   |   |
| Operating  expenses:                         |       |                                        |       |   |   |
| Research and  development                    |       | $                                           | —     |   | $ | (467,294 | ) |
| General and  administrative                  |       | 1,114,360                                   |       | 1,377,728 |   |
| Total operating  expenses                    |       | 1,114,360                                   |       | 910,434 |   |
|                                         |       |                                        |       |   |   |
| Other income:                                |       |                                        |       |   |   |
| Interest income                              |       | 326,904                                     |       | 263,607 |   |
| Other income                                 |       | —                                      |       | 5,598,000 |   |
| Total other  income                          |       | 326,904                                     |       | 5,861,607 |   |
|                                         |       |                                        |       |   |   |
| Net income  (loss) before income taxes       |       | (787,456                                    | )          | 4,951,173 |   |
|                                         |       |                                        |       |   |   |
| Income tax  expense                          |       | —                                      |       | 94,000 |   |
|                                         |       |                                        |       |   |   |
| Net income  (loss)                           |       | $                                           | (787,456   | ) | $ | 4,857,173 |   |
|                                         |       |                                        |       |   |   |
| Net income  (loss) per common share:         |       |                                        |       |   |   |
| Basic                                        |       | $                                           | (0.14      | ) | $ | 0.74 |   |
| Diluted                                      |       | $                                           | (0.14      | ) | $ | 0.74 |   |
|                                         |       |                                        |       |   |   |
| Weighted average  common shares outstanding: |       |                                        |       |   |   |
| Basic                                        |       | 5,813,856                                   |       | 6,589,673 |   |
| Diluted                                      |       | 5,813,856                                   |       | 6,603,389 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

53

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                                                             |       |                                        |       |   |   |
| Cash flows from  operating activities:                                                           |       |                                        |       |   |   |
| Net (loss)  income                                                                               |       | $                                           | (787,456   | ) | $ | 4,857,173 |   |
| Adjustments to  reconcile net (loss) income to cash (used in) provided by operating  activities: |       |                                        |       |   |   |
| Depreciation and  amortization                                                                   |       | 472                                         |       | 1,806 |   |
| Changes in  operating assets and liabilities:                                                    |       |                                        |       |   |   |
| Prepaid and  other current assets                                                                |       | 3,632                                       |       | 42,995 |   |
| Accounts payable  and accrued expenses                                                           |       | 133,925                                     |       | (413,933 | ) |
| Income taxes  payable                                                                            |       | —                                      |       | 94,000 |   |
| Net cash (used  in) provided by operating activities                                             |       | (649,427                                    | )          | 4,582,041 |   |
| Cash flows from  financing activities:                                                           |       |                                        |       |   |   |
| Payment for  purchase of treasury stock                                                          |       | —                                      |       | (2,417,657 | ) |
| Net cash used in  financing activities                                                           |       | —                                      |       | (2,417,657 | ) |
|                                                                                             |       |                                        |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                            |       | (649,427                                    | )          | 2,164,384 |   |
| Cash and cash  equivalents at beginning of year                                                  |       | 27,102,617                                  |       | 24,938,233 |   |
|                                                                                             |       |                                        |       |   |   |
| Cash and cash  equivalents at end of year                                                        |       | $                                           | 26,453,190 |   | $ | 27,102,617 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

54

----

 

**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

 
| ** **                    | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Cumulative  Dividends on  Preferred** | ** ** | **Accumulated** | ** ** | **Treasury Stock** | ** **  | **Total  Stockholder’s** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|----------------------------------------------|------------|-----------------|------------|-------------------------|-------------|-------------------------------|------------|
| ** **                    | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**                                   | ** ** | **Capital**     | ** ** | **Stock**               | ** **  | **Deficit**                   | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Equity** | ** ** |
|                          |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        |                          |       |   |   |   |   |   |   |
| Balance at  December 31, 2002 |       | 6,903                    |       | $                     | 4,306,520  |                    | 7,149,578  |                                         | $          | 71,496          |       | $                       | 111,880,321 |                          | $          | (2,296,953 | ) | $ | (89,652,000 | ) | — |   | $ | — |   | $ | 24,309,384 |   |
|                          |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        |                          |       |   |   |   |   |   |   |
| Treasury stock  purchase      |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        |                          |       | 1,335,722 |   |   | (2,417,657 | ) | (2,417,657 | ) |
| Net income                    |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        | 4,857,173                     |       |   |   |   |   | 4,857,173 |   |
|                          |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        |                          |       |   |   |   |   |   |   |
| Balance at  December 31, 2003 |       | 6,903                    |       | 4,306,520             |       | 7,149,578               |       | 71,496                                       |       | 111,880,321     |       | (2,296,953              | )           | (84,794,827                   | )          | 1,335,722 |   | (2,417,657 | ) | 26,748,900 |   |
|                          |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        |                          |       |   |   |   |   |   |   |
| Net loss                      |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        | (787,456                      | )          |   |   |   |   | (787,456 | ) |
|                          |       |                     |       |                  |       |                    |       |                                         |       |            |       |                    |        |                          |       |   |   |   |   |   |   |
| Balance at  December 31, 2004 |       | 6,903                    |       | $                     | 4,306,520  |                    | 7,149,578  |                                         | $          | 71,496          |       | $                       | 111,880,321 |                          | $          | (2,296,953 | ) | $ | (85,582,283 | ) | 1,335,722 |   | $ | (2,417,657 | ) | $ | 25,961,444 |   |
|                               |            |                          |            |                       |            |                         |            |                                              |            |                 |            |                         |             |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

55

----

 

**ERGO SCIENCE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****      Overviewand Summary of Significant Accounting Principles**

 

*Background and Recent Events*

* *

OnFebruary 9, 2005 the Company announced that on February 8, 2005 it had enteredinto a share purchase agreement to acquire the business publishing division (“Business”)of Highbury House Communications plc (“Highbury House”) for a purchase price ofGBP 12.5 million (approximately $23.395 million). The GBP 12.5 million purchaseprice is subject to a working capital adjustment that has been estimated by theparties to be GBP 1.041 million (approximately $1.948 million) at closing, andtherefore, the Company expects to pay GBP 11.459 million (approximately $21.447million) at closing. The GBP 11.459 million payment is subject to apost-closing adjustment based on the actual working capital of the Business onthe date of the closing. The Business, comprising of eight wholly-ownedsubsidiaries of Highbury House, provides information across a diverse range ofsectors including printed and web-based magazines, data services anddirectories, exhibitions, conferences and award ceremonies. The acquisition wascompleted in April 2005 and is subject to approval by the shareholders ofHighbury House, as required by the U.K. listing rules, as well as customaryclosing conditions. Ergo intends to fund the acquisition with cash and cashequivalents.

 

FromNovember 2003 until February 2005 the Company had been reviewing and evaluatingpotential acquisitions.

 

On November 24, 2003 the Company sold all of ourscientific and research assets and certain other intellectual property assetsto Pliva d.d., a company organized under the laws of Croatia (“Pliva”). At thetime of the sale, we received $5,498,000 in cash. Upon the occurrence ofcertain events outlined in the sale agreement, we would have received anadditional $500,000. In accordance with the asset purchase agreement, Pliva hadone year from the closing date to obtain the right to certain patents fromMassachusetts General Hospital (“MGH Patents”). Pliva was not able to obtainthe right to the MGH Patents and therefore they shall retain the additional$500,000 and shall have no further obligation to pay that amount to the Company.In addition, Pliva has assumed our future obligations under the LSU Royaltyagreement. Also as part of the agreement, Pliva has agreed to make payments toone of our wholly-owned subsidiaries, Ergo Texas, to cover certain paymentsrequired to be made in the event that Ergoset® or another specified drug isapproved by the Food and Drug Administration.

 

At our Annual Meeting of Stockholders held on October15, 2001, stockholders approved the imposition of transfer restrictions on ourcommon stock. These transfer restrictions were implemented on October 19, 2001.

 

In March 2001, the Company decided that the next phaseof the development of ERGOSET® would be better undertaken by a company that hasmore experience with human drug development and more resources for regulatoryapproval and marketing than the Company does.

 

From its incorporation through March 2001, the Companywas engaged in the development of ERGOSET® tablets for the treatment of type 2diabetes.

 

*Organization*

 

Ergo Science DevelopmentCorporation (“ESDC”) was incorporated on January 23, 1990. ESDC operatedas an S Corporation from inception to September 10, 1992, when itconverted to a C Corporation. In April 1995, ESDC went through arecapitalization whereby all the stock of ESDC was exchanged on a one-for-onebasis for an equal amount of stock in Ergo Science Holdings, Incorporated,which previously was a wholly owned subsidiary of ESDC. Subsequent to therecapitalization, Ergo Science Holdings, Incorporated changed its name to ErgoScience

 

56

----

 

Corporation. Theconsolidated financial statements include the accounts of the Company and itssubsidiaries, all of which are wholly owned. All intercompany accounts andtransactions are eliminated upon consolidation.

 

*Research and Development Costs*

 

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

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquid investmentswith maturity of 90 days or less at the date of purchase to be cashequivalents.

 

At December 31, 2004, the Company’s cash equivalentsconsisted only of investments in bank cash accounts and U.S. governmentobligations that mature within 90 days of purchase.

 

*Use of Estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make certain estimates and assumptions that effect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statement and the reported amountsof revenues and expenses during the reported period. Actual results coulddiffer from those estimates.

 

*Net Income (Loss) Per Common Share*

 

Basic earnings (loss) per common share are computed bydividing net income (loss) by the weighted average number of common sharesoutstanding for the period. Diluted earnings per common share is computed bydividing net income by the sum of the weighted average number of common sharesoutstanding for the period plus the assumed exercise of all dilutive securitiesusing the treasury stock method, such as stock options. For the year endedDecember 31, 2003, a total of 13,716 stock option shares were included in theweighted average number of common shares outstanding calculation because theseshares had exercise prices less than the market value of the Company’s common stockas of December 31, 2003.

 

The diluted loss per common share calculated for theyear ended December 31, 2004 excludes the effect of 28,375 options outstanding.This amount is excluded, as its inclusion would be anti-dilutive.

 

*Stock Based Compensation*

 

Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)requires that companies either recognize compensation expense for grants ofstock, stock options, and other equity instruments based on fair value, orprovide pro forma disclosure of net income or loss and earnings or loss pershare in the notes to the financial statements. The Company follows thedisclosure provisions of SFAS 123 and applies APB Opinion 25 and relatedinterpretations in accounting for its plans. Accordingly, no compensation costhas been recognized for its stock option plans since all options issued werefor a fixed number of shares and had fixed exercise prices equal to the fairmarket value of the common stock on the grant date. The effects of applyingSFAS 123 in this pro forma disclosure are not likely to be representativeof the effects on reported income or loss for future years. Had compensationcost for the Company’s stock-based compensation plans been determined based onthe fair value at the grant dates as calculated in accordance withSFAS 123, the Company’s net loss and loss per share for the years endedDecember 31, 2004 and 2003 would have been increased to the pro formaamounts indicated below:

 

57

----

 
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| Net income  (loss):                           |       |                                        |       |   |   |
| As reported                                   |       | $                                           | (787,456   | ) | $ | 4,857,173 |   |
| Deduct: Pro  forma stock compensation expense |       | 6,323                                       |       | 19,417 |   |
| Pro forma                                     |       | $                                           | (793,779   | ) | $ | 4,837,756 |   |
| Net income (loss)  per share—basic       |       |                                        |       |   |   |
| As reported                                   |       | $                                           | (0.14      | ) | $ | 0.74 |   |
| Pro forma                                     |       | (0.14                                       | )          | 0.74 |   |
| Net income  (loss) per share—diluted     |       |                                        |       |   |   |
| As reported                                   |       | $                                           | (0.14      | ) | $ | 0.74 |   |
| Pro forma                                     |       | (0.14                                       | )          | 0.74 |   |

 

No stock options were granted in 2004 or 2003.

 

*Equipment*

 

Equipment is stated at cost. Depreciation iscalculated using straight-line basis over a 2 to 7 year estimated usefullife. Repairs and maintenance costs are charged to expense as incurred. Uponretirement or sale, the cost of the assets disposed of and the relatedaccumulated depreciation are removed from the accounts and any resulting gainor loss is included in the determination of net income.

 

*Income Taxes*

 

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

 

*ComprehensiveIncome*

 

Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income,” establishes a standard for reporting and displayingcomprehensive income and its components within the financial statements.Comprehensive income (loss) includes only net income (loss) at December 31,2004 and 2003.

 

*New Accounting Pronouncements*

 

In December 2004,the FASB revised SFAS No. 123 (“SFAS No. 123(R)”). SFASNo. 123(R), *Share-Based Payment*,requires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues. Pro forma disclosure is no longer an alternative to financial statementrecognition. SFAS No. 123(R) is effective for periods beginning afterJune 15, 2005. We are still evaluating the transition provisions that areallowed by SFAS No. 123(R) and will adopt it in the third quarter of 2005.The financial statement impact is not expected to be materially different fromthat shown in the existing pro forma disclosure required under the originalSFAS No. 123. The issuance of additional stock options in the future willcause SFAS 123(R) to have a greater impact on our financial statements.

 

**2.****      Equipment**

 

Equipment consists of thefollowing at December 31: 

 
| ** **                                 | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|
| Furniture and  equipment                   |       | $        | 26,936     |   |
| Accumulated  depreciation and amortization |       | (26,936  | )          |
| Equipment, net                             |       | $        | —     |   |

 

Depreciation expense for the years endedDecember 31, 2004 and 2003 was $472 and $1,806, respectively. The Companywrote off $15,672 of fully depreciated software in the third quarter of 2004that was obsolete and no longer used by the Company.

 

58

----

 

**3.****      AccountsPayable and Accrued Expenses**

 

Accounts payable and accrued expenses consist of thefollowing at December 31,

 
| ** **                                   | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|
| Accounts payable                             |       | $        | 31,514     |   |
| Accrued legal  costs                         |       | 179,405  |       |
| Accrued payroll,  bonuses and vacation       |       | 37,054   |       |
| Accrued  professional fees                   |       | 142,336  |       |
| Accrued other  expenses                      |       | 17,974   |       |
| Total accounts  payable and accrued expenses |       | $        | 408,283    |   |

 

**4.****      Leases**

 

The Company leases officespace under a lease arrangement, which originally expired in June 2002.The office space lease currently renews on a monthly basis. The lease for theCompany’s office space includes payment terms that are subject to increases dueto taxes and other operating costs of the lessor. The minimum lease paymentunder this lease for 2005 is $1,030.

 

Rent expense for the years ending on December 31,2004 and 2003 amounted to $29,789 and $35,218, respectively.

 

**5.****      IncomeTaxes**

 

Significant components ofthe Company’s deferred tax assets and liabilities as of December 31 are asfollows:

 
| ** **                                   | ** ** | **2004**    | ** ** |
|----------------------------------------------|------------|-------------|------------|
| Deferred tax  assets:                        |       |        |       |
| Research and  development credits            |       | $           | 2,554,000  |   |
| Deferred  compensation                       |       | 79,000      |       |
| Intangible  amortization                     |       | 512,000     |       |
| Net operating  loss and AMT credits          |       | 26,539,000  |       |
| Total deferred  tax assets                   |       | 29,684,000  |       |
| Valuation  allowance for deferred tax assets |       | (29,684,000 | )          |
| Net deferred tax  assets                     |       | $           | —     |   |

 

As of December 31, 2004, the Company had federalnet operating losses (“NOL”) and research and experimentation creditcarryforwards remaining of approximately $74,756,000 and $2,554,000,respectively, which may be available to offset future federal income taxliabilities and expire at various dates from 2008 through 2024. Approximately$29,000 of the gross deferred tax asset represents the benefit of deductionsfrom the exercise of stock options, which have been fully reserved. The benefitfrom the $29,000 tax asset will be recorded as a credit to additional paid-incapital when realized. As required by Statement of Financial AccountingStandards No. 109, management of the Company has evaluated the positiveand negative evidence bearing upon the realizability of its deferred taxassets, which are comprised principally of net operating loss and research andexperimentation credit carryforwards. Management has determined that, at thistime, it is more likely than not that the Company will not realize the benefitsof federal and state deferred tax assets and, as a result, a valuationallowance of $29,684,000 has been established at December 31, 2004.

 

The change in thevaluation allowance was an increase of $79,000 for the year ended December 31,2004. For December 31, 2004, the increase in the valuation allowance is theresult of the net operating loss for the year partially offset by expiringMassachusetts state net operating loss carryovers. 

 

59

----

 

Ownership changes, asdefined in the Internal Revenue Code, may have limited the amount of netoperating loss carryforwards that can be utilized to offset future taxableincome. Subsequent ownership changes could further affect the limitation in futureyears.

 

**Thereconciliation of the expected tax (benefit) expense (computed by applying thefederal statutory tax rate to income before income taxes) to actual tax(benefit) expense was as follows:**

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                  |       |                                        |       |   |   |
| Expected federal  income tax expense (benefit)        |       | $                                           | (276,000   | ) | $ | 1,733,000 |   |
| Effect of  valuation allowance on current year losses |       | 79,000                                      |       | (2,493,000 | ) |
| Expiration of  state net operating loss carryforwards |       | 243,000                                     |       | 885,000 |   |
| Other                                                 |       | (46,000                                     | )          | (31,000 | ) |
|                                                  |       |                                        |       |   |   |
| Totals                                                |       | $                                           | —     |   | $ | 94,000 |   |

 

**6.****      CapitalStock**

 

See Note 8 for a description of series Dpreferred stock.

 

On October 15, 2001, the stockholders of the Companyvoted to approve the merger of Ergo Science Corporation with and into itswholly-owned subsidiary, ESC Merger Sub, Inc. On October 19, 2001, the mergerbecame effective and ESC Merger Sub. Inc. was renamed Ergo Science Corporation.Also at this time, each share of the pre-merger common stock was converted intothe right to receive .5 shares of the post-merger common stock, plus cash inlieu of any fractional shares. The total paid by the Company for cash in lieuof fractional shares was approximately $30. Shares of the post-merger commonstock are subject to certain transfer restrictions. These restrictions areintended to help preserve our substantial tax net operating loss carryforwardsfor use in offsetting future taxable income. In general, these restrictionswill prohibit, without the prior approval of the board of directors, the director indirect disposition or acquisition of any of the Company’s stock by or toany holder who owns or would so own upon the acquisition (either directly orthrough the tax attribution rules) 5% or more of the Company’s stock.

 

*Treasury stock*

 

On August 1, 2003, the Company purchased 1,335,722shares of its own common stock at a price of $1.81 per share, the currentmarket price, for a total purchase price of $2,417,657 from Court SquareCapital Limited, its largest shareholder at the time.

 

**7.****      Saleof Intellectual Property**

 

On November 24, 2003, the Company sold all of itsscientific and research assets and certain other intellectual property toPliva, a company organized under the laws of Croatia. The total selling pricewas $5,998,000, of which the Company received $5,498,000 at the time of thesale. The remaining $500,000 of the purchase price will be paid to the Companyin cash, if at all, upon the occurrence of certain events followingconsummation of the sale. In accordance with the asset purchase agreement, Plivahas one year from the closing date to obtain the right to certain patents fromMassachusetts General Hospital (“MGH Patents”). Pliva was not able to obtainthe right to the MGH Patents and therefore they shall retain the additional$500,000 and shall have no further obligation to pay that amount to us. Also inaccordance with the agreement, Pliva has assumed our future obligations underthe LSU Royalty agreement. Also as part of the agreement, Pliva has agreed tomake payments to one of our wholly-owned subsidiaries, Ergo Texas, to covercertain payments required to be made in the event that Ergoset® or anotherspecified drug is approved by the Food and Drug Administration.

 

The Company has recorded the $5,498,000 as otherincome on the statement of operations for 2003; the intellectual property had anet recorded value of zero since the related cost was previously recognized asresearch and development expense.

 

On June 30, 2003, the Company signed an agreement tosell its entire right, title and interest in its domain registration name forergo.com to ERGO Versicherungsgruppe AG, a company organized under the laws ofGermany. In accordance with the terms of the agreement, the Company received$100,000 in exchange for the entire

 

60

----

 

right, title and interest in ergo.com, which was completed on July 16,2003 and recorded as other income on the statement of operations.

 

**8.****      Commitmentsand Contingencies**

 

*License Agreements and Supplier Contracts*

 

On April 27, 1995 in conjunction with aredesigned plan for commercialization of the Company’s products, the Companyeffectively canceled all of its existing partnership sublicenses by acquiringall the partners’ interests. The Company issued 278,875 shares of common stockand 5,618 shares of series D exchangeable preferred stock (the “series Dpreferred stock”), par value $0.01 per share. At the time, the Company ascribeda value of $16 per share to the common stock issued and $584 per share to theseries D preferred stock.

 

The holders of series D preferred stock areentitled to receive quarterly dividends at a rate of 6% per annum, compoundedsemiannually, on the stated value. Such dividends shall be cumulative,commencing on the date of original issue, and shall only be payable to holdersof record when and as declared by the board of directors. The Company will havethe option to convert the series D preferred stock into common stockduring the 90 days after the Company receives FDA approval to market itsfirst product, if it receives that approval. If the Company does not exerciseits option to convert the series D preferred stock into common stockwithin the 90 days after FDA approval the series D preferred stockwill automatically be exchanged for subordinated debt securities at the end ofthe 90 days. The Company cannot pay dividends on its common stock withoutfirst obtaining the written consent of the holders of a majority of theoutstanding series D preferred stock. Upon any voluntary or involuntary liquidation,dissolution or winding up of the Company, the holders of series Dpreferred stock then outstanding will be entitled to receive an amount of cashequal to the stated value of series D preferred stock (including anyaccrued by unpaid dividends) after any distribution is made on any seniorsecurities and before any distribution is made on any junior securities,including common stock. The liquidation preference amount for the series Dpreferred stock as of December 31, 2004 was $12,225,487.

 

The Company is party to certain other licenseagreements, which require the Company to pay a royalty on product sales and tomake specific payments on the completion of certain milestones. No amounts havebeen accrued related to these requirements as of December 31, 2004.

 

**9.****      StockOptions and Incentive Plan**

 

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

 

No stock options were granted in 2004 or 2003.

 

Information related to stock option activity for theperiod from December 31, 2002 through December 31, 2004 is asfollows:

 

| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Option  Price** | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------------------|------------|
|                              |       |       |       |                                 |       |
| Outstanding at  December 31, 2002 |       | 213,625    |       | $                                    | 11.22      |   |
| Granted                           |       | —     |       | —                               |       |
| Exercised                         |       | —     |       | —                               |       |
| Canceled                          |       | (84,000    | )          | 7.37                                 |       |
| Outstanding at  December 31, 2003 |       | 129,625    |       | 13.72                                |       |
| Granted                           |       | —     |       | —                               |       |
| Exercised                         |       | —     |       | —                               |       |
| Canceled                          |       | (101,250   | )          | 17.06                                |       |
| Outstanding at  December 31, 2004 |       | 28,375     |       | $                                    | 1.81       |   |
| Exercisable at  December 31, 2002 |       | 157,500    |       | $                                    | 14.52      |   |
| Exercisable at  December 31, 2003 |       | 105,375    |       | $                                    | 16.45      |   |
| Exercisable at  December 31, 2004 |       | 21,375     |       | $                                    | 1.89       |   |
|                                   |            |            |            |                                      |            |  |  |

 

61

----

 

The following tablesummarizes information about stock options outstanding at December 31,2004: 

 
| **Options Outstanding**            | ** **    | **Options Exercisable** | ** ** |
|-----------------------------------------|---------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** **    | **Number  Outstanding**      | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| $                                       | 0.00 to 1.562 |                         | 27,500     |   | 6.2 years |   | $ | 1.56 |   | 20,500 |   | $ | 1.56 |   |
| $                                       | 1.563 to 6.50 |                         | 500        |   | 3.7 years |   | $ | 6.50 |   | 500 |   | $ | 6.50 |   |
| $                                       | 6.51 to 13.42 |                         | 375        |   | 0.8 years |   | $ | 13.42 |   | 375 |   | $ | 13.42 |   |
| $                                       | 0.00 to 13.42 |                         | 28,375     |   |   |   | $ | 1.81 |   | 21,375 |   | $ | 1.89 |   |
|                                         |               |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Effective as of November 1, 1994, the board ofdirectors adopted the Ergo Science Development Corporation Long-Term IncentivePlan (the “Incentive Plan”) pursuant to which certain officers, directors, andkey employees were granted awards with respect to shares of the Company’scommon stock. The awards that could be granted under the Incentive Planincluded incentive stock options, nonstatutory options, stock appreciationrights (SARs) and restricted stock awards. Awards of options to purchase 35,000shares at an exercise price of $1.562 per share were granted to directors underthe Incentive Plan in 2001. No awards were made in 2004 or 2003. These amountsare included in the tables above. At the time that the stockholders approvedthe 2001 Stock Plan, the Incentive Plan was closed and no new grants will bemade under this Plan.

 

On May 15, 1996, the board of directors approved,subject to stockholder approval, a proposal to adopt a Stock Option Plan forNon-Employee Directors of the Company (the “Director Stock Plan”). The DirectorStock Plan provided for an initial grant of an option to purchase 5,000 sharesof common stock to each eligible non-employee director upon first being electedor appointed to serve on the board of directors. Awards of options to purchase15,000 shares at exercise prices of $1.25-$1.562 per share were granted underthe Director Stock Plan in 2001. There were no awards granted in 2004 or 2003.These amounts are included in the tables above. At the time that thestockholders approved the 2001 Stock Plan, the Company’s Director Stock Planwas closed and no new grants will be made under this Plan.

 

On October 15, 2001, the stockholders of the Companyapproved the Ergo Science Corporation 2001 Employee, Director and ConsultantStock Plan (the “2001 Stock Plan”) pursuant to which certain officers,directors, key employees and consultants may be granted awards with respect toshares of the Company’s common stock. The awards that may be granted under the2001 Stock Plan include incentive stock options under section 422 of theInternal Revenue Code, non-qualified stock options, stock appreciation rights(SARs) and restricted stock awards. A total of 1,600,000 shares of our commonstock were reserved for issuance pursuant to options and other awards grantedunder this plan. This plan provides for an initial grant of an option topurchase 5,000 shares of common stock to each eligible non-employee directorupon first being elected or appointed to serve on the board of directors. Stockoptions granted to directors under the 2001 Stock Plan vest and becomeexercisable in equal increments on the first five anniversaries of their dateof grant, but no stock option may be exercised more than ten years after thedate of its grant. Awards of options to purchase 27,500 shares at an exerciseprice of $2.05 per share were granted under the 2001 Stock Plan in 2001 to theCompany’s former CEO. These options were cancelled in March 2004 as a result ofthe resignation of the Company’s former CEO. There were no awards granted in 2004or 2003. As of December 31, 2004, 1,600,000 shares were available to be grantedunder the 2001 Stock Plan.

 

At the time that the stockholders approved the 2001Stock Plan, the Company’s Long-Term Incentive Stock and Director Stock Plan wereclosed and no new grants will be made under either the Long-Term Incentive Planor the Director Plan.

 

**10.****    QuarterlyResults (Unaudited)**

 

The following table setsforth unaudited selected financial information for the periods indicated. Thisinformation has been derived from unaudited consolidated financial statements,which, in the opinion of management, include all adjustments (consisting onlyof normal recurring adjustments) necessary for a fair

 

62

----

 

presentation of suchinformation. The results of operations for any quarter are not necessarilyindicative of the results to be expected for any future period.

 
| ** **                   | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|---------------------|------------|
| **2004**                     |       |                   |       |                    |       |                   |       |                |       |
| Net loss                     |       | $                      | (292,031   | )                       | $          | (176,338               | )          | $                   | (125,196   | ) | $ | (193,891 | ) |
| Net loss per  share          |       |                   |       |                    |       |                   |       |                |       |
| Basic and  diluted           |       | $                      | (0.05      | )                       | $          | (0.03                  | )          | $                   | (0.02      | ) | $ | (0.04 | ) |
|                         |       |                   |       |                    |       |                   |       |                |       |
| **2003**                     |       |                   |       |                    |       |                   |       |                |       |
| Net income  (loss)           |       | $                      | (169,401   | )                       | $          | (201,690               | )          | $                   | (210,209   | ) | $ | 5,438,473 |   |
| Net income  (loss) per share |       |                   |       |                    |       |                   |       |                |       |
| Basic and  diluted           |       | $                      | (0.02      | )                       | $          | (0.03                  | )          | $                   | (0.03      | ) | $ | 0.94 |   |

 

**11.****    SubsequentEvents**

 

*Acquisition*

 

On February 9, 2005 theCompany announced that on February 8, 2005 it had entered into a share purchaseagreement to acquire the business to business publishing division (“Business”)of Highbury House Communications plc (“Highbury House”) for a purchase price ofGBP 12.5 million (approximately $23.395 million). The GBP 12.5 million purchaseprice is subject to a working capital adjustment that has been estimated by theparties to be GBP 1.041 million (approximately $1.948 million) at closing, andtherefore, the Company expects to pay GBP 11.459 million (approximately $21.447million) at closing. The GBP 11.459 million payment is subject to apost-closing adjustment based on the actual working capital of the Business onthe date of the closing. The Business, comprising of eight wholly-ownedsubsidiaries of Highbury House, provides information across a diverse range ofsectors including printed and web-based magazines, data services anddirectories, exhibitions, conferences and award ceremonies. The acquisition wascompleted in April 2005 and is subject to approval by the shareholders ofHighbury House, as required by the U.K. listing rules, as well as customaryclosing conditions. The Company intends to fund the acquisition with cash andcash equivalents.

 

63

----

 

**ITEM 9.****                 ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

 

On June 15, 2005, the Audit Committee of the Board ofDirectors of Ergo announced that it had appointed Deloitte & Touche LLP asits new independent registered accounting firm to audit its financialstatements for the year ending December 31, 2005.

 

Also on June 15, 2005, the Audit Committee of theBoard of Directors of Ergo dismissed PricewaterhouseCoopers LLP as itsindependent registered accounting firm. PricewaterhouseCoopers LLP has auditedour financial statements for the fiscal year ended December 31, 2004 and forthe preceding five fiscal years.

 

The reports issued by PricewaterhouseCoopers LLP onErgo’s financial statements for the past two fiscal years ended December 31,2004 and 2003 did not contain any adverse opinion or a disclaimer of opinion,or any qualification or modification as to uncertainty, audit scope oraccounting principles.

 

As reported in the Company’s Report on Form 8-K filedon June 17, 2005, during Ergo’s fiscal years ended December 31, 2004 and 2003and through June 15, 2005, there were no disagreements withPricewaterhouseCoopers LLP on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedure, which, if notresolved to the satisfaction of PricewaterhouseCoopers LLP, would have causedPricewaterhouseCoopers LLP to make reference to the subject matter of thedisagreement in connection with its reports.

 

**ITEM 9A.****              ****CONTROLS AND PROCEDURES**

 

*Disclosure controls and procedures*

 

As of the end of the quarterly periodended December 31, 2005, our management, with the participation of Charles E.Finelli, our Chief Executive Officer and acting Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures. Based onthis evaluation, Mr. Finelli concluded that the disclosure controls andprocedures were not effective to ensure that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. Mr. Finelli’s conclusion was based principally on the materialweaknesses in the internal controls of the Company as identified by the Companyand Deloitte & Touche LLP, our independent registered public accountingfirm, and discussed below.

 

In connection with the quarterly review of thefinancial statements of the Company for the period ended June 30, 2005, theCompany and Deloitte & Touche LLP, our independent registered publicaccounting firm, identified certain material weaknesses in the Company’sinternal controls. A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The material weaknessesidentified at the Company result from the acquisition of Nexus Media, whichbefore the acquisition had no history of operating as a stand-alone company andwas not required to prepare accounting statements in accordance with accountingprincipals generally accepted in the United States (“U.S. GAAP”) or thereporting requirements of the Securities and Exchange Commission (the “SEC”).

 

Before the Company’s acquisition of Nexus Media onApril 1, 2005, Nexus Media consisted of eight entities that were privatelyowned by Highbury House Communications plc, a company organized under the lawsof the United Kingdom, and that were operated as part of the group ofcompanies. As a result, a significant number of the controls required in astand-alone entity, including having its own chief financial officer, were notpresent at Nexus Media. The Company recently discovered that the lack of controlsin fact resulted in errors under U.S. GAAP in the timing of recognitionprincipally of certain sales and marketing costs relating to future events orpublications during fiscal year 2004 and fiscal year 2005 by Nexus Media. As aresult of these findings an amended Form 10Q for the period ended June 30, 2005was filed on November 22, 2005.

 

In addition, duringthe preparation of this annual report, it came to the Company’s attention thatcertain costs (principally editorial overheads), which should be classified aspart of costs of revenues, were classified previously as general andadministrative expenses in the financial statements for the years endedDecember 31, 2004 and 2003 as filed on Form 8-K/A on June 17, 2005. This errorarose because Nexus Media’s annual financial statements for the years endedDecember 31, 2004 and 2003 were derived by adjusting historic predecessorstatutory financial information prepared in accordance with generally acceptedaccounting principles in the United Kingdom to generally accepted accountingprinciples in the United States of America. By contrast our quarterly financialstatements have been derived from our management accounts. As a result, in thisannual report the Company has reclassified $5,437,000 and $6,460,000 fromgeneral and administrative expenses to cost of revenues in relation to theyears ended December 31, 2004 and 2003 respectively. The quarterly financialinformation already filed is classified correctly and requires no suchreclassification.

 

Since acquiring Nexus Media, theCompany has been working to remediate the material weaknesses identified. Actionstaken have included the hiring of an interim chief financial officer of NexusMedia, and subsequently hiring a permanent chief financial officer, hiring afinancial controller, engaging third party accountants with U.S. GAAP skills toassist with the preparation of SEC reports, and reorganizing the financedepartment of Nexus Media. The Company has made significant progress toovercome the material weaknesses identified and continues to work to implementthe internal controls necessary for a stand-alone entity.

 

**ITEM 9B.****              ****OTHER INFORMATION**

 

None

 

64

----

 

**PART III**

 

**ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The following sets forth the ages, principaloccupation and present position of each of our Directors and our executiveofficers.

 

CHARLES E. FINELLI, Age 42, Class I Director,joined our board of directors in March 2001. Mr. Finelli became theinterim Chief Executive Officer of the Company, President, Secretary and ChiefFinancial Officer on December 1, 2003. Mr. Finelli has been in the privatepractice of law for seven years specializing in litigation. He is a graduate ofthe University of Arkansas School of Law.

 

WILLIAM T. COMFORT, III, Age 39, Class IDirector, joined our board of directors in January 2001. Mr. Comfortwas a private equity investor with CVC Capital Partners, a leading privateequity firm based in London, England from 1995 to 2000. From February 2001 toFebruary 2003 he served as a consultant to Citicorp Venture Capital (“CVC”). Heis now principal of Conversion Capital Partners Limited, an investment fundheadquarter at 4th Floor, Liscartan House, 127 Sloane Street,London, England. Mr. Comfort has served as the Chairman of the Board of J.L.Halsey Corporation since November 2002 and as a director since June 2002.Mr. Comfort received his J.D. and L.L.M. in tax from New York UniversitySchool of Law.

 

NADIM NSOULI, Age 36, Class III Director, joined our Board of Directors in December 2003. Mr. Nsouli is the European Head of Gores Technology Group Limited, a private equity firm based in Los Angeles. From 2000 to May 2003, Mr. Nsouli was founder and managing partner of Lago Partners Limited, a $75 million venture capital fund,   with principal offices at 3 Burlington Gardens, London, England. From 1999 to 2000 Mr. Nsouli worked in Investment Banking, Media and Telecoms at Morgan Stanley Dean Witter with principal offices at Canary Wharf, London, England. From 1998 to 1999 Mr. Nsouli worked in Investment Banking, M&A for JP Morgan with principal offices in London, England. Prior to that, Mr. Nsouli was a corporate lawyer in New York at Jones, Day, Reavis & Pogue. Mr. Nsouli received his MBA with distinction from Insead in France, his Juris Doctor from New York University School of Law and his B.S., Magna Cum Laude from Georgetown University in Washington, DC.

 

LING KWOK, age 35, Class II Director,joined our board of directors in October 2005. Mr. Kwok has served as our VicePresident, Corporate Development, since December 1, 2003. From September 2002until joining us he was involved in international charitable work. FromFebruary 2000 until September 2002 Mr. Kwok was an investment banker withPacific Solutions Group. He also was an investment banker with Morgan Stanley& Co. from May 1996 until February 2000. Mr. Kwok received his B.A. degree,with honors,**from Trinity College inboth economics and Asian Studies.**

 

Our executive officers hold office at the pleasure ofthe board of directors. The board of directors is divided into three classes.Directors in each class are elected for three-year terms, with the terms of thethree classes staggered so that directors from a single class are elected ateach annual meeting of stockholders. William T. Comfort, III and Charles E.Finelli are Class I directors whose terms of office expire at the annualmeeting of stockholders to be held in 2008. Ling Kwok is a Class IIDirector whose term of office expires at the annual meeting of stockholders tobe held in 2006. Nadim Nsouli is a Class III director whose term of officeexpires at the annual meeting of stockholders to be held in 2007.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) of theSecurities Exchange Act of 1934 requires that our executive officers,directors, and persons who beneficially own more than 10% of a registered classof our equity securities file with the Securities and Exchange Commission initialreports of ownership and reports of any changes in ownership of our commonstock and our other equity securities. Based on our review of forms furnishedto us and written representations from reporting persons, we believe that allfiling requirements applicable to our executive officers, directors, and 10%beneficial owners were complied with during 2005.

 

65

----

 

**AuditCommittee Members and Financial Experts**

 

The audit committee of the board of directors iscomprised of Nadim Nsouli and Ling Kwok. The Board has determined that the Company does not currently have anaudit committee financial expert as defined in Item 401(h)(1) of Regulation S-Kunder the Securities Exchange Act of 1934 (the “Exchange Act”). However, theBoard believes that the members of the audit committee are capable of analyzingand evaluating its financial statements and understanding internal controls andprocedures for financial reporting. The Board believes that its current auditcommittee members are able to fill the role under the SEC regulations despitenot having a designated audit committee financial expert. The Board hasdetermined that the cost of hiring a financial expert to act as a director ofthe Company and to be a member of the audit committee or otherwise performaudit committee functions outweighs the benefits of having a financial experton the audit committee. The audit committee reviews the engagement of ourindependent accountants, reviews our financial statements, considers mattersrelating to our accounting policy and internal controls and reviews the scopeof our annual audits. Mr. Nsouli is “independent” as defined in the NASD’slisting standards, but Mr. Kwok is not “independent” as defined in the NASD’slisting standards. On November 3, 2005, the Board adopted the Second Amendedand Restated Audit Committee Charter setting forth the rights, obligations andfunctions of the Audit Committee

 

**Codeof Ethics**

 

We have adopted a code of ethics that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller or person performing similar functions. The code ofethics was filed as an exhibit to the annual report on Form 10-K for the yearended December 31, 2004.

 

**ShareholderNomination**

 

There have been nomaterial changes to the procedures by which shareholders may recommend nomineesto the Board, since the disclosure provided in the Company’s last proxystatement.

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

The following tablesummarizes all compensation awarded to, earned by and our current interim chiefexecutive officer and each of the other executive officers of the Company, forservices rendered in all capacities during the years ended December 31,2005, 2004 and 2003.

 
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | **Long-Term Compensation** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | **Awards**                      | ** ** | **Payouts** | ** ** |
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Other  Annual  Compensation(1)** | ** ** | **Restricted  Stock  Awards**   | ** ** | **Securities  Underlying  Options/  SARs(#)** | ** ** | **LTIP  Payouts** | ** ** | **All Other  Compensation** | ** ** |
| Charles E.  Finelli                            |       | 2005       |       | $          | 50,000     |       | $          | —                             |       | $                               | 25,000     |   | — |   | — |   | $ | — |   | $ | — |   |
| Chief Executive                                |       | 2004       |       | 50,000     |       | —     |       | 25,000                             |       | —                          |       | — |   | — |   | — |   |
| Officer,  President and Secretary              |       | 2003       |       | 4,167      |       | —     |       | 25,000                             |       | —                          |       | — |   | — |   | — |   |
|                                           |       |       |       |       |       |       |       |                               |       |                            |       |   |   |   |   |   |   |
| Ling S. Kwok                                   |       | 2005       |       | $          | 150,000    |       | —     |                               | —     |                            | —     |   | — |   | — |   | — |   |
| Vice President,                                |       | 2004       |       | 150,000    |       | —     |       | —                             |       | —                          |       | — |   | — |   | — |   |
| Business  Development                          |       | 2003       |       | 16,518     |       | —     |       | —                             |       | —                          |       | — |   | — |   | — |   |
|                                                |            |            |            |            |            |            |            |                                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Representspayment to Mr. Finelli in his capacity as a member of the Company’s Board ofDirectors.

 

## **Option Grants**

 

**During2005, we granted to a director options to purchase 22,500 shares of commonstock at an exercise price of $2.40 per share, which was the current marketprice on the grant date. During 2001, we granted to directors options topurchase 100,000 shares of common stock at exercise prices ranging from $.625to $.781, prior to the effect of the reverse stock split approved by ourstockholders on October 15, 2001. The effect of the reverse stock splitresulted in a reduction of the options to 50,000 shares at prices ranging from$1.25 to $1.562. One of our Board of Director’s cancelled his options in 2003which totaled 22,500 shares and returned all options to the Company.**

 

66

----

 

**Alsoduring 2001, we granted options to purchase 27,500 shares of common stock toour former CEO at an exercise price of $2.05, which were not exercised and havesubsequently been cancelled and returned to the Company in accordance with the2001 plan. All options issued in 2001 were issued at prices equal to the marketprice on the grant dates. No options were granted in 2004 or 2003.**

 

**Option Exercise and Year-EndOption Values**

 

The following tableprovides information about the number of shares issued upon option exercises bythe Chief Executive Officer during 2001, and the value realized by the ChiefExecutive Officer. The table also provides information about the number andvalue of options held by the Chief Executive Officer at December 31, 2005.

 

**Aggregated Option Exercises in LastFiscal Year and**

**Fiscal Year-End Option Values**

 
| ** **          | ** ** | **Shares  Acquired  on** | ** ** | **Value**             | ** ** | **Number of Securities  Underlying  Unexercised Options  At Fiscal Year-End** | ** ** | **Value of the Unexercised  In-The-Money Options  at Fiscal Year-End (2)** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------|------------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Exercise**             | ** ** | **Realized (1)** | ** ** | **Exercisable**                                                                                        | ** ** | **Unexercisable**                                                                                             | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Charles E.  Finelli |       | —                   |       | $                     | —     |                                                                                                   | 5,000      |                                                                                                          | —     |   | $ | — |   | $ | — |   |
|                     |            |                          |            |                       |            |                                                                                                        |            |                                                                                                               |            |  |  |  |  |  |  |  |

 

----

(1)           Amountsshown in this column do not necessarily represent actual value realized fromthe sale of the shares acquired upon exercise of the option because in manycases the shares are not sold on exercise but have continued to be held by theexecutive officer exercising the option. The amounts shown represent thedifference between the option exercise price and the market price on the dateof exercise, which is the amount that would have been realized if the shareshad been sold immediately upon exercise.

 

(2)           Thevalue of unexercised in-the-money options at fiscal year end assumes a fairmarket value for our common stock of $0.93, the closing sale price per share ofour common stock as reported in the OTC Bulletin Board on Friday,December 30, 2005.

 

**Compensation of Directors**

 

In previous years ourpolicy was to pay no compensation to members of the board of directors forattending meetings of the board of directors and its committees. In 2004, theCompany began a new policy of paying each board member a compensation amount of$25,000 annually. We also reimburse directors for the expenses incurred inattending meetings of the board of directors and its committees. InJune 1996, our shareholders approved a Stock Option Plan for Non-EmployeeDirectors, which we refer to as the Director Stock Plan. The Director StockPlan provided for an initial grant of a non-qualified stock option for 5,000shares of common stock to each non-employee director upon first being electedor appointed to serve on the board of directors. Messrs. Comfort, Finelli andJ. Warren Huff each received an initial grant of a stock option for 5,000shares of common stock upon first being elected or appointed to serve on theboard of directors during 2001. Each option under the Director Stock Plan hasan exercise price equal to the fair market value of the common stock on thegrant date. These options became exercisable in equal increments on the firstand second anniversary of their date of grant and will expire ten years afterthe grant date if not exercised. If a change in control occurs, all stockoptions granted under the Director Stock Plan will become fully exercisable. TheDirector Stock Plan was terminated in 2001, which had no effect on optionsalready outstanding.

 

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

 

67

----

 

In March 2001, Messrs.Comfort and Huff each received an additional non-qualified stock option for17,500 shares of common stock under our 1995 Long-term Incentive Plan. Each ofthese options has an exercise price equal to the fair market value of thecommon stock on the grant date. These options will become exercisable in equalincrements on each of the first five anniversaries of their date of grant ifthe grantee participates in 75% or more of the meetings of the board of directorsheld during the year ending on that anniversary and will expire ten years afterthe grant date if not exercised. If a change in control occurs, these stockoptions will become fully exercisable.

 

Mr. Comfort has neverreceived any compensation for his services as a director of the Company and hehas returned all options to the Company.

 

In 2003, we made cashpayments in the amount of $25,000 each to Mr. Finelli and Mr. Huff inconsideration of their service on the special committee of the board of directors.

 

In 2004, we made cashpayments in the amount of $25,000 each to Mr. Finelli, Mr. Huff and Mr. Nsouliin consideration of their services on the board of directors.

 

In 2005, we made cashpayments in the amount of $18,750 to Mr. Nsouli and $6,250 each to Mr. Finelliand Mr. Huff in consideration of their services on the board of directors. Asof December 31, 2005 Mr. Nsouli was owed $6,250, Mr. Huff was owed $12,500 andFinelli was owed $18,750 for services performed in 2005. These amounts wereproperly accrued for in 2005 and subsequently paid in the first quarter of2006.

 

**Employment Contracts**

 

Charles E. Finelli, our interim Chief ExecutiveOfficer is an employee-at-will. Mr. Finelli’s base annual salary is $50,000.The Compensation Committee may increase the base amounts at its discretion. Mr.Finelli also receives an additional $25,000 per year as compensation forservices as a member of our board of directors.

 

Ling S. Kwok, the Company’s Vice President of BusinessDevelopment is an employee-at-will. Mr. Kwok’s base annual salary is $150,000.The Compensation Committee may increase the base amounts at its discretion.

 

**Director and Officer Indemnification**

 

We have entered into indemnification agreements witheach of our directors and executive officers, agreeing to indemnify thedirector or officer to the fullest extent permitted by law, and to advanceexpenses, if the director or officer becomes a party to or witness or otherparticipant in any threatened, pending or completed action, suit or proceedingby reason of any occurrence related to the fact that the person is or was adirector, officer, employee, agent or fiduciary of ours or a subsidiary of oursor another entity at our request, unless a reviewing party, either outsidecounsel or a committee appointed by the board of directors, determines that theperson would not be entitled to indemnification under applicable law. Inaddition, if a change-in-control or a potential change-in-control occurs, andif the person indemnified so requests, we will establish a trust for thebenefit of the indemnitee and fund the trust in an amount sufficient to satisfyall expenses reasonably anticipated at the time of the request to be incurredin connection with any claim relating to such an event. The reviewing partywill determine the amount deposited in the trust. An indemnitee’s rights underthe indemnification agreement are not exclusive of any other rights under therestated certificate of incorporation or bylaws, as amended, or applicable law.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

The Compensation Committee has one member, William T.Comfort III. Mr. Comfort is not now nor has he ever been employed by us. Mr.Comfort is also the Chairman of the Compensation Committee for J. L. Halsey Corporation.None of our executive officers serve as a member of the board of directors orcompensation committee of any entity that has one or more executive officersserving as a member of our board of directors or Compensation Committee.

 

**ITEM 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table setsforth certain information regarding the beneficial ownership of the shares ofthe our common stock as of March 4, 2006, by (i) each person we know to bethe beneficial owner of 5% or more of the

 

68

----

 

outstanding shares of ourcommon stock, (ii) the Chief Executive Officer, (iii) each of ourdirectors, and (iv) all of our executive officers and directors as agroup. Except as indicated in the footnotes to the table, to our knowledge thepersons named in the table have sole voting and investment power with respectto the shares of common stock indicated. 

 
| ** **                                                                   | ** ** | **Shares Beneficially  Owned (1)** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **Name and Address****                                             | ** ** | **Number**                                   | ** ** | **Percent** | ** ** |
| William T.  Comfort III                                                      |       | 352,267                                      |       | 6.1 | % |
| Charles E.  Finelli (2)                                                      |       | 5,000                                        |       |   | * |
| Nadim Nsouli                                                                 |       | —                                       |       |   | * |
| Ling S. Kwok                                                                 |       | —                                       |       |   | * |
| All directors  and the current executive officer as a group  (4 persons) (4) |       | 357,267                                      |       | 6.1 | % |

 

----

*              Representsbeneficial ownership of less than 1% of the Company’s outstanding shares ofCommon Stock.

 

**           Theaddress of each reporting person is Ergo Science Corporation, 790 TurnpikeStreet, North Andover, Massachusetts 01845.

 

(1)           Thenumber of shares of common stock issued and outstanding on February 28, 2006,was 5,813,856. The calculation of percentage ownership for each listedbeneficial owner is based upon the number of shares of our common stock issuedand outstanding at February 28, 2006, plus shares of our common stock subjectto options held by such person at February 28, 2006, and exercisable within60 days thereafter. The persons and entities named in the table have solevoting and investment power with respect to all shares shown as beneficiallyowned by them, except as noted below.

 

(2)           Consistsof shares of common stock subject to stock options held by Mr. Finelli onFebruary 28, 2006 and exercisable within 60 days thereafter.

 

69

----

 

## **Equity Compensation Plan Information**

 

The following table furnishes information with respectto compensation plans under which equity securities of the Company areauthorized for issuance as of December 31, 2005.

 
| **Plan category**                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                                                                                                                       | ** ** | ** **                                                                                              | ** ** | ** **                                                                                                                              | ** ** |
| Equity  compensation plans approved by security holders |       | 50,875                                                                                                                                           |       | $                                                                                                       | 2.07       |                                                                                                                                    | 1,577,500  |   |
| ** **                                              | ** ** | ** **                                                                                                                                       | ** ** | ** **                                                                                              | ** ** | ** **                                                                                                                              | ** ** |
| Total                                                   |       | 50,875                                                                                                                                           |       | $                                                                                                       | 2.07       |                                                                                                                                    | 1,577,500  |   |

 

The Company’s 2001 Employee, Director and ConsultantStock Plan was approved by the stockholders of the Company on October 15, 2001.The plan reserves a total of 1,600,000 shares of our common stock for issuanceunder this plan. The purpose of the plan is to encourage ownership of shares bykey employees, directors and certain consultants to the Company in order toattract such people, to induce them to work for the benefit of the Company orof an affiliate and to provide additional incentive for them to promote thesuccess of the Company or of an affiliate. The awards that may be granted underthis plan include incentive stock options under section 422 of the InternalRevenue Code or non-qualified stock options. As of December 31, 2005, 1,577,500shares were available to be granted under this plan. At the time that theshareholders approved this plan, the Company’s Long-Term Incentive Stock andDirectors Stock Plan was closed, and no new grants will be made to either plan.

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

None.

 

**ITEM14.**       PRINCIPALACCOUNTANT FEES AND SERVICES

 

The followingtable sets forth the fees billed by Deloitte & Touche LLP for servicesprovided during fiscal years 2005 and 2004 and PricewaterhouseCoopers LLP forfiscal year 2004:

 
| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit fees (1)        |       | $        | 1,606,000  |     | $          | 218,000 |   |
| Audit related  fees   |       | —   |       | —   |       |
| Tax related fees  (2) |       | $        | 44,000     |     | $          | — |   |
|                  |       |     |       |     |       |
| Total                 |       | $        | 1,650,000  |     | $          | 218,0000 |   |

 

----

(1)   Represents feesfor professional services rendered in connection with the audit of our annualfinancial statements, the audits for Nexus for 2004 and 2003 which wereincluded in Form 8-K/A filed in June 2005, and the review of our quarterlyfinancial statements. The fees in fiscal year 2004 includes the audit of ErgoScience (PricewaterhouseCoopers LLP $70,000) and the Nexus Media’s UK GAAPfinancial statements (Deloitte & Touche LLP $148,000).

 

(2)   Represents feesfor assistance related to tax compliance and consulting services.

 

Our AuditCommittee has adopted a policy to pre-approve all audit, audit-related, tax andother services proposed to be provided by our independent registered publicaccounting firm prior to engaging the auditor for that purpose. Considerationand approval of such services generally will occur at the Audit Committee’sregularly scheduled quarterly meetings. In situations where it is impracticalto wait until the regularly scheduled quarterly meeting, the Audit Committeehas delegated authority to approve the audit, audit-related, tax and otherservices to the Audit Committee Chairman up to a certain pre-determined levelas approved by the Audit Committee. Prior to the adoption of this policy, as inthe case with the services provided for fiscal 2005 and 2004, all of theservices provided by our independent registered public accounting firm werepre-approved by the entire Board of Directors.

 

70

----

 

**PART IV**

 

**ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

See Item 8 in Part II ofthis Annual Report on Form 10-K, Financial Statements and Supplementary Data,for an index to the consolidated financial statements and supplementaryfinancial information filed in this Annual Report.

 

The following documents are filed or incorporated by reference asexhibits to this Annual Report:

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1                 |       | —     |       | Amended and Restated  Certificate of Incorporation of the Registrant. Filed as exhibit 3.1 to the  Registrant’s registration statement on Form S-4 (File No. 333-69172) filed  with the Commission on September 7, 2001, and incorporated by reference  herein.                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2                 |       | —     |       | By-Laws of the  Registrant. Filed as exhibit 3.2 to the Registrant’s registration statement  on Form S-4 (File No. 33-98162) filed with the Commission on September 7,  2001, and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 |       | —     |       | Form of Stock  Certificate of the Registrant’s Common Stock, par value $.01 per share. Filed  as Exhibit 4.1 to the Registrant’s registration statement on Form S-4 (File  No. 333-69172) filed with the Commission on September 7, 2001, and  incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1                |       | —     |       | Novated License and  Royalty Agreement dated May 1, 1995, between the Board of Supervisors of  Louisiana State University and Agricultural and Mechanical College, the  Registrant, E. Science Incorporated, a Delaware corporation formerly known as  Ergo Science Incorporated that is a subsidiary of the Registrant (“Ergo  Science Incorporated”), and Ergo Research Corporation, a Delaware corporation  that is a subsidiary of the Registrant. Filed as exhibit 10.2 to the  Registrant’s registration statement on Form S-1 (File No. 33-98162) filed  with the Commission on November 27, 1995, and incorporated by reference  herein. |
| 10.2                |       | —     |       | Indemnification  Agreement dated October 6, 1995, between the Registrant and Manuel Cincotta,  Jr., together with a schedule identifying substantially identical documents  and setting forth the material details in which those documents differ from  the foregoing document. Filed as exhibit 10.18 to the Registrant’s  registration statement on Form S-1 (File No. 33-98162) filed with the  Commission on November 27, 1995, and incorporated by reference herein.                                                                                                                                                                                 |
| 10.3                |       | —     |       | Form of Indemnification  Agreement between the Registrant and each of the Registrant’s officers and  directors. Filed as exhibit 10.1 to the Registrant’s registration statement  on Form S-4 (File No. 333-69172) filed with the Commission on September 7,  2001, and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                             |
| 10.4                |       | —     |       | Ergo Science  Corporation 2001 Employee, Director and Consultant Stock Plan. Filed as  Exhibit 10.3 to the Registrant’s registration statement on Form S-4 (File No.  333-69172) filed with the Commission on September 7, 2001, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5                |       | —     |       | Ergo Science  Corporation Stock Option Plan for Non-Employee Directors. Filed as Exhibit  99.2 to the Registrant’s registration statement on Form S-8 (File No.  333-73222) filed with the Commission on November 13, 2001, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6                |       | —     |       | Ergo Science  Corporation Amended and Restated 1995 Long-Term Incentive Plan. Filed as  Exhibit 99.3 to the Registrant’s registration statement on Form S-8 (File No.  333-73222) filed with the Commission on November 13, 2001, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7                |       | —     |       | Amended and Restated  Option Agreement, dated October 12, 1993, between Ergo Science Incorporated  and Albert H. Meier, Ph.D.; First Amendment to Amended and Restated Option  Agreement, dated April 27, 1995, among the Registrant, Ergo Science  Incorporated and Albert H. Meier, Ph.D.; and Second Amendment to Amended and  Restated Option Agreement, dated November 6, 1995, between the Registrant and  Albert H. Meier, Ph.D. Filed as Exhibit 99.4 to the Registrant’s registration  statement on Form S-8 (File No. 333-73222) filed with the Commission on  November 13, 2001, and incorporated herein by reference.                          |

 

71

----

 
| 10.8  |   | — |       | Option Agreement, dated  March 1, 1993, between Ergo Science Incorporated and David R. Burt; First  Amendment to Option Agreement, dated April 27, 1995, among the Registrant,  Ergo Science Incorporated and David R. Burt; Second Amendment to Option  Agreement, dated October 6, 1995, between the Registrant and David R. Burt;  and Third Amendment to Option Agreement, dated November 6, 1995, between the  Registrant and David R. Burt. Filed as Exhibit 99.5 to the Registrant’s  registration statement on Form S-8 (File No. 333-73222) filed with the  Commission on November 13, 2001, and incorporated herein by reference. |
|-------|--------|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | — |       | License Agreement  effective as of February 1, 1997, between The General Hospital Corporation  and Ergo Science Corporation and Ergo Research Corporation. Filed as Exhibit  10.1 to the Registrant’s quarterly filing on Form 10-Q filed with the  Commission on May 15, 1997 and incorporated by reference herein. [Portions of  this exhibit have been omitted and filed separately with the Commission in  accordance with Rule 406 of the Securities Act and the Registrant’s request for  confidential treatment.]                                                                                                               |
| 10.10 |   | — |       | Settlement Agreement  dated as of October 6, 2000 between the Registrant and Louisiana State  University. Filed as Exhibit 10.17 to the Registrant’s Annual Report on Form  10-K (File No. 000-26988) filed with the Commission on April 2, 2001, and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                               |
| 10.11 |   | — | ** ** | Stock Purchase  Agreement, dated as of August 1, 2003, by and between the Company and Court  Square Capital Limited. Filed as Exhibit 10.1 to the Registrant’s Quarterly  Report on Form 10-Q (File No. 000-26988) filed with the Commission on August  14, 2003, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                     |
| 10.12 |   | — | ** ** | Assignment Agreement,  dated as of June 30, 2003, by and between the Company and Ergo  Verisherungsgruppe AG regarding the sale of the ergo.com domain name. Filed  as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No.  000-26988) filed with the Commission on August 14, 2003, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                            |
| 10.13 |   | — |       | Asset Purchase  Agreement, dated as of November 24, 2003, by and between the Company and  PLIVA d.d regarding the sale of the Company’s intellectual property. Filed as  Exhibit 10.12 to the Registrant’s Current Report on Form 8-K filed with the  Commission on November 26, 2003 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                            |
| 10.14 |   | — | ** ** | **Share  Purchase Agreement, dated as of February 8, 2005, by and between the Company  and Highbury House Communications plc regarding the purchase of the business  publishing division of Highbury House Communications plc, filed herewith.**                                                                                                                                                                                                                                                                                                                                                                                                 |
| 14    |   | — | ** ** | **Ergo  Science Corporation Code of Business Conduct and Ethics. Filed as Exhibit 14  to the Registrant’s Annual Report on Form 10-K (File No. 000-26988) filed  with the Commission on March 30, 2004, and incorporated herein by reference.**                                                                                                                                                                                                                                                                                                                                                                                             |
| 21.1  |   | — |       | Subsidiaries of  registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1  |   | — |       | Rule 13a-14(a)/15d-14(a)  Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1  |   | — |       | Section 1350  Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

72

----

 

**SIGNATURES**

 

Pursuant to therequirements 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 theundersigned, thereunto duly authorized, in the City of North Andover andCommonwealth of Massachusetts on March 31, 2006.

 
|   | ERGO SCIENCE CORPORATION |
|--------|--------------------------|
|   |                     |
|   |                     |
|   | By:                      | /s/ *CHARLES E. FINELLI* |   |
|   |                     | Charles E. Finelli  President and Chief Executive Officer |   |

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant in thecapacities and on the dates indicated.

 

 
| /s/ *CHARLES E. FINELLI*      |   | President, Chief Executive Officer and Director   |   | March 31, 2006 |
|-------------------------------|--------|---------------------------------------------------|--------|----------------|
| (Charles E. Finelli)          |   | (Principal Executive and Financial Officer)       |   |           |
|                          |   |                                              |   |           |
| /s/ *WILLIAM T. COMFORT, III* |   | Director                                          |   | March 31, 2006 |
| (William T. Comfort,  III)    |   |                                              |   |           |
|                          |   |                                              |   |           |
| /s/ *NADIM NSOULI*            |   | Director                                          |   | March 31, 2006 |
| (Nadim Nsouli)                |   |                                              |   |           |
|                          |   |                                              |   |           |
| /s/ *LING S. KWOK*            |   | Vice President, Business Development and Director |   | March 31, 2006 |
| (Ling Kwok)                   |   |                                              |   |           |

 

73

----