<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 1997
                           Commission File No. 0-26804

                        PLANET POLYMER TECHNOLOGIES, INC.
                 (Name of small business issuer in its charter)

                  CALIFORNIA                               33-0502606
        State or other jurisdiction of                    (IRS Employer
        incorporation of organization                  identification No.)

9985 BUSINESSPARK AVENUE, SUITE A, SAN DIEGO, CA              92131
   (Address of principal executive offices)                 (Zip Code)

                    Issuer's telephone number (619) 549-5130

         Securities registered under Section 12(b) of the Exchange Act:
                                      NONE

         Securities registered under Section 12(g) of the Exchange Act:
                           COMMON STOCK, NO PAR VALUE

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

Check if there is no disclosure of delinquent filers in response to Items 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

The issuer's revenues for the year ending December 31, 1997 were $3,020,081.

The aggregate market value of the voting stock held by non-affiliates of the
Issuer as of February 24, 1998 was $5,558,548. Shares of Common Stock held by
each officer and director and by each person who owns 5% or more of the
outstanding Common Stock of the Company have been excluded because such persons
may be deemed to be affiliates.

The total number of shares outstanding of the Issuer's Common Stock was
5,300,144 as of March 10, 1998.

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

                      DOCUMENTS INCORPORATED BY REFERENCE

Issuer's Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with 1998 Annual Meeting is incorporated herein by
reference into Part III of this report.

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

Transitional Small Business Disclosure Format (check one) [ ] yes [X] no



<PAGE>   2

                        PLANET POLYMER TECHNOLOGIES, INC.

                                   FORM-10KSB
                          YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER                                                                      PAGE
                                     PART I.
<S>     <C>                                                                 <C>
 1.     Description of Business................................................2

 2.     Description of Property...............................................14

 3.     Legal Proceedings.....................................................14

 4.     Submission of Matters to a Vote of Security Holders...................14

                                    PART II.

 5.     Market for Common Equity and Related Stockholders Matters.............15

 6.     Management's Discussion and Analysis of Financial
        Condition and Results of Operations...................................15

 7.     Financial Statements..................................................18

 8.     Changes in and Disagreements With Accountants on
        Accounting and Financial Disclosures..................................18

                                    PART III.

 9.     Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act.....................18

10.     Executive Compensation................................................18

11.     Security Ownership of Certain Beneficial Owners and Management........18

12.     Certain Relationships and Related Transactions........................18

                                    PART IV.

13.     Exhibits and Reports on Form 8-K......................................19



        Signatures............................................................21

        Power of Attorney.....................................................21
</TABLE>



<PAGE>   3

     This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends that such statements shall be protected by the safe harbors provided for
in such sections. Such statements are subject to risks and uncertainties that
could cause the Company's actual results to vary materially from those projected
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to those discussed in this section
as well as those sections entitled "Risk Factors," and in "Item 6 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

                                     PART I.

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

     Planet Polymer Technologies, Inc. ("Planet" or the "Company") is a
specialty chemical Company that designs, develops, manufactures and markets
degradable and recycled polymer materials. The Company's proprietary polymer
materials, which are marketed under the trademarks EnviroPlastic(R) and
Aquadro(TM), can be used to produce films, coatings and injection molded parts
that serve as environmentally-compatible alternatives to conventional engineered
plastics.

     The Company has developed eight technologies. The Company's primary focus
is on the four technologies listed below:

     o Aquadro(TM) -- a hydrodegradable (water dispersible) polyvinyl alcohol
       ("PVOH") resin. 

     o EnviroPlastic(R) CRT (controlled-release technology) --
       a polymer coating.

     o Aquadro(TM) Metal Injection Molding (MIM) Materials -- moldable metal 
       filled polymers. 

     o Aquadro(TM) Self Sterilizing Materials (SSM) -- antimicrobial polymer 
       blends for medical devices.

     The Company also produces recycled thermoplastic resins, which are
manufactured at Deltco of Wisconsin, Inc. ("Deltco"), a subsidiary of the
Company. The Company has focused most of its efforts away from biodegradable
polymers to water soluble and/or dispersible polymers that eventually biodegrade
in the appropriate environment. All of the Company's technologies can be custom
engineered to replicate the product and manufacturing characteristics of
non-degradable plastic products.

     Planet believes that market demand is now centered on bringing value added
products to industrial manufacturers by reducing their manufacturing costs as
well as having environmental benefits. The Company also believes that its
EnviroPlastic(R) products can offer cost and engineering benefits over currently
produced plastics.

     The Company has targeted the personal hygiene, agrotechnology, medical
disposable, and industrial manufacturing markets because it believes that its
EnviroPlastic(R) technologies address certain needs of these markets and thereby
provides the Company with an opportunity for market acceptance and growth. The
Company has sought to develop strategic alliances with potential customers in
North America, Europe and Asia, and currently has such a relationship with
Agrium Inc. ("Agrium"). These strategic alliances are intended to define product
specifications and promote market acceptance of the Company's products and
technology. The Company has also secured marketing alliances both domestically
and internationally, including those with Mitsubishi International Corporation
("Mitsubishi"), Nippon Shokubai Corporation ("Nippon Shokubai"), and Am-Re
Services, Inc. ("ARS"). To date, the Company has not fully commercialized nor
received any significant revenues from the sale of any products but has sold
pilot production quantities based upon its EnviroPlastic(R) technologies.

     In January 1996, Planet acquired Deltco, a manufacturer and reprocessor of
thermoplastic scrap resins that can be used in a wide variety of applications,
either blended with other polymer materials or alone. Planet maintains Deltco as
a wholly-owned subsidiary, and uses Deltco's plant, equipment and other physical
property to manufacture recycled polypropylene. The Company believes that
Deltco's facilities could be used to manufacture Planet's proprietary resins in
commercial quantities. In addition to Deltco's full scale, expandable production
facility in Ashland, Wisconsin, Planet operates a research and development and
pilot production facility in San Diego, California. The Company continues to
focus on its EnviroPlastic(R) and Aquadro(TM) technologies and growing Deltco's
manufacturing business.



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<PAGE>   4

     Planet was incorporated under the laws of California in August 1991. The
Company's principal executive offices are located at 9985 Businesspark Avenue,
Suite A, San Diego, CA 92131, and its telephone number is (619) 549-5130.

PLANET POLYMER'S PRODUCTS AND TECHNOLOGY

     Planet is using its polymer chemistry expertise to provide degradable
technology-based solutions to the current and emerging needs of the industrial
and consumer plastics markets. Planet believes that increasing pressure from
original equipment manufacturers and government agencies for environmentally
clean products and processes have created a significant opportunity for
degradable and recycled plastic products. The Company's EnviroPlastic(R) and
Aquadro(TM) products are designed to offer water solubility, water
dispensability, and other engineering benefits over currently produced plastics.

     Planet has developed polymer materials that can be fabricated into films,
coatings, and plastic parts that degrade when exposed to water, light or soil
without reducing product efficacy. This degradation, which can be engineered to
occur over a period of a few seconds to hundreds of days, converts the polymer
into a combination of environmentally-safe water, carbon dioxide and biomass. In
addition, EnviroPlastic(R) and Aquadro(TM) materials can be custom engineered to
replicate the product and manufacturing characteristics of non-degradable
plastic materials. Supplementing the Company's degradable products, Deltco's
recycled materials offer an attractive alternative to customers who are required
or desire to incorporate recycled materials into their end products at a cost
advantage over virgin materials. The Company believes that opportunities for the
use of recycled materials continue to increase, particularly in markets such as
transportation, appliance manufacturing, construction and consumer products.

     The Company's EnviroPlastic(R) and Aquadro(TM) polymer materials are based
on technologies that the Company has developed and tested over the past seven
years. To date, the Company has not received significant revenue from the sale
of products based on its EnviroPlastic(R) and Aquadro(TM) technologies. The
Company is currently focusing on application, market development and sales of
the following product groups:

     Aquadro(TM). Aquadro(TM) is a polyvinyl alcohol ("PVOH") based compound
developed by Planet to provide cost effective product solutions for the medical
disposable, industrial manufacturing and personal hygiene markets. Aquadro(TM)
can be manufactured into blown film, extrusion cast film, and injection molded
products. Aquadro(TM) resins are highly versatile and can be engineered for
elastomeric or rigid applications. Aquadro(TM) can be disposed of through the
municipal sewage system by dissolving the material in hot or cold water. The
patent for Aquadro(TM) is No. 5,658,977.

     EnviroPlastic(R) CRT. The Company's EnviroPlastic(R) CRT (controlled-
release technology) polymer product line, developed for Agrium, Inc. (see
"Strategic Alliances: Agrium Technology Development and License Agreement"), is
a proprietary polymer coating derived from monomers such as urethane, acrylics,
styrene and natural vegetable oils. This product line is different from the
Company's other products; it is not a polymer alloy or blend. The product line
is targeted for fertilizer controlled-release coating applications including, in
particular, urea granules. By coating urea granules with the Company's
materials, it is possible to control the release of the fertilizer over a period
of up to 120 days. Initial field test results of CRT have shown an average
increase of 20% in crop yields. CRT technology has recently completed pilot
scale production trials with a large North American fertilizer manufacturer.
Numerous tests have occurred in the United States, Canada, China and Australia
with positive results.

     EnviroPlastic(R) H. The Company's EnviroPlastic(R) H line of materials are
based on polyethylene oxide polymers and are manufactured into films using a
patented proprietary process. EnviroPlastic(R) H materials are engineered to
disperse or dissolve on contact with water. The dissolution time of
EnviroPlastic(R) H can be engineered to occur over a period ranging from seconds
to days depending on the requirements of the ultimate application. These polymer
blends are targeted for use in the personal hygiene market. The patent for
EnviroPlastic(R) H is No. 5,367,003.



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<PAGE>   5

     EnviroPlastic(R) C. The Company's EnviroPlastic(R) C line of materials,
which are based on a polyester named polycaprolactone, are engineered to be
compostable, water repellent polymer blends. EnviroPlastic(R) C blends are ideal
for film based products that are designed to withstand contact with water, but
which need to ultimately biodegrade in a compost environment. The
EnviroPlastic(R) C line has been manufactured into blown and cast films and
filaments, and demonstrates a high level of processability, aesthetics and
acceptance of pigments. Under American Standard Testing Methodology ("ASTM")
standard D5338, testing has indicated that more than 40% of EnviroPlastic(R) C
materials will degrade within 45 days, which is similar to the degradation rates
of paper products. The Company believes that EnviroPlastic(R) C blends are
ideally suited for garden waste bags and agrotechnology applications.

     EnviroPlastic(R) Z. The Company's patented EnviroPlastic(R) Z materials are
biodegradable and compostable polymers based on the polymer cellulose acetate
derived from trees, a natural renewable resource. EnviroPlastic(R) Z materials
are subjected to a high energy physical process that enhances their
biodegradability and compostability. Product features include transparency, fast
molding cycles, outstanding processability and degradation rates from 1 to 3
years. EnviroPlastic(R) Z materials have been successfully injection molded and
extruded into sheet film. EnviroPlastic(R) Z materials are targeted for use in
products in the packaging and the industrial markets. The patent for
EnviroPlastic(R) Z is No. 5,505,830.

     Deltco Technology. Deltco reprocesses thermoplastic polypropylene resins
that are known as "wide spec" materials. These materials are offered in flake or
pellet form and are available in white, natural and mixed colors. The
performance characteristics of these post-industrial recycled materials compete
with virgin polypropylene for injection molded products.

     Additionally, see "Research and Development: Aquadro(TM) Metal Injection
Molding Technology" and "Research and Development: Aquadro(TM) Self-Sterilizing
Technology."

PRODUCT TESTING

     Acceptance and degradation testing for EnviroPlastic(R) alloys have been
conducted by several independent testing organizations and governmental
agencies. Comprehensive studies completed by the US Department of the Interior
on polyethylene oxide, the base material for the Company's EnviroPlastic(R) H
product line, have determined that it is non-toxic (acceptable volume of five
parts per million) to marine life such as bacteria, algae and fish. The findings
also indicate that in laboratory tests, sewage effluent containing these
polymers have an above normal flow rate through the sewer. Tests have also
confirmed the compostable or biodegradable capabilities of the Company's
EnviroPlastic(R) C and Z materials as being similar to that of yard waste,
cardboard and magazines. Additional tests, such as cytotoxicity screening and
sea water degradation, have been performed on EnviroPlastic(R) materials by the
company's customers with favorable results.

     Testing focused on the Company's Aquadro(TM) and EnviroPlastic(R) CRT
technologies commenced in 1996. Aquadro(TM) testing to date has included tests
designed to assess film properties, melting point, water vapor transmission and
oxygen permeability testing. Degradation testing on Aquadro(TM) formulations has
also been conducted and confirmed by independent research laboratories.
Additional product testing related to the Aquadro(TM) technology included
injection molding trials, environmental and humidity testing, antibacterial
cidal properties and controlled dispersion analysis. EnviroPlastic(R) CRT
technology testing has occurred in North America, Australia and China. Field
testing continues and results to date indicate an average 20% increase in crop
yields. Product testing for new and existing technologies will continue as
appropriate. However, there can be no assurance that results from testing will
continue to be favorable, or that products which produce initial positive test
results will be engineered to meet the specifications necessary to commercialize
such product.

MARKETS AND APPLICATIONS

     ENVIROPLASTIC(R) AND AQUADRO(TM)

     The Company is focusing on specific market opportunities where the Company
believes that its EnviroPlastic(R) materials, coupled with its polymer chemistry
expertise, address current or emerging market requirements. The Company is
currently targeting the following markets for EnviroPlastic(R):



                                       4
<PAGE>   6

     Personal Hygiene. Personal hygiene products targeted by the Company include
diaper film, feminine hygiene applicators, panty liners, tampon applicators and
personal hygiene wrappers. These products currently represent a market in excess
of $8.0 billion in annual worldwide manufacturer sales. Plastic components
account for approximately 10 to 20 percent of the manufacturer's cost of such
hygiene products.

     The Company's technologies offer both product enhancements and
environmental benefits in both film and injection molded applications in the
personal hygiene market. The Company believes that its hydrodegradable polymer
materials, which dissolve or disperse when exposed to water, are ideally suited
for the manufacture of disposable diaper film, flushable feminine hygiene
products and incontinence products. Prototype samples of these products,
manufactured with Planet's EnviroPlastic(R) H polymer blends, have demonstrated
that they can be disposed of in the toilet and jettisoned into the sewage
system. The Company believes that consumers will consider this method of
disposal to be more convenient and environmentally sound.

     Agrotechnology. The Company believes that EnviroPlastic(R) materials
provide a potential solution to the problem of soil and water contamination in
the fertilizer industry. The use of controlled-release technology decreases the
water contamination caused by unacceptably high levels of nitrates being
dissolved in the water table and provides a cost effective method of
dissemination of the fertilizer product. Additionally, rain does not wash away
controlled-release fertilizers using EnviroPlastic(R) materials.

     Medical Disposables. Potential applications for the medical disposable
marketplace may consist of suture packs, urinary tract related products and
various disposable hospital supplies and devices. According to forecasts from
the Freedonia Market Research Group of Cleveland, Ohio, USA, demand for
disposable medical supplies in the US is anticipated to reach a $30 billion
value by 1998. Planet believes that its injection molded Aquadro(TM) product, as
well as Aquadro(TM) modified to be antibacterial is well-positioned to
capitalize on the increasing concern for safe, efficient and
environmentally-compatible disposable medical supplies.

     Deltco; Recycled Material. In addition to its degradable plastic products,
the Company, through Deltco, offers recycled polymer products sold to the
following industries: Automotive, Construction, Gardening, Household Products,
Packaging and Furniture. Deltco has marketed its products as a price performance
alternative to virgin polypropylene. Over the last eleven years, Deltco has
built a customer base covering a variety of applications. These applications
include automotive heater/AC duct work, flower pots, hanging plant baskets,
decorative lawn furniture, garment hangers, fencing, continuous roof vents,
cafeteria food trays, paint roller trays and other related products.

STRATEGIC ALLIANCES

     To facilitate the development and commercialization of EnviroPlastic(R)
products, Planet has pursued a strategy of aligning itself with a number of
companies in the areas of product development and marketing. To date, however,
the Company has not commercialized or sold in commercial quantities products
based on its EnviroPlastic(R) technologies.

     Customer Alliances. Planet has sought to develop strategic relationships
with customers both to define particular EnviroPlastic(R) product specifications
and to promote acceptance of the Company's products and technology. These
relationships generally involve joint development of product specifications and
provide for product development and pilot runs that are funded by the customer.
The Company's current joint development and license agreements generally require
Planet to conduct research and development on a specific application of one of
its technologies in exchange for a development fee. Typically, new technology
resulting from the customer funded research and development is owned by the
customer and Planet receives a royalty-free, perpetual, exclusive license to the
new technology outside of the customer's specified field of business. The
customer would be granted a perpetual, exclusive license to use the relevant
underlying Planet technology solely in a specified field of business and would
be obligated either to pay a royalty to Planet or to purchase its
EnviroPlastic(R) materials requirements from Planet.

     The Company believes that its strategy of aligning itself with selected
customers is significant for a number of reasons: 

     o  Close collaboration with the customers engineering and technical
        personnel allows Planet to develop precise specifications designed to
        ensure cost-effective application of the Company's products.



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     o Planet is able to engage in innovative and extensive product
       development and test programs that are funded primarily by the
       customer. Customer funding has allowed the Company to pursue
       development of multiple applications for EnviroPlastic(R) products.

     o Planet believes that the emergence and development of the market for
       its products will accelerate if one or more of the customers with which
       the Company has a relationship decides to deploy the Company's products
       on a large-scale basis.

     The Company intends to continue developing similar strategic relationships
that may help it promote its products or that might extend the range of product
solutions provided by the Company's EnviroPlastic(R) materials. The Company has
entered into non-disclosure agreements providing for the confidential exchange
of information and discussion with potential strategic partners and customers.
There can be no assurance that any such agreements will result in any
development and license agreements or commercial relationships. There can be no
assurance that the Company will be able to negotiate acceptable customer
relationships in the future, or that its existing joint development and
licensing agreements will be successful.

     Agrium Technology Development and License Agreement. In January 1995, the
Company entered into a ten year technology and license agreement with Cominco
Fertilizers Ltd. (now named "Agrium Inc."), pursuant to which Agrium desired to
have the Company conduct further development work including, but not limited to,
the use of coatings to control release of fertilizers and to protect products
containing biological inoculants. The Company's EnviroPlastic(R) CRT polymer was
developed for Agrium under this agreement. Under the terms of the agreement,
Agrium owns all technology developed under the agreement, including, among other
things, compositions of matter, new chemical complexes, association compounds,
blends, mixtures or compositions of coating materials, or new products, or new
processes relating thereto developed by the Company or by Agrium. In addition,
Agrium has the exclusive right to grant licenses and sublicenses on the
technology developed under the agreement to other parties. In return for the
rights granted to Agrium, Agrium is required to pay royalties to the Company
determined in accordance with the terms of the agreement.

     During the term of the agreement, the Company may not conduct any
development work of the same nature or type as that performed under the
agreement for any third party on any subject if the intended use falls within,
or could reasonably be expected to fall within, Agrium's Field of Business as
defined in the agreement. Moreover, the Company may not enter into any
arrangements or agreements with any third party for a license under any of the
Company's technology used during performance of this agreement if the intended
place of use falls within, or could reasonably be expected to fall within,
Agrium's Field of Business, as defined in the agreement, without first offering
such arrangement to Agrium and at the terms no less favorable to Agrium than
those offered to a third party. Agrium's field of business is broadly related to
agriculture and, in particular, fertilizers. As a result, the Company's ability
to develop or license its technology to third parties for agricultural
applications is significantly restricted by the Agrium Agreement.

SALES AND MARKETING

     The Company primarily relies on direct sales efforts and strategic
marketing alliances to market the Company's products and technologies. Many of
these direct sales efforts are based on the initiatives of the Company's senior
management. The Company believes that these efforts have provided the Company
with significant market exposure and have continued the educational process
required to commercialize its technology in an emerging industry.

     Most of the Company's EnviroPlastic(R) technologies are designed to be
specially engineered to enhance, and become incorporated into, customers'
products. Due to this high degree of product specialization, the Company expects
the average sales cycle for its products to be approximately 24 to 48 months.
This average sales cycle includes initial customer contacts, specification
writing, engineering design, prototype construction, pilot testing, regulatory
approval (if any), sales and marketing and commercial manufacture. A significant
amount of time and energy is required by the Company's staff to educate the
customer, understand the customer's unique application requirements and
recommend and develop the appropriate solution.



                                       6
<PAGE>   8
COMPETITION

     The primary source of competition for the Company's products currently
comes from suppliers of conventional non-degradable plastic products. The use of
non-degradable products and current methods of solid waste disposal are well
established and accepted by both consumers and the industry, many of whom may be
indifferent to the benefits offered by Planet's technologies. Many of the
Company's competitors, who provide these non-degradable products, have
significantly greater financial, technical and human resources than the Company.
Direct competition with respect to degradable polymer materials is limited.
Technologies which the Company believes to be potentially competitive include
polyvinyl alcohol, starch-based polymers and polylactic acid. A lessening of
political or consumer concern for environmental aspects of waste disposal could
significantly harm the Company's competitive position. There can be no assurance
that any one of these potentially competitive technologies will not obtain a
significant market share prior to the commercialization of the Company's
EnviroPlastic(R) products. The development of a competing or superior technology
or the commercialization of such technology by any one of the Company's
potential competitors could have a material adverse effect on the Company's
sales or operating profits.

     The degradable plastics market is currently highly fragmented, with no
single manufacturer commanding significant market share. However, the natural
consolidation associated with industry maturity could result in increased
competition, leading to price reduction, reduced margins and a loss of market
share. The Company believes that its technologies compete favorably with respect
to the principal competition factors of the Company's markets, i.e., price,
processability, quality, environmental impact and convenience.

MANUFACTURING AND SUPPLIERS

     Planet manufactures polymer materials in pellet form from base raw
materials purchased from third party vendors. The Company has manufactured only
limited production quantities of its products at its facility in San Diego,
California, and continues to use contract manufacturers to produce larger
quantities of materials when required. In January 1996, the Company acquired
Deltco, a single-screw compounding manufacturer in Wisconsin. The acquisition
provided the Company with an expandable midwest presence and experience in large
scale manufacturing. The Company is considering alternatives for the expansion
of its manufacturing infrastructure to facilitate the scale up that would be
necessary should large orders for commercial volumes of the Company's products
be placed.

     The components for Planet's polymer blends, alloys and coating products are
available from several suppliers such as Union Carbide, Dow Chemical, DuPont,
Shell Chemical, Eastman Chemical and Air Products as well as other sources. The
Company has not executed long-term supply agreements with any of its vendors. To
date, the Company has obtained adequate quantities of raw materials on
acceptable terms to meet its requirements, with volume purchase orders on some
items in order to obtain quantity discounts. The Company does not anticipate
significant difficulties in obtaining raw materials in sufficient quantities to
meet its anticipated needs. Should supply problems arise, however, the Company's
inability to develop alternative cost-effective sources could materially impair
the Company's ability to manufacture and deliver products. Additionally, an
interruption or reduction in the source of supply of any of the component
materials, or an unanticipated increase in vendor prices, could materially and
adversely affect the Company's operating results and damage customer
relationships.

     Deltco purchases the majority of its scrap resins from Minnesotal Mining
and Manufacturing Company ("3M") and its affiliates. A formal supply agreement
has been executed with 3M. The agreement has an indefinite term and may be
terminated by either party upon thirty-days prior written notice. There can be
no assurance, however, that the supply of raw materials from 3M or other sources
will not be interrupted. In addition, although the Company has identified
potential alternative sources of raw material for Deltco, there can be no
assurance that such alternative sources will be able to provide raw materials
meeting the Company's quality control standards, if at all.

RESEARCH AND DEVELOPMENT

     Research and development expenditures during the years ended December 31,
1997 and 1996 were approximately $491,000 and $840,000 respectively, of which
approximately $144,000 and $255,000 respectively, were customer funded. Planet
believes that its long-term success depends on the continued development and
commercialization of cost-effective solutions consisting of engineered
environmentally compatible polymer materials. The Company currently has three
Ph.D. polymer scientists, one senior process manufacturing engineer 



                                       7
<PAGE>   9

and one process technician engaged in product development programs, which
include polymer synthesis, polymer blending, process development, pilot and full
scale manufacturing and testing. The Company aims to design and develop new
products internally and, where appropriate, acquire existing technologies for
commercialization, although the Company currently has no plans for any such
acquisitions.

     Historically, Planet's research and development efforts have been focused
primarily on hydrodegradable polymers (EnviroPlastic(R) H and Aquadro(TM)),
controlled-release degradable fertilizer coatings (EnviroPlastic(R) CRT), and
manufacturing methodologies relating to all of the Company's proprietary
technologies. In 1997, however, the Company commenced and continued several new
research and development projects which are expected to continue in 1998
including projects focused on metal injection molding and self-sterilizing
antibacterial materials. These research and development projects are in their
early phases, however, and there can be no assurance that the Company will be
successful in completing the development or commercial implementation of any
technologies or products that are the subject of such projects.

     Aquadro(TM) Metal Injection Molding Technology (MIM). MIM is based on the
company's Aquadro(TM) technology and extends it into the industrial
manufacturing marketplace. Manufacturers are constantly looking to lower their
cost of doing business by evaluating alternative innovative fabrication
techniques. Planet has learned through its marketing efforts that products made
by MIM using water soluble polymers can reduce the cost of manufacturing certain
metal parts by as much as 50%. Preliminary testing by one of Planet's potential
customers has demonstrated that medical devices made from stainless steel can be
manufactured by Planet's MIM technology. As a result Planet has contracted Dr.
Randall German, an authority on MIM, to evaluate and test the Company's
technology in his laboratory. Pending a successful outcome by Dr. German's lab,
Planet plans to commercialize the technology.

     Aquadro(TM) Self-Sterilizing Technology (SSM). Planet has advanced its
antimicrobial polymer technology to the point of pilot production. Planet
anticipates that a major medical device company will submit an FDA application
for a replacement device approval in the near future. Pending the results of
that approval process, Planet will begin pilot and then full scale production of
the device. Planet is also researching the potential use of SSM technology in
the food packaging area and testing is underway to evaluate the efficacy of the
products.

     The Company intends to shift the research and development work away from
basic materials and focus more resources on manufacturing process development
and refinements in the next 12 to 24 months.

INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY

     The Company believes that, although the ownership of patents is a
significant competitive advantage in its business, its success also depends on
the innovative skills, technical competence, and marketing ability of its
scientific, engineering, and marketing and sales personnel. The Company intends
to continue to design and develop proprietary engineered, environmentally
compatible polymer blends and alloys, as well as enhancements and improvements
on existing products and will seek patent and trademark protection for such
inventions, improvements and enhancements as appropriate.

     In 1997, the Company expanded its existing patent portfolio with the
issuance of a patent for the Company's Aquadro(TM) technology. In addition a
patent for the EnviroPlastic(R) CRT technology has been allowed. All other
technologies of the Company are considered trade secrets and patent protection
will be pursued as appropriate.

     While the Company believes that a competitor with substantial financial
resources and technical expertise could develop polymer materials equivalent to
Planet's, the Company believes that its lead times, continued research and
development efforts and relationship driven strategic alliances with customers
provide it with a competitive advantage. The Company relies on trade secrets and
proprietary know-how and process technology, which it seeks to protect, in part,
by confidentiality agreements with its employees, consultants and customers.
There can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.



                                       8
<PAGE>   10

     In addition, there can be no assurance that the Company's pending patent
applications will be approved, that the Company will develop additional
proprietary materials or processes that are patentable, that any patents issued
to the Company or any of its licenses will provide the Company with competitive
advantages or will not be successfully challenged by third parties or that the
patents of others will not have an adverse effect on the ability of the Company
to conduct its business. Furthermore, there can be no assurance that others will
not independently develop similar or superior technologies, duplicate any of the
Company's processes or design around the patented materials developed by the
Company. The Company believes that its products, patents, trademarks and other
proprietary rights do not infringe the property rights of third parties. There
can be no assurance, however, that third parties will not assert infringement
claims in the future. It is possible that the Company may need to acquire
licenses to, or to contest the validity of, issued or pending patents of third
parties relating to the Company's technology. There can be no assurance that
licenses under such patents would be made available to the Company on acceptable
terms, if at all, or that the Company would prevail in any such contest. In
addition, the Company could incur substantial costs defending itself in suits
brought against the Company with respect to patents or in bringing suits against
other parties.

GOVERNMENT REGULATION

     Certain end products into which the Company's products are incorporated may
be subject to significant regulation and approval by federal, state and local
entities such as the Food and Drug Administration (the "FDA") and the EPA.
Similar regulatory agencies exist worldwide. The Company may be required to
provide its customers with technical information on its products to be used by
the customer in the regulatory process. The Company's customers will have
primary responsibility for obtaining any required governmental approvals. The
approval process could be costly and lengthy and potential sales of the
Company's products could be significantly delayed and/or eliminated as to end
products subject to such regulatory approval.

EMPLOYEES

     The Company currently has nine full-time employees and one part-time
employee at its corporate headquarters in San Diego, California, three of whom
hold doctoral degrees. Five employees are engaged in research and development
activities, two are involved in sales and marketing, and four are in
administrative, business development, operations and research support positions.
Deltco currently has thirty-six full-time employees at its facility in Ashland,
Wisconsin. Two employees are in administrative, business development and support
positions and the remaining thirty-four are in production and material handling
positions.

     Competition for employees in the Company's industry is intense. The Company
believes that its future success will depend in part on its ability to recruit,
retain and motivate qualified management, marketing, technical and
administrative employees. The Company has employment agreements with three key
employees. None of the Company's employees are covered by collective bargaining
agreements, and management considers relations with employees to be good.

RISK FACTORS

     History of Operating Losses. The Company's revenues to date have consisted
primarily of revenues generated by Deltco and contract research and development
revenues. The Company has incurred losses since inception. For the years ended
December 31, 1996 and 1997, the Company had net losses of approximately $2.83
million and $975,000, respectively. As of December 31, 1997, the Company had an
accumulated deficit of approximately $8.2 million. Planet's product shipments to
date have related primarily to the Company's research and development efforts
and customer pilot trials. Planet has generated minimal revenues from product
sales. Due to lengthy customer evaluation and acceptance periods, the Company
expects that negative cash flow from operations will continue for the
foreseeable future. The Company has not received significant commitments beyond
the research, development and testing stage from any customer regarding
purchases of the Company's products or technologies. Full-scale commercial use
of any of the Company's products will require additional development and
testing. There can be no assurance as to the timing of the commercial deployment
of the Company's products or that the Company's products and technology will
ever receive widespread market acceptance.



                                       9
<PAGE>   11
     Seasonality and Fluctuations in Quarterly Results. Deltco has experienced
seasonal fluctuations in quarterly revenues and operating results and there can
be no assurance that Deltco will be profitable in any particular period. Such
fluctuations may result in volatility in the price of the Company's Common
Stock. Deltco's sales and income have historically been lower in the first and
fourth quarters and higher in the second and third quarters of the years
reflecting the general pattern associated with much of the manufacturing
industry. Furthermore, announcements by the Company or its competitors of new
products and technologies could cause customers to defer or cancel purchases of
Deltco's products, which could adversely affect the Company's business,
financial condition and results of operations. Additional factors that may cause
the Company's revenues, gross margins and results of operations to vary
significantly from period to period include mix of products sold; availability
of inventory; costs; price discounts; market acceptance and the time and
availability of new products by the Company or its customers; usage of different
distribution and sales channels; customization of products; and general economic
and political conditions. There can be no assurance that the Company will
realize positive operating results in the future, and even if so realized, there
can be no assurance as to the level of operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

     Future Capital Needs. Uncertainty of Additional Funding. The Company's
future capital requirements will depend on many factors, including the cost of
manufacturing scale-up, the timing of market acceptance of the Company's
products, competing technological and market developments and the costs involved
in filing, prosecuting and enforcing patent claims. The Company anticipates that
its existing resources will enable the Company to maintain its current and
planned operations through at least the next twelve months. There can be no
assurance that changes in the Company's plans or other events affecting the
Company's operating expenses will not result in the expenditure of such
resources before such time.

     The Company intends to seek additional funding through partnership
arrangements or the extension of existing arrangements or through public or
private equity or debt financing. There can be no assurance that additional
financing will be available on acceptable terms, or at all. Insufficient funds
may require the Company to delay, scale back or eliminate some or all of its
activities or to obtain funds through arrangements with third parties that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself.

     Availability of Raw Materials. Dependence upon Key Supplier. Although
certain raw materials used in the Company's products are available from several
sources, should supply problems arise, the inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products.
Deltco purchases the majority of its scrap resins from 3M. A formal supply
agreement has been executed with 3M. The agreement has an indefinite term and
may be terminated by either party upon thirty-days prior written notice. Should
demand for the Company's products substantially exceed current expectations, or
if supply problems should arise with current vendors, there can be no assurance
that the Company would be able to obtain sufficient quantities of raw materials
from its current sources, or that alternate sources could be found without
disrupting the manufacturing process.

     Cyclicality of Recycled Plastic Industry. Deltco's recycled polypropylene
generally replaces higher priced virgin polypropylene in its customer's end
products to reduce costs. Deltco's business depends substantially upon the
availability and price of this virgin polypropylene as well as the price of oil.
If the virgin polypropylene supply becomes imbalanced due to excess
polypropylene capacity, the price of the virgin material will decrease creating
a lessened demand for Deltco's recycled material. Price downturns in the virgin
polypropylene market will have a material adverse effect on the Company's
business, financial condition and results of operations.

     Uncertainty of Market Acceptance. The Company's success is dependent on the
commercial acceptance of its technologies by the various industries targeted by
the Company's products. Although the Company's products have undergone numerous
product trials with customers, to date no customer has made a significant
commitment to purchase any of the Company's products. There can be no certainty
as to the amount of time required to achieve full-scale commercialization, and
the commercialization process of any new product could take several years. There
can be no assurance that any customer will adopt the Company's technology or
that the Company's products will receive broad market acceptance as an
economically acceptable alternative to conventional plastics. Broad market
acceptance of the Company's products will depend upon the Company's ability to
demonstrate to potential customers that its products can compete favorably with
conventional plastic products. There can be no assurance that any of the
Company's targeted markets will result in a significant commercial opportunity,
that unforeseen 



                                       10
<PAGE>   12

problems will not develop with respect to the Company's technology or products
or that the Company will be successful in completing the commercial
implementation of its technology. A significant risk remains as to the timing of
commercial implementation and the prospects of commercial success for the
Company's technology and products. In addition, the Company will need to achieve
further product cost reductions to compete successfully in the future. Although
the Company intends to achieve such reductions through a combination of
engineering and process improvements and economies of scale, there can be no
assurance that the Company will achieve its cost objectives.

     Technological Uncertainty. The Company is developing an innovative approach
to address the solid waste disposal concerns of many industries. There can be no
assurance that unforeseen problems will not develop with respect to the
Company's technology or products or that the Company will be successful in
completing the development or the commercial implementation of the Company's
technology. In order to be successful, the Company must be able to provide its
products with a price-value relationship that is competitive with alternative
solutions. A significant risk remains as to the technological performance, the
implementation schedule and the prospects of commercial success of the Company's
technology and products.

     Limited Manufacturing Experience and Capability. The Company's facility in
San Diego, California is a pilot production facility with limited manufacturing
capability. Deltco's facility is in Ashland, Wisconsin. In the event that
production at either facility were interrupted by fire, earthquakes, floods or
other acts of God, regulatory actions or other causes, the Company would be
unable to continue to develop and manufacture its products. Such an interruption
would materially and adversely affect the Company's business and results of
operations. To date the Company has manufactured and sold only small quantities
of its EnviroPlastic(R) products for commercial use. The Company's San Diego
facility is inadequate to handle higher commercial volume manufacturing. To
increase production capability the Company will need to either expand the
production capabilities of Deltco or seek additional facilities, either of which
would require significant expenditures and additional personnel. Although the
Company plans to establish manufacturing relationships with contract
manufacturers, no manufacturer has produced significant volumes of the Company's
products to date. To be successful, the Company's products must be manufactured
in commercial quantities at competitive costs. If the Company is unable to
develop or contract for manufacturing capabilities on acceptable terms, the
Company's competitive position and its ability to achieve profitability could be
materially impaired.

     Reliance on Strategic Relationships. The Company's technologies are
designed to serve multiple industries affected by the problem of solid waste
disposal. An important part of the Company's strategy is to promote acceptance
of the Company's products through technology and product alliances with certain
customers. The Company's dependence on these customers raises certain risks with
respect to the future success of the Company and its business. The Company has
focused its product development efforts by working in close collaboration with
its customers. Certain of the Company's customers are concurrently engaged in
similar development and testing programs with other companies involving
competing products and technologies. The Company's success is dependent on the
successful completion and commercial deployment of the Company's products and on
the future commitment of its customers to the Company's products and technology.
There can be no assurance that the Company's collaboration with its customers
will result in products that are accepted by its customers or widely accepted in
the marketplace. In addition, the Company's reliance on collaborations with
third parties may require the Company to relinquish rights to certain of the
Company's technologies, product candidates or products that the Company would
otherwise seek to develop or commercialize itself. For example, pursuant to the
Company's Technology Development and License Agreement with Cominco Fertilizers
Ltd. (now named "Agrium Inc.") (the "Agrium Agreement"), Agrium Inc. has certain
rights to the Company's technologies, including the Company's patent application
for EnviroPlastic(R) CRT that was allowed in 1997. In addition, the Agrium
Agreement places certain limitations on the Company with respect to the use of
the Company's technologies in certain areas of business. There can be no
assurance that the Company will not enter into similar collaborations in the
future.

     Management of Growth. Future company growth may challenge the Company's
management, operational and financial resources. The Company may experience
problems associated with the design, engineering and manufacturing scale-up of
the Company's products. The Company's ability to manage growth effectively will
require it to continue to implement and improve its management, operational and
financial systems and to expand, train and manage its employees.



                                       11
<PAGE>   13

     Management of growth is especially challenging for a Company with a short
operating history and limited financial resources, and the failure to
effectively manage growth could have a material adverse effect on the Company's
results of operations. In addition, Planet has no experience in the operation of
a large-scale production facility and there can be no assurance that the Company
will not encounter unforeseen difficulties in the operation of a production
facility that would adversely affect the Company's results of operations in
future periods. Failure to upgrade operating and financial control systems or
difficulties encountered during such upgrades could adversely affect the
Company's business and results of operations. Although the Company believes that
its systems and controls are adequate to address its current needs, there can be
no assurance that such systems and controls will be adequate to address future
changes in the Company's business.

     Competition. The primary source of competition for the Company's products
currently comes from suppliers of conventional non-degradable plastic products.
The use of non-degradable products and the current methods of solid waste
disposal are well-established and accepted by both consumers and the industry,
many of whom may be indifferent to the benefits offered by the Company's
products. Many of the Company's competitors who provide these non-degradable
products have significantly greater financial, technical and human resources
than the Company. Changes in political and consumer emphasis on environmental
factors in waste disposal could significantly harm the Company's competitive
position relative to these established solutions with respect to certain of the
Company's products whose principal advantage is degradability. Such changes may
be imminent in light of the current political climate, the unlikelihood of
increased environmental regulation and the possibility of a reduction in
environmental regulation. In addition, the Company is subject to competition
from other specialty chemical companies offering alternative solutions to solid
waste disposal problems. There can be no assurance that the Company's
competitors will not succeed in developing products or technologies that are
more effective than any which have been or are being developed by the Company or
which would render the Company's technology and products obsolete and
noncompetitive. Accordingly, the Company's competitors may succeed in obtaining
market acceptance for products more rapidly than the Company. Furthermore, if
the Company obtains market acceptance of the Company's products, it will also be
competing with respect to volume manufacturing efficiency and marketing
capabilities, areas in which the Company has limited or no experience.

     Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of Robert J. Petcavich, the Company's
Chairman, Chief Executive Officer and President, and the loss of such key
executive could have a material adverse effect on the Company's business or
results of operations. The Company is also dependent on other key personnel, and
on its ability to continue to attract, retain and motivate highly skilled
personnel. The competition for such employees is intense, and there can be no
assurance that the Company will be successful in attracting, retaining or
motivating key personnel. The Company does maintain "key-man" life insurance
policies with respect to such persons to compensate the Company in the event of
their deaths.

     Uncertainty of Protection of Patents and Proprietary Rights. Planet relies
on a combination of patent and trade secret protection, non-disclosure
agreements and licensing arrangements to establish and protect its proprietary
rights. The Company has filed and intends to file applications as appropriate
for patents covering the Company's products. There can be no assurance that
patents will issue from any of the pending applications or, if patents do issue,
that claims allowed will be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that any issued patents will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company. Since U.S. patent
applications are maintained in secrecy until patents issue, and since
publication of inventions in the technical or patent literature tend to lag
behind such inventions by several months, Planet cannot be certain that it was
the first creator of inventions covered by its issued patents or pending patent
applications or that it was the first to file patent applications for such
inventions. Despite the Company's efforts to safeguard and maintain its
proprietary rights, there can be no assurance that the Company will be
successful in doing so or that the Company's competitors will not independently
develop or patent technologies that are substantially equivalent or superior to
the Company's technologies.

     Continued Quotation On The Nasdaq SmallCap Market. The Company's Common
Stock is quoted on the Nasdaq SmallCap Market. No assurance can be given that
the Company will be able to satisfy the criteria for continued quotation on the
Nasdaq SmallCap Market. Failure to meet the maintenance criteria in the future
may result in the Company's Common Stock not being eligible for quotation. In
such event, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's Common Stock.



                                       12
<PAGE>   14
     If the Company's Common Stock is delisted from the Nasdaq SmallCap Market,
trading, if any, in the Company's Common Stock would thereafter have to be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
the available, Nasdaq OTC Bulletin Board. As a result, an investor would find it
more difficult to dispose of, and to obtain accurate quotations as to the value
of, the Company's Common Stock.

     Penny Stock Regulations. If the Company's Common Stock is delisted from the
Nasdaq SmallCap Market and the trading price of the Company's Common Stock is
less than $5.00 per share, trading in the Company's Common Stock would also be
subject to the requirements of Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Under such rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny stock
(generally, according to recent regulations adopted by the Commission, any
equity security not traded on an exchange or quoted on Nasdaq that has a market
price of less than $5.00 per share, subject to certain exceptions), including
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Company's Common
Stock and the ability purchasers of the Company's Common Stock to sell such
shares in the secondary market. There can be no assurance that the Company's
Common Stock will not be delisted from the Nasdaq SmallCap Market or treated as
a penny stock.

     Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock in the public market or the prospect of such sales by
existing shareholders and warrant holders could materially adversely affect the
market price of the Company's Common Stock. As of December 31, 1997 the Company
had outstanding 5,800,144 shares of Common Stock (assuming the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock). Virtually
all of the Company's outstanding shares of Common Stock are either registered
and therefore freely tradable or may be transferred pursuant to Rule 144(k)
under the Securities Act, unless held by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act. The Company has also filed
a Registration Statement on Form S-8 under the Securities Act covering 500,000
shares of Common Stock reserved for issuance under its 1995 Stock Plan. Upon
issuance, shares registered under such Registration Statement will be, subject
to Rule 144 volume limitations applicable to affiliates of the Company,
available for sale in the open market.

     Government Regulation. Certain end products into which the Company's
products are expected to be incorporated are subject to extensive government
regulation in the United States by federal, state and local agencies including
the EPA and the Food and Drug Administration (the "FDA"). Similar regulatory
agencies exist worldwide. The Company's customers who incorporate the Company's
products into consumer products will bear primary responsibility for obtaining
any required regulatory approvals. The process of obtaining and maintaining FDA
and any other required regulatory approvals for products is lengthy, expensive
and uncertain, and regulatory authorities may delay or prevent product
introductions or require additional tests prior to introduction. There can be no
assurance that changes in existing regulations or the adoption of new
regulations will not occur, which could prevent the Company or its customers
from obtaining approval or delay the approval of various products or could
adversely affect market demand for the Company's products.

     Product Liability. Product liability claims may be asserted against the
Company in the event that the use of the Company's products or products which
incorporate the Company's products are alleged to have caused injury or other
adverse effects, and such claims may involve large amounts of alleged damages
and significant defense costs. The Company does not maintain product liability
insurance. If the Company does obtain product liability insurance in the future,
there can be no assurance that the liability limits or the scope of the
Company's insurance policy would be adequate to protect against such potential
claims. Additionally, the Company may not be able to obtain product liability
insurance. Whether or not the Company obtains such insurance, a successful claim
against the Company could have a material adverse effect on the Company. In
addition, the Company's business reputation could be adversely affected by
product liability claims, regardless of their merit or eventual outcome.

     Absence of Dividends. The Company has not paid any cash dividends on its
Common Stock since its inception and does not anticipate paying cash dividends
in the foreseeable future.



                                       13
<PAGE>   15

ITEM 2. DESCRIPTION OF PROPERTY

     The Company's executive offices, as well as research laboratories and a
limited production facility, are located in approximately 6,080 square feet of
leased office and manufacturing space in San Diego, California. The lease on
this space will expire in July 1999 and provide for monthly rental payments of
$4,317 until July 1998 and $4,489 until expiration. Deltco currently leases
approximately 35,000 square feet of space in Ashland, Wisconsin. The leases on
Deltco's space begin to expire in 1999 and provide for monthly rental payments
of $9,481. The Company may expand its manufacturing capabilities as demand
increases for the Company's products. Additional debt or equity financing will
be required prior to obtaining significant manufacturing facilities.


ITEM 3. LEGAL PROCEEDINGS

     The Company is not involved in any litigation or legal proceedings.


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

     None.












                                       14
<PAGE>   16


                                    PART II.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock has been traded on the Nasdaq SmallCap tier of
the Nasdaq Stock Market ("Nasdaq") under the symbol "POLY," since the Company's
initial public offering on September 21, 1995. The following table sets forth
the high and low sales prices of the Company's Common Stock for the period from
January 1, 1996 through December 31, 1997 as furnished by Nasdaq. These prices
reflect prices between dealers without retail markups, markdowns or commissions,
and may not necessarily represent actual transactions:

<TABLE>
<CAPTION>
                                                       Trade Prices
                                                     ---------------
                                                     High        Low
                                                     ----        ---
<S>                                                  <C>        <C> 
Fiscal year ended December 31, 1996
       First Quarter                                 16         6 3/4
       Second Quarter                                14 1/2     7 3/4
       Third Quarter                                  9 1/4     5 3/4
       Fourth Quarter                                 8 1/2     3 7/8
Fiscal year ended December 31, 1997
       First Quarter                                  6 1/4     2
       Second Quarter                                 4 1/8     1 3/4
       Third Quarter                                  4 5/8     2
       Fourth Quarter                                 3 1/2     1
</TABLE>


     On March 10, 1998, the last reported sale price of the Company's Common
Stock on the Nasdaq SmallCap market was $1.375. As of March 10, 1998, there were
approximately 121 holders of record of the Company's Common Stock with 5,300,144
shares outstanding. The market price of shares of Common Stock, like that of the
common stock of many other emerging growth companies, has been and is likely to
continue to be highly volatile.

     Under the terms of the Securities Purchase Agreement between the Company
and the investor of the Series A Preferred (the "Investor") dated as of
September 24, 1997, the Investor is entitled to receive, quarterly, such number
of shares of Common Stock (or, if the Company is unable to distribute shares of
Common Stock, cash) equal to (a) one and one-half percent (1.5%) multiplied by
the liquidation preference of the Series A Preferred, divided by (b) the average
closing price of the Company's Common Stock on the Nasdaq SmallCap Market over a
period of 5 consecutive trading days prior to the dividend distribution date.
Accordingly, on December 15, 1997, the Company issued to the Investor of the
Series A Preferred a dividend of 7,337 shares of Common Stock valued at
approximately $13,665.

     No cash dividends have been declared or paid on the Company's Common Stock
and the Company does not expect to pay any cash dividends in the foreseeable
future.

     On January 1, 1996, in connection with the purchase of Deltco, the Company
issued 96,775 shares of restricted Common Stock to the sole shareholder of
Deltco. The Company issued such shares in reliance upon the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

     Except for the historical information contained herein, the discussion in
this report contains forward-looking statements that involve certain risks and
uncertainties. The Company's actual results could differ materially from those
discussed in this report. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Item 1 --
Description of Business," including the section therein entitled "Risk Factors,"
this Item 6, and those discussed in any documents incorporated herein by
reference.



                                       15
<PAGE>   17

     Since the Company was founded in 1991, with exception of resources expended
in connection with the purchase and ongoing operation of Deltco, substantially
all of the Company's resources have been devoted to the development and
commercialization of its technologies and products. This has included the
expenditure of funds to develop the Company's corporate infrastructure, support
the Company's marketing efforts and establish a pilot production facility, in
addition to research and development. Prior to the acquisition of Deltco,
essentially all revenue recognized was from customer-funded research and
development activities, which included service and product sales for customer
pilot trials. Planet has incurred operating losses since inception and had an
accumulated deficit as of December 31, 1997 of approximately $8.2 million.
Pending commercial deployment of and related volume orders for the Company's
products, the Company expects to incur additional losses.

     In January, 1996, Planet acquired Deltco, a manufacturer and reprocessor of
plastic resins located in Ashland, Wisconsin. Planet maintains Deltco as a
wholly-owned subsidiary.

     Pursuant to the Purchase and Sale Agreement related to the purchase of
Deltco ("the Agreement"), Planet paid the sole shareholder of Deltco $1,125,000
and issued 96,775 shares of restricted Common Stock of Planet valued at $508,000
based on a discounted stock price at January 4, 1996. The Agreement also
specified minimum net worth and cash balances at the date of transaction. The
excess net worth of $36,000, reduced by $24,000 due from the seller brought the
total purchase price to $1,646,000. Planet paid the cash portion of the purchase
price out of its available cash reserves. The stock portion of the purchase
price was paid with newly issued shares of the Company's Common Stock. The
purchase price was first allocated to the tangible assets (which included
approximately $334,000 of cash) and liabilities based on fair market value at
the purchase date and to the appraised fair market value of property and
equipment. The remaining amount, approximately $617,000 and $307,631
respectively, was recorded as goodwill, which is being amortized over 20 years
and its remaining estimated period of benefit of 9 years.

RESULTS OF OPERATIONS

     The Company's revenue increased from approximately $3,014,000 during the
year ended December 31, 1996 to approximately $3,020,000 during the year ended
December 31, 1997. This increase reflects product sales of Deltco.

     Cost of sales increased from approximately $1,965,000 during the year ended
December 31, 1996 to approximately $2,160,000 during the year ended December 31,
1997. This increase was primarily attributable to increases in raw material
costs and higher manufacturing costs at Deltco. The lower margins were the
result of increases in raw material and personnel costs and write-offs of
obsolete inventory at Deltco. Raw material cost increases, which have resulted
from seasonal price fluctuations in the polypropylene market and price increases
from Deltco's preferred supplier of scrap plastic in connection with a recent
request for bid, are expected to continue for the foreseeable future.

     General and administrative expenses decreased from approximately $1,900,000
during the year ended December 31, 1996 to approximately $1,061,000 during the
year ended December 31, 1997. This decrease was primarily attributable to
decreased costs of outside services in 1997. Other contributing factors that
decreased costs included a $478,000 one time, non-cash compensation expense for
the fair value of options granted to an outside consultant during the first
quarter of 1996 and a patent and trademark write-down of approximately $75,000
recorded during the fourth quarter of 1996. The Company also incurred certain
costs associated with the acquisition of Deltco during 1996.

     Marketing expenses decreased from approximately $1,439,000 during the year
ended December 31, 1996 to approximately $434,000 during the year ended December
31, 1997. This decrease was primarily attributable to the reduction of outside
services, sales and marketing personnel and international travel expenditures
offset by increased marketing efforts in North America.

     The Company's net research and development expenses decreased from
approximately $584,000 during the year ended December 31, 1996 to approximately
$347,000 during the year ended December 31, 1997. This decrease was due
primarily to lower research and development expenditures resulting from lower,
offsetting, customer-funded research and development at Planet, the decreased
use of outside resin processors and a reduction in pilot plant operations staff.
The Company continued to focus on internally-funded, rather than customer-
funded, product 



                                       16
<PAGE>   18

development in 1997. The Company, however, continues to participate in
customer-funded development when appropriate, but believes internally-funded
development is advantageous as to certain technologies and applications.

     The Company's net loss decreased from approximately $2.83 million during
the year ended December 31, 1996 to approximately $975,000 during the year ended
December 31, 1997 as a result of the aforementioned contributing factors.

     As of December 31, 1997, the Company had a net operating loss carry forward
for federal income tax purposes of approximately $7.1 million, and for
California state tax purposes of approximately $3.9 million. Annual utilization
of loss carryforwards may be limited due to ownership changes.

     The Company's quarterly results of operations have and continue to
fluctuate materially depending on, among other things the mix of products sold,
availability of inventory, costs, price discounts, market acceptance and the
timing and availability of new products by the Company or its customers,
customization of products, and general economic and political conditions.

     Deltco's sales and income are also subject to seasonal fluctuations and
have been historically lower in the first and fourth quarters of the years
reflecting the general pattern associated with much of the manufacturing
industry. Because of these fluctuations in net sales and net income, the results
of operations of any quarter are not necessarily indicative of the results that
may be achieved for a full fiscal year or any future quarter. See "Risk Factors
-- Seasonality and Fluctuations in Quarterly Results."

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, Planet has financed its operations primarily through the
sale of equity securities and revenue from customer development agreements. The
Company has raised approximately $4 million (net of issuance costs) from the
private sale of Common Stock and exercise of warrants to purchase Common Stock.
In September 1995 the Company completed its initial public offering in which it
sold an aggregate of 1,150,000 shares of Common Stock to the public and received
net proceeds of approximately $5.6 million. In September 1997, the Company
issued 500,000 shares of Series A Convertible Preferred Stock and warrants to
purchase Common Stock for an aggregate purchase price of approximately $882,000,
net of issuance costs.

     In January 1996, the Company used $1,125,000 in cash and issued 96,775
shares of restricted Common Stock valued at approximately $508,000 to acquire
Deltco in a purchase transaction. In connection with the purchase, the Company
now has one outstanding debt agreement related to a Small Business
Administration loan collateralized by a certificate of deposit and inventory at
Deltco. As of December 31, 1997 the loan balance was approximately $182,000. The
Company has no material commitments for capital expenditures but anticipates
expenditures in 1998 of approximately $35,000 to update its computer software to
enable it to operate in years subsequent to 1999.

     The Company used approximately $685,000 for operations for the year ended
December 31, 1997. Such funds have been used for research and development
activities, marketing efforts and administrative support.

     The Company used approximately $90,000 for investing activities for the
year ended December 31, 1997. Such funds were used for the preparation and
filing of patents and for the purchase of equipment.

     Net cash provided by financing activities of approximately $651,000
resulted from proceeds from the issuance of Series A Convertible Preferred Stock
and warrants for an aggregate purchase price of approximately $882,000 and an
equipment lease of approximately $29,000 partially offset by approximately
$151,000 used for the repayment of debt and approximately $108,000 restricted
cash in connection with long-term debt.

     The Company believes that existing sources of liquidity and anticipated
revenue, including revenues generated from Deltco, will satisfy the Company's
projected working capital and other cash requirements through at least the next
twelve months. There can be no assurance, however, that changes in the Company's
plans or other events affecting the Company's operating expenses will not result
in the expenditure of such resources before such time. The Company expects that
it will need to raise substantial additional funds to continue its current and
planned operations and establish large-scale manufacturing capabilities. The
Company intends to seek additional funding 



                                       17
<PAGE>   19

from existing and potential customers or through public or private equity or
debt financing. There can be no assurance that additional financing will be
available on acceptable terms, or at all.

ITEM 7. FINANCIAL STATEMENTS

     The information required by this item is included in the Appendix attached
hereto and incorporated by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

     None.


                                    PART III.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

     The information required by this item is incorporated by reference from
Issuer's Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with its 1998 Annual Meeting of Shareholders (the
"Proxy Statement") under the headings "Proposal 1 -- Election of Directors,"
"Compliance with Section 16(a) of the Securities Exchange Act of 1934," and
"Additional Information -- Management."


ITEM 10. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference from the
Proxy Statement under the heading "Executive Compensation."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference from the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."









                                       18
<PAGE>   20

                                    PART IV.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  1. Financial Statements. Financial statements are attached as the
             Appendix to this report. The index to the financial statements is
             found on page F-1 of the Appendix.

          2. Financial Statement Schedules. All schedules are omitted since the
             required information is not present or is not present in amounts
             sufficient to require a submission of the schedules, or because the
             information required is included in the financial statements and
             notes thereto.

          3. Exhibits. See Exhibit Index in part (c), below.

     (b)  The Company did not file any reports on Form 8-K during the quarter
          ended December 31, 1997.

<TABLE>
<CAPTION>
    (c) Exhibit
        Number        Description
        -------       -----------
        <S>           <C>
        3.1(1)        Restated Articles of Incorporation of the Registrant.
        3.2(1)        Restated Bylaws of the Registrant.
        3.3(7)        Amended and Restated Certificate of Determination of
                      Preferences of Series A Convertible Preferred Stock.
        4.1           Reference is made to Exhibits 3.1, 3.2 and 3.3.
        4.2(1)        Form of warrant issued to Underwriters.
        4.3(1)        Form of Class B Warrant, with related schedule of
                      warrantholders.
        4.4(1)        Warrant issued to Reynolds Kendrick Stratton.
        4.5(1)        Form of warrant issued to advisors, with related schedule of
                      warrantholders.
        4.6(1)        Specimen Stock Certificate.
        4.7(2)        Non-statutory Stock Options granted in September 1994 to Dr.
                      Petcavich and Messrs. Wright and To.
        4.8(1)        Warrant issued to Am-Re Services, Inc.
        5.1(7)        Option of Cooley Godward LLP.
        10.1(1)       Form of Indemnity Agreement entered into between
                      the Registrant and each of its executive officers
                      and directors.
        10.2(1)       Registrant's 1995 Stock Option Plan (the "Option Plan").
        10.3(1)       Form of Incentive Stock Option Grant under the Option Plan.
        10.4(1)       Form of Non-statutory Stock Option Grant under the Option Plan.
        10.5(1)       Standard Industrial Gross Lease, dated June 1, 1992, between
                      the Registrant and The Trustees Under the Will and
                      of the Estate of James Campbell, Deceased, as
                      amended August 13, 1992 and May 3, 1994.
        10.6(1)       Agreement to Assign Proprietary Rights between the Registrant
                      and Dr. Robert J. Petcavich.
        10.7(1)       Form of Confidential Information Agreement entered into between
                      the Registrant and its employees.
        10.8(3)       Purchase and Sale Agreement dated as of January 1, 1996, by and
                      among the Registrant, Deltco of Wisconsin, Inc., and Jack G. Martinsen.
        10.9(4)       Executive Employment Agreement dated January 1, 1996, between
                      the Registrant and Robert J. Petcavich.
        10.10(4)      Consulting Services Agreement dated January 1, 1996 between the
                      Registrant and Tarrenz, Inc.
        10.11(5)(6)   Technology Development and License Agreement, dated January 30,
                      1995, between the Company and Cominco Fertilizers, Ltd.
        10.12(5)      Fourth Amendment to Lease, dated August 1, 1997 between the
                      Company and The Trustees Under the Will and of the Estate of
                      James Campbell.
        10.13(7)      Securities Purchase Agreement, dated September 19, 1997,
                      between the Registrant and Special Situations Private Equity
                      Fund, L.P.
        10.14(7)      Warrant to Purchase Common Stock, dated September 24, 1997,
                      issued by the Registrant to Special Situations Private Equity
                      Fund, L.P.
        10.15(8)(9)   Scrap Purchase Agreement, dated June 28, 1996, between Deltco
                      and 3M.
</TABLE>



                                       19
<PAGE>   21

<TABLE>
<CAPTION>
    (c) Exhibit
        Number        Description
        -------       -----------
        <S>              <C>
        11.1(8)       Statement of Computation of Common and Common Equivalent Shares.
        23.1(8)       Consent of Coopers & Lybrand L.L.P.
        24.1          Power of Attorney.  Reference is made to page 20.
        27.1(8)       Financial Data Schedule.
</TABLE>

----------
(1)  Previously filed as an exhibit to the Registration statement on Form SB-2,
     as amended (No. 33-91984 LA) and incorporated herein by reference.
(2)  Previously filed as an exhibit to the Registration Statement on Form S-8
     (No. 333-1042) filed on February 5, 1996 and incorporated herein by
     reference.
(3)  Previously filed as an exhibit to the current report on Form 8K filed on
     January 11, 1996, as amended by the current report on Form 8-K/A (Amendment
     No. 1) filed by the Company on March 15, 1996 and incorporated herein by
     reference.
(4)  Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB filed for
     the fiscal year ended December 31, 1995.
(5)  Previously filed as an Exhibit to Registrant's Quarterly Report on Form
     10-QSB for the quarter ended June 30, 1997 and incorporated herein by
     reference.
(6)  Confidential treatment has been granted with respect to certain portions of
     this exhibit. Omitted portions have been filed separately with the
     Securities and Exchange Commission.
(7)  Previously filed as an exhibit to the Registration Statement on Form S-3
     (No. 333-39845) filed on November 7, 1997, amended on December 31, 1997 and
     incorporated herein by reference.
(8)  Filed as an Exhibit to this annual report on Form 10-KSB.
(9)  Confidential treatment has been requested with respect to certain portions
     of this exhibit. Omitted portions will be filed separately with the
     Securities and Exchange Commission.



                                       20
<PAGE>   22
                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                        PLANET POLYMER TECHNOLOGIES, INC.

Dated  March 17, 1998                    By: /s/ ROBERT J. PETCAVICH
                                             -----------------------------------
                                             Robert J. Petcavich
                                             President, Chief Executive 
                                             Officer and Director


                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert J. Petcavich, his attorney-in-fact, each
with the power of substitution, for him, in any and all capacities, to sign any
amendments to this report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that each the attorney in-fact, or his
substitute may do or cause to be done by virtue hereof.

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

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

/s/ ROBERT J. PETCAVICH
-----------------------     President,                                       March 17, 1998
Robert J. Petcavich         Chief Executive Officer and Director
                            (Principal Executive Officer)
                            (Principal Financial and Accounting Officer)

/s/ MICHAEL M. COLEMAN
-----------------------     Director                                         March 17, 1998
Michael M. Coleman

/s/ THOMAS M. CONNELLY
-----------------------     Director                                         March 17, 1998
Thomas M. Connelly

/s/ H.M. BUSBY
-----------------------     Director                                         March 17, 1998
H.M. Busby

/s/ THOMAS A. LANDSHOF
-----------------------     Director                                         March 17, 1998
Thomas A. Landshof     
</TABLE>









                                       21

<PAGE>   23












                                  APPENDIX

                              FINANCIAL STATEMENTS












<PAGE>   24

             INDEX TO FINANCIAL STATEMENTS -- ITEM 7 OF FORM 10-KSB

<TABLE>
<S>                                                                                        <C>
Report of Independent Accountants..........................................................F-2

Consolidated Financial Statements and Notes:

Balance Sheet as of December 31, 1997......................................................F-3

Statements of Operations for the Years Ended December 31, 1997 and 1996....................F-4

Statements of Shareholders' Equity for the Years Ended December 31, 1997 and 1996..........F-5

Statements of Cash Flows for the Years Ended December 31, 1997 and 1996....................F-6

Notes to Financial Statements..............................................................F-7
</TABLE>









                                      F-1
<PAGE>   25

                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Shareholders and Board of Directors of
Planet Polymer Technologies, Inc.

     We have audited the accompanying consolidated balance sheet of Planet
Polymer Technologies, Inc. and Subsidiary as of December 31, 1997 and the
related statements of operations, shareholders' equity and cash flows for each
of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Planet Polymer
Technologies, Inc. and Subsidiary as of December 31, 1997 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.


                                        /s/ COOPERS & LYBRAND L.L.P.

San Diego, California
February 20, 1998




                                      F-2
<PAGE>   26

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET
                                 ---------------

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
ASSETS                                                                 1997
                                                                   ------------
<S>                                                                <C>    
Current assets:
    Cash and cash equivalents                                        $ 1,516,405
     Accounts receivable, net of allowance for doubtful accounts
       of $10,000                                                        386,057
     Inventories                                                         442,433
     Prepaid expenses                                                     83,758
     Deferred income taxes                                                16,014
                                                                     ----------- 
          Total current assets                                         2,444,667

Restricted cash                                                          108,277
Property, plant and equipment, net                                       818,311
Goodwill, net                                                            576,020
Patents and other, net                                                   333,982
                                                                     -----------
          Total assets                                               $ 4,281,257
                                                                     ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued expenses                           $   203,065
     Notes payable                                                        91,962
                                                                     -----------
          Total current liabilities                                      295,027

Other liabilities                                                        389,476
Deferred income taxes                                                      9,721
                                                                     -----------
          Total liabilities                                              694,224
                                                                     -----------

Commitments and contingencies (Note 7)

Shareholders' equity:
     Preferred Stock, no par value
        Authorized shares 4,250,000
        No shares issued or outstanding                                       --
     Series A Convertible Preferred Stock, no par value 
        Authorized shares 750,000 
        Issued and outstanding 500,000                                   804,435
        Liquidation preference $2 per share
     Common Stock, no par value
        Authorized shares 20,000,000                                
        Issued and outstanding 5,300,144                              10,940,967
     Accumulated deficit                                              (8,158,369)
                                                                     -----------
          Total shareholders' equity                                   3,587,033
                                                                     -----------
          Total liabilities and shareholders' equity                 $ 4,281,257
                                                                     ===========
</TABLE>


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




                                      F-3
<PAGE>   27

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 ---------------

<TABLE>
<CAPTION>

                                                                       YEARS ENDED DECEMBER 31,
                                                                       ------------------------
                                                                         1997            1996
                                                                       --------        --------
<S>                                                                    <C>          <C>
Sales                                                                  $3,020,081   $ 3,014,382
 Cost of sales                                                          2,159,974     1,964,784
                                                                       ----------   -----------
        Gross profit                                                      860,107     1,049,598
                                                                       ----------   -----------
Operating expenses:
     General and administrative                                         1,061,147     1,899,798
     Marketing                                                            433,658     1,439,203
     Research and development, net                                        346,823       584,468
                                                                       ----------   -----------
        Total operating expenses                                        1,841,628     3,923,469
                                                                       ----------   -----------
        Loss from operations                                             (981,521)   (2,873,871)
 Other income, net                                                         36,803        96,364
                                                                       ----------   -----------
        Loss before income taxes                                         (944,718)   (2,777,507)
 Income taxes                                                              30,286        51,080
                                                                       ----------   -----------
        Net loss                                                       $ (975,004)  $(2,828,587)
                                                                       ==========   ===========
        Loss per share (Basic and Diluted)                             $    (0.18)  $     (0.54)
                                                                       ==========   ===========
        Shares used in per share computations                           5,271,635     5,260,693
                                                                       ==========   ===========
</TABLE>


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



                                      F-4
<PAGE>   28

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 ---------------

<TABLE>
<CAPTION>
                                                    SERIES A PREFERRED STOCK          COMMON STOCK     
                                                    ------------------------     ----------------------    ACCUMULATED
                                                       SHARES      AMOUNT         SHARES       AMOUNT        DEFICIT        TOTAL
                                                    ---------  -------------     ----------------------   ------------   -----------
<S>                                                 <C>        <C>              <C>         <C>           <C>            <C>
 Balance at December 31, 1995                              --      $      --     5,163,888  $ 9,700,019   $(4,341,113)   $5,358,906
 Acquisition of Deltco of Wisconsin, Inc.                                           96,775      508,069            --       508,069
 Issuance of Common Stock under incentive
    compensation plan                                                               10,606       87,500            --        87,500
 Fair market value of stock options granted to
    an outside consultant                                                               --      478,491            --       478,491
 Net loss for year                                         --             --            --           --    (2,828,587)   (2,828,587)
                                                      -------       --------    ----------  -----------   -----------    ----------
 Balance at December 31, 1996                              --             --     5,271,269   10,774,079    (7,169,700)    3,604,379
 Issuance of Common Stock under incentive
    compensation plan                                                               21,538       24,129                      24,129
 Issuance of Warrants                                                                            77,500                      77,500
 Fair market value of stock options granted to 
    non-employees                                                                                51,594                      51,594
 Issuance of Series A Convertible Preferred
    Stock, net                                        500,000        804,435                                                804,435
 Issuance of Common Stock as a dividend on
    Convertible Preferred Stock                                                      7,337       13,665       (13,665)           --
 Net loss for year                                         --             --            --           --      (975,004)     (975,004)
                                                      -------       --------    ----------  -----------   -----------    ----------
 Balance at December 31, 1997                         500,000       $804,435     5,300,144  $10,940,967   $(8,158,369)   $3,587,033
                                                      =======       ========    ==========  ===========   ===========    ==========
</TABLE>










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



                                      F-5
<PAGE>   29

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 ---------------

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                       ------------------------
                                                          1997          1996
                                                       ----------    -----------
<S>                                                    <C>           <C>         
 Cash flows from operating activities:
     Net loss                                          $ (975,004)   $(2,828,587)
     Adjustments to reconcile net loss to net cash 
       used by operating activities:
       Depreciation and amortization                      203,789        182,656
       Compensation expense -- non cash                    75,723        565,991
       Loss on disposal of assets                          23,106         79,226
       Deferred income taxes                               (6,714)        51,080
     Changes in assets and liabilities, net of 
       effects of acquisition:
       Accounts receivable                                137,329        (51,852)
       Related party receivables                          148,380       (148,380)
       Inventories                                        (72,858)       (83,497)
       Other                                              (24,410)        19,917
       Accounts payable and accrued expenses             (152,778)      (388,295)
       Other liabilities                                  (41,928)       307,770
                                                       ----------    -----------
          Net cash used by operating activities          (685,365)    (2,293,971)
                                                       ----------    -----------
 Cash flows from investing activities:
     Purchases of property and equipment                  (74,428)      (148,343)
     Proceeds from the sale of property and equipment       4,335         39,700
     Cost of patents and other                            (19,886)       (38,200)
     Acquisition of subsidiary, net of cash acquired           --       (803,945)
     Sales of investments, net                                 --      1,736,950
                                                       ----------    -----------
          Net cash (used) provided by investing
          activities                                      (89,979)       786,162
                                                       ----------    -----------
 Cash flows from financing activities:
     Proceeds from Preferred Stock                        925,000             --
     Payments for issuance costs                         (120,565)            --
     Proceeds from the issuance of warrants                77,500             --
     Payments on notes payable to related parties              --        (20,834)
     Payments on short-term borrowings                         --        (88,436)
     Payments on long-term debt                          (151,093)            --
     Restricted cash in connection with long-term
       debt                                              (108,277)            --
     Proceeds from equipment lease                         28,792             --
                                                       ----------    -----------
          Net cash provided (used) by financing
          activities                                      651,357       (109,270)
                                                       ----------    -----------
          Net decrease in cash and cash equivalents      (123,987)    (1,617,079)
 Cash and cash equivalents at beginning of period       1,640,392      3,257,471
                                                       ----------    -----------
 Cash and cash equivalents at end of period            $1,516,405    $ 1,640,392
                                                       ==========    ===========

---------------------------------------------------
 Supplemental Disclosure of Cash Flow Information:
     Cash paid during the year for --
       Interest paid                                    $  29,822    $    33,145
       Income taxes paid                                   74,825         44,800
     Non-cash financing activities --
       Stock options granted to non-employees              51,594        478,491
       Issuance of Common Stock under incentive
         compensation plan                                 24,129         87,500
       Restricted Common Stock issued in connection
         with acquisition                                      --        508,069
       Issuance of Common Stock dividend on Preferred
         Stock                                             13,665             --
</TABLE>

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



                                      F-6
<PAGE>   30

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. THE COMPANY:

     Planet Polymer Technologies, Inc. (the "Company") was incorporated in
August, 1991 in the State of California for the purpose of engaging in the
design, development, manufacture and marketing of degradable polymer and
recycled content materials which serve as an environmentally compatible
alternative to conventional plastics.

     The Company emerged from the development stage as a result of its
acquisition of Deltco of Wisconsin, Inc., a Wisconsin corporation ("Deltco"),
effective January 1, 1996. Prior to this acquisition, substantially all of the
Company's resources had been devoted to the development and commercialization of
its eight EnviroPlastic(R) technologies and products.

     Deltco was incorporated in 1984 in the State of Wisconsin. Deltco is a
manufacturer and reprocessor of thermoplastic scrap resins located in Ashland,
Wisconsin. The Company intends to continue to use Deltco's plant, equipment and
other physical property in the manner in which it was used prior to the
acquisition. In addition, the Company plans to leverage its EnviroPlastic(R)
technologies and sales and marketing expertise with Deltco's manufacturing
experience.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

     The accompanying consolidated financial statements include accounts of the
Company and its wholly-owned subsidiary, Deltco. All intercompany balances and
transactions have been eliminated in consolidation. Certain items shown in the
December 31, 1996 financial statements have been reclassified to conform with
the current period presentation.

Use of Estimates

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

Revenue Recognition

     Reprocessed thermoplastic sales revenue is recognized upon shipment of
goods to customers.

Research and Development

     Company-sponsored research and development costs related to future products
and the re-design of present products are expensed as incurred. Research and
development fees for customer research and development projects partially offset
incurred costs. These fees are recognized when services have been rendered or
products have been shipped. The components of research and development, net are
as follows:

<TABLE>
<CAPTION>
                                                       1997             1996
                                                    ---------         ---------
<S>                                                 <C>               <C>      
Research and development expenditures               $ 491,077         $ 839,737
Development fees                                     (144,254)         (255,269)
                                                    ---------         ---------
    Research and development, net                   $ 346,823         $ 584,468
                                                    =========         =========
</TABLE>

Cash and Cash Equivalents

     Cash and cash equivalents include time deposits and approximately
$1,100,000 in U.S. Treasury Bills with original maturities of three months or
less.



                                      F-7
<PAGE>   31

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Fair Value of Financial Instruments

     The carrying amount reported in the balance sheet for notes payable at
December 31, 1997 approximates fair value.

Investments

     The Company's investment portfolio was classified as available-for-sale and
carried at estimated current market value with unrealized gains or losses
reflected as a component of shareholders' equity. Market value is determined
based upon market quotations, which approximate cost. Realized gains or losses
are reflected in operations. As of December 31, 1997 the Company had no
marketable securities.

Inventories

     Inventories, which consist primarily of raw materials, are stated at the
lower of cost or market. Cost is determined using the average cost method.

Property, Plant and Equipment

     Property, plant and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives ranging from three to ten
years. When assets are sold or retired, the cost and associated accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
operations.

Goodwill

     Goodwill, representing the excess of the purchase price over the fair value
of the net assets of the acquired entity, is being amortized on a straight-line
basis over the estimated benefit period of twenty years. The allocation of the
purchase price to property and equipment, based upon appraised fair market value
is being amortized on a straight-line basis over the remaining estimated benefit
period of nine years. The carrying value of goodwill is reviewed periodically
and compared to the undiscounted future cash flows of the acquired entity. There
was no adjustment to the carrying value of goodwill resulting from these
evaluations during fiscal 1997.

Patents

     Costs incurred to obtain patents, principally legal fees, are capitalized.
The Company amortizes these costs on a straight-line basis over the estimated
benefit period, not to exceed eighteen years.

Income Taxes

     The Company accounts for income taxes using the liability method. Under
this method, deferred income taxes are recognized for the tax consequences in
future years for differences between the tax basis of assets and liabilities
("temporary differences") and their financial reporting amounts at each year end
based on enacted tax laws and statutory rates applicable to the periods in which
the temporary differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.

Stock-Based Compensation

     SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to account
for stock-based compensation using the intrinsic value method under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.




                                      F-8
<PAGE>   32

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Per Share Information

     Loss per share is computed using the weighted average number of common
shares and dilutive common stock equivalents. The Company adopted the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") effective December 31, 1997. SFAS 128 requires the presentation of
basic and diluted earnings per share. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of the incremental common shares
issuable upon conversion of convertible preferred stock (using the "if
converted" method) and exercise of stock options and warrants for all periods.
All prior period earnings per share amounts have been restated to comply with
the SFAS 128.

     The Company reported net losses for the periods ended December 31, 1997 and
1996. As a result, the Common Stock equivalents at December 31, 1997 and 1996 of
1,569,886 and 816,047, respectively, were determined to be antidilutive.
Therefore, there was no difference between the weighted average number of shares
used to calculate basic and diluted EPS for the periods ended December 31, 1997
and 1996.

Recent Accounting Pronouncements

     During 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS 130"), and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). These accounting standards are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes new standards for reporting and
displaying comprehensive income and its components. SFAS 131 requires disclosure
of certain information regarding operating segments, products and services,
geographic areas of operation and major customers. The adoption of these
Statements is expected to have no material impact on the Company's consolidated
financial statements.


3. ACQUISITION:

     Effective January 1, 1996, the Company acquired all the outstanding capital
stock of Deltco, a Wisconsin corporation, from the sole stockholder of Deltco
pursuant to the terms of a Purchase and Sale Agreement dated as of January 1,
1996 (the "Agreement"). This transaction was accounted for as a purchase.

     Pursuant to the Agreement, the Company paid the sole stockholder of Deltco
$1,125,000 and issued 96,775 shares of restricted Common Stock of the Company
valued at approximately $508,000 based on a discounted stock price at January 4,
1996, the date of the transaction announcement. The Agreement also specified
target net worth and cash balances at the date of transaction. The excess net
worth of approximately $36,000, reduced by $24,000 due from the seller, brought
the total purchase price to approximately $1,646,000. The Company paid the cash
portion of the purchase price out of its available cash reserves. The stock
portion of the purchase price was paid with newly issued shares of the Company's
Common Stock, which were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended. The purchase price was
first allocated to the tangible assets (which included approximately $334,000 of
cash) and liabilities based on fair market value at the purchase date and to the
appraised fair market value of property and equipment. The remaining amount,
approximately $617,000 and $307,631, respectively, was recorded as goodwill,
which is being amortized over 20 years and its remaining estimated period of
benefit of 9 years.

     As a result of the Deltco acquisition, the Company was no longer considered
a development stage company.



                                      F-9
<PAGE>   33

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   CONCENTRATIONS OF CREDIT RISKS:

     Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents.
The Company invests its excess cash in interest bearing deposits with major
banks, United States government securities and money market funds. At times the
Company's cash balances may be in excess of FDIC insurance limits.

     The Company purchases 87% of its thermoplastic scrap resins from one
supplier and its affiliates. The Company has executed a formal agreement with
the supplier. The Company has had a long-term relationship with this supplier
and has obtained adequate quantities of raw materials on acceptable terms to
meet its requirements. However, there can be no assurance that the quality and
quantity of raw materials from this supplier will be adequate to meet future
operating needs. Management believes that other suppliers could provide similar
scrap resins on comparable terms. A change in suppliers, however, could cause
delays in production and possible loss of sales, which could adversely affect
operating results.

     During the fiscal year 1997, 33% of the Company's revenues were from three
customers. At December 31, 1997, accounts receivable included balances from
these three customers which represented approximately 15%.


5.   INVENTORIES:

     Inventories at December 31, 1997 consist of the following:

<TABLE>
<S>                                              <C>     
                     Raw materials               $191,521
                     Finished goods               241,727
                     Supplies                      30,185
                                                 --------
                                                  463,433
                     Allowance                    (21,000)
                                                 --------
                                                 $442,433
                                                 ========
</TABLE>


6.   PROPERTY, PLANT AND EQUIPMENT:

     Property, plant and equipment is comprised of the following at December 31,
1997:

<TABLE>
<S>                                            <C>       
                   Machinery and equipment     $1,430,651
                   Building and improvements      171,566
                   Furniture and fixtures          34,858
                   Vehicles and trailers           40,764
                                               ----------
                                                1,677,839
                   Less accumulated
                     depreciation                (859,528)
                                               ----------
                                               $  818,311
                                               ==========
</TABLE>

     Depreciation expense charged to operations in 1997 and 1996 was $151,473
and $122,442, respectively.



                                      F-10
<PAGE>   34

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   COMMITMENTS AND LEASES:

     The Company has entered into several agreements to lease certain equipment
and office space. These leases, with terms ranging from 2 to 5 years, provide
for certain early cancellation rights, as well as renewal and purchase options.

     Future minimum payments under noncancelable leases are as follows:

<TABLE>
<CAPTION>
                                                Capital    Operating
                                                Leases       Leases
                                               --------    ---------
 <S>            <C>                            <C>         <C>        
                1998                           $ 10,116    $ 175,102  
                1999                             10,116       57,344  
                2000                             10,116       24,145  
                2001                             10,116       23,772  
                2002                              8,151       23,772  
                Thereafter                           --           --
                                               --------    ---------
 Total minimum lease payments                    48,615    $ 304,135  
 Less: Interest                                 (14,705)   =========  
                                               --------
 Present value of net minimum                  
     lease payments                              33,910
 Less: Current portion of capital             
     lease obligations (included in
     accounts payable and accrued
     expenses)                                   (5,118)
                                               --------
 Long-term capital obligations                 
     (included in long-term debt)              $ 28,792
                                               ========
</TABLE>


     Rent expense charged to operations in 1997 and 1996 was $188,690 and
$178,009, respectively.


8.   LOAN PAYABLE:

     As of December 31, 1997 the Company has borrowed $181,686 from First Star
of Manitowac. Principal and interest are payable in monthly installments of
$8,289. Aggregate annual principal payments are $86,844 and $94,842 for the
fiscal years ending 1998 and 1999, respectively. The loan bears interest at
8.75% and is collaterized by a $108,277 certificate of deposit, bearing interest
rate at 5.92%, and substantially all Deltco's inventory.




                                      F-11
<PAGE>   35

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. INCOME TAXES:

     The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                1997          1996
                                ----          ----
<S>                         <C>            <C>    
 Federal
     Current                $     --       $ 7,515
     Deferred                     --            --
 State
     Current                  37,000        58,636
     Deferred                 (6,714)      (15,071)
                            --------      --------
     Total                  $ 30,286       $51,080
                            ========       =======
</TABLE>


     The differences between income taxes provided at the Company's effective
rate and the federal statutory rate are as follows:

<TABLE>
<CAPTION>
                                           1997          1996
                                          ------        -----
<S>                                    <C>          <C>       
Federal benefit at statutory rate      $(331,501)   $(944,352)
State taxes, net of federal
  benefit                                 19,989        28,753
Nondeductible expenses                    15,388        23,902
Other                                         --         7,515
Net operating losses not utilized        326,410       935,262
                                       ---------    ----------
     Total                             $  30,286    $   51,080
                                       =========    ==========
</TABLE>


     Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

     Significant components of the Company's deferred tax assets and liabilities
at December 31, 1997 are as follows:


<TABLE>
<CAPTION>
                                                       1997     
                                                    ----------- 
<S>                                                 <C>         
 Net operating loss carryforward                    $ 2,754,394 
 Tax credit carryforward                                 36,735 
 Reserve, accrued expenses and other                    402,559 
 Property, plant and equipment and intangible
    assets                                             (177,800)
                                                    ----------- 
     Deferred tax asset                               3,015,888 
 Less, valuation allowance                           (3,009,595)
                                                    ----------- 
     Net deferred tax asset                         $     6,293 
                                                    =========== 
</TABLE>


     Management has determined that a full valuation allowance for Federal and
California is necessary due to the Company's lack of historical earnings. The
net deferred tax asset relates to Wisconsin state income taxes where Deltco has
historically generated income.

     At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $7,087,000 and for California
franchise tax purposes of approximately $3,900,000. The difference in the
California net operating loss carryforward is primarily due to the limitation on
loss carryforwards provided by California law. California loss carryforwards
began to expire in 1997 and federal loss carryforwards begin to expire in 2006.
Annual utilization of loss carryforwards may be limited due to an ownership
change as defined in the Internal Revenue Code.



                                      F-12
<PAGE>   36

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.   SHAREHOLDERS' EQUITY:

Preferred Stock

     On September 24, 1997 the Company issued to one investor (the "Investor")
500,000 shares of its Series A Convertible Preferred Stock ("Series A
Preferred") at $1.85 per share. The holder of the Series A Preferred is entitled
to receive quarterly dividends at an annual rate of 6% payable in shares of the
Company's Common Stock. Each share of Series A Preferred is convertible at the
option of the holder into shares of Common Stock of the Company. The conversion
rate of the Series A Preferred into shares of the Company's Common Stock is
one-to-one. However, the Series A Preferred automatically converts if, at any
time after March 24, 1998, the average market price of the Company's Common
Stock for a certain number of consecutive days is $6.00 or above. At the option
of the Company, the Series A Preferred can be redeemed at any time after
September 24, 1998 if the average market price of the Company's Common Stock for
a certain number of consecutive days is $5.00 or above. The voting rights of
Series A Preferred do not differ from those associated with the Company's Common
Stock. Upon liquidation or dissolution of the Company, the Series A Preferred
has a liquidation preference of $2.00 per share. All per share rights and
benefits are subject to adjustment upon the occurrence of certain events.

Common Stock

     Pursuant to the Deltco Purchase Agreement, the Company issued 96,775 shares
of restricted Common Stock valued at approximately $508,000 based on a
discounted stock price at January 4, 1996, the date of the transaction
announcement. In addition, the Company issued 10,606 shares of Common Stock as
incentive compensation for 1996, and will issue 21,538 shares of Common Stock as
incentive compensation for 1997.

     On December 15, 1997 the Company issued to the Investor of the Series A
Preferred a dividend of 7,337 shares of Common Stock valued at approximately
$13,665.

Warrants

     On September 24, 1997, the Company issued to the Investor of the Series A
Preferred, for $75,000, a warrant to purchase up to 375,000 shares of the
Company's Common Stock. In addition, as partial consideration for services
rendered in connection with the issuance of the Series A Preferred and the
Warrant to the Investor, the Company issued to the finder, for $2,500, a five
year warrant to purchase up to 50,000 shares of the Company's Common Stock.

     At December 31, 1997, the following warrants were outstanding:

<TABLE>
<CAPTION>
                             Number of     Number of
                              Warrants       Shares      Exercise Price     Expiration Date
                             ---------     ---------     --------------     ---------------
<S>                            <C>           <C>         <C>                <C>        
Advisor warrants               47,153        47,153      $3.00 - $3.875       2000 - 2003
Underwriter warrants          115,000       115,000           $7.20              2000
Investor warrants             375,000       375,000           $2.75              2002
Other warrants                 50,000        50,000           $4.16              2002
</TABLE>


Options

     The Company has one stock-based compensation plan, which is described
below. In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" and is effective for periods
beginning after December 15, 1995. SFAS No. 123 requires that companies either
recognize compensation expense for grants of stock, stock options, and other
equity instruments based upon their fair value, or provide pro forma disclosure
of net income and earnings per share had the Company adopted the fair value
method, in the notes to the financial statements. The Company adopted the
disclosure provisions of SFAS No. 123 in 1996 and has applied APB Opinion No. 25
and related Interpretations in accounting for stock option issuances to 



                                      F-13
<PAGE>   37

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. SHAREHOLDERS' EQUITY: (CONTINUED)

employees and directors under its plan. The Company issued stock options to its
employees and directors with exercise prices equal to the market value of the
Company's Common Stock at the date of grant. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates as calculated in accordance with SFAS No. 123, the Company's
net loss and loss per share for the years ended December 31, 1997 and 1996 would
have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                      1997                           1996
                          --------------------------------------------------------
                                            Loss per                      Loss per
                             Net Loss        Share         Net Loss        Share
                          --------------------------------------------------------
<S>                          <C>            <C>            <C>            <C>     
As Reported                  $975,004       $    0.18      $2,828,587     $   0.54
Pro forma                    $995,259       $    0.19      $4,204,271     $   0.80
</TABLE>


     The effects of applying SFAS No. 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net loss or income for
future years. SFAS No. 123 does not apply to awards prior to 1995 and additional
awards in future years are anticipated.

     The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997 and 1996: an expected life of 2.1 and 4.0 years, expected
volatility of 65.48% and 65.72%, no dividend yield and a risk-free interest rate
of 5.75% and 5.31%, respectively, represented by the interest rate on U.S. Zero
Coupon Bonds with a term of maturity equal to the option's expected time to
exercise on the dates of grant.

     On January 31, 1996, the Company's Board of Directors granted non-statutory
stock options to purchase 66,137 shares of Common Stock at an exercise price of
$6.00 per share and 27,863 shares of Common Stock at an exercise price of $5.10
per share to an outside consultant of the Company. These options were fully
vested as of the date of the grant and expire on January 30, 2004. In connection
with this transaction, the Company recorded a charge to income of approximately
$478,000 based on the Black-Scholes option-pricing model. As of December 31,
1997, none of these options have been exercised.

     On January 31, 1996, the Company's Board of Directors granted non-statutory
stock options to purchase an aggregate of 70,620 shares of Common Stock at an
exercise price of $8.125 per share to directors and employees under the 1995
Stock Option Plan. These options were fully vested as of the date of the grant
and expire on January 30, 2004. As of December 31, 1997, none of these options
have been exercised.

     On January 31, 1996, the Company's Board of Directors granted non-statutory
stock options to purchase an aggregate of 242,000 shares of Common Stock at an
exercise price of $8.938 per share to directors and employees under the 1995
Stock Option Plan. These options were fully vested as of the date of the grant
and expire on January 30, 2001. As of December 31, 1997, these options were
cancelled and reissued as described below.

     On February 1, 1996, the Company's Board of Directors granted incentive
stock options to purchase 5,000 shares of Common Stock at an exercise price of
$8.125 per share to employees under the 1995 Stock Option Plan. These options
vest one year from the grant date and expire on October 22, 2005. As of December
31, 1997, none of these options have been exercised.

     On April 11, 1997, the Company's Board of Directors granted incentive stock
options to purchase 10,000 shares of Common Stock at an exercise price of $2.50
per share to employees under the 1995 Stock Option Plan. These options were
fully vested as of the date of the grant and expire on April 10, 2007. As of
December 31, 1997, none of these options have been exercised.




                                      F-14
<PAGE>   38

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. SHAREHOLDERS' EQUITY: (CONTINUED)

     On May 22, 1997, the Company's Board of Directors granted non-statutory
stock options to purchase 10,000 shares of Common Stock at an exercise price of
$3.00 per share to an outside consultant of the Company. These options vest
monthly over one-year and expire on May 22, 2007. In connection with this
transaction, the Company recorded a charge to income, of approximately $8,367,
based on the Black-Scholes option pricing model. As of December 31, 1997, none
of these options have been exercised.

     On September 26, 1997, the Company's Board of Directors granted
non-statutory stock options to purchase an aggregate of 9,600 shares of Common
Stock at an exercise of $4.125 per share to directors under the 1995 Stock
Option Plan. These options vest monthly over eight months and expire on
September 25, 2007. As of December 31, 1997, none of these options have been
exercised.

     On October 30, 1997, the Company's Board of Directors cancelled previously
issued, fully vested, non-statutory stock options to purchase an aggregate of
242,000 shares of Common Stock at an exercise price of $8.938 per share under
the Stock Option Plan. Upon cancellation the Company's Board of Directors
reissued non-statutory stock options to purchase an aggregate of 101,239 shares
of Common Stock under the 1995 Stock Option Plan to the original recipients of
the stock options. The terms of reissued stock options include annual vesting
over two years, an exercise price equal to 110% of the fair market value of the
stock at the date of reissuance or $3.025 per share and expire on October 29,
2002. In connection with this transaction, the Company recorded a charge to
income, of approximately $43,227, based on the Black-Scholes option pricing
model. As of December 31, 1997, none of these options have been exercised.

     During 1997, previously granted incentive stock options to purchase 60,000
shares of Common Stock were terminated in accordance with their terms.

<TABLE>
<CAPTION>
                                            1995 Stock Option Plan              Other Options
                                           --------------------------    --------------------------
                                                          Weighted                        Weighted
                                                            Avg.                            Avg.
                                           Number of      Exercise         Number of      Exercise
                                            Shares         Price            Shares         Price
                                           ---------      --------        ----------      --------
<S>                                        <C>            <C>             <C>             <C>
Outstanding at December 31, 1995             125,000      $  3.875           132,274      $  3.780
     Granted/reissued                        317,620         8.744            94,000         5.733
     Exercised                                    --            --                --            --
     Forfeited/Expired                       (15,000)       (5.292)               --            --
     Cancelled                                    --            --                --            --
                                             -------      --------           -------      --------  
 Outstanding at December 31, 1996            427,620         7.442           226,274         4.591
     Granted/reissued                        130,839         3.064                --            --
     Exercised                                    --            --                --            --
     Forfeited/Expired                       (60,000)       (3.875)               --            --
     Cancelled                              (242,000)       (8.938)               --            --
                                             -------      --------           -------      ---------   
 Outstanding at December 31, 1997            256,459      $  4.631           226,274      $  4.591
                                             =======      ========           =======      ========    
</TABLE>


     The 1995 Stock Option Plan options exercisable at December 31, 1997 and
1996 were 371,327 and 653,894, respectively, to which the weighted average
remaining contractual lives were 6 and 8 years, respectively as of December 31,
1997. The weighted average fair value of options granted and outstanding during
fiscal years 1997 and 1996 was $1.07 and $4.40, respectively.



                                      F-15
<PAGE>   39

                PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11. RELATED PARTY TRANSACTIONS:

   During 1997 and 1996, the following amounts were recorded in connection with
transactions with related parties:

<TABLE>
<CAPTION>
                                                                    1997        1996
                                                                  -------     --------
<S>                                                               <C>         <C>     
Consulting fees to a shareholder and director of the Company      $46,750     $241,819
Fees to an accounting firm in which an officer of the
  Company is a partner                                                 --        1,497
Consulting fees paid to the Company's President                        --       50,000
Consulting fees and expenses paid to a relative of a former
  director and shareholder of the Company                          20,255       94,013
Rents paid                                                        113,772      113,772
Sales to a company in which the President of Deltco is a
  shareholder                                                      11,072       38,679
Directors fees                                                     32,000       46,000
</TABLE>


     During 1991, the Company entered into a license agreement with an officer
and principal shareholder of the Company, Dr. Petcavich, to acquire exclusive
rights to the EnviroPlastic(R) Design Blend invention in exchange for 2,360,317
shares of Common Stock. Under the terms of the agreement, the Company was
required to pay a royalty of 2% of net sales made by the Company of products
based on the patent rights if the patent is obtained plus 1/2 of 1% of
production sales licensed under trademarks.

     In May 1995, the Company and Dr. Petcavich entered into an agreement
whereby Dr. Petcavich assigned to the Company all of his rights in all
technology and trademarks related to the Company's business in exchange for
$200,000, which was paid in fiscal 1996, and the termination of the license
agreement discussed above.

     During fiscal 1993, the Company retained the services of a consultant who
is now a significant shareholder and was a member of the Board of Directors
until April 1997. In January 1996, the Company formalized this consulting
relationship and entered into a three year consulting agreement. The services
furnished under the terms of this agreement included organizational development,
strategic marketing, and general management of the Company. This agreement
provided that the Company would reimburse the consultant for certain business
expenses inclusive of travel and entertainment costs. Reimbursable expenses in
the amount of $24,746 and $120,800 were paid in fiscal 1997 and 1996,
respectively in connection with this consulting agreement. This agreement
provided for severance payments if the relationship is terminated without cause
during the term of the agreement. As allowed by its provisions, the consultant
terminated the agreement in April 1997.

     In May 1997, prior to his appointment to the Company's Board of Directors,
the Company and Mr. Connelly entered into a one-year general business consulting
agreement whereby Mr. Connelly received an option to purchase 10,000 shares of
the Company's Common Stock to render consulting services to the Company.

     The Company leases primarily all of Deltco's operating facilities from the
brother of Deltco's president and from a partnership owned 50% by Deltco's
president. These leases expire in 2003 and 1998, respectively, and each provides
for an automatic 10 year extension with substantially the same terms. Both
agreements have been accounted for as operating leases.

12. EMPLOYMENT AGREEMENTS:

     Effective January 1, 1996, the Company entered into a three-year employment
agreement with Dr. Petcavich. This agreement provides for severance payments to
Dr. Petcavich if terminated without cause during the term of employment. In
October 1997, this agreement was amended to increase Dr. Petcavich's salary.



                                      F-16
<PAGE>   40

                       PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. EMPLOYMENT AGREEMENTS: (CONTINUED)

     Effective January 1, 1996, pursuant to the Deltco Purchase and Sale
Agreement, the Company entered into a three year employment agreement with the
President of Deltco which includes two, one-year renewal options. The agreement
provides for severance payments if he is terminated without cause during the
term of the agreement. The agreement also provides a two-year incentive
compensation package, based on performance criteria, for each of the years ended
December 31, 1996 and 1997. The incentive compensation is reflected in the
financial statements.









                                      F-17