OPHIDIAN PHARMACEUTICALS INC, S-1/A, 1998-02-17

OPHIDIAN PHARMACEUTICALS INC
S-1/A, 1998-02-17
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998

REGISTRATION NO. 333-33219
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 6

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

OPHIDIAN PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)

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

<TABLE>
<C> <C> <C>
WISCONSIN 8731 39-1661164
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>

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

5445 EAST CHERYL PARKWAY
MADISON, WISCONSIN 53711
608/271-0878
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

------------------------
DOUGLAS C. STAFFORD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5445 EAST CHERYL PARKWAY
MADISON, WISCONSIN 53711
608/271-0878
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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

Copies to:

<TABLE>
<C> <C>
MICHAEL E. SKINDRUD, ESQ. LAWRENCE B. FISHER, ESQ.
LAFOLLETTE & SINYKIN ORRICK, HERRINGTON & SUTCLIFFE LLP
ONE EAST MAIN STREET 666 FIFTH AVENUE
MADISON, WISCONSIN 53703 NEW YORK, NEW YORK 10103
608/257-3911 212/506-5000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998

PROSPECTUS
OPHIDIAN
PHARMACEUTICALS, INC.

2,500,000 UNITS

EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT

Ophidian Pharmaceuticals, Inc. ("Ophidian" or the "Company") hereby offers
(the "Offering") 2,500,000 Units (the "Units"), each Unit consisting of one
share of common stock, $.0025 par value (the "Shares" or "Common Stock") and one
redeemable common stock purchase warrant (the "Warrants"). The Units, Shares and
Warrants are sometimes hereinafter collectively referred to as the "Securities."
The Shares and Warrants comprising the Units are detachable and will trade
separately 90 days after issuance, subject to earlier separability in the
discretion of National Securities Corporation, the representative of the several
Underwriters (the "Representative"), and the Company, based upon factors that
include the stability and trading volume of the Units. Each Warrant entitles the
registered holder thereof to purchase one Share of Common Stock at an exercise
price of $ per Share [120% of the initial public offering price per
Unit], subject to adjustment, at any time during the period commencing on
, 1999 [twelve months from the date of the Prospectus] until
, 2003 [5 years after the date of this Prospectus]. Commencing
, 2000 [24 months from the date of the Prospectus], the Warrants are
subject to redemption by the Company, in whole but not in part, at $.10 per
Warrant on 30 days' prior written notice provided that the average closing bid
price of the Common Stock as reported on the American Stock Exchange ("AMEX")
equals or exceeds $ per share [240% of the initial public offering price
per Unit] for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
See "Description of Securities -- Warrants."

Prior to the Offering, there has been no public market for the Units, the
Common Stock or the Warrants, and there can be no assurance that such a market
will develop after completion of the Offering, or if developed, that it will be
sustained. It is currently anticipated that the public offering price will be
$6.10 per Unit. For information regarding the factors considered in determining
the initial public offering price of the Units and the terms of the Warrants,
see "Risk Factors" and "Underwriting." It is anticipated that the Units, Shares
and Warrants will be included for quotation on the AMEX under the symbols OPD.U,
OPD and OPD.WS, respectively. The Company and the Representative may jointly
determine, based upon market conditions including trading volume of the Units,
to delist the Units upon expiration of a 30-day period commencing on the date of
this Prospectus and subsequent to the separation of the Units into Shares and
Warrants which will trade separately thereafter.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO THE PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Per Unit.................................... $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
=======================================================================================================================
</TABLE>

(1) Does not include additional compensation to the Representative in the form
of a non-accountable expense allowance. In addition, see "Underwriting" for
information concerning indemnification and contribution arrangements with
the Underwriters and other compensation payable to the Representative.
(2) Before deducting estimated expenses of $350,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Representative an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an aggregate of
375,000 additional Units upon the same terms and conditions as set forth
above, solely to cover over-allotments, if any (the "Over-Allotment
Option"). If such Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Company will be
$ $ and $ respectively. See "Underwriting."

The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment therefor
at the offices of National Securities Corporation, Seattle, Washington on or
about , 1998.

NATIONAL SECURITIES CORPORATION

The date of this Prospectus is , 1998
<PAGE> 3

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK OR THE WARRANTS, INCLUDING PURCHASES OF THE UNITS, COMMON STOCK AND/OR
WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE UNITS,
COMMON STOCK AND/OR WARRANTS TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED
BY THE UNDERWRITERS IN THE UNITS, COMMON STOCK AND/OR WARRANTS, RESPECTIVELY,
AND THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

THE COMPANY INTENDS TO FURNISH ITS SHAREHOLDERS ANNUAL REPORTS CONTAINING
FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
QUARTERLY REPORTS CONTAINING UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE
FIRST THREE QUARTERS OF EACH FISCAL YEAR.

2
<PAGE> 4

PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements. Such forward-looking
statements include, but are not limited to, the Company's expectations regarding
its future financial condition and operating results, product development,
business and growth strategy, market conditions and competitive environment. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus. The following
summary is qualified in its entirety by the more detailed information and the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus (i) assumes the
Underwriter's Over-Allotment Option is not exercised, and (ii) assumes the
Warrants and the warrants to purchase 250,000 Units issued to the Representative
in connection with this Offering (the "Representative's Warrants") are not
exercised.

THE COMPANY

Ophidian Pharmaceuticals, Inc. ("Ophidian" or the "Company"), a development
stage company, is engaged in the research and development of pharmaceuticals
with an emphasis on products for infectious diseases. Under a collaboration with
Eli Lilly and Company ("Lilly"), the Company is developing a product for the
treatment of Clostridium difficile-associated disease ("CDAD"). CDAD is a
bacterial infection that has become a common side effect of antibiotic therapy.
The CDAD product is a result of the Company's strategy to design new drugs for
infectious diseases by targeting molecules involved in the host-pathogen
interaction.

Ophidian signed a collaborative development and license agreement and a
stock purchase agreement with Lilly in June 1996 ("Lilly Agreements"). Under the
Lilly Agreements, Ophidian has received $4.4 million in equity investments and
development milestone payments. Lilly will pay the Company an additional $8.0
million if certain CDAD product development objectives are met and Lilly chooses
to proceed with development. The Lilly Agreements provide for Lilly to fund and
conduct clinical testing, registration and marketing of the CDAD product
worldwide and Ophidian to manufacture bulk drug for clinical and commercial use.
The CDAD product is a passive antibody formulation that neutralizes
disease-causing toxins secreted by C. difficile during infection of the human
intestinal tract. These toxins are responsible for the development of diarrhea,
inflammation and symptoms of colitis caused by the C. difficile organism. CDAD
is a common side effect of treatment with certain broad spectrum antibiotics.
Based on surveys and research, the Company estimates that CDAD arises in
approximately one percent of all hospitalized patients. An Investigational New
Drug application ("IND") was filed with the United States Food and Drug
Administration ("FDA") for initial human clinical testing of the CDAD drug in
November of 1997. The Company anticipates that several years of clinical testing
will be required prior to FDA marketing approval.

The Company is also developing a drug to prevent disease caused by
enterohemorrhagic Escherichia coli, ("EHEC"), including E. coli O157:H7.
Ophidian has received research funding of $816,000 from the U.S. National
Institutes of Health ("NIH") for this program. The public health problem of EHEC
became widely recognized following outbreaks in the U.S. and Japan that
afflicted thousands of persons as a result of contaminated food products,
including ground beef. The Company has shown in animals that the injection of
its passive antibodies that neutralize EHEC toxins can block progression of
lethal disease symptoms. The Company is conducting pre-clinical development of
its EHEC passive antibodies as a potential human therapeutic.

Ophidian has devised a drug formulation and manufacturing technology for
the production of avian polyclonal antibodies for passive immune therapy. The
Company believes avian antibodies will be generally safe when administered
orally because they are derived from hen eggs that are common in the human diet.
Ophidian intends to manufacture and sell bulk drugs based on its avian antibody
technology to its commercial partners for final formulation and marketing of
drug products.

3
<PAGE> 5

and the emergence of new infectious agents have created a significant need for
new approaches for the treatment of infectious diseases. In addition,
broad-spectrum antibiotics can be detrimental to the patient because beneficial
microbes are often killed along with the disease-causing pathogen. The Company's
research strategy is to develop infectious disease drugs that target molecules
involved in specific host-pathogen interactions. In contrast to typical
antibiotics, the Company's products are designed to leave beneficial microbes
undisturbed, support the action of the host's immune system, and reduce the
potential for the development of microbial resistance. The Company has 57 United
States or foreign patents, issued or pending, from its research and development
programs and has acquired rights to several external patents to supplement its
technology.

The Company's business strategy is to create commercial opportunities from
its technologies by manufacturing proprietary antibody pharmaceuticals,
establishing royalty-bearing licenses for the sale of its proprietary products
with marketing partners, licensing technology to pharmaceutical firms, and
forming sponsored research agreements.

Ophidian was incorporated in the State of Wisconsin in November 1989 and
commenced business operations in August 1990. The Company's principal offices
and laboratories are located at 5445 East Cheryl Parkway, Madison, Wisconsin,
53711, and its telephone number is (608) 271-0878.

4
<PAGE> 6

THE OFFERING

Securities offered........... 2,500,000 Units, each unit consisting of one
share of Common Stock and one Warrant. The
Shares of Common Stock and Warrants will be
detachable 90 days after issuance, subject to
earlier separability in the discretion of the
Representative and the Company.

Terms of Warrants............ Each Warrant entitles the registered holder
thereof to purchase, at any time commencing
, 1999 [one year after the date of
this Prospectus], until , 2003
[five years after the date of this Prospectus],
one Share of Common Stock at a price of
$ per Share [120% of the initial
public offering price per Unit]. Commencing
, 2000 [24 months after the date of
this Prospectus], the Warrants are subject to
redemption by the Company, in whole, but not in
part, at $.10 per Warrant provided that the
average closing bid price of the Common Stock
as reported on the AMEX equals or exceeds
$ per share [240% of the initial
public offering price per Unit] for any 20
trading days within a period of 30 consecutive
trading days ending on the fifth trading day
prior to the date of the notice of redemption.
See "Description of Securities."

Common Stock Outstanding
Prior to the Offering(1)... 7,289,930 shares

Securities to be Outstanding
After
the Offering(1).......... 9,789,930 shares of Common Stock and 2,500,000
Warrants.

Use of Proceeds.............. For technology development/new product discovery,
product development expenses, capital
expenditures, working capital and general
corporate purposes. See "Use of Proceeds."

Risk Factors and Dilution.... An investment in the securities offered hereby
involves a high degree of risk and immediate
and substantial dilution to the purchasers in
this Offering. See "Risk Factors" and
"Dilution."

Proposed AMEX Symbols(2):
Units.................... OPD.U

Common Stock............ OPD

Warrants................ OPD.WS
- ---------------

(1) Excludes (i) 646,608 shares of Common Stock issuable upon the exercise of
outstanding stock options as of February 13, 1998, under the 1990 Incentive
Stock Option Plan and the 1992 Employee Stock Option Plan (collectively, the
"1990/1992 Stock Option Plans") at a weighted average exercise price of
$2.74 per share, leaving a balance of 5,296 shares of Common Stock reserved
for future grants of options under the 1990/1992 Stock Options Plans, (ii)
Fitchburg Research Park Associates' warrant to purchase up to 114,290 shares
at an exercise price of $.0025 per share, (iii) a consultant's option to
purchase 100,000 shares at an exercise price of $4.50 per share, and (iv)
options to purchase a maximum of 90,000 shares of Common Stock to be granted
to six employees and three outside directors.

(2) Application has been made for listing of the Units, Common Stock and the
Warrants on AMEX.

5
<PAGE> 7

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1996 1997
---------- ---------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $1,746,596 $1,017,627 $ 386,979 $ 321,444 $ 671,881 $ 393,361 $ 115,185
Operating expenses:
Research and development........ 842,000 1,156,428 1,215,366 1,339,048 2,432,102 428,998 666,632
General and administrative...... 404,709 753,549 916,294 1,119,409 1,005,797 256,151 355,100
---------- ---------- ----------- ----------- ----------- --------- ----------
Total operating expenses........ 1,246,709 1,909,977 2,131,660 2,458,457 3,437,899 685,149 1,021,732
---------- ---------- ----------- ----------- ----------- --------- ----------
Income (loss) from operations... 499,887 (892,350) (1,744,681) (2,137,013) (2,766,018) (291,788) (906,547)
Investment income, net........... 106,576 191,040 144,750 50,761 281,483 75,864 46,102
Interest expense................. -- (4,082) (4,624) (3,320) (2,800) (718) (724)
Other............................ -- 97 668 -- -- -- --
---------- ---------- ----------- ----------- ----------- --------- ----------
Net earnings (loss)............. $ 606,463 $ (705,295) $(1,603,887) $(2,089,572) $(2,487,335) $(216,642) $ (861,169)
========== ========== =========== =========== =========== ========= ==========
Net earnings (loss) per
share(1)...................... $ $ $ $
Basic......................... $0.11 $(0.12) $(0.26) $(0.34) $(0.34) $(0.03) $(0.12)
Diluted....................... $0.11 $(0.12) $(0.26) $(0.34) $(0.34) $(0.03) $(0.12)
Shares used to compute net
earnings (loss) per
share(1)......................
Basic......................... 5,334,283 6,086,065 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464
Diluted....................... 5,674,121 6,086,065 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464

INCEPTION
(NOV. 11, 1989) TO
DECEMBER 31, 1997
-------------------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $ 4,388,327
Operating expenses:
Research and development........ 8,306,647
General and administrative...... 5,070,359
-----------
Total operating expenses........ 13,377,006
-----------
Income (loss) from operations... (8,988,679)
Investment income, net........... 865,822
Interest expense................. (38,710)
Other............................ 765
-----------
Net earnings (loss)............. $(8,160,802)
===========
Net earnings (loss) per
share(1)......................
Basic.........................
Diluted.......................
Shares used to compute net
earnings (loss) per
share(1)......................
Basic.........................
Diluted.......................
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
SEPTEMBER 30, -------------------------
----------------------------------------------------------------- AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(2)
---------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $5,100,728 $ 2,507,268 $ 1,319,826 $ 3,328,103 $3,812,539 $ 2,725,172 $16,023,172
Total assets..................... 5,856,184 4,917,996 3,408,129 5,247,761 5,975,606 5,116,176 18,414,176
Deficit accumulated during
development stage.............. (413,544) (1,118,839) (2,722,726) (4,812,298) (7,299,633) (8,160,802) (8,160,802)
Total shareholders' equity....... 5,500,501 4,680,233 3,156,544 4,743,260 5,397,956 4,544,458 17,842,458
</TABLE>

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

(1) See Note 1 of Notes to Financial Statements "Net Loss Per Share" for a
description of the shares used in calculating net earnings (loss) per share.

(2) As adjusted to give effect to the estimated net proceeds from the sale of
2,500,000 Units offered by the Company at an assumed initial public offering
price of $6.10 per Unit. See "Use of Proceeds."

6
<PAGE> 8

RISK FACTORS

An investment in the Securities offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Securities offered hereby. Prospective
investors should be in a position to risk the loss of their entire investment.
This Prospectus contains forward-looking statements. Such forward-looking
statements include, but are not limited to, the Company's expectations regarding
its future financial condition and operating results, product development,
business and growth strategy, market conditions and competitive environment. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
in the following risk factors and elsewhere in this Prospectus.

DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY; NO PRODUCT REVENUES AND NO
ASSURANCE OF PROFITABILITY

The Company is in the development stage and is subject to all business
risks associated with a new enterprise, including uncertainties regarding
product development, constraints on the Company's financial and personnel
resources, and dependence on and need for third party relationships. At December
31, 1997, the Company had an accumulated deficit of $8,160,802. For the three
months ended December 31, 1997, the Company had a net loss of $861,169. The
Company anticipates that it will continue to incur substantial additional
operating losses for at least the next several years and expects cumulative
losses to increase as the Company's research and development efforts expand. The
Company has a limited history of operations consisting primarily of development
of its products and contract research. While the Company has generated revenues
primarily from contract fees and research grants of $4,388,327 since its
inception through December 31, 1997, it has not generated any revenue to date
from pharmaceutical product sales, and there can be no assurance as to when or
whether it will be able to develop such sources of revenue or that its
operations will become profitable, even if it is able to commercialize any
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

NEED FOR SUBSTANTIAL ADDITIONAL FUNDS

The Company's operations to date have consumed substantial and increasing
amounts of cash. The negative cash flow from operations is expected to continue
and to accelerate in the foreseeable future. The Company will require
substantial funds of its own, or from third parties, to conduct research and
development, pre-clinical and clinical testing and to manufacture (or have
manufactured) and market (or have marketed) its product candidates. The Company
estimates that its current cash resources and the net proceeds of the Offering
will be sufficient to meet its operating and capital requirements for at least
12 months following the closing of the Offering. However, the Company's cash
requirements may vary materially from those now planned because of results of
research and development, results of pre-clinical and clinical testing,
relationships with possible strategic partners, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, the FDA regulatory process and other factors. The net
proceeds of this Offering are not expected to be sufficient to fund the
Company's operations through the commercialization of one or more products
yielding sufficient revenues to support the Company's operations. Therefore, the
Company will need to raise additional funds. The Company expects to secure long-
term debt financing of up to approximately $5 million to complete construction
of its manufacturing facility. The Company may seek to satisfy its future
funding requirements through public or private offerings of securities, with
collaborative or other arrangements with major pharmaceutical companies, debt
arrangements or from other sources. Additional financing may not be available
when needed or on terms acceptable to the Company. If adequate financing is not
available, the Company may not be able to continue as a going concern, or may be
required to delay, scale back or eliminate certain of its research and
development programs, to relinquish rights to certain of its technologies or
products or technologies that the Company would otherwise seek to develop
itself. To the extent the Company raises additional capital by issuing equity
securities, ownership dilution to the investors in this Offering will result.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

7
<PAGE> 9

DEPENDENCE ON ELI LILLY AND COMPANY

The Company and Lilly have entered into agreements setting forth a
collaboration for the development and marketing of Ophidian's CDAD therapeutic
antitoxin and Lilly's purchase of Ophidian's Common Stock. If the product is
developed successfully and approved for commercial sale, Ophidian would be
responsible for the manufacturing of bulk drug and Lilly would be responsible
for sales, marketing and distribution. There can be no assurance that Lilly will
pursue the development of the CDAD therapeutic antitoxin or that Lilly will
satisfy its obligations under the terms of the Lilly Agreements. Lilly may
terminate the Lilly Agreements if it concludes that further efforts under these
agreements are no longer commercially reasonable. No assurance can be given that
the collaboration with Lilly will result in the successful commercialization of
the Company's CDAD antitoxin or that any future milestone payments or fees will
be received by the Company. Lilly owns 9.6% of the Company's Common Stock
outstanding before the Offering and will own 7.1% after the Offering.

DEPENDENCE ON AND NEED FOR OTHER THIRD PARTY RELATIONSHIPS

The Company's business strategy is to utilize the expertise and resources
of third parties in a number of areas, including the conduct of pre-clinical and
clinical trials for the Company's development products, and for the regulatory
approvals, marketing and in certain cases the manufacture of such products. This
strategy of reliance on third party relationships creates risks to the Company
by placing critical aspects of the Company's business in the hands of third
parties who the Company may not be able to control as effectively as its own
operations. Moreover, in reliance on these relationships, the Company has not
developed its own resources to the extent these activities have been contracted
to third parties. If these third parties do not perform in a timely and
satisfactory manner, the Company may incur additional costs and lose time in the
conduct of its development and clinical programs as it seeks alternate sources
of such products and services, if available. The effect of such costs and delays
may have a material adverse effect on the Company. See "Business -- Business
Strategy."

The Company may seek additional third party relationships in certain areas,
particularly in situations in which the Company believes that the clinical
testing, marketing, manufacturing and other resources of a pharmaceutical
company collaborator will enable the Company to develop particular products or
geographic markets which are otherwise beyond the Company's resources and/or
capabilities. There is no assurance that the Company will be able to obtain any
such collaboration, or any other research and development, manufacturing, or
clinical trial agreement. The inability of the Company to obtain and maintain
satisfactory relationships with third parties may have a material adverse effect
on the Company.

NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT OR COMMERCIALIZATION

The Company's research and development programs are at various stages of
development. Substantial additional research and development will be necessary
in order for the Company to obtain regulatory approval for its product
candidates, and there can be no assurance that the Company's research and
development will lead to development of products that are shown to be safe and
effective in clinical trials, or that are commercially viable. In addition to
further research and development, the Company's product candidates will require
clinical testing, regulatory approval, and development of marketing and
distribution channels, all of which are expected to require substantial
additional investment prior to commercialization. There can be no assurance that
the Company's products will be successfully developed, prove to be safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs, be eligible for
third party reimbursement from governmental or private insurers, be successfully
marketed or achieve market acceptance. Further, the Company's products may prove
to have undesirable or unintended side effects that may prevent or limit their
commercial use. See "Business -- Government Regulation."

NO CURRENT MARKETING, SALES OR MANUFACTURING CAPABILITY

The Company currently has no marketing and sales resources or personnel. In
the event the Company successfully completes the regulatory process for the
introduction of any of its passive antibodies for the

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treatment of gastrointestinal infections or other products, the Company will
need to establish distribution, marketing and sales resources in order to
commercialize such products. For the CDAD product, however, the Lilly Agreements
provide that Lilly will carry out marketing and sales activities. Depending upon
the product, the Company may seek to develop its own distribution, marketing and
sales resources, or may seek to enter a collaborative agreement with a major
pharmaceutical company or biotechnology company for such purposes. There is no
assurance that the Company will be successful in either situation. The inability
of the Company to successfully distribute, market and sell products will
adversely affect the commercial value of such products and may adversely affect
the financial position of the Company.

The Company does not have a manufacturing facility, and thus currently
lacks the resources or capability to manufacture itself any of its product
candidates on a clinical or commercial scale. At the present time, the Company
believes that there are a number of facilities with FDA approval that have the
capability of manufacturing the Company's products. However, the process for
manufacturing and formulating the Company's products is complex and subject to
uncertainties. The Company intends to construct its own facility capable of
meeting requirements for development and commercial quantities of bulk
biological products. The Company is currently, and may continue to be, dependent
on third parties for manufacturing clinical and commercial scale quantities of
its products. There can be no assurance that the Company will be able to
maintain existing agreements for the manufacturing of clinical quantities of
products, that it will be able to enter into additional agreements with other
third parties for commercial scale manufacturing, or that contract manufacturers
will be able to adequately produce the Company's products in commercial
quantities in a cost-effective manner. Interruptions or difficulties in clinical
or commercial production of the Company's products may require the Company to
incur substantial costs to address the situation, which could have a material
adverse effect on the Company. See "Business."

The Company has undertaken steps to build its own manufacturing facility to
produce bulk biological products. The Company is engaged in the design of a
facility and is seeking to acquire land. The Company expects that completion of
this facility will enable it to meet its production obligations under the Lilly
Agreements and that the facility will serve in the production of other Company
products. Failure to provide suitable manufacturing facilities either Company
owned or belonging to suitable third party manufacturers could delay development
of the CDAD product.

The Company and each contract manufacturer must adhere to current Good
Manufacturing Practice ("GMP") regulations strictly enforced by the FDA on an
ongoing basis through its facilities inspection program. Such manufacturing
facilities must pass a pre-approval plant inspection before the FDA will approve
a Biologic License Application ("BLA") or a Product License Application ("PLA")
and Establishment License Application ("ELA"). Certain material manufacturing
changes that occur after approval are also subject to FDA review and clearance
or approval. There can be no assurance that the FDA or other regulatory agencies
will approve the process or the facilities by which any of the Company's
products may be manufactured. The Company's dependence on third parties for the
manufacture of products may adversely affect the Company's ability to develop
and deliver products on a timely and competitive basis. See "Risk Factors -- No
Assurance of FDA Approval; Government Regulation" and "Business -- Government
Regulation."

RISK OF RAW MATERIALS

The Company uses live animals, principally laying hens, for the research,
development and production of many of its products. While the health of animals
used for producing raw materials for the Company's products is monitored and
documented by the Company, there can be no assurance that some unforeseen animal
disease or environmental factor will not at some time in the future injure the
animals, jeopardizing the Company's research, development or production
operations.

UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS

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United States and selected foreign jurisdictions. The Company currently holds 10
issued United States or foreign patents and has 47 United States or foreign
patent applications. No assurance can be given that the Company's patent
applications will be approved or that any issued patents will provide
competitive advantages for the Company's technologies or will not be challenged
or circumvented by competitors. With respect to already issued patents and any
patents which may issue from the Company's applications, there can be no
assurance that claims allowed will be sufficient to protect the Company's
technologies. Patent applications in the United States are maintained in secrecy
until a patent issues, and the Company cannot be certain that others have not
filed patent applications for technology covered by the Company's pending
applications or that the Company was the first to file patent applications for
such technology. Competitors may have filed applications for, or may have
received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes that may block the Company's patent rights
or compete without infringing the patent rights of the Company. In addition,
there can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or commercial advantage to the Company.

The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party or may otherwise be of limited
effectiveness or enforceability.

The ability to develop the Company's technologies and to commercialize
products using such technologies will depend on avoiding the infringement of the
patents of others. Although the Company is not aware of any claim of patent
infringement against it, claims concerning patents and proprietary technologies
determined adversely to the Company could have a material adverse effect on the
Company. In addition, litigation may also be necessary to enforce any patents
issued or licensed to the Company or to determine the scope and validity of
third-party proprietary rights. There can be no assurance that the Company's
issued or licensed patents would be held valid by a court of competent
jurisdiction. Whether or not the outcome of litigation is favorable to the
Company, the cost of such litigation and the diversion of the Company's
resources during such litigation could have a material adverse effect on the
Company.

The Company could incur substantial costs in defending itself in suits that
may be brought against the Company claiming infringement of the patent rights of
others or in asserting the Company's patent rights in a suit against another
party. The Company may also be required to participate in interference
proceedings declared by the United States Patent and Trademark Office for the
purpose of determining the priority of inventions in connection with the patent
applications of the Company or other parties. Adverse determination in
litigation or interference proceedings could require the Company to seek
licenses (which may not be available on commercially reasonable terms) or
subject the Company to significant liabilities to third parties, and could
therefore have material adverse effect on the Company. See "Business -- Patents
and Proprietary Technology."

NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION

The Company's products in development have not been proven in formal
clinical tests, and there can be no assurance that such products are, or will
be, safe or effective in human use. All new drugs and biologics, including the
Company's product candidates, are subject to extensive and rigorous regulation
by the federal government, principally the FDA under the Federal Food, Drug and
Cosmetic Act and other laws including, in the case of biologics, the Public
Health Services Act, and by state and local governments. Such regulations
govern, among other things, the development, testing, manufacture, labeling,
storage, premarket clearance or approval, advertising, promotion, sale and
distribution of such products. If drug products are marketed abroad, they also
are subject to extensive regulation by foreign governments. Failure to comply
with the FDA or other applicable regulatory requirements may subject the Company
to administrative or judicially imposed sanctions

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<PAGE> 12

such as civil penalties, criminal prosecution, injunctions, product seizure or
detention, product recalls, total or partial suspension of production, and FDA
refusal to approve pending products and other applications.

The Company has not received regulatory approval in the United States or
any foreign jurisdiction for the commercial sale of any of its products. The
process of obtaining FDA and other required regulatory approvals, including
foreign approvals, often takes many years and can vary substantially based upon
the type, complexity and novelty of the products involved and the indications
being studied. Furthermore, such approval process is extremely expensive and
uncertain. There can be no assurance that the Company's product candidates will
be cleared for marketing by the FDA. There can be no assurance that the Company
will have sufficient resources to complete the required regulatory review
process, or that the Company could overcome the inability to obtain, or delays
in obtaining, such approvals. The failure of the Company to receive FDA approval
for its product candidates would preclude the Company from marketing and selling
its products in the United States. Therefore, the failure to receive such FDA
approval would have a material adverse effect on the Company. Even if regulatory
approval of a product is granted, there can be no assurance that the Company
will be able to obtain the labeling claims necessary or desirable for the
promotion of those products. FDA regulations prohibit the marketing or promotion
of a drug for unapproved indications. Furthermore, regulatory marketing approval
may entail ongoing requirements for postmarketing studies.

If regulatory approval is obtained, the Company will be subject to ongoing
FDA obligations and continued regulatory review. In particular, the Company or
its third party manufacturers will be required to adhere to regulations setting
forth GMPs, which require that the Company or third party manufacturers
manufacture products and maintain records in a prescribed manner with respect to
manufacturing, testing and quality control activities. Further, the Company or
its third party manufacturer must pass a preapproval inspection of its
manufacturing facilities by the FDA before obtaining marketing approval. Failure
to comply with applicable regulatory requirements may result in penalties such
as restrictions on a product's marketing or withdrawal of the product from the
market. In addition, identification of certain side effects after a drug is on
the market or the occurrence of manufacturing problems could cause subsequent
withdrawal of approval, reformulation of the drug, additional pre-clinical
testing or clinical trials and changes in labeling of the product.

Prior to the submission to the FDA of a new drug application, drugs
developed by the Company must undergo rigorous pre-clinical and clinical testing
which may take several years and the expenditure of substantial resources.
Before commencing clinical trials in humans, the Company must submit to the FDA
and receive clearance of an Investigational New Drug application ("IND"). There
can be no assurance that submission of an IND for future clinical testing of any
product under development or other future products of the Company would result
in FDA permission to commence clinical trials or that the Company will be able
to obtain the necessary approvals for future clinical testing in any foreign
jurisdiction. Success in pre-clinical studies or early stage clinical trials
does not assure success in later stage clinical trials. Data obtained from pre-
clinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Further, there can be
no assurance that if such testing of products under development is completed,
any such drug compounds will be accepted for formal review by the FDA or any
foreign regulatory body, or approved by the FDA for marketing in the United
States or by any such foreign regulatory bodies for marketing in foreign
jurisdictions. Future federal, state, local or foreign legislation or
administrative acts could also prevent or delay regulatory approval of the
Company's products. See "Business -- Government Regulation."

DEPENDENCE ON QUALIFIED PERSONNEL

Because of the specialized nature of the Company's business, the Company is
highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel and to maintain relationships with leading
research institutions and consultants. The loss of the Company's Chief Executive
Officer, Dr. Douglas C. Stafford, or other senior management, would be highly
detrimental to the Company. The Company has established employment agreements
with Dr. Stafford, Dr. Firca and Dr. Hoffmann setting forth a term of employment
for the next three years. See "Management." The Company maintains key person
insurance for $500,000 on the life of each of Dr. Stafford and Dr. Firca. The
proceeds of such insurance may

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not be sufficient to compensate the Company for the loss of the services of such
individuals and is not applicable in the case of resignation. There is intense
competition for qualified personnel in the biotechnology field, including
competition from companies with substantially greater resources than the
Company. There can be no assurance that the Company will be able to continue to
attract and retain qualified personnel necessary for the development of its
business, either as employees or as consultants. The loss of the services of
existing personnel as well as the failure to recruit additional key scientific
and technical personnel in a timely manner could have a material adverse effect
on the Company.

RELATIONSHIPS OF SCIENTIFIC ADVISORS WITH OTHER ENTITIES

The members of the Company's Scientific Advisory Board are often employed
on a full-time basis by academic or research institutions. Scientific Advisory
Board Members serve as consultants to the Company, and in some cases as
consultants to other companies. Accordingly, Scientific Advisory Board members
are able to devote only a portion of their time to the Company's business and
research activities. In addition, except for work performed specifically for and
at the direction of the Company, the inventions or processes discovered by the
Company's Scientific Advisory Board members and other consultants will not
become the intellectual property of the Company, but will be the intellectual
property of their institutions. If the Company desires access to inventions
which are not its property, it will be necessary for the Company to obtain
licenses to such inventions from the owners. In addition, invention assignment
agreements executed by Scientific Advisory Board members and consultants in
connection with their relationships with the Company may be subject to the
rights of their primary employers or other third parties with whom such
individuals have consulting relationships. See "Business -- Advisory Board."

COMPETITION

There are many companies, including the well-known pharmaceutical companies
such as SmithKline Beecham Corporation, Bristol-Meyers Squibb Company, Abbott
Laboratories and other smaller biotechnology firms, as well as academic and
other research institutions, that are engaged in the discovery, development,
marketing and sale of products for the treatment of infectious diseases. The
Company expects to encounter significant competition for its product candidates
from traditional and new treatment methods.

Most of the Company's competitors and potential competitors have
substantially greater capital, research and development capabilities and human
resources than the Company. Furthermore, many of these competitors have
significantly greater experience than the Company in undertaking pre-clinical
testing and clinical trials of new biotechnology products and obtaining FDA and
other regulatory approvals. If the Company is permitted to commence commercial
sales of any product, it will also be competing with companies that have greater
resources and experience in manufacturing, marketing and sales. The Company's
competitors may succeed in developing products that are more effective, less
costly, or have a better side effect profile than any that may be developed by
the Company, and such competitors may also prove to be more successful than the
Company in manufacturing, marketing and sales. If the Company is able to
successfully commercialize a product, subsequent competitive developments could
render such product noncompetitive or obsolete. See "Business -- Competition."

TECHNOLOGICAL CHANGES AND UNCERTAINTY

The Company's research and development strategy is based upon advances in
recent years in the scientific understanding of infectious diseases. The
Company's strategy focuses on techniques to exploit new infectious disease
targets for new drug development. This area is the subject of extensive research
efforts and rapid scientific progress. New developments are expected to continue
at a rapid pace in industry and academia in both the specific areas of interest
to the Company and in other areas directed at the prevention or treatment of
infectious diseases. There can be no assurance that research and discoveries by
others will not render some or all of the Company's proposed products
noncompetitive or obsolete. In addition, the Company's business strategy is
subject to the risks inherent in the development of new therapeutic products.
There can be no assurance that unforeseen problems will not develop, that the
Company will be able to address successfully

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technological challenges it encounters in its research and development programs
or that commercially feasible products will ultimately be developed by the
Company. See "Business -- Competition."

UNCERTAIN AVAILABILITY OF HEALTH CARE REIMBURSEMENT; HEALTH CARE REFORM

The Company's ability to commercialize its product candidates may depend in
part on the extent to which reimbursement for the costs of such product will be
available from government health administration authorities, private health
insurers and others. Significant uncertainty exists as to the reimbursement
status of newly approved health care products. There can be no assurance of the
availability of adequate third-party insurance reimbursement coverage that
enables the Company to establish and maintain price levels sufficient for
realization of an appropriate return on its investment in developing drug
products. Government and other third-party payors are increasingly attempting to
contain health care costs by limiting both coverage and the level of
reimbursement for new therapeutic products approved for marketing by the FDA and
by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
government and third-party payors for uses of the Company's product candidates,
the market acceptance of these products would be adversely affected.

Health care reform proposals have been introduced in Congress and in
various state legislatures. It is currently uncertain whether any health care
reform legislation will be enacted at the federal level, or what actions
governmental and private payors may take in response to the suggested reforms.
The Company cannot predict when any proposed reforms will be implemented, if
ever, or the effect of any implemented reforms on the Company's business. There
can be no assurance that any implemented reforms will not have a material
adverse effect on the Company. Such reforms, if enacted, may affect the
availability of third-party reimbursement for products developed by the Company
as well as the price levels at which the Company is able to sell such products.
In addition, if the Company is able to commercialize products in overseas
markets, the Company's ability to achieve success in such markets may depend, in
part, on the health care financing and reimbursement policies of such countries.

RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF PRODUCT LIABILITY
INSURANCE

The Company's business exposes it to potential product liability risks
which are inherent in the manufacturing, clinical testing, marketing and use of
human therapeutic products. The Company currently carries no product liability
insurance. The Company plans to obtain product liability insurance covering the
clinical trials and the commercial sale of its products prior to their clinical
and commercial introduction respectively, however, there can be no assurance
that the Company will be able to obtain or maintain such insurance on acceptable
terms or that any insurance obtained will provide adequate coverage against
potential liabilities. Claims or losses in excess of any liability insurance
coverage obtained by the Company could have a material adverse effect on the
Company.

CONCENTRATION OF OWNERSHIP

Upon consummation of this Offering, the directors and officers of the
Company (and certain members of their families) will beneficially own 4,026,531
shares of the Company's Common Stock or approximately 41.1% of the outstanding
shares of the Company's Common Stock following the completion of this Offering.
Accordingly, the Company's officers and directors and their affiliates may be
able to influence the outcome of shareholder votes, including votes concerning
the election of directors, adoption of amendments to the Company's Articles of
Incorporation and Bylaws and approval of mergers and other significant
transactions. See "Principal Shareholders."

IMMEDIATE SUBSTANTIAL DILUTION; DISPARITY OF CONSIDERATION

Purchasers of Securities in this Offering will experience immediate and
substantial dilution in the net tangible book value of the Shares of Common
Stock and Warrants purchased by them in this Offering. The immediate dilution to
purchasers of the Securities offered hereby is $4.41 per Unit (or approximately
72%),

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<PAGE> 15

assuming an initial public offering price of $6.10 per Unit. Additional dilution
to future net tangible book value per Share may occur upon the exercise of the
Warrants, the Representative's Warrants, options that are outstanding or to be
issued under the Company's option plans, and options that are outstanding to a
consultant of the Company. The founding shareholders of the Company acquired
their shares of Common Stock for consideration other than cash or for
consideration substantially less than the public offering price of the Units
offered hereby. See "Capitalization," "Dilution" and "Certain Transactions."

POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE

Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this Offering could materially
and adversely affect the market price of the Securities. Such sales also might
make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the completion of this Offering, the Company will have
9,789,930 shares of Common Stock outstanding. Of these securities, 2,500,000
Shares of Common Stock and Warrants to purchase 2,500,000 Shares of Common Stock
contained in the Units will be freely tradable (unless held by affiliates of the
Company) without restriction under the Securities Act commencing 90 days after
issuance, subject to earlier separability of the Units in the discretion of the
Representative and the Company. The remaining 7,289,930 shares will be
restricted securities within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). The Company's directors, executive officers and
certain shareholders, who in the aggregate hold more than 90% of the shares of
Common Stock of the Company outstanding immediately prior to the completion of
this Offering, have entered into lock-up agreements under which they have agreed
not to sell, directly or indirectly, any shares owned by them for a period of
nine months after the date of this Prospectus without the prior written consent
of the Representative. The Representative may, in its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
lock-up agreements. Upon expiration of the nine month lock-up agreements, 90% of
the shares of Common Stock (not including approximately 535,176 shares subject
to outstanding vested options) held by existing shareholders will be eligible
for public resale, subject to volume limitations pursuant to Rule 144 (67% of
the shares of Common Stock -- not including approximately 535,176 shares subject
to outstanding vested options -- after giving effect to the issuance of
2,500,000 shares of Common Stock pursuant to this offering). In addition, 12
months after the completion of this Offering, 250,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants and 250,000 shares of
Common Stock issuable upon exercise of the Warrants issuable upon exercise of
Representative's Warrants will be available for sale. The number of shares sold
in the public market could increase if Lilly's registration rights are exercised
and such sales may have an adverse effect on the market price of the Common
Stock. See "Description of Securities -- Registration Rights" and "Shares
Eligible for Future Sale."

NO ASSURANCE OF CONTINUED AMERICAN STOCK EXCHANGE LISTING; RISK OF LOW-PRICED
SECURITIES; RISK OF APPLICATION OF PENNY STOCK RULES

The AMEX has established certain standards for the continued listing of a
security on AMEX. The AMEX would consider delisting securities of a company if,
among other things, (i) stockholders' equity falls below $4,000,000 if such
company has losses in three of its four most recent fiscal years, (ii)
stockholder equity falls below $2,000,000 if such company has losses in two of
its three most recent fiscal years, (iii) the number of shares publicly held is
less than 200,000, or (iv) the aggregate market value of shares publicly held is
less than $1,000,000. There can be no assurance that the Company will continue
to satisfy the requirements for maintaining an AMEX listing. If the Company's
Securities were to be excluded from AMEX, it would adversely affect the prices
of such Securities and the ability of holders to sell them, and the Company
would be required to comply with the initial listing requirements in order to be
relisted on AMEX.

If the Company is unable to satisfy maintenance requirements and the price
per share were to drop below $5.00, then unless the Company satisfied certain
net asset tests, or the Company was able to have its Securities listed on
another exchange, the Company's Securities would become subject to certain penny
stock rules promulgated by the Securities and Exchange Commission (the
"Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny
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<PAGE> 16

stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If the Securities become subject to the penny stock rules,
investors in the Offering may find it more difficult to sell their Securities.

ANTI-TAKEOVER EFFECT OF WISCONSIN LAW

Wisconsin statutory law contains provisions that could discourage potential
acquisition proposals and might delay or prevent a change in control of the
Company. Such provisions could result in the Company being less attractive to a
potential acquirer and could result in the shareholders receiving less for their
Common Stock than otherwise might be available in the event of a takeover
attempt. See "Description of Securities -- Certain Provisions of Wisconsin Law."

POTENTIAL LIABILITY OF SHAREHOLDERS

Wisconsin Statutes Section 180.0622(2)(b) provides that the shareholders of
a Wisconsin corporation are personally liable "to an amount equal to the par
value of shares owned by them respectively" for debts or other amounts owing to
employees for services performed for the corporation, but not exceeding six
months' service in any one case. A Wisconsin trial court interpreted this
statute to impose personal liability on shareholders extending up to the
consideration paid for their stock (rather than the stock's lower stated par
value). While the trial court's decision was affirmed by the Wisconsin Supreme
Court, such affirmation technically provides no precedential value due to an
equal division of the Court. However, under the principle of the trial court's
decision, investors in this Offering would have potential liability, in the
event of the Company's insolvency or inability to pay its debts, for unpaid
compensation to Company employees (not exceeding six months' service) in an
amount up to the purchase price paid for every Unit acquired hereby ($6.10 per
Unit).

ABSENCE OF DIVIDENDS

The Company has never declared or paid dividends on its Common Stock and
does not intend to pay any dividends in the foreseeable future. See "Dividend
Policy."

ARBITRARY DETERMINATION OF OFFERING PRICE; NO PUBLIC MARKET FOR THE SECURITIES

The initial public offering price of the Units and the exercise price and
terms of the Warrants have been determined arbitrarily by negotiations between
the Company and the Representative. Factors considered in such negotiations, in
addition to prevailing market conditions, included the history and prospects for
the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the current
market for initial public offerings, and certain other factors as were deemed
relevant. Therefore, the public offering price of the Units and the exercise
prices and terms of the Warrants do not necessarily bear any relationship to
established valuation criteria and therefore may not be indicative of prices
that may prevail at any time or from time to time in the public market for the
securities of the Company. Prior to this Offering, there has been no public
market for the Securities, and there can be no assurance that an active trading
market will develop in any of the Securities after the Offering, or, if
developed, be sustained. See "Underwriting."

PRICE VOLATILITY

The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical or biotechnology companies have in the past been,
and can in the future be expected to be, especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning patents or proprietary rights, publicity
regarding actual or potential clinical trial results relating to products under
development by the Company or its competitors, regulatory developments in both
the United States and foreign countries,
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delays in the Company's testing and development schedules, public concern as to
the safety of drug products and economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market prices of the Securities. The realization of
any of the risks described in these "Risk Factors" could have a significant and
adverse impact on such market prices.

POTENTIAL ADVERSE EFFECT OF REPRESENTATIVE'S WARRANTS

At the consummation of the Offering, the Company will sell to the
Representative for nominal consideration the Representative's Warrants to
purchase up to 250,000 Units. The Representative's Warrants will be exercisable
for a period of four years commencing one year after the effective date of this
Offering, at an exercise price of $ per Unit [120% of the public
offering price per Unit]. The Warrants obtained upon exercise of the
Representative's Warrants will be exercisable for a period of four years
commencing one year after the effective date of this Offering, at an exercise
price of $ per Share [165% of the exercise price of the Warrants]. For
the term of the Representative's Warrants, the holders thereof will have, at
nominal cost, the opportunity to profit from a rise in the market price of the
Securities without assuming the risk of ownership, with a resulting dilution in
the interest of other security holders. As long as the Representative's Warrants
remain unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representative may be expected to exercise the
Representative's Warrants at a time when the Company would, in all likelihood,
be able to obtain any needed capital through a new offering of its securities on
terms more favorable than those provided by the Representative's Warrants. See
"Underwriting."

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS

Commencing 24 months after the date of this Prospectus, the Warrants are
subject to redemption at $.10 per Warrant on 30 days prior written notice to the
Warrant holders if the average closing bid price of the Common Stock as reported
on the AMEX equals or exceeds $ per share [240% of the initial public
offering price per Unit] for any 20 trading days within a period 30 consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. If the Warrants are redeemed, holders of the Warrants will lose
their rights to exercise the Warrants upon expiration of the 30 day notice of
redemption period. Upon receipt of a notice of redemption, holders would be
required to (i) exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so, (ii) sell the Warrants at the
current market price, if any, when they might otherwise wish to hold the
Warrants or (iii) accept the redemption price which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Warrants."

POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK RESERVED

The Company has reserved Shares of Common Stock for issuance as follows:
(i) 2,500,000 Shares for issuance upon exercise of the 2,500,000 Warrants; (ii)
250,000 Shares for issuance upon exercise of the Representative's Warrants;
(iii) 250,000 Shares for issuance upon exercise of the Warrants issuable upon
exercise of the Representative's Warrants; (iv) 646,608 shares for issuance upon
exercise of stock options granted under the Company's 1990/1992 Stock Option
Plans; (v) 5,296 shares of Common Stock reserved for future grants of options
under the 1990/1992 Stock Option Plans; (vi) 114,290 shares for issuance upon
exercise by Fitchburg Research Park Associates of its warrants; and (vii)
100,000 shares for issuance upon exercise of the stock option held by a
consultant to the Company. The existence of the Warrants, the Representative's
Warrants and any other options or warrants may adversely affect the Company's
ability to consummate future equity financings. Further, the holders of such
warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company.

REPRESENTATIVE'S INFLUENCE ON THE MARKET

A significant amount of the Securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such Securities through or with the
Representative. If it participates in the market, the Representative may exert a
dominating influence on the market, if one develops, for the Securities
described in this Prospectus. Such market-making activity may be discontinued at
any time. The price and liquidity of the Common Stock and the Warrants may be
significantly affected by the degree, if any, of the Representative's
participation in the market.

16
<PAGE> 18

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS

The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the Shares of Common Stock issuable
upon exercise of the Warrants and such Shares have been registered, qualified or
deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there is no assurance that it will be able to do so.
The value of the Warrants may be greatly reduced if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the states in which the holders of the Warrants reside. Until completion of
this Offering, the Common Stock and the Warrants may only be purchased together
on the basis of one Share of Common Stock and one Warrant, but the Warrants will
be separately tradable 90 days after issuance subject to earlier separability in
the discretion of the Representative and the Company. Although the Securities
will not knowingly be sold to purchasers in jurisdictions in which the
Securities are not registered or otherwise qualified for sale, investors may
purchase the Warrants in the secondary market or move to a jurisdiction in which
the Shares underlying the Warrants are not registered or qualified during the
period that the Warrants are exercisable. As a result, the Company will be
unable to issue Shares to those persons desiring to exercise their Warrants
unless and until the Shares are qualified for sale in jurisdictions in which
such purchasers reside, or an exemption from such qualification exists in such
jurisdictions, and holders of the Warrants would have no choice but to attempt
to sell the Warrants in a jurisdiction where such sale is permissible or allow
them to expire unexercised. See "Description of Securities -- Warrants."

MANAGEMENT'S BROAD DISCRETION IN USE OF PROCEEDS

Although the Company intends to apply the net proceeds of this Offering in
the manner described under "Use of Proceeds," it has broad discretion within
such proposed uses as to the precise allocation of the net proceeds, the timing
of expenditures and all other aspects of the use thereof. The Company reserves
the right to reallocate the net proceeds of this Offering among the various
categories set forth under "Use of Proceeds" as it, in its sole discretion,
deems necessary or advisable. Approximately $3,298,000 or 25% of the estimated
net proceeds of the Offering has been allocated to working capital and general
corporate purposes. Accordingly, the Company's Board of Directors will have
discretion with respect to the allocation of such net proceeds. See "Use of
Proceeds."

LIMITATION OF LIABILITY AND INDEMNIFICATION

Under the Wisconsin Business Corporation Law, directors and officers of the
Company are entitled to mandatory indemnification from the Company against
certain liabilities and expenses (a) to the extent such officers or directors
are successful in the defense of a proceeding and (b) in proceedings in which
the director or officer is not successful in the defense thereof, unless it is
determined the director or officer breached or failed to perform his or her
duties to the Company and such breach or failure constituted: (i) a willful
failure to deal fairly with the Company or its shareholders in connection with a
matter in which the director or officer had a material conflict of interest;
(ii) a violation of criminal law, unless the director or officer had reasonable
cause to believe his or her conduct was lawful or had no reasonable cause to
believe his or her conduct was unlawful; (iii) a transaction from which the
director or officer derived an improper personal profit; or (iv) willful
misconduct. The Company's Amended and Restated Bylaws provide that the Company
may purchase and maintain insurance on behalf of an individual who is a director
or officer of the Company against liability asserted against or incurred by such
individual in his or her capacity as a director or officer regardless of whether
the Company is required or authorized to indemnify or allow expenses to the
individual against the same liability under the bylaws.

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 Units
offered hereby (after deducting underwriting discounts and other estimated
offering expenses) are estimated to be approximately $13,298,000 (or $15,345,000
if the Over-Allotment Option is exercised in full), based on an assumed initial
public offering price of $6.10 per Unit.

The Company currently intends to use the net proceeds from this Offering
approximately as follows:

<TABLE>
<CAPTION>
NET PROCEEDS PERCENT OF TOTAL
------------ ----------------
<S> <C> <C>
Technology development/new product discovery........... $ 5,000,000 38%
Product development expenses........................... 3,000,000 22%
Capital expenditures................................... 2,000,000 15%
Working capital and general corporate purposes......... 3,298,000 25%
----------- ---
Total........................................ $13,298,000 100%
=========== ===
</TABLE>

Technology Development/New Product Discovery. The Company intends to spend
a portion of the proceeds of this Offering in the development of certain
technologies related to the discovery of new drug targets and new drug products
in the area of infectious diseases and other disease areas where the Company
believes business opportunities exist. Such expenses would likely include the
hiring of additional scientific staff, enlargement of facilities and the
establishment of contractual relationships with academic or commercial entities.

Product Development Expenses. The Company intends to continue investing in
the further development of its passive antibody and other infectious disease
therapeutic products. Where appropriate, resources may be applied to laboratory
studies, manufacturing methods development, formal pre-clinical or clinical
studies to support product licensure. With respect to the Company's CDAD
therapeutic antitoxin product, these funds will supplement funds paid to the
Company pursuant to the Lilly Agreements for the pre-clinical and clinical
studies.

Capital Expenditures. The Company expects to spend a portion of the net
proceeds of this Offering to make capital investments in laboratories and
related facilities, including the establishment of manufacturing facilities and
purchase of equipment for the pilot production of its passive antibody products.
The initial phase of this capital investment includes acquisition of land and
the design of a pilot manufacturing facility. The Company expects to begin
construction of this facility within twelve months from the date of this
Offering. The Company also expects to secure long-term debt financing of up to
approximately $5 million to complete construction of its manufacturing facility.

Working Capital and General Corporate Purposes. The remaining available
funds will be added to the Company's working capital to be used for general
corporate purposes, including the hiring of research, management, regulatory,
manufacturing and business development personnel; rent and other overhead costs
for facilities; equipment and machinery needed for research, manufacturing and
administrative functions; and the costs for patenting, licensing or acquiring
technologies.

The Company intends to proceed with the expenditures to advance the
development of its infectious disease technologies and products. This
development is anticipated to include prototype optimization, pre-clinical
development, clinical prototype manufacturing, and human clinical evaluations.
The Company also anticipates investigating new therapeutic and diagnostic
technologies and exploring additional commercial opportunities.

The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including the progress of the Company's
research and development programs, the results of clinical studies, the timing
of regulatory approvals, technological advances, and determinations as to
commercial potential and the status of competitive products. The Company may
also, to the extent its product development activities proceed more quickly than
expected, expand its research and development facilities or allocate a portion
of the proceeds to the construction or acquisition and staffing of manufacturing
facilities for

18
<PAGE> 20

the production of any developed products. In addition, if the Company deems it
desirable to acquire assets or technologies to further its development
objectives, the Company may reapportion proceeds of this offering to such
acquisition or development. Expenditures will also be dependent upon the
establishment of collaborative arrangements with other companies, the
availability of financing, and other factors. See "Risk Factors -- Management's
Broad Discretion in Use of Proceeds."

Subject to the variables set forth above, the Company anticipates that the
net proceeds of this Offering, together with its available cash, should be
sufficient to finance its operational and working capital requirements for at
least the next 12 months. However, there can be no assurance that the net
proceeds of this Offering will satisfy the Company's requirements for any
particular period of time. The Company anticipates that additional funding will
be required after the use of proceeds of the Offering. The Company may seek to
raise additional capital from future offerings of equity, corporate partnerships
or debt financings. No assurance can be given that such additional financing
will be available when needed on terms acceptable to the Company, if at all. See
"Risk Factors -- Need for Substantial Additional Funds."

Pending application of the net proceeds of the Offering, the Company
intends to invest such net proceeds in interest-bearing investment grade
financial securities.

DIVIDEND POLICY

The Company has never declared nor paid dividends on its Common Stock and
does not intend to pay any dividends for the foreseeable future.

19
<PAGE> 21

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis, and (ii) as adjusted to give effect to
the estimated net proceeds from the sale of the Units offered hereby at an
assumed initial public offering price of $6.10 per Unit and the initial
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's financial statements and related notes thereto
and selected financial data appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C>
Capital lease obligations, less current portion............. $ 14,463 $ 14,463
Shareholders' equity
Common stock, $0.0025 par value per share, 22,400,000
shares authorized, 7,288,566 shares issued and
outstanding, actual; 9,788,566 shares issued and
outstanding, as adjusted(1)............................ 18,221 24,471
Additional paid-in capital.................................. 12,687,266 25,979,016
Deficit accumulated during the development stage............ (8,160,802) (8,160,802)
Net unrealized loss on available securities for sale........ (227) (227)
----------- --------------
Total shareholders' equity........................ 4,544,458 17,842,458
----------- --------------
Total capitalization.............................. $ 4,558,921 $ 17,856,921
=========== ==============
</TABLE>

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

(1) Excludes (i) 646,608 shares of Common Stock issuable upon the exercise of
outstanding stock options as of February 13, 1998, under the 1990 Incentive
Stock Option Plan and the 1992 Employee Stock Option Plan (collectively, the
"1990/1992 Stock Option Plans") at a weighted average exercise price of
$2.74 per share, leaving a balance of 5,296 shares of Common Stock reserved
for future grants of options under the 1990/1992 Stock Option Plans, (ii)
Fitchburg Research Park Associates' warrant to purchase up to 114,290 shares
at an exercise price of $.0025 per share, (iii) a consultant's option to
purchase 100,000 shares at an exercise price of $4.50 per share, (iv)
options to purchase a maximum of 90,000 shares of Common Stock to be granted
to six employees and three outside directors, and (v) 1,364 shares of Common
Stock which have been issued to consultants since December 31, 1997.

(2) As adjusted to reflect the sale of 2,500,000 Units offered hereby and
receipt by the Company of the estimated net proceeds therefrom based upon an
assumed initial public offering price of $6.10 per Unit.

20
<PAGE> 22

DILUTION

At December 31, 1997, the net tangible book value of the Company was
$3,243,857 or approximately $0.45 per share of Common Stock. Net tangible book
value per share is determined by dividing the net tangible book value (tangible
assets less liabilities) of the Company by 7,288,566 shares of Common Stock
outstanding at such date. Net tangible book value dilution per share represents
the difference between the amount per Share paid by purchasers of Units of this
Offering and the net tangible book value per share of Common Stock immediately
after the completion of this Offering. After giving effect to the sale of Units
offered hereby at an assumed initial public offering price of $6.10 per Unit
(after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company), the pro forma net tangible book value of the
Company at December 31, 1997 would have been $16,541,857 or approximately $1.69
per share of Common Stock. This represents an immediate increase in the net
tangible book value of $1.24 per share of Common Stock to existing shareholders
and an immediate dilution in net tangible book value of $4.41 per share of
Common Stock (or approximately 72%) to new investors purchasing Shares of Common
Stock in this Offering.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per Unit.............. $6.10
Net tangible book value per share at December 31, 1997...... 0.45
Increase per share attributable to this Offering............ 1.24
----
Pro forma net tangible book value per share after this
Offering.................................................. 1.69
-----
Dilution per share to new investors......................... $4.41
=====
</TABLE>

The computations in the table set forth above assumes that the
Over-Allotment Option is not exercised. If the Over-Allotment Option is
exercised in full, the pro forma net tangible book value at December 31, 1997
would have been $18,588,857 or $1.83 per share of Common Stock, resulting in
dilution to new investors of $4.27 per share of Common Stock.

The following table summarizes at December 31, 1997, the total number of
shares of Common Stock purchased from the Company, the total consideration paid,
and the average price per share paid by (i) existing shareholders of Common
Stock at December 31, 1997, and (ii) new investors in the Offering, assuming the
sale of Units offered hereby at an assumed initial public offering price of
$6.10 per Unit. The calculations are based upon total consideration given by new
investors and existing shareholders before any deduction of underwriting
discounts and Offering expenses payable by the Company.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 7,288,566 74% $12,813,341 46% $1.76
New investors(2)............ 2,500,000 26% 15,250,000 54% $6.10
--------- --- ----------- ---
Total............. 9,788,566 100% $28,063,341 100%
========= === =========== ===
</TABLE>

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

(1) Excludes (i) 646,608 shares of Common Stock issuable upon the exercise of
outstanding stock options as of February 13, 1998, under the 1990 Incentive
Stock Option Plan and the 1992 Employee Stock Option Plan (collectively, the
"1990/1992 Stock Option Plans") at a weighted average exercise price of
$2.74 per share, leaving a balance of 5,296 shares of Common Stock reserved
for future grants of options under the 1990/1992 Stock Option Plans, (ii)
Fitchburg Research Park Associates' warrant to purchase up to 114,290 shares
at an exercise price of $.0025 per share, (iii) a consultant's option to
purchase 100,000 shares at an exercise price of $4.50 per share, (iv)
options to purchase a maximum of 90,000 shares of Common Stock to be granted
to six employees and three outside directors, and (v) 1,364 shares of Common
Stock which have been issued to consultants since December 31, 1997.

(2) Reflects the initial public offering price of the Units.

21
<PAGE> 23

SELECTED FINANCIAL DATA

The following financial data as of September 30, 1996 and 1997 and for each
of the three years in the period ended September 30, 1997 are derived from the
financial statements of the Company included elsewhere in this prospectus which
have been audited by Ernst & Young LLP, independent auditors. The selected
financial data set forth below, as of September 30, 1993, 1994 and 1995 and the
years ended September 30, 1993 and 1994 are derived from financial statements
audited by Ernst & Young LLP, not included in this Prospectus. The data should
be read in conjunction with the consolidated financial statements, related
notes, and other financial information included herein. The selected financial
data for December 31, 1997 and for the three months ended December 31, 1996 and
1997 are derived from the Company's unaudited financial statements included
elsewhere in this Prospectus and include, in the opinion of the Company, all
adjustments (consisting of normal recurring adjustments) necessary for fair
presentation of the Company's financial position at that date and results of
operations for those periods. Operating results for the three months ended
December 31, 1997 are not necessarily indicative of the results for any future
period.

<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS ENDED (NOVEMBER 11,
YEARS ENDED SEPTEMBER 30, DECEMBER 31, 1989) TO
----------------------------------------------------------------- ---------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1996 1997 1997
---------- ---------- ----------- ----------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Revenues............. $1,746,596 $1,017,627 $ 386,979 $ 321,444 $ 671,881 $ 393,361 $ 115,185 $ 4,388,327
Operating Expenses
Research and
development...... 842,000 1,156,428 1,215,366 1,339,048 2,432,102 428,998 666,632 8,306,647
General and
administrative... 404,709 753,549 916,294 1,119,409 1,005,797 256,151 355,100 5,070,359
---------- ---------- ----------- ----------- ----------- --------- ---------- -----------
Total operating
expenses......... 1,246,709 1,909,977 2,131,660 2,458,457 3,437,899 685,149 1,021,732 13,377,006
---------- ---------- ----------- ----------- ----------- --------- ---------- -----------
Income (loss) from
operations....... 499,887 (892,350) (1,744,681) (2,137,013) (2,766,018) (291,788) (906,547) (8,988,679)
Investment income,
net................ 106,576 191,040 144,750 50,761 281,483 75,864 46,102 865,822
Interest expense..... -- (4,082) (4,624) (3,320) (2,800) (718) (724) (38,710)
Other................ -- 97 668 -- -- -- -- 765
---------- ---------- ----------- ----------- ----------- --------- ---------- -----------
Net earnings
(loss)........... $ 606,463 $ (705,295) $(1,603,887) $(2,089,572) $(2,487,335) $(216,642) $ (861,169) $(8,160,802)
========== ========== =========== =========== =========== ========= ========== ===========
Net earnings (loss)
per share(1)
Basic.............. $ 0.11 $ (0.12) $ (0.26) $ (0.34) $ (0.34) $ (0.03) $ (0.12)
Diluted............ $ 0.11 $ (0.12) $ (0.26) $ (0.34) $ (0.34) $ (0.03) $ (0.12)
Shares used to
compute net
earnings (loss) per
share(1)
Basic.............. 5,334,283 6,086,065 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464
Diluted............ 5,674,121 6,086,065 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, 1997
---------------------------------------------------------------- ----------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED(2)
---------- ---------- ----------- ----------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.......... $5,443,235 $1,521,295 $ 887,577 $ 3,276,339 $3,547,036 $ 2,435,401 $15,733,401
Working capital............... 5,100,728 2,507,268 1,319,826 3,328,103 3,812,539 2,725,172 16,073,172
Total assets.................. 5,856,184 4,917,996 3,408,129 5,247,761 5,975,606 5,116,176 18,414,176
Long-term obligations......... -- 68,046 50,856 33,914 17,956
Deficit accumulated during
development stage........... (413,544) (1,118,839) (2,722,726) (4,812,298) (7,299,633) (8,160,802) (8,160,802)
Total shareholders' equity.... 5,500,501 4,680,233 3,156,544 4,743,260 5,397,956 4,544,458 17,842,458
</TABLE>

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

(1) See Note 1 of Notes to Financial Statements for a description of the shares
used in calculating net earnings (loss) per share.

22
<PAGE> 24

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

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Prospectus.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors."

OVERVIEW

Ophidian is a development stage corporation focused on the research,
development and commercialization of therapeutic products for human and animal
use. The Company's business has been directed to numerous areas of disease but
has focused principally on products for infectious disease prevention and
treatment. The Company has not received any revenues from the sale of FDA
licensed products to date and does not expect to receive any such revenues
during the next two fiscal years. Except for the fiscal year ended September 30,
1993 ("Fiscal 1993"), the Company has been unprofitable every year since
inception. The Company expects to incur additional losses over the next several
years. At December 31, 1997, the Company had an accumulated deficit of
$8,160,802 and for the three months ended December 31, 1997 incurred a net loss
of $861,169.

The Company intends to continue investing in the further research and
development of its technologies and products in infectious disease and other
therapeutic areas. Depending on a variety of factors, including collaborative
arrangements, availability of personnel and financial resources, the Company
will engage in the development of its products and establish capabilities to
support regulatory submissions. The Company will need to make additional capital
investments in research and development laboratories and manufacturing
facilities, including the construction of facilities for the large-scale
production of avian antibodies and supporting testing laboratories. Investments
in manufacturing and associated capabilities would be required to be made before
any regulatory agency would grant approval to market products, however, there
can be no assurance that such approval will be granted. It is expected that the
Company will need to hire additional personnel to support increased research and
development, manufacturing, quality systems, and general business requirements.

RESULTS OF OPERATIONS

Three Months Ended December 31, 1997 Compared to Three Months Ended December
31, 1996

Revenues. Revenues decreased $278,176 to $115,185 for the three months
ended December 31, 1997 as compared to $393,361 for the three months ended
December 31, 1996. Revenues in the three months ended December 31, 1996 were
greater due primarily to the one-time receipt of payments from Lilly in
connection with the achievement of certain product development milestones.

Research and Development Expenses. Research and development expenses
increased $237,634 to $666,632 for the three months ended December 31, 1997 as
compared to $428,998 for the three months ended December 31, 1996. The increase
in expenses in the three months ended December 31, 1997 resulted primarily from
additional personnel expenses and costs associated with preclinical development
of the CDAD therapeutic antitoxin.

General and Administrative Expenses. General and administrative expenses
increased $98,949 to $355,100 for the three months ended December 31, 1997 as
compared to $256,151 for the three months ended December 31, 1996. The increase
in expenses in the three months ended December 31, 1997 resulted primarily from
increased salary expenses and personnel recruiting expenses to support business
development and financial functions.

Interest Income and Expenses. Interest income decreased $29,762 to $46,102
for the three months ended December 31, 1997 as compared to $75,864 for the
three months ended December 31, 1996. The decrease in interest in the three
months ended December 31, 1997 resulted from lower average cash deposits.
Interest

23
<PAGE> 25

expenses increased $6 to $724 for the three months ended December 31, 1997 as
compared to $718 for the three months ended December 31, 1996.

Net Loss. Net losses increased $644,527 to $861,169 for the three months
ended December 31, 1997 as compared to $216,642 for the three months ended
December 31, 1996. The increased loss in the three months ended December 31,
1997 resulted from lower revenues due to a one-time payment and increased
research and development and general and administrative expenses.

Fiscal Year Ended September 30, 1997 Compared with Fiscal Year Ended September
30, 1996

Revenues. Revenues increased $350,437 or 109% to $671,881 in Fiscal 1997
compared to $321,444 in the fiscal year ended September 30, 1996 ("Fiscal
1996"). Increased revenues resulted from payments received from Lilly under the
Lilly Agreements of $300,000 and payments of $354,266 received from the NIH
under a Phase II Small Business Innovation Research ("SBIR") grant for
Ophidian's EHEC program. Revenues in Fiscal 1996 included $100,000 in payments
from Lilly and $200,493 from the NIH.

Research and Development Expenses. Research and development expenses
increased $1,093,054 or 82% to $2,432,102 in Fiscal 1997 compared with
$1,339,048 in Fiscal 1996. The increase in expenses resulted from process
development and manufacture of bulk drug to support pre-clinical and clinical
development of Ophidian's CDAD therapeutic antitoxin and additional personnel,
consultants and related expenses in connection with the Company's Host Response
Program. See "Business -- Ophidian's Discovery Technologies."

General and Administrative Expenses. General and administrative expenses
decreased $113,612 or 10% to $1,005,797 in Fiscal 1997 compared with $1,119,409
in Fiscal 1996. The decrease resulted primarily from a decrease in consulting
expenses and legal expenses.

Investment Income and Expenses. Investment income increased $230,722 or
455% to $281,483 in Fiscal 1997 compared with $50,761 for Fiscal 1996. The
increase in interest income was due to the deposit of funds received by the
Company from its private placement stock offering which raised net proceeds of
$2,629,957 and sales of stock to Lilly in June and November, 1996, totaling
$3,999,997. Interest expenses for Fiscal 1997 were $2,800 compared with $3,320
in Fiscal 1996.

Net Loss. Net losses increased $397,763 or 19% to $2,487,335 for Fiscal
1997 compared with $2,089,572 for Fiscal 1996. The increased loss during Fiscal
1997 resulted from increased research and development, business development, and
general operating activities.

Fiscal Year Ended September 30, 1996 Compared with Fiscal Year Ended September
30, 1995.

Revenues. Revenues decreased $65,535 or 17% to $321,444 in Fiscal 1996
compared with $386,979 for the fiscal year ended September 30, 1995 ("Fiscal
1995"). Revenues in 1996 consisted of $220,492 from a Phase II SBIR grant from
the NIH to support the Company's EHEC program and $100,000 from Lilly under the
Lilly Agreements. Revenues in Fiscal 1995 consisted of $181,707 from contracts
from the Department of Defense for the Company's antitoxin and vaccine programs
and the NIH for the Company's EHEC and other passive antibody programs, $200,000
received from Wyeth-Ayerst Laboratories ("Wyeth") in connection with a
collaborative product development and license agreement related to Ophidian
antivenom technology and miscellaneous biologic reagent sales.

Research and Development Expenses. Research and development expenses
increased by $123,682 or 10% to $1,339,048 in Fiscal 1996 compared with
$1,215,366 in Fiscal 1995. Research and development expenses in both fiscal
years included personnel, supplies, and allocated overhead in support of the
Company's avian antibody programs and other infections disease laboratory
activities. The increased costs in Fiscal 1996 were associated primarily with
pilot manufacturing in support of pre-clinical and clinical development of the
Company's CDAD therapeutic antitoxin.

General and Administrative Expenses. General and administrative expenses
increased $203,115 or 22% to $1,119,409 in Fiscal 1996 compared with $916,294 in
Fiscal 1995, reflecting increased personnel and

24
<PAGE> 26

overhead costs to support expanded technology development programs, business
development activities and technology licensing.

Investment Income and Expenses. Investment income decreased $93,989 or 65%
to $50,761 in Fiscal 1996 compared with $144,750 in Fiscal 1995. Income was
earned on deposits in a cash management account. The decrease in investment
income in Fiscal 1996 was due to lower average monthly cash balances during the
year as compared with Fiscal 1995. Interest expenses decreased $1,304 or 28% to
$3,320 in Fiscal 1996 compared with $4,624 in Fiscal 1995, and are related to
capital leases of office equipment.

Net Loss. Net losses increased $485,685 or 30% to $2,089,572 in Fiscal 1996
compared with $1,603,887 in Fiscal 1995. The increase in net losses in Fiscal
1996 was due primarily to increased expenses and reduced investment income.

Fiscal Year Ended September 30, 1995 Compared with Fiscal Year Ended September
30, 1994.

Revenue. Revenues decreased $630,648 or 62% to $386,979 in Fiscal 1995
compared with $1,017,627 in the fiscal year ended September 30, 1994 ("Fiscal
1994"). Revenues in 1995 consisted of $186,283 from research grants and
contracts from the Department of Defense for the Company's antitoxin and vaccine
programs and the NIH for the Company's EHEC and other passive antibody programs,
$200,000 from Wyeth in connection with a collaborative product development and
license agreement, and miscellaneous biologic reagent sales. Revenues in Fiscal
1994 included $657,553 received from Wyeth, $357,024 from the Department of
Defense and the NIH for the Company's antitoxin, vaccine and passive antibody
programs, and $3,050 in miscellaneous revenues.

Research and Development Expenses. Research and development expenses
increased $58,938 or 5% to $1,215,366 in Fiscal 1995 compared with $1,156,428 in
Fiscal 1994. Research and development activities in both years included
collaborative research, federal research contracts, and the Company's infectious
disease research and development programs. Increased expenses in Fiscal 1995
reflected normal annual increases in personnel and overhead costs.

General and Administrative Expenses. General and administrative expenses
increased $162,745 or 22% to $916,294 in Fiscal 1995 compared with $753,549 in
Fiscal 1994. The increase in Fiscal 1995 resulted primarily from additional
personnel and consulting costs to support development of the Company's passive
antibodies programs.

Investment Income and Expense. Net investment income decreased $46,290 or
24% to $144,750 in Fiscal 1995 compared with $191,040 in Fiscal 1994. Interest
income in Fiscal 1994 was greater due to higher average balances in the
Company's cash management account. Interest expenses increased $542 or 13% to
$4,624 in Fiscal 1995 compared with $4,082 in Fiscal 1994.

Net Loss. Net losses increased $898,592 or 127% to $1,603,887 in Fiscal
1995 compared with $705,295 in Fiscal 1994. The increased loss in Fiscal 1995
was due primarily to increased operating expenses and reduced revenues resulting
from discontinuation of the agreement with Wyeth.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily through
the sale of equity and revenues consisting of payments received under
collaborative agreements and federal research grants. As of December 31, 1997,
the Company had received $12,813,341 in proceeds from the sale of equity. The
Company's principal sales of equity have occurred through private placement
stock offering activities and sales to Lilly.

In January 1990, the Company sold 800,000 shares of Common Stock to
Fitchburg Research Park Associates ("FRPA") at $.0625 per share, resulting in
net proceeds to the Company of $50,000.

In December 1992, the Company sold 933,120 shares of Common Stock and
warrants in a private placement offering at $2.00 per unit consisting of one
share of Common Stock and a warrant to purchase one-half additional share at an
exercise price of $2.25 per share, resulting in net proceeds to the Company of
$1,828,364. In March 1993, warrants to exercise 447,120 shares of common stock
sold pursuant to this offering were exercised at an exercise price of $2.25 per
share, resulting in net proceeds to the Company of $1,006,020.
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The Company sold 579,482 shares of Common Stock in a private placement
offering at $4.50 per share, which was completed in June, 1993 resulting in net
proceeds to the Company of $2,579,661.

In September 1993, Fitchburg Research Park Associates exercised its warrant
(issued October, 1990) to purchase 125,000 shares of Common Stock at $2.00 per
share, resulting in net proceeds to the Company of $250,000.

The Company sold 485,805 shares of Common Stock in a private placement
offering at $5.50 per share, which was completed in October 1996 resulting in
net proceeds to the Company of $2,629,957.

In June 1996, the Company and Lilly entered into the Lilly Agreements,
according to which the Company sold to Lilly 153,846 shares of Common Stock at
$6.50 per share and in October 1996 sold 545,454 shares of Common Stock at $5.50
per share, resulting in aggregate net proceeds of $3,999,997.

Net cash used in operating activities was $2,468,689 in Fiscal 1997 as
compared with net cash used in operating activities of $1,581,943 in Fiscal
1996. The increase in cash used in operations is primarily the result of
increased research and development funding activities and general and
administrative expenses. Net cash used in investing activities was $77,494 in
Fiscal 1997, as compared with net cash provided of $458,610 in Fiscal 1996. The
net decrease in cash used in investing activities was attributable to a net
decrease of $121,821 in the proceeds received from available-for-sale securities
combined with an increase in capital expenditures of $67,379 and patent costs of
$346,904. Net cash provided by financing activities was $2,816,880 in Fiscal
1997, as compared with net cash provided by financing activities in Fiscal 1996
of $3,512,095. The decrease in cash provided by financing activities is
primarily attributable to proceeds from the sale of equity. Fiscal 1996 included
a private placement offering which was completed in October 1996 resulting in
net proceeds of $2,629,957 and an equity sale to Lilly of $999,999. Fiscal 1997
proceeds included a second equity sale to Lilly of $2,999,997. At September 30,
1997 the Company had cash and cash equivalents of $3,547,036.

Net cash used in operating activities was $1,581,943 for Fiscal 1996, as
compared with net cash used in operating activities of $1,440,141 for Fiscal
1995. The increase in cash used in operating activities is primarily
attributable to increased research and development funding activities and
increased general and administrative expenses. Net cash provided by investing
activities was $458,610 for Fiscal 1996 as compared to $822,549 for Fiscal 1995.
The decrease is principally attributable to a decrease in net proceeds received
from available for sale investment activities. Net cash provided by financing
activities was $3,512,095 for Fiscal 1996 as compared with cash used in
financing activities of $16,126 for Fiscal 1995. The change is primarily
attributable to the receipt of $999,999 in proceeds from the sale of equity to
Lilly and $2,517,367 of net proceeds in a private placement offering received in
Fiscal 1996 while there were no equity sales in Fiscal 1995.

The Company has established and intends to renew annually a bank
line-of-credit in the principal amount of $500,000 secured against cash
investments. The Company has not borrowed against this line-of-credit and has no
current plans to do so.

Through December 31, 1997, the Company had invested approximately $767,903
(including capital lease obligations) in equipment and leasehold improvements.
The present value of obligations under capital leases at December 31, 1997 was
$29,663. Minimum annual principal payments due under capital leases total
$16,450 in Fiscal 1998 and decline each year thereafter until expiration in the
year 2003. The Company made principal payments under capital lease obligations
of $17,703, $15,783 and $16,126 in Fiscal 1997, 1996 and 1995, respectively. The
Company invested $145,216 in Fiscal 1996, $492,120 in Fiscal 1997 and $108,705
in the three months ended December 31, 1997 for patents based on the Company's
research and development activities.

The Company believes that the anticipated net proceeds from this Offering,
together with its existing capital resources, interest income and future
revenues, if any, due under collaborative agreements, will be sufficient to
satisfy its funding requirements for at least 12 months. The Company expects to
secure long-term debt financing of up to approximately $5 million to complete
construction of its manufacturing facility. These funding requirements include
continued expenditures for research and development programs, as well as
expenditures related to expanded laboratory and general corporate facilities and
the establishment of pilot manufacturing facilities.

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Furthermore, the Company anticipates that the following material changes
resulting from its collaboration with Lilly will occur in the next twelve
months: hiring of additional manufacturing personnel, purchase of capital
equipment and increased operating expenses in connection with bulk product
manufacturing.

NET OPERATING LOSSES

The Company has not generated taxable income to date. At September 30,
1997, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $7,604,000. These carryforwards
expire beginning in 2007 if not utilized. At September 30, 1997, the Company has
research and other federal tax credit carryforwards of approximately $423,000
and Wisconsin carryforwards of approximately $192,000. The Company has recorded
a full valuation allowance against any deferred tax assets established for the
carryforwards.

The Company anticipates that its expenses incurred in bulk manufacturing of
the CDAD product will increase and will contribute to future increases in net
operating losses. These future increases in operating losses will result from
the hiring of additional manufacturing and quality control personnel and the
operation of a facility.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Since this statement applies only to the presentation
of comprehensive income, it will not have any impact on the Company's results of
operations, financial position or cash flows.

In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The statement defines operating segments as components of an
enterprise for which separate financial information is available and evaluated
regularly as a means for assessing segment performance and allocating resources
to segments. A measure of profit or loss, total assets and other related
information are required to be disclosed for each operating segment. In
addition, this statement requires the annual disclosure of information
concerning revenues derived from the enterprise's products or services,
countries in which it earns revenue or holds assets, and major customers. The
statement is also effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS No. 131 will not affect the company's results of operations
or financial position, but may affect the disclosure of segment information in
the future.

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BUSINESS

SUMMARY

Ophidian, a development stage company, is engaged in the research and
development of pharmaceuticals with an emphasis on products for infectious
diseases. Under a collaboration with Lilly, the Company is developing a product
for the treatment of CDAD. CDAD is a bacterial infection that has become a
common side effect of antibiotic therapy. The CDAD product is a result of the
Company's strategy to design new drugs for infectious diseases by targeting
molecules involved in the host-pathogen interaction.

Ophidian signed a collaborative development and license agreement and a
stock purchase agreement with Lilly in June, 1996. Under the Lilly Agreements,
Ophidian has received $4.4 million in equity investments and development
milestone payments. Lilly will pay the Company an additional $8.0 million if
certain CDAD product development objectives are met and Lilly chooses to proceed
with development. The Lilly Agreements provide for Lilly to fund and conduct
clinical testing, registration and marketing of the CDAD product worldwide and
Ophidian to manufacture bulk drug for clinical and commercial use. The CDAD
product is a passive antibody formulation that neutralizes disease-causing
toxins secreted by C. difficile during infection of the human intestinal tract.
These toxins are responsible for the development of diarrhea, inflammation and
symptoms of colitis caused by the C. difficile organism. CDAD is a common side
effect of treatment with certain broad spectrum antibiotics. Based on surveys
and research, the Company estimates that CDAD arises in approximately one
percent of all hospitalized patients. An IND for initial human clinical testing
of the CDAD drug was filed in November 1997.

The Company is also developing a drug to prevent disease caused by EHEC,
including E. coli O157:H7. Ophidian has received research funding of $816,000
from the NIH for this program. The public health problem of EHEC became widely
recognized following outbreaks in the U.S. and Japan that afflicted thousands of
persons as a result of contaminated food products, including ground beef. The
Company has shown in animals that the injection of its passive antibodies that
neutralize EHEC toxins can block progression of lethal disease symptoms. The
Company is conducting pre-clinical development of its EHEC passive antibodies as
a potential human therapeutic.

Broad-spectrum antibiotics are the most commonly used drugs to treat
infectious diseases, with worldwide sales of approximately $20 billion annually.
However, increased microbial resistance to antibiotics and the emergence of new
infectious agents have created a significant need for new approaches for the
treatment of infectious diseases. In addition, broadspectrum antibiotics can be
detrimental to the patient because beneficial microbes are often killed along
with the disease-causing pathogen. The Company's research strategy is to develop
infectious disease drugs that target molecules involved in specific
host-pathogen interactions. In contrast to typical antibiotics, the Company's
products are designed to leave beneficial microbes undisturbed, support the
action of the host's immune system, and reduce the potential for the development
of microbial resistance. The Company has 57 patents, issued or pending, from its
research and development programs and has acquired rights to several external
patents to supplement its technology.

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INFECTIOUS DISEASES

Infectious diseases remain the world's leading cause of premature death.
Between 1980 and 1992, the death rate due to infectious diseases rose 58% in the
United States, making infectious diseases the third leading cause of death in
this country behind heart disease and cancer. In 1995, it was reported that in
the United States, approximately 25% of physician visits were attributable to
infectious diseases and their indirect costs were estimated at more than $120
billion. Despite the use of antibiotics and other drugs, infectious disease
prevention and treatment remains a major medical challenge throughout the world.
It has been estimated that 4 billion cases of infectious diarrhea occurred in
1995. Tuberculosis continues to be epidemic worldwide, with 1995 estimates of
over 1.9 billion carriers and 8.9 million new cases per year. Other familiar
bacterial (whooping cough, respiratory infections, meningococcal meningitis) and
viral (hepatitis, measles) diseases continue to be among the ten most common
infections worldwide. In addition, hospital acquired (nosocomial) infections,
such as CDAD, add significant costs to the treatment of patients hospitalized
for many other diseases. The Company estimates that CDAD alone is responsible
for over $1 billion in hospital charges annually in the U.S.

The emergence of infectious agents as health care problems, such as EHEC,
provides new challenges and opportunities for antimicrobial drugs.
Cryptosporidiosis, toxic shock syndrome, Legionnaires' disease, Ebola
hemorrhagic fever, hemolytic uremic syndrome, AIDS, gastric ulcers, and Lyme
disease are among the diseases that have emerged in the past two decades. The
emergence of new pathogens has resulted from: the capacity of microbes to change
and adapt in ways that make them more virulent or resistant to drugs and
vaccines; an increased population of persons, such as children in daycare
centers, the elderly or institutionalized patients, that may be more susceptible
to infection; and increased international travel and trade that allow infections
to spread rapidly and widely. These factors are promoting new or previously
unrecognized infectious agents to emerge as human pathogens and known pathogens
to reemerge in regions where they were once thought to be under control.

In addition to these infectious agents, other microbes are causing disease
based on their ability to resist conventional antibiotic therapy. Among these,
vancomycin-resistant enterococci, penicillin-resistant pneumococci,
multi-resistant S. aureus, and multi-resistant tuberculosis have become
significant clinical problems. While new antibiotics that attack a broad
spectrum of pathogens may help to overcome the present crisis of pathogen
resistance, microbes will likely evolve new mechanisms of resistance. With the
rise in antibiotic resistance, emergence of new pathogens, and harmful side
effects associated with the widespread use of broad spectrum antibiotics, new
medical strategies are needed to control infectious diseases.

Antibiotics are the mainstay of infectious disease medicine. Traditional
antibiotics are chemicals that interfere with essential metabolic processes or
structural components of the microbe, resulting in microbial killing or
inhibition of microbial multiplication. These chemicals are nonspecific in that
both the undesirable pathogen and desirable members of the microbial flora
normally living in the host are destroyed. The beneficial microbes compete with,
and are an important barrier to, infectious pathogens. Loss of this barrier,
especially in patients that are immunocompromised, can lead to further disease
complications and can predispose the patient to infections by other pathogens.
Ophidian is pursuing an alternative medical approach-to develop drugs that are
active against only a single pathogen or limited spectrum of organisms.

In certain clinical scenarios broad-spectrum antibiotics may be incapable
of preventing host injury once infection is diagnosed. In diseases such as CDAD,
hemolytic uremic syndrome caused by EHEC, and sepsis, antibiotics are unable to
prevent the widespread organ damage caused by toxins released from the offending
bacterium. In other scenarios, the host's efforts to wall off, kill or
neutralize pathogens, may proceed rapidly, causing fibrosis (scarring) and other
complications. These aspects of infectious disease require drug strategies
(i.e., disease specific) that involve the interaction of the host and pathogen.

Ophidian focuses on the discovery and development of new antimicrobial
drugs that avoid resistance and damage to the normal flora or that treat
infection-related host injury. This is accomplished by targeting molecules
involved in the interaction of the host and pathogen. Ophidian has selected
certain virulence factors, such as bacterial toxins, as drug targets because
they are specific to a pathogen and likely to remain essential to pathogenesis.
The Company uses this specificity to design drugs that do not disrupt the normal
microbial
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ecology of the host and are less susceptible to resistance development. The
Company's lead products are also designed to prevent host injury from
inflammatory or other undesirable defense reactions brought on by infection.

THE COMPANY'S PRODUCTS

Therapeutic Antitoxin for Clostridium difficile-Associated Disease (CDAD).
Since June 1996, Ophidian and Lilly have collaborated on the development of the
Company's passive antibodies to treat or prevent CDAD. Ophidian and Lilly have
completed pre-clinical studies and filed an IND in November of 1997.

CDAD afflicts, in the Company's estimation, one percent of all hospital
admissions in the U.S. and as many as one million patients annually worldwide.
The management of diarrheal disease characteristic of CDAD is a growing burden
to hospitals and is especially problematic on medical and surgical wards. Most
patients develop a self-limiting diarrhea, but some progress to pseudomembranous
colitis, toxic megacolon, peritonitis, and/or death.

An epidemic of CDAD is attributed to the widespread use of broad-spectrum
antibiotics that alter the intestinal flora and predispose a patient to C.
difficile infection, either by allowing resident organisms to proliferate or by
exposing the host to nosocomial infection. The costs of CDAD can easily amount
to thousands of dollars per patient due to nursing care, barrier precautions,
diagnostic tests, and medical treatment. In an intensive care unit, the costs
are compounded by the battery of diagnostics and empirical antibiotic therapies
that are ordered when a patient becomes febrile.

Vancomycin has been a drug of choice for treating CDAD, but its use is
being restricted due to selection for vancomycin-resistant enterococci. In 1995,
the Centers for Disease Control and Prevention ("CDC") reported a twenty-fold
increase in the incidence of vancomycin-resistant enterococci ("VRE").
Epidemiologists suspect the widespread use of vancomycin is selecting for VRE.
Certain strains of VRE are now resistant to all proven antibiotic therapies.
Vancomycin resistance can be transferred genetically from enterococci to
Staphylococcus aureus. Methicillin-resistant Staphylococcus aureus is an
organism that is currently susceptible only to vancomycin. Enterococcus and S.
aureus are two of the most prevalent pathogens causing sepsis and other serious
nosocomial infections. As a result, it has been recommended that hospitals
restrict vancomycin use as a primary therapy for CDAD treatment. As an
alternative antibiotic, metronidazole is used for CDAD control. Metronidazole is
as effective as vancomycin in terms of relapse rates and response time for mild
and moderate CDAD; however, metronidazole's toxicity and efficacy in severe
cases of colitis are a concern. The American College of Gastroenterology issued
guidelines recommending that physicians switch from metronidazole to vancomycin
therapy if symptoms do not abate.

Ophidian is proposing to treat or prevent CDAD by using specific passive
antibodies. The medical advantages of the Company's CDAD product could include
more rapid recovery, fewer relapses, and reduction of resistance development in
intestinal bacteria. Ophidian has shown in animals that its orally delivered
antibodies neutralize C. difficile toxins without disrupting the intestinal
function. C. difficile causes disease by producing two potent toxins, known as
toxins A and B, that are released by the bacteria and cause severe damage to the
gut lining and underlying tissue. By attacking the toxins specifically, the
pathogenic mechanism of the organism is blocked; its ability to thrive in the
gut is diminished; and, the normal microbial ecology is allowed to recover.
Because the toxin neutralizing passive antibodies are polyclonal and react to
multiple toxin epitopes, the Company believes that the emergence of resistant C.
difficile strains is unlikely.

The Company has demonstrated the effectiveness of its passive antibodies in
the hamster model of CDAD. This animal model offers clear end-points, is
reproducible, and has been highly predictive of antibiotic performance in human
disease. Prophylactic or therapeutic administration of Ophidian's antibodies
prevents tissue destruction, diarrhea, and death in the animal model.
Importantly, relapse does not occur after termination of Ophidian's antibody
therapy, whereas the animals relapse and die within five to seven days after
metronidazole or vancomycin treatment is ended.

The Company believes efficacy trials for its CDAD passive antibodies can
proceed more rapidly than for many other drugs since CDAD is prevalent and
easily and accurately diagnosed. In addition, the normally

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acute course of CDAD allows the effectiveness of drugs to be evaluated in days
to weeks. Ophidian's antibodies are isolated from hen eggs that are a normal
dietary component. Therefore, the Company believes they will be safe when used
as an orally delivered therapeutic. Ophidian has produced avian antibodies
through the use of various contract manufacturers and intends to apply a portion
of the proceeds for this offering to establish its own manufacturing capability.
The Company can provide no assurance that the FDA will determine that Ophidian's
antibodies are safe or effective or that their manufacture will meet FDA
requirements.

The Company has more than 15 United States or foreign patents, issued or
pending, relating to the compositions, methods and uses of its avian antibodies
for CDAD.

Antitoxin for Enterohemorrhagic Escherichia coli (EHEC). Ophidian is
developing an EHEC passive antibody formulation funded by an $816,000 grant from
the NIH. The Company is currently conducting pre-clinical studies in animal
disease models.

EHEC, such as serotype O157:H7, have emerged as serious food-borne
pathogens. EHEC gained wide-spread notoriety in the U.S. after a major outbreak
in the Pacific Northwest in which over 700 people fell ill due to undercooked
ground beef, which contained E. coli 0157:H7. Worldwide, E. coli O157:H7 and
other EHEC are becoming increasingly evident as a human health problem.
Estimates from the CDC indicate that over 20,000 E. coli O157:H7 infections
occur annually in the U.S., resulting in 400-500 deaths. Although O157:H7 is the
predominant E. coli serotype causing illness in North America, several other
serotypes produce toxins and have been associated with major outbreaks in
Europe, Mexico, China, Argentina, and Thailand.

EHEC cause a spectrum of illness ranging from mild, uncomplicated diarrhea
to severe bloody diarrhea and about 10% of patients progress to renal disease
known as hemolytic uremic syndrome (HUS). Disease symptoms are caused by toxins
(known as vero- or Shiga-like toxins) released by ingested bacteria that destroy
the intestinal lining, causing bloody diarrhea and allowing the further
dissemination of toxin into the bloodstream. It is believed that, within two to
four days after the onset of bloody diarrhea, systemic toxin may incite
microthrombi which can progress to kidney (or other organ) failure and death.

The Company believes the injection of its EHEC toxin-neutralizing
antibodies will halt systemic disease when delivered within two to four days
following onset of bloody diarrhea. Typically, patients do not seek medical
attention until the onset of bloody diarrhea, when toxins have likely begun
entering the bloodstream. Conventional antibiotic treatment may increase the
patient risk due to increased toxin release from the bacterium. Ophidian's
passive antibodies are designed to neutralize toxins that enter circulation
following EHEC infection. These polyclonal antibodies are directed to
recombinant verotoxins developed by Ophidian. The antibody formulation
neutralizes both major verotoxin types produced by organisms of the O157:H7
serotype as well as structural variants produced by other serotypes such as
O91:H21.

Ophidian's antibodies can be protective against lethality in a rodent model
of EHEC infection when administered up to 36 hours following EHEC inoculation.
These results demonstrate a window for therapeutic intervention in animal EHEC
disease. Without treatment, animals inoculated orally with viable EHEC bacteria
will develop disease symptoms within 48 hours and will die due to kidney and
other complications after four to five days.

The Company's funding from the NIH will support research and development of
the EHEC project at Ophidian until March 1998. Ophidian will seek to establish a
partnership with a biotechnology firm or regional public health agencies to
participate in the clinical development and, if approved, marketing of the
product. The Company has filed two patent applications relating to compositions
of and methods for producing EHEC antibodies and their therapeutic use.

Vaccines and Antitoxins for Biological Agents. From 1991 to 1996, Ophidian
received over $600,000 in contracts from the U.S. Department of Defense for the
research and development of antitoxins and vaccines to a number of biologic
agents. These programs applied the Company's technology in recombinant microbial
antigens (particular bacterial toxins), capabilities in the cloning and
expression of Clostridium genes, and avian passive antibody formulation. The
Company has shown in various animal models, including primates,

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that its vaccines and passive antibodies are safe and effective against specific
toxins. Furthermore, the Company believes that the clinical development
requirements for these products could be abbreviated because appropriate animal
models exist as surrogates to human testing and it is impractical to conduct
efficacy trials by exposing humans to biological toxins. The Company currently
has four United States or foreign patents, issued or pending, relating to
antitoxins and vaccines to biologic agents.

Diagnostic Products. Ophidian has developed reagents (polyclonal
antibodies, recombinant microbial proteins, and peptides) in the course of its
drug development that have application in clinical diagnostic testing. The
Company's technology facilitates the manufacture of these reagents on a
commercial scale using methods developed in its therapeutic programs, such as
CDAD. The Company believes that these reagents could be sold to clinical
diagnostic firms as components in their instrumented assay systems or test kits.
The Company believes that it could receive bulk reagent supply revenues and/or
royalties from final product sales. In addition, the development of rapid and
accurate infectious disease diagnostics based on Ophidian's reagents could
assist in the clinical development of Ophidian's therapeutic candidates by
providing improved diagnosis and therapy decisions. The Company has United
States or foreign patents, issued or pending, relating to diagnostic
applications of its CDAD and EHEC programs.

Additional Therapeutic Products for Infectious Disease. Ophidian intends to
pursue the development of additional products resulting from its programs in
target discovery and drug design for passive antibody products. The Company is
applying its technologies for products to treat or prevent acute
gastrointestinal infections or microbial toxin-mediated diseases. In addition,
the Company is developing drug candidates for chronic diseases, such as chronic
inflammatory bowel disorders, where responses to infectious agents are
implicated in the disease process. The Company is also identifying small
molecule compounds that react with microbial virulence factors for diseases
where passive immunization or vaccination is unsuited. The Company has 10 United
States or foreign patents, issued or pending, relating to its small molecule
drug discovery programs.

OPHIDIAN'S DISCOVERY TECHNOLOGIES

The Company's technology focuses on the interaction of the infectious agent
with the host to discover new targets for therapeutic intervention. The Company
identifies and evaluates drug targets by using molecular genetics, protein
biochemistry and animal disease models and designs drug candidates to react with
these targets that interfere with the disease process. Ophidian's study of human
cellular regulation pathways is directed to the discovery of new infectious
disease drugs and is also relevant to non-infectious diseases.

Ophidian uses antibodies to bind and neutralize virulence factors of
pathogenic bacteria, such as C. difficile and E. coli toxins. For targets in the
intestinal tract, Ophidian has shown that avian antibodies can be formulated in
a solid oral dosage form. Oral delivery of pathogen-specific antibodies is
intended to block the infection process while leaving the normal, beneficial
bacterial flora undisturbed.

Microbial Virulence Factors Program. The Company's strategy to target
microbial virulence factors in drug design is exemplified by its CDAD and EHEC
programs where both diseases are caused by toxin-producing bacteria. Ophidian
has established expertise in the laboratory analysis of toxin molecules and
animal models of disease. Microbial toxins provide ready targets for
intervention with vaccines and passive antibodies. For example, existing
vaccines for tetanus and diphtheria stimulate antibodies that neutralize
microbial toxins responsible for virulence. Many other common pathogens,
including Clostridium, E. coli, Staphylococcus, Streptococcus, Shigella and
Vibrio, produce toxins or enzymes that are either the direct cause of disease or
are important in the disease process.

Molecules related to other disease-causing microbes can be identified by
understanding the mechanism of interaction between disease-causing microbes and
the susceptible host. The Company has analyzed therapeutic targets from
organisms including C. difficile, enterohemorrhagic E. coli, enteroadherent E.
coli, C. botulinum, gram negative endotoxin from various gram negative
organisms, and staphylococcal enterotoxins. The Company has over 20 United
States or foreign patents, issued or pending, relating to compositions or
therapeutic use of microbial targets from these organisms.

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Ophidian's study of microbial virulence factors includes the following
steps.

1. Selection of Virulence Factor Target. Potential drug targets are
evaluated in laboratory studies whereby antibodies or small molecules are
designed to interfere with virulence factors. Targets are selected if the
disease process can be impeded and an appropriate drug form can be designed
(i.e., a suitable drug for intestinal use).

2. Production of Target for Drug Development. Certain virulence factors,
such as toxins, can be extracted only in small quantities from laboratory
cultures of the pathogenic organism. Even if available, naturally-occurring
toxins can be hazardous to manipulate and unsuitable for pharmaceutical
research. Ophidian develops recombinant forms of virulence factors that can be
expressed with appropriate chemical conformation, purified and handled safely
using proprietary techniques of molecular cloning and expression.

3. Drug Design. The Company's principal approach to drug design is the
application of immunochemical techniques. Ophidian maps the regions of the
protein that are optimally susceptible to drug targeting using antibodies as
probes. From this analysis, passive antibodies or vaccines can be developed.
Alternatively, the target can be used to screen chemical libraries to identify
small molecule drug candidates.

4. Develop Process Reagents. When the optimal drug form is passive
antibodies or vaccines, the recombinant production system is scaled to yield
larger quantities of the target molecule.

5. Animal Models of Disease. Ophidian tests the effectiveness of antibody
or other drug formulations using animal (usually rodent) models of disease.
Treatment regimens and dosing are evaluated to arrive at a drug composition
yielding the desired therapeutic effect.

Host Response Program. The Company has initiated a program to identify host
functions that are involved in infectious disease pathogenesis. The Company is
targeting the "transforming growth factor beta" (TGF-SS) pathway for new drug
discovery because this pathway is used by several infectious agents to suppress
the immune response of the host. Pathogens, including viruses, bacteria, fungi
and multicellular parasites, can exploit many host cell functions, including
signal transduction pathways, cytoskeletal rearrangements and vacuolar
trafficking. In turn, the host cell environment can induce specific patterns of
gene expression in a pathogen. The TGF-SS cytokine is known to regulate cell
growth, fibrogenesis and the immune response in numerous diseases.

The Company's strategy is to study molecules involved in the TGF-SS signal
transduction pathway to increase the number of targets for drug intervention.
Cells respond through cell surface receptors for TGF-SS that activate signal
transduction proteins inside the cells called SMADS. Upon activation, SMADS
enter the cell nucleus and participate in the regulation of TGF-SS-responsive
genes. The Company believes that targeting molecules involved in TGF-SS signal
transduction, such as SMADS, may provide a means to modulate specific TGF-SS
responses during infectious and other disease processes.

The Company is developing specific assays for high throughput screens for
new small molecule activators and inhibitors of the pathway. The Company has
acquired intellectual property for various uses of SMADS and established an
academic collaboration to evaluate the biological actions of such novel
compounds affecting SMADS. The Company intends to test such leads in animal
models of infectious disease-induced immunosuppression and fibrosis as well as
for other indications. As other targets and pathways are validated through
genetic manipulation in animal models of disease, the Company and its
collaborators intend to develop appropriate biological assays for future small
molecule drug discovery efforts.

Drugs and drug targets discovered in this program may have other medical
applications. The range of disease applications that could result from the study
of TGF-SS targets expands well beyond Ophidian's interest in infectious
diseases. The Company expects to outlicense those applications that are outside
its business interest or establish sponsored research agreements with firms
wanting access to Ophidian's signal transduction targets for drug discovery or
diagnosis. Possible disease applications of Ophidian's technology are summarized
below.

Cancer. Drugs that affect SMADS may compensate for disease-causing
mutations in SMAD genes or in the genes of receptors and other proteins that
exert their effects through SMADS. Mutations in the TGF-SS

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receptor and SMAD genes on the TGF-SS pathway have been detected in colon and
other cancers. Mutations in the type II TGF-SS receptor are detected in
approximately 20% of sporadic colorectal cancers. Mutations in the TGF-SS
pathway SMAD4 protein are found in human pancreatic cancer and 90% of human
pancreatic cancers exhibit chromosome loss for the chromosomal region that
includes SMAD4. In addition, defects detected in prostate cancer include loss of
TGF-SS receptors.

Fibrotic diseases. Fibrotic diseases occur when the body's response to
tissue injury results in an overproduction of extracellular matrix deposition.
New drugs that target TGF-SS could be used to temper the body's response to
tissue injury so that tissue regeneration can occur in a more orderly fashion,
without the potentially life threatening complications engendered by extensive
fibrosis. Overproduction of TGF-SS is a major cause of fibrotic diseases
affecting the kidney, lung, liver, bone marrow, and heart. Fibrosis of the
kidney contributes to end stage renal disease, which in 1993 affected over
250,000 people and led to over $11 billion in healthcare expenses in 1994.
Interference with TGF-SS by binding proteins has had positive therapeutic
effects in animal models for glomerulonephritis. Chronic liver disease, which is
often caused by viral infections, is also associated with fibrosis that
progresses to cirrhosis. Interfering with TGF-SS allows wounds to heal without
scarring.

Other diseases. The pathogenicity of over-exuberant repair reactions may
also pertain to the reported actions of TGF-SS in osteoarthritis in which low
level expression can heal cartilage damage but high level expression mimics the
changes found in the diseased joints. In addition, there are implications
involving the TGF-SS pathway which the Company may explore in conditions ranging
from immunosuppression, myelodysplastic syndromes, bone loss, neural
degeneration, and Alzheimer's disease.

OPHIDIAN'S MANUFACTURING TECHNOLOGY

Ophidian has developed a manufacturing technology which harvests polyclonal
antibodies from the egg yolks of hyperimmunized laying hens. In contrast to
large mammals, laying hens provide a practical animal production source for the
development and optimization of new antibody products. Similar experimentation
in large mammals is burdened by expense, time, material, and potential animal
losses. The production capacity of hens and the efficiency of extracting
antibodies from eggs provides an efficient source of antibodies that the Company
considers advantageous for large-scale production.

Ophidian believes the use of avian antibodies as a drug form is attractive
because of the following features:

- Hens generate large quantities of antibody relative to their body mass.

- Hens can typically be immunized safely with higher doses of immunogen on
a body weight basis than large mammals, resulting in high specific
antibody output.

- The costs of purchasing, housing, and maintaining production hens can be
less than for horses or other large mammals.

- Egg yolks containing IgY can be separated using high-throughput food
industry automation.

- Antibodies can be recovered using bulk fractionation without the use of
volatile solvents.

- Antibody preparations can be filter-sterilized, lyophilized, tableted and
reconstituted without appreciable loss of structural integrity and can be
enterically coated for oral delivery.

The Company has developed process protocols to facilitate work flow,
maximize egg production, and maximize IgY output. The Company has developed
process and logistical controls that it believes will meet Good Manufacturing
Practices requirements of the FDA. Ophidian has carried out various stages of
the IgY manufacturing process under contracts with manufacturing firms. Ophidian
is developing its own manufacturing capability to produce pharmaceutical grade
IgY in larger scale and intends to apply a portion of the proceeds of this
Offering to acquire a manufacturing facility and pay expenses associated with
its validation and operation.

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OPHIDIAN'S BUSINESS STRATEGY

The Company's strategy is to commercialize technologies and products from
its research and development programs. The Company intends to manufacture and
sell its bulk pharmaceuticals, receive royalties from the sale of its product
through marketing partners, receive license fees from the use of its
technologies and establish sponsored research agreements encompassing Ophidian
technologies. The Company intends to achieve its objectives as follows.

- Develop portfolio of infectious disease drugs. The Company has applied
its resources to a portfolio of products to diversify the risks inherent
in pharmaceutical product development. The establishment of a product
portfolio is also intended to leverage the Company's proprietary
discovery and manufacturing technologies and know-how in the field of
infectious disease.

- Develop new technologies for drug discovery and formulation. Ophidian's
research strategy is to discover new drug targets through examination of
and research involving molecules involved in the host-pathogen
interaction. The Company's initial programs on bacterial toxins as drug
targets has expanded to the study of host factors involved in the
infectious disease process.

- Develop business and enhance research through collaborations. The
Company's business strategy is to leverage the resources gained from each
collaboration to expand its technology and operations base. The Company
also intends to rely on commercial partners for the marketing, sales and
distribution of its products. In addition, collaborations with academic
centers can supplement the scientific resources available within Ophidian
and broaden access to rapidly emerging drug discovery technologies.

- Establish manufacturing capability to facilitate new product development
and retain a greater portion of product value. The Company intends to
establish a manufacturing business to maximize the commercial opportunity
of its core technologies. The Company intends to develop multiple
products based on its avian antibody manufacturing technology to leverage
its know-how and facilities investment. The Company also believes that
controlling its own manufacturing facility will accelerate the
development and licensure of future products.

COLLABORATIVE AGREEMENTS

In June, 1996, the Company and Lilly entered into a collaborative agreement
for the research, development, manufacture and sale of Ophidian's product for
the treatment of CDAD ("Development Agreement"). In connection with the
Development Agreement the parties also entered into a Stock Purchase Agreement
that set forth terms for the purchase of Ophidian common stock by Lilly. To
date, the Company has received $400,000 in development payments, $1.0 million
from the sale of stock to Lilly at signing of the Lilly Agreements, and $3.0
million from the sale of stock to Lilly upon achievement of the first
development milestone under the Lilly Agreements. Lilly has agreed to provide
the Company an additional $8.0 million through a cash payment and stock purchase
upon the completion of certain project milestones and Lilly's decision to
proceed with clinical development. Under the Development Agreement, Lilly also
agreed to fully fund pre-clinical and clinical development, formulation
development, and the submission of regulatory documents required for marketing
approval. Ophidian agreed to manufacture bulk drug substance for pre-clinical
and clinical development. The Company granted Lilly an exclusive worldwide right
to market, sell and distribute the CDAD product and exclusive worldwide license
to Ophidian's intellectual property as it applies to the CDAD product. Under the
Development Agreement, the Company is responsible for the production of bulk
drug substance and Lilly for drug product. The parties have agreed to a revenue
sharing plan as compensation for their respective manufacturing and marketing
activities. The Company is required to establish a manufacturing capability
sufficient to produce clinical and commercial quantities of bulk drug substance
for the CDAD product. Should Ophidian fail to meet its manufacturing
obligations, Lilly may assume bulk drug substance manufacturing rights subject
to certain payments to Ophidian. Under the terms of the Development Agreement,
Lilly may, at any time, terminate the agreement. Upon such termination, all
licenses to Ophidian technology would expire and Ophidian would retain ownership
of all information generated during the collaboration.

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In June, 1997, the Company entered into an agreement with Dr. Allen
Laughon, and other researchers, (the "Laughon Agreement") wherein the Company
was granted an exclusive license to compositions and methods for the binding of
certain molecules (i.e., SMADs) involved in the regulation of the TGF-b pathway
as set forth in a U.S. patent application. The Laughon Agreement also grants to
the Company an exclusive license to any products or other subject matter whose
discovery emanates from the licensed invention. The Company may maintain the
license upon the yearly payment of $10,000. The Laughon Agreement also requires
the Company to make cash payments upon the achievement of certain development
milestones for product candidates. In connection with the Laughon Agreement, the
Company has other agreements with Dr. Laughon and the University of
Wisconsin-Madison whereby the Company is funding ongoing SMAD research by Dr.
Laughon in his University laboratory. The Company will have certain patent
rights to inventions resulting from such research.

In September, 1991, the Company entered an agreement with Promega
Corporation ("Promega"), Madison, Wisconsin, ("Promega Agreement") to provide
marketing of the Company's technologies outside its core markets ("Core Markets"
are defined as therapeutic and diagnostic products and their accessory or
component parts, for human or animal use). Under the Promega Agreement, the
Company granted Promega an exclusive and confidential first right, for a period
of 10 years, to review any technology developed by the Company incidental to its
Core Markets. The Promega Agreement will terminate upon its tenth anniversary or
on the date when Promega owns less than one percent of the Company's common
stock. In connection with the Promega Agreement, Promega acquired shares of the
Company for an aggregate purchase price of $546,920. To date, no licenses have
been negotiated under the Promega Agreement.

The Company has formed collaborations with various academic or commercial
institutions for the evaluation of technology of either party. These agreements
may provide that ownership of the Company's inventions is retained by the
Company and ownership of the outside party's technology is retained by the
outside party. Should inventions arise during the course of a collaboration
which are invented by both the Company and the outside party, the parties agree
to negotiate in good faith the commercial use by the Company of such joint
inventions.

The Company has entered into license agreements with academic and
government agencies for the use of technologies involved in recombinant DNA
research. Maintenance of these licenses generally require annual payments and
certain royalties are payable upon the commercialization of products that employ
the technology. In aggregate, the Company pays approximately $22,000 annually to
these licensors.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies and to preserve its trade
secrets. It is the policy of the Company to file patent applications in the
United States and/or foreign jurisdictions. The Company currently holds 10
issued United States or foreign patents and has 47 United States or foreign
patent applications pending. No assurance can be given that the Company's patent
applications will be approved or that any issued patents will provide
competitive advantages for the Company's technologies or development of products
or will not be challenged or circumvented by competitors. With respect to
already issued patents and any patents which may be issued from the Company's
applications, there can be no assurance that claims allowed will be sufficient
to protect the Company's technologies. Patent applications in the United States
are maintained in secrecy until a patent issues, and the Company cannot be
certain that others have not filed patent applications for technology covered by
the Company's pending applications for, or may have received patents and may
obtain additional patents and proprietary rights relating to, compounds or
processes that may block the Company's patent rights or compete without
infringing the patent rights of the Company. In addition, there can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, that the rights granted thereunder will provide
proprietary protection or commercial advantage to the Company.

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for any such breach or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors. Although potential
collaborative partners and the Company's research partners and consultants are
not given access to proprietary trade secrets and know-how of the Company until
they have executed confidentiality agreements, these agreements may be breached
by the other party thereto or may otherwise be of limited effectiveness or
enforceability.

The ability to develop the Company's technologies and to commercialize
products using such technologies will depend on not infringing the patents of
others. Although the Company is not aware of any claim of patent infringement
against it, claims concerning patents and proprietary technologies determined
adversely to the Company could have a material adverse effect on the Company. In
addition, litigation may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third-party
proprietary rights. There can be no assurance that the Company's issued or
licensed patents would be held valid by a court of competent jurisdiction.
Whether or not the outcome of litigation is favorable to the Company, the cost
of such litigation and the diversion of the Company's resources during such
litigation could have a material adverse effect on the Company.

Under the Lilly Agreements, Ophidian granted to Lilly an exclusive
worldwide license with certain rights to sublicense under Ophidian's patents for
the manufacture, sale, and use of drug product employing avian antibodies useful
in the treatment of CDAD. Under the Agreements, Lilly has granted to Ophidian a
non-exclusive license to certain process technology. Should Lilly terminate the
Agreement out of a desire to end the collaboration, all licenses granted to
Lilly would be canceled and the non-exclusive license granted to Ophidian would
remain in force.

All pending patent applications referred to herein are derived from work of
the Company's employees, collaborators and consultants. The Company holds
exclusive worldwide rights to all inventions and patent applications made by its
employees pursuant to written employment agreements.

In addition to the patent applications described herein, the Company
intends to aggressively pursue patent protection for any new technologies that
it may develop or consider essential for its future business development and
intends to safeguard its remaining proprietary technology as trade secrets
through non-disclosure agreements with its employees and third parties.

The pharmaceutical industry has experienced extensive litigation regarding
patent and other intellectual property rights. Accordingly, the Company could
incur substantial costs in defending itself in suits that may be brought against
the Company claiming infringement of the patent rights of others or in asserting
the Company's patent rights in a suit against another party. The Company may
also be required to participate in interference proceedings declared by the
United States Patent and Trademark Office for the purpose of determining the
priority of inventions in connection with the patent applications of the Company
or other parties. Adverse determinations in litigation or interference
proceedings could require the Company to seek licenses (which may not be
available on commercially reasonable terms) or subject the Company to
significant liabilities to third parties, and could therefore have a material
adverse effect on the Company.

COMPETITION

The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Several other
companies have developed or are developing novel technologies for the prevention
and treatment of infectious diseases, and those competing technologies may prove
superior, either generally or in particular market segments, in terms of factors
such as cost, consumer satisfaction or drug safety or efficacy profiles. The
Company's principal competitors in the area of infectious disease drug research
and development include companies, such as SmithKline Beecham Corporation,
Bristol-Myers Squibb Company, Abbott Laboratories as well as numerous
biotechnology firms, all of which have substantially greater financial,
technological, marketing, personnel, and research and development resources than
the Company. In addition, the Company may face competition from pharmaceutical
and biotechnology companies that may develop or acquire infectious disease
technologies. Companies that complete clinical trials, obtain regulatory
approvals and commence commercial sales before their competitors may achieve a
significant competitive advantage. A number of companies are developing new
products for the treatment of
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the same disease being targeted by the Company. In some instances, the Company's
competitors already have products in clinical trials. In addition, certain
pharmaceutical companies are currently marketing drugs for the treatment of the
same diseases targeted by the Company.

The Company believes that its competitive success will be based partly on
its ability to attract and retain scientific personnel, establish specialized
research and development capabilities, gain access to manufacturing, marketing
and distribution resources, secure licenses to external technologies, and obtain
sufficient development capital. The Company intends to obtain many of these
capabilities from pharmaceutical or biotechnology companies through
collaborative or license arrangements. However, there is intense competition
among early stage biotechnology firms to establish such arrangements. The
Company's development products may not be of suitable potential market size or
provide a compelling return on investment to attract other firms to commit
resources to a collaboration. Even if collaborations can be established, there
can be no assurance that the Company will secure financial terms that meet the
Company's commercial objectives.

MANUFACTURING

To be successful, the Company's products must be manufactured in commercial
quantities under appropriate controls as required by the FDA, and at an
acceptable cost. The Company has not yet manufactured any of its passive
antibodies for treatment of gastrointestinal infections in commercial quantities
and currently does not have the facilities to manufacture these products at
commercial scale. To proceed with product development, the Company will rely on
contract manufacturers to perform certain manufacturing processes. There can be
no assurance that the Company will be able to enter into any such manufacturing
arrangements on acceptable terms, if at all. If the Company is not able to enter
into commercial manufacturing agreements, it could encounter delays in
introducing its products.

Manufacturers of products utilizing Ophidian's avian technology will be
subject to applicable GMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into manufacturing agreements
either domestically or abroad with companies whose facilities and procedures
comply with GMP or applicable foreign standards. Should such agreements be
entered into, the Company will be dependent on such manufacturers for continued
compliance with GMP and applicable foreign standards. Failure by a manufacturer
to maintain GMP or applicable foreign standards could result in significant time
delays or the inability of the Company to commercialize products and could have
a material adverse effect on the Company. There also can be no assurance that
any products utilizing the avian antibodies can be manufactured at a cost or in
quantities required to make them commercially viable. The Company's inability to
contract on acceptable terms and with qualified suppliers for the manufacture of
any products or delays or difficulties in its relationships with manufacturers,
would have a material adverse effect on the Company.

Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program. Contract
manufacturing facilities must pass a pre-approval plan inspection before FDA
approval of any product. Certain material manufacturing changes that occur after
other regulatory agencies will approve the process or facilities by which any of
the Company's products may be manufactured. The Company's dependence on third
parties for the manufacture of products utilizing may adversely affect the
Company's ability to develop and deliver such products on a timely and
competitive basis.

The Company anticipates that it will construct pilot and commercial
facilities for the processing of bulk avian antibodies in the near future.
Facility construction will require the commitment of substantial funds
(including long-term debt financing of up to approximately $5 million), the
hiring and retention of significant additional personnel and compliance with
extensive regulations applicable to such a facility. While current Company
management has experience in the design, construction and operation of
bioprocessing facilities, there can be no assurance that the Company will be
able to manufacture products in commercial quantities and meet regulatory
requirements. See "Use of Proceeds -- Capital Expenditures."

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GOVERNMENT REGULATION

The Company is subject to regulation under various federal laws regarding
pharmaceutical products and also various federal and state laws regarding, among
other things, occupational safety, environmental protection, hazardous substance
control and product advertising and promotion. In connection with its research
and development activities, the Company is subject to federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials and wastes. The Company believes that it has complied with
these laws and regulations in all material respects and it has not been required
to take any action to correct any material noncompliance.

FDA Approval Process. In the United States, pharmaceutical products are
subject to rigorous regulation by the FDA. If a company fails to comply with
applicable requirements, it may be subject to administrative or judicially
imposed sanctions such as civil penalties, criminal prosecution of the company
or its officers and employees, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending new drug applications, premarket approval applications, or
supplements to approved applications.

Prior to commencement of clinical studies involving human beings,
pre-clinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part of
an IND application, which must become effective before clinical testing in
humans can begin. Typically, clinical evaluation involves a time consuming and
costly three-phase process. In Phase I, clinical trials are conducted with a
small number of subjects to determine the early safety profile, the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors the
progress of each of the three phases of clinical testing and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.

The results of the pre-clinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of an NDA for
approval prior to commencement of commercial sales. In responding to an NDA, the
FDA may grant marketing approval, request additional information or deny the
application if the FDA determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that approvals will be
granted on a timely basis, if at all. An IND application for the CDAD product
was filed in November 1997. The Company anticipates that several years of
clinical testing will be required prior to FDA marketing approval. Failure to
receive approval for any of its products could have a material adverse effect on
the Company.

Other Regulations. Even if required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must also be
obtained prior to marketing the product internationally. Foreign approval
procedures vary from country to country and the time required for approval may
delay or prevent marketing. In certain instances the Company or its
collaborative partners may seek approval to market and sell certain of its
products outside of the U.S. before submitting an application for U.S. approval
to the FDA. The regulatory procedures for approval of new pharmaceutical
products vary significantly among foreign countries. The clinical testing
requirements and the time required to obtain foreign regulatory approvals may
differ from that required for FDA approval. Although there is now a centralized
European Union ("EU") approval mechanism in place, each EU country may
nonetheless impose its own procedures and requirements, many of which are time
consuming and expensive, and some EU countries require price approval as part of
the regulatory process. Thus, there can be substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after the
relevant applications are filed, and approval in any single country may not be a
meaningful indication that the product will thereafter be approved in another
country.

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To date, no product candidate being developed by the Company has been
submitted for approval or has been approved by the FDA or any other regulatory
authority for marketing, and there can be no assurance that any such product
will ever be approved for marketing, or that the Company will be able to obtain
the labeling claims desired for its products. The Company is and will continue
to be dependent on collaborators, third party laboratories, contract
manufacturers and medical institutions for the conduct of pre-clinical and
clinical testing of its products. If any of these parties should fail to meet
their obligations or comply with applicable regulations, the development
progress of the Company's products could be delayed.

Finally, the Company is also subject to regulation by the Environmental
Protection Agency, the Occupational Safety and Health Administration, the
Wisconsin Department of Natural Resources, and the Wisconsin Department of
Health and Social Services, regarding, among other things, employee safety,
toxic substances, and hazardous waste handling and disposal. The Company may
also be subject to regulation by other state and federal agencies.

PRODUCT LIABILITY

The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Any such claims could have a material adverse effect on the Company.
The Company does not currently have any product liability insurance. Although
the Company intends to acquire product liability insurance, there can be no
assurance that it will be able to obtain or maintain such insurance on
acceptable terms, that the Company will be able to secure increased coverage as
the commercialization of products proceeds or that any insurance will provide
adequate protection against potential liabilities.

ADVISORY BOARD

The Company has assembled an Advisory Board composed of leaders in various
disciplines relating to Ophidian's scientific or business interests. These
individuals are appointed by the Board of Directors and provide critical review
and advice pertaining to the Company's research, development, and business
development activities and strategies at the request of management or the Board
of Directors. The Company intends to increase the number of members on the
Advisory Board in recognition of the increasing need for expert consultation as
Ophidian's business is developing. Members of the Advisory Board are compensated
on a case-by-case basis based on their commitment of time and other factors.
Compensation through stock options or stock purchases may be provided.

The current members of the Advisory Board are:

Dr. Dennis G. Maki. Dr. Maki is a Professor of Medicine and head of the
section of infectious diseases at the University of Wisconsin-Madison Medical
School. He has also served as Director of, and is currently an Attending
Physician for, the Center for Trauma and Life Support at the University of
Wisconsin Hospitals and Clinics. Dr. Maki earned his M.D. from the University of
Wisconsin Medical School. Following his Internship and Assistant Residency with
Harvard Medical Unit, Boston City Hospital, he served as Epidemic Intelligence
Service Officer, Hospital Infectious Section, U.S. Center for Disease Control in
Atlanta, Georgia. He holds Professional Certifications with the American Board
of Medical Examiners, the American Board of Internal Medicine (Infectious
Diseases and Critical Care Medicine), and the Advanced Trauma Life
Support-American College of Surgeons. Dr. Maki is recognized worldwide as a
leading authority on the prevention and control of hospital-acquired infections.

Dr. Robin D.G. Cooper. Dr. Cooper worked for over 30 years at Eli Lilly and
Company engaged in the development of infectious disease drugs. His
responsibilities included participation in numerous management groups focused on
new drug development and strategic planning. His laboratory research has lead to
over 40 patents and numerous scientific publications. Dr. Cooper received a
B.Sc. degree from the Imperial College, a Ph.D. from the Imperial College and
Queen Mary College, and a D.Sc. from London University.

Dr. Joan Massague. Dr. Massague is an Investigator with the HHMI. He is
also Chairman of the Cell Biology Program at Memorial Sloan-Kettering Cancer
Center, and Professor of Cell Biology at Cornell University Graduate School of
Medical Sciences. Before assuming his present positions, he was Professor of
Biochemistry at the University of Massachusetts Medical School. Dr. Massague has
served on numerous

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advisory boards for the National Institutes of Health, National Institute of
Diabetes, Digestive and Kidney Diseases, Damon Runyon-Walter Winchell Cancer
Fund and the National Cancer Institute. Dr. Massague has published numerous
scientific articles on the signal transduction mechanisms of TGF-b.

EMPLOYEES

The Company has 33 full-time employees. Of these, eleven hold Ph.D. degrees
with substantial post-graduate experience in biological science disciplines. In
addition, the Company's officers, directors and consultants possess substantial
expertise in biologic product development, manufacturing, and marketing. The
Company expects to add significantly to its present personnel. These additional
employees will be involved in research and development, administration, and
product manufacturing.

FACILITIES

On January 1, 1993, the Company entered into a lease with Promega
Corporation for a facility located at 5445 East Cheryl Parkway, Madison,
Wisconsin. Mr. Linton is Ophidian's Chairman of the Board of Directors and a
shareholder as well as the Chairman, President, and a shareholder of Promega
Corporation. This facility provides the Company with approximately 10,000 square
feet of laboratory and office space, and has the potential to house additional
staff and research operations. Currently, a majority of the Company's activities
are carried out at this facility, which has been leased through December 31,
1998, with an option to extend the lease through December 31, 2003. For the
twelve month period beginning January 1, 1997, the lease provides for monthly
rental payments of $19,612, which are adjusted annually by a preset amount to
reflect inflationary trends.

The Company has made significant leasehold improvements and capital
purchases, to date costing approximately $767,903. The Company's facilities
contain a fully-functioning immunochemistry and infectious research laboratory,
four bio-containment suites, a networked computer system, and furnished office
space. These improvements, however, do not allow for finished pharmaceutical
manufacturing under GMP guidelines pursuant to applicable federal regulations.
The Company will continue to invest in the necessary plant and equipment for
in-house manufacturing for certain products and to use qualified pharmaceutical
contract manufacturers based upon the demand for bulk drug products and the most
efficient use of its capital.

The current facility is capable of supporting continued product research,
development, and prototype product testing, along with all aspects of
administrative support. To accommodate expected expansion of the Company's
manufacturing operations, it is anticipated that additional facilities will be
secured, either purchased or subject to appropriate lease arrangements or debt
financing.

The Company also leases approximately 20,000 square feet of animal care
facilities located in Waterloo, Wisconsin. This facility is currently capable of
housing laying hens used for avian antibody research and production. Ophidian
pays a fixed monthly fee for the care and housing of these animals, and Ophidian
may terminate the animal care agreement at any time without financial penalty.
Ophidian also maintains research animals at the University of Wisconsin-Madison
under a fee-for-services arrangement.

RAW MATERIALS

The Company's raw materials (such as laying hens and laboratory chemicals)
and other supply items to be used in its research and manufacturing processes
are available from many different suppliers and are generally immediately
available in sufficient quantities. The Company does not anticipate any
significant problems in the availability of, or significant price increases for,
required raw materials or other production items in the foreseeable future.

LEGAL PROCEEDINGS

There are no material legal proceedings pending to which the Company or any
of its property is currently subject.

41
<PAGE> 43

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dr. Douglas C. Stafford(1)................ 42 President, Chief Executive Officer,
Director, Treasurer
Mr. William A. Linton(1)(2)............... 50 Chairman of the Board, Director
Dr. Joseph R. Firca....................... 53 Vice President, Research and Development
Dr. F. Michael Hoffmann................... 46 Vice President, Genetic Technology Programs
Donald L. Nevins.......................... 59 Vice President, Finance, Chief Financial
Officer
Dr. Margaret B. van Boldrik(1)(2)......... 42 Director, Vice President, Secretary
Mr. Rex J. Bates(3)....................... 74 Director
Dr. W. Leigh Thompson(3).................. 59 Director
Dr. Peter Model(3)........................ 64 Director
</TABLE>

- ---------------
(1) Member of Executive Search and Review Committee

(2) Member of Stock Option Committee

(3) Member of Audit Committee

Dr. Douglas C. Stafford, has served as President and Chief Executive
Officer of the Company since January, 1995. Dr. Stafford served as the Company's
President and Chief Operating Officer from August, 1990 to January, 1995. In
May, 1997, Dr. Stafford joined the Company's Board of Directors. Prior to
joining the Company, Dr. Stafford was employed by Baxter Healthcare Corporation,
a publicly held healthcare products company, from 1985 to 1990. He held various
senior management positions, including Director of Immunodiagnostics Development
and Manufacturing at the Pandex Division of Baxter Healthcare Corporation, a
company developing products for the diagnosis of infectious diseases. His
experience also includes senior management positions in biologic product
development, quality assurance, project management, process development, and
manufacturing operations at Pandex and in other assignments within the Baxter
organization where he was involved in corporate and divisional technology and
manufacturing, strategic planning and business development. Prior to Baxter, Dr.
Stafford was employed at Sensor Diagnostics, Inc., a privately held medical
diagnostics company, from 1984 to 1985 and held a faculty position at the
University of Detroit from 1983 to 1984. Dr. Stafford holds B.S. and M.S.
degrees in Biology from the University of Detroit, a Ph.D. in Immunology from
Tufts University, and a M.S. in Management from Lesley College.

Mr. William Linton, has served as Chairman of the Board of Directors and a
member of the Board of Directors of the Company since its inception in November,
1989. Mr. Linton founded Promega Corporation, a privately held developer and
manufacturer of biomedical research products, in 1978, continuously serving as
President and Chief Executive Officer and Chairman of the Board of Directors. He
is also a Director of Promega's two joint ventures in the People's Republic of
China: Sino-American Biotechnology Company and Shanghai-Promega Biochemicals
Company LTD. Mr. Linton has extensive experience in biotechnology product
development and in structuring both U.S. and international marketing and
strategic business partnerships. Since 1996, Mr. Linton has served as the
President of the Fitchburg Center Corporation, a privately held real estate
development company, and on the Board of Directors of Wisconsin Manufacturers
and Commerce, a trade association since January, 1996. Mr. Linton holds a B.S.
degree in Biology from the University of California-Berkeley and conducted
graduate studies at the University of Wisconsin-Madison.

Dr. Joseph Firca, has served as the Company's Vice President, Research and
Development since July, 1992. Prior to joining the Company, Dr. Firca was Vice
President, Advanced Technologies, at the Pandex Division of Baxter Healthcare
Corporation, a publicly held healthcare products company, responsible for
infectious disease, blood screening systems technology, immunoassay product
development, and advanced technology development from May, 1985 to January,
1992. Previously he held several scientific management positions at Abbott
Laboratories from 1976 to 1985. Dr. Firca received a B.S. degree in biology from
Xavier University, a M.S. from Duquesne University, and a Ph.D. in Microbiology
from the University of Cincinnati.

42
<PAGE> 44

In addition, Dr. Firca conducted post-doctoral research at the Argonne National
Laboratory and was a Visiting Associate at the California Institute of
Technology.

Dr. F. Michael Hoffmann, has served the Company as Vice President of
Genetic Technology Programs since August, 1997. He was employed by the Company
from November, 1996 to July, 1997 as Principal Scientist in Business
Development. From July, 1994, Dr. Hoffmann has been a Professor of Oncology and
Medical Genetics at the McArdle Laboratory for Cancer Research at the University
of Wisconsin-Madison and has been granted a leave of absence from the
University. He held the positions of Associate and Assistant Professor at the
University of Wisconsin-Madison from July, 1984 to July, 1994. He conducted
post-doctoral research at Harvard University and the Massachusetts Institute of
Technology from January, 1979 to June, 1984. He holds a Ph.D. degree in
biochemistry from Cornell University and a B.S. degree in chemistry from
Rensselaer Polytechnic Institute.

Mr. Donald L. Nevins joined the Company as Vice President, Finance, Chief
Financial Officer in November 1997. From 1993 to 1997, Mr. Nevins operated his
own consulting firm, CPR Electronics, Inc. which provided financial and
strategic services to development-stage companies. He has been President, CEO,
and a director of CPR Electronics Inc., a company he formed for investment and
consulting purposes in 1993 which became inactive in September 1997. He was
president, CEO, and a director of LouveRail Enterprises, Inc. in 1996 and Vice
President-Finance and CFO of Personnel Data Systems from 1995 to 1996. From 1988
to 1992, he was chief financial officer of C & D Technologies, Inc., a
publicly-held battery and electronic company. From 1986 to 1988, he was senior
vice president of finance and a director of Protein Sciences Corp., a private
biopharmaceutical company. From 1976 to 1986, he held a series of positions with
Uniroyal Inc. including chief financial officer of two major groups (Chemical
and Engineered Products). From 1974 to 1976, Mr. Nevins was assistant controller
of Combustion Engineering, Inc. and chief financial officer of its Brazilian
subsidiary. From 1967 to 1972, he held a series of financial staff positions
with Commercial Union Companies, Inc.; from 1972 to 1974 with Northwest
Industries, Inc.; from 1964 to 1967 with Carborundum Company. From 1960 to 1964,
Mr. Nevins was a certified public accountant at Price Waterhouse & Co. Mr.
Nevins received his B.B.A. from the University of Pittsburgh and a M.B.A. from
the State University of New York.

Dr. Margaret B. van Boldrik, has served as a Director of the Company since
its inception in November, 1989. Dr. van Boldrik has also served as Vice
President of the Company since January, 1990 and as Secretary of the Company
since November, 1989. Prior to joining the Company, Dr. van Boldrik was Director
of the University of Wisconsin Biotechnology Center's Technology Transfer Office
where she managed broad-based programs for the commercial development of
University-affiliated technologies from 1987 to 1990. Dr. van Boldrik holds a
B.S. in Biochemistry from the University of California at Davis, and a Ph.D. in
Biochemistry from Tufts University.

Mr. Rex J. Bates, has served as a Director of the Company since March,
1992. He has also served as a Director of Ventana Medical Systems, Inc., a
publicly held medical diagnostic instrument company, since April, 1996. From
August, 1991 to May, 1995, Mr. Bates served on the Board of Directors of
Twentieth Century Industries, a publicly held insurance holding company, and was
a member of its compensation committee. Mr. Bates worked at State Farm Mutual
Automobile Insurance Company from May, 1972 to March, 1991 serving as
Vice-Chairman of the Board of Directors and as Chief Investment Officer. In
March of 1991, Mr. Bates retired from State Farm. Mr. Bates was a member of the
investment advisory firm of Stein, Roe & Farnham in Chicago from August, 1949 to
May, 1972. Mr. Bates received an S.B. and an M.B.A. from the University of
Chicago.

Dr. W. Leigh Thompson, has served as a Director of the Company since
December, 1995. Dr. Thompson founded Profound Quality Resources, Inc., a private
healthcare consulting firm, in 1995 to provide consulting services to health
institutions and manufacturers worldwide. Dr. Thompson served as an Assistant
Professor of Medicine and of Pharmacology and Experimental Therapeutics at Johns
Hopkins University from 1970 to 1974 where he founded and led the Medical
Critical Care Unit, and as a Professor of Medicine at Case Western Reserve from
1974 to 1982, where he founded programs in clinical pharmacology and critical
care medicine. He worked at Eli Lilly and Company, holding several executive
positions including Executive Vice

43
<PAGE> 45

President of Lilly Research Laboratories and Chief Scientific Officer from 1982
to 1985. He holds a Ph.D. from the Medical University of South Carolina and an
M.D. from Johns Hopkins University.

Dr. Peter Model, has served as a Director of the Company since December,
1996. Dr. Model is a senior faculty member conducting research in the areas of
biochemistry and genetics at the Rockefeller University, where he has been
employed since 1967. He serves on the editorial boards of the Journal of
Virology and Virology and is a member of various scientific advisory committees.
Dr. Model received his B.S. from Stanford University and his Ph.D. in
Biochemistry from Columbia University.

BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION

The Company's directors are elected annually and hold office until the next
annual meeting of shareholders of the Company and until their respective
successors have been qualified and elected. Officers are elected by, and serve
at the discretion of, the Board of Directors.

In July, 1997, the Board of Directors appointed an Audit Committee that
reviews the scope and results of the Company's financial statements conducted by
the Company's independent accountants, the scope of other services provided by
the Company's independent accountants, proposed changes in the Company's
financial and accounting standards and principles, and the Company's policies
and procedures with respect to its internal accounting, auditing and financial
controls, and makes recommendations to the Board of Directors on the engagement
of the independent accountants, as well as other matters which may come before
it or as directed by the Board of Directors.

A subcommittee of the Board of Directors administers the Company's stock
option plans. The Board of Directors has also established an Executive Search
and Review Committee charged with identifying executive staff requirements,
recruiting, and evaluating performance and compensation of the Company's
executive officers. Although no other committees currently exist, management
expects the Board will in the future set up such finance, compensation, and
other standing and ad hoc committees, made up of Board members, officers,
consultants and others, as it deems necessary and appropriate for the efficient
operation of the Company.

DIRECTOR COMPENSATION

Non-employee Directors of the Company are paid $1,000 per meeting of the
Board of Directors which is payable in cash or in shares of the Company. Drs.
van Boldrik and Thompson do not receive compensation as Directors of the Company
but receive compensation as consultants. See "Management -- Consultant
Compensation."

EMPLOYMENT AND CONSULTING AGREEMENTS

The Company has entered into agreements with all its employees, including
Drs. Stafford, Firca and Hoffmann, who are corporate officers, concerning
ownership of intellectual property. These agreements prohibit competition with
the Company during, and for a term of one year after termination of, employment
with the Company. They obligate each employee to keep confidential the trade
secrets and other proprietary information of the Company, and employees are
required to disclose and assign to the Company all of their discoveries and
inventions and any and all patent rights therein.

Effective June 1, 1997, the Company entered into an employment agreement
with Dr. Douglas Stafford, President and Chief Executive Officer of the Company,
for a three-year term. Pursuant to such agreement, Dr. Stafford receives an
annual base salary of $180,000 subject to annual review and increase by mutual
agreement.

Effective June 1, 1997, the Company entered into an employment agreement
with Dr. Joseph Firca, Vice President, Research and Development of the Company,
for a three-year term. Pursuant to such agreement, Dr. Firca receives an annual
base salary of $140,000 subject to annual review and increase by mutual
agreement.

Effective August 1, 1997, the Company entered into an employment agreement
with Dr. F. Michael Hoffmann, Vice President, Genetic Technology Programs of the
Company, for a three-year term. Pursuant to

44
<PAGE> 46

such agreement, Dr. Hoffmann receives an annual base salary of $125,000 subject
to annual review and increase by mutual agreement.

Effective November 6, 1997, the Company entered into an employment
agreement with Donald A. Nevins, Vice President, Finance, Chief Financial
Officer. Mr. Nevins assumed his duties with the Company December 1, 1997. Mr.
Nevins receives an annual base salary of $110,000, subject to annual review and
increases by mutual agreement.

Scientists and consultants retained by the Company will generally be
contractually obligated to disclose and assign to the Company certain ideas and
inventions developed in the performance of duties for the Company and will be
prohibited from disclosing any confidential Company information to anyone
outside the Company at any time. The terms of their agreements may depend upon
the outcome of negotiations and the level of protection provided by other
circumstances.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during Fiscal 1997,
1996 and 1995 by the Company's President and Chief Executive Officer and all
other corporate officers earning in excess of $100,000 annually.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
--------------------------- COMMON STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
--------------------------- ---- -------- ------- ------------------
<S> <C> <C> <C> <C>
Dr. Douglas C. Stafford....................... 1997 $154,162 $10,000 30,000
President, CEO 1996 $146,028 $30,000 --
1995 $130,460 $ -- --
Dr. Joseph R. Firca(1)........................ 1997 $132,909 $15,000 20,000
Vice President, Research and Development 1996 $125,668 $15,000 --
1995 $114,960 $ -- --
Dr. F. Michael Hoffmann(2).................... 1997 $ 86,250 -- 100,000
1996 $ -- $ -- --
1995 $ -- $ -- --
</TABLE>

- ---------------
(1) Does not include certain relocation expenses to be paid by the Company in
the future to Dr. Firca.

(2) Dr. Hoffmann became a Vice President of the Company as of August 1, 1997.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information concerning grants of options to
purchase the Company's Common Stock made to each of the Named Executive Officers
during the fiscal year ended September 30, 1997.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OPTION TERM(3)
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(1) $/SH.(2) DATE 5% 10%
---- ------------------ ---------------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dr. Douglas C. Stafford.... 30,000(4) 15.6% $5.50 7/30/07 $128,100 $ 301,800
Dr. Joseph R. Firca........ 20,000(5) 10.4% $5.50 7/30/07 $ 85,400 $ 201,200
Dr. F. Michael Hoffmann.... 100,000(6) 52.0% $5.50 7/30/07 $427,000 $1,006,000
</TABLE>

- ---------------
(1) Based on an aggregate of 192,325 options granted to employees of the Company
in Fiscal 1997.

(2) The exercise price per share of options granted represented the fair value
of the underlying shares of Common Stock on the dates the options were
granted as determined by the Board of Directors. The Company's Common Stock
was not traded publicly at the time of the option grants to the Named
Executive Officers.

45
<PAGE> 47

(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.

(4) The options vest at a rate of 20% per year over five years from July 30,
1997.

(5) The options vest at a rate of 20% per year over five years from July 13,
1997.

(6) The options vest at a rate of 20% per year over five years from November 1,
1996.

None of the named Executive Officers exercised options to purchase Common
Stock during the fiscal year ended September 30, 1997. The following table sets
forth certain information regarding the value of exercised and unexercised stock
options held by each of the named Executive Officers as of September 30, 1997.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SEPTEMBER 30, 1997 AT SEPTEMBER 30, 1997(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dr. Douglas C. Stafford...................... 187,200 30,000 $1,033,345 $18,000
Dr. Joseph R. Firca.......................... 100,000 20,000 $ 410,000 $12,000
Dr. F. Michael Hoffmann...................... -- 100,000 -- $60,000
</TABLE>

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

(1) The value of the options is based upon the difference between the exercise
price and the assumed value of $6.10 per share based on the estimated
initial public offering price of the Unit set forth on the cover of this
Prospectus.

CONSULTANT COMPENSATION

In June, 1996, the Company granted a consultant, G. Steven Burrill, the
option to purchase 100,000 shares of the Company at a price of $4.50 per share
exercisable until May, 2004.

Dr. van Boldrik receives consulting fees for services which do not include
her services as a Director. Dr. van Boldrik receives a consulting fee of $5,000
per quarter plus health insurance benefits, subject to annual review. For Fiscal
1997, Dr. van Boldrik received $20,000.

The Company paid Dr. Sean Carroll a monthly consulting fee of $3,333, which
ended January, 1998 for consulting services which did not include his services
as a director. Dr. Carroll's consulting agreement expired in January, 1998 and
is not subject to renewal. For Fiscal 1997, Dr. Carroll received $40,000.

Dr. Thompson receives $2,400 per day for his services as a consultant and
Director payable in cash or shares, in any event not to exceed 10,000 shares in
aggregate. For Fiscal 1997, Dr. Thompson received $9,600. Each of the
consultants provides services regarding business development, technology
assessment or research strategies.

STOCK OPTION PLANS

The Company currently has a 1990 Incentive Stock Option Plan and a 1992
Employee Stock Option Plan ("1990/1992 Stock Option Plans") in force for its
employees, advisors and directors. The 1990/1992 Stock Option Plans provide for
the grant of options to purchase shares, in the case of the 1990 Incentive Stock
Option Plan, at not less than fair market value as of the date options are
granted, and in the case of the 1992 Employee Stock Option Plan at a value
determined by the Stock Option Committee. The 1990/1992 Stock Option Plans are
administered by a committee ("Stock Option Committee") made up of at least three
members of the Company's Board of Directors, and is currently made up of Dr.
Carroll, Dr. van Boldrik and Mr. Linton. To facilitate the operation of the
1990/1992 Stock Option Plans, the Company initially reserved 457,160 authorized
but unissued shares for the 1990/1992 Stock Option Plans. On December 1, 1992,
by a

46
<PAGE> 48

vote of shareholders, the number of shares available for employee stock options
was increased by 200,000 shares, for a total of 657,160.

The Company's Board of Directors has approved and will seek shareholder
approval for a new incentive stock option plan (the "1997 Incentive Stock Option
Plan") which will provide for the issuance of options to purchase 975,000 shares
of the Company reduced by the number of shares subject to options granted under
the 1990/1992 Stock Option Plans which may be granted to eligible employees,
advisors and Directors.

As of September 30, 1997, the Company has entered into stock option
agreements granting Dr. Stafford options to purchase up to 137,200 shares at an
exercise price of $.0625 per share which options vested in stages ending August
1, 1994, and may only be exercised prior to July 31, 2000, and to purchase
50,000 shares at an exercise price of $2.00 per share, which options vested in
stages ending October 25, 1995, and may only be exercised prior to October 24,
2001, and to purchase 30,000 shares at an exercise price of $5.50 per share,
which options vest in stages ending July 30, 2002 and may only be exercised
prior to July 30, 2007. The Company has entered into an agreement granting Dr.
Firca the option to purchase 100,000 shares at an exercise price of $2.00 per
share, which option vested in stages ending July 13, 1997, and may only be
exercised prior to July 13, 2002, and to purchase 20,000 shares at an exercise
price of $5.50 per share, which options vest in stages ending July 30, 2002 and
may only be exercised prior to July 30, 2007. The Company has entered into an
agreement granting Dr. Hoffmann the option to purchase 100,000 shares at an
exercise price of $5.50 per share, which options vest in stages ending November
1, 2001 and may only be exercised prior to November 1, 2006. After the effective
date of the Prospectus, the Company intends to grant Mr. Nevins an option to
purchase 50,000 shares at the initial public offering price per Unit, which
option will vest in stages over a five year period. The Company has entered into
an agreement granting Mr. Bates the option to purchase 25,000 shares at an
exercise price of $2.00 per share, which options were immediately vested, and
may only be exercised prior to July 31, 2006. He was also granted the option to
purchase 5,000 shares at an exercise price of $4.50 per share which options were
immediately vested, and may only be exercised prior to January 12, 2006 in
recognition of his past services to the Company. A third Stock Option Agreement
was entered into between the Company and Mr. Bates according to which he was
granted the option to purchase 5,000 shares at an exercise price of $5.50 which
option vests upon one year of service following January 10, 1997, and may only
be exercised prior to January 10, 2007. The Company has entered into an
agreement granting Dr. Model the option to purchase 5,350 shares at an exercise
price of $5.50 per share which option vests upon one year of service following
June 10, 1997 and may be exercised only prior to January 10, 2007. The Company
has entered into an agreement granting Dr. Thompson the option to purchase 5,323
shares at an exercise price of $4.50 per share which option vests upon one year
of service following January 12, 1996 and may be exercised by January 12, 2006,
and a second agreement with Dr. Thompson granting him the option to purchase
5,000 shares at an exercise price of $5.50 per share which vests upon one year
of service from January 10, 1997 and may be exercised by January 10, 2007. The
Company has entered into similar agreements with 23 Company employees who are
not executive officers pursuant to the 1990/1992 Stock Option Plans granting
options to purchase an aggregate of 112,975 shares of common stock at a weighted
average exercise price of $3.65 per share. The options granted pursuant to the
1990/1992 Stock Option Plans are nontransferable, but may be exercised by the
personal representative of a holder thereof in the event of death.

401(K) RETIREMENT PLAN

Effective October 1, 1993, the Company established a profit sharing plan
and trust to provide retirement benefits for eligible employees. The Ophidian
Pharmaceuticals, Inc. 401(k) Plan (the "401(k) Plan") is intended to be
tax-qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended. Participants may direct a portion of their compensation, the lesser of
15% or $9,500 (the maximum limit set by law for 1997), to be contributed to
their accounts under the 401(k) Plan. The Company has arranged for the firm of
Robert W. Baird and Company to provide investment services to employees for
their funds contributed to the 401(k) Plan. The Company may, but is not required
to, match a participant's pre-tax contributions to the 401(k) Plan. In addition,
the Company may make discretionary contributions to the 401(k) Plan on an annual
basis. To date, the Company has not made any contributions under the 401(k) Plan
in addition to participants' own contributions. Participants are always vested
fully in their pre-tax contributions to the 401(k) Plan.

47
<PAGE> 49

Generally, amounts contributed to the 401(k) Plan (and any earnings or
interest) may not be distributed until the participant's death, disability,
retirement or termination of employment. There may be certain tax penalties
levied for lump-sum withdrawals made prior to age 59 1/2, unless the sum is
rolled over into another qualified plan or individual retirement account. In
addition, funds may be made available in the form of a loan or hardship
distribution to a participant in the event of an immediate and heavy financial
necessity.

48
<PAGE> 50

PRINCIPAL SHAREHOLDERS

The following table sets forth the beneficial ownership of the Company's
Common Stock as of December 31, 1997 by (a) each person known by the Company to
be the beneficial owner of more than 5% of the Company's Common Stock, (b) the
directors of the Company, (c) the executive officers of the Company, and (d) all
directors and executive officers as a group.

<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE PERCENTAGE
BENEFICIALLY OWNED BEFORE OWNED AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) THE OFFERING THE OFFERING
- ------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Dr. Margaret B. van Boldrik(2)............................. 2,920,000 40.1% 29.8%
Dr. Sean B. Carroll(2)..................................... 2,920,000 40.1 29.8
Eli Lilly and Company...................................... 699,300 9.6 7.1
Lilly Corporate Center, Indianapolis, IN 46285
Mr. William A. Linton(3)................................... 513,020 7.0 5.2
Dr. Douglas C. Stafford(4)................................. 187,200 2.6 1.9
Dr. Peter Model(5)......................................... 190,532 2.6 1.9
Dr. Joseph R. Firca(6)..................................... 100,000 1.4 1.0
Mr. Donald L. Nevins....................................... -- -- --
Mr. Rex J. Bates(7)........................................ 84,728 1.2 *
Dr. F. Michael Hoffmann(8)................................. 20,000 * *
Dr. W. Leigh Thompson(9)................................... 11,051 * *
All Directors and Officers as a Group(10)(11).............. 4,026,531 55.2 41.1
</TABLE>

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

* Less than 1%.

(1) Includes ownership of shares of Common Stock plus options exercisable
within 60 days of December 31, 1997. Shares of Common Stock subject to
outstanding options are deemed outstanding for purposes of computing the
percentage of ownership of the person holding such options but are not
deemed outstanding for computing the percentage ownership for any other
persons.

(2) Includes 1,390,000 shares owned by Dr. van Boldrik, 1,350,000 owned by Dr.
Carroll and 90,000 shares in the Jan Patrick Carroll Trust and 90,000
shares in the Willem Erin van Boldrik Trust controlled by Dr. van Boldrik
and Dr. Carroll as Trustees for the benefit of their children.

(3) Includes 262,520 shares owned by Promega Corporation of which Mr. Linton is
Chairman, President and Chief Executive Officer and may be deemed to have
voting and investment power over the shares.

(4) Includes options to purchase 137,200 shares currently vested in the 1990
Stock Option Plan at an exercise price of $0.0625 which expire in July,
2000 and options to purchase 50,000 shares currently vested the 1990 Stock
Option Plan at an exercise price of $2.00 which expire in October, 2001.

(5) Includes 185,000 shares in the Model Charitable Lead Trust and Peter Model
Trust II both of which are controlled by Dr. Model as sole trustee and
options to purchase 5,350 shares currently vested in the 1992 Stock Option
Plan at an exercise price of $5.50 per share which expire January 2007.

(6) Includes options to purchase 100,000 shares currently vested in the 1990
Stock Option Plan at an exercise price of $2.00 which expire in July, 2002.

(7) Includes options to purchase 25,000 shares currently vested in the 1992
Stock Option Plan at an exercise price of $2.00 which expire in July, 2006,
options to purchase 5,000 shares currently vested in the 1992 Stock Option
Plan at an exercise price of $4.50 which expire in January, 2006 and
options to purchase 5,000 shares currently vested in the 1992 Stock Option
Plan at an exercise price of $5.50 per share which expire January 2007.

(8) Includes options to purchase 20,000 shares which will vest within 60 days
of December 31, 1997 in the 1992 Stock Option Plan at an exercise price of
$5.50 per share which expire July, 2007.

(9) Includes options to purchase 5,323 shares currently vested in the 1992
Stock Option Plan at an exercise price of $4.50 per share which expire in
January, 2006 and options to purchase 5,000 shares currently vested in the
1992 Stock Option Plan at an exercise price of $5.50 per share which expire
January 2007.

(10) Address is 5445 East Cheryl Parkway, Madison, Wisconsin 53711.

(11) Includes 357,873 shares of Common Stock issuable upon exercise of
outstanding options which will vest within 60 days of December 31, 1997 of
which 137,200 have an exercise price of $0.0625, 175,000 have an exercise
price of $2.00, 10,323 have an exercise price of $4.50 and 15,350 currently
vested in the 1992 Stock Option Plan at an exercise price of $5.50 per
share which expire January 2007.

49
<PAGE> 51

CERTAIN TRANSACTIONS

Dr. Sean B. Carroll, a founder of the Company currently owns 1,350,000
shares. In exchange for those shares, Dr. Carroll contributed in 1990 all of his
rights to his invention entitled "Antivenoms and Methods for Making Antivenoms"
which is the basis for the Company's avian technology, as well as a subsequent
assignment in the same year of his rights to any patent applications filed in
connection with the Company's passive antibody technology. The Company
determined that the transfer of Dr. Carroll's technology rights was adequate
consideration for the issuance of these shares of Company Stock.

Dr. van Boldrik, Vice President, Secretary, a Director and Founder of the
Company, currently owns 1,390,000 shares. In exchange for those shares, Dr. van
Boldrik contributed in 1990 all of her rights in the invention entitled
"Antivenoms and Methods for Making Antivenoms," as well as a subsequent
assignment in the same year of her rights to any patent application filed in
connection with the Company's passive antibody technology. The Company
determined that the transfer of Dr. van Boldrik's technology rights was adequate
consideration for the issuance of these shares of Company Stock.

Fitchburg Research Park Associates Limited Partnership ("FRPA"), a
Wisconsin limited partnership of which William A. Linton, Chairman of the Board
and a Director, is the sole general partner and holds a 50% ownership interest,
received 800,000 shares when the Company first issued shares January 17, 1990.
In exchange for those shares, FRPA contributed $50,000 for an effective price of
$0.0625 per share. FRPA has distributed its shares from the partnership.

Under the terms of a Stock Warrant granted to FRPA (the "FRPA Warrant") by
the Company on January 17, 1990, designed to protect FRPA against dilution of
its holdings in the Company due to the issuance of shares to employees of the
Company pursuant to the Company's Stock Option Plans, FRPA is entitled to
purchase one share for every four shares issued to employees pursuant to the
Plans. FRPA may purchase a maximum of 114,290 shares under the FRPA Warrant; the
exercise price thereunder is $.0025 per share.

On October 1, 1990, the Company obtained a line of credit from FRPA in the
original principal amount of $250,000 (the "FRPA Line of Credit"). The FRPA Line
of Credit was repaid in full on October 21, 1991, and the line of credit is no
longer in effect. As additional consideration for the line of credit, the
Company granted to FRPA an option to purchase 125,000 shares at a price of $2.00
per share. The option was exercised fully on October 1, 1993 through the payment
of $250,000 for 125,000 shares.

In September, 1991, Promega agreed to purchase shares of the Company
conditioned upon its receipt of an exclusive and confidential first right, for a
period of 10 years, to review any technology developed by the Company that is
incidental to the human and animal therapeutic and diagnostic markets.
"Incidental" refers to those markets that are not human or animal therapeutics
or diagnostics. Promega serves various incidental markets, such as, research
products or food testing. The arrangement was established so that the Company's
core business interests would not be encumbered by the agreement with Promega
and a market could be established in incidental markets. Promega has 60 days
after disclosure of a technology to review the technology and notify the Company
in writing of its interest in developing the technology. The parties will then
negotiate in good faith for up to 60 days thereafter regarding terms on which
Promega might obtain the right to use the technology. If Promega and the Company
fail to enter into an agreement within 60 days after notice of Promega's
interest in the technology, the Company may attempt to license or assign the
rights to the product to a third party, subject to Promega's right to first
refuse the price and terms offered by a third party, exercisable within 15 days
after notice thereof to Promega. The agreement with Promega will terminate at
any time that Promega's ownership of the Company falls below one percent of the
outstanding shares. Promega currently owns 262,520 shares of Ophidian, or 3.6%
before the Offering and 2.7% after the Offering.

Promega and FRPA are affiliated by virtue of common control and partial
common ownership. As sole general partner of FRPA; a shareholder, President, and
Chairman of the Board of Promega; and a Director and Chairman of the Board of
the Company, William A. Linton may be subject to various conflicts of interest
in determining whether Promega will pursue, for use in incidental markets, the
development of any technology initially developed by the Company, and would be
subject to a significant conflict of interest in connection

50
<PAGE> 52

with any dispute that might arise under the disclosure agreement between the
Company and Promega described above.

On January 1, 1994, the Company entered into a Lease with Promega for a
10,000 square foot office/research laboratory and production facility at 5445
East Cheryl Parkway, Madison, Wisconsin. Mr. Linton is a shareholder, the
President and Chairman of the Board of Promega. The lease provides for a five
year lease term with an option to renew the lease for an additional five year
term.

The facility lease described above gives Promega the right to terminate in
case of a broad range of events of default by the Company, in which event the
Company would lose the value of improvements and may be liable for the remaining
rent even if its rights to use the premises are terminated. As Chairman of the
Board and a director of the Company, Mr. Linton would be subject to a
significant conflict of interest in connection with taking any adverse action on
the lease on behalf of Promega. See "Business -- Facilities"

Dr. Peter Carroll, who is Dr. Sean Carroll's brother, is an attorney with
Medlen & Carroll, LLP, San Francisco, California, and serves as patent counsel
to the Company. Dr. Peter Carroll and his wife, Maureen Collins-Carroll, were
given 40,000 shares as a gift from Dr. Sean Carroll in April, 1990. As Dr. Sean
Carroll's brother, Dr. Peter Carroll would have a conflict of interest in any
dispute between Dr. Sean Carroll and the Company, especially with respect to
ownership of intellectual property.

Pursuant to the Lilly Agreements, Lilly can require, subject to certain
qualifications, that the Company register the shares Lilly purchased either in a
separate public offering or in conjunction with a public offering sponsored by
the Company. Lilly has waived its rights to require the Company to register its
shares in conjunction with this Offering, but in every other respect, retains
those rights. See "Description of Securities -- Registration Rights" and "Shares
Eligible for Future Sale."

The Company believes that each of the transactions set forth above were
entered into on terms as fair as those that could be obtained from independent
third parties. All transactions with the Company in which a director of the
Company has a direct or indirect interest must be approved by a majority of
directors who have no direct or indirect interest in the transaction.

LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under the Company's Amended and Restated Bylaws and the Wisconsin Business
Corporation Law, directors and officers of the Company are entitled to mandatory
indemnification from the Company against certain liabilities and expenses (a) to
the extent such officers or directors are successful in the defense of a
proceeding and (b) in proceedings in which the director or officer is not
successful in the defense thereof, unless it is determined the director or
officer breached or failed to perform his or her duties to the Company and such
breach or failure constituted: (i) a willful failure to deal fairly with the
Company or its shareholders in connection with a matter in which the director or
officer had a material conflict of interest, (ii) a violation of criminal law,
unless the director or officer had reasonable cause to believe his or her
conduct was lawful or had no reasonable cause to believe his or her conduct was
unlawful, (iii) a transaction from which the director or officer derived an
improper personal profit, or (iv) willful misconduct. The Company's Amended and
Restated Bylaws provide that the Company may purchase and maintain insurance on
behalf of an individual who is a director or officer of the Company against
liability asserted against or incurred by such individual in his or her capacity
as a director or officer regardless of whether the Company is required or
authorized to indemnify or allow expenses to the individual against the same
liability under the Amended and Restated Bylaws.

Under Section 180.0828 of the Wisconsin Business Corporation Law, directors
of a corporation are not subject to personal liability to the corporation, its
shareholders, or any person asserting rights on behalf thereof for certain
breaches or failures to perform any duty resulting solely from their status as a
director, unless the person asserting liability proves that the breach or
failure constituted: (i) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director had a
material conflict of interest, (ii) a violation of criminal law, unless the
director had reasonable cause to believe his or her conduct was lawful or had no
reasonable cause to believe his or her conduct was unlawful, (iii) a transaction
from which the director derived an improper personal profit, or (iv) willful
misconduct. These provisions pertain
51
<PAGE> 53

only to breaches of duty by directors as directors and not in any other
corporate capacity, such as officers. As a result of such provisions,
shareholders may be unable to recover monetary damages against directors for
actions taken by them which constitute negligence or gross negligence or which
are in violation of their fiduciary duties, although it may be possible to
obtain injunctive or other equitable relief with respect to such actions. If
equitable remedies are found not to be available to shareholders in any
particular case, shareholders may not have any effective remedy against the
challenged conduct.

DESCRIPTION OF SECURITIES

The following description of the securities of the Company and certain
provisions of the Company's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws is qualified in its entirety by the provisions of
the Amended and Restated Articles of Incorporation and Amended and Restated
Bylaws, which have been filed as exhibits to the Company's Registration
Statement, of which this prospectus is a part.

Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 22,400,000 shares of Common Stock, $.0025 par value.

THE UNITS

Each Unit consists of one share of Common Stock and one Warrant, which
entitles the registered holder thereof to purchase one share of Common Stock at
an initial exercise price of $ per share [120% of the initial public
offering price per Unit]. The shares of Common Stock and Warrants are detachable
and will trade separately 90 days after the issuance, subject to earlier
separability in the discretion of the Representative and the Company.

COMMON STOCK

Upon completion of this Offering, there will be 9,789,930 shares of Common
Stock issued and outstanding. Holders of Common Stock are entitled to one vote
per share on all matters to be voted upon by the shareholders of the Company.
The holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. The holders of Common Stock have no
preemptive, redemption, conversion, sinking fund or other subscription rights.
The outstanding shares of Common Stock are, and the Shares of Common Stock
included in the Units (including shares issuable upon exercise of the Warrants)
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable.

WARRANTS

The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company, and
Continental Stock Transfer & Trust Company, New York, New York (the "Warrant
Agent"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1999 [12 months after
the date of this Prospectus], until , 2003 [five years after the
date of this Prospectus], one Share of Common Stock at a price of $ per
Share [120% of the initial public offering price per Unit], subject to
adjustment in accordance with the anti-dilution provisions referred to below.
The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Warrant Agent, with the subscription
form thereon properly completed and executed, together with payment of the
exercise price. No fractional shares will be issued upon the exercise of
Warrants. The exercise price of the Warrants bears no relationship to any
objective criteria and should in no event be regarded as an indication of any
future market price of the securities offered hereby.

Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock or the sale by the Company
of
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<PAGE> 54

shares of its Common Stock or other securities convertible into Common Stock at
a price below the initial public offering price, excluding shares of Common
Stock issued in connection with incentive or benefit plans of the Company and
strategic alliances. Additionally, an adjustment will be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation (other than a consolidation or merger
in which the Company is the surviving corporation) or sale of all or
substantially all of the assets of the Company, in order to enable warrant
holders to acquire the kind and number of shares of stock or other securities or
property receivable in such event by a holder of the number of shares of Common
Stock that might have been purchased upon the exercise of the Warrant.

Redemption Provisions. Commencing 24 months after the date of this
Prospectus, the Warrants are subject to redemption at $.10 per Warrant on 30
days prior written notice provided that the average closing bid price of the
Common Stock as reported on the AMEX equals or exceeds $ per share
[240% of the initial public offering price of the Unit] (subject to adjustment
for stock dividends, stock splits, combinations or reclassifications of the
Common Stock), for any 20 trading days within a period of 30 consecutive trading
days ending on the fifth trading day prior to the date of the notice of
redemption. In the event the Company exercises the right to redeem the Warrants,
such Warrants will be exercisable until the close of business on the business
day immediately preceding the date for redemption fixed in such notice. If any
Warrant called for redemption is not exercised by such time, it will cease to be
exercisable and the holder will be entitled only to the redemption price.

Transfer, Exchange and Exercise. The Warrants are in registered form. The
Warrants may be presented to the Warrant Agent for transfer or exchange
commencing 90 days after issuance, subject to earlier separability in the
discretion of the Representative and the Company but no later than their
expiration date. The Warrants may be presented to the Warrant Agent for exercise
commencing 12 months after the date of this Prospectus but no later than their
expiration date. The expiration date of the Warrants is five years from the date
of this Prospectus, after which date the Warrants become wholly void and of no
value. If a market for the Warrants develops, the holder may sell the Warrants
instead of exercising them. There can be no assurance, however, that a market
for the Warrants will develop, or if it develops, that it will continue.

Warrantholders Not a Shareholder. The Warrants do not confer upon holders
any voting, dividend or other rights as shareholders of the Company.

Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days prior written notice to the
warrantholders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrantholders.

The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.

The Warrants are separately transferable commencing 90 days after issuance
subject to earlier separability in the discretion of the Representative and the
Company. Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the aftermarket or may move to
jurisdictions in which the Shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants and holders of Warrants would have no choice but to
attempt to sell the Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised.

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<PAGE> 55

REGISTRATION RIGHTS

Lilly, the holder of 699,300 shares of Common Stock and its permitted
transferees (the "Holders") are entitled to certain rights with respect to the
registration of such shares under the Securities Act. These rights will also
extend to any additional shares purchased by Lilly under the Lilly Agreements.
Under the terms of the Lilly Agreements, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or the
account of controlling shareholders of the Company participating in a secondary
distribution, the Holders are entitled to notice of such registration and are
entitled to include their registrable securities therein; provided, among other
conditions, that the underwriters have the right to limit the number of such
shares included in any such registration. Lilly, the sole Holder on the date of
this Offering, has waived this right in connection with the registration of the
Shares hereby offered. Lilly also has the right, after December 31, 1998, to
request on three occasions that the Company file a registration statement under
the Securities Act at the Company's expense with respect to its shares of Common
Stock and with respect to the shares of other Holders who request to be included
in such registration. See "Risk Factors -- Potential Adverse Effect of Shares
Eligible for Future Sale."

CERTAIN PROVISIONS OF WISCONSIN LAW

The provisions of the Wisconsin Business Corporation Law ("WBCL") described
in this section may delay or make more difficult acquisitions or changes of
control of the Company not approved by the Company's Board of Directors. Such
provisions enable the Company, particularly (but not exclusively) in the initial
years of its existence as a publicly-traded company, to develop its business in
a manner which will foster its long-term growth without disruption caused by the
threat of a takeover deemed by its Board of Directors not to be in the best
interests of the Company and its shareholders. Such provisions could have the
effect of discouraging third parties from making proposals involving an
acquisition or change of control of the Company, although such proposals, if
made, might be considered desirable by a majority of the Company's shareholders.

Constituency or Stakeholder Provision. Under Section 180.0827 of the WBCL
(the "Wisconsin Stakeholder Provision"), in discharging his or her duties to the
Company and in determining what he or she believes to be in the best interests
of the Company, a director or officer may, in addition to considering the
effects of any action on shareholders, consider the effects of the action on
employees, suppliers, customers, the communities in which the Company operates
and any other factors that the director or officer considers pertinent.

Restrictions on Business Combinations. Section 180.1141 of the WBCL
provides that a "resident domestic corporation," such as the Company, may not
engage in a "business combination" with an "interested stockholder" (a person
beneficially owning at least 10% of the voting power of the outstanding voting
stock), for three years after the date (the "stock acquisition date") the
interested stockholder acquired its 10% or greater interest, unless the business
combination (or acquisition of 10% or greater interest) was approved before the
stock acquisition date by the corporation's board of directors. After the
three-year period, a business combination that was not so approved can be
consummated only if it is approved by the majority of the outstanding voting
shares not held by the interested stockholder, or is made at a specified formula
price intended to provide a fair price for the shares held by noninterested
stockholders.

Wisconsin Fair Price Statute. Sections 180.1130 to 180.1133 of the WBCL
provides that certain business combinations involving a "significant
shareholder" and an "issuing public corporation" (each as defined below) are
subject to a supermajority vote of shareholders in addition to any approval
otherwise required. The required supermajority vote is 80% of the votes entitled
to be cast by all the outstanding voting shares of the issuing public
corporation and two-thirds of the votes entitled to be cast by holders of the
voting shares of the issuing public corporation other than the voting shares
held by the significant shareholder who is a party to that business combination.
A "significant shareholder," with respect to an issuing public corporation, is
defined as a person who beneficially owns, directly or indirectly, 10% or more
of the voting stock of the corporation, or an affiliate of the corporation which
beneficially owned, directly or indirectly, 10% or more of the voting stock of
the corporation within the last two years. An "issuing public corporation" is
defined as a Wisconsin corporation that has (i) total assets exceeding $1
million and a class of equity securities held of record by 500 or more persons
and (ii) at least 100 shareholders of record who have unlimited voting rights
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<PAGE> 56

and who are residents of Wisconsin. The supermajority vote is not required if
the aggregate amount of cash and market value of noncash consideration to be
received per share by each shareholder of the issuing public corporation in the
business combination meets certain tests of fairness.

Wisconsin Control Share Statute. Section 180.1150 of the WBCL provides that
the voting power of shares, including shares issuable upon the exercise of
options, of an issuing public corporation held by any person or persons acting
as a group, in excess of 20% of the voting power in the election of directors,
is limited in voting on any matter to 10% of the full voting power of those
excess shares. This restriction does not apply to shares acquired directly from
the issuing public corporation, in certain specified transactions, or in a
transaction with respect to which the corporation's shareholders have voted to
approve restoration of the full voting power of otherwise restricted shares.

Wisconsin Defensive Action Restrictions. Section 180.1134 of the WBCL
provides that, in addition to the vote otherwise required by the law or the
articles of incorporation of an issuing public corporation, the approval of the
holders of a majority of the shares entitled to vote is required before such
corporation can take certain action while a takeover offer is being made or
after a takeover offer has been publicly announced and before it is concluded.
Under the Wisconsin Defensive Action Restrictions, shareholder approval is
required for the corporation to (i) acquire more than five percent of the
outstanding voting shares at a price above the market price from any individual
who or organization which owns more than three percent of the outstanding voting
shares and has held such shares for less than two years, unless a similar offer
is made to acquire all voting shares, or (ii) sell or option assets of the
corporation which amount to at least 10% of the market value of the corporation,
unless the corporation has at least three independent directors (directors who
are not officers or employees) and a majority of the independent directors vote
not to have this provision apply to the corporation. The restrictions described
in clause (i) above may have the effect of deterring a shareholder from
acquiring shares of the Company's Common Stock with the goal of seeking to have
the Company repurchase such shares at a premium over the market price.

Impact of Statutory Provisions. The explicit grant in the Wisconsin
Stakeholder Provisions of discretion to directors to consider nonshareholder
constituencies could, in the context of an active "auction" of the Company, have
antitakeover effects in situations where the interests of stakeholders of the
Company, including employees, suppliers, customers and communities in which the
Company does business, conflict with the short term maximization of shareholder
value.

The Restrictions on Business Combinations in the WBCL encourage negotiation
by an acquiring shareholder with the Company board of directors prior to its
purchase of the Company's shares in order to have flexibility later to enter
into business combinations with the Company. The Wisconsin Control Share Statute
may deter any shareholder from acquiring in excess of 20% of the outstanding
voting stock of the Company and the Wisconsin Fair Price Statute may discourage
any attempt by a shareholder to squeeze out other shareholders without offering
an appropriate premium purchase price. In addition, the Wisconsin Defensive
Actions Restrictions may have the effect of deterring a shareholder from
acquiring the Company's Common Stock with the goal of seeking to have the
Company repurchase the Common Stock at a premium. The WBCL statutory provisions
referenced above are intended to encourage persons seeking to acquire control of
the Company to initiate such an acquisition through arms-length negotiations
with the Company's board of directors, and to ensure that sufficient time for
consideration of such a proposal, and any alternatives, is available. Such
measures are also designed to discourage investors from attempting to accumulate
a significant minority position in the Company and then use the threat of a
proxy contest as a means to pressure the Company to repurchase shares of Common
Stock at a premium over the market value. To the extent that such measures make
it more difficult for, or discourage, a proxy contest or the assumption of
control by a holder of a substantial block of the Company's Common Stock, they
may have the effect of discouraging a tender offer or other attempt to obtain
control of the Company, even though such attempt might be beneficial to the
Company and its shareholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Units and Common Stock
and the Warrant Agent for the Warrants is Continental Stock Transfer & Trust
Company, New York, New York.
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<PAGE> 57

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 9,789,930 shares of
Common Stock outstanding, of which the 2,500,000 Shares of Common Stock included
in the Units offered hereby will be transferable without restriction under the
Securities Act commencing 90 days after issuance, subject to earlier
separability in the discretion of the Representative and the Company. The other
outstanding shares of Common Stock are "restricted securities" (as that term is
defined in Rule 144 promulgated under the Securities Act) which may be publicly
sold only if registered under the Securities Act or if sold in accordance with
an applicable exemption from registration, such as Rule 144. In general, under
the revised holding period requirements of Rule 144, subject to the satisfaction
of certain other conditions, a person, including an affiliate of the Company,
who has beneficially owned restricted securities for at least one year, is
entitled to sell (together with any person with whom such individual is required
to aggregate sales) within any three-month period, a number of shares that does
not exceed the greater of one percent of the total number of outstanding shares
of the same class, or, if the Common Stock is quoted on AMEX or another national
securities exchange, the average weekly trading volume during the four calendar
weeks preceding the sale. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements, and the availability of current
public information regarding the Company. A person who has not been an affiliate
of the Company for at least three months, and who has beneficially owned
restricted securities for at least two years, is entitled to sell such
restricted shares under Rule 144(k) without regard to any of the limitations
described above.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus pursuant
to written compensatory benefit plans such as the Stock Plan and written
contracts such as option agreements. Rule 701 is also available for sales of
shares acquired by persons pursuant to the exercise of options granted prior to
the effective date of this Prospectus, regardless of whether the option exercise
occurs before or after the effective date of this Prospectus. Securities issued
in reliance on Rule 701 are "restricted securities" within the meaning of Rule
144 and, beginning 90 days after the date of this Prospectus, may be sold by
persons other than affiliates of the Company subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one-year minimum holding period requirement.

As of September 30, 1997, 646,608 options granted under the 1990/1992 Stock
Option Plans and 100,000 options granted pursuant to an agreement with a
consultant for shares of Common Stock are outstanding, and 5,296 options to
purchase additional shares are reserved for future issuance under the 1990/1992
Stock Option Plans. Of the options granted under the 1990/1992 Stock Option
Plans, and the agreement with a consultant, 533,862 were currently exercisable
as of September 30, 1997, with the remaining outstanding options to become
exercisable at the rate of 26,063 options between October 1, 1997 and December
31, 1997, 60,284 in calendar 1998, 39,289 in calendar 1999 and 87,110 options in
calendar 2000 and thereafter. Shares of Common Stock issued upon the exercise of
outstanding options or the above-described Warrant will be "restricted
securities" and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available. Potential
exemptions include those available under Rule 144 and Rule 701.

No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will have
on the market prices of the Common Stock and Warrants prevailing from time to
time. Pursuant to the Lock-Up Agreements, the Company, all officers and
directors of the Company and certain shareholders who hold more than 90% of the
Common Stock of the Company have agreed not to, directly or indirectly, issue,
agree or offer to sell, transfer, assign, distribute, grant an option for
purchase or sale of, pledge, hypothecate or otherwise encumber or dispose of any
beneficial interest in such securities for a period of nine months following the
date of this Prospectus without the prior written consent of the Representative.
Assuming that the Representative does not release the shareholders from the
Lock-Up Agreements, after the Lock-Up Period all of the shares will be eligible
for sale in the public market. Of such shares, 4,402,350 shares of Common Stock
will be eligible for sale under Rule 144 (subject to volume limitations imposed
by such rule), 2,887,580 shares of Common Stock will be eligible for sale under
Rule 144(k), and 596,608 shares will be eligible for sale under Rule 701. The
sale or issuance, or the potential for sale or issuance, of Common Stock after
such nine-month period could have an adverse impact on the market prices of the
Common Stock and/or the Warrants. Sales of substantial amounts of Common Stock
or the perception that such sales could occur could adversely affect prevailing
market prices for the Common Stock and/or the Warrants. See "Underwriting."

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<PAGE> 58

UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of Units set forth opposite their names:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
------------ ---------
<S> <C>
National Securities Corporation.............................

Total............................................. 2,500,000
=========
</TABLE>

The Underwriters are committed to purchase all the Units offered hereby, if
any of such Units are purchased. The Underwriting Agreement provides that the
obligations of the several Underwriters are subject to conditions precedent
specified therein.

The Company has been advised by the Representative that the Underwriters
propose initially to offer the Units to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less concessions not in excess of $ per Unit.
Such dealers may reallow a concession not in excess of $ per Unit to
certain other dealers. After the commencement of the Offering, the public
offering price, concession and reallowance may be changed by the Representative.

The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that Underwriters may be required to make. The Company has also agreed
to pay to the Representative a non-accountable expense allowance equal to 2 1/2%
of the gross proceeds derived from the sale of the Units underwritten, of which
$50,000 has been paid to date.

The Company has granted to the Underwriters the Over-Allotment Option,
exercisable during the 45-day period from the date of this Prospectus, to
purchase from the Company up to an additional 375,000 Units at the initial
public offering price per Unit offered hereby, less underwriting discounts. Such
option may be exercised only for the purpose of covering over-allotments, if
any, incurred in the sale of the Securities offered hereby. To the extent such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional Securities proportionate to its initial commitment.

In connection with this Offering, the Company has agreed to sell to the
Representative, for $.0001 per Warrant, Warrants to purchase from the Company up
to 250,000 Units (the "Representative's Warrants"). The Representative's
Warrants are initially exercisable at a price of $ per Unit [120% of
the initial public offering price per Unit] for a period of four years,
commencing one year after the date of this Prospectus and are restricted from
sale, transfer, assignment or hypothecation for a period of 12 months from the
date of this Prospectus, except to officers of the Representative. The Warrants
contained in the Units issuable upon exercise of the Representative's Warrants
are initially exercisable at $ per share [165% of the exercise price of the
Warrants] for a period of four years commencing one year from the date of this
Prospectus. The Representative's Warrants provide for adjustment in the number
of securities issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the Common Stock. The

57
<PAGE> 59

Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise thereof.

The Company's directors, executive officers and certain shareholders, in
the aggregate 90% of the holders of Common Stock, options, warrants or other
securities convertible, exercisable or exchangeable for Common Stock have agreed
not to offer, sell, or otherwise dispose of any shares of Common Stock for a
period of nine months following the date of this Prospectus without the prior
written consent of the Representative. An appropriate legend shall be placed on
the certificates representing such securities.

In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the Securities.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Units, Common Stock and/or Warrants for the purpose of stabilizing
their respective market prices. The Underwriters also may create a short
position for the account of the Underwriters by selling more Securities in
connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase Securities in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
375,000 Units, by exercising the Over-Allotment Option referred to above. In
addition, the Representative may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of other Underwriters,
the selling concession with respect to the Securities that are distributed in
the Offering but subsequently purchased for the account of the Underwriters in
the open market. Any of the transactions described in this paragraph may result
in the maintenance of the prices of the Securities at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.

Prior to this Offering, there has been no public market for the Units,
Common Stock or Warrants. Consequently, the initial public offering price of the
Units has been determined by negotiation between the Company and the
Representative and does not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value. The factors
considered in such negotiations, in addition to prevailing market conditions,
included the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure, the market for initial public offerings and
certain other factors as were deemed relevant.

The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration Statement
of which this Prospectus is a part. For a more complete description thereof, see
"Additional Information."

LEGAL MATTERS

The legality of the Securities offered hereby will be passed upon for the
Company by LaFollette & Sinykin, Madison, Wisconsin. Medlen & Carroll, LLP, San
Francisco, California has acted as counsel to the Company in connection with
certain intellectual property and regulatory matters. Dr. Peter Carroll, a
partner in the firm of Medlen & Carroll, LLP owns 40,000 shares of the Company
and is a brother of Dr. Sean Carroll, a founder of the Company. Orrick,
Herrington & Sutcliffe LLP, New York, New York has acted as counsel to the
Underwriters in connection with the Offering. See "Certain Transactions."

EXPERTS

The financial statements of Ophidian Pharmaceuticals, Inc. at September 30,
1996, 1997 and for each of the three years in the period ended September 30,
1997 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon

58
<PAGE> 60

appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act
(the "Registration Statement") with respect to the Securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contracts or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
of the Registration Statement may be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment
of certain fees prescribed by the Commission. The Commission maintains an
Internet World Wide Web site that contains reports, proxy and information
reports and other materials that are filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval System. The site can be accessed at
http://www.sec.gov.

59
<PAGE> 61

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Shareholders' Equity........................... F-5
Statements of Cash Flows.................................... F-7
Notes to Financial Statements............................... F-8
</TABLE>

F-1
<PAGE> 62

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Ophidian Pharmaceuticals, Inc.

We have audited the accompanying balance sheets of Ophidian
Pharmaceuticals, Inc. (the Company), a development stage corporation, as of
September 30, 1996 and 1997, and the related statements of operations,
shareholders' equity and cash flows for each of three years in the period ended
September 30, 1997 and the cumulative period from inception to September 30,
1997 (not separately presented herein). 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 financial position of the Company at September 30,
1996 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1997 and the cumulative period
from inception to September 30, 1997 (not separately presented herein), in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Milwaukee, Wisconsin
October 9, 1997

F-2
<PAGE> 63

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,276,339 $ 3,547,036 $ 2,435,401
Short-term investments (Note 2)................... 481,463 359,588 359,588
Accounts receivable............................... 28,554 214,988 140,807
Prepaid expenses and other........................ 12,334 58,975 58,252
----------- ----------- ------------
Total current assets...................... 3,798,690 4,180,587 2,994,048
Long-term investments (Note 2)...................... 456,806 -- --
Other assets........................................ -- 278,005 493,141
Equipment and leasehold improvements (Note 4)
Furniture and fixtures............................ 96,692 96,692 96,692
Manufacturing equipment........................... 82,381 123,452 128,469
Laboratory equipment.............................. 325,914 429,758 464,113
Office equipment.................................. 53,760 54,537 54,537
Leasehold improvements............................ 11,758 24,092 24,092
----------- ----------- ------------
570,505 728,531 767,903
Accumulated depreciation.......................... 290,438 406,167 439,517
----------- ----------- ------------
Net equipment and leasehold improvements............ 280,067 322,364 328,386
Patent costs, net of accumulated amortization of
$11,097, $20,765 and $24,935 at September 30, 1996
and 1997 and December 31, 1997, respectively...... 712,198 1,194,650 1,300,601
----------- ----------- ------------
Total assets.............................. $ 5,247,761 $ 5,975,606 $ 5,116,176
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 92,244 $ 246,096 $ 147,707
Accrued expenses and other liabilities............ 60,148 105,502 105,969
Deferred revenue (Note 7)......................... 300,000 -- --
Current portion of capital lease obligations (Note
4)............................................. 18,195 16,450 15,200
----------- ----------- ------------
Total current liabilities................. 470,587 368,048 268,876
Capital lease obligations, less current portion
(Note 4).......................................... 33,914 17,956 14,463
Deferred revenue -- noncurrent (Note 7)............. -- 191,646 288,379
Commitments and contingencies
Shareholders' equity (Notes 5 and 6):
Common stock, $.0025 par value, 22,400,000 shares
authorized, 6,716,766, 7,287,315 and 7,288,566
shares issued and outstanding at September 30,
1996, and 1997 and December 31, 1997,
respectively................................... 16,791 18,218 18,221
Additional paid-in capital........................ 9,546,730 12,680,394 12,687,266
Deficit accumulated during the development
stage.......................................... (4,812,298) (7,299,633) (8,160,802)
Net unrealized loss on available-for-sale
securities..................................... (7,963) (1,023) (227)
----------- ----------- ------------
Total shareholders' equity.......................... 4,743,260 5,397,956 4,544,458
----------- ----------- ------------
Total liabilities and shareholders' equity.......... $ 5,247,761 $ 5,975,606 $ 5,116,176
=========== =========== ============
</TABLE>

See accompanying notes.
F-3
<PAGE> 64

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

STATEMENTS OF OPERATIONS

See accompanying notes.
F-4
<PAGE> 65

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
NET DEFICIT
UNREALIZED ACCUMULATED
COMMON STOCK LOSS ON DURING THE
--------------------- AVAILABLE-FOR- ADDITIONAL DEVELOPMENT
SHARES PAR VALUE SALE SECURITIES PAID-IN STAGE TOTAL
--------- --------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for:
Cash at .0625 per share on
January 17, 1990........... 800,000 $ 2,000 $ -- $ 48,000 $ -- $ 50,000
Assignment of intellectual
property................... 3,200,000 8,000 192,000 -- 200,000
Net loss for 1990............ -- -- -- -- (247,248) (247,248)
--------- ------- --------- ----------- ----------- ----------
Balance at September 30,
1990......................... 4,000,000 10,000 -- 240,000 (247,248) 2,752
Net loss for 1991............ -- -- -- -- (298,863) (298,863)
--------- ------- --------- ----------- ----------- ----------
Balance at September 30,
1991......................... 4,000,000 10,000 -- 240,000 (546,111) (296,111)
Common stock issued for cash
at $2.00 per share on
January 10, 1992........... 933,120 2,333 -- 1,826,031 -- 1,828,364
Net loss for 1992............ -- -- -- -- (473,896) (473,896)
--------- ------- --------- ----------- ----------- ----------
Balance at September 30,
1992......................... 4,933,120 12,333 -- 2,066,031 (1,020,007) 1,058,357
Exercise of stock warrants at
$2.25 per share on March 4,
1993 through March 22, 1993
and $2.00 per share on
September 30, 1993......... 572,120 1,430 -- 1,254,590 -- 1,256,020
Common stock issued for cash
at $4.50 per share on June
22, 1993................... 579,482 1,449 -- 2,578,212 -- 2,579,661
Net income for 1993.......... -- -- -- -- 606,463 606,463
--------- ------- --------- ----------- ----------- ----------
Balance at September 30,
1993......................... 6,084,722 15,212 -- 5,898,833 (413,544) 5,500,501
Common stock issued for
consulting services at
$4.50 per share on November
30, 1993, February 11, 1994
and July 22, 1994.......... 2,801 7 -- 12,597 -- 12,604
Net unrealized loss on
available for-sale
securities................. -- -- (127,577) -- -- (127,577)
Net loss for 1994............ -- -- -- -- (705,295) (705,295)
--------- ------- --------- ----------- ----------- ----------
Balance at September 30,
1994......................... 6,087,523 15,219 (127,577) 5,911,430 (1,118,839) 4,680,233
Common stock issued for
consulting services at
$4.50 per share on October
20, 1994, January 4, 1995,
April 4, 1995 and July 6,
1995....................... 2,668 6 -- 11,989 -- 11,995
Net unrealized gain on
available for-sale
securities................. -- -- 68,203 -- -- 68,203
Net loss for 1995............ -- -- -- -- (1,603,887) (1,603,887)
--------- ------- --------- ----------- ----------- ----------
Balance at September 30,
1995......................... 6,090,191 15,225 (59,374) 5,923,419 (2,722,726) 3,156,544
</TABLE>

See accompanying notes.

F-5
<PAGE> 66

OPHIDIAN PHARMACEUTICALS, INC.

(A DEVELOPMENT STAGE CORPORATION)

SHAREHOLDERS' EQUITY -- CONTINUED

<TABLE>
<CAPTION>
NET
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
COMMON STOCK AVAILABLE-FOR- DURING THE
---------------------- SALE ADDITIONAL DEVELOPMENT
SHARES PAR VALUE SECURITIES PAID-IN STAGE TOTAL
--------- ----------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for
consulting services at $4.50
per share on October 19, 1995
and May 10, 1996 and $5.50 per
share on August 6, 1996........ 2,668 6 -- 11,993 -- 11,999
Common stock issued for cash at
$6.50 on August 6, 1996 and
$5.50 per share issued on
October 25, 1996............... 618,651 1,547 -- 3,515,819 -- 3,517,366
Exercise of stock options at
$2.00 per share on August 6,
1996........................... 5,256 13 -- 10,499 -- 10,512
Provision for Compensation --
consultant stock options....... -- -- -- 85,000 -- 85,000
Net unrealized gain on available
for-sale securities............ -- -- 51,411 -- -- 51,411
Net loss for 1996................ -- -- -- -- (2,089,572) (2,089,572)
--------- --------- ----------- ------------ ------------ -----------
Balance at September 30, 1996...... 6,716,766 16,791 (7,963) 9,546,730 (4,812,298) 4,743,260
Common stock issued for
consulting services at $5.50
per share on October 3, 1996,
January 27, 1997, April 11,
1997, May 15, 1997, July 15,
1997 and August 15, 1997....... 4,095 10 -- 22,493 -- 22,503
Common stock issued for cash at
$5.50 per share issued on
October 25, 1996............... 566,454 1,417 -- 3,111,171 -- 3,112,588
Net unrealized gain on available
for-sale securities............ -- -- 6,940 -- -- 6,940
Net loss for 1997................ -- -- -- -- (2,487,335) (2,487,335)
--------- --------- ----------- ------------ ------------ -----------
Balance at September 30, 1997...... 7,287,315 18,218 (1,023) 12,680,394 (7,299,633) 5,397,956
--------- --------- ----------- ------------ ------------ -----------
Common stock issued for
consulting services at $5.50
per share on October 31 and
December 5, 1997 (unaudited)... 1,251 3 -- 6,872 -- 6,875
Net unrealized gain on available
for sale securities
(unaudited).................... -- -- 796 -- -- 796
Net loss for December 31, 1997
(unaudited).................... -- -- -- -- (861,169) (861,169)
--------- --------- ----------- ------------ ------------ -----------
Balance at December 31, 1997
(unaudited)...................... 7,288,566 $ 18,221 $ (227) $ 12,687,266 $ (8,160,802) $ 4,544,458
========= ========= =========== ============ ============ ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 67

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS ENDED (NOVEMBER 11,
YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1989) TO
--------------------------------------- ----------------------- DECEMBER 31,
1995 1996 1997 1996 1997 1997
----------- ----------- ----------- ---------- ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................... $(1,603,887) $(2,089,572) $(2,487,335) $ (216,642) $ (861,169) $(8,160,802)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 90,530 108,854 132,744 27,385 36,104 514,290
Loss on sale of investments............... 36,720 44,464 5,622 -- -- 86,806
Common stock issued for consulting
services................................ 11,995 11,999 22,503 3,000 6,875 65,976
Provision for Compensation -- consulting
stock options........................... -- 85,000 -- -- -- 85,000
Assignment of intellectual property used
in research and development............. -- -- -- -- -- 200,000
Changes in operating assets and
liabilities:
Accounts receivable..................... (3,804) (14,103) (186,434) 3,289 74,181 (140,807)
Prepaid expenses and other.............. (1,643) 2,690 (46,641) (18,344) 723 (58,252)
Accounts payable........................ 41,200 (42,269) 153,852 2,748 (98,389) 147,707
Accrued expenses and other
liabilities........................... (3,162) 10,994 45,354 25,561 467 105,969
Deferred revenue........................ (8,090) 300,000 (108,354) (300,000) 96,733 288,379
----------- ----------- ----------- ---------- ---------- -----------
Net cash used in operating activities....... (1,440,141) (1,581,943) (2,468,689) (473,003) (744,475) (6,865,734)
INVESTING ACTIVITIES
Purchase of available-for-sale
securities.............................. (235,672) -- -- -- -- (4,517,181)
Proceeds from sale of available-for-sale
securities.............................. 1,338,030 701,821 580,000 222,146 -- 4,056,260
Purchases of equipment and leasehold
improvements, net....................... (71,073) (97,995) (165,374) (46,479) (38,576) (697,044)
Expenditures for patents and other
assets.................................. (208,736) (145,216) (492,120) (50,426) (108,705) (1,335,241)
----------- ----------- ----------- ---------- ---------- -----------
Net cash provided by (used in) investing
activities................................ 822,549 458,610 (77,494) 125,241 (147,281) (2,493,206)
FINANCING ACTIVITIES
Proceeds from issuance of common stock.... -- 3,566,939 3,115,497 3,115,497 -- 12,462,365
Private placement financing costs......... -- (39,061) (2,909) (2,260) -- (107,854)
Principal payments of capital lease
obligation.............................. (16,126) (15,783) (17,703) (5,242) (4,743) (67,029)
Advances from shareholder................. -- -- -- -- -- 330,000
Payments to shareholder................... -- -- -- -- -- (330,000)
Offering costs............................ -- -- (278,005) -- (215,136) (493,141)
----------- ----------- ----------- ---------- ---------- -----------
Net cash provided by (used in) financing
activities................................ (16,126) 3,512,095 2,816,880 3,107,995 (219,879) 11,794,341
----------- ----------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents............................... (633,718) 2,388,762 270,697 2,760,233 (1,111,635) 2,435,401
Cash and cash equivalents at beginning of
period.................................... 1,521,295 887,577 3,276,339 3,276,339 3,547,036 --
----------- ----------- ----------- ---------- ---------- -----------
Cash and cash equivalents at end of
period.................................... $ 887,577 $ 3,276,339 $ 3,547,036 $6,036,572 $2,435,401 $ 2,435,401
=========== =========== =========== ========== ========== ===========
Supplemental disclosure of cash flows
information --
Cash paid for interest.................... $ 4,655 $ 3,320 $ 2,800 $ 718 $ 724
Supplemental disclosure of non-cash
transactions --
Common stock issued for consulting
services................................ $ 11,995 $ 11,999 $ 22,503 $ 3,000 $ 6,875
</TABLE>

See accompanying notes.
F-7
<PAGE> 68

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Ophidian Pharmaceuticals, Inc. (the Company) was incorporated on November
10, 1989, and began operations on January 17, 1990. Ophidian is a development
stage corporation dedicated to the research, development and commercialization
of therapeutic and diagnostic products for human and animal use. The Company's
business has been directed to numerous areas of disease but has focused
principally on products for infectious disease prevention and treatment. The
Company has not received any revenues from the sale of FDA licensed products to
date and it does not expect to receive any such revenues during the next two
years.

INTERIM FINANCIAL INFORMATION

The financial information at December 31, 1997, and for the three-month
periods ended December 31, 1996 and 1997 is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Results for the
three months ended December 31, 1997 are not necessarily indicative of the
results for the entire year.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

AUTHORIZATION OF INITIAL PUBLIC OFFERING

In February 1997, the Board of Directors authorized management of the
Company to enter a letter of intent with an underwriter to file a registration
statement with the Securities and Exchange Commission ("SEC") allowing the
Company to sell up to 2,875,000 shares of its common stock and issue warrants to
purchase 2,875,000 shares of its common stock. The Company has incurred costs
aggregating $232,000 related to the planned initial public offering which are
included in other assets as of September 30, 1997.

NET LOSS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to SFAS No. 128
requirements.

The following table sets forth the computation of basic weighted-average
shares used in the per share calculations. Dilutive earnings per share is not
shown as the impact is antidilutive.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------- ---------------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding..... 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464
</TABLE>

F-8
<PAGE> 69

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of
three months or less at the date of acquisition to be cash equivalents. Cash
equivalents, consisting of commercial paper, treasury and commercial notes,
repurchase agreements and money market funds, totaled $3,081,019 and $3,451,707
at September 30, 1996 and 1997. The cost of these securities, which are
considered "available for sale" for financial reporting purposes, approximates
fair value at both September 30, 1996 and 1997.

INVESTMENTS

The Company's investments are considered available-for-sale securities and,
as such, are carried at fair value, with unrealized gains and losses, net of
tax, reported as a separate component of shareholders' equity. The cost of
securities sold is based on the specific identification method.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of assets under capital leases are provided over the estimated
useful lives of the assets, generally five years, and lease terms, respectively,
by the straight-line method.

OTHER ASSETS

Patent costs, principally legal fees, are capitalized and, upon issuance,
are amortized on a straight-line basis over the estimated useful life of the
patents.

REVENUE RECOGNITION

Revenues on cost-reimbursement contracts are recorded under awarded
research grants and recognized as revenue as the associated costs are incurred
by the Company. Milestone payments for collaborative product development are
recorded as earned based on the performance requirements of the contract.
Payments received which are related to future performance are deferred and taken
into revenue as earned. Contract payments designated to purchase specific assets
to be used in the performance of a contract are recognized as revenue over the
shorter of the useful life of the asset acquired or the contract.

RESEARCH AND DEVELOPMENT

All costs for research and development activities are expensed in the year
incurred.

INCOME TAXES

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the 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.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities (see Note 9). No current or
deferred income taxes have been provided because of the net operating losses
incurred by the Company.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
F-9
<PAGE> 70

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

2. INVESTMENTS

The following is a summary of available-for-sale investments at September
30:

<TABLE>
<CAPTION>
1996
-----------------------------------
GROSS ESTIMATED
UNREALIZED FAIR
COST LOSSES VALUE
-------- ---------- ---------
<S> <C> <C> <C>
U.S. Government and agency obligations............. $846,275 $7,849 $838,426
Corporate obligation............................... 99,957 114 99,843
-------- ------ --------
$946,232 $7,963 $938,269
======== ====== ========
</TABLE>

<TABLE>
<CAPTION>
1997
-----------------------------------
GROSS ESTIMATED
UNREALIZED FAIR
COST LOSSES VALUE
-------- ---------- ---------
<S> <C> <C> <C>
U.S. Government and agency obligations............. $360,466 $ 878 $359,588
-------- ------ --------
</TABLE>

Available-for-sale investments have been classified based upon their
contractual maturity dates. The amortized cost and estimated fair value of
investments at September 30, by contractual maturity, are as follows:

<TABLE>
<CAPTION>
1996 1997
------------------------ ----------------------
ESTIMATED ESTIMATED
FAIR FAIR
COST VALUE COST VALUE
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 484,029 $ 481,463 $360,466 $359,588
Due after one year through three
years.............................. 462,203 456,806 -- --
---------- ---------- -------- --------
$ 946,232 $ 938,269 $360,466 $359,588
========== ========== ======== ========
</TABLE>

3. LINE OF CREDIT

The Company has available a $500,000 bank line of credit which is annually
renewable in February. Any borrowings bear interest at prime plus 1% and are
collateralized by the Company's investments. There were no borrowings on the
line during fiscal 1996, and 1997.

4. CAPITAL LEASE OBLIGATIONS

The Company has incurred obligations under capital leases for equipment and
furniture and fixtures, including the following amounts for leases that have
been capitalized at September 30:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Furniture and fixtures...................................... $84,934 $84,934
Office equipment............................................ 11,758 11,758
------- -------
96,692 96,692
Less accumulated depreciation............................... 53,181 72,519
------- -------
$43,511 $24,173
======= =======
</TABLE>

F-10
<PAGE> 71

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

Future minimum payments under capital lease obligations consist of the
following at September 30, 1997:

<TABLE>
<CAPTION>
RELATED CAPITAL
PARTY OTHER LEASES
------- ------ -------
(NOTE
7)
-------
<S> <C> <C> <C>
1998................................................... 16,800 956 17,756
1999................................................... 6,513 -- 6,513
2000................................................... 3,084 -- 3,084
2001................................................... 3,084 -- 3,084
2002................................................... 3,084 -- 3,084
Thereafter............................................. 3,855 -- 3,855
------- ------ -------
Total minimum lease payments........................... $36,420 956 37,376
======= ======
Amount representing interest........................... 2,970
-------
Present value of net minimum lease payments (including
current portion of $16,450).......................... $34,406
=======
</TABLE>

5. STOCK OPTION PLANS AND WARRANTS

The Company has an incentive stock option plan and an employee stock option
plan (collectively, the Plans) under which options for a maximum of 657,160
shares of common stock may be granted. The option price per share will be no
less than fair market value at the date the options are granted. The options
expire within ten years from such date. Options for 5,256 shares have been
exercised at September 30, 1997.

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at September 30, 1994......................... 445,105 $1.55
Granted at $4.50........................................ 2,667 4.50
Exercised............................................... -- --
Canceled at $2.00 - $4.50............................... 14,871 3.03
------- ------
Outstanding at September 30, 1995......................... 432,901 1.51
Granted at $2.00 - $5.50................................ 41,142 3.12
Exercised at $2.00...................................... 5,256 2.00
Canceled at $4.50....................................... 6,059 3.05
------- ------
Outstanding at September 30, 1996......................... 462,728 1.63
Granted at $5.50........................................ 192,325 5.50
Exercised............................................... -- --
Canceled at $4.50....................................... 8,445 4.50
------- ------
Outstanding at September 30, 1997......................... 646,608 $2.74
------- ------
</TABLE>

F-11
<PAGE> 72

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

The following table summarizes weighted-average information by range of
exercise prices for stock options outstanding and exercisable.

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTION
-------------------------------------------------------- --------------------------------------
RANGE OF SHARES AT OUTSTANDING WEIGHTED AVERAGE SHARES AT WEIGHTED AVERAGE
EXERCISE PRICE SEPTEMBER 30, 1997 EXERCISE PRICE EXERCISE LIFE SEPTEMBER 30, 1997 EXERCISE PRICE
-------------- ------------------ -------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.06................ 160,080 $0.06 2.8 years 160,080 $0.06
$2.00-2.25........... 250,645 $2.01 5.0 years 244,756 $2.01
$4.50-5.50........... 235,883 $5.34 8.5 years 29,026 $4.54
------- -------
646,608 $2.74 433,862 $1.46
</TABLE>

In fiscal 1990, the Company granted a warrant to a shareholder to purchase
up to 114,290 shares of common stock at a price of $.0025 per share. The warrant
becomes exercisable in a defined manner upon the issuance of shares of common
stock under the Plans. The warrant terminates thirty days after exercise of the
total number of options covered by the plans discussed above. At September 30,
1997, 1,314 shares are exercisable under the warrant.

In May 1996, the Company granted a consultant an option to purchase 100,000
shares of the Company's common stock at a price of $4.50 per share exercisable
until May, 2004. The Company recorded $85,000 as compensation expenses based
upon the estimated fair value of the option using the minimum value option
pricing method with an assumption of a risk free interest rate of 6%, an
expected life of three and one-half years, and no expected dividend yield.

The Company has reserved 866,194 shares of common stock at September 30,
1997 to provide for the exercise of stock options and outstanding warrants.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("FAS No. 123") became effective for the Company
beginning October 1, 1996. As allowed by FAS No. 123, the Company has elected to
continue to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB No. 25) in accounting for its stock option
plan. Under APB No. 25, the Company does not recognize compensation expense on
the issuance of its stock options because the option terms are fixed and the
exercise price equals the market price of the underlying stock on the grant
date.

The weighted average fair value of options granted in 1996 and 1997 was
$2.06 and $0.98 per above, respectively. Had compensation expense for the
Company's stock option plan been determined based upon the fair value at the
grant date for these options consistent with the methodology described under FAS
No. 123, the Company's net earnings would have been reduced by approximately
$8,000 and $76,400 in 1996 and 1997, respectively. The pro forma impact on a per
share basis is not material to the financial presentation. The fair value of the
options granted during both years is estimated using the minimum value option
pricing model using a risk-free interest rate of 6% and assuming no dividends.
The model assumes that all options will be exercised in two years after an
initial public offering of stock projected for November 1997. All options
vesting after that date are expected to be exercised immediately.

Pro forma net earnings reflect only options granted in fiscal years 1997
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under FASB Statement No. 123 is not reflected in the pro forma net
earnings amounts presented because compensation cost is reflected over the
option-vesting period and compensation expense for options granted prior to
October 1, 1995 is not considered.

F-12
<PAGE> 73

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

6. RELATED-PARTY TRANSACTIONS

The Company leases its facilities under a five-year operating lease,
expiring in 1999, from a corporation whose principal shareholder is a director
of the Company. Rent expense of $208,586 and $233,688 was recorded for the years
ended September 30, 1996 and 1997, respectively. The lease includes an option to
extend the lease for an additional five years. At September 30, 1996, future
minimum rental commitments are as follows:

<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1998........................................................ $240,456
1999........................................................ 60,540
--------
Total............................................. $300,996
========
</TABLE>

In addition, the Company leases certain furniture and fixtures, from this
same related-party corporation, under a capital lease arrangement as described
in Note 4.

The Company has consulting agreements with shareholders that expire at
various dates. Consulting expenses were $64,000, $84,000 and $84,000 for the
years ended September 30, 1995, 1996 and 1997, respectively.

7. ELI LILLY & COMPANY COLLABORATIVE AGREEMENT (THE AGREEMENT)

On June 3, 1996, Eli Lilly & Company (Lilly) and the Company entered into a
20-year collaborative agreement (Agreement) and stock purchase agreement with
respect to the further research, development, manufacture and sale of products
for the treatment of Clostridium difficile-associated diseases.

In accordance with the Agreement, Lilly may provide the Company with up to
$12.4 million over the term of the Agreement. As of September 30, 1997, Lilly
has: (1) made equity investments totaling $4.0 million; $1.0 million in fiscal
1996 for 153,846 shares and $2,999,997 in November 1996, for 545,454 shares of
the Company's stock; (2) made cash payments of $400,000 in fiscal 1996, of which
$300,000 was recognized as revenues in fiscal 1997 upon meeting certain
contractual requirements; and (3) agreed to reimburse the Company for certain
patent application costs totaling $191,646.

Upon achievement of specific milestone events by the Company, as defined in
the Agreement, Lilly will make future equity investments or fee payments. Lilly
has agreed to pay a price per share equal to the average of the closing prices
of the Company's stock as quoted on a national exchange for the first ten of the
most recent fifteen trading days prior to attainment of the respective milestone
event, or if the Company's stock is not listed on an exchange, the fair market
value for equity investments, determined by mutual agreement of Lilly and the
Company. Pursuant to other provisions in the Agreement, Ophidian must provide
manufacturing facilities and meet certain bulk product delivery requirements and
timetables. The Agreement also defines a pricing structure for future delivery
of product.

8. 401(K) PLAN

The Ophidian Pharmaceuticals, Inc. 401(k) Plan (the Plan) covers all
employees. Employees become eligible to participate in the Plan on the first day
of their employment and may contribute up to 15% of their compensation. The
Company may make matching contributions at a discretionary percentage. No
matching contributions were made for the years ended September 30, 1995, 1996
and 1997.

F-13
<PAGE> 74

OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
IS UNAUDITED)

9. INCOME TAXES

At September 30, 1997, the Company has net operating loss carryforwards for
federal and Wisconsin tax purposes remaining of approximately $7,604,000 and
$7,842,000, respectively. These carryforwards expire beginning in 2007. The
Company has research and other tax credit carryforwards of approximately
$423,000 and $192,000 for federal and Wisconsin tax purposes, respectively.

The types of temporary differences between tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax asset (liability) and their approximate tax effects are as follows at
September 30:

<TABLE>
<CAPTION>
1996 1997
------------------------- --------------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Depreciation, patents, prepaid
insurance and other.......... $ (660,000) $ (257,000) $(1,164,000) $ (456,000)
Net operating loss
carryforwards................ 4,899,000 1,911,000 7,604,000 2,981,000
Research and AMT credit
carryforwards................ - 273,000 - 423,000
----------- -----------
Deferred tax assets, net....... 1,927,000 2,948,000
Valuation allowance............ (1,927,000) (2,948,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>

Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.

F-14
<PAGE> 75

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 18
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 28
Management............................ 42
Principal Shareholders................ 49
Certain Transactions.................. 50
Liability and Indemnification of
Directors and Officers.............. 51
Description of Securities............. 52
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 59
Index to Financial Statements......... F-1
</TABLE>

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

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================

======================================================
OPHIDIAN
PHARMACEUTICALS, INC.

2,500,000 UNITS

EACH UNIT CONSISTING OF

ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON
STOCK PURCHASE WARRANT
------------------------

PROSPECTUS
------------------------
NATIONAL SECURITIES

CORPORATION
, 1998
======================================================
<PAGE> 76

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the Common Stock being registered. All amounts are estimated
except the Commission Registration Fee, the NASD Filing Fee and the American
Stock Exchange Application Fee.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 12,801
NASD Filing Fee............................................. 4,687
American Stock Exchange Application Fee..................... 50,000
Blue Sky Qualification Fees and Expenses.................... 20,000
Accounting Fees and Expenses................................ 75,000
Legal Fees and Expenses..................................... 112,386
Transfer Agent and Registrar Fees........................... 5,000
Printing and Engraving...................................... 70,000
Miscellaneous............................................... 126
Total............................................. $350,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Under the Wisconsin Business Corporation Law, directors and officers of the
Company are entitled to mandatory indemnification from the Company against
certain liabilities and expenses (a) to the extent such officers or directors
are successful in the defense of a proceeding and (b) in proceedings in which
the director or officer is not successful in defense thereof, unless it is
determined the director or officer breached or failed to perform his duties to
the Company and such breach or failure constituted: (i) a willful failure to
deal fairly with the Company or its shareholders in connection with a matter in
which the director or officer had a material conflict of interest, (ii) a
violation of criminal law, unless the director or officer had reasonable cause
to believe his or her conduct was lawful or had no reasonable cause to believe
his or her conduct was unlawful, (iii) a transaction from which the director or
officer derived an improper personal profit, or (iv) willful misconduct. The
Company's Bylaws provide that the Company may purchase and maintain insurance on
behalf of an individual who is a director or officer of the Company against
liability asserted against or incurred by such individual in his or her capacity
as a director or officer regardless of whether the Company is required or
authorized to indemnify or allow expenses to the individual against the same
liability under the Bylaws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Securities Act").

In November 1996, the Company completed a private placement offering under
which it sold 485,805 shares of Common Stock at $5.50 per share and raised net
proceeds of $2,629,959 to certain accredited and unaccredited investors. The
shares were issued under Rule 506 of the Securities Act and Section 4(2) of the
Securities Act.

In June 1996, the Company and Eli Lilly and Company ("Lilly") entered into
collaborative agreements, according to which the Company sold to Lilly 153,846
shares of Common Stock at $6.50 per share and in November, 1996 sold 545,454
shares of Common Stock at $5.50 per share.

During the past three fiscal years, the Company has issued an aggregate of
10,408 shares of its Common Stock to consultants for services rendered in the
ordinary course of business and 8,137 to certain Directors for payment in lieu
of cash for an aggregate value of $6,006. The Company has issued 5,256 of its
Common Stock to an employee pursuant to an exercise of her stock options granted
pursuant to the 1990/1992 Stock Option

II-1
<PAGE> 77

Plans. The shares issued to consultants, Directors, and pursuant to the exercise
of options under the 1990/1992 Stock Option Plans, were issued under Rule 701 of
the Securities Act pursuant to written agreements between the Company and the
respective parties. See "Management -- Consultant Compensation and Director
Compensation."

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Amended and Restated Articles of Incorporation**
3.2 Amended and Restated Bylaws**
4.1 Specimen Common Stock Certificate**
4.2 Specimen Warrant Certificate (included in Exhibit 4.4)**
4.3 Form of Representative's Warrant Agreement including form of
Representative's Warrant**
4.4 Form of Warrant Agreement**
4.5 Specimen Unit Certificate**
5.1 Opinion of LaFollette & Sinykin
10.1 Lease dated February 12, 1994 between the Company and
Promega Corporation**
10.2 1997 Incentive Stock Option Plan**
10.3 1990 Incentive Stock Option Plan**
10.4 1992 Employee Stock Option Plan**
+10.5 Agreement dated June 3, 1996 between the Company and Eli
Lilly and Company
10.6 Employment Agreement dated June 1, 1997 between the Company
and Douglas C. Stafford**
10.7 Employment Agreement dated June 1, 1997 between the Company
and Joseph Firca**
10.8 Employment Agreement dated August 1, 1997 between the
Company and F. Michael Hoffmann**
10.9 Employment Agreement dated November 6, 1997 between the
Company and Donald L. Nevins**
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of LaFollette & Sinykin (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4)
27.1 Financial Data Schedule
</TABLE>

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

+ Portions of the Agreement between the Company and Eli Lilly have been omitted
and filed separately with the SEC pursuant to a request for confidentiality.

** Filed previously.

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

The Company hereby undertakes that:

(1) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.

II-2
<PAGE> 78

(1A) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar volume of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in value and
price represent no more than a 20% change in the aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement;

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.

(1B) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(1C) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the provisions set forth in Item 14 above, or otherwise,
the Company has been advised in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred, or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 will be governed by the final
adjudication of such issue.

II-3
<PAGE> 79

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this amendment to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized on February 13, 1998 in the City of
Madison, Wisconsin.

OPHIDIAN PHARMACEUTICALS, INC.

By: /s/ DOUGLAS C. STAFFORD
------------------------------------
Douglas C. Stafford, Ph.D.
President, Chief Executive Officer
and Director

By: /s/ MARGARET B. VAN BOLDRIK
------------------------------------
Margaret B. van Boldrik, Ph.D.
Vice President, Secretary and
Director

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Douglas
C. Stafford and Margaret B. van Boldrik, and each of them as his or her true and
lawful attorney-in-fact and agent with full power of substitution to sign on his
or her behalf, individually and in the capacity stated below and to perform any
acts necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, and any and all instruments or
documents filed as part of or in connection with this Registration Statement of
the amendments thereto. Each of the undersigned does hereby ratify and confirm
all that said attorney-in-fact and agent, or his or her substitute, does or
causes to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

WILLIAM A. LINTON* Chairman of the Board of Directors February 13, 1998
- ------------------------------------------------
William A. Linton

/s/ DOUGLAS C. STAFFORD President, Chief Executive Officer and February 13, 1998
- ------------------------------------------------ Director (Principal Executive
Douglas C. Stafford, Ph.D. Officer)

/s/ DONALD L. NEVINS Vice President, Finance, Chief February 13, 1998
- ------------------------------------------------ Financial Officer (Principal
Donald L. Nevins Financial Officer)

/s/ MARGARET B. VAN BOLDRIK Vice President, Secretary and Director February 13, 1998
- ------------------------------------------------
Margaret B. van Boldrik, Ph.D.

REX J. BATES* Director February 13, 1998
- ------------------------------------------------
Rex J. Bates

PETER MODEL* Director February 13, 1998
- ------------------------------------------------
Peter Model

W. LEIGH THOMPSON* Director February 13, 1998
- ------------------------------------------------
W. Leigh Thompson, Ph.D, M.D.

*/s/ DOUGLAS C. STAFFORD February 13, 1998
- ------------------------------------------------
Douglas C. Stafford as true and lawful
attorney-in-fact for William A. Linton, Rex J.
Bates, Peter Model and W. Leigh Thompson

*/s/ MARGARET B. VAN BOLDRIK February 13, 1998
- ------------------------------------------------
Margaret B. van Boldrik as true and lawful
attorney-in-fact for William A. Linton, Rex J.
Bates, Peter Model and W. Leigh
Thompson
</TABLE>

II-4
<PAGE> 80

INDEX TO EXHIBITS

<TABLE>
<S> <S>
1.1 Form of Underwriting Agreement**
3.1 Amended and Restated Articles of Incorporation**
3.2 Amended and Restated Bylaws**
4.1 Specimen Common Stock Certificate**
4.2 Specimen Warrant Certificate (included in Exhibit 4.4)**
4.3 Form of Representative's Warrant Agreement including form of
Representative's Warrant**
4.4 Form of Warrant Agreement**
4.5 Specimen Unit Certificate**
5.1 Opinion of LaFollette & Sinykin
10.1 Lease dated February 12, 1994 between the Company and
Promega Corporation**
10.2 1997 Incentive Stock Option Plan**
10.3 1990 Incentive Stock Option Plan**
10.4 1992 Employee Stock Option Plan**
+10.5 Agreement dated June 3, 1996 between the Company and Eli
Lilly and Company
10.6 Employment Agreement dated June 1, 1997 between the Company
and Douglas C. Stafford**
10.7 Employment Agreement dated June 1, 1997 between the Company
and Joseph Firca**
10.8 Employment Agreement dated August 1, 1997 between the
Company and F. Michael Hoffmann**
10.9 Employment Agreement dated November 6, 1997 between the
Company and Donald L. Nevins**
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of LaFollette & Sinykin (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4)
27.1 Financial Data Schedule
</TABLE>

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

+ Portions of the Agreement between the Company and Eli Lilly have been omitted
and filed separately with the SEC pursuant to a request for confidentiality.

** Filed previously.

II-5

<PAGE> 1
Exhibit 5.1

February 13, 1998

Ophidian Pharmaceuticals, Inc.
5445 East Cheryl Parkway
Madison, WI 53711

Registration Statement on Form S-1, No. 333-33219

Ladies and Gentlemen:

We have examined the Registration Statement on Form S-1 which is being filed
with the Securities and Exchange Commission (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of 2,875,000 shares of your Common Stock and 2,875,000 shares of your Common
Stock issuable upon conversion of the warrants described in the Registration
Statement (collectively, "the Shares"). All of the Shares are authorized but
heretofore unissued. The Shares are to be sold to the underwriters for resale
to the public as described in the Registration Statement and pursuant to the
Underwriting Agreement being filed as an exhibit thereto. As your counsel, we
have examined the proceedings proposed to be taken in connection with said sale
and issuance of the Shares.

It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states, where required, the Shares, when issued and sold in the
manner referred to in the Registration Statement will be legally and validly
issued, fully paid and nonassessable.

We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.

Sincerely yours,

/s/ La Follette & Sinykin
-------------------------
LA FOLLETTE & SINYKIN

<PAGE> 1

EXHIBIT 10.5 TO S-1

AGREEMENT

BETWEEN

OPHIDIAN PHARMACEUTICALS, INC.

AND

ELI LILLY AND COMPANY

JUNE 3, 1996
**** Indicates where confidential material has been omitted and filed
separately with the Commission
<PAGE> 2
TABLE OF CONTENTS

**** Indicates where confidential material has been omitted and filed
separately with the Commission

AGREEMENT

<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Bulk Drug Substance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Bulk Drug Substance Process . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Bulk Manufacturing Program . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Bulk Process Development Program . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 CDAD Diagnostic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Clinical Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Clinical Development Program . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.9 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Drug Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11 Drug Product Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.12 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13 Enabling Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.14 FDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.15 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.16 GLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 GMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 Lilly Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 Lilly Program Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.20 Lilly Program Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 Lilly Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.22 Major Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.23 Manufacturing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.24 Manufacturing Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.25 Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.26 Ophidian Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.27 Ophidian Program Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.28 Ophidian Program Technology . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.29 Ophidian Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.30 Process Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.31 Product Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.32 Product Idea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.33 Product Launch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.34 Product Manufacturing Program . . . . . . . . . . . . . . . . . . . . . . . . 5
1.35 Product Process Development Program . . . . . . . . . . . . . . . . . . . . . 5
1.36 Program Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.37 Program Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.38 Project Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.39 Regulatory Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>

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<PAGE> 3
<TABLE>
<S> <C> <C>
1.40 Steering Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.41 Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.42 Trademark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.43 Trigger Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.44 Valid Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE 2 COLLABORATION SCOPE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Purpose and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Steering Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Project Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4 Responsibilities of Project Team . . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Disagreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Governance Following Product Launch . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE 3 CLINICAL DEVELOPMENT PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 Commencement; Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Clinical Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.3 Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 Clinical Development Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE 4 BULK DRUG SUBSTANCE AND PRODUCT PROCESS
DEVELOPMENT PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Commencement; Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.2 Process Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.3 Bulk Process Development Program . . . . . . . . . . . . . . . . . . . . . . . 10
4.4 Product Process Development Program . . . . . . . . . . . . . . . . . . . . . 10
4.5 Process Development Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE 5 BULK MANUFACTURING AND PRODUCT
MANUFACTURING PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.1 Commencement; Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.2 Manufacturing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.3 Manufacturing Bulk Drug Substance . . . . . . . . . . . . . . . . . . . . . . 11
5.4 Processing Bulk Drug Substance into Drug Product . . . . . . . . . . . . . . . 12
5.5 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE 6 CDAD DIAGNOSTIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>

-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE 7 COMMERCIALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.1 Commercialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 Marketing Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 Commercial Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.4 Commercialization Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE 8 EQUITY INVESTMENTS AND MILESTONE FEES . . . . . . . . . . . . . . . . . . . . . . . 14
8.1 Initial Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.2 Milestone Equity Investments or Fees . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 9 LICENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.1 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.2 Lilly Manufacturing and Other Rights Following Trigger
Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.3 Trigger Event Involving Force Majeure . . . . . . . . . . . . . . . . . . . . 19
9.4 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE 10 TRADEMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.1 Selection; License; Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.2 Infringement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE 11 SUBSEQUENT PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE 12 INFORMATION AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12.1 Information Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12.2 Complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12.3 Adverse Drug Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12.4 Use of information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.5 Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.6 Regulatory Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ARTICLE 13 INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13.1 Ownership of Inventions and Know-How . . . . . . . . . . . . . . . . . . . . . 22
13.2 Infringement Claims by Third Parties . . . . . . . . . . . . . . . . . . . . . 23
13.3 Infringement Claims Against Third Parties . . . . . . . . . . . . . . . . . . 24
13.4 Notice of Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13.5 Patent Term Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ARTICLE 14 CONFIDENTIALITY AND NONDISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . 26
14.1 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
14.2 Authorized Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
14.3 Nondisclosure of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>

-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
14.5 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

ARTICLE 15 TERM AND TERMINATION OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 27
15.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
15.2 Termination for Material Breach . . . . . . . . . . . . . . . . . . . . . . . 27
15.3 Termination Based on Results of Immunology Tests . . . . . . . . . . . . . . . 27
15.4 Termination by Lilly for Failure to Meet Goals . . . . . . . . . . . . . . . . 27
15.5 Termination Upon Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . 28
15.6 Accrued Rights, Surviving Obligations . . . . . . . . . . . . . . . . . . . . 28
15.7 Rights Upon Termination for Breach . . . . . . . . . . . . . . . . . . . . . . 28
15.8 Assistance following Termination . . . . . . . . . . . . . . . . . . . . . . . 29

ARTICLE 16 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

ARTICLE 17 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.1 Right, Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.2 Absence of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.3 No Approvals or Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.4 Patents; Prior Art . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.5 Prior Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.6 No Debarrment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

ARTICLE 18 GOVERNING LAW; DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . 31
18.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
18.2 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

ARTICLE 19 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19.2 Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
19.3 Non Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
19.4 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
19.5 Entirety of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.6 Non-Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.7 Disclaimer of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.10 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.11 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19.12 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>

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<PAGE> 6
<TABLE>
<S> <C> <C>
19.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
19.14 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>

-v-
<PAGE> 7
AGREEMENT

THIS AGREEMENT ("AGREEMENT") is entered into as of the 3rd day of
June, 1996 ("EFFECTIVE DATE"), by and among OPHIDIAN PHARMACEUTICALS, INC., a
Wisconsin corporation ("OPHIDIAN"), and ELI LILLY AND COMPANY, an Indiana
corporation ("Lilly").

RECITALS

A. Ophidian has developed avian antibody-based technology for the
treatment of Clostridium difficile associated diseases ("CDAD").

B. Lilly is engaged in the research, development, marketing,
manufacture and distribution of therapeutic pharmaceutical and animal health
products and health care solutions.

C. Ophidian and Lilly desire to enter into a collaborative
agreement with respect to the further research, development, manufacture and
sale of products for the treatment of CDAD.

AGREEMENT

In consideration of the foregoing, and the covenants and premises
contained in this Agreement, Ophidian and Lilly agree as follows:

ARTICLE 1

DEFINITIONS

As used herein, the following terms shall have the following meanings:

1.1 "AFFILIATE" shall mean any company or entity controlled by,
controlling, or under common control with a party hereto and shall include
without limitation any company forty percent (40%) or more of whose voting
stock (or other comparable ownership interest for an entity other than a
corporation) is owned or

<PAGE> 8
controlled, directly or indirectly, by a party, and any company which owns or
controls, directly or indirectly, forty percent (40%) or more of the voting
stock (or other comparable ownership interest for an entity other than a
corporation) of a party.

1.2 "BULK DRUG SUBSTANCE" shall mean a preparation comprising a
polyclonal avian antibody, effective in treating CDAD, in bulk form.

1.3 "BULK DRUG SUBSTANCE PROCESS" shall mean the process or
processes used to manufacture the Bulk Drug Substance and to confirm
specifications and stability of Bulk Drug Substance.

1.4 "BULK MANUFACTURING PROGRAM" shall mean the effort necessary
to develop adequate manufacturing capabilities for clinical and commercial
supply of the Bulk Drug Substance.

1.5 "BULK PROCESS DEVELOPMENT PROGRAM" shall mean the process
development effort necessary to complete development of a process to
manufacture the Bulk Drug Substance.

1.6 "CDAD DIAGNOSTIC" shall have the meaning set forth in Article
6.

1.7 "CLINICAL DEVELOPMENT PLAN" shall have the meaning assigned
thereto in Section 3.2.

1.8 "CLINICAL DEVELOPMENT PROGRAM" shall mean the pre-clinical
studies, clinical trials and regulatory filings and related steps directed
toward Regulatory Approval of the Drug Product.

1.9 "CONFIDENTIAL INFORMATION" shall mean each party's
confidential information, inventions, know-how or data, and shall include,
without limitation, manufacturing, marketing, financial, regulatory, personnel
and other business information and plans, whether in oral, written, graphic or
electronic form and whether in existence as of the Effective Date or developed
or acquired in the future, except where such information (i) is public
knowledge at the time of disclosure by the disclosing party, (ii) becomes
public knowledge through no fault of the receiving party or (iii) was in the
possession of the receiving party at the time of disclosure by the disclosing
party as evidenced by proper business records.

1.10 "DRUG PRODUCT" shall mean a finished product form prepared
from the Bulk Drug Substance and ready for administration to the ultimate
consumer as a pharmaceutical.

2
<PAGE> 9
1.11 "DRUG PRODUCT PROCESS" shall mean the process or processes
used to convert the Bulk Drug Substance to the Drug Product, including but not
limited to formulating and fill/finishing.

1.12 "EFFECTIVE DATE" shall mean the date indicated at the
beginning of this Agreement.

1.13 "ENABLING TECHNOLOGY" shall mean, collectively, Program
Patents and Program Technology.

1.14 "FDA" shall mean the United States Food and Drug
Administration.

1.15 "GAAP" shall mean U.S. generally accepted accounting
principles, consistently applied.

1.16 "GLP" shall mean the current Good Laboratory Practice
Standards promulgated or endorsed by the FDA (or in the case of foreign
jurisdictions, comparable regulatory standards), including those procedures
expressed or implied in the regulatory filings made with respect to the Drug
Product with the FDA or foreign regulatory agents.

1.17 "GMP" shall mean the current Good Manufacturing Practices
Standards promulgated or endorsed by the FDA (or in the case of foreign
jurisdictions, comparable regulatory standards), and all additional procedures
expressed or implied in the regulatory filings made with respect to the Drug
Product with the FDA or foreign regulatory authorities.

1.18 "LILLY PATENTS" shall mean all patents, both foreign and
domestic, with claims which cover the manufacture, use or sale of Bulk Drug
Substance and/or Drug Product and which have not been held invalid or
unenforceable in a decision by a court of competent jurisdiction from which no
appeal has been or can be taken, including without limitation all
substitutions, extensions, reissues, renewals, supplementary protection
certificates, and inventors' certificates, issued as of, or which subsequently
issue from applications (including provisional applications, divisionals,
continuations and continuations-in-part) pending as of the Effective Date which
Lilly or any majority owned Affiliate of Lilly, owns, controls or has a license
to (with right to sublicense), including, without limitation, those Patents
being listed on Schedule 1.20 attached hereto.

1.19 "LILLY PROGRAM PATENTS" shall mean all patents, both foreign
and domestic, including without limitation, all substitutions, extensions,
reissues, renewals, supplementary protection certificates, and inventors'
certificates thereof, and all patent applications including provisional
applications, divisions, continuations and continuations-in-part with claims
which cover the manufacture,

3
<PAGE> 10
use or sale of Bulk Drug Substance and/or Drug Product that are filed or
acquired by Lilly (with the right to sublicense) after the Effective Date.

1.20 "LILLY PROGRAM TECHNOLOGY" shall mean all tangible or
intangible know-how, trade secrets, inventions (whether or not patentable),
data, clinical and preclinical results, information, and any physical, chemical
or biological material, any replication or any part of such material, which is
developed or acquired (with the right to disclose and/or sublicense) by Lilly
after the Effective Date and which relate to the manufacture, use or sale of
Bulk Drug Substance and/or Drug Product.

1.21 "LILLY TECHNOLOGY" shall mean all tangible or intangible
know-how, trade secrets, inventions (whether or not patentable), data, clinical
and preclinical results, information, and any physical, chemical or biological
material, any replication or any part of such material, necessary for the
development and manufacture of Drug Product, that Lilly or any Affiliate of
Lilly, owns or controls as of the Effective Date.

1.22 "MAJOR MARKET" shall mean *******************.

1.23 "MANUFACTURING PLAN" shall have the meaning assigned thereto
in Section 5.2.

1.24 "MANUFACTURING PROGRAM" shall mean the effort to scale-up for
and manufacture the Bulk Drug Substance and Drug Product for clinical and
commercial supply.

1.25 "NET SALES" shall mean ***************************************
********************************************************************************
********************************.

1.26 "OPHIDIAN PATENTS" shall mean all patents, both foreign and
domestic, with claims that cover the manufacture, use or sale of Bulk Drug
Substance and/or Drug Product and which have not been held invalid or
unenforceable in a decision by a court of competent jurisdiction from which no
appeal has been or can be taken, including without limitation all
substitutions, extensions, reissues, renewals, supplementary protection
certificates, and inventors' certificates, issued as of, or which subsequently
issue from applications (including provisional applications, divisionals,
continuations and continuations-in-part) pending as of the Effective Date which
Ophidian owns, controls or has a license to (with the right to sublicense),
including but not limited to those patents and patent applications listed on
Schedule 1.26 attached hereto.

1.27 "OPHIDIAN PROGRAM PATENTS" shall mean all patents, both
foreign and domestic, including without limitation, all substitutions,
extensions, reissues, renewals, supplementary protection certificates, and
inventors' certificates thereof,

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<PAGE> 11
and all patent applications including provisional applications, divisions,
continuations and continuations-in-part, covering inventions made by, or
acquired by (with the right to sublicense) with claims that cover the
manufacture, use or sale of Bulk Drug Substance or Drug Product that are filed
or acquired by Ophidian after the Effective Date.

1.28 "OPHIDIAN PROGRAM TECHNOLOGY" shall mean all tangible or
intangible know-how, trade secrets, inventions (whether or not patentable),
data, clinical and preclinical results, information, and any physical, chemical
or biological material, any replication or any part of such material, which is
developed or acquired (with the right to disclose and/or sublicense) by
Ophidian after the Effective Date and which relate to the manufacture, use or
sale of Bulk Drug Substance and/or Drug Product.

1.29 "OPHIDIAN TECHNOLOGY" shall mean all tangible or intangible
know-how, trade secrets, inventions (whether or not patentable), data, clinical
and preclinical results, information, and any physical, chemical or biological
material, any replication or any part such material, necessary for the
development and manufacture of Drug Product, that Ophidian owns or controls as
of the Effective Date.

1.30 "PROCESS DEVELOPMENT PLAN" shall have the meaning assigned
thereto in Section 4.2.

1.31 "PRODUCT DECISION" shall mean a decision *****************
********************************************************************************
**************************************** **********************************.

1.32 "PRODUCT IDEA" shall have the meaning assigned thereto in
Article 11.

1.33 "PRODUCT LAUNCH" shall have the meaning set forth in Exhibit
A.

1.34 "PRODUCT MANUFACTURING PROGRAM" shall mean the effort to
develop adequate fill/finish and related manufacturing capabilities for
clinical and commercial supply of the Drug Product utilizing Bulk Drug
Substance.

1.35 "PRODUCT PROCESS DEVELOPMENT PROGRAM" shall mean the process
development effort necessary to develop the Drug Product Process.

1.36 "PROGRAM PATENTS" shall mean Lilly Program Patents and
Ophidian Program Patents, collectively, whether or not developed solely or
jointly by Ophidian or Lilly.

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<PAGE> 12
1.37 "PROGRAM TECHNOLOGY" shall mean Lilly Program Technology and
Ophidian Program Technology, collectively, whether or not developed solely or
jointly by Ophidian or Lilly.

1.38 "PROJECT TEAM" shall have the meaning assigned in Section 2.3.

1.39 "REGULATORY APPROVAL" shall mean all authorization by the
appropriate governmental entity or entities necessary for commercial sale of
Drug Product (including exports) in each jurisdiction in which Lilly elects to
market the Drug Product including, without limitation, approval of labeling,
price, reimbursement and manufacturing.

1.40 "STEERING COMMITTEE" shall mean that committee to be formed
pursuant to Section 2.2.

1.41 "THIRD PARTY" shall mean any entity which is not a party or
Affiliate of any party to this Agreement.

1.42 "TRADEMARK" shall have the meaning assigned thereto in Section
10.1.

1.43 "TRIGGER EVENT" shall have the meaning set forth in Section
9.2.

1.44 "VALID CLAIM" shall mean any claim(s) pending in a patent
application or in an unexpired patent which has not been held unenforceable,
unpatentable or invalid by a decision of a court or other governmental agency
of competent jurisdiction, unappealed or unappealable within the time allowed
for appeal, and which has not been admitted to be invalid or unenforceable
through reissue or disclaimer.

ARTICLE 2

COLLABORATION SCOPE AND GOVERNANCE

2.1 PURPOSE AND SCOPE. The parties wish to collaborate in the
development and manufacture of the Drug Product. As more fully described
below, Ophidian will have principal responsibility for the Bulk Drug Substance
Process Development Program, the Bulk Manufacturing Program and the manufacture
(either itself or through a third party acceptable to Lilly) of Bulk Drug
Substance for clinical and commercial supply. Lilly will have principal
responsibility for the Drug Product Process Development Program, manufacture of
Drug Product from Bulk Drug Substance for clinical and commercial supply, the
conduct of the Clinical Development Program, and filing and maintenance of
regulatory documents necessary for Regulatory Approvals. Lilly will have sole
responsibility for distribution and marketing of the Drug Product. All pricing
for Drug Product shall be determined solely by Lilly. It is expected that Drug
Product will be marketed by

6
<PAGE> 13
Lilly or its Affiliates (or in selected territories, by Third Parties) selected
by Lilly in each jurisdiction in which it is determined by Lilly to be feasible
and commercially attractive.

2.2 STEERING COMMITTEE. The collaborative effort conducted
hereunder shall be conducted under the overall direction of a Steering
Committee comprised of four (4) members (the "Steering Committee"). Two (2)
members shall be appointed by each of Lilly and Ophidian not later than thirty
(30) days after the Effective Date. All decisions of the Steering Committee
shall be unanimous by a quorum of all four (4) members. Either party may
change its representation on the Steering Committee at any time by written
notice to the other. Minutes shall be kept of all Steering Committee meetings
and circulated to the parties for approval. Minutes shall be deemed approved
unless any member of the Steering Committee objects to the accuracy of such
minutes within five (5) days of receipt.

2.3 PROJECT TEAM.

(a) The Steering Committee shall appoint a Project Team,
consisting of such number of Lilly personnel, not exceeding ten (10), as Lilly
deems appropriate from time to time and such number of representatives of
Ophidian, not exceeding four (4), as Ophidian deems appropriate from time to
time (the "Project Team"). The Project Team shall provide the day-to-day
management for the collaboration and shall be responsible for directing and
overseeing specific activities hereunder, including but not limited to the
Clinical Development Program, the Process Development Program and the
Manufacturing Program. Although one or the other of the parties has been
allocated principal responsibility for each of such programs, all significant
decisions with respect to such programs (other than those relating to
commercialization of the Drug Product, which shall be the sole responsibility
of Lilly) shall be made by the Project Team. The Project Team shall be
subordinate to the Steering Committee, which shall have the right upon timely
appeal as provided below to review, accept, reject or modify all actions of the
Project Team. Either party may change its representatives on the Project Team
at any time by written notice to the other.

(b) Decisions of the Project Team shall be made by unanimous
consensus when possible, and otherwise by majority vote, subject to the right
of either party to appeal any decision of the Project Team to the Steering
Committee. No vote of the Project Team may be taken unless a majority of the
members of the Project Team are present, including at least one (1)
representative of each party. The Project Team shall keep minutes of any
meeting at which a decision is to be reached and shall circulate such minutes
to all members of the Project Team and the Steering Committee. Minutes shall
be deemed approved unless any member of the Project Team or the Steering
Committee objects to the accuracy of such minutes within five (5) days of
receipt. Any party desiring to appeal a decision of the Project Team to the
Steering Committee shall make its appeal in writing to the Steering Committee

7
<PAGE> 14
within five (5) days of receipt of the minutes for the meeting at which the
decision was made. Action pursuant to any decision appealed to the Steering
Committee shall be suspended pending a determination by the Steering Committee
to accept, reject or modify the decision of the Project Team. Any party may at
any time request reconsideration of any issue if such party in good faith
believes that substantial changes in circumstances have occurred that
necessitate such reconsideration.

(c) The Project Team may appoint one or more other committees
("Advisory Committees") to perform such functions as the Project Team may
determine. Unless a party elects not to participate on a particular Advisory
Committee, all Advisory Committees shall have at least one representative of
each party. Advisory Committees may provide advice and make recommendations to
the Project Team, but shall have no authority to bind the Project Team or any
of the parties.

2.4 RESPONSIBILITIES OF PROJECT TEAM. The Project Team shall: (1)
establish comprehensive and detailed plans designed to accomplish the goals of
the Process Development Program, the Clinical Development Program, and the
Manufacturing Program, (2) allocate tasks and coordinate activities required to
carry out the goals of the Clinical Development Program, the Process
Development Program, and the Manufacturing Program, (3) determine the strategy
for filing and prosecuting applications for Program Patents and otherwise
protecting Program Technology, (4) monitor progress of the Clinical Development
Program, the Process Development Program, and the Manufacturing Program, and
(5) discharge such other obligations as are assigned to the Project Team under
this Agreement.

2.5 DISAGREEMENTS. Disputes not resolved by the Project Team
shall be referred to the Steering Committee. Disputes not resolved by the
Steering Committee shall be referred to non-binding mediation in accordance
with Section 18.2.

2.6 GOVERNANCE FOLLOWING PRODUCT LAUNCH. As soon as practicable
following product launch of the Drug Product, the parties shall meet to review
whether it is appropriate to continue the collaboration under the day to day
management of the Project Team, or whether the objectives of the Project Team
have been substantially achieved and it is appropriate to disband or reorganize
the Project Team. Regardless of whether the parties elect to disband or
reorganize the Project Team, the Steering Committee shall continue to provide
overall direction to the collaboration.

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<PAGE> 15

ARTICLE 3

CLINICAL DEVELOPMENT PROGRAM

3.1 COMMENCEMENT; ROLES. The Clinical Development Program shall
commence as soon as practicable after the Effective Date. Lilly shall have
principal responsibility for the conduct of the Clinical Development Program,
and Ophidian shall provide consultation and advice. The Project Team shall
coordinate the efforts of the parties with respect to the Clinical Development
Program.

3.2 CLINICAL DEVELOPMENT PLAN. The Project Team shall prepare and
oversee the implementation of an overall development plan (the "CLINICAL
DEVELOPMENT PLAN") for the Drug Product which shall describe fully the proposed
preclinical studies, toxicology, clinical trials, regulatory plans and any
other key elements of obtaining Regulatory Approval in each country of the
world where Lilly elects to market the Drug Product.

3.3 REGULATORY APPROVALS. The parties shall use their respective
commercially reasonable efforts to file for and obtain all necessary Regulatory
Approvals. Except for Ophidian's Establishment License, and except where
Regulatory Approvals are legally required to be in Ophidian's name, Lilly shall
have the sole right to obtain Regulatory Approvals, which shall be in Lilly's
name, and Lilly shall own all submissions in connection therewith, provided
that Ophidian shall have an irrevocable right of reference thereto. All
contacts or filings with any regulatory agency shall be subject to overall
coordination by the Project Team. The Project Team shall develop a regulatory
contact plan that shall allocate authority for making regulatory contacts and
establish the procedures to be followed when making such contacts. All
formulary or marketing approvals shall also be obtained by and in the name of
Lilly.

3.4 CLINICAL DEVELOPMENT COSTS. Except as set forth below or
otherwise determined by the Project Team, Lilly shall pay all costs incurred in
the Clinical Development Program (including those relating to Regulatory
Approvals) after the Effective Date pursuant to the Clinical Development Plan,
except those costs involved in conducting those immunology tests described in
Exhibit E, which shall be borne by Ophidian. Ophidian shall be responsible for
its own costs in providing advice to Lilly.

ARTICLE 4

BULK DRUG SUBSTANCE AND PRODUCT
PROCESS DEVELOPMENT PROGRAMS

4.1 COMMENCEMENT; ROLES. The Bulk Process Development Program and
the Product Process Development Program shall commence as soon as practicable
after the Effective Date. Ophidian shall have principal responsibility for the
conduct of the Bulk Process Development Program, and Lilly shall have principal
responsibility for the conduct of the Product Process Development Program.
Each party shall provide advice and consultation with respect to the area of
principal responsibility of the other party. The Project Team shall coordinate
the

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<PAGE> 16

efforts of the parties with respect to both the Bulk Process Development
Program and the Product Process Development Program. The parties recognize
that certain manufacturing activities will be performed by Third Parties as
contemplated by Article 5, and that certain process development activities will
accordingly be conducted in cooperation with such Third Parties.

4.2 PROCESS DEVELOPMENT PLAN. The Project Team shall prepare and
oversee the implementation of a detailed, overall process development plan,
which shall address fully the key elements necessary for the Bulk Process
Development Program and the Product Process Development Program and for the
design and construction of necessary manufacturing facilities and shall further
define the roles of each party in the Process Development Program (the "PROCESS
DEVELOPMENT PLAN").

4.3 BULK PROCESS DEVELOPMENT PROGRAM. As set forth above,
Ophidian shall have principal responsibility for the Bulk Process Development
Program, including the development of the process to produce the Bulk Drug
Substance, provision of analytical methods, environmental testing, in-process
testing, and release testing of the Bulk Drug Substance, generation of
appropriate procedures and controls in order to ensure compliance with GLP and
GMP or other governing regulations, and the procurement of necessary
manufacturing facilities for production of the Bulk Drug Substance for the
supply of clinical studies. Lilly shall provide advice with respect to the
Bulk Process Development Program, and the Project Team shall review and approve
procedures and practices required to ensure compliance with GLP, GMP,
environmental and other regulatory requirements.

4.4 PRODUCT PROCESS DEVELOPMENT PROGRAM. Lilly shall have
principal responsibility for the Product Process Development Program including
the development of the process to produce the Drug Product from Bulk Drug
Substance, provision of analytical methods, environmental testing, in-process
testing, and release testing of the Drug Product, generation of appropriate
procedures and controls in order to ensure compliance with GLP and GMP
regulations, and the procurement of necessary manufacturing facilities for
production of the Drug Product from Bulk Drug Substance for the supply of
clinical studies. Ophidian shall provide advice with respect to the Product
Process Development Program, and the Project Team review and approve procedures
and practices required to ensure compliance with GLP and GMP.

4.5 PROCESS DEVELOPMENT COSTS. Except as set forth in this
Agreement, Ophidian shall pay all costs incurred in the Bulk Process
Development Program and Lilly shall pay all costs incurred in connection with
the Product Process Development Program. Each party shall bear its own costs
in providing advice to the other. No party shall be obligated to provide any
additional services in support of the other party's area of principal
responsibility or be entitled to compensation from the other for any services
provided unless approved by the Committee.

<PAGE> 17
ARTICLE 5

BULK MANUFACTURING AND PRODUCT MANUFACTURING PROGRAM

5.1 COMMENCEMENT; ROLES. The Manufacturing Program shall commence
as soon as practicable after the Effective Date. Ophidian shall have principal
responsibility for the Bulk Manufacturing Program, and Lilly shall have
principal responsibility for the Product Manufacturing Program. The Project
Team shall coordinate the efforts of the parties with respect to the
Manufacturing Program.

5.2 MANUFACTURING PLAN. The Project Team shall prepare and
oversee the implementation of a detailed, overall manufacturing plan, which
shall address fully the key elements necessary for the clinical and commercial
manufacture of the Bulk Drug Substance and the Drug Product and the roles of
each party in the Manufacturing Program (the "MANUFACTURING PLAN").

5.3 MANUFACTURING BULK DRUG SUBSTANCE. To produce necessary
quantities of Bulk Drug Substance, Ophidian shall provide the following
facilities and services:

(a) Facilities will be provided to house laying hens for the
production of egg raw material necessary to produce the Bulk Drug Substance.
As soon as practicable after the Effective Date, Ophidian shall develop the
capacity to ***************. Ophidian shall add such additional capacity
following Product Decision as may be necessary to insure adequate commercial
supply of Bulk Drug Substance. The location, scale and design of the hen
production facilities will be determined solely by Ophidian, but shall be of a
type sufficient to comply with all applicable regulatory and GMP
requirements.*************************** *******************.

(b) As soon as practicable following the Effective Date, ****************
************************************************* in accordance with quality
requirements for clinical trials. *************************************
*************************************************************************.

(i) As soon as practicable following the Effective Date, *******
******************************************** competent to produce Bulk Drug
Substance in accordance with the quality and quantity requirements for clinical
trials. It is expected that Bulk Drug Substance will be produced
*********************** ******************************************** .

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<PAGE> 18

(ii) As soon as practicable following the receipt by
Ophidian of the Milestone Equity Investment set forth in Article 8.2(a) of this
Agreement, Ophidian shall begin the design and construction of its own pilot
facilities for the production of Bulk Drug Substance. The location, scale and
design of the facilities will be determined by Ophidian, subject to written
approval by Lilly, which approval shall not be unreasonably withheld.
********************************************************************************
**************************************************.

(d) Ophidian shall construct additional facilities for the
manufacture of Bulk Drug Substance as necessary to meet the market demand for
Drug Product. If market demand requires manufacturing capacity in excess of
Ophidian's bulk product pilot facilities, additional capacity will be provided
by Ophidian, through the expansion of Ophidian's bulk product pilot facilities
or additional facilities constructed separately. The location, scale and
design of any additional facilities will be determined by Ophidian, subject to
the written approval by Lilly, which approval shall not be unreasonably
withheld.

(e) All manufacturing facilities shall comply with and be operated
in accordance with all applicable GMP, GLP and other regulatory requirements.
Lilly shall have the right to audit and approve these facilities, including
procedures and practices, to verify their conformance with applicable GMP, GLP
and other regulatory requirements. Ophidian shall comply with all applicable
governmental requirements, and shall provide the Project Team with all
information pertinent to Regulatory Approvals for manufacturing facilities.
Ophidian shall have principal responsibility for in-process and final Bulk Drug
Substance release assays.

(f) As provided in this Agreement, Ophidian shall manufacture and
supply (either itself or through Third Parties approved by Lilly) all of
Lilly's commercial requirements for the Bulk Drug Substance. The Purchase
Price for Bulk Drug Substance supplied by Ophidian shall be as set forth in
Exhibit A. All sales of Bulk Drug Substance shall be subject to the terms and
conditions set forth in Exhibit B.

(g) Ophidian shall not engage any Third Party to manufacture Bulk
Drug Substance without the prior written consent of Lilly, which consent shall
not be unreasonably withheld. Ophidian understands that Lilly would approve a
Third Party manufacturer only after such manufacturer first received a
favorable review by Lilly's scientific, quality control/quality assurance,
manufacturing, financial and other groups.

5.4 PROCESSING BULK DRUG SUBSTANCE INTO DRUG PRODUCT. To produce
quantities of Drug Product from Bulk Drug Substance, Lilly shall provide the
following facilities and services:

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<PAGE> 19

(a) Lilly, either itself or through a Third Party acceptable to
Ophidian, shall provide pilot facilities and equipment for formulation, fill
and finish activities necessary for the manufacture of Drug Product from Bulk
Drug Substance. The location, scale and design of the facilities will be
determined by Lilly. Lilly shall comply with all applicable governmental
requirements, and shall provide the Project Team with all information pertinent
to Regulatory Approvals. Ophidian shall have the right to audit facilities for
formulation, fill and finish of Drug Product.

(b) Lilly shall either itself or through a Third Party acceptable
to Ophidian construct or otherwise provide additional facilities for the
formulation, fill and finish of Drug Product as necessary to meet the market
demand. The Drug Product shall be manufactured in accordance with then-current
GMP, applicable regulatory requirements and such further specifications as are
determined from time to time by the Project Team.

5.5 COSTS.
Ophidian shall pay all costs incurred in the manufacture of Bulk Drug
Substance. Lilly shall pay a fee for Bulk Drug Substance used in clinical
trials as provided in paragraph 7 of Exhibit A. Lilly shall pay costs incurred
in the processing of the Bulk Drug Substance to produce Drug Product.

ARTICLE 6

CDAD DIAGNOSTIC
The licenses granted to Lilly hereunder shall not include the right to
utilize any Ophidian intellectual property to develop, manufacture or use
diagnostic products for CDAD, whether in the form of methods, processes,
devices, compounds, kits or services.******************************************
**********************************************************************, unless
the parties earlier agree that an Agreement is not possible. Regardless of
whether Lilly and Ophidian reach an agreement *************** ******, if
Ophidian elects to develop the *********************, either itself or through a
Third Party, and the clinical ******************** will be developed in time for
use in the ********** **********************************, Ophidian shall use
its commercially reasonable efforts to ****************************************
******************************************************************** upon such
terms as the parties shall negotiate in good faith.

ARTICLE 7
COMMERCIALIZATION

7.1 COMMERCIALIZATION. Ophidian hereby appoints Lilly as the sole
and exclusive (even as to Ophidian) distributor of Drug Product throughout the
world, with the sole and exclusive right (even as to Ophidian) to promote,
market and sell

<PAGE> 20
Drug Product throughout the world. Ophidian shall not sell Bulk Drug Substance
for therapeutic use (either directly or as an intermediate) or Drug Product to
any person other than Lilly or its Affiliates or permit any person other than
Lilly or its Affiliates to promote Drug Product without Lilly's prior written
consent. Lilly shall have the sole right to commercialize the Drug Product in
each country of the world.

7.2 MARKETING PARTNERS. Lilly shall have the right to appoint
one or more Third Party marketing partners to promote, co-promote, or co-market
Drug Product in any territory of the world. In the event Lilly elects to
appoint a marketing partner, Lilly shall have the right to supply Drug Product
to such partner at such prices as Lilly shall determine. With the consent of
Ophidian, which consent will not be unreasonably withheld, Lilly may, in
connection with the appointment of a marketing partner, assign to such partner
some or all of Lilly's obligations under the Clinical Development Program,
provided that such assignment shall not release Lilly from any obligation it
may have under this Agreement.

7.3 COMMERCIAL DILIGENCE. Lilly shall work diligently, consistent
with accepted business practices and legal requirements, to obtain regulatory
approval for and to market, sell and distribute the Drug Product in all
territories of the world where in the opinion of Lilly such marketing is
feasible and commercially justifiable, devoting the same degree of attention
and diligence to such efforts that it devotes to such activities for its own
products of comparable market potential.

7.4 COMMERCIALIZATION COSTS. Except as otherwise determined by
the Committee, Lilly shall pay all costs incurred in connection with the
commercialization of the Drug Product.

ARTICLE 8

EQUITY INVESTMENTS AND MILESTONE FEES

8.1 INITIAL INVESTMENT. Within thirty (30) days after the
Effective Date, pursuant to a Stock Purchase Agreement substantially in the
form attached as Exhibit C to be entered into by the parties, Lilly shall
purchase and Ophidian shall sell 153,846 shares of unregistered common stock of
Ophidian at a price per share of $6.50, for an aggregate purchase price of nine
hundred ninety-nine thousand, nine hundred ninety-nine dollars ($999,999) .

8.2 MILESTONE EQUITY INVESTMENTS OR FEES. Provided that Ophidian
is not then in breach of any of its obligations under this Agreement, upon
achievement of the respective milestone events listed below, Lilly shall make
milestone equity investments in unregistered common stock of Ophidian or pay a
milestone fee to Ophidian as provided below:

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<PAGE> 21

(a) $3,000,000 (Three Million Dollars) equity investment upon the
later of (i) the earlier of (A) the date on which Lilly advises Ophidian in
writing that those immunology studies listed on Exhibit E have been completed
and that the results of such studies are satisfactory to Lilly or (B) the
expiration of Lilly's right of termination provided for in Section 15.3, or
*********************************;

(b) $3,500,000 (Three Million Five Hundred Thousand Dollars)
equity investment upon the later of (i) first patient dose pursuant to the
Clinical Development Program in the first Phase II clinical trial for the Drug
Product, or ***********************************************************; and

(c) $4,500,000 (Four Million Five Hundred Thousand Dollars)
milestone Fee upon the later of (i) a favorable Product Decision by Lilly,
or ***********.

Upon the achievement of a milestone event, Ophidian shall send Lilly a
written request for the appropriate milestone investment or fee, which
shall be made or paid within thirty (30) days of Lilly's receipt of Ophidian's
written request. The price per share at which such milestone equity investments
shall be made shall be equal to the average of the closing prices of Ophidian's
common stock as quoted on NASDAQ (or other exchange on which the Ophidian stock
is listed) for the first ten (10) of the most recent fifteen (15) trading
days prior to attainment of the respective milestone event, if Ophidian Common
Stock is then authorized for trading on NASDAQ, or if Ophidian common stock is
not then authorized for trading on NASDAQ, at the fair market value thereof as
determined by mutual agreement of the parties. In connection with developing
its estimate of the fair market value of the Ophidian common stock, Lilly shall
be provided access to all necessary financial records of Ophidian. If the
parties are not able to agree upon the fair market value of the Ophidian stock,
the fair market value shall be determined by a nationally recognized investment
banking firm or nationally recognized firm of certified public accountants
selected by the parties, whose fees shall be borne equally by the parties. If
the parties are unable to agree upon the fair market value of Ophidian stock,
the 30 day period in which Lilly is to make the investment shall be extended as
necessary to permit necessary valuations to be done. For every thirty (30)
days that the period for making a milestone equity investment is so extended or
adjusted, Lilly agrees to pay Ophidian an advance equal to ten percent (10%) of
the cash value of the investment for up to fifty percent (50%) of the total
investment. The parties shall enter into a Milestone Stock Purchase Agreement
in substantially the form attached as Exhibit D with respect to each milestone
equity investment. Each milestone equity investment shall be subject to
applicable regulatory requirements, including, if applicable, the notice
provisions of the Hart Scott Rodino Antitrust Improvements Act, and the period
for making such investments shall be adjusted as necessary to permit the
parties to comply with such regulatory requirements.

ARTICLE 9

LICENSES

9.1 LICENSES.

(a) LICENSE TO LILLY.

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<PAGE> 22
(i) Subject to the other provisions of this Agreement,
Ophidian hereby grants to Lilly and its majority owned Affiliates an exclusive
worldwide right and license, with the right to sublicense to Third Party
fill/finish manufacturers, under the Ophidian Patents, Ophidian Technology,
Program Patents and Program Technology to make, have made, use, have used,
import, offer for sale, sell and have sold the Drug Products for any human
therapeutic use and to otherwise comply with its obligations under this
Agreement. Ophidian shall have the limited right to practice under Ophidian
Patents, Ophidian Technology, Ophidian Program Patents, and Ophidian Program
Technology to the extent necessary to develop, manufacture and sell to Lilly,
its Affiliates or any Third Party marketing partner of Lilly as contemplated by
Section 7.2, the Bulk Drug Substance and to otherwise comply with its
obligations under this Agreement. Lilly may not exercise any rights granted
pursuant to this Section 9.1(a) to manufacture the Bulk Drug Substance unless a
Trigger Event as defined in Section 9.2 shall have occurred. Ophidian shall
retain all rights under Ophidian Patents, Ophidian Technology, Ophidian Program
Patents and Ophidian Program Technology not granted to Lilly, including but not
limited to the right to develop, manufacture and sell Bulk Drug Substance for
non-therapeutic uses.

(ii) Ophidian will use its best efforts to obtain, on or
prior to the Effective Date, all necessary consents to its granting a
sublicense to Lilly under, or assignment to Lilly of, any Third Party
intellectual property known to Ophidian that covers the manufacture, use, or
sale of the Bulk Drug Substance or Drug Product and, upon obtaining each such
consent, shall promptly grant to Lilly a royalty-free sublicense under or
assignment of all of its rights under each license for use in the manufacture,
use, sale, distribution or promotion of the Bulk Drug Substance and the Drug
Product; provided, however, that Lilly may not exercise any rights under such
sublicense or assignment obtained pursuant to this Section 9.2(a)(ii) to
manufacture Bulk Drug Product unless a Trigger Event shall have occurred.

(b) LICENSES TO OPHIDIAN. (i) Subject to the other provisions of
this Agreement, Lilly hereby grants to Ophidian the nonexclusive, right and
license with the right to sublicense solely to Third Party manufacturers as
provided in Section 5.3, to practice under the Lilly Patents, Lilly Technology,
Lilly Program Patents and Lilly Program Technology solely for the purpose of
developing, manufacturing, and selling to Lilly, its Affiliates or any Third
Party marketing partner of Lilly as contemplated by Section 7.2, the Bulk Drug
Substance under this Agreement and to otherwise comply with its obligations
under this Agreement.

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<PAGE> 23
9.2 LILLY MANUFACTURING AND OTHER RIGHTS FOLLOWING TRIGGER EVENT.

(a) Ophidian understands that Lilly will expend substantial monies
in reliance upon the availability of Bulk Drug Substance, and that continued
availability of Bulk Drug Substance will be important to Lilly's ability to
maintain its credibility as a supplier of products. Therefore, as part of the
consideration to induce Lilly to enter into this Agreement, Ophidian agrees as
follows:

(i) Ophidian hereby agrees that upon occurrence of a
Trigger Event, Lilly shall have the right to exercise the licenses granted in
Section 9.1(a) to manufacture, use and sell Bulk Drug Substance, and Ophidian
shall assign to Lilly any Regulatory Approvals and any trademarks related
thereto; provided, however, that Lilly may not exercise any of the rights
granted pursuant to this Section 9.2(a)(i) to manufacture the Bulk Drug
Substance unless a Trigger Event shall have occurred; and

(ii) Ophidian shall, upon request, transfer to a Third
Party escrow agent selected by mutual agreement of the parties samples of all
materials necessary for manufacture of the Bulk Drug Substance, including
master cell banks and working cell banks, and copies of all written
manufacturing procedures or other items necessary for manufacture of the Bulk
Drug Substance. The escrow agent shall hold such items in escrow pursuant to a
written escrow agreement to be entered into among Lilly, Ophidian and the
escrow agent, which agreement shall provide that such items shall be promptly
delivered to Lilly upon receipt of a written certification by Lilly that a
Trigger Event has occurred. The expense of the escrow agent shall be shared
equally by the parties; and

(iii) Ophidian hereby grants an option to Lilly exercisable
in whole or in part upon a Trigger Event to purchase any manufacturing facility
then owned by Ophidian, and all associated equipment, work in process,
supplies and related assets used in the manufacture of the Bulk Drug Substance
("Manufacturing Assets"), at the fair market value thereof as determined by an
appraisal to be prepared by a nationally recognized appraisal firm acceptable
to the parties, the cost of which shall be borne by the parties. If any of the
Manufacturing Assets are not used primarily in the production of Bulk Drug
Substance, Lilly and Ophidian shall negotiate in good faith an arrangement by
which Lilly shall accommodate Ophidian's need to utilize for other purposes any
of the Manufacturing Assets not used primarily in the production of Bulk Drug
Substance. If the parties are unable to agree upon an acceptable appraiser,
each party shall appoint its own nationally recognized appraisal firm which
shall promptly prepare an appraisal of the fair market value, and the average
of the two appraisals shall be the fair market value. In such event each party
shall bear the expenses of its own appraisal firm; and

(iv) Ophidian shall provide such assistance as Lilly may
reasonably request to assist Lilly in obtaining an alternate source of supply
of Bulk Drug Substance.

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<PAGE> 24
(b) A "Trigger Event" shall occur if:

(i) Lilly terminates this Agreement pursuant to Section
15.5 or 15.7; or

(ii) Ophidian has failed to provide by the date of the
first regulatory submission for Drug Product approval, pilot manufacturing
facilities sufficient to meet the needs of the Commercialization Program for
******************************************************************************,
as the same were projected on the Effective Date, a copy of which is attached as
Schedule 9.2; or

(iii) Ophidian has failed other than as a result of a Force
Majeure referred to in Section 19.4 to supply to Lilly ************************
******** for Bulk Drug Substance for commercial sale ************************
***********************************************************************
***********************************************************************; or

(iv) Ophidian has failed to supply Lilly *****************
****** of Bulk Drug Substance over a period of **************** as a result of
any factor, including a Force Majeure condition and Ophidian has been unable to
establish to the reasonable satisfaction of Lilly that adequate supply will be
available within no more than *********** ; or
(v) Ophidian fails to pay principal or interest when due,
after giving effect to any applicable grace period, upon acceleration or
otherwise, with respect to any indebtedness for borrowed money in an aggregate
principal amount equal to or exceeding $1,000,000; or

(vi) Ophidian without proper cause provides notice to
Lilly that Ophidian will not perform its obligations under this Agreement; or

(vii) Ophidian violates, or is alleged to have violated,
any applicable law or regulatory requirement, which violation or alleged
violation renders, in Lilly's reasonable opinion, Ophidian unable to fulfill
its obligations under this Agreement after a period for cure that is reasonable
under the circumstances. Notwithstanding the foregoing, any failure to supply
Bulk Drug Substance under item (iii) or (iv) above shall not be deemed to be a
Trigger Event if such failure is a result of (A) either (i) a delay in
construction due to a delay in making the Product Decision or (ii) a
significant and unexpected increase in demand for Bulk Drug Substance, provided
that in either case Ophidian is using all commercially reasonable efforts to
increase its capacity as soon as practicable, or (B) changes to processes or
methods agreed to by the Project Team or imposed by law or regulatory
requirements, provided that Ophidian is using all commercially reasonable
efforts to implement such changes as soon as practicable, provided, in each of
(A) and (B)

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<PAGE> 25
that Ophidian demonstrates to the reasonable satisfaction of Lilly that
Ophidian has or can obtain adequate financing for such efforts and is otherwise
capable of increasing capacity or implementing changes in a reasonable period
of time.

9.3 TRIGGER EVENT INVOLVING FORCE MAJEURE. If a Trigger Event
occurs pursuant to Section 9.2(b)(iv), which event is the result of a Force
Majeure, and Lilly exercises its rights under Section 9.2 to manufacture Bulk
Drug Substance, Ophidian shall cooperate with and assist Lilly in arranging for
alternate sources of supply so as to avoid interruption of supply. Beginning
**************** after the effective date of Lilly's notice to Ophidian that it
is exercising its rights under Section 9.2, Lilly shall pay Ophidian a royalty
equal to *********** of Net Sales of Drug Product, which royalty shall be paid
on a country-by-country basis until the expiration of the last to expire
Ophidian Patent or Ophidian Program Patent in such country with respect to
which a Valid Claim covers the manufacture, use, or sale of such Drug Product.
No royalty will be due in the event a Trigger Event occurs other than by
reason of Force Majeure.

9.4 SPECIFIC PERFORMANCE. Each party agrees that money damages
would not be a sufficient remedy for any breach of this Article 9 of this
Agreement by the other party and that, in addition to all other remedies, the
injured party shall be entitled to specific performance and injunctive or other
equitable relief as a remedy for any such breach, and each party further agrees
in advance to the granting of injunctive relief in the other party's favor
without proof of actual damages.

ARTICLE 10

TRADEMARKS

10.1 SELECTION; LICENSE; EXPENSES. Lilly may select one or more
trademarks, as appropriate, for the marketing of the Drug Product. Such
trademarks shall be owned solely by Lilly (collectively, the "TRADEMARKS");
provided, however, that if required by law in any country Ophidian shall own
the Trademarks in that country and grant an exclusive license to Lilly.
Expenses for registration of the Trademarks shall be *************************.

10.2 INFRINGEMENT. Ophidian shall notify Lilly promptly upon
learning of any actual, alleged or threatened infringement of any of the
Trademarks or any unfair trade practices, passing off of counterfeit goods, or
like offenses.

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ARTICLE 11

SUBSEQUENT PRODUCTS

During the term of this agreement and not later than the date of disclosure to
any Third Party (it being understood that this Article 11 does not authorize
disclosure of any information that Ophidian is not otherwise permitted to
disclose), Ophidian shall promptly disclose to Lilly any significant
improvement or enhancement to the Bulk Drug Substance or Drug Product or any
process used or useful in connection with the manufacture thereof unless in the
case of processes the same shall have been developed as part of a collaboration
with a Third Party, the terms of which prohibit disclosure to Lilly. The
licenses granted to Lilly pursuant to this Agreement shall be deemed to include
the right to utilize any such improvement or enhancement solely in connection
with the Bulk Drug Substance and the Drug Product, and to sell Drug Product for
any therapeutic purpose, all in accordance with this Agreement, but shall not
include the right to develop a diagnostic. In addition, Ophidian shall
disclose to Lilly, prior to the disclosure to any Third Party or the filing of
information with any regulatory agency any compound, product, invention,
technique, process, method or the like, in the field of CDAD, whether developed
independently by Ophidian outside of the collaboration contemplated by this
Agreement, or licensed by Ophidian from any Third Party, with the right to
sublicense unless in the case of techniques or processes the same shall have
been developed as part of a collaboration with a Third Party, the terms of
which prohibit disclosure to Lilly (a "PRODUCT IDEA"). Lilly shall have a
period of thirty (30) days following such disclosure to advise Ophidian whether
Lilly desires to engage in negotiations with Ophidian to obtain the right to
commercialize the Product Idea. If Lilly elects to engage in such
negotiations, Ophidian shall thereafter negotiate in good faith with Lilly on
an exclusive basis for an additional period of ninety (90) days in an effort to
reach an agreement by which Lilly may commercialize the Product Idea.

ARTICLE 12

INFORMATION AND REPORTS

12.1 INFORMATION DISCLOSURE. Lilly and Ophidian will disclose and
make available to each other promptly the results of the work conducted in the
Clinical Development Program, Process Development Program and Manufacturing
Program, including without limitation all preclinical, clinical, regulatory,
and other information known by Lilly or Ophidian concerning the Drug Product at
any time during the term of this Agreement. All significant information will
be disclosed to the other party promptly after it is learned or its
significance is appreciated. Lilly shall own and maintain its database of
clinical trial data and adverse drug event information accumulated from all
clinical trials of the Drug Product for which it was responsible.

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<PAGE> 27
12.2 COMPLAINTS. Each party shall maintain a record of all
complaints it receives with respect to the Drug Product. Each party shall
notify the other of any complaint received by it in reasonable detail and
within five (5) days after the event, and, in any event in sufficient time to
allow the responsible party to comply with any and all regulatory requirements
imposed upon it in any country.

12.3 ADVERSE DRUG EVENTS. The parties recognize that the holder of
a drug approval application may be required to submit information and file
reports to various governmental agencies on compounds under clinical
investigation, compounds proposed for marketing, or marketed drugs, including
adverse event reports. The Project Team shall develop and the parties shall
adhere to appropriate procedures to insure compliance with all such applicable
regulatory requirements.

12.4 USE OF INFORMATION. Information contained in reports made
pursuant to this Article 12 or otherwise communicated between the parties will
be subject to the confidentiality provisions of Article 14 below. Lilly may
use any information obtained by it pursuant to this Agreement for the purposes
of obtaining Regulatory Approval for the Drug Product throughout the world.
Each party shall have the right to use the Confidential Information disclosed
by the other party without charge, but only to the extent necessary to enable
each party to carry out their respective roles defined in this Agreement.
Neither party has a license to use Confidential Information disclosed by the
other party for the development, use, manufacture or sale of products other
than the Drug Product.

12.5 PUBLICATIONS. The parties acknowledge that scientific lead
time is a key element of the value of the research to be performed under this
Agreement and further agree that scientific publications must be strictly
monitored to prevent any adverse effect of premature publication. The Project
Team will establish a procedure for publication review and approval and each
party shall first submit to the Project Team or its designee an early draft of
all such publications, whether they are to be presented orally or in written
form, prior to submission for publication. The Project Team or its designee
shall review each such proposed publication in order to avoid the unauthorized
disclosure of a party's Confidential Information and to preserve the
patentability of inventions and data package exclusivity arising from the
research performed in the course of the Agreement. If, within thirty (30) days
of receipt of an advance copy of a party's proposed publication, the Committee
or its designee informs such party that its proposed publication contains
Confidential Information of the other party, then such party shall delete such
Confidential Information from its proposed publication. If, within thirty (30)
days of receipt of an advance copy of a party's proposed publication, the
Committee or its designee informs such party that its proposed publication
could be expected to have a material adverse effect on any Program Patents or
Program Technology, then such party shall delay such proposed publication,
sufficiently long to permit the timely preparation and filing of a patent
application(s) on the information involved. If, within forty five (45) days of
receipt of an advance copy of a party's proposed publication, the Project Team
or its designee fails to approve of

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<PAGE> 28
such party's proposed publication, then such proposed publication shall be
regarded as denied by the Project Team or its designee and shall not be
published.

12.6 REGULATORY REPORTING. The parties acknowledge that either or
both parties will be required to submit information and file reports with
various governmental agencies in addition to those contemplated by the
preceding sections. The Project Team shall establish procedures to be followed
by the parties which will allow each party to comply with its respective
regulatory obligations, and the parties agree to cooperate with each other as
necessary to allow each party to comply with its regulatory obligations. To
the extent practicable, Lilly shall coordinate all contacts with regulatory
agencies, keeping Ophidian appropriately advised of such contacts.

ARTICLE 13

INTELLECTUAL PROPERTY

13.1 OWNERSHIP OF INVENTIONS AND KNOW-HOW. Any significant
improvement or enhancement to the Bulk Drug Substance or Drug Product or any
process used or useful in connection with the manufacture thereof made by
either party during the term of this Agreement or within twelve (12) months
after termination or expiration of this Agreement will be disclosed to the
other party promptly after the disclosing party recognizes the significance
thereof unless in the case of process developments the same shall have been
developed as part of a collaboration with a Third Party, the terms of which
prohibit disclosure to the other party. All Program Patents and Program
Technology shall be owned by the party making the invention claimed or
contained therein or, if such invention is made jointly, shall be owned
jointly, all as determined in accordance with U.S. laws of inventorship. Lilly
shall have the right to select patent counsel and to take such other actions as
are reasonably necessary or appropriate to obtain patent protection with
respect to Program Technology and Ophidian shall cooperate in procuring Program
Patents including jointly owned Program Patents. *******************
**************************************************************************.
Lilly shall provide the Committee with a copy of any patent application which
first discloses any specific Program Technology, prior to filing the first of
such applications in any jurisdiction, if possible, for review and comment by
the Committee or its designees. If Lilly decides not to file or maintain an
application or patent on an invention, or on a joint invention, in any country,
it shall give Ophidian reasonable notice to this effect. After such notice,
Ophidian may file or maintain the application or patent. Lilly agrees to
prosecute and/or maintain the Lilly Patents and to prosecute any interference
proceedings with respect to such Lilly Patents. Ophidian agrees to prosecute
and/or maintain the Ophidian Patents and to prosecute any interference
proceedings with respect to such Ophidian

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<PAGE> 29
Patents. ****************************************************************
******************************************************************. Ophidian
shall provide Lilly with an opportunity to review and comment on the
prosecution of the Ophidian Patents. The party initially responsible for such
prosecution and maintenance of Program Patents, Lilly Patents and Ophidian
Patents (the "Initial Responsible Party") shall give notice to the other party
of any decision to cease such prosecution and maintenance and, in such case,
shall permit the other party at its sole discretion to continue prosecution or
maintenance at its expense. If the other party elects to continue prosecution
or maintenance, the Initial Responsible Party shall execute such documents and
perform such acts as may be reasonably necessary for the other party to
continue prosecution or maintenance.

13.2 INFRINGEMENT CLAIMS BY THIRD PARTIES.

(a) If the manufacture, use or sale of Bulk Drug Substance and/or
Drug Product results in a claim against a party for patent infringement or for
inducing or contributing to patent infringement ("Infringement Claim"), the
party first having notice of an Infringement Claim shall promptly notify the
other in writing. The notice shall set forth the facts of the Infringement
Claim in reasonable detail.

(i) If the Infringement Claim relates to a Third Party patent issued prior
to the Effective Date, Lilly shall have the option to control the defense of
the Infringement Claim and to employ counsel of Lilly's choice. Lilly shall
elect to control the defense or not within forty-five (45) days of receipt of
notice of the Infringement Claim. If it is necessary to take any action prior
to the date of Lilly's decision regarding control of the defense in order to
protect the rights of either party, the parties shall cooperate to ensure that
such action is taken in a timely manner. If Lilly elects not to control the
defense, then Ophidian shall have the obligation to defend such Infringement
Claim and may control such defense and may employ counsel of its choice.

(ii) If the Infringement Claim relates to a Third Party patent issued after
the Effective Date, Lilly shall have the obligation to defend such Infringement
Claim and may control such defense and may employ counsel of its choice.

(iii) The party not controlling the defense of any Infringement Claim shall
have the right to participate in the defense, with counsel of its choice, but
solely at its expense. Lilly and Ophidian shall cooperate in the defense of
any Infringement Claim, and shall provide such assistance to the other party as
may reasonably be requested. No settlement shall be made without the consent
of the other party, which consent shall not be unreasonably withheld. If any
party shall fail to commence defense against any Infringement Claim that it is
obligated to defend within a period of sixty (60) days after receiving or
giving notice of such claim, the other party shall have the right to commence
such defense. The expenses of any defense shall be handled as provided in
subparagraph (b) below.

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<PAGE> 30
(b) With respect to Infringement Claims related to Third Party
patents issued prior to the Effective Date:

(i) If Lilly exercises its option to control such litigation,*************
*********************************************************************.

(ii) If Lilly does not exercise its option to control such litigation,
**********************************************************************.
(iii) Within 60 days from the end of each quarter, Lilly shall send to
Ophidian an invoice for reimbursement of any of the aforementioned expenses
incurred by Lilly for which Lilly is entitled to reimbursement. Ophidian shall
have 30 days from the date of invoice to pay Lilly, either in cash or through a
credit against any then outstanding invoice for Lilly's purchases of Bulk Drug
Substance. However, the ******************************************************
************. Amounts deferred because of this limitation will be carried
forward to subsequent quarters until paid in full. If payment is not received
within 30 days, whether because of deferral as provided above or other reasons,
simple interest at ******************************** will begin to accrue and
will be paid to Lilly on a monthly basis until the invoice is paid in full.

For example,***********************************************************
***********************************************************************.

(c) With respect to Infringement Claims relating to patents issued
after the Effective Date, the parties shall share all costs and expenses
incurred in conducting the defense of such claims, including the investigation
and settlement thereof on the basis of *********** by Lilly and ******** by
Ophidian. Provided that Lilly is conducting the defense of the Infringement
Claim, Ophidian shall bear its own defense costs. Except as otherwise provided
in this Agreement, any and all royalties, amounts paid in settlement and
damages resulting from settlement or a final nonappealable judgment pursuant to
litigation relating to an Infringement Claim shall be ***********************.

13.3 INFRINGEMENT CLAIMS AGAINST THIRD PARTIES.

(a) Ophidian and Lilly each agrees to take reasonable actions to
protect the Ophidian Patents and Program Patents from infringement and to
protect the Program Technology from unauthorized use, when, from its own
knowledge or upon notice by the other party, the party with knowledge or
receiving notice becomes aware of the reasonable probability that such
infringement or unauthorized use exists.

(b) If any Ophidian Patent, Ophidian Technology, Program Patent or
Program Technology is infringed or misappropriated, as the case may be, by a
Third

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<PAGE> 31
Party, the party to this Agreement first having knowledge of such infringement
or misappropriation, or knowledge of a reasonable probability of such
infringement or misappropriation, shall promptly notify the other in writing.
The notice shall set forth the facts of such infringement or misappropriation
in reasonable detail. The owner of the patent or technology shall have the
primary right, but not the obligation, to institute, prosecute, and control any
action or proceeding with respect to infringement or misappropriation of such
patent or technology by it own counsel and the other party shall have the
right, at its own expense, to be represented in such action by its own counsel.
The Committee shall determine which party shall have the primary responsibility
to institute, prosecute, and control any action or proceeding with respect to
infringement or misappropriation of jointly owned patents or technology and the
other party shall have the right, at its expense, to be represented by its
counsel. If the party having the primary right or responsibility to institute,
prosecute, and control such action or prosecution fails to do so within a
period of one hundred twenty (120) days after receiving notice of the
infringement, the other party shall have the right to bring and control any
such action by counsel of its own choice, and the other shall have the right,
at its own expense, to be represented in any such action by counsel of its own
choice. If one party brings any such action or proceeding, the second party
may be joined as a party plaintiff and, in case of joining, the second party
agrees to give the first party reasonable assistance and authority to file and
to prosecute such suit. The costs and expenses of all suits brought by a party
under this Section 13.3 shall be reimbursed to such filing party and then to
the participating party, pro rata, out of any damages or other monetary awards
recovered therein in favor of Ophidian or Lilly. Any remaining damages shall
then be split (i) ******************* to Ophidian and ****************** to
Lilly. No settlement or consent judgment or other voluntary final disposition
of a suit under this Section 13.3 may be entered into without the joint consent
of Ophidian and Lilly (which consent shall not be unreasonably withheld).

13.4 NOTICE OF CERTIFICATION. Ophidian and Lilly each shall
immediately give notice to the other of any certification filed under the U.S.
"Drug Price Competition and Patent Term Restoration Act of 1984" claiming that
a Program Patent is invalid or that any infringement will not arise from the
manufacture, use or sale of any product by a third party. If Ophidian decides
not to bring infringement proceedings against the entity making such a
certification, Ophidian shall give notice to Lilly of its decision not to bring
suit within twenty-one (21) days after receipt of notice of such certification.
Lilly may then, but is not required to, bring suit against the party that filed
the certification. Any suit by Lilly or Ophidian shall either be in the name
of Lilly or in the name of Ophidian, or jointly by Lilly and Ophidian, as may
be required by law. For this purpose, the party not bringing suit shall execute
such legal papers necessary for the prosecution of such suit as may be
reasonably requested by the party bringing suit.

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<PAGE> 32
13.5 PATENT TERM EXTENSIONS. The parties shall cooperate with each
other in gaining patent term extension wherever applicable to Program Patents
covering Drug Products. Lilly and Ophidian shall mutually determine which
patents shall be extended. All filings for such extension shall be made by the
party to whom the patent is assigned, provided, however, that in the event that
the party to whom the patent is assigned elects not to file for an extension,
such party shall (i) inform the other party of its intention not to file and
(ii) grant the other party the right to file for such extension.

ARTICLE 14

CONFIDENTIALITY AND NONDISCLOSURE

14.1 CONFIDENTIALITY. For a period of five (5) years following the
later of: (a) the termination of this Agreement or (b) if Lilly is marketing
the Drug Product the date on which Lilly ceases to market the Drug Product,
each party shall maintain in confidence all Confidential Information disclosed
by the other party, and shall not, except as contemplated by this Agreement,
use it for its benefit or the benefit of others, without the consent of the
disclosing party. Documents made available to the other party shall remain the
property of the disclosing party and shall be returned upon written request,
except that one copy of all such information may be retained for legal archival
purposes.

14.2 AUTHORIZED DISCLOSURE. Each party may disclose the
Confidential Information for the purpose of making various regulatory filings
and complying with applicable governmental regulations, and to consultants and
others having a need to know for the purposes of development, manufacture or
marketing of the Drug Product pursuant to this Agreement, provided that such
consultants and others shall also agree to appropriate notice and protective
provisions.

14.3 NONDISCLOSURE OF AGREEMENT. Neither party shall disclose any
information about this Agreement, including its existence, without the prior
written consent of the other. Consent shall not be required, however, for
disclosures to tax authorities or to bona fide potential sublicensees, to the
extent required or contemplated by this Agreement, provided, that in connection
with such disclosure, each party agrees to use its commercially reasonable
efforts to secure confidential treatment of such information. Each party shall
have the further right to disclose the terms of this Agreement as required by
applicable law, including the rules and regulations promulgated by the
Securities and Exchange Commission and to disclose such information to
shareholders or potential investors as is customary for publicly-held
companies, provided the disclosing party provides to the other party a copy of
the information to be disclosed and an opportunity to comment thereon prior to
such disclosure and consults within a reasonable time in advance of the
proposed disclosure with the other on the necessity for the disclosure and the
text of the proposed release.

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<PAGE> 33
14.4 SURVIVAL. The confidentiality obligations of this Article 14
shall survive the termination or expiration of the Agreement.

14.5 PRESS RELEASES. Attached hereto as Exhibit F is a press
release, which may be released upon the execution of this Agreement. All
future press releases by either party relating to the collaboration
contemplated by this Agreement shall be approved in advance by each party,
except for those communications required by law.

ARTICLE 15

TERM AND TERMINATION OF AGREEMENT

15.1 TERM. This Agreement shall become effective on the Effective
Date and shall continue in effect until the later of 20 years from the
Effective Date or the date on which all Ophidian Patents have expired in all
Major Markets, unless sooner terminated as provided below or by mutual written
agreement of the parties.

15.2 TERMINATION FOR MATERIAL BREACH. Either party shall have the
right to terminate this Agreement after ninety (90) days written notice to the
other in the event the other is in material breach of this Agreement, unless
the other party cures the breach before the expiration of such period of time.
Such notice shall set forth in reasonable detail the specifics of the breach.
In the event of termination hereunder by Lilly, all licenses granted under this
Agreement to Lilly shall not be affected and shall continue in full force and
effect, and Lilly shall have the right to exercise all licenses provided for in
Section 9.2. All licenses granted under this Agreement to Ophidian in such
event shall automatically terminate upon such termination by Lilly. In the
event of termination hereunder by Ophidian, licenses to Ophidian Patents and
Ophidian Technology granted hereunder to Lilly shall terminate, and Ophidian
shall have a limited non-exclusive, worldwide, fully paid license with the
right to sublicense to the Lilly Patents, Lilly Technology, Lilly Program
Patents and Lilly Program Technology to make, have made use, have used, import,
offer for sale, sell, and have sold Bulk Drug Substance and Drug Product.
Notwithstanding the foregoing, Lilly shall be permitted to distribute and sell
all supplies of Drug Product in its inventory at the time of termination until
such supplies are exhausted.

15.3 TERMINATION BASED ON RESULTS OF IMMUNOLOGY TESTS. Within
sixty (60) days following completion of the immunology tests set forth on
Exhibit E, Ophidian shall deliver to Lilly a detailed report of the results
thereof. If Lilly in good faith concludes that the results of such tests
suggests that the probability that the Drug Product can be successfully
developed is significantly diminished, Lilly

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<PAGE> 34
may, within thirty (30) days following receipt of the report described above,
elect to terminate this Agreement upon written notice to Ophidian. In such
event, all licenses granted to Lilly and Ophidian under this Agreement shall
terminate and Lilly shall have no further obligations under this Agreement.

15.4 TERMINATION BY LILLY FOR FAILURE TO MEET GOALS. Ophidian
acknowledges that the development and commercialization of pharmaceutical
products such as the Drug Product is an inherently uncertain process, and that
there can be no assurance either that the Drug Product can be successfully
developed or that the potential commercial rewards available for the
commercialization of the Drug Product, when weighed against the costs and
uncertainties involved and compared to Lilly's other commercial opportunities,
will be sufficient to justify Lilly's continued efforts to develop and/or
commercialize the Drug Product. Lilly agrees to work diligently, consistent
with accepted business practices, to fulfill its obligations under this
Agreement, devoting the same degree of attention and diligence to such efforts
as it devotes to such activities for its own products of comparable risk and
market potential. If Lilly in good faith concludes that further efforts under
this Agreement would not be commercially reasonable for Lilly, it may so notify
Ophidian, and the parties shall then promptly meet to explore whether any steps
may be taken that would lead Lilly to conclude that further efforts would be
justified. In the event the parties are unable to agree to continue efforts
within sixty (60) days of Lilly's notice to Ophidian provided for above, Lilly
shall be entitled to terminate this Agreement upon written notice to Ophidian.
Further, if in Lilly's sole opinion, Ophidian fails to gain adequate patent
protection for the CDAD Products, Lilly may terminate this Agreement upon
written notice to Ophidian. Upon termination by Lilly, the licenses under
Ophidian Patents and Ophidian Technology granted to Lilly under this Agreement
shall terminate, Lilly shall have no further obligation under this Agreement,
and Ophidian shall have a limited non-exclusive, worldwide, fully paid
license, with the right to sublicense, to the Lilly Patents, Lilly Technology,
Program Patents and Program Technology to make, have made, use, have used,
import, offer for sale, sell, and have sold Bulk Drug Substance and Drug
Products.

15.5 TERMINATION UPON INSOLVENCY. This Agreement may be terminated
by either party upon notice to the other should the other party:

(a) become insolvent; or

(b) file a petition under any bankruptcy or insolvency law or have any
such petition filed against it which has not been stayed within 60 days of such
filing.

15.6 ACCRUED RIGHTS, SURVIVING OBLIGATIONS. Termination of the
Agreement shall not affect any accrued rights of either party. As provided
herein, certain provisions, including, in certain circumstances, provisions
relating to

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<PAGE> 35
licensing of intellectual property and confidentiality are intended to survive
termination of this Agreement.

15.7 RIGHTS UPON TERMINATION FOR BREACH. If a party (the
"Non-Breaching Party") terminates this Agreement under Article 15 following
material breach by the other party (the "Breaching Party"), (a) the Breaching
Party shall return to the Non-Breaching Party all Confidential Information and
materials received from the Non-Breaching Party during the Agreement, (b) the
Breaching Party shall cease all use of the Confidential Information and
materials received from the Non-Breaching Party for any purpose, except that
the Breaching Party may keep a copy of all documents for record keeping
purposes only, and (c) the Breaching Party shall deliver to the Non-Breaching
Party all data and information developed by the Breaching Party prior to such
termination as a result of the activities under this Agreement which can
reasonably be viewed as necessary or useful to obtain governmental regulatory
approvals.

15.8 ASSISTANCE FOLLOWING TERMINATION. In the event Lilly elects
to terminate this Agreement pursuant to Section 15.4 and if Ophidian so
requests, Lilly shall provide reasonable assistance to Ophidian for a period of
ninety (90) days following the date of notice of termination. During this
period, Lilly shall provide Ophidian copies of its registration dossier for the
Drug Product, clinical data and unrestricted permission to use the dossier and
data for development, registration and commercialization of the Drug Product;
written Drug Product process procedures and training in these procedures; and
assistance in transferring contracts with Third Parties (e.g. clinical test
sites, contract research organizations, manufacturers of Drug Product, and
marketers) to Ophidian. Lilly will also agree to negotiate in good faith the
sale of any dedicated equipment, work in process, and finished product
inventories and supplies then owned by Lilly provided that the same would not
be disruptive to Lilly's other operations. In addition, Lilly shall grant to
Ophidian the licenses provided for in Section 15.4. In the event Lilly has
registered a trademark or tradename for use in connection with the Drug
Product, Ophidian shall also have a paid-up license to use such trademark or
tradename, provided however that Ophidian shall not be entitled to such license
in the event the trademark or tradename chosen by Lilly is also associated with
other Lilly products (such as the "huma" association between humulin and
humalog).

ARTICLE 16

INDEMNITY

(a) Each party hereby agrees to indemnify, defend and hold
harmless the other party and its Affiliates, and their respective officers,
directors, agents and employees from and against any and all suits, claims,
actions, demands, liabilities, expenses and/or losses, including reasonable
attorneys' fees and other costs of

29
<PAGE> 36
defense other than claims for infringement as provided in Section 13.2,
("Claims") resulting directly or indirectly from the manufacture, use,
handling, storage, sale or other disposition of Bulk Drug Substance or Drug
Product by the indemnifying party, its Affiliates, agents or sublicensees, but
only to the extent such Claims result from the negligence of the indemnifying
party or its employees and agents and do not result from the negligence of the
party seeking indemnification.

(b) Lilly shall indemnify defend and hold harmless Ophidian, its
Affiliates, and their respective officers, directors, agents and employees from
and against all Claims based upon the death or actual bodily injury or property
damage resulting from the manufacturing (but not including manufacture of the
Bulk Drug Substance), packaging, labeling, handling, storage, promotion,
marketing, distribution, use or sale of the Drug Product, except to the extent
caused by the negligence or willful misconduct of Ophidian or the material
breach by Ophidian of this Agreement, or caused prior to Ophidian placing Bulk
Drug Substance on the common carrier selected by Lilly for delivery to Lilly.

(c) Ophidian shall indemnify, defend and hold harmless Lilly, its
Affiliates, and their respective officers, directors, agents and employees from
and against all Claims based upon the death or any actual bodily injury or
property damage resulting from its manufacture or handling of Bulk Drug
Substance (including, without limitation, any Claims relating to release of
materials into the environment) except to the extent caused by the negligence
or willful misconduct of Lilly.

(d) Any entity entitled to indemnification under this Article
shall give prompt written notice to the indemnifying party of any Claims with
respect to which it seeks indemnification, and the indemnifying party shall
have the option to assume the defense of such Claims with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed by the
indemnifying party with counsel so selected, the indemnifying party will not be
obligated to pay the fees and expenses of any separate counsel retained by the
indemnified party with respect to such Claims. Except with the prior consent
of the indemnified party, which consent shall not be unreasonably withheld, the
indemnifying party may not enter into any settlement of such litigation unless
such settlement includes an unqualified release of the indemnified party.

ARTICLE 17

REPRESENTATIONS AND WARRANTIES

17.1 RIGHT, POWER AND AUTHORITY. Each of Ophidian and Lilly
represents and warrants to the other that as of the Effective Date it has full
right, power and authority to enter into this Agreement, including the right to
grant the licenses granted hereunder.

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<PAGE> 37
17.2 ABSENCE OF LITIGATION. As of the Effective Date, each party
represents and warrants to the other that it is not aware of any pending or
threatened litigation (and has not received any communication) which alleges
that such party's activities related to this Agreement have violated, or by
conducting the activities as contemplated herein would violate, any of the
intellectual property rights of any other person. To the best of Ophidian's
and Lilly's knowledge, there is no material unauthorized use, infringement or
misappropriation of any of its intellectual property rights licensed hereunder.

17.3 NO APPROVALS OR CONSENTS. Each party represents and warrants
to the other that no approval or consent of a governmental agency or
instrumentality is required for the authorization, execution, or delivery by it
of this Agreement.

17.4 PATENTS; PRIOR ART. Except as Ophidian has otherwise advised
Lilly in writing, each of Ophidian and Lilly represents and warrants to the
other that as of the Effective Date, to the best of its respective knowledge,
it has sufficient legal and/or beneficial title and ownership under its
intellectual property rights necessary for it to fulfill its obligations under
this Agreement and that it is not aware of any communication alleging that it
has violated or by conducting its business as contemplated by this Agreement
would violate any of the intellectual property rights of any other person, and
that to the best of its knowledge there is no material unauthorized use,
infringement or misappropriation of any of its intellectual property rights
relevant to this Agreement. Ophidian represents and warrants to Lilly that it
has advised Lilly in writing of any and all Third Party licenses necessary for
Ophidian to possess all necessary rights to all Third Party intellectual
property rights known to Ophidian that are required for the manufacture, use
and sale of the Bulk Drug Substance and the Drug Product, and has provided
Lilly with a true and correct copy of any relevant license agreement. As used
herein, "intellectual property rights" means all patent rights, copyrights,
trademarks, trade secret rights, chemical and biological material rights and
know-how rights necessary or useful to make use or sell the Bulk Drug Substance
and/or Drug Product. Ophidian has, or will obtain at its sole cost, all
necessary licenses to the Polson Patents (U.S. Patent Nos. 4,357,272 and
4,550,019), the Brookhaven Patent (U.S. Patent NO. 4,952,496) and the
Cohon-Boyer patents now owned by Stanford University.

17.5 PRIOR DATA. Ophidian represents and warrants to Lilly that it
has made available to Lilly (to the extent the same exists and is material to
accessing the commercial, medical, clinical or regulatory potential of the Drug
Product) all toxicology studies, clinical data, manufacturing process data and
other information in its possession regarding the Bulk Drug Substance and/or
Drug Product including all events or information that would be reportable to
the FDA under 21 C.F.R. 200 et. seq., and that to the best of its knowledge,
such data and information is accurate and complete and is what it purports to
be.

31
<PAGE> 38
17.6 NO DEBARRMENT. Each party represents and warrants to the
other that it will comply at all times with the provisions of the Generic Drug
Enforcement Act of 1992 and will upon request certify in writing to the other
that none of it, its employees, or any person providing services to such party
in connection with the collaboration contemplated by this Agreement have been
debarred under the provisions of such Act.

ARTICLE 18

GOVERNING LAW; DISPUTE RESOLUTION

18.1 GOVERNING LAW. The Agreement shall be governed by the laws of
the State of Indiana, without regard to Indiana choice of law provisions.

18.2 DISPUTE RESOLUTION. In the event of any dispute relating to
this Agreement or the collaborative effort contemplated hereby, the parties
shall prior to instituting any lawsuit on account of such dispute, refer such
dispute to the Chief Executive Officer of Ophidian and the President of Lilly's
Infectious Diseases and Generics Global Business Unit (or any successor
position having principal responsibility for Lilly's infectious diseases
products) who shall, as soon as practicable, and with the assistance of a
mediator as provided below, attempt in good faith to resolve the dispute. The
parties shall select a mediator who shall serve as an impartial facilitator of
such discussion. If the parties are unable to agree upon a mediator, a
mediator shall be designated by the American Arbitration Association. The
mediation shall be treated as a settlement discussion and therefore will be
confidential and privileged. The mediator may not testify for either party in
any later proceeding relating to the dispute, and no recording or transcript
shall be made of the mediation proceedings. Each party shall bear its own
costs in the mediation and the fees and expenses of the mediator shall be
shared equally by the parties. Either party shall be free to institute
litigation if such dispute is not resolved within ninety (90) days of the first
written request for mediation. Notwithstanding anything in this Agreement to
contrary, either party shall be entitled to institute litigation immediately if
the same shall be necessary to prevent irreparable harm to any party.

ARTICLE 19

MISCELLANEOUS PROVISIONS

19.1 NOTICES. All notices required or permitted to be given under
this Agreement shall be in writing and shall be mailed by registered or
certified mail addressed to the signatory to whom such notice is required or
permitted to be given

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<PAGE> 39
and transmitted by facsimile to the number indicated below. All notices shall
be deemed to have been given when mailed as evidenced by the postmark at the
point of mailing or a confirmed facsimile transmission.

All notices to Lilly shall be addressed to Lilly as follows:

Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46285
Attention: General Counsel

Fax: (317) 276-9152

All notices to Ophidian shall be addressed as follows:

Ophidian Pharmaceuticals, Inc.
5445 East Cheryl Parkway
Madison, WI 53711
Attention: President

Fax: (608) 277-2395

Any party may, by written notice to the others, designate a new address or fax
number to which notices to the party giving the notice shall thereafter be
mailed or faxed.

19.2 FOREIGN EXCHANGE. Sales and expenses of the parties under
this Agreement which are in currencies other than United States dollars shall
be converted into United States dollars according to the parties' customary and
usual currency translation procedures which shall be consistent with the
procedures used throughout the parties' operations and shall be in accordance
with GAAP, consistently applied.

19.3 NON COMPETITION. During the term of this Agreement, neither
Lilly nor Ophidian shall develop or market any antibody based treatment for
CDAD, except the Drug Product; provided, however, that (i) Lilly shall be free
to develop or market a product having activity for CDAD if such activity is
incidental to a broader spectrum product whose primary indication is not for
treatment of CDAD, (ii) Lilly shall be permitted to market CDAD products as
part of pharmacy benefit management, wholesale distribution, mail order
pharmacy, or similar businesses, (iii) Lilly shall be free to develop or market
any product acquired by Lilly as a result of any business combination between
Lilly and any other company, and (iv) Ophidian shall be permitted to develop or
market any product containing CDAD

33
<PAGE> 40
antibodies provided such product is not therapeutically effective against CDAD.
In the event Lilly develops and markets an antibody based treatment for CDAD
acquired as a result of a business combination referred to in (iii) above,
Ophidian may elect to terminate this Agreement upon ninety (90) days written
notice to Lilly, unless Lilly elects to discontinue marketing of the acquired
product within sixty (60) days of receipt of Ophidian's notice of termination.
Such termination shall be treated as if Lilly had terminated this Agreement
pursuant to Section 15.4.

19.4 FORCE MAJEURE. If either party is affected by any
extraordinary, unexpected and unavoidable event such as acts of God, floods,
fires, riots, war, accidents, labor disturbances, breakdown of plant or
equipment, lack or failure of transportation facilities, unavailability of
equipment, sources of supply or labor, raw materials, power or supplies,
infectious diseases of animals, or by the reason of any law, order,
proclamation, regulation, ordinance, demand or requirement of the relevant
government or any sub-division, authority or representative thereof, or by
reason of any other cause whatsoever (provided that in all such cases the party
claiming relief on account of such event can demonstrate that such event was
extraordinary, unexpected and unavoidable by the exercise of reasonable care)
("Force Majeure") it shall as soon as reasonably practicable notify the other
party of the nature and extent thereof and take all reasonable steps to
overcome the Force Majeure and to minimize the loss occasioned to that other
party. Neither party shall be deemed to be in breach of this Agreement or
otherwise be liable to the other party by reason of any delay in performance or
nonperformance of any of its obligations hereunder to the extent that such
delay and nonperformance is due to any Force Majeure of which it has notified
the other party and the time for performance of that obligation shall be
extended accordingly, subject however, to the rights of Lilly to exercise the
licenses granted pursuant to Section 9.2 should a Trigger Event occur. During
any period that adequate supply of Bulk Drug Substance is not available as a
result of any Force Majeure, Lilly may purchase and use Bulk Drug Substance
from any other supplier.

19.5 ENTIRETY OF AGREEMENT. This Agreement, its exhibits and
schedules and the Stock Purchase Agreement of even date herewith, sets forth
the entire agreement and understanding of the parties relating to the subject
matter contained herein and merges all prior discussions and agreements between
them. No party shall be bound by any representation other than as expressly
stated in this Agreement, or by a written amendment to this Agreement signed by
authorized representatives of both parties.

19.6 NON-WAIVER. The failure of a party in any one or more
instances to insist upon strict performance of any of the terms and conditions
of this Agreement shall not be construed as a waiver or relinquishment, to any
extent, of the right to assert or rely upon any such terms or conditions on any
future occasion.

34
<PAGE> 41
19.7 DISCLAIMER OF AGENCY. This Agreement shall not constitute any
party the legal representative or agent of another, nor shall any party have
the right or authority to assume, create, or incur any Third Party liability or
obligation of any kind, express or implied, against or in the name of or on
behalf of another except as expressly set forth in this Agreement.

19.8 SEVERABILITY. In the event any term of this Agreement is or
becomes or is declared to be invalid or void by any court of competent
jurisdiction, such term or terms shall be null and void and shall be deemed
deleted from this Agreement, and all the remaining terms of the Agreement shall
remain in full force and effect.

19.9 ASSIGNMENT. Lilly may discharge any obligations and exercise
any right hereunder through an Affiliate. References to Lilly shall include
any Affiliate of Lilly to whom such an assignment or delegation has been made
or ratified. Except as provided in this Section, neither Lilly, nor Ophidian
shall delegate duties of performance or assign, in whole or in part, rights or
obligations under this Agreement without the prior written consent of the other
party, and any attempted delegation or assignment without such written consent
shall be of no force or effect. Subject to the restrictions contained in the
preceding sentence, this Agreement shall be binding upon the successors and
assigns of the parties.

19.10 HEADINGS. The headings contained in this Agreement have been
added for convenience only and shall not be construed as limiting.

19.11 LIMITATION OF LIABILITY. No party shall be liable to another
for indirect, incidental, consequential or special damages, including but not
limited to lost profits, arising from or relating to any breach of this
Agreement, regardless of any notice of the possibility of such damages.
Nothing in this Section is intended to limit or restrict the indemnification
rights or obligations of any party.

19.12 INTERPRETATION This Agreement has been jointly prepared by
the parties and their respective legal counsel and shall not be strictly
construed against either party.

19.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which shall
constitute together the same document.

19.14 COMPLIANCE WITH LAWS. Each party shall, and shall cause its
respective Affiliates to, comply in all material respects with all federal,
state, local and foreign laws, statutes, rules and regulations applicable to
the parties and their respective activities under this Agreement.

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<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.

OPHIDIAN PHARMACEUTICALS, INC.

By: s/s Douglas C. Stafford
------------------------------------
Douglas C. Stafford
President

ELI LILLY AND COMPANY

By: s/s August M. Watanabe
------------------------------------
August M. Watanabe
Executive Vice President
Science and Technology

36
<PAGE> 43

**** Indicates where confidential material has been omitted and filed
separately with the Commission
EXHIBIT A

PURCHASE PRICE FOR BULK DRUG SUBSTANCE

1. The purchase price to be paid to Ophidian by Lilly for Bulk Drug
Substance for commercial sales shall be **************************
***************************************************************.

2. The price as determined in paragraph 1 above shall be subject to the
following adjustments:

(A) For purchases during the ************************ following the
date of first commercial sale of the Drug Product (the "Product
Launch"), the purchase price shall be *************************.

(B) For purchases during the******************* following the date of
Product Launch, the purchase price shall be *****************
***********************.

(C) For purchases ************************ following the date of
Product Launch there shall be **************************
***********************.
(D) There shall be a *********************************************
***********************************************************. This
adjustment shall be calculated as follows:
(i) **************************************************
*************************************************
(ii) **************************************************
*************************************************
(iii) **************************************************
*************************************************

(E) "COPS" shall mean ************************************
******************************************************.

3. ***********************************************************
***********************************************************
<PAGE> 44
4. *****************************************************************
*****************************************************************

5.
(A) In the event Ophidian exercises its right to terminate pursuant to
paragraph 3, Ophidian shall provide assistance to Lilly for an
Assistance Period sufficient to permit Lilly to develop an
alternative source of supply, but not more than 4 years, such
Assistance Period commencing on the day of Lilly's receipt of
written notice of termination. During the Assistance Period,
Ophidian shall provide Lilly with copies of its Establishment
License dossier and all other regulatory filings and unrestricted
permission to use the dossier and other regulatory filings for
development, registration and commercialization of the Drug
Product; copies of written manufacturing procedures and training
in these procedures; master cell banks and working cell banks; and
assistance in transferring contracts with Third Parties (e.g., hen
facilities, veterinarians, Bulk Drug Substance manufacturers) to
Lilly if requested by Lilly. Ophidian will grant an option to
Lilly exercisable to purchase any and all dedicated facilities and
equipment where it has the legal right to transfer title, work in
process, finished product inventories and supplies then owned by
Ophidian, at the fair market value thereof as determined by an
appraisal.

(B) During the Assistance Period Ophidian will not be required to
initiate new activities or make further capital investments;
however, it will be expected to, in good faith, continue to
manufacture and supply Bulk Drug Substance to enable the
continuity of supply until an alternative source of supply can be
obtained and facilitate the orderly transfer of activities and
information.

(C) Both Ophidian and Lilly shall bear their own costs incurred during
the Assistance Period *************************************
*********************************************************.
Appraisals shall be prepared by a nationally recognized appraisal
firm acceptable to the parties, the cost of which shall be borne
by the party requesting the appraisal. If the parties are unable
to agree upon an acceptable appraiser with thirty (30) days, each
party shall appoint its own nationally recognized appraisal firm
which shall promptly prepare an appraisal of the fair market
value, and the average of the two appraisals shall be the fair
market value. In such event each party shall bear the expenses of
its own appraisal firm.
<PAGE> 45
(D) It is the intent of the parties that Lilly be unencumbered in its
efforts to take on the responsibilities of Ophidian or to arrange
for a third party to assume such obligation. Insofar as Enabling
Technology is needed from Ophidian, it is the intent of the
parties that Lilly's rights to such technology shall survive
termination. Insofar as the use of the Tradename owned by
Ophidian is desired, Lilly shall be deemed to have a royalty free
license to the Tradename upon notice of termination by Ophidian.
All licenses granted to Lilly under this Agreement shall not be
affected and shall continue in full force and effect and Lilly
shall have the right to manufacture or have manufactured, use and
sell the Bulk Drug Substance. All licenses to Ophidian in such
event shall automatically terminate. Lilly shall pay Ophidian a
royalty equal to **************** of Net Sales of Drug Product
manufactured by Lilly or Third Parties under license from Lilly on
a country-by-country basis until expiration of applicable
Ophidian or Program patents in that country. In the event that
Lilly later terminates and/or ceases activities and/or ceases all
sales of Drug Product, all license under Ophidian Patents,
Ophidian Program Patents, Ophidian Program Technology and Ophidian
Technology granted to Lilly under this Agreement shall terminate.

6. **************************************************************
**************************************************************

7. Ophidian shall supply all Bulk Drug Substance necessary for the Clinical
Development Program, the Product Process Development Program, validation
testing and similar matters. **************
*************************************************************

8. Before or during the first year following product launch for the Drug
Product, Lilly shall purchase not less than ****** of Lilly's forecast at
product launch for sales during such year.

9. All terms used but not defined herein shall have the meanings set forth
in the Agreement.
<PAGE> 46

**** Indicates where confidential material has been omitted and filed
separately with the Commission

EXHIBIT B

TERMS AND CONDITIONS OF SALE OF BULK DRUG SUBSTANCE

BULK DRUG SUBSTANCE SUPPLY

All sales of Bulk Drug Substance from Ophidian to Lilly shall be subject to the
following terms and conditions.

Section 1. Definitions

As used in this Exhibit B, the following terms shall have the meanings set
forth below. Capitalized terms used but not defined in this Exhibit B shall
have the meanings set forth in the Agreement.

1.1. "Contract Requirements" shall mean ************************* of
Lilly's requirements for Bulk Drug Substance. Lilly may at its option commence
a commercial scale process development project for the Bulk Drug Substance to
enable Lilly to register its facilities or those of a Third Party contingent
manufacturer in the registration. Lilly or the Third Party may manufacture
limited quantities of the Bulk Drug Substance as part of that development
project. Lilly shall have the right to make and sell Drug Product made from
limited quantities of Bulk Drug Substance that Lilly or its Third Party
manufacturers have produced, in jurisdictions other than Major Markets. Lilly
shall pay Ophidian a ************** on Net Sales of such limited quantities and
Ophidian reserves the right to be the sole supplier of any of the materials,
including but not limited to ************, used in the facility. Ophidian's
Technology and Ophidian's Program Technology shall not be used in the
contingent facilities to manufacture any substance other than the Bulk Drug
Substance. Ophidian shall have the right to have a representative on site and
audit these facilities at reasonable intervals upon reasonable notice.

1.2. "Latent Defects" shall mean defects that cause the Bulk Drug
Substance to fail to conform to the Bulk Drug Substance Specifications or
otherwise fail to conform to the warranties provided by Ophidian hereunder,
which defects are not discoverable upon reasonable physical inspection and
testing using the methodology specified in the Manufacturing Requirements
Document.

1.3. "Manufacturing Requirements Document" shall mean a manual
containing certain specifications, procedures, methods and personnel contacts
relating to the manufacturing and supply of the Bulk Drug Substance by Ophidian
to Lilly that will be compiled and agreed upon by the Project Team prior to the
<PAGE> 47

commencement of manufacture of the Bulk Drug Substance by Ophidian. Sections
of the Manufacturing Requirements Document may be modified from time to time by
the Project Team.

1.4. "Bulk Drug Substance Specifications" shall mean the
specifications for Bulk Drug Substance that are included in the Manufacturing
Requirements Document.

Section 2. Manufacture and Supply of Bulk Drug Substance

2.1. Pursuant to the terms and conditions of this Agreement, Lilly
shall purchase or have purchased from Ophidian the Contract Requirements, and
Ophidian shall manufacture, sell and deliver to Lilly such quantities of Bulk
Drug Substance. Ophidian shall not manufacture or sell Bulk Drug Substance for
or to any other person for human therapeutic use.

2.2. Bulk Drug Substance shall be manufactured to conform with the
Bulk Drug Substance Specifications. The Bulk Drug Substance Specifications may
be modified from time to time by the Project Team.

Section 3. Forecasts and Orders
3.1. At the time of *****************************, Lilly will supply
Ophidian with a non-binding estimate of Bulk Drug Substance requirements for
the first ***************************************. Beginning with
******** ************* Lilly shall provide Ophidian with a non-binding rolling
forecast, provided **********, for each of the **************. If Lilly
believes that market demand will require Ophidian to expand its manufacturing
capacity, it will advise Ophidian as soon as possible.

3.2. Orders for Bulk Drug Substance may be submitted to Ophidian by
Lilly or by one or more Affiliates of Lilly. Lilly will guarantee payment by
its Affiliates. When possible, orders shall be placed ************** in
advance of expected shipment.

3.3. Each Lilly order shall be governed by the terms of the Agreement
(including this Exhibit B) and none of the terms or conditions of Lilly's
purchase order or any acknowledgment form from Ophidian shall be applicable,
except those specifying quantity ordered, delivery dates, special supply
instructions and invoice information.

Timing of shipments shall be agreed upon between the parties.
<PAGE> 48
-3-

Section 4. Price

4.1. The price for Bulk Drug Substance to be delivered during the
term of this Agreement is set forth in Exhibit A to the Agreement, which is
attached hereto and made a part hereof.

4.2. Bulk Drug Substance shall be delivered to Lilly ***************,
by a common carrier selected by Lilly. ****************************************

4.3. Ophidian shall invoice Lilly or the Lilly Affiliate designated
on each order upon shipment of Bulk Drug Substance. Invoicing and payment
shall be in United States Dollars. Payment shall be made by Lilly or its
Affiliate net ********************** from the date of invoice.*****************
********************************************************************** Lilly
shall guarantee payment by its Affiliates.

4.4. Any federal, state, county, or municipal sales or use tax,
excise or similar charge, or other tax assessment, foreign or domestic, (other
than that assessed against income), assessed or charged on the sale of Bulk
Drug Substance sold pursuant to this Agreement shall be paid by Lilly or its
Affiliate.

4.5. If Bulk Drug Substance Specifications are modified pursuant to
Subsection 2.2 hereof and such modification results in the requirement to
rework otherwise acceptable Bulk Drug Substance, each party shall be
responsible for the rework costs resulting from the Bulk Drug Substance
specification changes it initiates.********************************************
*******************************************************************************

Section 5. Manufacture of Bulk Drug Substance

5.1. Bulk Drug Substance shall be manufactured in accordance with
GMP. Ophidian shall promptly advise Lilly of any proposed process change,
which change must be approved by Lilly (and if necessary the appropriate
regulatory authorities) prior to its implementation by Ophidian. Such approvals
shall not be unreasonably withheld by Lilly.

5.2. Lilly shall have the right to audit Ophidian and its contractors
for compliance with the manufacturing process referenced in the appropriate
regulatory filings, GMP's, GLP's and applicable regulatory requirements at
reasonable intervals. Such audits shall be scheduled at mutually agreeable
times upon at least ten (10) days advance written notice to Ophidian. Ophidian
agrees to inform Lilly in advance of any regulatory inspection which affects
the manufacture of the Bulk Drug Substance, to permit a Lilly representative to
be present at the
<PAGE> 49
-4-

time of such inspection and to promptly advise Lilly of the results of such
inspection. In the event of an FDA inspection (or other regulatory authority)
which involves the Bulk Drug Substance, Lilly shall be immediately informed of
the issuance of a notice of inspection. In the event that there are
inspectional observations (or their equivalent), Lilly shall be informed
immediately and shall have the opportunity to review and have input to the
response. If during manufacture of any lot of Bulk Drug Substance, any rework
or remanufacture is required in order to meet the Bulk Drug Substance
Specifications, Ophidian shall conduct such reworks or remanufacture only
pursuant to the referenced procedures in the appropriate regulatory filings.
Ophidian shall inform Lilly of any inadvertent deviation from the manufacturing
process referenced in the appropriate regulatory filings for the Bulk Drug
Substance or from GMP. Both the notification and the Lilly response shall be
in writing before the lot will be given final disposition. Lilly, at its
option, upon 10 days prior notice to Ophidian, may have Lilly personnel present
at the Ophidian facility where Bulk Product is manufactured to monitor
manufacturing activities. The observing and monitoring of Ophidian's
operations by Lilly personnel, or the consultation by Lilly personnel with
personnel of Ophidian, shall in no way relieve Ophidian of its responsibility
hereunder.

5.3. Ophidian shall provide certificates of analysis to Lilly for
each shipment of Bulk Drug Substance delivered hereunder as specified in the
Manufacturing Requirements Document.

5.4. Each party shall promptly advise the other of any safety or
toxicity problem of which either party becomes aware regarding Bulk Drug
Substance or intermediates used in the manufacture of Bulk Drug Substance.

Section 6. Acceptance of Bulk Drug Substance

(a) Lilly shall have a period of thirty (30) days from the date of
receipt of Bulk Drug Substance at the Lilly facility designated in the purchase
order to inspect any shipment of Bulk Drug Substance to determine whether that
shipment conforms to the Bulk Drug Substance Specifications. That inspection
shall be performed in accordance with the Manufacturing Requirements Document.
The parties may agree from time to time to revise the analytical methods with
the revisions to become effective as of the date agreed by the parties.

(b) If Lilly determines the Bulk Drug Substance does not conform
to the Bulk Drug Substance specifications it shall notify Ophidian by telephone
with a written confirmation. If Ophidian agrees that the Bulk Drug Substance
does not conform to the Bulk Drug Substance, Lilly shall have the right to
return that non-conforming Bulk Drug Substance to Ophidian. All or any part of
any shipment which does not conform to the Bulk Drug Substance may be held for
Ophidian's
<PAGE> 50
-5-

disposition and at Ophidian's expense. If Ophidian does not agree with Lilly's
determination that the Bulk Drug Substance does not conform to the Bulk Drug
Substance, Ophidian shall as quickly as possible, but in any event within
thirty (30) days, so advise Lilly by telephone with written confirmation.
Lilly and Ophidian shall meet and attempt to agree whether the Bulk Drug
Substance conforms to the Bulk Drug Substance Specifications.

(c) Ophidian shall use its best efforts to replace any non-
conforming Bulk Drug Substance within the shortest possible time. Lilly shall
have no responsibility to Ophidian for the price of non-conforming Bulk Drug
Substance but shall pay Ophidian the price for the replacement Bulk Drug
Substance. As to quantities of Bulk Drug Substance in relation to which Lilly
and Ophidian are unable to agree as to whether they conform to the Bulk Drug
Substance Specifications, the parties may submit appropriate samples of that
Bulk Drug Substance to a mutually acceptable third party testing laboratory
that will perform testing to determine whether the Bulk Drug Substance conforms
to the Bulk Drug Substance Specifications, using the test protocols and
methodology provided in the Manufacturing Requirements Document. If the third
party testing laboratory determines that the Bulk Drug Substance conforms to
the Bulk Drug Substance Specifications, Lilly shall pay Ophidian the price
established under this Agreement for that Bulk Drug Substance. The parties
hereto recognize that it is possible for a shipment of Bulk Drug Substance to
have Latent Defects. As soon as either party becomes aware of a Latent Defect
in any lot of Bulk Drug Substance, it shall immediately notify the other party
and the lot or batch involved shall, at Lilly's election, be deemed rejected as
of the date of such notice. The party shall then investigate to determine
whether latent defects are caused by a party of negligence in production of
Bulk Drug Substance or handling of Bulk Drug Substance after shipment from
Ophidian, or whether there is unforeseen variability in the process requiring
revalidation. The rejected lot will be paid for by the non-compliant party or
shared by both parties if the process requires revalidation.

Section 7. Audits

Lilly and its Affiliates will keep records of the sales of the Drug
Product in sufficient detail to permit the determination of Net Sales. At the
request and expense of Ophidian, Lilly will permit its auditors, Ernst & Young
LLP, or another independent auditor acceptable to Lilly, to examine these
records during ordinary business hours to the extent necessary to verify the
propriety of Net Sales. Such examination will be made no later than two years
after the invoice dates of Bulk Drug Substance shipments to be examined. The
results of any such examination will be made available to both Ophidian and
Lilly provided that the auditor will not disclose to Ophidian the business
details of Lilly's records, but will report only as to the propriety of Net
Sales of the Drug Product, calculation of the price paid to Ophidian, and, if
applicable, the amount by which the auditor's
<PAGE> 51
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calculation varies from Lilly's calculation. Upon Ophidian's request to be
made no later than seven (7) days following issuance of the auditor's report,
Lilly and/or the auditors will make available for Ophidian's inspection Lilly's
calculation, auditor's calculation and Net Sales of the Drug Product. Ophidian
shall have sixty (60) days following the issuance of the auditor's report to
meet with and ask questions regarding the auditor's report. If the auditor's
calculation varies by more than five percent (5%) from Lilly's calculation and
such variance is to the disadvantage of Ophidian, Lilly will refund Ophidian
the cost of such audit examination.

Section 8. Guarantee and Warranty

8.1. Ophidian guarantees and warrants that Bulk Drug Substance
delivered to Lilly pursuant to this Agreement shall, at the time of delivery,
not be adulterated or misbranded within the meaning of the Federal Food, Drug
and Cosmetic Act, as amended, or within the meaning of any applicable foreign,
state or municipal law, as such Act and such laws are constituted and effective
at the time of delivery and will not be an article which may not, under the
provisions of Sections 404 and 505 of such Act, be introduced into interstate
commerce.

8.2. Ophidian warrants that Bulk Drug Substance delivered to Lilly
pursuant to this Agreement shall conform with the Bulk Drug Substance
Specifications and shall be in compliance with applicable law and all
applicable regulatory requirements. OPHIDIAN MAKES NO OTHER WARRANTIES, EXPRESS
OR IMPLIED, WITH RESPECT TO BULK DRUG SUBSTANCE. ALL OTHER WARRANTIES, EXPRESS
OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY DISCLAIMED BY
OPHIDIAN. IN NO EVENT SHALL OPHIDIAN BE LIABLE FOR INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST REVENUES OR PROFITS.

8.3 Ophidian warrants that it shall conform to the provisions of the
EEO clause in Section 2.02 of Executive Order 11246 as amended, 41 C.F.R. 60-
250 and 41 C.F.R. 60-741, as amended, which are incorporated herein by
reference.

Section 9. Recalls

9.1. In the event of a recall ordered by a government agency or a
confirmed failure of the CDAD Product ("Recall"), Lilly shall be responsible
for the coordination of Recall activities.

9.2. Where the Recall is caused by Ophidian's negligence or willful
misconduct or its material breach of this Agreement, Ophidian agrees to pay all
costs and expenses of any Recall, including costs of retrieving Bulk Drug
Substance
<PAGE> 52
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or the Drug Product already delivered to Lilly's customers. Ophidian further
agrees to reimburse Lilly for costs and expenses Lilly is required to pay for
notification, shipping and handling charges. Prior to any such reimbursement,
Lilly shall provide Ophidian with supporting documentation of all reimbursable
costs and expenses. If the Recall is caused by reasons other than Ophidian's
negligence, willful misconduct or material breach, Lilly shall pay all of the
costs and expenses described above for such Recall.
<PAGE> 53

EXHIBIT C

OPHIDIAN PHARMACEUTICALS, INC.

STOCK PURCHASE AGREEMENT

WITH

ELI LILLY AND COMPANY

**** Indicates where confidential material has been omitted and filed
separately with the Commission

JUNE 3, 1996

<PAGE> 54

TABLE OF CONTENTS

STOCK PURCHASE AGREEMENT

**** Indicates where confidential material has been omitted and filed
separately with the Commission

<TABLE>
<S> <C>
ARTICLE I PURCHASE AND SALE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II REPRESENTATIONS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Organization, Good Standing and Qualification . . . . . . . . . . . . . . . . 1
2.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Valid Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.8 Patents and Other Proprietary Rights . . . . . . . . . . . . . . . . . . . . . 3
2.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 No Conflict With Other Instruments . . . . . . . . . . . . . . . . . . . . . . 3
2.11 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 No Material Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.13 No Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.15 Voting Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.16 Private Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.17 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.18 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.19 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.20 Inventions and Secrecy Agreements . . . . . . . . . . . . . . . . . . . . . . 6
2.21 Company Contracts and Documents . . . . . . . . . . . . . . . . . . . . . . . 6
2.22 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.23 Tax Returns and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.24 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.25 Employee Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.26 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.27 FDA Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.28 Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.29 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.30 Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.31 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.32 Development Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>

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<PAGE> 55
<TABLE>
<S> <C>
ARTICLE III REPRESENTATIONS OF THE INVESTOR . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE IV SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Securities Laws Representations and Covenants
of the Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.2 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE V DISCLOSURE OF THE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE VI CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT
THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 11
6.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.3 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.4 Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARTICLE VII CONDITIONS OF THE COMPANY'S OBLIGATIONS AT
THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 Blue Sky Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE VIII POST-CLOSING COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . 14
8.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.2 Open Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.4 Private Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.5 Invention and Secrecy Agreements . . . . . . . . . . . . . . . . . . . . . . . 14
8.6 Payment of Documentary, Stamp and Similar Taxes . . . . . . . . . . . . . . . 14
8.7 Reports Under Securities Exchange Act of 1934 . . . . . . . . . . . . . . . . 15
8.8 Termination of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE IX SUBSEQUENT OFFERINGS AND REGISTRATIONS . . . . . . . . . . . . . . . . . . . . . . 16
9.1 Participation in Subsequent Offerings . . . . . . . . . . . . . . . . . . . . 16
9.2 Subsequent Offerings Having Dilutive Effect . . . . . . . . . . . . . . . . . 16
9.3 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.4 Company Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>

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<PAGE> 56
<TABLE>
<S> <C> <C>
10.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.5 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.7 Survival of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.8 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.10 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>

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<PAGE> 57

STOCK PURCHASE AGREEMENT

THISSTOCK PURCHASE AGREEMENT ("Agreement") is entered into and
effective as of the 3rd day of June, 1996, by and between OPHIDIAN
PHARMACEUTICALS, INC., a Wisconsin corporation, (the "Company"), and ELI LILLY
AND COMPANY, an Indiana corporation (the "Investor").

ARTICLE I

PURCHASE AND SALE OF SHARES

1.1 PURCHASE AND SALE. Subject to the terms and conditions hereof, the
Investor agrees to purchase from the Company, and the Company agrees to issue
and sell to the Investor, 153,846 shares of the Company's common stock, $.0025
par value (the "Shares"), at a price of $6.50 per share for a total purchase
price of one million dollars ($999,999) (the "Purchase Price").

1.2 THE CLOSING. The closing ("Closing") of the purchase and sale of the
Shares is to be held at the offices of Eli Lilly and Company located at Lilly
Corporate Center, Indianapolis, IN, on July 1, 1996, at 9:00 a.m., or at such
other time and place as the Company and Investor shall mutually agree. At the
Closing, the Company shall deliver the Shares to the Investor upon delivery to
the Company by the Investor of a check drawn on a U.S. bank or wire transfer of
funds in the amount of the Purchase Price. The Shares to be delivered to the
Investor will be evidenced by a single certificate registered in the Investor's
name.

ARTICLE II

REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to the Investor as follows:

2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company: (a ) is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Wisconsin; (b) has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as it is presently being conducted and as proposed to be conducted;
and (c) is qualified and is in good standing as a foreign corporation in all
other jurisdictions in which the failure so to qualify would have a material
adverse effect on its business or properties.

2.2 CAPITALIZATION. Immediately prior to the Closing, the authorized
capital of the Company will consist of:
<PAGE> 58

(a) COMMON STOCK, 22,400,000 shares of common stock, $0.0025 par
value, of which 6,092,192 shares are duly and validly issued
(including, without limitation, issued in compliance with
applicable federal and state securities laws), fully-paid,
non-assessable, and outstanding. A true and correct list of
all five percent (5%) shareholders has been furnished to the
Investor.

(b) PREFERRED STOCK. 0 shares of preferred stock.

(c) OTHER SECURITIES. Except with respect to (i) the Company's
stock option plan as described below, (ii) preemptive rights
granted to shareholders in Article XIII of the Company's
Bylaws, (iii) a Stock Warrant dated January 17, 1990, and
amended on February 8, 1991, issued to Fitchburg Research Park
Associates enabling it, under certain circumstances, to
purchase 114,290 shares of Company common stock at a purchase
price of $0.0025 per share, and (iv) a certain Consulting
Agreement dated May 19, 1994, enabling the consultant to
purchase 200,000 shares of Company common stock at a purchase
price of $4.50 per share, there are no outstanding options,
warrants, rights (including conversion or preemptive rights)
or agreements for the purchase or acquisition from or by the
Company of any shares of its capital stock. Options to
purchase 430,346 shares of the Company's common stock have
been issued pursuant to the Company's stock option plan for
employees, officers and directors and are currently
outstanding. 657,160 shares of the Company's common stock are
currently reserved for issuance pursuant to such plan.

2.3 SUBSIDIARIES. The Company has no subsidiaries and does not control,
directly or indirectly any other corporation, association, or business
organization.

2.4 AUTHORIZATION. All corporate action on the part of the Company and
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder and the authorization, issuance and delivery of the
Shares has been taken or will be taken on or prior to the Closing, and this
Agreement constitutes a valid and legally binding obligation of the Company.

2.5 VALID ISSUANCE OF SHARES. When issued in accordance with the terms of
this Agreement, the Shares shall be duly and validly authorized and issued
(including, without limitation, issued in compliance with applicable federal
and state securities laws), fully paid and non-assessable and not subject to
any preemptive rights, liens, claims or encumbrances, or other restriction on
transfer, except as set forth in this Agreement and Article XII of the
Company's Bylaws

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<PAGE> 59

pertaining to the Company's right of first refusal with respect to transfers of
Company common stock.

2.6 GOVERNMENTAL CONSENTS. All consents, approvals, orders,
authorizations, registrations, qualifications, designations, declarations, or
filings of or with any federal, state or local governmental authority on the
part of the Company required in connection with the consummation of the
transactions contemplated herein have been or shall be obtained prior to the
Closing and shall be effective as of the Closing.

2.7 TITLE TO PROPERTY. The Company owns its property and assets free and
clear of all mortgages, liens, loans and encumbrances, except those that arise
in the ordinary course of business and do not materially impair the Company's
ownership or use of such property or assets. With respect to the property and
assets the Company leases, the Company is in compliance with such leases and,
to the best of its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances which would be materially adverse to the Company.

2.8 PATENTS AND OTHER PROPRIETARY RIGHTS. The Company has sufficient
title and ownership of all Proprietary Rights (as defined below) necessary for
its business as now conducted without any conflict with or infringement of the
rights of others. There are no outstanding options, licenses or agreements of
any kind relating to the Company's Proprietary Rights, nor is the Company bound
by or a party to any options, licenses or agreements of any kind with respect
to the Proprietary Rights of any other person or entity, that prevent the
Company from carrying out its business as it is now conducted. The Company has
not received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate the Proprietary Rights of
others. Proprietary Rights shall mean patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information, proprietary
rights and processes.

2.9 LITIGATION. There are no actions, suits, proceedings or
investigations pending or, to the best of the Company's knowledge and belief,
any basis therefor or threat thereof, against or affecting the Company which
question the validity of this Agreement or the right of the Company to enter
into it, or to consummate the transactions contemplated hereby, or which might
result, either individually or in the aggregate, in any material adverse change
in the business, prospects, conditions, affairs or operations of the Company or
in any of the properties or assets, or in any material impairment of the right
or ability of the Company to carry on its business as now conducted or as
proposed to be conducted. The foregoing includes, without limitation, actions
pending or threatened (or any basis therefor known to the Company) involving
the prior employment of any of the Company's employees, use in connection with
the Company's business of any information or techniques allegedly proprietary
to any former employers of the Company's employees, or obligations of the
Company's employees under any agreements with

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<PAGE> 60

their prior employers. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or governmental
agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company intends to
initiate.

2.10 NO CONFLICT WITH OTHER INSTRUMENTS. The Company is not in violation
or default of any provisions of its Articles of Incorporation or Bylaws or of
any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound or, to its knowledge, of any provision of federal
or state statute, rule or regulation applicable to the Company, which violation
or default would be materially adverse to the Company. The execution, delivery
and performance of this Agreement will not result in any violation of, be in
conflict with, or constitute a default under, with or without the passage of
time or the giving of notice: (a) any provision of the Company's Articles of
Incorporation or Bylaws subject, however, to compliance with certain preemptive
rights that are provided to the Company's shareholders as set forth in the
Company Bylaws; (b) any provision of any judgment, decree or order to which the
Company is a party or by which it is bound; (c) any material contract,
obligation or commitment to which the Company is a party or by which it is
bound; or (d) to the Company's knowledge, any statute, rule or governmental
regulation applicable to the Company.

2.11 FINANCIAL STATEMENTS. Attached as Exhibit A are the audited financial
statements (balance sheet, statement of operations and statement of cash flows)
of the Company as of and for the three (3) years ending September 30, 1993,
1994 and 1995, together with the accompanying notes and report of the Company's
independent auditors together with the unaudited financial statements for the
interim period ended March 31, 1996 (such audited and unaudited financial
statements are collectively referred to as the "Financial Statements"). The
Financial Statements are complete and correct in all material respects and have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and are
consistent with each other.

2.12 NO MATERIAL LIABILITY. There are no outstanding material liabilities
except for those that are set forth in the Financial Statements.

2.13 NO ADVERSE CHANGE. Since the date of the latest audited Financial
Statements, there has not been:

(a) any change in the assets, properties, liabilities, financial
condition, operating results, prospects or business of the
Company (as such business is presently conducted and as it is
proposed to be conducted) from that reflected in the Financial
Statements, except changes in the ordinary course of business
which have not been, in the aggregate, materially adverse;

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<PAGE> 61

(b) any waiver by the Company of a valuable right or of a material
debt owed to it;

(c) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company,
except in the ordinary course of business and which is not
material to the assets, properties, financial condition,
operating results, prospects or business of the Company (as
such business is presently conducted and as it is proposed to
be conducted);

(d) any change or amendment to a material contract or arrangement
by which the Company or any of its assets or properties is
bound or subject;

(e) to the Company's knowledge, any other event or condition of
any character which might materially and adversely affect the
assets, properties, financial condition, prospects or business
of the Company (as such business is presently conducted and as
it is proposed to be conducted).

2.14 CORPORATE DOCUMENTS. Except for amendments necessary to satisfy
representations and warranties or conditions contained herein (the form of
which has been approved by the Investor), the Articles of Incorporation and
By-laws of the Company are in the form previously provided to the Investor.
The minute books of the Company made available to the Investor contain a
complete summary of all meetings of the board of directors (including
committees thereof) and shareholders since the time of incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.

2.15 VOTING ARRANGEMENTS. Except for the voting agreement dated February
8, 1991, by and between Margaret B. van Boldrik and Sean B. Carroll, husband
and wife, and Fitchburg Research Park Associates, a Wisconsin partnership, to
the Company's knowledge, there are no outstanding stockholder agreements,
voting trusts, proxies or other arrangements or understandings among the
stockholders of the Company relating to the voting of their respective shares.

2.16 PRIVATE OFFERING. Neither the Company nor anyone acting on its behalf
has offered any securities of the Company for issuance or sale to, or solicited
any offer to acquire any of the same from, any person or entity so as to make
the issuance and sale of the Shares subject to the registration requirements of
Section 5 of the Securities Act of 1933, as amended ("Securities Act").

2.17 REGISTRATION RIGHTS. Except as provided in this Agreement, or as set
forth in the Disclosure Schedule, the Company is under no contractual
obligation to

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register (now or in the future, whether contingent or not) under the Securities
Act any of its presently outstanding securities or any of its securities that
may subsequently be issued.

2.18 BROKERS AND FINDERS. Except as set forth in the Disclosure Schedule,
the Company has not retained any investment banker, broker or finder, and is
not obligated to any such person for any fee, in connection with the
transactions contemplated by this Agreement.

2.19 FULL DISCLOSURE. The Company believes it has provided the Investor
with all information that the Investor has requested for deciding whether to
purchase the Shares and all information reasonably necessary to enable the
Investor to make such decision. Neither this Agreement nor any other
statements or certificates made or delivered in connection herewith contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements not misleading.

2.20 INVENTIONS AND SECRECY AGREEMENTS. Each employee, consultant and
subcontractor of the Company with access to the Company's proprietary
information has executed an agreement regarding inventions and confidential
information in substantially the form previously provided to the Investor. The
Company, after reasonable investigation, is not aware that any such employee,
consultant, or contractor is in violation thereof.

2.21 COMPANY CONTRACTS AND DOCUMENTS.

(a) Except for (i) transactions relating to purchases of shares of
the Company's securities and (ii) regular salary payments and
fringe benefits paid in the ordinary course of the Company's
business, none of the officers, employees, directors or other
affiliates of the Company is a party to any transaction,
agreement or understanding with the Company, and there have
been no assumptions or guarantees by the Company of any
obligations of such persons;

(b) Except for items that the Company is prohibited from
disclosing under the terms of a confidentiality agreement with
a third party, there are no agreements, undertakings,
instruments, contracts or proposed transactions to which the
Company is a party or by which it is bound which involve (i)
the license of any Proprietary Rights of the Company, or (ii)
the prohibition or limitation of the Company's ability to
engage in its business or any other business or to compete
with any person;

(c) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any
restriction under its Articles of Incorporation or By-laws,
which adversely affect, in any

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material respect, its business as now conducted or as proposed
to be conducted, or its assets, properties, financial
condition or prospects; and

(d) The Company has not engaged in the past 12 months in any
discussions (i) with any representative of any corporation or
corporations regarding the consolidation or merger of the
Company with or into any such corporation or corporations;
(ii) with any corporation, partnership, association or other
business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the
assets of the Company or a transaction or series of
transactions in which more than 50% of the voting power of the
Company is disposed of, or (iii) regarding any other forms of
business combination, liquidation, dissolution or winding up
of the Company.

2.22 DISTRIBUTION. There has been no declaration or payment by the Company
of any dividend, nor any distribution by the Company of any assets of any kind,
to any of its shareholders with respect to any of the Company's securities,
except as set forth in the Financial Statements.

2.23 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax
returns and reports as required by law. These returns and reports are true and
correct in all material respects and accurately reflect all tax liabilities of
the Company with respect to all tax periods ending on or prior to the date
hereof. The Company has received no notice that the Company's federal income
tax returns or any state income or franchise or other tax returns have been or
are being audited by any governmental authority. The Company has paid all
taxes and other assessments due on or before the date hereof and such payments
were made prior to the time penalties would accrue thereon. The provision for
taxes of the Company is adequate for taxes due or accrued as of the date
hereof. All taxes which should be reserved on the books of the Company in
accordance with generally accepted accounting principles, consistently applied,
have been so reserved.

2.24 INSURANCE. The Company has in full force and effect fire and casualty
insurance policies, with extended coverage, reasonably sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. The Company has also obtained
any other insurance coverages with respect to risks associated with its
business in such amounts as are customary in its industry. The Company is not
aware of any pending or threatened claims against or by the Company for
property damages or personal injuries.

2.25 EMPLOYEE RELATIONS. The Company is not bound by or subject to (and
none of its assets or properties is bound by or subject to) any written or
oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or, to the knowledge of the Company,
has sought to represent

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any of the employees, representatives or agents of the Company. There is not a
strike or other labor dispute involving the Company pending, or to the
knowledge of the Company threatened, which could have a material adverse effect
on the assets, properties, financial condition, prospects or business (as now
conducted or as proposed to be conducted) of the Company, nor is the Company
aware of any labor organization activity involving its employees. The Company
is not aware that any officer or key employee intends to terminate his or her
employment with the Company, nor does the Company intend to terminate the
employment of any such person. The Company believes its relations with its
employees are satisfactory.

2.26 INVESTMENT COMPANY ACT. The Company is not an "investment company" or
a company controlled by an "investment company" as such terms are defined in
the Investment Company Act of 1980, as amended.

2.27 FDA MATTERS. There are no applications or other proceedings presently
pending before the United States Food and Drug Administration ("FDA"). The FDA
has not delivered a letter of nonapproval, or threatened to deliver such a
letter, with respect to any product manufactured, marketed, licensed or
developed by the Company, or any product which the Company intends to
manufacture, market, license or develop.

2.28 BUSINESS PLAN. The Company's business plan entitled Business Summary
and Financial Model (1996-2004), as furnished to the Investor, has been
prepared in good faith by the Company, does not contain any untrue statement of
material fact and does not omit to state a material fact necessary to make the
statements made therein not misleading.

2.29 CONDITION OF ASSETS. All property of the Company, whether real or
personal, is in good condition, reasonable wear and tear excepted, and is
sufficient for its current use in the business of the Company.

2.30 CONFLICT OF INTEREST. The Company and its executive officers have no
interest (other than as holders of securities of a publicly-traded company),
either directly or indirectly, in any entity, including, without limitation
thereto, any corporation, partnership, joint venture, proprietorship, firm,
person, licensee, business or association (whether as an employee, officer,
director, shareholder, agent, independent contractor, security holder,
creditor, consultant or otherwise) that presently (i) provides any services, or
designs, produces and/or sells any products, or engages in any activity which
is the same, similar to or competitive with any activity or business in which
the Company is now engaged or proposes to become engaged; (ii) is a supplier,
customer, or creditor of the Company, or has an existing contractual
relationship with any of the Company's managing employees; or (iii) has any
direct or indirect interest in any asset or property, real or personal,
tangible or intangible, of the Company or any property, real or personal,
tangible or intangible, that is necessary or desirable for the conduct of the
Company's business.

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2.31 COMPLIANCE WITH LAW. The business of the Company is not being
conducted in violation of any material law, ordinance or regulation of any
governmental entity (including, without limitation, those relating to
environmental protection and occupational safety and health practices). All
material governmental approvals, permits and licenses required to conduct the
current business of the Company have been obtained and are in full force and
effect and are being complied with in all material respects.

2.32 DEVELOPMENT AGREEMENT. The representations and warranties made by the
Company in the Agreement dated of even date herewith by and between the Company
and the Investor ("Development Agreement") are true and correct.

ARTICLE III

REPRESENTATIONS OF THE INVESTOR

The Investor represents and warrants to the Company as follows:

3.1 AUTHORIZATION. The Investor has full power and authority to enter
into this Agreement. This Agreement constitutes a valid and legally binding
obligation of the Company.

3.2 BROKERS AND FINDERS. The Investor has not retained any investment
banker, broker or finder, and is not obligated to any such person for any fee,
in connection with the transactions contemplated by this Agreement.

ARTICLE IV

SECURITIES LAWS

4.1 Securities Laws Representations and Covenants of the Investor. The
Investor represents, warrants and covenants to the Company as follows:

(a) PURCHASE ENTIRELY FOR OWN ACCOUNT. The Shares are being
acquired for investment for the Investor's own account, not as
a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and the Investor has no
present intention of selling, granting any participation in,
or otherwise distributing the same. The Investor does not
have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participation to such
person or to any third person, with respect to any of the
Shares.

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<PAGE> 66

The Investor was not organized solely for the purpose of
acquiring the Shares.

(b) DISCLOSURE OF INFORMATION. The Investor believes it has
received all information it considers necessary or appropriate
for deciding whether to purchase the Shares. The Investor has
had an opportunity to ask questions and receive answers from
the Company regarding the terms and conditions of the offering
of the Shares. The foregoing does not, however, limit or
modify the representations and warranties of the Company in
Article II of this Agreement.

(c) INVESTMENT EXPERIENCE. The Investor has previously invested
in companies in the development stage, can bear the economic
risks of the investment and has such knowledge and experience
in financial or business matters that it is capable of
evaluating the merits and risks of its investment in the
Shares.

(d) ACCREDITED INVESTOR. The Investor is an accredited investor
as defined in Rule 501(a) of Regulation D, as amended, of the
Securities and Exchange Commission ("SEC") under the
Securities Act.

(e) RESTRICTED SECURITIES. The Investor understands that the
Shares it is purchasing pursuant to this Agreement are
characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the
Company in a transaction not involving a public offering and
that under such laws and applicable regulations the Shares may
be resold without registration under the Securities Act only
in certain limited circumstances. In this connection, the
Investor is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby
and by the Securities Act.

(f) DISPOSITION OF SHARES. The Investor will not dispose of any
of the Shares (other than pursuant to SEC Rules 144 or 144A or
any similar or analogous rule or rules) unless and until (i)
the Investor shall have notified the Company of the proposed
disposition and the circumstances surrounding the proposed
disposition and, if reasonably requested by the Company, the
Investor shall have furnished the Company with an opinion of
counsel reasonably satisfactory in form and substance to the
Company to the effect that such disposition will not require
registration under the Securities Act; or (ii) there is in
effect a registration statement under the Securities Act
covering the proposed disposition and the proposed disposition
is made in accordance with such registration statement.

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<PAGE> 67

4.2 LEGENDS. The certificates evidencing the Shares may bear the
restrictive legends set forth below, except that such certificates shall not
bear the legends set forth in (a) and (c) below if the transfer was made in
compliance with Rule 144 or if the opinion of counsel, if any, referred to in
Section 4.1(f)(i) is to the effect that such legend is not required in order to
establish compliance with any provisions of the Securities Act:

(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("ACT"). THE SECURITIES MAY NOT BE TRANSFERRED UNLESS A
REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH
TRANSFER OR SUCH TRANSFER IS MADE PURSUANT TO RULES 144 OR
144A OF THE ACT OR AN EXEMPTION TO THE REGISTRATION
REQUIREMENTS OF THE ACT."

(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL
AND MANDATORY SALE UPON THE HAPPENING OF CERTAIN EVENTS ASSET
FORTH IN ARTICLE XII OF THE BYLAWS OF THE CORPORATION, A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION."

(c) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
CORPORATION RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF SAID ACT."

(d) Any legend required by the laws of any applicable state or
other jurisdiction governing the Shares.

ARTICLE V

DISCLOSURE OF THE AGREEMENT

Neither party shall disclose any information about this Agreement,
including its existence, without the prior written consent of the other.
Consent shall not be required, however, for disclosures to tax authorities or
to bona fide potential sublicensees, to the extent required or contemplated by
this Agreement, provided,

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<PAGE> 68

that in connection with such disclosure, each party agrees to use its
commercially reasonable efforts to secure confidential treatment of such
information. Each party shall have the further right to disclose the terms of
this Agreement as required by applicable law, including the rules and
regulations promulgated by the Securities and Exchange Commission and to
disclose such information to shareholders or potential investors as is
customary for publicly-held companies, provided the disclosing party provides
to the other party a copy of the information to be disclosed and an opportunity
to comment thereon prior to such disclosure and consults within a reasonable
time in advance of the proposed disclosure with the other on the necessity for
the disclosure and the text of the proposed release.

ARTICLE VI

CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT THE CLOSING

The obligations of the Investor under this Agreement to purchase the Shares
from the Company are subject to the fulfillment on or before the Closing of
each of the following conditions, any of which may be waived in writing by the
Investor:

6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in Article II of this Agreement shall be true on and as
of the Closing with the same effect as though such representation and
warranties had been made on and as of the Closing.

6.2 PERFORMANCE. The Company shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.

6.3 COMPLIANCE CERTIFICATE. The Company shall have delivered to the
Investor a certificate dated as of the Closing, executed by an executive
officer of the Company and in a form reasonably acceptable to the Investor,
certifying that the conditions set forth in Sections 6.1 and 6.2 have been
satisfied and that there has been no material adverse change in the assets,
properties, prospects, condition, affairs, operations or business of the
Company, as now conducted or as proposed to be conducted, since the date of
this Agreement.

6.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings taken
by the Company in connection with the transactions contemplated by this
Agreement and all documents incident thereto shall be reasonably satisfactory
in form and substance to the Investor, and the Investor shall have received all
such documents as it may have reasonably requested.

6.5 OPINION OF COUNSEL. The Investor shall have received an opinion from
the Company's counsel, dated as of the Closing and in a form and substance
reasonably acceptable to the Investor, to the effect that:

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(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Wisconsin,
and the Company has the requisite corporate power and
authority to own its properties and to conduct its business;

(b) The Company has the requisite corporate power and authority to
execute, deliver and perform this Agreement. This Agreement
has been duly and validly authorized by the Company, duly
executed and delivered by an authorized officer of the Company
and constitutes a legal, valid and binding obligation of the
Company enforceable in accordance with its terms, except as
enforceability may be limited by law affecting the rights of
creditors generally;

(d) The certificates representing the Shares are in due and proper
form and have been duly and validly executed by the officers
of the Company named thereon;

(e) The execution, delivery, performance and compliance with the
terms of this Agreement do not violate any provision of the
Company's Articles of Incorporation or By-laws and, to the
best of such counsel's knowledge, do not conflict with or
constitute a default under the provisions of any judgment,
writ, decree, order or agreement to which the Company is a
party or by which it is bound, which conflict or default would
be materially adverse to the Company.

(f) All consents, approvals, orders or authorizations of, and all
qualifications, registrations, designations, declarations, or
filings with, any federal or Wisconsin governmental authority
required to be made prior to the Closing in connection with
the consummation of the transactions contemplated by this
Agreement have been obtained, and are effective, as of the
Closing and such counsel is not aware of any proceedings, or
threat thereof, which question the validity thereof;

(g) Based in part upon the representations of the Investor set
forth in this Agreement, the offer and sale of the Shares
pursuant to the terms of this Agreement are exempt from the
registration requirements of Section 5 of the Securities Act
and from any state qualification requirements of the Company's
state of incorporation and principal place of business;

(h) Such counsel is not aware of any action, proceeding or
investigation pending against the Company or any of its
officers, directors, or

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employees, or that any of the foregoing has received any
threat thereof, which questions the validity of this
Agreement, or the right of the Company or its officers or
directors to enter into this Agreement or which might result,
either individually or in the aggregate, in any material
adverse change in the assets, conditions, affairs, or
prospects of the Company nor is such counsel aware of any
litigation pending against the Company or any of its officers,
directors or employees, or that any of the foregoing has
received any threat thereof, by reason of the proposed
activities of the Company, the past employment relationships
of its officers, directors or employees, or negotiations by
the Company or any of its officers, directors or employees
with possible investors in the Company or its business; and

(i) The Shares have been duly and validly authorized and issued
(including, without limitation, issued in compliance with
applicable federal and state securities laws), fully paid and
non-assessable and not subject to any preemptive rights,
liens, claims or encumbrances, or other restriction on
transfer, except as set forth in this Agreement and Article
XII of the Company's Bylaws pertaining to the Company's right
of first refusal with respect to transfers of Company common
stock.

ARTICLE VII

CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING

The obligations of the Company under this Agreement to issue and sell
the Shares to the Investor are subject to the fulfillment on or before the
Closing of each of the following conditions, any of which may be waived in
writing by the Company:

7.1 REPRESENTATIONS AND WARRANTIES. The representation and warranties of
the Investor contained in Article III and Section 4.1 of this Agreement shall
be true on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.

7.2 PAYMENT OF PURCHASE PRICE. The Investor shall at the Closing pay the
Purchase Price upon delivery by the Company of a certificate representing the
Shares.

7.3 BLUE SKY COMPLIANCE. The Company shall have complied with all
applicable state securities laws as necessary to offer and sell the Shares to
the Investor.

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ARTICLE VIII

POST-CLOSING COVENANTS OF THE COMPANY

8.1 FINANCIAL STATEMENTS. The Company shall deliver to the Investor all
financial and other reports required under federal, state or local law and such
other reports as the parties may agree upon. In addition, the Company shall
deliver to the Investor: (i) as soon as practicable, but in any event within
120 days after the end of each fiscal year of the Company, an income statement
for such fiscal year, a balance sheet as of the end of such year and a schedule
as to the sources and applications of funds for such year, such year end
financial reports to be in reasonable detail, prepared in accordance with
generally accepted accounting principles, consistently applied, and audited and
certified by independent public accountants reasonably acceptable to the
Investor; and (ii) within 30 days of the end of each quarter, an unaudited
income statement, balance sheet and cash flow analysis for and as of the end of
such quarter, including the foregoing information on a comparative and year to
date basis.

8.2 OPEN COMMUNICATION. The Company shall permit the Investor at
reasonable times to discuss the Company's affairs, finances and accounts with
the Company's officers.

8.3 INSURANCE. The Company shall maintain insurance coverage covering
risks associated with its business in such amounts as are customary in the
industry.

8.4 PRIVATE OFFERING. Neither the Company nor anyone acting on its behalf
will offer any securities of the Company for issuance or sale to, or solicit
any offer to acquire any of the same from, any person or entity so as to make
the issuance and sale of the Shares subject to the registration requirements of
Section 5 of the Securities Act.

8.5 INVENTION AND SECRECY AGREEMENTS. Each employee and consultant of the
Company who may have access to the Company's and Investor's proprietary
information shall execute an appropriate confidentiality agreement.

8.6 PAYMENT OF DOCUMENTARY, STAMP AND SIMILAR TAXES. The Company shall
pay any and all documentary, stamp, transfer or other taxes which may become
due or payable with respect to or as a result of the issuance and delivery of
the Shares.

8.7 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Investor the benefits of SEC Rule 144 and any other rule or
regulation of the SEC that may at any time permit the Investor to sell
securities of the Company to the public without registration or pursuant to a
registration on SEC Form S-3, the Company agrees to:

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(a) make and keep public information available, as those terms are
defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement
filed by the Company for the offering of its securities to the
general public;

(b) take such action, which may, but shall not be required to,
include the voluntary registration of its securities under
Section 12 of the Securities Exchange Act of 1934, as amended
("1934 Act"), as is necessary to enable the Investor to
utilize SEC Form S-3 for the sale of the Shares, such action
to be taken, as required under the 1934 Act, after the end of
the fiscal year in which the first registration statement
filed by the Company for the offering of its securities to the
general public is declared effective;

(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and
the 1934 Act; and

(d) furnish to the Investor, so long as the Investor owns Shares,
upon request (i) a written statement by the Company that it
has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date
of the first registration statement filed by the Company), the
Securities Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold
pursuant to SEC Form S-3 (at any time after it so qualifies),
(ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be
reasonably requested in availing the Investor of any rule or
regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such plan.

8.8 TERMINATION OF COVENANTS. The covenants contained in Sections 8.1,
8.2, and 8.6 shall terminate upon an underwritten public offering by the
Company of its securities.

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ARTICLE IX

SUBSEQUENT OFFERINGS AND REGISTRATIONS

9.1 PARTICIPATION IN SUBSEQUENT OFFERINGS. If at any time the Company
shall issue, for cash, shares of its common stock or any other security which
can be converted into shares of the Company's common stock (a "Subsequent
Offering"), other than shares to be issued to employees or directors or
consultants of the Company pursuant to the Company's stock option plan, and
other than pursuant to an agreement that also provides for the transfer of
technology or other similar strategic alliance, the Company shall offer upon
the same price and terms to the Investor such number of additional shares of
such common stock or other security as would result in the Investor maintaining
the same overall percentage ownership of such common stock of the Company
(taking into consideration the conversion rights of all securities) following
such new issuance as existed immediately prior thereto. Upon receipt of written
notice of such offer, the Investor shall have a period of forty-five (45)
calendar days within which to accept or reject the offer of sale of such
securities. Closing for the purchase of such securities shall occur
immediately following the closing of the Subsequent Offering. The requirements
of this Section shall terminate upon the first sale of the Company's common
stock to the public pursuant to a registration statement filed with, and
declared effective by, the SEC under the Securities Act covering the offer and
sale of the Company's common stock with an aggregate offering price to the
public of not less than ten million dollars ($10,000,000).

9.2 SUBSEQUENT OFFERINGS HAVING DILUTIVE EFFECT. If the Company shall
issue shares of its common stock or any other security which can be converted
into shares of the Company's common stock ("Additional Issuance"), other than
shares to be issued to employees or directors of the Company pursuant to the
Company's stock option plan, for a per share consideration less than the per
share consideration paid by the Investor pursuant to this Agreement (taking
into consideration conversion rights and subdivisions of the securities by
stock dividends, splits or otherwise), the Company shall issue to the Investor
such additional number of shares of the Company's common stock as necessary so
that the number of shares purchased under this Agreement plus any such
additional shares issued pursuant to this Section 9.2 shall equal the number of
shares which the Investor would have been able to purchase for the Purchase
Price had the per share consideration paid by the Investor pursuant to this
Agreement been equal to the per share consideration paid for the Additional
Issuance. For purposes of this Section 9.2, the per share consideration shall
not be considered to be less than the per share consideration paid by the
Investor under circumstances where the Investor's independent certified public
accountant renders an opinion to the effect that the Additional Issuance will
not result in a permanent impairment in the value of the Investor's shares of
Company common stock in accordance with Generally Accepted Accounting
Principles. Additional shares under this Section 9.2 shall be issued to the
Investor contemporaneously with the closing of the Additional Issuance. The
requirements of this Section 9.2 shall terminate upon completion of the first
public offering of the Company's common stock pursuant to a registration
statement filed with, and declared effective by, the SEC under the Securities
Act

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with an aggregate price to the public of not less than ten million dollars
($10,000,000) (it being understood that this Section 9.2 shall apply to the
sale of shares of the Company's common stock in such public offering).

For the purposes of determining the per share consideration paid for the
Additional Issuance, the following provisions shall be applicable.

(a) In the case of issuance of common stock for cash, the
consideration shall be deemed to be the amount of cash paid
therefore without deducting any discounts or commissions paid
or incurred by the Company in connection with the issuance and
sale thereof.

(b) In the case of the issuance of common stock for consideration
in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as may
be mutually agreed upon by the Company and the Investor. If
the Company and the Investor are unable to agree on such fair
value, the fair value shall be determined by a nationally
recognized investment banking firm or nationally recognized
firm of independent certified public accountants selected by
the parties, whose fees shall be borne equally by the parties;
provided, however, that if, at the time of such determination,
the Company's common stock is traded in the over-the-counter
market or on a national or regional securities exchange, such
fair market value as determined shall not exceed the aggregate
"current market price" (as defined below) of shares of common
stock being issued.

(c) In the case of issuance of (i) options to purchase or rights
to subscribe for common stock, (ii) securities by their terms
convertible into or exchangeable for common stock, or (iii)
options to purchase or rights to subscribe for securities by
their terms convertible into or exchangeable for common stock:

(1) The aggregate maximum number of shares of common
stock deliverable upon exercise of such options to
purchase or rights to subscribe for common stock
shall be deemed to have been issued at the time such
options or rights were issued and for a consideration
equal to the consideration (determined in the manner
provided in subdivisions (a) and (b) above), if any,
received by the Company upon the issuance of such
options or rights plus the minimum purchase price
provided in such options or rights for the common
stock covered thereby;

(2) The aggregate maximum number of shares of common
stock deliverable upon conversion of or in exchange
for any such convertible or exchangeable securities,
or upon the exercise of

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options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent
conversion or exchange thereof, shall be deemed to
have been issued at the time such securities were
issued or such options or rights were issued and for
a consideration equal to the consideration received
by the Company for any such securities and related
options or rights (excluding any cash received on
account of accrued interest or accrued dividends),
plus the additional consideration, if any, to be
received by the Company upon the conversion or
exchange of such securities or the exercise of any
related options or rights (the consideration in each
case to be determined in the manner provided in
subdivisions (a) and (b) above;

(d) For purpose of any computation pursuant to this section 9.2,
the "Current Market Price" at any date of one share of common
stock shall be deemed to be the average of the highest
reported bid and the lowest reported offer prices on the
preceding business day as furnished by the National Quotation
Bureau, Incorporated (or equivalent recognized source of
quotations).

9.3 REGISTRATION RIGHTS.

(a) DEFINITIONS. As used in this Section 9.3, the following terms
shall have the following respective meanings:

o "COMMISSION" shall mean the Securities and Exchange
Commission or any other federal agency at the time
administering the Securities Act.
o "TRANSFER" shall mean any disposition of the Shares
which would constitute a sale thereof within the meaning
of the Securities Act.
o "RESTRICTED SECURITIES" shall mean (i) the Shares; (ii)
any common stock issued to the Investor as a result of
any Subsequent Offering under Section 9.1 or otherwise;
(iii) any common stock issued to the Investor as a
result of any Additional Issuance under Section 9.2 or
otherwise; and (iv) any common stock or other security
issued as a dividend or other distribution with respect
to the foregoing.

(b) REQUEST FOR REGISTRATION. In the event the Company shall
receive from Investor a written request that the Company
effect any registration, qualification or compliance with
respect to shares of Restricted Securities with an expected
aggregate offering price to the public of at least five
million dollars ($5,000,000), the Company will: within ten
(10) days of the receipt by the Company of such notice, give
written notice of the proposed registration, qualification or
compliance to all other holders of Restricted Securities; and
as soon as practicable,

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<PAGE> 76

use its best efforts to effect such registration,
qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with
applicable regulations issued under the Securities Act and any
other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and
distribution of all the Restricted Securities as are specified
in such requests; together with all or such portion of the
Restricted Securities of any holder or holders of Restricted
Securities, joining in such request as are specified in a
written request received by the Company within twenty (20)
days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to
take any action to effect any such registration, qualification
or compliance pursuant to this Section 9.3(b):

(l) In any particular jurisdiction in which the Company
would be required to execute a general consent to
service of process in effecting such registration,
qualification or compliance unless the Company is
already subject to service in such jurisdiction and
except as may be required by the Securities Act;

(2) prior to December 31, 1998;

(3) during the period starting with the date sixty (60)
days prior to the Company's estimated date of filing
of, and ending on the date three (3) months
immediately following the effective date of, any
registration statement pertaining to securities of
the Company (other than registration of securities in
a Rule 145 transaction, with respect to an employee
benefit plan or with respect to the Company's first
registered public offering of its stock in which case
the period shall end on the date six (6) months
following the effective date), provided that the
Company is actively employing in good faith
reasonable efforts to cause such registration
statement to become effective;

(4) after the Company has effected three (3) such
registrations pursuant to this section 9.3(b), and
such registrations have been declared or ordered
effective; provided, however, that in the event that
any legal restrictions or prohibitions shall result
in the inability of the holders of Restricted
Securities participating in a registration pursuant
to this Section 9.3(b) to sell at least seventy-five
percent (75%) of the Restricted Securities included
in any such registration within one hundred eighty
(180) days of the effectiveness thereof, then the
Investor shall be entitled to

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demand an additional registration pursuant to this
Section 9.3(b);

(5) If the Company shall furnish to the Investor a
certificate signed by the President of the Company
stating that in the good faith judgment of the Board
of Directors it will be seriously detrimental to the
Company or its shareholders for a registration
statement to be filed in the near future, then the
Company's obligation to use its best efforts to
register, qualify or comply under this Section 9.3
shall be deferred for a period not to exceed one
hundred twenty (120) days from the date of receipt of
written request from the Investor; provided, however,
that the Company shall not exercise such rights more
than once in any twelve (12) months.

(6) Subject to the foregoing clauses (1)-(5), the Company
shall file registration statement covering the
Restricted Securities so requested to be registered
as soon as practicable, after receipt of the request
or requests of the Investor.

(c) REQUEST FOR REGISTRATION ON FORM S-3. If the Investor
requests that the Company file a registration statement on
Form S-3 (or any successor form to Form S-3) or any similar
short-form registration statement, for a public offering of
Restricted Securities, the reasonably anticipated aggregate
price to the public of which, net of underwriting discounts
and commissions, would exceed one million dollars ($1,000,000)
and the Company is a registrant entitled to use Form S-3 to
register the Restricted Securities for such an offering, the
Company shall use its best efforts to cause such Restricted
Securities to be registered on such form for the offering and
to cause such Restricted Securities to be qualified as the
Investor may reasonably request; provided, however, that the
Company shall not be required to effect more than four (4)
registrations pursuant to this Section 9.3(c) or more than one
(1) such registration in any twelve (12) month period. After
the Company's first public offering of its securities, the
Company will use its best efforts to qualify for Form S-3
registration or a similar short-form registration.

Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 9.3(c):

(1) In any particular jurisdiction in which the Company
would be required to execute a general consent to
service of process in effecting such registration,
qualification or compliance unless

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<PAGE> 78

the Company is already subject to service in such
jurisdiction and except as may be required by the
Securities Act;

(2) If the Company within ten (10) days of the receipt of
the request described herein, gives notice of its
bonafide intention to effect the filing of a
registration statement with the Commission within
ninety (90) days of receipt of such request (other
than with respect to a registration statement
relating to a Rule 145 transaction, or an offering
solely to employees);

(3) During the period starting with the date ninety (90)
days prior to the Company's estimated date of filing,
and ending on the date three (3) months immediately
following, the effective date of any registration
statement pertaining to securities of the Company
(other than a registration of securities in a Rule
145 transaction or with respect to an employee
benefit plan) provided that the Company is actively
employing in good faith all reasonable efforts to
cause such registration statement to become
effective; or

(4) If the Company shall furnish to the Investor, a
certificate signed by President of the Company
stating that in good faith judgment of the Board of
Directors it would be seriously detrimental to the
Company or its shareholders for registrations
statements to be filed in the near future, then the
Company's obligation to use its best effort to file a
registration statement shall be deferred for a period
not to exceed ninety (90) days from the receipt of
request to file such registration by the Investor;
provided, however, that the Company shall not
exercise such right more than once in any twelve (12)
month period.

(d) "PIGGYBACK" REGISTRATIONS. If and whenever the Company
proposes to register any of its equity securities under the
Securities Act for an offering to the general public for cash,
whether on its own behalf or on behalf of controlling
shareholders of the Company participating in a secondary
distribution, it will give written notice to all holders of
Restricted Securities of its intention to do so and, upon the
written request of the holders of any Restricted Securities
given within forty-five (45) business days after the Company's
giving of such notice (which request shall state the intended
method of disposition of such Restricted Securities by the
prospective sellers), the Company will use its best efforts to
cause the Restricted Securities as to which registration shall
have been so requested to be included in the shares of
securities to be covered by the registration statement
proposed to be filed by the Company, all to the extent
requisite to permit the sale or

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<PAGE> 79

other disposition (in accordance with the written request of
the holders) by the prospective seller or sellers of such
Restricted Securities.

(e) UNDERWRITING. In the event that any registration pursuant to
this Section 9.3 shall be, in whole or in part, a firm
commitment underwritten offering of securities of the Company,
any request by such holders pursuant to this Section 9.3 to
register Restricted Securities must specify that such shares
are to be included in the underwriting (i) on the same terms
and conditions as the shares of securities, if any, otherwise
being sold through underwriters under such registration; (ii)
in the event that no shares of securities, other than
Restricted Securities, are being sold through underwriters
under such registration, then on terms and conditions
comparable to those normally applicable to offerings of common
stock in reasonably similar circumstances. Notwithstanding
any other provision of this Section 9.3, if the underwriter
determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may
exclude a pro rata portion of the Restricted Securities of the
requesting holders based on the proportion of such Restricted
Securities to the total securities to be included in the
registration (excluding securities to be issued directly by
the Company if the Company initiated the registration).

(f) REGISTRATION PROCEDURES AND EXPENSES. If and whenever the
Company is required by the provisions of this Section to
include any of the Restricted Securities of the Investor in a
registration under the Securities Act, the Investor will
furnish in writing such information as is reasonably requested
by the Company for inclusion in the registration statement
relating to such offering and such other information and
documentation as the Company shall reasonably request, and the
Company will, as expeditiously as possible:

(1) Prepare and file with the Commission a registration
statement with respect to such securities and use its
best efforts to cause such registration to become and
remain effective for such period as may be necessary
to permit the successful marketing of such securities
but not exceeding 120 days.

(2) Prepare and file with the Commission such amendments
and supplements to such registration statement and
the prospectus used in connection therewith as may be
necessary to comply with the provisions of the
Securities Act and to keep such registration
statement effective for that period of time specified
in paragraph 9.3(f)(1).

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<PAGE> 80

(3) Furnish to each selling shareholder such number of
prospectuses and preliminary prospectuses in
conformity with the requirements of the Securities
Act, and such other documents as such seller may
reasonably request in order to facilitate the public
sale or other disposition of the Restricted
Securities owned by such seller.

(4) If the Company is required by the underwriters, if
any, of the securities registered under this Section
9.3 to deliver an opinion of counsel to such
underwriters in connection with such registration,
and if requested by any holders of Restricted
Securities participating in such registration, use
its best efforts to furnish such opinion to such
holders on the day of delivery to the underwriters,
addressed to such underwriters and to such holders
containing substantially the following provisions:

(a) that the registration statement covering
such registration of securities has become
effective under the Securities Act;

(b) that, to the best of such counsel's
knowledge, no stop order suspending the
effectiveness thereof has been issued and
no proceedings for that purpose have been
instituted or are pending or threatened
under the Securities Act;

(c) that at the time the registration statement
became effective, the registration
statement and the related prospectus
complied as to form in all material
respects with the requirements of the
Securities Act and the applicable rules and
regulations of the Commission thereunder
(except that such counsel need express no
opinion as to financial statements and
related schedules contained therein);

(d) that while such counsel has not
independently verified the accuracy or
completeness of the information contained
therein, such counsel has no reason to
believe that the registration statement at
the time it became effective or the
prospectus contained any untrue statement
of a material fact or omitted to state a
material fact required to be stated therein
or necessary to make the statements therein
not misleading;

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<PAGE> 81

(e) that, to the best of such counsel's
knowledge, the descriptions in the
registration statement and the prospectus,
and any amendments or supplements thereto,
of all legal and governmental matters and
all contracts and other legal documents or
instruments described therein are accurate
and fairly present the information required
to be stated therein concerning such
matters, contracts, documents and
instruments;

(f) that such counsel does not know of any
legal or governmental proceedings, pending
or threatened, required to be described in
the registration statement or prospectus,
or any amendment or supplement thereto,
which are not described as required, nor of
any contracts or documents or instruments
of a character required to be described in
the registration statement or prospectus;
or any amendment or supplement thereto, or
to be filed as exhibits to the registration
statement which are not described or filed
as required. Such opinion shall be in such
form as is customary for similar opinions
delivered by such counsel so long as such
form is acceptable to the underwriters.

(5) If the Company is required by the underwriters, if
any, of the securities registered in a registration
under this Section 9.3 to deliver a letter from the
independent certified public accountants of the
Company to such underwriters in connection with such
registration, and if requested by any holders of
Restricted Securities participating in such
registration, use its best efforts to furnish such
letter to such holders on the day of delivery to the
underwriters, addressed to such underwriters and to
such holders, providing substantially that such
accountants are independent certified public
accountants within the meaning of the Securities Act
and that in the opinion of such accountants, the
financial statements and other financial data of the
Company included in the registration statement and
the prospectus, and any amendment or supplement
thereto, comply as to form in all material respects
with the applicable accounting requirements of the
Securities Act. Such letter shall additionally cover
such other financial matters (including information
as to the period ending not more than five business
days prior to the date of such letter) with respect
to the registration in respect of which such letter
is being given as the holders of Restricted
Securities requesting such letter may reasonably
request, and shall be in such form as is customary

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<PAGE> 82

for similar letters delivered by such certified
independent public accountants so long as such form
is acceptable to the underwriters.

(6) Use its best efforts to register or qualify the
Restricted Securities covered by such registration
statement under such other securities or blue sky
laws of such jurisdictions as each such selling
shareholder shall reasonably request and do any and
all other acts and things which may be necessary or
desirable to enable such seller to consummate the
public sale or other disposition in such
jurisdictions of the Restricted Securities owned by
such seller and covered by such registration
statement.

(g) MANAGING UNDERWRITERS. In the event holders of Restricted
Securities propose to sell Restricted Securities in accordance
with this Section 9.3 pursuant to an underwritten offering,
the Company shall have the right to approve the managing
underwriters for such offering; providing, however, that such
approval shall not be unreasonably withheld.

(h) REGISTRATION AND SELLING EXPENSES. As used herein,
"Registration Expenses" shall mean all expenses incurred by
the Company in complying with this Section 9.3, including,
without limitation, all registration and filing fees; printing
expenses; fees and disbursements of counsel for the Company;
blue sky fees and expenses; and the expense of any special
audits incident to or required by any such registration (but
excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company); and "Selling
Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sales. The Company will pay all
Registration Expenses in connection with the registration
pursuant to Section 9.3. All Selling Expenses in connection
with each registration pursuant to this Section 9.3 shall be
borne by the Company and the selling shareholders pro rata in
proportion to the securities covered thereby being sold by
them.

(i) STANDOFF AGREEMENT. Investor agrees in connection with any
registration of the Company's securities that, upon the
request of the Company or the underwriters managing any
underwritten offering of the Company's securities, not to
sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Restricted Securities
(other than those included in the registration) without the
prior written consent of the Company or such underwriters, as
the case may be, for such reasonable period of time from the

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<PAGE> 83

effective date of such registration as the underwriters may
specify, provided that all officers and directors of the
Company and all other holders of the Securities of the Company
enter into similar agreements. Such agreement shall be in
writing and in a form satisfactory to the Company and such
underwriter. The Company may impose stop-transfer instructions
with respect to the shares subject to the foregoing
restrictions until the end of such period.

(j) INDEMNIFICATION. In the event of a registration of any of the
Restricted Securities under the Securities Act pursuant to
this Section, the Company will indemnify and hold harmless the
seller of such Restricted Securities and each underwriter of
such Restricted Securities and each other person, if any, who
controls such seller or underwriter within the meaning of
Section 15 of the Securities Act, against any and all losses,
claims, damages or liabilities, joint or several, to which
such seller or underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained on
the effective date thereof in any registration statement under
which such Restricted Securities are registered under the
Securities Act, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and the Company will reimburse such seller and
each such underwriter and each such controlling person for any
legal or any other expenses reasonably incurred by them in
connection with their investigating or defending any such
loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such
registration statement, said preliminary prospectus or said
prospectus or said amendment or supplement in reliance upon
and in conformity with written information furnished to the
Company by such seller or underwriter specifically for use in
the preparation thereof; and provided, further, that if any
losses, claims, damages or liabilities arise out of or are
based upon an untrue statement, alleged untrue statement,
omission or alleged omission contained in any preliminary
prospectus which did not appear in the final prospectus, the
Company shall not have any liability with respect thereto to
(i) the seller or any person who controls such seller within
the meaning of Section 15 of the Securities Act, if the seller
delivered a copy of the preliminary prospectus to the person

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<PAGE> 84

alleging such losses, claims, damages or liabilities and
failed to deliver a copy of the final prospectus, as amended
or supplemented if it has been amended or supplemented, to
such person at or prior to the written confirmation of the
sale to such person or (ii) any underwriter or any person who
controls such underwriter within the meaning of Section 15 of
the Securities Act, if such underwriter delivered a copy of
the preliminary prospectus to the person alleging such losses,
claims, damages or liabilities and failed to deliver a copy of
the final prospectus, as amended or supplemented if it has
been amended or supplemented to such person at or prior to the
written confirmation of the sale to such person.

In the event of any registration of any of the Restricted
Securities under the Securities Act pursuant to this Section,
each seller of such Restricted Securities, severally and not
jointly, will indemnify and hold harmless the Company and each
person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, each officer of the Company
who signs the registration statement, each director of the
Company, each underwriter and each person who controls any
underwriter within the meaning of Section 15 of the Securities
Act, against any and all such losses, claims, damages or
liabilities referred to in the first paragraph of this
Subsection, if the statement, alleged statement, omission or
alleged omission in respect of which such loss, claim, damage
or liability is asserted was made in reliance upon and in
conformity with information furnished in writing to the
Company by or on behalf of such seller specifically for use in
connection with the preparation of such registration
statement, preliminary prospectus, prospectus, amendment or
supplement; provided, however, that if any losses, claims,
damages or liabilities arise out of or are based upon an
untrue statement, alleged untrue statement, omission or
alleged omission contained in any preliminary prospectus which
did not appear in the final prospectus, such seller shall not
have any such liability with respect thereto to the Company,
any person who controls the Company within the meaning of
Section 15 of the Securities Act, any officer of the Company
who signed the registration statement or any director of the
Company, if the Company delivered a copy of the preliminary
prospectus to the person alleging such losses, claims, damages
or liabilities and failed to deliver a copy of the final
prospectus, as amended or supplemented if it has been amended
or supplemented, to such person at or prior to the written
confirmation of the sale to such person.

(k) TERMINATION OF CONDITIONS AND OBLIGATIONS. Except for the
Company's indemnification obligation contained in Subsection
9.3(j), the obligations and conditions precedent imposed by
this Section shall

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<PAGE> 85

cease and terminate as to any of such Restricted Securities
when (i) such securities shall have been effectively
registered under the Securities Act and sold or otherwise
disposed of in accordance with the intended method of
disposition by the seller or sellers thereof set forth in the
registration statement covering such securities or (ii) such
time as an opinion of counsel with respect to free
transferability shall have been rendered pursuant to
Subsection 4.1(f)(i) above.

(l) AMENDMENTS OF REGISTRATION RIGHTS. Without the written
consent of the holders of 51% of the total number of shares
which would, at the time of such calculation, constitute
Restricted Securities, the Company shall not amend this
Section 9.3, or enter into any agreement with any holder or
prospective holder of any securities of the Company which
would grant to such holder or prospective holder rights
superior to or in conflict with any rights conferred upon the
Investor and other holders of Restricted Securities under this
Section.

9.4 COMPANY ACTION. The Company shall not amend its Articles of
Incorporation or participate in any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action for the purpose of avoiding or seeking to avoid the observance
or performance of any of the provisions of this Article, but will at all times
in good faith assist in carrying out all of its actions as may be reasonably
necessary or appropriate in order to protect the rights of the Investor and
other holders of Restricted Securities.

ARTICLE X

MISCELLANEOUS

10.1 ENTIRE AGREEMENT. This Agreement (together with any attachments or
exhibits) constitutes the entire agreement between the Company and the Investor
relating to the subject matter hereof, and no party shall be liable or bound to
the other in any manner by any warranties, representations or covenants except
as specifically set forth herein.

10.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Except as expressly provided in this Agreement,
nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto or their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement.

10.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin without application of the
choice of laws provisions of such laws.

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<PAGE> 86

10.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

10.5 HEADINGS. The headings used in this Agreement are for convenience and
shall not by themselves be considered in construing or interpreting this
Agreement.

10.6 NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be conclusively deemed effectively given upon either (a)
personal delivery; (b) one day after facsimile transmission to the facsimile
number indicated below and evidenced by a written record of completed
transmission to such number; or (c) five days after deposit in the United
States mail, by registered or certified mail, postage prepaid, addressed to the
following address, or to such other address as the party may designate by ten
(10) days' advance written notice to the other party:

If to the Investor:

Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Attn: General Counsel
Facsimile #: 317-276-9152

If to the Company

Ophidian Pharmaceuticals, Inc.
5445 East Cheryl Parkway
Madison, WI 53711
Attn: Douglas Stafford, President
Facsimile #: 608-277-2395
(with a copy to LaFollette & Sinykin,
Attn: Michael E. Skindrud
One East Main Street
Madison, WI 53703
Facsimile #: 608-257-3911)

10.7 SURVIVAL OF WARRANTIES. The warranties, representations and covenants
of the parties contained in or made pursuant to this Agreement shall survive
the execution and deliver of this Agreement and the Closing and shall in no way
be affected by any investigation of the subject matter thereof by or on behalf
of the

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<PAGE> 87

Investor; provided, however, that such representations and warranties need only
be accurate as of the date of such execution and delivery and as of the
Closing.

10.8 FINDER'S FEES. Each party agrees to indemnify and hold harmless the
other party from and against any liability for any commission or compensation
in the nature of investment banking or finder's fees in connection with the
transactions contemplated by this Agreement (and the costs and expenses of
defending against such liability or asserted liability) for which the
indemnifying party or any of its officers, employees or representatives is
responsible.

10.9 EXPENSES. Irrespective of whether the Closing is effected, the
Company and the Investor will each pay their respective legal and other fees
and expenses in connection with the negotiation, execution, delivery and
performance of this Agreement.

10.10 AMENDMENTS AND WAIVERS. Except as expressly provided in this
Agreement, any provision of this Agreement may be amended only by the mutual
written agreement of the parties and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) only in a written document executed by
the waiving party.

10.11 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

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<PAGE> 88

IN WITNESS WHEREOF the parties have executed this Agreement effective
as of the day and year first above written.

OPHIDIAN PHARMACEUTICALS, INC. ELI LILLY AND COMPANY

By /s/ Douglas C. Stafford By /s/ August M. Watanabe
----------------------------------- --------------------------------
Douglas C. Stafford August M. Watanabe
President Executive Vice President
Science and Technology

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<PAGE> 89
**** Indicates where confidential material has been omitted and filed
separately with the Commission

EXHIBIT D

OPHIDIAN PHARMACEUTICALS, INC.

MILESTONE STOCK PURCHASE AGREEMENT

WITH

ELI LILLY AND COMPANY

THIS AGREEMENT ("AGREEMENT") is entered into as of the 15th day of
November, 1996 ("EFFECTIVE DATE"), by and among OPHIDIAN PHARMACEUTICALS, INC.,
a Wisconsin corporation (the "COMPANY"), and ELI LILLY AND COMPANY, and Indiana
corporation (the "INVESTOR").

RECITALS

A. Company has developed avian antibody-based technology for the
treatment of Clostridium difficile associated diseases ("CDAD").

B. Investor is engaged in the research, development, marketing,
manufacture and distribution of therapeutic pharmaceutical and animal health
products and health care solutions.

C. Company and Investor have entered into a certain collaborative
agreement dated June 3, 1996, (the "DEVELOPMENT AGREEMENT") with respect to the
further research, development, manufacture and sale of products for the
treatment of CDAD.

D. In connection with the Development Agreement, the Investor agreed
to make an initial investment in the Company pursuant to a certain stock
purchase agreement dated June 3, 1996, (the "INITIAL STOCK PURCHASE AGREEMENT")
and to make certain subsequent milestone equity investments in exchange for
Company stock at the occurrence of certain defined events (the "MILESTONE
EVENTS").

E. A Milestone Event has occurred and the parties desire to effect
the milestone equity investment required by the Development Agreement.
<PAGE> 90
AGREEMENT

In consideration of the foregoing, and the covenants and promises
contained in this Agreement, Company and Investor agree as follows:

ARTICLE I

INCORPORATION BY REFERENCE

As of the date of this Agreement, except for Sections 1.1, 1.2, 2.2,
2.3, 2.7, 2.8, 2.9, 2.10, 2.11, 2.12, 2.13, 2.14, 2.15, 2.17, 2.19, 2.20, 2.21,
2.22, 2.23, 2.24, 2.25, 2.26, 2.27, 2.28, 2.29, 2.30, 2.31, 2.32 and Article VI
of the Initial Stock Purchase Agreement, all the terms, definitions,
provisions, representations, warranties and obligations of the Initial Stock
Purchase Agreement are hereby incorporated by reference, in their entirety, to
apply in full force and effect with respect to the purchase and sale of Shares
as described in Article II of this Agreement as if the same were made as of the
date of this Agreement.

ARTICLE II

PURCHASE AND SALE OF SHARES

2.1 PURCHASE AND SALE. Subject to the terms and conditions hereof, the
Investor agrees to purchase from the Company, and the Company agrees to issue
and sell to the Investor, 545,454 shares of the Company's common stock, $.0025
par value (the "Shares"), at a price of $5.50 per share for a total purchase
price of $2,999,997.00 (the "Purchase Price").

2.2 THE CLOSING. The closing ("Closing") of the purchase and sale of the
Shares shall be held on November 20, 1996, or at such other time as the
Company and Investor shall mutually agree. At the Closing, the Company shall
deliver the Shares to the Investor upon delivery to the Company by the Investor
of a check drawn on a U.S. bank or wire transfer of funds in the amount of the
Purchase Price. The Shares to be delivered to the Investor will be evidenced by
a single certificate registered in the Purchaser's name.

ARTICLE III

In addition to the representation and warranties made by the Company
under Article I above, the Company also represents and warrants to the Investor
as follows:

-2-
<PAGE> 91

3.1 CAPITALIZATION. Immediately prior to the Closing, the authorized
capital of the Company will consist of:

(a) COMMON STOCK. 22,400,000 shares of common stock, $0.0025 par
value, of which 6,738,312 shares are duly and validly issued
(including, without limitation, issued in compliance with
applicable federal and state securities laws), fully-paid, non-
assessable, outstanding. A true and correct list of all five
percent (5%) shareholders has been furnished to the Investor.

(b) OTHER SECURITIES. Except with respect to (i) the Company's stock
option plan as described below, (ii) a Stock Warrant dated
January 17, 1990, and amended on February 8, 1991, issued to
Fitchburg Research Park Associates enabling it, under certain
circumstances, to purchase 114,290 shares of Company common stock
at a purchase price of $0.0025 per share, and (iii) a certain
Consulting Agreement dated May 19, 1994, enabling the consultant
to purchase 200,000 shares of Company common stock at a purchase
price of $4.50 per share, there are no outstanding options,
warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from or by the Company
of any shares of its capital stock. Options to purchase 461,889
shares of the Company's common stock have been issued pursuant to
the Company's stock option plan for employees, officers and
directors and are currently outstanding. 657,160 shares of the
Company's common stock are currently reserved for issuance
pursuant to such plan.

3.2 FINANCIAL STATEMENTS. The Company has furnished the Investor with the
audited financial statements (balance sheet, statement of operations and
statement of cash flows) of the Company as of and for the year ending September
30, 1995, together with the accompanying notes and report of the Company's
independent auditors together with unaudited financial statements for the
interim period ended September 30, 1996 (such audited and unaudited financial
statements are collectively referred to as the "Financial Statements"). The
Financial Statements are complete and correct in all material respects and have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and are
consistent with each other.

3.3 DEVELOPMENT AGREEMENT. The Company is not in violation or breach of any
provisions, representations, warranties or obligations set forth in the
Development Agreement.

-3-
<PAGE> 92

3.4 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and
performance of this Agreement will not result in any violation of, be in
conflict with, or constitute a default under, with or without the passage of
time or the giving of notice: (a) any provision of the Company's Articles of
Incorporation or Bylaws; (b) any provision of any judgment, decree or order to
which the Company is a party or by which it is bound; (c) any material
contract, obligation or commitment to which the Company is a party or by which
it is bound; or (d) to the Company's knowledge, any statute, rule or
governmental regulation applicable to the Company.

3.5 NO MATERIAL LIABILITY. As of the date of this Agreement, there are no
outstanding material liabilities except for those that are set forth in the
Financial Statements.

3.6 DISTRIBUTION. As of the date of the Financial Statements, there has
been no declaration or payment by the Company of any dividend, nor any
distribution by the Company of any assets of any kind, to any of its
shareholders with respect to any of the Company's securities, except as set
forth in the Financial Statements.

3.7 CONFLICT OF INTEREST. The Company and its executive officers have no
interest (other than as holders of securities of a publicly-traded company)
that are material to the Company's ability to meet its responsibilities and
obligations under this Agreement and the Development Agreement, either directly
or indirectly, in any entity, including, without limitation thereto, any
corporation, partnership, joint venture, proprietorship, firm, person,
licensee, business or association (whether as an employee, officer, director,
shareholder, agent, independent contractor, security holder, creditor,
consultant or otherwise) that presently (i) provides any services, or designs,
produces and/or sells any products, or engages in any activity which is the
same, similar to or competitive with any activity or business in which the
Company is now engaged or proposes to become engaged; (ii) is a supplier,
customer, or creditor of the Company, or has an existing contractual
relationship with any of the Company's managing employees; or (iii) has any
direct or indirect interest in any asset or property, real or personal,
tangible or intangible, of the Company or any property, real or personal,
tangible or intangible, that is necessary or desirable for the conduct of the
Company's business.

3.8 INSURANCE. The Company has in full force and effect fire and casualty
insurance policies, with extended coverage, reasonably sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. The Company has also obtained
any other insurance coverages with respect to risks associated with its
business in such amounts as are customary in its industry.

-4-
<PAGE> 93

ARTICLE IV

CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT THE CLOSING

4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in Article I and Article III of this Agreement shall be
true on and as of the Closing with the same effect as though such
representation and warranties had been made on and as of the Closing.

4.2 PERFORMANCE. The Company shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.

4.3 COMPLIANCE CERTIFICATE. The Company shall have delivered to the
Investor a certificate dated as of the Closing, executed by an executive
officer of the Company and in a form reasonably acceptable to the Investor,
certifying that the conditions set forth in Sections 4.1 and 4.2 have been
satisfied and that there has been no material adverse change in the assets,
properties, prospects, condition, affairs, operations or business of the
Company, as now conducted or as proposed to be conducted, since the date of
this Agreement.

4.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings taken by
the Company in connection with the transactions contemplated by this Agreement
and all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor, and the Investor shall have received all such
documents as it may have reasonably requested.

4.5 OPINION OF COUNSEL. The Investor shall have received an opinion from
the Company's counsel, dated as of the Closing and in a form and substance
reasonably acceptable to the Investor, to the effect that:

(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of its state of incorporation,
and the Company has the requisite corporate power and authority
to own its properties and to conduct its business;

(b) The Company has the requisite corporate power and authority to
execute, deliver and perform this Agreement. This

-5-
<PAGE> 94

Agreement has been duly and validly authorized by the Company,
duly executed and delivered by an authorized officer of the
Company and constitutes a legal, valid and binding obligation of
the Company enforceable in accordance with its terms, except as
enforceability may be limited by law affecting the rights of
creditors generally;

(d) The certificates representing the Shares are in due and proper
form and have been duly and validly executed by the officers of
the Company named thereon;

(e) The execution, delivery, performance and compliance with the
terms of this Agreement do not violate any provision of the
Company's Articles of Incorporation or By-laws and, to the best
of such counsel's knowledge, do not conflict with or constitute a
default under the provisions of any judgment, writ, decree, order
or agreement to which the Company is a party or by which it is
bound, which conflict or default would be materially adverse to
the Company.

(f) All consents, approvals, orders or authorizations of, and all
qualifications, registrations, designations, declarations, or
filings with, any federal, state of incorporation or principal
place of business governmental authority required to be made
prior to the Closing in connection with the consummation of the
transactions contemplated by this Agreement have been obtained,
and are effective, as of the Closing and such counsel is not
aware of any proceedings, or threat thereof, which question the
validity thereof;

(g) Based in part upon the representations of the Investor set forth
in this Agreement, the offer and sale of the Shares pursuant to
the terms of this Agreement are exempt from the registration
requirements of Section 5 of the Securities Act and from any
state qualification requirements of the Company's state of
incorporation and principal place of business;

(h) Such counsel is not aware of any action, proceeding or
investigation pending against the Company or any of its officers,
directors, or employees, or that any of the foregoing has
received any threat thereof, which questions the validity of this

-6-
<PAGE> 95

Agreement, or the right of the Company or its officers or
directors to enter into this Agreement.

(i) The Shares have been duly and validly authorized and issued
(including, without limitation, issued in compliance with
applicable federal and state securities laws), fully paid and
non-assessable and not subject to any preemptive rights, liens,
claims or encumbrances, or other restriction on transfer, except
as set forth in this Agreement.

IN WITNESS WHEREOF the parties have executed this Agreement effective as
of the day and year first above written.

OPHIDIAN PHARMACEUTICALS, INC. ELI LILLY AND COMPANY

By By
--------------------------------- ---------------------------------
Douglas C. Stafford August M. Watanabe
President Executive Vice President
Science and Technology

-7-
<PAGE> 96
**** Indicates where confidential material has been omitted and filed
separately with the Commission

EXHIBIT E

IMMUNOLOGY INVESTIGATIONS

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<PAGE> 97

OPHIDIAN PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
5445 East Cheryl Parkway, Madison, WI 53711 Phone: (608) 271-0878
Fax: (608) 277-2395

EXHIBIT F

DR. DOUGLASSTAFFORD, PRESIDENT & CEO
OPHIDIAN PHARMACEUTICALS, INC.
FOR IMMEDIATE RELEASE (608) 271-0878

JAMES P. KAPPEL
ELI LILLY AND COMPANY
(317) 276-5795

LILLY AND OPHIDIAN TEAM UP TO DEVELOP A NEW, NON-ANTIBIOTIC
THERAPY FOR SERIOUS GASTROINTESTINAL INFECTIONS

June 4, 1996, Indianapolis, IN; Madison, WI. Eli Lilly and Company and Ophidian
Pharmaceuticals, Inc. announced today that they will jointly develop a new type
of pharmaceutical for the treatment of gastrointestinal infections. The
collaborative effort will first focus on developing Ophidian's lead compound to
treat Clostridium difficile - associated diseases (CDAD). CDAD is a serious
diarrheal disease that results from broad-spectrum antibiotic therapy of other
infections and is increasing at an alarming rate worldwide. Unlike currently
available antibiotics used to treat CDAD, the new compound selectively targets
toxins produced by the disease-causing microbe and not the intestine's normal
microbes. This approach should provide more effective management of CDAD.

Under the agreement, Ophidian could receive up to $12.4 million in equity
investments, milestone and other precommercial payments and will manufacture
the compound for Lilly. Lilly will conduct clinical testing, register and
market of the drug worldwide. In addition, the companies will begin to
negotiate an agreement for the supply of Ophidian's companion CDAD diagnostic
product.

The overuse of powerful, broad-spectrum antibiotics has led to a growing
medical problem of antibiotic resistance and opportunistic infections.
"Broad-spectrum antibiotics indiscriminately destroy both the good and the bad
bacteria" comments Dr. Dennis Maki, Head, Section of Infectious Diseases, at
the University of Wisconsin Hospitals and Clinics. "Some bacteria that escape
through resistance, and others like C. difficile that sprout like weeds in the
barren gut, multiply at an alarming rate--especially in hospitals," explains

<PAGE> 98

Dr. Maki. The normal bacterial residents of the gut keep C. difficile in check.
When this ecological balance is altered by antibiotics, C. difficile can take
over.

CDAD now affects hundreds of thousands of hospitalized patients worldwide.
Already weakened by other conditions, infected patients often develop diarrhea,
but some progress to a more debilitating or life-threatening form of the
disease--colitis. CDAD also adds considerably to treatment and containment
costs, imposing a growing economic burden on hospitals.

Antibiotics used to treat CDAD, while effective, further devastate the
intestinal microbial ecology--thereby promoting selection and over growth of
drug-resistant microbes in the gut. One intestinal bacterial species, the
enterococcus, are now resistant to virtually all antibiotics. To address this
difficult issue, Ophidian developed an antibody that specifically targets the
toxins of C. difficile, thus allowing the normal bacteria to recover and
contribute to the patient's natural defenses.

Comments August Watanabe, M.D., Lilly Executive Vice President, Science and
Technology, "As a leader in the treatment of infectious diseases, Lilly is
committed to providing solutions to unmet medical needs, such as this difficult
problem. Ophidian's technology offers the potential for more effective CDAD
therapy while helping to preserve the usefulness of essential antibiotics."

"While still early in the development process Ophidian has collected extensive
preclinical data showing the compound's efficacy in animals," says Dr. Douglas
Stafford, President and Chief Executive Officer of Ophidian. "To make this
approach work, we had to combine several scientific and manufacturing
strengths. First we focused on discovering what parts of the disease process
make the best drug target. Then we designed antibodies that block this target
and found a way to get these antibodies through the digestive system to the
diseased parts of the gut. What we now have is a technology which has the
potential to

Page 2 of 3
<PAGE> 99

create an expanding family of products to manage gastrointestinal
infections. Lilly's unparalleled strengths in biologic products and infectious
disease management make them a perfect partner for this product," adds
Stafford.

Lilly is a global research-based pharmaceutical corporation headquartered in
Indianapolis, IN, that is dedicated to creating and delivering superior health
care solutions--by combining pharmaceutical innovation, existing pharmaceutical
technology, disease prevention and management, and information technologies--in
order to provide customers worldwide with optimal clinical and economic
outcomes.

Ophidian is a privately-held biopharmaceutical firm headquartered in Madison,
WI, focused on the discovery and development of new drugs to prevent and treat
infectious diseases. Ophidian's proprietary technologies for the production and
oral delivery of pathogen-specific anti-infectives have opened a new pathway to
the management of gastrointestinal infections that does not lead to antibiotic
resistance or opportunistic infections.

Page 3 of 3
<PAGE> 100
**** Indicates where confidential material has been omitted and filed
separately with the Commission

Schedule 8.2

MANUFACTURING MILESTONES

Section 8.2(a) Manufacturing Milestone:

*********************************************************
*********************************************************

Section 8.2(b) Manufacturing Milestone:

*********************************************************
*********************************************************

Section 8.2(c) Manufacturing Milestone:

*********************************************************
*********************************************************

<PAGE> 101

**** Indicates where confidential material has been omitted and filed
separately with the Commission

Schedule 1.20

Lilly Patents

***************************

<PAGE> 102

Schedule 1.26

Ophidian Patents

United States Patent Appln. Serial No. 07/985,321, filed 12/4/92

PCT Patent Appln. No. PCT/U.S. 93/11755, filed 12-4-93

United States Patent Appln. Serial No. 08/329,154, filed 10/24/94

United States Patent Appln. Serial No. 08/422,711, filed 4/14/95

United States Patent Appln. Serial No. 08/456,997, filed 6/1/95

Canadian Patent Appln. No. 2150935, filed 6/2/95

United States Patent Appln. Serial No. 08/456,847, filed 6/1/95

United States Patent Appln. Serial No. 08/480,604, filed 6/7/95

United States Patent Appln. Serial No. 08/161,907, filed 12/2/93

PCT Patent Appln. No. PCT/U.S. 94/03765, filed 4/6/94

PCT Patent Appln. No. PCT/U.S. 95/13737, filed 10-23-95

United States Patent Appln. Serial No. 08/457,890, filed 6/1/95

Australian Patent Appln. No. 66538/94, filed 7/3/95

EPC Patent Appln. No. 94 903 438.3, filed 6/12/95

United States Patent Appln. Serial No. 08/457,048, filed 6/1/95

<PAGE> 103

**** Indicates where confidential material has been omitted and filed
separately with the Commission

Schedule 9.2

Projected Sales at Effective Date

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*********************************************************************

<PAGE> 104
**** Indicates where confidential material has been omitted and filed
separately with the Commission Schedule A-2

Base Bulk Drug Substance Manufacturing Process

1. ***************************************************************
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*******************************************************************************.

2. ***************************************************************
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*******************************************************************************.

3. ***************************************************************
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<PAGE> 1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated October 9, 1997 in
Amendment No. 6 to the Registration Statement (Form S-1 No. 333-33219) and
related Prospectus of Ophidian Pharmaceuticals, Inc. for the registration of
2,500,000 Units.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

Milwaukee, Wisconsin

February 12, 1998

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-START> OCT-01-1996 OCT-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 6,036,572 2,435,401
<SECURITIES> 480,487 359,588
<RECEIVABLES> 25,265 140,801
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,573,002 2,994,048
<PP&E> 616,983 767,903
<DEPRECIATION> 316,651 439,517
<TOTAL-ASSETS> 7,872,350 5,116,176
<CURRENT-LIABILITIES> 199,178 268,876
<BONDS> 0 0
0 0
0 0
<COMMON> 18,209 18,221
<OTHER-SE> 7,626,573 4,526,237
<TOTAL-LIABILITY-AND-EQUITY> 7,872,350 5,116,176
<SALES> 0 0
<TOTAL-REVENUES> 393,361 115,185
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 718 724
<INCOME-PRETAX> 0 0
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<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (216,642) (861,169)
<EPS-PRIMARY> (0.26) (0.12)
<EPS-DILUTED> (0.26) (0.12)

</TABLE>