SIGA PHARMACEUTICALS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the Fiscal Year Ended Commission File No. 0-23047
December 31, 1997

SIGA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

Delaware 13-864870
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)

420 Lexington Avenue, Suite 620
New York, NY 10170
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (212) 672-9100

Securities registered pursuant to Section 12(b) of the Act:

None
(Title of Class)

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

Common Stock, $.0001 par value
(Title of Class)

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

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

As of March 27, 1998, the Registrant had outstanding 6,577,712 shares of
Common Stock. The aggregate market value of the registrant's Common Stock on
such date held by those persons deemed to be non-affiliates was approximately
$20,398,933.

PART I

Item 1. Business

Introduction

SIGA Pharmaceuticals, Inc (the "Company") is a development stage,
biopharmaceutical company focused on the discovery, development and
commercialization of vaccines, antibiotics and novel anti-infectives for serious
infectious diseases. The Company's lead vaccine candidate is for the prevention
of group A streptococcal pharyngitis or "strep throat." The Company is
developing a technology for the mucosal delivery of its vaccines which may allow
those vaccines to activate the immune system at the mucus lined surfaces of the
body - the mouth, the nose, the lungs and the gastrointestinal and urogenital
tracts - the sites of entry for most infectious agents. The Company's
anti-infectives programs, aimed at the increasingly serious problem of drug
resistance, are designed to block the ability of bacteria to attach to human
tissue, the first step in the infection process.

The Company's Technologies

Vaccine Technologies: Mucosal Immunity and Vaccine Delivery

Using proprietary technology licensed from The Rockefeller University
("Rockefeller"), the Company is developing certain commensal bacteria
("commensals") as a means to deliver mucosal vaccines. Commensals are harmless
bacteria that naturally inhabit the body's surfaces with different commensals
inhabiting different surfaces, particularly the mucosal surfaces. The Company's
vaccine candidates utilize genetically engineered commensals to deliver antigens
from a variety of pathogens to the mucosal immune system. When administered, the
genetically engineered ("recombinant") commensals colonize the mucosal surface
and replicate. By activating a local mucosal immune response, the Company's
vaccine candidates are designed to prevent infection and disease at the earliest
possible stage. By comparison, most conventional vaccines are designed to act
after infection has already occurred.

The Company's commensal vaccine candidates utilize gram-positive bacteria,
one of two major classes of bacteria. Rockefeller scientists have identified a
protein region that is used by gram-positive bacteria to anchor proteins to
their surfaces. The Company is using the proprietary technology licensed from
Rockefeller to combine antigens from a wide range of infectious organisms, both
viral and bacterial, with the surface protein anchor region of a variety of
commensal organisms. By combining a specific antigen with a specific commensal,
vaccines can be tailored to both the target pathogen and its mucosal point of
entry.

To target an immune response to a particular mucosal surface, a vaccine
would employ a commensal organism that naturally inhabits that surface. For
example, vaccines targeting sexually transmitted diseases could employ
Lactobacillus acidophilus, a commensal colonizing the female urogenital tract.
Vaccines targeting GI diseases could employ Lactobacillus casei, a commensal
colonizing the GI tract. The Company has conducted initial experiments using
Streptococcus gordonii ("S. gordonii"), a commensal that colonizes the oral
cavity and that can potentially be

used in vaccines targeting pathogens that enter through the upper respiratory
tract, such as the influenza virus.

By using an antigen unique to a given pathogen, the technology can
potentially be applied to any infectious agent that enters the body through a
mucosal surface. The Company's founding scientists have expressed and anchored a
variety of viral and bacterial antigens on the outside of S. gordonii, including
the M6 protein from group A streptococcus, a group of organisms that cause a
range of diseases, including strep throat, necrotizing fasciitis, impetigo and
scarlet fever. In addition, proteins from other infectious agents, such as HIV
and human papilloma virus have also been expressed using this system. The
Company believes this technology will enable the expression of essentially any
antigen regardless of size or shape. In animal studies, the Company has shown
that the administration of a recombinant S. gordonii vaccine prototype induces
both a local mucosal immune response and a systemic immune response.

The Company believes that mucosal vaccines developed using its proprietary
commensal delivery technology could provide a number of advantages, including:

More complete protection than conventional vaccines: Mucosal vaccines in
general may be more effective than conventional parenteral (injectable)
vaccines, due to their ability to produce both a systemic and local
(mucosal) immune response.

Potential single dose administration: The commensal delivery has the
potential to allow for long term colonization of the host, eliminating the
need for boosters, while providing an extended exposure to the selected
vaccine candidate(s).

Safety advantage over other live vectors: A number of bacterial pathogens
have been genetically rendered less infectious, or attenuated, for use as
live vaccine vectors. Commensals, by virtue of their harmless nature, offer
a safer delivery vehicle without fear of genetic reversion to the
infectious state inherent in attenuated pathogens.

Non-injection administration: Oral, nasal, rectal or vaginal administration
of the vaccine eliminates the need for painful injections with their
potential adverse reactions.

Potential for combined vaccine delivery: The Children's Vaccine Initiative
has called for the development of combined vaccines, specifically to reduce
the number of needle sticks per child, by combining several vaccines into
one injection, thereby increasing compliance and decreasing disease. The
Company believes its commensal delivery technology can be an effective
method of delivery of multi-component vaccines within a single commensal
organism that address multiple diseases or diseases caused by multiple
strains of an infectious agent.

Eliminating need for refrigeration: One of the problems confronting the
effective delivery of parenteral vaccines is the need for refrigeration at
all stages prior to injection. The stability of the commensal organisms in
a freeze-dried state would, for the most part, eliminate the need for
special climate conditions, a critical consideration, especially for the

delivery of vaccines in developing countries.

Low cost production: By using a live bacterial vector, extensive downstream
processing is eliminated, leading to considerable cost savings in the
production of the vaccine. The potential for eliminating the need for
refrigeration would add considerably to these savings by reducing the costs
inherent in refrigeration for vaccine delivery.

Anti-Infectives Technology: Prevention of Attachment and Infectivity

The bacterial infectious process generally includes three steps:
colonization, invasion and disease. The adherence of bacteria to a host's
surface is crucial to establishing colonization. Bacteria cells adhere through a
number of mechanisms, but generally by using highly specialized surface
structures which, in turn, bind to specific structures or molecules on the
host's cells or, as discussed below, to inanimate objects residing in the host.
Once adhered, many bacteria will invade the host's cells and either establish
residence or continue invasion into deeper tissues. During any of these stages,
the invading bacteria can produce the molecules (toxins) which result in the
outward manifestations of the disease. The severity of disease, while dependent
on a large combination of factors, is often the result of the ability of the
bacteria to persist in the host. These bacteria accomplish this persistence by
using surface molecules which can alter the host's nonspecific mechanisms or its
highly specific immune responses to clear or destroy the organisms.

Unlike conventional antibiotics, as discussed above, the Company's
anti-infectives approaches aim to block the ability of pathogenic bacteria to
attach to and colonize human tissue, thereby preventing infection at its
earliest stage. The Company is pursuing two anti-infective strategies: (i)
inhibiting the expression of bacterial surface proteins required for bacterial
infectivity and (ii) blocking the tissue binding sites on bacterial surface
proteins. The Company believes that these approaches have promise in the areas
of hospital-acquired drug-resistant infections and a broad range of other
diseases caused by bacteria.

Many special surface proteins used by bacteria to infect the host are
anchored in the bacterial cell wall. Scientists at Rockefeller have identified
an amino acid sequence and related enzyme, a selective protease, that are
essential for anchoring proteins to the surface of most Gram- positive bacteria.
Published information indicates that this amino acid sequence is shared by more
than 50 different surface proteins found on a variety of gram-positive bacteria.
This commonality suggests that this protease represents a promising target for
the development of a new class of antibiotic products for the treatment of a
wide range of infectious diseases. Experiments by the Company's founding
scientists at Rockefeller have shown that without this sequence, proteins cannot
become anchored to the bacterial surface and thus the bacteria are no longer
capable of attachment, colonization or infection. Such "disarmed" bacteria
should be readily cleared by the body's immune system. The Company is using a
combination of structure-based drug design and high throughput screening
procedures to identify compounds that inhibit the protease, thereby blocking the
anchoring process. If successful, this strategy should provide relief from many
Gram- positive bacterial infections, but may prove particularly important in
combating diseases caused by the emerging antibiotic resistance of the
gram-positive organisms S. aureus, Streptococcus pneumoniae, and the
enterococci.

In contrast to the above program, which focuses on gram-positive bacteria,
the Company's pilicide program, based upon initial research performed at
Washington University, focuses on a number of new and novel targets all of which
impact on the ability of gram-negative bacteria to assemble adhesive pili on
their surfaces. This research program is based upon the well- characterized
interaction between a periplasmic protein - a chaperone - and the protein
subunits required to form pili. In addition to describing the process by which
chaperones and pili subunits interact, this program has developed the assay
systems necessary to screen for potential therapeutic compounds, and has
provided an initial basis for selecting novel antibiotics that work by
interfering with the pili adhesion mechansism.

Surface Protein Expression System ("SPEX")

The ability to overproduce many bacterial and human proteins has been made
possible through the use of recombinant DNA technology. The introduction of DNA
molecules into E. coli has been the method of choice to express a variety of
gene products, because of this bacteria's rapid reproduction and well-understood
genetics. Yet despite the development of many efficient E. coli-based gene
expression systems, the most important concern continues to be associated with
subsequent purification of the product. Recombinant proteins produced in this
manner do not readily cross E. coli's outer membrane, and as a result, proteins
must be purified from the bacterial cytoplasm or periplasmic space. Purification
of proteins from these cellular compartments can be very difficult. Frequently
encountered problems include low product yields, contamination with potentially
toxic cellular material (i.e., endotoxin) and the formation of large amounts of
partially folded polypeptide chains in non-active aggregates termed inclusion
bodies.

To overcome these problems, the Company has taken advantage of its
knowledge of Gram- positive bacterial protein expression and anchoring pathways.
This pathway has evolved to handle the transport of surface proteins that vary
widely in size, structure and function. Modifying the approach used to create
commensal mucosal vaccines. The Company has developed methods which, instead of
anchoring the foreign protein to the surface of the recombinant gram-positive
bacteria, result in it being secreted into the surrounding medium in a manner
which is readily amenable to simple batch purification. The Company believes the
advantages of this approach include the ease and lower cost of gram-positive
bacterial growth, the likelihood that secreted recombinant proteins will be
folded properly, and the ability to purify recombinant proteins from the culture
medium without having to disrupt the bacterial cells and liberating cellular
contaminants. gram-positive bacteria may be grown simply in scales from those
required for laboratory research up to commercial mass production.

The Company's Product Candidates and Research and Discovery Programs

Mucosal Vaccines

Development of the Company's mucosal vaccine candidates involves: (i)
identifying a suitable immunizing antigen from a pathogen; (ii) selecting a
commensal that naturally colonizes the mucosal point of entry for that pathogen;
and (iii) genetically engineering the commensal to express the antigen on its
surface for subsequent delivery to the target population.

Strep Throat Vaccine Candidate. Until the age of 15, many children suffer
recurrent strep throat infections. Up to five percent of ineffectively treated
strep throat cases progress to rheumatic fever, a debilitating heart disease,
which worsens with each succeeding streptococcal infection. Since the advent of
penicillin therapy, rheumatic fever in the United States has experienced a
dramatic decline. However, in the last decade, rheumatic fever has experienced a
resurgence in the United States. Part of the reason for this is the latent
presence of this organism in children who do not display symptoms of a sore
throat, and, therefore, remain untreated and at risk for development of
rheumatic fever. Based on data from the Centers for Disease Control and
Prevention, there are seven to 20 million cases of pharyngitis due to group A
streptococcus in the United States each year. There are over 32 million children
in the principal age group targeted by the Company for vaccination. Worldwide,
it is estimated that one percent of all school age children in the developing
world have rheumatic heart disease. Despite the relative ease of treating strep
throat with antibiotics, the specter of antibiotic resistance is always present.
In fact, resistance to erythromycin, the second line antibiotic in patients
allergic to penicillin, has appeared in a large number of cases.

No vaccine for strep throat has been developed because of the problems
associated with identifying an antigen that is common to the more than 100
different serotypes of group A streptococcus, the bacterium that causes the
disease. The Company has licensed from Rockefeller a proprietary antigen which
is common to most types of group A streptococcus, including types that have been
associated with rheumatic fever. When this antigen was orally administered to
animals, it was shown to provide protection against multiple types of group A
streptococcal infection. Utilizing this antigen, the Company is developing a
mucosal vaccine for strep throat.

The Company's technology expresses the strep throat antigen on the surface
of the commensal, S. gordonii, which lives on the surface of the teeth and gums.
The Company believes that a single oral dose of the vaccine may be adequate to
provide protection. Indeed, investigators at other institutions have shown that
organisms of this type can safely colonize in the human oral cavity for up to
two years. The Company is currently completing pre-clinical development of its
strep throat vaccine candidate. Pre-clinical research in mice and rabbits has
established the ability of this vaccine candidate to colonize and induce both a
local and systemic immune response. The Company is collaborating with the
National Institutes of Health (the "NIH") and the University of Maryland Center
for Vaccine Development on the clinical development of this vaccine candidate.
The NIH in cooperation with the Company filed an Investigational New Drug
Application ("IND") with the United States Food and Drug Administration (the
"FDA") in December 1997. The Company anticipates commencement of clinical
studies under this IND at the University of Maryland by mid-1998.

Periodontal Vaccine Candidate. Periodontal disease is characterized by
acute soft tissue inflammation and subsequent alveolar bone loss. It is
estimated that this condition afflicts up to 50% of the adult population by the
time they reach age 65, and is a major cause of tooth loss in the older
population. In addition, animal studies conducted at the University of Minnesota
show that bacteria from the mouth which enter the blood stream via diseased gums
can induce clotting which is the pivotal event in most heart attacks and
storkes. Current treatments for periodontal disease include mechanical
debridement, tissue resection and/or antibiotic therapy. It is believed that
periodontal disease is the result of an interaction between the immune system or
the host and

a number of oral bacterial pathogens, principally Porphyromonas gingivalis ("P.
gingivalis").

The Company has entered into a collaborative research agreement with the
State University of New York at Buffalo School of Dental Medicine ("SUNY
Buffalo") to develop a mucosal vaccine to prevent periodontal disease. The
vaccine, as currently constructed, features a surface antigen, fimbrillin from
P. gingivalis delivered to the oral cavity via the Company's proprietary mucosal
vaccine delivery system. In preclinical trials, mucosal immunization with, or
direct delivery of, fimbrillin-derived peptides to the oral cavity of germ-free
rats blocked the ability of P. gingivalis to colonize in the rats upon
subsequent challenge, and dramatically reduced associated periodontal disease
and bone loss. Additional clinical studies of the bacterial vector for this
vaccine candidate will be conducted in spring 1998.

Two vaccine candidates are currently being studied in pre-clinical animal
colonization and challenge experiments. In addition, the Company has undertaken
an early stage clinical evaluation of the proposed commensal bacterial vector
for this program, S. gordonii. These clinical studies are designed to optimize
the preparation of the vector for adherence to mucosal membranes and teeth, as
well as methods to remove the vector should it be clinically indicated.

STD Vaccine Candidates. One of the great challenges in vaccine research
remains the development of effective vaccines to prevent sexually transmitted
viral diseases. The three principal viral pathogens which are transmitted via
this route are Herpes simplex, type 2 ("HSV- 2") which causes recurrent genital
ulcers, HIV, the causative agent of AIDS, and human papilloma virus (HPV) which
is linked to both genital warts and cervical carcinoma. To date, a great deal of
effort has been expended, without appreciable success, to develop effective
injectable prophylactic vaccines versus these pathogens. Given that each of
these viruses enters the host through the mucosa, the Company believes that
induction of a vigorous mucosal response to viral antigens may protect against
acquisition of the initial infection. To test this hypothesis, the Company is
expressing known immunodominant antigens from each of these viral pathogens in
its proprietary mucosal vaccine delivery system. These live recombinant vaccines
will be delivered to animals and tested for local and systemic immune response
induction, and whether these responses can block subsequent viral infections.
The Company is collaborating with Chiron Corporation on research toward the
development of vaccines against two sexually transmitted diseases.

Mucosal Vaccine Delivery System

The Company is also developing a proprietary mucosal vaccine delivery
system which is a component of the Company's vaccine candidates and which the
Company intends to license to other vaccine developers. The Company's commensal
vaccine candidates utilize gram-positive bacteria as vectors for the
presentation of antigens. Scientists at Rockefeller have identified a protein
region used by gram-positive bacteria to anchor proteins to their surfaces. The
Company is using proprietary technology licensed from Rockefeller to anchor
antigens from a wide range of infectious organisms, both viral and bacterial, to
the surface protein anchor region of a variety of commensal organisms. By
combining a specific antigen with a specific commensal, the

Company believes that vaccines can be tailored to both the target pathogen and
its mucosal point of entry.

The Company has developed several genetic methods for recombining foreign
sequences into the genome of gram-positive bacteria at a number of non-essential
sites. Various parameters have been tested and optimized to improve the level of
foreign protein expression and its immunogenicity. In pre-clinical studies,
recombinant commensals have been implanted into the oral cavities of several
animal species with no deleterious effects. The introduced vaccine strains have
taken up residence for prolonged periods of time and induce both a local mucosal
(IgA) as well as a systemic immune response (IgG and T-cell).

The current and proposed clinical studies by the NIH at the University of
Maryland, and by the Company, are designed to evaluate the function of S.
gordonii as a commensal bacterial vector for vaccines designed to prevent strep
throat and periodontal disease, respectively. These studies are designed to
evaluate preparatory procedures to optimize adherence of the commensal vector to
mucosal membranes and teeth. It is also recognized that on rare occasions it may
be clincially warranted to remove the recombinant commensal. Therefore, these
studies will also evaluate the use of existing antibiotics in the eradication of
recombinant commensal bacteria.

Anti-Infectives

The Company's anti-infectives program is targeted principally toward
drug-resistant bacteria and hospital-acquired infections. According to estimates
from the Centers for Disease Control, approximately two million
hospital-acquired infections occur each year in the United States.

The Company's anti-infectives approaches aim to block the ability of
bacteria to attach to and colonize human tissue, thereby blocking infection at
the first stage in the infection process. By comparison, antibiotics available
today act by interfering with either the structure or the metabolism of a
bacterial cell, affecting its ability to survive and to reproduce. No currently
available antibiotics target the attachment of a bacterium to its target tissue.
By preventing attachment, the bacteria should be readily cleared by the body's
immune system.

Gram-Positive Antibiotic Technology. The Company's lead anti-infectives
program is based on a novel target for antibiotic therapy. The Company's
founding scientists have identified an enzyme, a selective protease, utilized by
most gram-positive bacteria to anchor certain proteins to the bacterial cell
wall. These surface proteins are the means by which certain bacteria recognize,
adhere to and colonize specific tissue. The Company's strategy is to develop
protease inhibitors. The Company believes protease inhibitors will have wide
applicability to gram-positive bacteria in general, including antibiotic
resistant staphlyococcus and a broad range of serious infectious diseases
including meningitis and respiratory tract infections. The Company has entered
into a collaborative research and license agreement with the Wyeth-Ayerst
Laboratories Division of American Home Products Corporation ("Wyeth-Ayerst") to
identify and develop protease inhibitors as novel antibiotics.

Gram-Negative Antibiotic Technology The Company recently entered into a set
of technology transfer and related agreements with MedImmune, Inc.
("MedImmune"), Astra AB and The Washington University, St. Louis ("Washington
University"), pursuant to which the Company has acquired all of the rights to
gram-negative antibiotic targets, products, screens and services developed at
Washington University. The Company and MedImmune plan to collaborate in the
development of antibiotics against gram-negative pathogens. These bacteria
utilize structures called pili to adhere to target tissue, and the Company plans
to exploit the assembly and export of these essential infective structures as
novel anti-infective targets.

Research carried out at Washington University has demonstrated that
assembly of type P pili on gram-negative bacteria requires the participation of
both a periplasmic molecular chaperone and an outer membrane usher. Since the
gram-negative pili are the primary mechanism by which these organisms adhere to
and colonize host tissue, inhibition of their assembly should effectively
inhibit disease caused by this class of organisms. Detailed structural data is
available on the molecular chaperone and scientists at Washington University are
developing the same for the usher protein. This information has been used in
concert with molecular modeling techniques to identify potential structures that
will bind to the conserved residues of the chaperone and usher proteins. With
identification of these structures, natural and synthetic molecules that inhibit
chaperone/usher function can be screened using high throughput assays developed
by scientists at Washington University. The Company believes that this approach
is a departure from conventional antibiotics and therefore may afford a method
to circumvent the resistance mechanisms already established in many
gram-negative bacteria.

Scientists at Washington University have elucidated the role of chaperones
- - a family of periplasmic proteins - in the formation of pili, which are
essential for the virulence of certain gram-negative bacteria, such as E. coli
or the Enterobacteriaceae (Salmonella, Shigella, Klebsiella, etc.). The
elucidation of this pathway provides several targets for the development of
novel anti-infectives: (i) blocking the interaction between chaperones and pilin
subunits; (ii) interfering with chaperone-dependent folding of pilin subunits;
or (iii) interfering with how pilin subunits exit from the bacteria's outer
membrane (through the "usher" component). The chaperone-pilin complex has been
examined using x-ray crystallography, and assays measuring the chaperone
interactions have been established. The Company and Washington University are
reviewing potential compounds which interfere with the chaperone-pilin
interaction, as well as seeking alternative intervention sites in the pilus
formation pathway.

Surface Protein Expression System

The Company's proprietary SPEX protein expression uses the protein export
and anchoring pathway of gram-positive bacteria as a means to facilitate the
production and purification of biopharmaceutical proteins. The Company has
developed vectors which allow foreign genes to be inserted into the chromosome
of gram-positive bacteria in a manner such that the encoded protein is
synthesized, transported to the cell surface and secreted into the medium. This
system has been used to produce milligram quantities of soluble antigenically
authentic protein that can be easily purified from the culture medium by
affinity chromatography. The Company believes this

technology can be extended to a variety of different antigens and enzymes.

The Company has commenced yield optimization and process validation of
this system. This program is designed to transfer the method from a laboratory
scale environment to a commercial production facility. The Company intends to
begin the non-exclusive licensing of this technology for a broad range of
applications during 1998.

Collaborative Research and Licenses

The Company sponsors research and development activities in laboratories at
Rockefeller, Oregon State, SUNY Buffalo, and Washington University. The
Company's own research and development facility is under construction in
Corvallis, Oregon. Construction scheduled to be completed in June 1998. The
Company has entered into the following license agreements and collaborative
research arrangements:

Rockefeller University. The Company and Rockefeller have entered into an
exclusive worldwide license and research agreement whereby the Company has
obtained the right and license to make, use and sell mucosal vaccines based on
gram-positive organisms and products for the therapy, prevention and diagnosis
of diseases caused by streptococcus, staphylococcus and other organisms. The
license covers two issued United States patents and one issued European patent
as well as 11 pending United States patent applications and corresponding
foreign patent applications. The issued United States patents expire in 2005 and
2014, respectively. The agreement generally requires the Company to pay
royalties on sales of products developed from the licensed technologies and fees
on revenues from sublicensees, where applicable, and the Company is responsible
for certain milestone payments and for the costs of filing and prosecuting
patent applications. Pursuant to the agreement, the Company is providing funding
to Rockefeller for sponsored research through January 31, 1999, with exclusive
license rights to all inventions and discoveries resulting from this research.

Oregon State. Oregon State is also a party to the Company's license
agreement with Rockefeller whereby the Company has obtained the right and
license to make, use and sell products for the therapy, prevention and diagnosis
of diseases caused by streptococcus. Because the license relates to one of the
pending United States patent applications covered by the Rockefeller license,
the Company has agreed to reimburse Rockefeller for Oregon State's patent
expenses and Rockefeller will remit such amounts to Oregon State. Pursuant to a
separate research support agreement with Oregon State, the Company is providing
funding for sponsored research through January 31, 1999, with exclusive license
rights to all inventions and discoveries resulting from this research. At the
time the Company opens its own research facilities in Corvallis, a significant
portion of the research being conducted at Oregon State will be transferred to
the Company.

National Institutes of Health. The Company has entered into a clinical
trials agreement with the NIH pursuant to which the NIH, with the cooperation of
the Company, will conduct a clinical trial of the Company's strep throat
vaccine.

SUNY Buffalo. The Company has entered into a research agreement with SUNY
Buffalo to develop a mucosal vaccine to prevent periodontal disease. Pursuant to
the agreement, the Company is providing funding for sponsored research through
June 30, 1998 and has an exclusive option to license all inventions and
discoveries resulting from this research.

Wyeth-Ayerst. The Company has entered into a collaborative research and
license agreement with Wyeth-Ayerst in connection with the discovery and
development of anti-infectives for the treatment of gram-positive bacterial
infections. Pursuant to the agreement, Wyeth-Ayerst is providing funding for a
joint research and development program through June 30, 1999 and is responsible
for additional milestone payments.

Chiron. The Company has entered into a collaborative research agreement
with Chiron regarding research toward the development of vaccines against two
sexually transmitted diseases. The agreement was entered into as of July 1, 1997
and expires on July 1, 1998. Pursuant to the agreement, each company retains
sole rights to any technology invented solely by such company and the companies
will jointly own any technology jointly developed by the companies.

Washington University. The Company has entered into a research
collaboration and worldwide license agreement with the Washington University
pursuant to which the Company has obtained the right and license to make, use
and sell antibiotic products based on gram-negative technology for all human and
veterinary diagnostic and therapeutic uses. The license covers five pending
United States patent applications and corresponding foreign patent applications.
The agreement generally requires the Company to pay royalties on sales of
products developed from the licensed technologies and fees on revenues from
sublicensees, where applicable, and the Company is responsible for certain
milestone payments and for the costs of filing and prosecuting patent
applications. Pursuant to the agreement, the Company has agreed to provided
funding to Washington University for sponsored research through February 6,
2000, with exclusive license rights to all inventions and discoveries resulting
from this research.

Patents and Proprietary Rights

Protection of the Company's proprietary compounds and technology is
essential to the Company's business. The Company's policy is to seek, when
appropriate, protection for its lead compounds and certain other proprietary
technology by filing patent applications in the United States and other
countries. The Company has licensed the rights to two issued United States
patents and one issued European patent. The Company has also licensed the rights
to 17 pending United States patent applications as well as corresponding foreign
patent applications. The two issued United States patents expire in 2005 and
2014, respectively.

The patents and patent applications licensed by the Company relate to all
of the core technology used in the development of the Company's leading product
candidates, including the mucosal vaccine delivery system, the SPEX protein
expression system for producing biopharmaceutical products, the protective
streptococcal antigens and the antibiotic development target, as well as a
variety of early stage research projects. Each of the Company's products

represented by each of the patents is in a very early stage in its development
process.

The Company also relies upon trade secret protection for its confidential
and proprietary information. No assurance can be given that other companies will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or that the
Company can meaningfully protect its trade secrets.

Government Regulation

Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
products that may be developed by the Company. The nature and the extent to
which such regulation may apply to the Company will vary depending on the nature
of any such products. Virtually all of the Company's potential products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, human therapeutic products are subject to rigorous pre-clinical
and clinical testing and other approval procedures by the FDA and similar health
authorities in foreign countries. Various federal statutes and regulations also
govern or influence the manufacturing, safety, labeling, storage, record keeping
and marketing of such products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations requires the expenditure of substantial resources.

In order to test clinically, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company must
file an IND and receive clearance from the FDA. This application is a summary of
the pre-clinical studies that were conducted to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies that are being proposed.

The pre-marketing program required for approval of a new drug typically
involves a time-consuming and costly three-phase process. In Phase I, trials are
conducted with a small number of patients to determine the early safety profile,
the pattern of drug distribution and metabolism. In Phase II, trials are
conducted with small groups of patients afflicted with a target 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
for statistical proof of efficacy and safety required by the FDA and others.

The FDA closely monitors the progress of each of the three phases of
clinical testing and may, in its discretion, reevaluate, alter, suspend or
terminate the testing based on the data that have been accumulated to that point
and its assessment of the risk/benefit ratio to the patient. Estimates of the
total time required for carrying out such clinical testing vary between two and
ten years. Upon completion of such clinical testing, a company typically submits
a New Drug Application ("NDA") or Product License Application ("PLA") to the FDA
that summarizes the results and observations of the drug during the clinical
testing. Based on its review of the NDA

or PLA, the FDA will decide whether to approve the drug. This review process can
be quite lengthy, and approval for the production and marketing of a new
pharmaceutical product can require a number of years and substantial funding;
there can be no assurance that any approvals will be granted on a timely basis,
if at all.

Once the product is approved for sale, FDA regulations govern the
production process and marketing activities, and a post-marketing testing and
surveillance program may be required to monitor continuously a product's usage
and its effects. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained. Other countries in which any products
developed by the Company may be marketed impose a similar regulatory process.

Competition

The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include most of the major pharmaceutical companies, which have financial,
technical and marketing resources significantly greater than those of the
Company. Biotechnology and other pharmaceutical competitors include Cubist
Pharmaceuticals, Inc., Microcide Pharmaceuticals, Inc., Oravax, Inc., Maxim
Pharmaceuticals, Inc., ID Vaccines Ltd., Actinova PLC, and Vaxcel, Inc. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint venture.
There can be no assurance that the Company's competitors will not succeed in
developing products that are more effective or less costly than any which are
being developed by the Company or which would render the Company's technology
and future products obsolete and noncompetitive.

Human Resources and Facilities

As of March 27, 1998 the Company had 10 full time employees. The Company's
employees are not covered by a collective bargaining agreement and the Company
considers its employee relations to be excellent.

Item 2. Properties

The Company's headquarters are located in New York, New York and its
research and development facilities (when completed) will be located in
Corvallis, Oregon. In New York, the Company leases approximately 5,200 square
feet under a lease that expires in November 2002. In Corvallis, the Company
leases approximately 10,000 square feet under a lease that expires in December
2005.

Item 3. Legal Proceedings

None.

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

During the fourth quarter of 1997, no matter was submitted to a vote of the
security holders of the Company.

Part II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters

Price Range of Common Stock

The Company's Common Stock commenced trading on the Nasdaq SmallCap Market
on September 9, 1997 under the symbol "SGPH." The following table sets forth,
for the periods indicated, the high and low sales prices for the Common Stock,
as reported on the Nasdaq SmallCap Market.

Price Range
1997 High Low
- ---- ---- ---
Third Quarter (from September 9, 1997) $ 6 1/8 $ 5
Fourth Quarter 7 3 1/4
1998
- ----
First Quarter (through March 27, 1998) 4 7/8 4

As of March 27, 1998, there were approximately 47 holders of record of the
Common Stock. The Company believes that the number of beneficial owners is
substantially greater than the number of record holders, because a large portion
of the Common Stock is held of record in broker "street names."

The Company has paid no dividends on its Common Stock and does not expect
to pay cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.

Sales of Unregistered Securities in 1997

On February 28, 1997, the Company completed a bridge financing pursuant to
which the Company issued bridge notes in the aggregate principal amount of
$1,000,000 and bridge warrants to purchase 100,000 shares in aggregate of the
Company's Common Stock an exercise price equal to $5.00 per share. The bridge
financing was exempt from registration under the Securities Act of 1933, as
amended (the "Act"), pursuant to Regulation D under the Act, as it was a
transaction not involving a public offering.

Certain Information Concerning the Company's Initial Public Offering

Set forth below is certain information concerning the Company's initial
public offering (the "Offering").

1. Prior to commencing the Offering, the Company filed a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission"), pursuant to the Act, in order to register the
shares of the Common Stock that the Company proposed to offer. The Commission
file number assigned to the Registration Statement is 333- 23037. The
Registration Statement was declared effective by the Commission on September 9,
1997.

2. The Offering commenced on July 11, 1997 and was completed on October 15,
1997.

3. The underwriters for the Offering were Sunrise Securities Corp.
("Sunrise") and M.H. Meyerson & Co., Inc.

4. The Registration Statement set forth a "Proposed Maximum Aggregate
Offering Price" of $14,375,000.

5. The Company sold in the Offering an aggregate of 2,875,000 shares of
Common Stock at an initial public offering price of $5.00 per share. The
aggregate public offering price of the shares sold in the Offering was
$14,375,000.

6. During the period from September 9, 1997 (the effective date of the
Registration Statement) through December 31, 1997, the total expenses paid by
the Company related to the Offering (determined on a cash basis) was $2,195,391
and consisted of the following:

a. $1,753,750 paid to the underwriters in respect of the underwriting
discount and non-accountable expense allowance;

b. $441,641 of other expenses.

7. None of the payments described in paragraph 6 above represented a direct
or indirect payment to (i) directors, officers or general partners of the
Company or to their associates, (ii) persons owning 10% or more of any class of
equity securities of the Company or (iii) affiliates of the Company.

8. After deducting the payments described in paragraph 6 above, the amount
of Offering proceeds that remained was $12,179,609. The Company used $1,058,306
of such proceeds to repay the bridge notes. As of December 31, 1997, the balance
of such proceeds was invested in cash reserves in bank deposits, certificates of
deposit, commercial paper, corporate notes, U.S. government instruments and
other investment-grade quality instruments.

Item 6. Plan of Operation

Results of Operations

The Company is a development stage, biopharmaceutical company. Since its
inception in December 1995, the Company's efforts have been principally devoted
to research and development, securing patent protection and raising capital.
From inception through December 31, 1997, the Company has sustained cumulative
losses of $4,463,814, including non-cash charges in the amount of $436,043 for
stock option and warrant compensation expense. These losses have resulted
primarily from expenditures incurred in connection with research and
development, patent preparation and prosecution and general and administrative
activities. From inception through December 31, 1997, research and development
expenses amounted to $1,608,990, patent preparation and prosecution expenses
amounted to $740,206 and general and administrative expenses amounted to
$2,343,503. From inception through December 31, 1997, total revenues from
research and development collaborative agreements totaled $675,000.

The Company expects to continue to incur substantial research and
development costs in the future resulting from ongoing research and development
programs, manufacturing of products for use in clinical trials and pre-clinical
and clinical testing of the Company's products. The Company also expects that
general and administrative costs, including patent and regulatory costs,
necessary to support clinical trials, research and development, manufacturing
and the creation of a marketing and sales organization, if warranted, will
increase in the future. Accordingly, the Company expects to incur increasing
operating losses for the foreseeable future. There can be no assurance that the
Company will ever achieve profitable operations.

To date, the Company has not marketed, or generated revenues from the
commercialization of, any products. The Company's current product candidates are
not expected to be commercially available for several years.

Revenues from research and development collaborative agreements from
inception through December 31, 1997 were $675,000, related to a collaborative
research and license agreement entered into with a pharmaceutical company.

General and administrative expenses from inception through December 31,
1997 were $2,343,503, primarily due to personnel costs and associated operating
costs. The Company anticipates that general and administrative expenses will
increase substantially during the next 12 months as the Company increases its
staffing levels.

Research and development expenditures consist primarily of payments for
sponsored research, payments to its scientific consultants and the salaries of
its research staff. Research and development expenses from inception through
December 31,1997 were $1,608,990. As of December 31, 1997, the Company had made
advance payments of $11,684 for research support to Rockefeller for the period
ending January 31, 1998. The Company has research support agreements with both
Emory and Oregon State pursuant to which the Company is obligated to fund
research through January 31, 1998 in the aggregate annual amount of $183,320.
The

Company anticipates that its research and development expenses will increase
during the next 12 months as the Company continues to fund research programs and
pre-clinical and clinical testing for its product candidates and technologies
under development.

From inception through December 31, 1997, the Company recorded non-cash
compensation expense in the amount of $436,043 primarily related to the issuance
of compensatory stock options and warrants to the Chief Executive Officer of the
Company and a consultant who serves as the Company's Chief Scientific Advisor.
The warrants issued to the consultant were to compensate him for his efforts in
introducing the Company to potential collaborative partners.

Liquidity and Capital Resources

Initial Public Offering

In September and October 1997, the Company completed the Offering of
2,875,000 shares of its common stock at an offering price of $5.00 per share.
The Company realized gross proceeds of $14,375,000 and net proceeds, after
deducting underwriting discounts and commissions, and other offering expenses
payable by the Company, of $12,179,609.

In September 1997, upon the initial closing of the Offering, the Company
repaid, as required by the bridge note agreements, bridge notes in the principal
amount of $1,000,000 and accrued interest thereon in the amount of $58,306.

1996 Private Placement Transactions

In March 1996, the Company completed a private placement transaction in
which it sold 1,038,008 shares of Common Stock for an aggregate gross
consideration of $1,557,000. In September 1996, the Company completed a private
placement transaction in which it sold 250,004 shares of Common Stock for an
aggregate gross consideration of $750,000.

Collaborative Research and License Agreement

In July 1997, the Company entered into a collaborative research and license
agreement with Wyeth-Ayerst. Under the terms of the agreement, the Company has
granted Wyeth-Ayerst an exclusive worldwide license to develop, make, use and
sell products derived from specified technologies. The agreement requires
Wyeth-Ayerst to sponsor further research by the Company for the development of
the licensed technologies for a period of two years from the effective date of
the agreement, in return for payments to the Company totaling $1,200,000. An
initial sponsored research payment in the amount of $300,000 was received by the
Company within 30 days of the execution of the agreement. The remaining
sponsored research payments are payable in equal quarterly installments over the
two years

In consideration of the license grant, the Company is entitled to receive
royalties equal to specified percentages of net sales of products incorporating
the licensed technologies. The royalty

percentages increase as certain cumulative and annual net sales amounts are
attained. The Company could receive milestone payments, up to $13,750,000 for
the initial product and up to $3,250,000 for the second product developed from a
single compound derived from the licensed technologies. The Company could also
receive, under certain circumstances, additional milestone payments, for an
additional compound, as defined in the agreement, developed from the licensed
technologies. Such milestone payments are contingent upon the Company meeting
the milestones set forth in the agreement, and, accordingly, if the Company is
unable to meet such milestones, the Company will not receive such milestone
payments. The Company reached the first research milestone in November 1997
related to the delivery of sufficient sortase to allow the commencement of
screening assay development. During the year ended December 31, 1997, the
Company recognized $675,000 in revenue related to this agreement.

Current Resources

The Company anticipates that its current resources will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures through at least 1999. In addition, the Company will attempt to
generate additional working capital through a combination of collaborative
agreements, strategic alliances and equity and debt financings. However, no
assurance can be provided that additional capital will be obtained through these
sources. In addition, until September 1998, the prior written consent of Sunrise
is required if the Company seeks to raise additional funds through the issuance
of equity.

The Company's working capital and capital requirements will depend upon
numerous factors, including progress of the Company's research and development
programs; pre-clinical and clinical testing; timing and cost of obtaining
regulatory approvals; levels of resources that the Company devotes to the
development of manufacturing and marketing capabilities; technological advances;
status of competitors; and ability of the Company to establish collaborative
arrangements with other organizations.

Until required for operations, the Company's policy is to invest its cash
reserves in bank deposits, certificates of deposit, commercial paper, corporate
notes, U.S. government instruments and other investment-grade quality
instruments.

At December 31, 1997, the Company had $10,674,104 in cash and cash
equivalents, and working capital of $10,413,878.

Product Research and Development Plan

The Company's plan of operation for the next 12 months will consist
primarily of research and development and related activities including:

Formulation and further pre-clinical and clinical development of the
Company's vaccine vector candidates for strep throat, periodontal disease
and other vaccine applications.

Formulation and further pre-clinical and clinical development of the
Company's vaccine candidate for strep throat, and if successful, the
initiation of clinical trials.

Further development of the Company's anti-infectives programs aimed at
blocking the function or expression of certain bacterial surface proteins
in both gram-positive and gram-negative bacteria.

Continued funding of the academic research on mucosal vaccine delivery
systems, mucosal vaccine candidates and novel anti-infectives currently
being conducted at a number of universities.

Continuing the prosecution and filing of patent applications.

Hiring additional employees, including filling senior positions in the
areas of business development and regulatory and clinical affairs.

The actual research and development and related activities of the Company
may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, and other factors.

Item 7. Financial Statements and Supplementary Data

The information called for by this Item 7 is included following the "Index
to Financial Statements" contained in this Annual Report on Form 10-KSB.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The directors, officers and key employees of the Company are as follows:

Name Age Position
- ---- --- --------
David H. de Weese 54 Chairman and Chief Executive Officer
Walter Flamenbaum, M.D. 55 President and Chief Operating Officer
Joshua D. Schein, Ph.D* 37 Executive Vice President, Chief Financial Officer,
Secretary and Director

Judson A. Cooper 37 Executive Vice President, Director
Thomas N. Konatich* 52 Chief Financial Officer, Treasurer and Secretary
Dennis E. Hruby, Ph.D 45 Vice President of Research
Donald S. Howard 69 Director
Terence E. Downer 58 Director
- ---------------
* Effective April 1, 1998, Mr. Konatich will replace Dr. Schein as Chief
Financial Officer of the Company.

David H. de Weese has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since November 1996. Mr. DeWeese also
served as President of the Company from November 1996 until February 1998. Prior
to joining the Company, Mr. de Weese served as a director and a consultant to
Biovector Therapeutics, S.A., a developer of drug delivery technology based in
France, and as an advisor to Paul Capital Partners, L.P., a private equity
investment manager with whom he maintains a consulting relationship. From 1993
to 1995, Mr. de Weese was President, Chief Executive Officer and a Director of
M6 Pharmaceuticals, Inc, a biopharmaceutical company. From 1986 to 1992, Mr. de
Weese was the President, Chief Executive Officer, a Director and a founder of
Cygnus Therapeutic Systems (now Cygnus, Inc.), a developer and manufacturer of
transdermal drug delivery systems. Prior to that, Mr. de Weese co-founded
Medical Innovations Corporation, a medical device business currently a division
of Ballard Medical Products, Inc., and was Chairman of the Board, President and
Chief Executive Officer of Machine Intelligence Corporation, a developer of
computer software and hardware. Mr. de Weese is a director of Bioject Medical
Technologies, Inc., a publicly traded biotechnology company. Mr. de Weese
received his M.B.A. from the Harvard University Graduate School of Business.

Walter Flamenbaum, M.D. became President and Chief Operating Officer of the
Company in February 1998. Prior to joining the Company, he served as principal
in The Plumtree Group, Ltd., which provided consulting services to the
biomedical industry. From 1993 to 1997, he was President, Chief Executive
Officer and a Director of Therics, Inc., a medical products company which he
founded in association with the Johnson & Johnson Development Corporation. From
1986 to 1993, Dr. Flamenbaum was President, a Director and Chief Medical Officer
of Health & Sciences Research, Inc., and its predecessor companies, a contract
research organization which he founded. He was also Group Vice President,
Clinical Research Group, of TSI Incorporated. Prior to 1992, he was Chief,
Division of Nephrology at the Beth Israel Medical Center, New York, NY, and
remains a clinical professor of medicine at the Mount Sinai School of Medicine.
Dr. Flamenbaum received his MD degree from Columbia University's College of
Physicians & Surgeons.

Joshua D. Schein, Ph. D. has served as an Executive Vice President of the
Company since December 1996 and Chief Financial Officer, Secretary and a
Director of the Company since December 1995. Dr. Schein is being replaced by Mr.
Konatich as Chief Financial Officer as of April 1, 1998. Dr. Schein is a
Director of DepoMed, Inc., a publicly traded biotechnology company. Dr. Schein
also serves as Executive Vice President and Director of Virologix Corporation, a
private biotechnology company ("Virologix"). Additionally, Dr. Schein

serves as Chief Financial Officer and a Director of Callisto Pharmaceuticals,
Inc., a privately held, development stage, pharmaceutical company (Callisto").
From October 1994 to December 1995, Dr. Schein served as a Vice President of
Investment Banking at Josephthal, Lyon and Ross, Incorporated, an investment
banking firm. From June 1991 to September 1994, Dr. Schein was a Vice President
at D. Blech & Company, Incorporated, a merchant hank that invested in the
biopharmaceutical industry. Dr. Schein received a Ph.D. in neuroscience from the
Albert Einstein College of Medicine and an MBA from the Columbia Graduate School
of Business. Dr. Schein is a principal of CSO Ventures LLC ("CSO") and Prism
Ventures LLC ("Prism"), privately held limited liability companies. See "Certain
Relationships and Related Transactions."

Judson A. Cooper has served as Executive Vice President of the Company
since November 1996 and a Director of the Company since December 1995 and served
as President from December 1995 until November 1996. Mr. Cooper is a Director of
DepoMed, Inc., a publicly traded biotechnology company. Mr. Cooper also serves
as Chief Financial Officer and Director of Virologix. Additionally, Mr. Cooper
serves as President and a Director of Callisto. Mr. Cooper had been a private
investor from September 1993 to December 1995. From 1991 to 1993, Mr. Cooper
served as a Vice President of D. Blech & Company, Incorporated. Mr. Cooper is a
graduate of the Kellogg School of Management. Mr. Cooper is a principal of CSO
and of Prism. See "Certain Relationships and Related Transactions."

Thomas N. Konatich will serve as Chief Financial Officer and Treasurer of
the Company beginning on April 1, 1998. From November 1996 through March 1998,
Mr. Konatich served as Chief Financial Officer and a Director of Innapharma,
Inc., a privately held pharmaceutical development company. From 1993 through
November 1996, Mr. Konatich served as Vice President and Chief Financial Officer
of Seragen, Inc., a publicly traded biopharmaceutical development company. From
1988 to 1993, he was Treasurer of Ohmicron Corporation, a venture capital firm.
Mr. Konatich has an MBA from the Columbia Graduate School of Business.

Dennis F. Hruby, Ph.D. has served as Vice-President of Research of the
Company since April 1,1997. From January 1996 through March 1997, Dr. Hruby
served as a senior scientific advisor to the Company. Dr. Hruby is a Professor
of Microbiology at Oregon State University, and from 1990 to 1993 was Director
of the Molecular and Cellular Biology Program and Associate Director of the
Center for Gene Research and Biotechnology. From 1993 to 1995, Dr. Hruby served
as Vice-President of Research for M6 Pharmaceuticals, Inc. Dr. Hruby specializes
in virology and cell biology research, and the use of viral and bacterial
vectors to produce recombinant vaccines. Dr. Hruby has published more than 100
research, review articles and book chapters. He is a member of the American
Society of Virology, the American Society for Microbiology and a fellow of the
American Academy of Microbiology. Dr. Hruby received a Ph.D. in microbiology
from the University of Colorado Medical Center and a B.S. in microbiology from
Oregon State University.

Donald S. Howard has served as a Director of the Company since September
1997. Mr. Howard has served as a consultant to a number of financial
institutions since 1994. Mr. Howard served as Executive Vice President and Chief
Financial Officer and a Managing Director of

Salomon Brothers from 1988 to 1993. From 1980 to 1988, Mr. Howard served as
Executive Vice President and Chief Financial Officer of Citicorp, Inc. Prior to
that time, Mr. Howard held numerous positions at Citicorp, Inc. Mr. Howard is
currently a director of Green Garden Inc., Consolidated Purchasing Services,
Bank Leumi [USA] and Green Tree Financial Corp.

Terence E. Downer has served as a Director of the Company since July 1,
1997. Mr. Downer served as Vice President, Corporate Development of Janssen
Pharmaceutica, Inc., an affiliate of Johnson & Johnson, from 1991 to June 1997.
Mr. Downer has worked in the pharmaceutical industry for Johnson & Johnson and
its affiliates for over 30 years and has held senior positions in sales,
marketing, research and business development. In addition to Janssen
Pharmaceutica, Inc., Mr. Downer was also involved in starting up two other
companies for Johnson & Johnson, Cyclex, Inc. and Critikon, Inc. Mr. Downer is
on the Board of the National Organization of Orthopaedic Nurses and is the New
Jersey Program Chair for the Licensing Executive Society.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports that they file.

Based solely upon review of the copies of such reports furnished to the
Company and written representations from certain of the Company's executive
officers and directors that no other such reports were required, the Company
believes that during 1997 all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten-percent beneficial owners were
complied with on a timely basis.

Item 10. Executive Compensation

The following table summarizes the total compensation of the Chief
Executive Officer of the Company for 1997 and the two previous years, as well as
all other executive officers of the Company who received compensation in excess
of $100,000 for 1997.

Summary Compensation Table

Annual Compensation Long Term Compensation
------------------------------ ------------------------------
Stock
Other Annual Underlying All Other
Name/ Year Salary Bonuses Compensation Options/ Compensation
Principal Position Warrants
- --------------------------- ---- -------- ------- ------------ --------- -----------

David H. de Weese, Chairman 1997 $231,923 -- -- (5) 16,667 --
Chief Executive Officer and 1996 21,635 (1) -- -- (5) 477,683 --
President

Annual Compensation Long Term Compensation
------------------------------ ------------------------------
Stock
Other Annual Underlying All Other
Name/ Year Salary Bonuses Compensation Options/ Compensation
Principal Position Warrants
- --------------------------- ---- -------- ------- ------------ --------- -----------

Joshua D. Schein, Ph.D., 1997 154,616 (2) -- -- (5) 16,667 --
Executive Vice President,
Chief Financial Officer 1996 153,116 (2) -- -- (5) 16,667 --
and Director

Judson A. Cooper, 1997 154,616 (3) -- -- (5) 16,667 --
Executive Vice 1996 153,116 (3) -- -- (5) 16,667 --
President and Director

Dennis E. Hruby, Ph.D., 1997 78,549 (4) -- 27,366 10,000 --
Vice President of Research 1996 50,000 -- -- (5) -- --

- --------------------
(1) Mr. de Weese became Chairman, President and Chief Executive Officer of the
Company in November 1996.
(2) Does not include Dr. Schein's share ($40,000) of payments made to CSO. See
"Certain Relationships and Related Transactions."
(3) Does not include Mr. Cooper's share ($40,000) of payments made to CSO. See
"Certain Relationships and Related Transactions."
(4) Dr. Hruby became Vice President of Research on April 1, 1997. He was a
consultant to the Company in 1996 and the first quarter of 1997.
(5) Aggregate amount does not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for the named officer.

The following tables set forth information with respect to the named
executive officers concerning the grant, repricing and exercise of options
during the last fiscal year and unexercised options held as of the end of the
fiscal year.

Option Grants for the Year Ended December 31, 1997

Common Stock % of Total
Underlying Options Granted Exercise Expiration
Name Options Granted(1) to Employees Price Per Share Date
- ---- ----------------- --------------- --------------- ----

David H. de Weese. 16,667 27.8% $5.00 11/18/07
Joshua D. Schein.. 16,667 27.8% $5.00 9/15/02
Judson A. Cooper.. 16,667 27.8% $5.00 9/15/02
Dennis E. Hruby... 10,000 16.6% $5.00 4/1/07

- ------------
(1) All options were granted pursuant to the Company's 1996 Stock Option Plan.

Aggregated Option Exercises for the Year Ended December 31, 1997 and Option
Values as of December 31, 1997:

Number of Securities
Shares Underlying Unexercised Options Value of Unexercised
Acquired Value at December 31, 1997 In-the-Money Options(1)
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ------------ -------------

David H. de
Weese(2)....... -- -- 33,334 -- $27,084 --

Joshua D.
Schein, Ph.D... -- -- 33,334 -- 52,084 --

Judson A.
Cooper......... -- -- 33,334 -- 52,084 --

Dennis E.
Hruby............ -- -- 10,000 -- 0 --

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

(1) Based upon the closing price on December 31, 1997 as reported on the Nasdaq
SmallCap Market and the exercise price per option.
(2) Excludes warrants, 50% of which were exercisable on December 31, 1997, to
purchase 461,016 shares of Common Stock at an exercise price of $3.00 per
share.

Stock Option Plan

As of January 1, 1996, the Company adopted its 1996 Incentive and
Non-Qualified Stock Option Plan (the "Plan"), pursuant to which stock options
may be granted to key employees, consultants and outside directors.

The Plan is administered by a committee (the "Committee") comprised of
disinterested directors. The Committee will determine persons to be granted
stock options, the amount of stock options to be granted to each such person,
and the terms and conditions of any stock options as permitted under the Plan.
The members of the Committee have not yet been appointed.

Both Incentive Options and Nonqualified Options may be granted under the
Plan. An Incentive Option is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Any Incentive Option granted under the Plan will have an
exercise price of not less than 100% of the fair market value of the shares on
the date on which such option is granted. With respect to an Incentive Option
granted to an employee who owns more than 10% of the total combined voting stock
of the Company or of any parent or Subsidiary of the Company, the exercise price
for such option must be at least 110% of the fair market value of the shares
subject to the option on the date the option is granted. A Nonqualified Option
(i.e., an option to purchase Common Stock that does not meet the Code's
requirements for Incentive Options) must have an exercise price of at least the
fair market value of the stock at the date of grant.

The Plan provides for the granting of options to purchase 333,333 shares of
Common Stock, of which 117,061 options were outstanding as of December 31, 1997,

Employment Contracts and Directors Compensation

David H. de Weese, Chairman and Chief Executive Officer of the Company, has
an employment agreement with the Company which expires in November 1999 and is
cancelable by the Company only for cause, as defined in the agreement. Mr. de
Weese currently receives an annual base salary of $225,000 and 16,667 stock
options per year, exercisable at the fair market value on the date of grant, and
is eligible to receive additional stock options and bonuses at the discretion of
the Board of Directors. In addition, Mr. de Weese will receive a cash payment
equal to 1.5% of the total consideration received by the Company in a
transaction resulting in a change of ownership of at least 50% of the
outstanding Common Stock of the Company. In connection with Mr. de Weese's
employment agreement, Mr. de Weese received warrants to purchase 461,016 shares
of Common Stock at $3.00 per share. Warrants to purchase 50% of such shares are
currently exercisable and the remaining warrants become exercisable on a pro
rata basis on the second and third anniversaries of the agreement.

Dr. Walter Flamenbaum, President and Chief Operating Officer, has an
employment agreement with the Company which expires in January 2000 and is
cancelable by the Company only for cause, as defined in the agreement. Dr.
Flamenbaum receives an annual base salary of $225,000 and received options to
purchase 100,000 shares of Common Stock at an exercise price of 4.25 per share.
Options to purchase 20,000 of such shares are currently vested and the remaining
options become vest on a pro rata basis on the first, second, third and fourth
anniversaries of the agreement. Dr. Flamenbaum is also eligible to receive
additional stock options and bonuses at the discretion of the Board of
Directors. In addition, Dr. Flamenbaum received a sign-on bonus of $75,000
payable in equal monthly installments during the first year of the agreement.

Dr. Joshua Schein, an Executive Vice President and Chief Financial Officer
(through March 1998) of the Company, has an employment agreement with the
Company which expires in December 1998 and is cancelable by the Company only for
cause, as defined in the agreement. Dr. Schein receives an annual base salary of
$150,000 and 16,667 stock options per year, exercisable at the fair market value
on the date of grant, and is eligible to receive additional stock options and
bonuses at the discretion of the Board of Directors. In addition, Dr. Schein
will receive a cash payment equal to 1.5% of the total consideration received by
the Company in a transaction resulting in a change of ownership of at least 50%
of the outstanding Common Stock of the Company.

Judson Cooper, an Executive Vice President of the Company, has an
employment agreement with the Company which expires in December 1998 and is
cancelable by the Company only for cause, as defined in the agreement. Mr.
Cooper currently receives an annual base salary of $150,000 and 16,667 stock
options per year, exercisable at the fair market value on the date of grant, and
is eligible to receive additional stock options and bonuses at the discretion of
the Board of Directors. In addition, Mr. Cooper will receive a cash payment
equal to 1.5% of the total consideration received by the Company in a
transaction resulting in a change of ownership of at least 50% of the
outstanding Common Stock of the Company.

Thomas Konatich will become Chief Financial Officer of the Company as of
April 1, 1998. Mr. Konatich's employment agreement with the Company expires on
April 1, 2000 and is cancelable by the Company only for cause, as defined in the
agreement. Mr. Konatich receives an annual base salary of $170,000 and received
options to purchase 95,000 shares of Common Stock, exercisable at the fair
market value on April 1, 1998. The options vest on a pro rata basis on the
first, second, third and fourth anniversaries of the agreement. Mr. Konatich is
also eligible to receive additional stock options and bonuses at the discretion
of the Board of Directors.

Dr. Dennis Hruby, Vice President of Research of the Company, has an
employment agreement with the Company which expires on January 1, 2000 and is
cancelable by the Company only for cause, as defined in the agreement. Dr. Hruby
received options to purchase 40,000 shares of Common Stock at an exercise price
of 4.63 per share. The options become exercisable on a pro rata basis on the
first, second, third and fourth anniversaries of the agreement. Dr. Hruby is
eligible to receive additional stock options and bonuses at the discretion of
the Board of Directors.

Directors' Compensation. In 1997, outside Directors earned $1,500 for each
Board meeting attended.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 27, 1998, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.

Amount of
Name and Address of Beneficial Percentage
Beneficial Owner(1) Ownership(2) of Total
- ---------------------- ------------ ----------
David H. de Weese(3) 273,842 4.0%
Judson Cooper(4) 494,350 7.5%
Joshua D. Schein, Ph.D.(5) 494,350 7.5%
Steven M. Oliveira(6) 431,016 6.6%
Richard B. Stone 414,915 6.3%
135 East 57th St., 11th FL
New York, NY 10022
Terence E. Downer 0 *
International Sounding Board

Amount of
Name and Address of Beneficial Percentage
Beneficial Owner(1) Ownership(2) of Total
- ---------------------- ------------ ----------
60 Huntley Way
Bridgewater, NJ 08807
Donald S. Howard 0 *
3 Hook Harbor Road
Atlantic Highlands, NJ 07716

All Officers and Directors
as a Group (seven persons) 1,299,601 18.7%

- ------------
* Less than 1% of the outstanding shares of Common Stock.

(1) Unless otherwise indicated the address of each beneficial owner identified
420 Lexington Avenue, Suite 620, New York, NY 10170.

(2) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person has the right to acquire within
60 days after such date. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above on a
given date, any security which such person or persons has the right to
acquire within 60 days after such date is deemed to be outstanding for the
purpose of computing the percentage ownership of such person or persons,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.

(3) Includes currently exercisable warrants and options to purchase 263,842
shares of Common Stock.

(4) Includes curr ently exercisable options to purchase 33,334 shares of Common
Stock.

(5) Includes currently exercisable options to purchase 33,334 shares of Common
Stock.

(6) Mr. Oliveira is a member of CSO. See Item 12 - "Certain Relationships and
Related Transactions."

Item 12. Certain Relationships and Related Transactions

The Company entered into a consulting agreement with CSO Ventures LLC
("CSO") pursuant to which CSO provided certain business services to the Company,
including business development, licensing, strategic alliances and
administrative support. Pursuant to the terms of the agreement, CSO received
$120,000 in 1997. The agreement expired on January 15, 1998. Mr. Cooper, Dr.
Schein and Steven Oliveira are the members of CSO.

Effective January 15, 1998, the Company entered into a consulting agreement
with Prism Ventures LLC ("Prism") pursuant to which Prism has agreed to provide
provided certain business services to the Company, including business
development, operations and other advisory services, licensing, strategic
alliances, merger and aquisition activity, financings and other corporate
transactions. Pursuant to the terms of the agreement, Prism receives an annual
fee of $150,000 and 16,667 stock options per year. The agreement expires on
January 15, 2001, and is cancelable by the Company only for cause as defined in
the agreement. Mr. Cooper and Dr. Schein are the members of Prism.

PART IV

Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements and Exhibits

(1) FINANCIAL STATEMENTS

Report of Independent Accountants

Balance Sheet at December 31, 1996 and 1997

Statement of Operations for the years ended December 31, 1996 and
1997, and for the period from inception through December 31, 1997

Statement of Changes in Stockholders' Equity for the period from
inception through December 31, 1997

Statement of Cash Flows for the years ended December 31, 1996 and
1997, and for the period from inception through December 31, 1997

Notes to Financial Statements

(2) FINANCIAL STATEMENT SCHEDULES

All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or note thereto.

(3) EXHIBITS; EXECUTIVE COMPENSATION PLANS

Exhibits

3 Articles of Incorporation and By-Laws

3(a) Articles of Incorporation of the Company (Incorporated by reference to
Form SB-2 Registration Statement of the Company dated March 10, 1997
(No. 333-23037)).

3(b) Bylaws of the Company (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

4 Instruments defining the rights of holders

4(a) Form of Common Stock Certificate (Incorporated by reference to Form
SB-2 Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

4(b) 1996 Incentive and Non-Qualified Stock Option Plan ++ (Incorporated by
reference to Form SB-2 Registration Statement of the Company dated
March 10, 1997 (No. 333-23037)).

4(c) Warrant Agreement dated as of September 15, 1996 between the Company
and Vincent A. Fischetti (1) (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

4(d) Warrant Agreement dated as of November 18, 1996 between the Company
and David de Weese (1) (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

4(e) Form of Bridge Loan Letter Agreement for Bridge Investors
(Incorporated by reference to Form SB-2 Registration Statement of the
Company dated March 10, 1997 (No. 333-23037)).

4(f) Form of Promissory Note for Bridge Investors (Incorporated by
reference to Form SB-2 Registration Statement of the Company dated
March 10, 1997 (No. 333-23037)).

4(g) Form of Warrant Agreement for Bridge Investors (Incorporated by
reference to Form SB-2 Registration Statement of the Company dated
March 10, 1997 (No. 333-23037)).

4(h) Form of Registration Rights Agreement for Bridge Investors
(Incorporated by reference to Form SB-2 Registration Statement of the
Company dated March 10, 1997 (No. 333-23037)).

4(i)* Stock Purchase Agreement between the Company and MedImmune, Inc.,
dated as of February 10, 1998

4(j)* Registration Rights Agreement between the Company and MedImmune, Inc.,
dated as of February 10, 1998

10 Material Contracts

10(a) License and Research Support Agreement between the Company and The
Rockefeller University, dated as of January 31, 1996; and Amendment to
License and Research Support Agreement between the Company and The
Rockefeller University, dated as of October 1, 1996(2) (Incorporated
by reference to Form SB-2 Registration Statement of the Company dated
March 10, 1997 (No. 333-23037)).

10(b) Research Agreement between the Company and Emory University, dated as
of

January 31, 1996(2) (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(c) Research Support Agreement between the Company and Oregon State
University, dated as of January 31, 1996(2) (Incorporated by reference
to Form SB-2 Registration Statement of the Company dated March 10,
1997 (No. 333-23037)).

10(d) Employment Agreement between the Company and Dr. Joshua D. Schein,
dated as of January 1, 1996(1) ++ (Incorporated by reference to Form
SB-2 Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(e) Employment Agreement between the Company and Judson A. Cooper, dated
as of January 1, 1996; and Amendment No. 1 to Employment Agreement
between the Company and Judson A. Cooper, dated as of November 18,
1996(1) ++ (Incorporated by reference to Form SB-2 Registration
Statement of the Company dated March 10, 1997 (No. 333-23037)).

10(f) Employment Agreement between the Company and Dr. Kevin F. Jones, dated
as of January 1, 1996 ++ (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(g) Employment Agreement between the Company and David de Weese, dated as
of November 18, 1996(1) ++ (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(h) Consulting Agreement between the Company and CSO Ventures LLC, dated
as of January 1, 1996 (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(i) Consulting Agreement between the Company and Dr. Vincent A. Fischetti,
dated as of January 1, 1996 (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(j) Consulting Agreement between the Company and Dr. Dennis Hruby, dated
as of January 1, 1996 (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(k) Letter Agreement between the Company and Dr. Vincent A. Fischetti,
dated as of March 1, 1996 (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).

10(l) Employment Agreement between the Company and Dr. Dennis Hruby, dated
as of April 1, 1997 ++ (Incorporated by reference to Amendment No. 1
to Form SB-2

Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).

10(m) Clinical Trials Agreement between the Company and National Institute
of Allergy and Infectious Diseases, dated as of July 1, 1997
(Incorporated by reference to Amendment No. 1 to Form SB-2
Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).

10(n) Research Agreement between the Company and The Research Foundation of
State University of New York, dated as of July 1, 1997(2)
(Incorporated by reference to Amendment No. 1 to Form SB-2
Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).

10(o) Collaborative Research and License Agreement between the Company and
American Home Products Corporation, dated as of July 1, 1997(2)
(Incorporated by reference to Amendment No. 3 to Form SB-2
Registration Statement of the Company dated September 2, 1997 (No.
333-23037)).

10(p) Collaborative Evaluation Agreement between the Company and Chiron
Corporation, dated as of July 1, 1997 (Incorporated by reference to
Amendment No. 1 to Form SB-2 Registration Statement of the Company
dated July 11, 1997 (No. 333-23037)).

10(q) Consulting Agreement between the Company and Dr. Scott Hultgren, dated
as of July 9, 1997 (Incorporated by reference to Amendment No. 1 to
Form SB-2 Registration Statement of the Company dated July 11, 1997
(No. 333-23037)).

10(r) Letter of Intent between the Company and MedImmune, Inc., dated as of
July 10, 1997 (Incorporated by reference to Amendment No. 1 to Form
SB-2 Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).

10(s)* Research Collaboration and License Agreement between the Company and
The Washington University, dated as of February 6, 1998 (2)+.

10(t)* Technology Transfer Agreement between the Company and MedImmune, Inc.,
dated as of February 10, 1998.+

10(u)* Employment Agreement between the Company and Dr. Dennis Hruby, dated
as of January 1, 1998.++

10(v)* Employment Agreement between the Company and Dr. Walter Flamenbaum,
dated as of February 1, 1998.++

10(w)* Employment Agreement between the Company and Thomas Konatich, dated as
of April 1, 1998.++

10(x)* Consulting Agreement between the Company and Prism Ventures LLC, dated
as of January 15, 1998.

11 Statement re Computation of Per Share Earnings

11(a)* Statement re Computation of Per Share Earnings

- ----------
1 These agreements were entered into prior to the reverse split of the
Company's Common Stock and, therefore, do not reflect such reverse split.

2 Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.

* Filed herewith

+ Filed without exhibits and schedules (to be provided supplementally upon
request of the Commission).

++ This document is a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1997.

SIGNATURES

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

SIGA PHARMACEUTICALS, INC.

Date: March 31, 1998 By: /s/ David de Weese
-----------------------------------
David de Weese
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1933, this
registration statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated:

Signatures Title Date
- ---------- ----- ----

/s/ Joshua D. Schein Chief Financial Officer March 31, 1998
- ------------------------- (Principal Accounting and
Joshua D. Schein Financial Officer), Executive
Vice President, Secretary and
Director

/s/ Judson A. Cooper Executive Vice President March 31, 1998
- ------------------------- and Director
Judson Cooper

/s/ Terence E. Downer Director March 31, 1998
- -------------------------
Terence E. Downer

/s/ Donald S. Howard Director March 31, 1998
- -------------------------
Donald S. Howard

SIGA Pharmaceuticals, Inc.
(A development stage company)
Index to Financial Statements
- --------------------------------------------------------------------------------

Report of Independent Accountants......................................... F-2

Balance Sheet as of December 31, 1996 and 1997............................ F-3

Statement of Operations for the years ended December 31, 1996 and
1997, and for the period from inception through December 31, 1997.... F-4

Statement of Changes in Stockholders' Equity for the period
from inception through December 31, 1997............................. F-5

Statement of Cash Flows for the years ended December 31, 1996, and
1997, and for the period from inception through December 31, 1997.... F-6

Notes to Financial Statements............................................. F-7

F-1

Report of Independent Accountants

To the Board of Directors and Stockholders
of SIGA Pharmaceuticals, Inc.

In our opinion, the accompanying balance sheet and related statements of
operations, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of SIGA Pharmaceuticals, Inc.
(a development stage company) at December 31, 1996 and 1997, and the results of
its operations for the years ended December 31, 1996 and 1997, and for the
period from inception through December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
New York, New York
March 2, 1998

F-2

SIGA Pharmaceuticals, Inc.
(A development stage company)
Balance Sheet
- --------------------------------------------------------------------------------

December 31,
1996 1997
------------ ------------

Assets

Current assets
Cash and cash equivalents $ 42,190 $ 10,674,104
Accounts receivable -- 150,000
Prepaid sponsored research 370,798 11,684
Prepaid expenses and other current assets -- 43,698
Deferred offering costs 115,688 --
------------ ------------
Total current assets 528,676 10,879,486
Prepaid sponsored research 30,208 --
Equipment, net 21,425 29,814
Other assets 609 142,841
------------ ------------
Total assets $ 580,918 $ 11,052,141
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 92,241 $ 224,623
Accrued expenses 22,260 174,548
Patent preparation fees payable 66,437 66,437
------------ ------------
Total liabilities 180,938 465,608
------------ ------------

Commitments and contingencies
(Notes 6, 7, 8, 9 and 10) -- --
Stockholders' equity
Preferred stock (.0001 par value, 10,000,000
shares authorized, none issued and
outstanding) -- --
Common stock (.0001 par value, 25,000,000
shares authorized, 3,367,183 and 6,242,182
shares issued and outstanding at December 31, 1996
and December 31, 1997 respectively) 337 624
Additional paid-in capital 2,668,819 15,049,723
Stock subscriptions outstanding -- --
Deficit accumulated during the development stage (2,269,176) (4,463,814)
------------ ------------
Total stockholders' equity (deficit) 399,980 10,586,533
------------ ------------
Total liabilities and stockholders' equity $ 580,918 $ 11,052,141
============ ============

The accompanying notes are an integral part of these financial statements.

F-3

SIGA Pharmaceuticals, Inc.
(A development stage company)
Statement of Operations
- --------------------------------------------------------------------------------

December 28,
1995 (Inception)
Year Ended December 31, to December
1996 1997 31, 1997
----------- ----------- -----------

Revenue
Research and development contracts $ 675,000 $ 675,000
Operating expenses
General and administrative (including
amounts to related parties of $444,000
and $429,231 for the years ended
December 31, 1996 and 1997, respectively) $ 787,817 1,554,686 2,343,503
Research and development (including
amounts to related parties of $75,000
and $77,831 for the years ended
December 31, 1996 and 1997, respectively) 662,205 946,785 1,608,990
Patent preparation fees 452,999 287,207 740,206
Stock option and warrant compensation 367,461 68,582 436,043
----------- ----------- -----------
Total operating expenses 2,270,482 2,857,260 5,128,742
----------- ----------- -----------

Interest income/(expense) 2,306 (12,378) (10,072)
----------- ----------- -----------
Net loss $(2,268,176) $(2,194,638) $(4,463,814)
=========== =========== ===========
Basic and diluted loss per share $ (.75) $ (.52)
=========== ===========
Weighted average common shares
outstanding used for basic and
diluted loss per share 3,020,990 4,217,044
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-4

SIGA Pharmaceuticals, Inc.
(A development stage company)
Statement of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------

Deficit
Accumulated
Additional Stock During the Total
Paid-in Subscriptions Development Stockholders'
Shares Par Value Capital Outstanding Stage Equity (Deficit)
------------ ------------ ------------ ------------- ----------- ---------------

Issuance of common stock at
inception 2,079,170 $ 208 $ 1,040 $ (1,248)
Net loss -- -- -- -- $ (1,000) $ (1,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 2,079,170 208 1,040 (1,248) (1,000) (1,000)
Net proceeds from issuance
and sale of common stock 1,038,008 104 1,551,333 -- -- 1,551,437
Net proceeds from issuance
and sale of common stock 250,004 25 748,985 -- -- 749,010
Receipt of stock subscriptions
outstanding -- -- -- 1,248 -- 1,248
Issuance of compensatory options
and warrants -- -- 367,461 -- -- 367,461
Net loss -- -- -- -- (2,268,176) (2,268,176)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 3,367,182 337 2,668,819 (2,269,176) 399,980

Net proceeds from issuance and sale
of common stock 2,875,000 287 12,179,322 12,179,609

Issuance of warrants with bridge
notes 133,000 133,000

Stock option and warrant
compensation -- -- 68,582 -- -- 68,582

Net loss -- -- -- -- (2,194,638) (2,194,638)
------------ ------------ ------------ ------------ ------------ ------------

Balance at December 31, 1997 6,242,182 $ 624 $ 15,049,723 $ -- $ (4,463,814) $ 10,586,533
============ ============ ============ ============ ============ ============

The accompanying notes are an integral part of these financial statements.

F-5

SIGA Pharmaceuticals, Inc.
(A development stage company)
Statement of Cash Flows
- --------------------------------------------------------------------------------

December 28,
Year Ended 1995 (Inception)
December 31, to December
1996 1997 31, 1997
------------ ------------ --------------

Cash flows from operating activities
Net loss $ (2,268,176) $ (2,194,638) $ (4,463,814)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 7,249 9,212 16,461
Stock option and warrant compensation 367,461 68,582 436,043
Amortization of debt discount -- 133,000 133,000
Changes in assets and liabilities
Prepaid sponsored research (401,006) 389,322 (11,684)
Accounts receivable -- (150,000) (150,000)
Other current assets 6,328 (43,698) (43,698)
Accounts payable and accrued expenses 173,001 284,670 465,608
Other assets -- (142,232) (142,841)
------------ ------------ ------------
Net cash used in operating activities (2,115,143) (1,645,782) (3,760,925)
------------ ------------ ------------
Cash flows from investing activities
Capital expenditures (28,674) (17,601) (46,275)
------------ ------------ ------------
Net cash used in investing activities (28,674) (17,601) (46,275)
------------ ------------ ------------
Cash flows from financing activities
Net proceeds from issuance of common stock 2,300,447 12,179,609 14,480,056
Receipt of stock subscriptions outstanding 1,248 -- 1,248
Deferred offering costs (115,688) 115,688 --
Proceeds from bridge notes 1,000,000 1,000,000
Repayment of bridge notes -- (1,000,000) (1,000,000)
------------ ------------ ------------
Net cash provided from
financing activities 2,186,007 12,295,297 14,481,304
------------ ------------ ------------
Net increase in cash and cash equivalents 42,190 10,631,914 10,674,104
Cash and cash equivalents, beginning of period -- 42,190 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 42,190 $ 10,674,104 $ 10,674,104
============ ============ ============

There were no cash payments for interest or income taxes for the periods ended
December 31, 1996 and 1997.

The accompanying notes are an integral part of these financial statements.

F-6

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

1. Organization and Basis of Presentation

Organization

SIGA Pharmaceuticals, Inc. (the "Company") was incorporated in the State of
Delaware on December 28, 1995. The Company is engaged in the discovery,
development and commercialization of vaccines, antibiotics, and novel
anti-infectives for the prevention and treatment of infectious diseases.
The Company's technologies are licensed from third parties and the Company
depends on third parties to conduct research on its behalf pursuant to
research and consulting agreements.

Basis of presentation

The Company's activities since inception have consisted primarily of
sponsoring research and development, performing business and financial
planning, preparing and filing patent applications, and raising capital.
Accordingly, the Company is considered to be a development stage company.

2. Summary of Significant Accounting Policies

Cash equivalents

Cash equivalents consist of short term, highly liquid investments, with
original maturities of less than three months when purchased and are stated
at cost. Interest is accrued as earned.

Equipment

Equipment is stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets, none of
which exceeds three years.

Deferred offering costs

In connection with the Company's initial public offering ("IPO"), the
Company had incurred certain costs which were deferred at December 31,
1996. In 1997, upon completion of the Company's IPO, these costs were
charged to equity.

Revenue recognition

Revenue from research and development collaborative contracts are
recognized based upon the provisions of the agreements.

Research and development

Research and development costs are expensed as incurred and include costs
of third parties who conduct research and development, pursuant to
development and consulting agreements, on behalf of the Company. Costs
related to the acquisition of technology rights, for which development work
is still in process, and that have no alternative future uses, are expensed
as incurred and considered a component of research and development costs.

Income taxes

Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and the
tax basis of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be

F-7

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

in effect for the years in which the differences are expected to reverse. A
valuation allowance is provided if it is more likely than not that some or
all of the deferred tax asset will not be realized.

Net loss per common share

Effective December 31, 1997 the Company adopted Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS 128") which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS") by all entities that have publicly traded common
stock or potential common stock (options, warrants, convertible securities
or contingent stock arrangements). Basis EPS is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings.

As required by Securities and Exchange Commission Staff Accounting Bulletin
No. 98, ("SAB 98"), previously reported per share information included in
the accompanying financial statements have been restated to give effect to
the adoption of FAS 128 and SAB 98, resulting in an increase in the net
loss per share for the year ended December 31, 1996 of $.09.

At December 31, 1997, outstanding options to purchase 117,061 shares of
common stock, with exercise prices ranging from $1.50 to $5.50 have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 949,016 shares of common
stock, with exercise prices ranging from $1.50 to $6.00 were also
antidilutive and excluded from the computation of diluted loss per share at
December 31, 1997.

Accounting estimates

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

Fair value of financial instruments

The carrying value of cash and cash equivalents, and accounts payable and
accrued expenses approximates fair value due to the relatively short
maturity of these instruments.

Concentration of Credit Risk

The Company has cash in bank accounts that exceed the FDIC insured limits.
The Company has not experienced any losses on its cash accounts. No
allowance has been provided for potential credit losses because management
believes that any such losses would be minimal.

Accounting for stock based compensation

During 1996 the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). As provided
by SFAS 123, the Company has elected to continue to account for its
stock-based compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to

F-8

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

Employees." Accordingly, compensation expense has been recognized to the
extent of employee or director services rendered based on the intrinsic
value of compensatory options or shares granted under the plans. The
Company has adopted the disclosure provisions required by SFAS 123.

New accounting pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"), which requires the presentation of the components of
comprehensive income in the company's financial statement for reporting
periods beginning subsequent to December 15, 1997. Comprehensive income is
defined as the change in the company's equity during a financial reporting
period from transactions and other circumstances from non-owner sources
(including cumulative translation adjustments, minimum pension liabilities
and unrealized gains/losses on available for sale securities). The adoption
of FAS 130 is not expected to have a material impact on the Company's
financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"), which requires disclosure
of information about operating segments in annual financial statements for
reporting periods beginning subsequent to December 15, 1997. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The adoption of FAS 131 is not expected to have a
material impact on the Company's financial statements.

3. Equipment

Equipment consisted of the following at December 31, 1996 and 1997

December 31,
1996 1997
-------- --------
Computer equipment $ 28,674 $ 45,768
Furniture & fixture -- 507
-------- --------
28,674 46,275
Less - Accumulated depreciation (7,249) (16,461)
-------- --------
Equipment, net $ 21,425 $ 29,814
======== ========

4. Stockholders' Equity

In September and October 1997, The Company completed the IPO of 2,875,000
shares of its common stock at an offering price of $5.00 per share. The
Company realized gross proceeds of $14,375,000 and net proceeds, after
deducting underwriting discounts and commissions, and other offering
expenses payable by the Company, of $12,179,609.

F-9

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

In March 1996, the Company completed a private offering of 1,038,008 shares
of its common stock at the price of $1.50 per share, providing gross
proceeds of $1,557,000, and net proceeds, after deducting expenses, of
$1,551,437. In September 1996, the Company completed a second private
offering of 250,004 shares of common stock at a price of $3.00 per share
providing gross proceeds of $750,000 and net proceeds, after deducting
expenses, of $749,010.

Reverse stock split

Effective December 1996, the Company implemented a one for six reverse
stock split (without changing the par value thereof) applicable to all
issued and outstanding shares of the Company's common stock. All fractional
shares resulting from such stock split were rounded up to the next whole
share.

Stock option plan and warrants

In January 1996, the Company implemented its 1996 Incentive and
Non-Qualified Stock Option Plan (the "Plan") whereby options to purchase up
to 333,333 shares of the Company's common stock may be granted to
employees, consultants and outside directors of the Company. The exercise
period for options granted under the Plan, except those granted to outside
directors, is determined by a committee of the Board of Directors. Stock
options granted to outside directors pursuant to the Plan must have an
exercise price equal to or in excess of the fair market value of the
Company's common stock at the date of grant and become exercisable over a
period of three years with a third of the grant being exercisable at the
completion of each year of service subsequent to the grant. The fair market
value of the Company's common stock before its initial public offering in
September 1997, was determined by a committee of the Board of Directors.
The committee is comprised entirely of employees who receive stock options
under the Plan.

Transactions under the Plan are summarized as follows:

Weighted
Average
Number of Exercise
Shares Price
------- --------

Outstanding at December 31, 1995 -- --
Granted 50,001 $2.00
------- -----
Outstanding at December 31, 1996 50,001 2.00
Granted 67,060 5.03
------- -----

Total outstanding at December 31, 1997 117,061 $3.74
======= =====

Options available for future grant 216,272
=======

Weighted average fair value of options granted during 1996 $ .30
=======

Weighted average fair value of options granted during 1997 $ 2.18
=======

F-10

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

The following table summarizes information about options outstanding at
December 31, 1997:

Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Price 31, 1997 Life (Years) Price 31, 1997 Price

$ 1.50 33,334 8.00 $1.50 33,334 $1.50
3.00 16,667 8.90 3.00 16,667 3.00
5.00-5.50 67,060 9.70 5.03 67,060 5.03
---------- --------
117,061 117,061
========== ========

In November 1996, the Company entered into an employment agreement with its
President and Chief Executive Officer. Under the terms of the agreement,
the employee received warrants to purchase 461,016 shares of common stock
at $3.00 per share. Warrants to purchase 25% of such shares were
exercisable upon issuance and the remaining warrants are exercisable on a
pro rata basis on the first, second and third anniversaries of the
agreement (see Note 9). These warrants expire on November 18, 2006.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for warrants issued to employees and stock options granted under the Plan.
During the years ended December 31, 1996 and 1997, compensation expense of
$57,627 and $57,627, respectively, has been recognized for warrants issued
to employees, and $8,334 and $3,452, respectively, for options issued
pursuant to its stock-based compensation plan calculated based upon the
difference between the exercise price of the warrant or option and the fair
market value of the Company's common stock on the date of grant. Had
compensation cost for warrants issued and stock options granted been
determined based upon the fair value at the grant date for awards
consistent with the methodology prescribed under SFAS 123 the Company's net
loss and loss per share have been increased by approximately $146,000, or
$.03 per share for the year ended December 31, 1997, and approximately
$73,000, or $.02 per share for the year ended December 31, 1996.

In September 1996, a consultant was issued warrants to purchase 150,000
shares of its common stock, at an exercise price of $1.50 per share. The
warrants were exercisable upon issuance and expire on the twentieth
anniversary of the date of issuance. The Company has recognized non-cash
compensation expense of $301,500 for the year ended December 31, 1996,
based upon the fair value of such warrants on the date of grant (see Note
6).

In connection with the issuance of bridge notes (the "Bridge Notes") in the
aggregate principal amount of $1,000,000 in January and February 1997, the
Company issued the holders of the Bridge Notes five-year warrants to
purchase an aggregate of 100,000 shares of common stock at an exercise
price of $5.00 per share, pursuant to warrant agreements entered into by
the Company

F-11

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

and the investors. The warrants are not exercisable until September 1998.
The fair value of the warrants, in the amount of $133,000, issued by the
Company in connection with the bridge financing, was recorded as debt
discount and was amortized over the six month term of the Bridge Notes.

In June and September 1997, the Company issued two of its directors
warrants to purchase an aggregate of 13,000 shares of its common stock, at
an exercise price of $5.00 per share. The warrants are exercisable on the
first and second anniversaries of the agreements, on a pro rata basis. The
Company has recognized non-cash compensation expense of $7,503 for the year
ended December 31, 1997, based upon the fair value of such warrants on the
date of grant.

In September 1997, in connection with the Company's IPO, the Company issued
the underwriters warrants to purchase 225,000 shares of common stock at an
exercise price of $6.00 per share. The warrants have a term of five years
and are not exercisable until September 1998.

The fair value of the options and warrants granted to employees and the
warrants issued to the consultant during 1996 and 1997 ranged from $.22 to
$2.63 on the date of the respective grant using the Black-Scholes
option-pricing model assuming (a) no dividend yield, (b) a risk-free
interest rate ranging from 5.06% to 6.26% based on the date of the
respective grant, (c) no forfeitures, (d) an expected life of three years
and (e) a volatility factor of 0% prior to the date of initial filing of
the Company's IPO and 65% thereafter.

5. Income Taxes

The Company has incurred losses since inception which have generated net
operating loss carryforwards of approximately $2,000,000, at December 31,
1997 for federal and state income tax purposes. These carryforwards are
available to offset future taxable income and expire in 2011 and 2012 for
federal income tax purposes. These losses are subject to limitation on
future years' utilization should certain ownership changes occur.

The net operating loss carryforwards and temporary differences, arising
primarily from deferred research and development expenses, and noncash
compensation expense, result in a gross deferred tax asset at December 31,
1996 and December 31, 1997 of approximately $877,000 and $1,752,000,
respectively. In consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize this deferred tax asset in the
future, the Company has recorded a valuation allowance of an equal amount
on such date to fully offset the deferred gross tax asset amount.

For the years ended December 31, 1996 and December 31, 1997, the Company's
effective tax rate differs from the federal statutory rate principally due
to net operating losses and other temporary differences for which no
benefit was recorded, state taxes and other permanent differences.

F-12

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

6. Related Parties

Consulting agreements

The Company has entered into a consulting agreement, expiring January 15,
1998, with CSO Ventures LLC ("CSO") under which CSO provides the Company
with business development, operations and other advisory services. Pursuant
to the agreement CSO is paid an annual consulting fee of $120,000. Two
Executive Vice Presidents of the Company are principals of CSO. The
agreement is only cancelable by the Company for cause, as defined in the
agreement. During the years ended December 31, 1996 and 1997, the Company
incurred expense of $120,000 pursuant to the agreement.

In connection with the development of its licensed technologies the Company
has entered into a consulting agreement with the scientist who developed
such technologies, under which the consultant serves as the Company's Chief
Scientific Advisor. The scientist, who is a stockholder, shall be paid an
annual consulting fee of $75,000. The agreement, which commenced in January
1996 and is only cancelable by the Company for cause, as defined in the
agreement, has an initial term of two years and provides for automatic
renewals of three additional one year periods unless either party notifies
the other of its intention not to renew. Research and development expense
incurred under the agreement amounted to $75,000 and $77,831 for the years
ended December 31, 1996 and 1997, respectively. During the year ended
December 31, 1996, the scientist was issued warrants to purchase 150,000
shares of the Company's common stock at an exercise price of $1.50 per
share (see Note 4).

Employment agreements

The Company has employment agreements, expiring in December 1998, with its
two Executive Vice Presidents ("EVPs"), who are principal shareholders of
the Company and CSO, under which the EVPs are each to be paid minimum
annual compensation of $150,000. In addition, the Company granted each of
the EVPs options to purchase 16,667 shares of the Company's common stock,
at an exercise price of $1.50 per share, upon execution of the respective
agreements. During the term of the agreements the EVPs are each to receive
annual stock option grants to purchase 16,667 common shares exercisable at
the fair market value at the date of grant. Under the provisions of the
agreements the EVPs will each receive a cash payment equal to 1.5% of the
total consideration received by the Company in a transaction resulting in a
greater than 50% change in ownership of the outstanding common stock of the
Company. The Company incurred $324,000 and $309,231 of expense for the
years ended December 31, 1996 and 1997, respectively, pursuant to these
agreements.

F-13

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

7. Collaborative Research and License Agreement

In July 1997, the Company entered into a collaborative research and license
agreement with a pharmaceutical company. Under the terms of the agreement,
the Company has granted the pharmaceutical company an exclusive worldwide
license to develop, make, use and sell products derived from specified
technologies. The agreement requires the pharmaceutical company to sponsor
further research by the Company for the development of the licensed
technologies for a period of two years from the effective date of the
agreement, in return for payments totaling $1,200,000. In consideration of
the license grant the Company is entitled to receive royalties equal to
specified percentages of net sales of products incorporating the licensed
technologies. The royalty percentages increase as certain cumulative and
annual net sales amounts are attained. The Company could receive milestone
payments, under the terms of the agreement of up to $13,750,000 for the
initial product and $3,250,000 for the second product developed from a
single compound derived from the licensed technologies. Such milestone
payments are contingent upon the Company making project milestones set
forth in the agreement, and, accordingly, if the Company is unable to make
such milestones, the Company will not receive such milestone payments.
During 1997, the Company recognized $675,000 in revenue related to this
agreement.

8. License and Research Support Agreements

In October 1997, the Company entered into an agreement with a third party
for the sale and assignment of certain patent rights to the Company. In
exchange for the patent rights, the Company agreed to pay $50,000 upon the
signing of the agreement and up to $400,000 upon the achievement of certain
milestones specified in the agreement. The Company has also granted the
third party a royalty free license to use and sell products derived from
the patent rights in certain countries. In addition, the Company has agreed
to reimburse the third party, up to $50,000, for patent expenses incurred
prior to the execution of this agreement. For the year ended December 31,
1997, the Company has recorded $100,000 of patent expense related to this
agreement.

In January 1996, the Company entered into a license and research support
agreement with third parties. Under the terms of the agreement, the Company
has been granted an exclusive world-wide license to make, use and sell
products derived from the licensed technologies. In consideration of the
license grant the Company is obligated to pay royalties equal to a
specified percentage of net sales of products incorporating the licensed
technologies. In the event the Company sublicenses any technologies covered
by the agreement the third parties would be entitled to a significant
percentage of the sublicense revenue received by the Company. In addition,
the Company is required to make milestone payments, up to $225,000 per
product, for each product developed from the licensed technologies.

The Company has agreed to sponsor further research by the third parties for
the development of the licensed technologies for a period of two years from
the date of the agreement, in return for a payment of $725,000 to such
third parties. The period of sponsored research will automatically be
renewed for additional one-year periods unless terminated by the Company.
Amortization of prepaid sponsored research under this agreement was
$332,292 and $362,500 for the years ended December 31, 1996 and December
31, 1997, respectively. The Company also agreed to reimburse the third
parties for costs associated with the preparation, filing and prosecution
of patent rights for

F-14

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

the licensed technologies incurred prior to the execution of the license
and research support agreement. The agreement is only cancelable by the
Company for cause, as defined in the agreement. The Company has expensed
$310,986 of reimbursable patent preparation costs pursuant to the agreement
during the year ended December 31, 1996, of which $66,437 remains accrued
at December 31, 1997.

In January 1996, the Company entered into research agreements with third
parties. Under the terms of the agreements, the Company has agreed to fund
two years of research in return for annual payments of $183,320. Research
and development expense under these agreements amounted to $175,024 and
$183,322 for the years ended December 31, 1996 and 1997, respectively.

9. Commitments and Contingencies

Employment agreement

In November 1996, the Company entered into an employment agreement,
expiring in November 1999, with its President and Chief Executive Officer.
Under the terms of the agreement, the employee is to receive annual base
compensation of $225,000 and options to purchase 16,667 shares of the
Company's common stock, exercisable at the fair market value on the date of
grant. Upon execution of the agreement, the Company granted the employee
options to purchase 16,667 shares of its common stock at an exercise price
of $3.00 per share. In addition, the employee was issued warrants to
purchase 461,016 shares of common stock at $3.00 per share (see Note 4).
Under the provisions of the agreement, the President will receive a cash
payment equal to 1.5% of the total consideration received by the Company in
a transaction resulting in a greater than 50% change in ownership of the
outstanding common stock of the Company. During the years ended December
31, 1996 and December 31, 1997, the Company incurred $28,435 and $231,923,
respectively of expense pursuant to the agreement.

Lease commitments

The Company leases certain facilities and office space under operating
leases. Minimum future rental commitments under operating leases having
noncancelable lease terms in excess of one year are as follows:

Year ended December 31,
1998 $ 226,273
1999 228,990
2000 231,789
2001 234,672
2002 and thereafter 439,491
------------
$ 1,361,215
============

F-15

SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------

10. Subsequent Events

In February 1998, the Company entered into an agreement with a third party
pursuant to which the Company acquired the third party's rights to certain
technology, intellectual property and related rights in the field of gram
negative antibiotics in exchange for 335,530 shares of the Company's common
stock.

In February 1998, the Company entered into a research collaboration and
license agreement with a third party. Under the terms of the agreement, the
Company has been granted an exclusive world-wide license to make, use and
sell products derived from the licensed technologies. In consideration of
the license grant, the Company is obligated to pay royalties equal to a
specified percentage of net sales of products incorporating the licensed
technologies, beginning in the year of the first sale of any product
developed from the licensed technologies. In the event the Company
sublicenses any technologies covered by this agreement, the third parties
are entitled to a significant percentage of the sublicense revenue received
by the Company. The Company is also required to make milestone payments, up
to $675,000 per product, for each product developed from the licensed
technologies and pay license maintenance fees per year until the first sale
of any product developed from the licensed technologies. In addition, the
Company has agreed to sponsor further research by the third party for the
development of the licensed technologies in the amounts of approximately
$187,000, $387,000 and $403,000, for the years ending December 31, 1998,
1999 and 2000, respectively.

In February 1998, the Company entered into two two-year employment
agreements with two officers. Under the terms of the agreements, the
officers are to receive aggregate annual base compensation of $395,000 per
year. In addition, the Company has granted the officers options to purchase
an aggregate of 195,000 shares of the Company's common stock.

Related party transactions (unaudited)

On March 27, 1998, the Company entered into a consulting agreement with a
limited liability company in which two of the Company's executive officers
are principals. The agreement is effective as of January 15, 1998 and has
an initial term of three years and provides for automatic renewals of
additional one year periods, unless either party notifies the other of its
intent not to renew the agreement. Pursuant to the agreement, the limited
liability company is to receive an annual consulting fee of $150,000 and
annual stock option grants to purchase 16,667 shares of the Company's
common stock.

F-16