SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549 FORM 10-K(Mark
  One)[
  X ]
  Annual
  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the Fiscal Year Ended December 31, 2000or[    ]
  Transition
  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the Transition Period From ____________ to ____________ Commission file number 0-27976 GalaGen Inc.(Exact name of registrant as specified in
  its charter)Delaware
  41-1719104(State or other jurisdiction of
  incorporation or organization)
  (I.R.S. employer
  identification no.)301 Carlson Parkway
  Minnetonka, Minnesota
  55305(Address of principal executive offices)
  (Zip code)(952) 258-5500(Registrants telephone number, including
  area code) Securities registered pursuant to Section 12(b) of the Act:  None
                    Securities registered
pursuant to Section 12(g) of the Act: 
Common Stock, par value $.01 per share 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.
          The aggregate market value of
the Common Stock held by non-affiliates of the registrant as of March 21, 2001
was $6,288,808, based
on the closing sale price for the Common Stock on that date as reported by The
Nasdaq Over the Counter Bulletin Board. 
For purposes of determining such aggregate market value, all officers,
and directors of the registrant are considered to be affiliates of the registrant,
as well as stockholders holding 10% or more of the outstanding Common Stock as
reflected on Schedules 13D or 13G filed with the registrant.  This number is provided only for the purpose
of this report on Form 10-K and does not represent an admission by either the
registrant or any such person as to the status of such person. As of March 21, 2001 the registrant had
12,275,448 shares of Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the registrants definitive Proxy Statement dated for the annual meeting of
stockholders to be held on June 6, 2001 for the year ended December 31,
2000 are incorporated by reference in Part III of this Annual Report on Form
10-K.  (The Audit Committee Report,
Compensation Committee Report and the stock performance graph contained in the
registrants Proxy Statement are expressly not incorporated by reference in
this Form 10-K).

PART I

Item 1.Business

Forward-Looking Statements

The
information presented in this Annual Report on Form 10-K under the headings
Item 1. Business and Item 2. Properties under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements within the meaning of the safe harbor provisions
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended.  Such statements are subject to risks and uncertainties, including
those discussed under Risk Factors beginning on page 15 of this Annual Report
on Form 10-K, that could cause actual results to differ materially from those
projected.  Because actual results may
differ, readers are cautioned not to place undue reliance on these forward-looking
statements.  Certain forward-looking
statements are indicated below by an asterisk.

Introduction

GalaGen
Inc. (GalaGen or the Company), was incorporated in 1992, as a successor to
a wholly-owned subsidiary of Land O'Lakes, Inc. ("Land O'Lakes"),
which was incorporated in 1987.  GalaGens
mission is to become the leading presence in foods, beverages and dietary
supplements that help enhance the immune system and take advantage of all of
the benefits offered by colostrum.* To accomplish this mission, the Company is
focusing its efforts on channels that demand immune-enhancing benefits in
certain segments of the consumer food and beverage product markets and in
certain segments of the dietary supplement markets, as described below. In
addition, the Company continues to market its critical care line of products
through its licensee partner Hormel HealthLabs.

A
critical factor for success of the Company is its immune-enhancing ingredient,
which is derived from bovine colostrum, the highly nutritious first milk from a
dairy cow after its calf is born, and which has been branded ProventraäBrand
Natural Immune Components (Proventra). 
The primary immune-enhancing components of Proventra are antibodies,
which are proteins that enhance the body's immune system to protect against
harmful pathogens.  Secondary
immune-enhancing components of Proventra providing further disease resistance
are proteins, such as lactoferrin, and 
multiple vitamins and minerals.

The Company believes it is in a position of
strategic advantage with its propriety colostrum ingredient, as follows:Ability to Address Multiple Health
Conditions.Using its proprietary immunization
technologies, including the use of immune system stimulating adjuvants, the
Company can produce antibodies in the cow that target specific pathogens that
may cause problems in the human gastrointestinal (GI) tract, including
bacteria and their toxins, parasites, fungi and viruses. This technology
increases by many fold a dairy cows natural production of these targeted
antibodies in its colostrum and can be utilized to enhance the body's normal
immune response.  In addition targeted
colostrum can benefit womens and childrens health, oral care and sports
muscle rejuvenation. This point of technological difference provides the
Company with a platform technology that can benefit a variety of conditions and
provides our customers with more than one use for our ingredient.*Ingredient Patent Protection.GalaGen
holds exclusive patent licenses that prevent potential competitors from
combining antibodies with dietary fibers or antibodies with active cultures
(probiotics).  The licenses provide the
Company with a high degree of competitive insulation in addition to
establishing the Company as an innovator.* This allows the Company to provide
our customers with the extra benefits derived from patent protected products.Access to Colostrum.The Company has access to the Land OLakes dairy
system.  This dairy system has
approximately 750,000 cows, from which the Company receives its supply of
colostrum.  These cows are located
primarily in the upper Midwest and both the East and West coasts.Proprietary Manufacturing Procedures.The Company
has patented, proprietary manufacturing processes that are used to concentrate
antibodies from the colostrum.  Standard
dairy processing techniques destroy the activity of most of the antibodies
present in milk and colostrum, whereas the Companys processing retains the
antibodys effectiveness. In addition, the Companys ability to concentrate
colostrum provides an ingredient which generally does not effect the taste
profile or composition of our customers product.Ability to Forge Alliances.The
advantages described above and the experience of the management team have
provided the Company with  access to
some of the recognized leaders in food, beverage and supplement categories. We
believe this combination of skills and attributes provides us with the unique
ability to create strategic customer alliances with these companies.*The
Company is developing, in conjunction with strategic partners, a portfolio of
proprietary consumer and clinical nutritional food and beverage products that
will incorporate Proventra.* 
Additionally, the Company will supply Proventra as an ingredient to food
companies for incorporation into dietary supplements or other similar
products.* These products will target needs of both consumers and healthcare
professionals.*

In 
December 1998, the Company acquired Nutrition Medical, Inc.'s
("NMI") developed line of critical care enteral nutrition products
and formulas. The products are sold to the hospital and home healthcare
industries through a license agreement with Hormel HealthLabs, a subsidiary of
Hormel Foods Corporation.  The Company
is researching ways in which to incorporate certain of its immune-enhancing
ingredients into selected products acquired from NMI to provide additional
proprietary protection and added benefits that are not currently available in
that market segment.*  Additionally, Glutasorb,
one of the acquired products, has its own immune-enhancing ingredient,
glutamine, already in the product.*



Background

Immune-Enhancing
Technology

GalaGen
offers comprehensive immune support via passive and active mechanisms.  In particular, passive immunity consists of
using antibodies produced by one individual or animal to provide immune
protection in another individual. Dairy cows provide antibodies to their calves
through the colostrum, which is the milk produced during the first several days
of lactation.  The concentration of antibodies
in colostrum is many times higher than the normal concentration in milk.  Through their natural exposure to the
environment, cows have developed antibodies that recognize and bind to many
human pathogens.  Clinical studies
performed by GalaGen and others have proven that the antibodies are not
destroyed by passage through the gastrointestinal tract, and they remain
functionally active protecting the human body against these undesirable
organisms.



Functional
Food and Nutraceutical Products

The Company believes that its
immune-enhancing technology lends itself to the creation of food products or
dietary supplements, for both consumer and clinical food and beverage markets,
with health claims, often called functional foods or nutraceuticals.*  The Company further believes that the
inclusion of Proventra in functional foods or nutraceuticals, along with
including other components such as active cultures (probiotics) and dietary
soluble fiber for which the Company has licensed certain patents, provide
important benefits and competitive advantages, including (i) a unique
immune-enhancing system that works instantly, (ii) a fit with consumer needs,
(iii) no known drug interactions or toxicity and (iv) a safe, proven means to
enhance the body's natural resistance.*

Functional foods and nutraceuticals have been
defined as foods that provide benefits beyond their nutritional value.  While there is not a regulatory definition
for the terms functional food or nutraceutical, these terms are widely used
in the marketplace.  The Company
believes that the enactment by Congress of the Nutrition Labeling and Education
Act (NLEA) in 1990 and the Dietary Supplement Health and Education Act
(DSHEA) in 1994 established the framework for the regulatory process for
marketing foods or dietary supplements with health benefits.  NLEA permits certain health claims related
to the food's ability to reduce the risk of certain diseases.  DSHEA permits such products to bear
structure-function claims related to how the product affects the structure or
function of the body, and such claims do not require Food and Drug
Administration ("FDA") review or approval, but must be supported by
scientific evidence. The Company believes that the incorporation of Proventra
in foods or dietary supplements would add benefits to these products,
particularly since there is a significant amount of scientific data to support
the benefits of colostrum.*

According
to the Nutrition Business Journal, a competitive-market analysis publication, the
market for nutraceutical or functional food beverages, into which the Company's
Proventra could be incorporated, now approaches $30 billion with the market
segment for immunity benefits alone estimated at between $3 and $4.5 billion.*
The Company believes that this significant market size is due to a number of
factors, including (i) increased interest in healthier lifestyles, (ii) the
publication of research findings supporting the positive health effects of
certain nutritional supplements and (iii) the aging of the Baby Boom
generation combined with the tendency of consumers to purchase more nutritional
supplements as they age.

Critical Care Products

Critically
ill or severely injured patients are often unlikely to consume adequate
nutrients, which can exacerbate a patient's condition, cause complications and
prolong hospital stays. Total enteral nutrition delivers, often via specialized
pumps, formulations of protein, carbohydrates, fat and vitamins via feeding
tubes directly into the patient's intestinal tract.  Unless nearly all of the intestinal tract is missing or
nonfunctional, most patients can be fed via this enteral route. The largest
single category of total enteral nutrition products used in critical care
formulas are products that contain unique protein sources referred to as
"elemental." Unlike long-term care formulas that contain "whole
protein," which must be digested before it can be absorbed and utilized by
the patient, elemental formulas contain predigested protein or free amino acids
that offer immediately available nutrition because little or no digestion is
required. All of the Company's critical care nutrition products are elemental
formulas. The critical care nutrition formula market is currently dominated by
a small number of established manufacturers of national brands, each of which
focuses on particular segments of the market. These manufacturers include Ross
Laboratories, a division of Abbott Laboratories ("Ross
Laboratories"), Mead Johnson Nutritionals, a Bristol-Myers Squibb Company
("Mead Johnson"), Novartis, formerly known as Sandoz Corp.
("Novartis") and Nestlé Ltd ("Nestlé"), formerly known as
Clintec Nutrition Co.  In an effort to
grow its critical care business aggressively and to take advantage of the
synergies a larger organization can bring to the distribution of these
products, the Company licensed its clinical nutrition business to Hormel
HealthLabs under a technology licensing arrangement.*  The arrangement provides the Company with a guaranteed royalty
based upon operations of the business. 
The Company is also researching ways in which to incorporate certain of
its immune-enhancing ingredients into selected critical care products to
provide additional proprietary protection and added benefits that are not
currently available in that market segment.* 
Hormel HealthLabs continues to grow its influence in the critical care
market with its recent acquisition of Diamond Crystal.

Business Strategy

GalaGen is focusing on two market segments to
optimally capitalize on its immune-enhancing capabilities: (i) functional food
and nutraceutical products and (ii) critical care products.*  The emphasis on the first market will yield
consumer food, beverage and supplement products containing Proventra, and other
immune components, in grocery and health food stores.*  The emphasis on the second market will yield
products for hospitals, nursing homes and home healthcare that may contain
Proventra or other immune-enhancing ingredients.*  The Company will utilize relationships and collaborations with
strategic partners to deliver these products to the marketplace.*

Nutritional consumer food and beverage
product categories that the Company is focusing on include juices, sports
drinks, yogurts, bars, supplements, cereals and water.* The Company is working
with and securing future large potential partners in these categories to
introduce its Proventra immune components into consumer products.*  The Company believes that it can utilize the
significant distribution and marketing capabilities of its partners to
successfully brand its products and generate future revenue.*

The
following strategic partner agreements are currently in place to market and
develop new Proventra products:

Consumer Food, Beverage and Supplement
Products

Lifeway Foods, Inc.

In
1997, the Company assisted in introducing Basics Plus, a dietary supplement
product, in conjunction with its marketing and manufacturing partner, Lifeway
Foods, Inc.  Basics Plus contains active
kefir cultures, which are cultures that contain beneficial bacteria strains,
and the Companys Proventra.  Basics
Plus is the first dairy-based dietary supplement sold in the United States in
the refrigerated section of health food stores and grocery stores. The product was
featured in the February 1998 issue of Dairy Foods Magazine and has gained
recognition as an industry breakthrough. 
Dairy
Foods Magazine named Basics Plus the top new dairy product in 1998
for the Functional Foods category.

American Home Products - Wyeth Ayerst

In
1998, the Company entered into a collaboration and license agreement and a
manufacturing and supply agreement with Wyeth-Ayerst, a division of American
Home Products Corporation.  The two
companies will develop and commercialize a proprietary ingredient with unique
antibacterial properties for use in pediatric formula and other nutritional
products.*  The companies will
collaborate during the research and development phase of the product, which is
being funded by Wyeth-Ayerst.* 
Additionally, Wyeth-Ayerst has financial and oversight responsibilities
for all clinical trials and regulatory compliance related to the use of the
ingredient in pediatric formula products. 
Wyeth-Ayerst has worldwide rights to the use of the ingredient in its
pediatric formula and other nutritional products.  GalaGen retains certain rights to manufacture the ingredient and
has the right to request a sublicense from Wyeth-Ayerst to develop and
commercialize non-pediatric formula nutritional products.

General Nutrition Corporation

In
1998, the Company entered into an agreement with General Nutrition Corporation
("GNC").  Under this
agreement, the Company and GNC will develop and market a range of
immune-boosting dietary supplements and sports nutrition formulas for
specialized retail and mass-market retail channels using certain proprietary
formulations of Proventra.*  The Company
will sell its Proventra to General Nutrition Products, Inc. ("GNP"),
the manufacturing company of GNC, for incorporation into the products for
exclusive distribution and retail marketing in North America by GNC, its
affiliates, franchisees and certain other stores in mass market channels.* The
first product introduced during the second half of 1999 was a tablet supplement
called Proventra, which is distributed through GNC and Rite-Aid Drugstores. The
Company can also sell its supplements to other distribution partners since GNC
did not meet the exclusivity purchase provisions of the agreement.

Novartis Consumer Health

In 1999, the Company entered into an
exclusive worldwide licensing agreement that grants Novartis the rights to
develop, market and distribute certain products based on Proventra Natural
Immune Components and other proprietary colostrum technologies.  The agreement provides the Company with a
license fee, royalty payments on products sold containing Proventra, supply
revenue for the sale of Proventra to Novartis and milestone revenues based on
product revenue targets.

Tropicana

In
1999, the Company entered into an agreement with Tropicana Products, Inc., a
division of PepsiCo Inc.  Under the
agreement, which expired in December 1999, the two companies were  exploring development of nutritious
beverages for the health-conscious consumer. 
Subsequent to the expiration of the exploratory agreement in December
1999, the Company and Tropicana are continuing to work together on various
potential products. Additional studies are underway that may lead to product
introduction opportunities with Tropicana.*

Estee Lauder

In
July of 2000 the Company entered into a non-exclusive supply agreement with
Estee Lauder for sale of one of its colostrum ingredients for use in skin-care
products. The Company is also seeking additional partners to sell this
ingredient to for incorporation into skin-care products.*

Land O'Lakes

The Company secured the rights to make a
yogurt product containing Proventra from Land O' Lakes. The Company is seeking
a new partner to introduce this product into the wholesale and retail
distribution chain.*

Critical Care
Products

Hormel HealthLabs

The
Company acquired the critical care product line from NMI during 1998. The
products are sold to the hospital and home healthcare industries.  GalaGen purchased substantially all of NMIs
critical care enteral nutrition products and formulas, all related inventory
and certain other assets, including the existing customer base of over 500
hospitals and home healthcare facilities. 
In 1999, the Company licensed the sales of these products to Hormel
HealthLabs in order to take advantage of a superior distribution channel and to
more rapidly grow the business.*  The
Company earns a monthly royalty from Hormel HealthLabs based upon an annual
operating budget.  The licensed critical
care products are manufactured by third parties.

Critical
care nutrition formulas are used by hospitals and other health care providers
to feed critically ill patients who cannot consume adequate nutrients orally
and consequently require specialized feeding via tubes into the intestinal
tract.  The use of critical care
nutrition formulas often continues at home or in a nursing home after a patient
is discharged from the hospital.  The
licensing strategy is to focus on the development and sale of a core line of
critical care formulas for patients who do not metabolize foods well and are most
likely in intensive care units.* 
Certain unique ingredients are combined to meet the special nutritional
requirements of specific patient populations. 
Partnering with Hormel HealthLabs provides the Company an ability to
compete more aggressively with larger name brand manufacturers.*

Hormel
HealthLabs is selling seven nutrition products for critical care use. Most
products contain elemental protein sources, which contain predigested protein
that offers immediately available nutrition. The first proprietary critical
care formula, Glutasorb, was launched in 1998. This formula is the first high
glutamine, ready-to-use, liquid elemental diet available in the United States
and, as such, has no specific competing branded product.

The
following chart provides information regarding each of the Company's critical
care nutrition products.

Product Name
  Date
  Introduced
  Product DescriptionL-Emental
  May
  1994
  A 100% free amino acid-based elemental
  nutrition formula for gastrointestinal ("GI") impaired or critically
  ill patientsL-Emental
  Hepatic
  June
  1996
  A 100% free amino acid and calorie
  supplement for the dietary management of chronic liver disease patients.Pro-Peptide
  Unflavored
  November
  1994
  A ready-to-use, isotonic, peptide-based
  diet for GI impaired patientsPro-Peptide
  VHN
  November
  1995
  A high nitrogen, isotonic, peptide-based
  diet for GI impaired and critically impaired patients who require high
  protein levelsPro-Peptide
  Vanilla
  November
  1995
  Vanilla flavored ready-to-use,
  peptide-based diet for GI impaired patients who require an oral productPro-Peptide
  For Kids
  May
  1997
  Vanilla flavored ready-to-use,
  peptide-based diet for children ages 1 to 10 who are GI impairedGlutasorb
  February
  1998
  Ready-to-use, high glutamine, amino
  acid-peptide based product for patients who have severe catabolic illness, GI
  dysfunction, surgery and trauma

Effective July 1, 2000 sales of the L-Emental Pediatric were
discontinued pursuant to an agreement between the Company and Novartis. In
addition, the Company also discontinued sales of NitroPro in 2000 due to a lack
of volume.

The
Company is researching ways in which to incorporate certain of its
immune-enhancing ingredients into certain products listed above to provide
additional proprietary protection and added benefits that are not currently
available in that market segment.* 
Additional products that Hormel HealthLabs may introduce would include
proprietary immune-enhancing features.*

We
also offer a specially formulated critical care product called VistrumTM,
which is a cultured dairy beverage used to improve gastrointestinal health of
patients in hospitals and nursing homes. The product contains Proventra and is
currently being evaluated by Hormel before its official product launch.

Manufacturing System

Functional Food and Nutraceutical Products
Manufacturing

The
Companys manufacturing system produces antibodies for nutritional
products.  The Companys system has been
designed to access very large numbers of cows in commercial milking herds, organize
them into discrete product–specific groups and, if needed, immunize them
with specific antigens to heighten the natural production of targeted
antibodies in their colostrum, collect the colostrum and concentrate the
antibodies using proprietary processes. 
These processes preserve the essential antibody activity and other
immune-enhancing components, while reducing unnecessary components, including
microbial contaminants. Modern dairy cows, having been bred for high volume
milk production, produce colostrum in quantities far greater than their calves
can consume.  After the calf fulfills
its colostrum needs, this surplus colostrum can be collected by the Company.

Standard
dairy processing techniques destroy the activity of most of the antibodies
present in milk and colostrum and render them inactive.  The proprietary processes used by the
Company to concentrate antibodies have been developed by the Company through
many years of research and development. 
This work has resulted in processes that use well–tested and
efficient dairy product manufacturing techniques, including pasteurization,
that have been modified to preserve the biological activity of the
antibodies.  The Company has two patents
that have been issued for these processes. The Company is supporting its
proprietary antibody processing system with a quality control system designed
to regulate, monitor and review the processing system.  The Company has obtained Kosher
certification for the natural immune components found in Proventra.

Construction
of the Companys manufacturing facility within the existing Land OLakes
manufacturing complex in Arden Hills, Minnesota was completed in 1996.  Land OLakes has guaranteed the equipment
leases associated with the manufacturing facility.  The Company believes that the capacity of this facility will be
adequate for the production of Proventra for nutritional products, either for
sale or product development requirements, into 2001 and believes that contract
manufacturers would be available to increase its production capacity quickly,
if required.*

Critical Care Products Manufacturing

All
of the Companys critical care products are manufactured by third parties.
These toll manufacturers are subject to FDA regulatory requirements for food
and medical food production, and the Company's products undergo quality control
testing during and after the production process. By using third party
manufacturers, Hormel HealthLabs is better able to introduce new products that
require differing manufacturing processes and maintain a favorable fixed cost
structure.* Critical care nutrition products are shipped from the manufacturer
to Hormel HealthLabs for product distribution. 
The Company believes that there are several manufacturers in the United
States that could manufacture the critical care products and that it is not
dependent upon one single manufacturer for its product supply.*

Marketing and Research Relationships

Marketing

Functional Food and
Nutraceutical Products

To
exploit Proventra as broadly as possible in human applications, the Companys
consumer  products strategy is to enter
into strategic relationships with food, beverage and supplement companies to
develop products that incorporate Proventra and/or other immune combinations
and/or to sell Proventra to these companies as an ingredient.*  The Company does not anticipate that it will
manufacture, market or distribute any final food product, but will rely upon
collaborations with larger companies to accomplish these goals.*

Critical Care Products

The
Companys critical care products are marketed through the Hormel HealthLabs
sales distribution system.  This system
incorporates an active distribution broker force of over 50 brokers who began
representing the product in the first quarter of 2000. The acquisition of
Diamond Crystal may also provide a direct sales force to sell the critical
product line after evaluation by Hormel HealthLabs.*

Research

Functional Food and Nutraceutical Products

The
Companys product development strategy for functional food and nutraceutical
products is to pursue its own research programs internally and to complement
such programs by establishing relationships with key external medical,
academic, governmental and major research organizations.*  The Company's primary focus is on seeking
collaborative arrangements for commercialization of its Proventra-based
products.*   Additionally, the Company
intends to continue complementing its extensive immune-enhancing technology
base by acquiring access to additional proprietary technology and patents in
the areas of antibodies, vaccine, molecular biology, and processing and
manufacturing technology.* The Company spent $2.3 million, $1.6 million and
$1.9 million for product development in fiscal years 2000, 1999 and 1998
respectively. The increase in spending in 2000 was primarliy as a result of
direct spending on products relating to current contracts with customers.

Critical
Care Products

The Companys product development strategy
for critical care products is to initially determine the size of market
opportunity with respect to a particular product. Outside laboratories are then
used to analyze the ingredients of the existing product and to formulate the
Companys potential product version of a competing product.  The Company anticipates that any future
product development may generally follow this procedure, but anticipates that
any new products will incorporate immune-enhancing benefits to make a product
proprietary and have unique features not currently available in the market so as
to maintain or increase gross margins.* The Company's critical care, disease
specific and intact protein nutrition formulas are not required to undergo
clinical testing or obtain FDA approval for such products, though they are
subject to certain FDA guidelines.

Land OLakes
Relationship

The
Company believes that the Companys existing relationship with Land OLakes
provides it with certain advantages over existing and potential
competitors.*  Land OLakes has made
significant advances in the development and commercialization of antibody
products for treating and preventing diseases in animals.  This technology provides the Company with a
solid foundation on which to base its efforts to develop similar products for human
use.

Under
an exclusive supply agreement with Land OLakes, the Company agreed to purchase
all of its commercial requirements for high titre colostrum from Land OLakes
through May 7, 2002, subject to Land OLakes option to renew the supply
agreement for an additional ten–year period. During 1999 the Company
negotiated the right to obtain its colostrum supply from additional external
sources and the exclusive supply agreement has been subsequently cancelled.
While the Company can continue to obtain colostrum from Land O' Lakes, the
elimination of the exclusive arrangement provides the Company the opportunity
to obtain the most cost competitive supply.

When
the Company was formed, it signed a letter of intent with Land OLakes to
develop strategic relationships focused on the development of functional food
products.  In March 1998, the Company
and Land OLakes signed an amended and restated license agreement (the
Restated License) under which the Company has significantly broadened its
rights to develop and market functional foods. 
Under the Restated License, the Company can use, improve, exploit,
license or share existing Procor Technology, Inc. (the Company's predecessor,
"Procor") technology, Procor technology improvements and new
technologies, as defined, in all areas of functional foods except under certain
reserved food product and first refusal food product categories, as
defined.  If the Company intends to
engage in manufacturing or marketing any first refusal food product, the
Company must give Land OLakes notice of its intent, in which case Land OLakes
can negotiate with the Company, in good faith and within a defined period of
time, to undertake any part of the manufacturing or marketing areas.  If the Company intends to engage in
manufacturing or marketing any reserved food product, the Company must give
Land OLakes notice of its intent and must only work with Land OLakes to
undertake the manufacturing or marketing of such products.  In its license agreements with Land OLakes,
the Company retained rights to pursue the development of infant formula
products containing polyclonal antibody technology.

In
March 1997, Land OLakes granted the Company a license (the Kefir License) to use existing antibody technology and
future improvements in the development, formulation, manufacture, marketing,
distribution and sale of kefir-based products, as defined in the Kefir
License.  In consideration of granting
the Kefir License, Land OLakes will receive a royalty based on food components
or ingredients sold by the Company to be included in any kefir-based product
and on net receipts from any kefir-based finished product sold by the Company.

In
October of 1999, the Company and Land O'Lakes agreed to transfer the rights to
manufacture a yogurt-based product containing Proventra to the Company. The
Company is currently exploring alliance relationships with major yogurt
manufacturers to introduce a Proventra yogurt product through their
distribution channels.*  The ultimate
introduction of such a yogurt product containing Proventra will be dependent
upon successful completion of a yogurt license agreement.*

Proprietary Rights
and Patents

Functional Foods and
Nutraceutical Products

The
Companys policy is to protect its proprietary technology as trade secrets and
by filing patent applications on technology for which the Company believes
patent protection is available and is in the best interest of the Company.  The Company also relies upon know–how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position.

The
Company has obtained a series of sole licenses for enabling patents from
Metagenics, Inc. relating to the combination of antibodies and soluble fibers,
and antibodies and active cultures (e.g., probiotics) for use in the fields of
dietary supplements, medical foods and consumer foods. Metagenics, Inc. retains
the right to use these patents for its own products.   The Company has also acquired a patent from Biotest Pharma GmbH
for an alternative antibody processing technology. During 2000, the Company
also acquired the Gaull patent which prevents the use of recombitant human
proteins in infant formula without approval of the Company.  The Company believes that as future products
are developed these patents can provide a competitive advantage to our
customers when they incoporate combination ingredients into their products.

The
Company believes that certain of its process improvements are more valuable as
trade secrets than as patented processes, where the process improvements would
have to be publicly disclosed.  The
Company relies on trade secrets and proprietary know–how it developed
while manufacturing antibody products. 
The Company believes that substantial barriers exist for competitors
desiring to commercialize antibodies derived from milk or colostrum that have
the features that the Companys antibodies, or Proventra, have*; however, there
can be no assurance that other companies will not develop production processes
or initiate relationships with other large dairy cooperatives to develop a
similar procurement system.  The Company
seeks to protect trade secrets and know–how through confidentiality
agreements with employees, consultants and other parties.  These agreements provide that all
confidential information developed or made known during the course of the
relationship with the Company is to be kept confidential and not disclosed to
third parties, except in specific circumstances.  No assurance can be given that such agreements will provide
meaningful protection for the Companys non-patented trade secrets or provide
adequate remedies in the event of unauthorized use of such information.  Neither can assurance be given that others
will not independently develop substantially equivalent proprietary information
and technology or otherwise gain access to the Companys trade secrets or
disclose such technology.

The
Company has five patents from the United States Patent & Trademark Office
and  European and/or foreign
counterparts have issued or are pending the same patents.  Two patents cover significant processes in
its core manufacturing technology for antibodies for microfiltering milk and
colostrum that reduces contaminants while improving yield.  The third patent covers the therapeutic use
of Clostridium
difficile specific bovine antibodies for the treatment of C. difficile
related diseases such as diarrhea. The fourth patent covers a vaccine
composition for generating specific, high titre antibodies against Cryptosporidium
parvum. The fifth patent is the Gaull patent discussed above. The
Company also has several United States patent applications pending and has
acquired licenses to a number of patents or patent applications of others.  The Companys United States patent applications
are in the area of bovine antibody technology and product applications.  The Company believes that useful, new and
different antibody formulations also may be patentable in support of its
immune-enhancing strategy.* 
Furthermore, in some cases, patent coverage may be available for the vaccines
or antigens used to provoke the immune response which produces the
antibodies.*  The Companys strategy is
to pursue patent protection for each of its products where possible, including
their components, as well as for certain process and formulation improvements,*
although the Company may not be successful in achieving broad patent protection
for its technology.

Critical Care Products

The
Company is in the process of registering its existing trademarks, for the
products acquired from NMI, with the United States Patent & Trademark
Office.*  As part of NMI, the products
were not registered but instead relied on NMI's common law trademark rights.
The lack of such registration may impair the ability of the Company to
successfully register the trademarks or to prosecute successfully an
infringement action against other users of these trademarks. There can be no
assurance that the Company's marks do not or will not violate the proprietary
rights of others, that the Company's proprietary rights in the marks would be
upheld if challenged, or that the Company would not be prevented from using its
marks, any of which could have an adverse effect on the Company.  In addition, there can be no assurance that
the Company will have the financial resources necessary to enforce or defend
its trademarks.

Government Regulation

Functional Food and
Nutraceutical Products

General

The formulation, manufacturing, processing,
packaging, labeling, advertising, distribution and sale of nutritional
supplements such as those being developed by the Company are subject to
regulation by one or more federal agencies, principally the FDA and the Federal
Trade Commission (the FTC), and to a lesser extent the Consumer Product
Safety Commission and the United States Department of Agriculture.  These activities are also regulated by
various governmental agencies for the states and localities in which the
Companys products are sold, as well as by governmental agencies in certain
foreign countries in which the Companys products are sold.  Among other matters, regulation of the
Company by the FDA and FTC is concerned with claims made with respect to a
product which refer to the value of the product in treating or preventing
disease or other adverse health conditions.

Federal
agencies, primarily the FDA and FTC, have a variety of remedies and processes
available to them, including initiating investigations, issuing warning letters
and cease and desist orders, requiring corrective labels or advertising,
requiring consumer redress (for example, requiring that a company offer to
repurchase products previously sold to consumers), seeking injunctive relief or
product seizure and imposing civil penalties or commencing criminal
prosecution.  In addition, certain state
agencies have similar authority, as well as the authority to prohibit or
restrict the manufacture or sale of products within their jurisdiction. These
federal and state agencies have in the past used these remedies in regulating
participants in the nutritional products industry, including the imposition by
federal agencies of civil penalties in the millions of dollars against a few
industry participants.  There can be no
assurance that the regulatory environment in which the Company operates will
not change or that such regulatory environment, or any specific action taken
against the Company, will not result in a material adverse effect on the
Companys business, financial condition or results of operations.  In addition, increased sales and publicity
of nutritional supplements may result in increased regulatory scrutiny of the
nutritional supplements industry.

Dietary Supplement Health and Education Act

DSHEA
was enacted in October 1994, amending the Food, Drug and Cosmetic Act.  The Company believes this law is generally
favorable to the dietary supplement industry. 
DSHEA establishes a new statutory class of dietary supplements, which
includes vitamins, minerals, herbs, amino acids and other nutritional
supplements for human use to supplement the diet and includes in such class all
dietary ingredients on the market as of October 15, 1994.  Such class of nutritional supplements will
not require the submission by the manufacturer or distributor of evidence of a
history of use or other evidence of safety establishing that the supplement
will reasonably be expected to be safe, but a nutritional supplement that
contains a dietary ingredient that was not on the market as of October 15, 1994
does require such submission of evidence of a history of use or other evidence
of safety. Among other things, this law prevents the further regulation of
dietary ingredients as food additives and allows the use of statements of
nutritional support on product labels. DSHEA allows the use of
"structure/function" claims on the label of a product, which may
allow the Company to communicate advantages of Proventra without the expenses
associated with FDA clinical trials.* 
The law requires companies to file label claim information with FDA
within 30 days after initiating marketing of a product, and FDA may respond
with a "courtesy letter" commenting on the claims if it believes they
are not appropriate.

Since
the passage of DSHEA, FDA has indicated that food products not considered
dietary supplements and regulated under the Nutrition Labeling and Education
Act (NLEA) may also bear structure/function claims, provided that the food or
ingredient in the food product meets the Generally Recognized as Safe (GRAS)
standard.  While the Companys products
have not been certified GRAS, the Company believes that its ingredients will
meet this standard and has initiated the review process with a third party
regulatory consulting group.*  NLEA also
provides for a class of label claims called health claims, which describe the effect
a food product may have on reducing disease risk.  Health claims, in contrast to structure/function claims, do
require advance approval and are subject to the standard that such claims must
represent substantial scientific agreement (as generally evidenced by multiple
well controlled clinical studies).  Only
a limited number of health claims have been approved under NLEA or a succeeding
act, the FDA Modernization Act, which provided additional pathways for
obtaining approval of health claims.

Research Based Dietary Ingredients Association

The
Company is a member of the Research Based Dietary Ingredients Association (
RDIA), which is an organization that works with regulators to set
scientifically based standards for functional foods. The Companys Chairman is
the current president of this organization.

Other
Regulatory Requirements

The
Company is also subject to regulation by the Occupational Safety and Health
Administration, the Environmental Protection Agency and the Minnesota
Environmental Quality Board and to regulation under the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, among others, and
other regulations, and may in the future be subject to other federal, state and
local statutes or regulations.  The
Company is unable to predict whether any agency will adopt any regulation which
would have a material adverse effect on the Company.

BSE

Bovine
Songiform Encephalophy, or BSE (madcow disease), is a predominantly European
disease currently believed to be transmitted primarily through the bone tissue
of cattle. The World Health Organization has developed four categories for
measuring the risk of contracting  the
BSE disease through cattle. Category I is considered high infectivity, category
II medium infectivity, category III low infectivity and category IV no
detectable infectivity. Colostrum, milk and other items are classified as
category IV and therefore there appears to be no risk of contracting BSE
through these products.  No known cases
of BSE have ever been attributed to colostrum.

Critical Care Products

The
Company's critical care products are also subject to government
regulation.  These products are
regulated as food and medical food by the FDA and are subject to labeling
requirements, current good manufacturing practice regulations and certain other
regulations designed to ensure the safety of the products. Claims made by the
Company in labeling and advertising its products are subject to regulation by
the FDA, the FTC and various state agencies under their general authority to
prevent false, misleading and deceptive trade practices. These regulations
involve more stringent tracking, testing and documentation standards. Failure
to comply with FDA requirements can result in adverse regulatory action,
including injunctions, civil or criminal penalties, product recalls or the
re-labeling, reformulation or possible termination of certain products.

Competition

Functional Food and Nutraceutical Products

The
area of nutritional products is highly fragmented and competitive with many
large nationally known manufacturers and many smaller manufacturers and
marketers of nutritional products.  The
Company has licensed patents from Metagenics regarding the incorporation of
antibodies combined with active cultures and antibodies combined with soluble
fiber.  Many of the nutritional products
the Company anticipates developing, in conjunction with a strategic partner,
will be covered by these patents.* 
Potential competitors, however, could be larger than the Company, have greater
access to capital and may be better able to withstand volatile market
conditions.  Moreover, because the
nutritional products industry generally has low barriers to entry, additional
competitors could enter the market at any time.  In that regard, although the nutritional products industry to
date has been characterized by many relatively small participants, national or
international companies (which may include food or pharmaceutical companies or
other suppliers to the mass markets) may seek to enter or to increase their
presence in this industry, which would have a material adverse effect on the
Companys competitive position.

The
Company has assessed the factors that may make it competitive in this
environment and believes that its central strength is that the products it will
develop in conjunction with various partners will be unique, distinct and
proprietary in the marketplace.*  This
distinction is made by offering in its products direct immune enhancing
benefits that include Proventra and a combination of other  key ingredients, such as active cultures and
soluble fiber, currently not available in the market.*  Such products will also be subject to patent
protection.*  Another strength includes
proprietary technologies that can enhance Proventra by offering immune
protection against specific common disease-causing pathogens.*  Additionally, the Companys collaborative
relationships offer financial, production, sales and distribution synergies
beyond those of GalaGen itself, which allow the Company to compete more
effectively.*

Colostrum Manufacturers

The
Company knows of certain colostrum manufacturers, including New Zealand Dairy
and La Belle, Inc., which supply colostrum in dried or liquid form.   These competitors are larger than the
Company, have greater access to capital and may be better able to withstand
volatile market conditions. Potential competitors could also be larger than the
Company, have greater access to capital and may be better able to withstand
volatile market conditions.  The
colostrum market requires access to a substantial number of dairy cows to be
commercially successful.  The Company
has assessed the factors that may make it competitive in this environment and
believe that its central strengths are: (i) its access to 750,000 dairy cows in
the Land O'Lakes system, (ii) its ability to pasteurize, and/or certify Kosher,
colostrum, while still maintaining the effectiveness of the immune-enhancing
components, namely antibodies, which the Company believes no competitor offers,
and (iii) its ability to enhance Proventra by offering immune protection
against targeted pathogens.*



Critical Care Products

Competition
in the critical care nutrition products market primarily consists of five
companies that have established brands in the specialty markets in which the
Company has chosen to compete. These companies, Novartis, Mead Johnson, Nestlé
and Ross Laboratories, each market their specialty products through sales
personnel who generally use traditional in-person sales.  All of these companies are larger than the
Company, have greater access to capital and are likely to be better able to
withstand volatile market conditions. 
Although Ross Laboratories is the dominant manufacturer in the United
States adult total enteral nutrition market (which includes the critical care nutrition
market), Ross Laboratories has focused on whole protein products that do not
compete directly with the Company's critical care elemental protein formulas.
Although the Company believes it is the only company currently offering low
cost alternatives to the established brands, other companies may enter this
market.*

Employees

At
December 31, 2000, the Company had 17 employees, two of whom came from NMI
when the Company acquired certain assets of NMI and are in sales working
through Hormel HealthLabs.  Three
employees have Ph.D. degrees, one of whom has an M.D. degree.  Five employees are currently working in
product development, including the clinical regulatory area.  The Company believes its employee
relationships are good.

Risk Factors

Certain
statements made in this Annual Report on Form 10-K, including those indicated
by an asterisk above, are forward–looking statements based on our current
expectations, assumptions, estimates and projections about our business and our
industry.  These forward–looking
statements involve risks and uncertainties. 
Our business, financial condition and results of operations could differ
materially from those anticipated in these forward–looking statements as
a result of certain factors, as more fully described below and elsewhere in
this Form 10-K.  You should consider
carefully the risks and uncertainties described below, which are not the only
ones facing our Company.  Additional
risks and uncertainties also may impair our business operations.  We undertake no obligation to update
publicly any forward–looking statements for any reason, even if new
information becomes available or other events occur in the future.

General

We may not ever achieve a profitable level of operations.Our ability to
achieve profitable operations depends in large part on:         entering into agreements to develop
products and establish markets for those products; and         making the transition from a research company to an operating and marketing company.We
cannot be sure we will be successful in ever achieving either result.  We have experienced significant operating
losses in each year since our inception in 1987.  We have an accumulated deficit of approximately $65 million as of
December 31, 2000.  We may continue
to lose money in the future.

If we cannot obtain continuing funding, we
may be unable to implement our business plans.

If
we cannot find adequate funding, we may have to delay or eliminate some of our
product development plans.  We may be
required to grant licenses to others to establish markets for products or
technologies that we would otherwise seek to market ourselves.

Our cash
requirements for working capital depend on numerous factors.  These factors include:         our spending on marketing activities,
including clinical marketing trials;         our
progress in finding partners to help us develop products and market those
products;
         the
willingness and ability of our partners to provide funding for our activities;
         our
spending on product development programs;
         the
rate of technological advances in the production of our products;
         our
spending on facilities, equipment and personnel to make our products; and
         the
status of competitive products.Our
long-term ability to continue funding our planned operations depends on our
ability to obtain additional funds through:

         product revenues;         equity
or debt financing;
         partners
to help us develop products and market those products;
         license agreements; or
         other
financing sources.Because
of our significant long–term capital requirements, we may seek to raise
funds when conditions are favorable.  We
may do so even if we do not have an immediate need for the capital at the time
we raise it.  If we have not raised
funds prior to when our needs for funding become immediate, we may be forced to
raise funds when conditions are unfavorable. 
This could result in significant dilution of our current stockholders.

If we do not achieve a profitable level of
operations and cannot find funding in the future, we could eventually become
insolvent or bankrupt.

If
we do not achieve a profitable level of operations and we do not obtain funding
necessary from some source other than operations, we could eventually deplete
our cash reserves and become insolvent or bankrupt.

The relatively low level of trading in our
common stock may make it highly volatile.

Our  Common Stock  is traded on the 
Over-the-Counter Bulletin Board, or OTCBB and the volume of shares of
Common Stock traded on that market has been relatively small.  Given the small volume of shares traded,
market fluctuations may have a particularly adverse effect on the market price
of our Common Stock.  We cannot be sure
of the liquidity of the market for the Common Stock or the price at which any
sales may occur.  The volume of trading
in our Common Stock in the future will depend upon the number of holders of the
Common Stock, the interest of securities dealers in maintaining a market in the
Common Stock and other factors beyond our control.  The market price of our Common Stock could be subject to
significant fluctuations in response to:

         our operating results;         the
operating results of our competitors or other biotechnology companies;
         technological developments;
         government
regulations;
         the
status of our proprietary rights to potential products;
         litigation;
         public
safety concerns; and
         other
factors.Some
of these factors are unrelated to our operating performance and beyond our
control.

GalaGen and our stockholders may have
difficulty in selling shares of our Common Stock.

The OTCBB is not a listing service, market or exchange. Instead, it is
a regulated quotation service that displays real-time quotes, last-sale prices
and volume information for securities traded on it. In order for a security to
trade on the OTCBB, market makers must be willing to make a market in the
security. We cannot be sure that market makers will continue to make a market
in shares of our Common Stock. Even if market makers do continue to make a
market in our Common Stock, we cannot be sure that they will be successful in
executing trades placed with them. The lack of a liquid market for our Common
Stock, may make it difficult for us to raise funds through the sale of our
Common Stock or securities convertible into Common Stock.

We may be subject to product liability claims
that exceed our insurance coverage.

Our
business involves exposure to potential product liability risks that are
inherent in the production, manufacture and distribution of consumer and
clinical food products that are designed to be ingested. The successful
assertion or settlement of any uninsured claim, a significant number of insured
claims or a claim exceeding our insurance coverage could have a material
adverse effect on our business and financial condition.  We cannot be sure that we will be able to
obtain product liability insurance on acceptable terms or that provides
adequate protection. Furthermore, we cannot be sure that we will be able to
secure increased insurance coverage as the markets for our products increase.

If we rely on inaccurate market information,
we could make a decision that has a material adverse effect on our business and
financial condition.

Because
we are currently developing our products and markets for those products, we are
particularly reliant on market data.  If
that data is inaccurate, we may commit resources to product development and
marketing efforts that do not become profitable.  Product development and marketing efforts that do not become
profitable may have a material adverse effect on our business and financial
condition.  We have obtained market and
related data from a competitive-market analysis firm.  We have not independently verified the accuracy of that information.  In any event, the methodology typically used
in compiling market and related data makes it subject to inherent uncertainties
and estimations.  As a result, we cannot
be sure as to the accuracy or completeness of our market information.

Inadequate Proventra production could have a
material adverse effect on our business and financial condition.

Given
our limited experience in manufacturing Proventra, we cannot be sure that we
will be successful in producing Proventra of acceptable quality on a commercial
scale and at acceptable costs in our manufacturing facility.  If we cannot, our business and financial
condition could be materially adversely affected.  Our production of Proventra will be regulated by the Minnesota
Department of Agriculture.  We believe
that our current manufacturing facility will meet the anticipated requirements
for the production of Proventra for use in consumer and clinical nutritional
products through the year 2001. 
Further, we believe that contract manufacturers would be available to
increase our Proventra production capacity quickly, if required.  However, until we begin producing Proventra
on a commercial scale, we cannot be sure that our production capabilities will
be adequate.

Failure of our collaborations to develop and
market products containing Proventra could have a material adverse effect on
our business and financial condition.

We
are relying on collaborations with larger more established companies to develop and market products containing
Proventra.  Our collaborators inability
to bring products to market could have a material adverse effect on our
business and financial condition. 
Introduction of new products depends on our ability and our
collaborators ability to accomplish the following:

         complete market research;         complete
product development;
         establish
product manufacturing;
         initiate
marketing, sales and distribution activities related to such products; and
         provide
the funding necessary to accomplish such activities.Delays or high costs in product development
could have a material adverse effect on our business and financial condition.

If we, or our strategic partners, cannot
obtain accurate marketing data, or develop a product responsive to the needs
identified by that data, our business and financial condition could be
materially adversely affected.  The
amount of time it will take us, together with our strategic partners, to
develop consumer and clinical nutrition products and the associated costs of
developing those products depends on, among other things, the results of our
market research for consumer and clinical products.  It also depends on our discussions with certain end users or
purchasers of the potential products. 
Market research and discussions may give us indications of potential
customers, what types of products they may desire and what clinicalinformation is necessary for effective marketing and sales.

Risks
Specific to Functional Food and Nutraceutical Products

Consumer fear of Bovine Songiform
Encephalopahy, or BSE, may impair our ability to commercialize products
containing bovine colostrum.

Occurrences
of BSE, or mad cow disease, in certain parts of the world may lead to
consumer resistance to product containing bovine derived ingredients. Such
consumer resistance, or concerns on the part of consumer product developers and
manufacturers about such consumer resistance, may impair our ability to
commercialize products containing our proprietary bovine colostrum ingredients.

Public misperception of the safety of our
product could have a material adverse effect on our business and financial
condition.

We
are highly dependent upon consumers perception of the safety and quality of
our products as well as of similar products distributed by other
companies.  Thus, for example, the
publication of reports asserting that such products may be harmful could have a
material adverse effect on our business and financial condition, regardless of
whether such reports are scientifically supported and regardless of whether the
alleged harmful effects would be present at the dosages recommended for such
products.

Innovative ingredients may produce unwanted
effects and expose us to product liability claims or loss of consumer
confidence.

If
we develop products with innovative ingredients that over time are shown to
produce unwanted effects, we could be exposed to product liability claims and
lose consumer confidence, which could have a material adverse effect on our
business and financial condition.  Some
of our future products may contain innovative ingredients or combinations of
ingredients that do not have a long history of human consumption.  While we believe all of our products will be
safe when taken as we direct, there is little long-term experience with human
consumption of certain of these innovative product ingredients or combinations
thereof in concentrated form.  Although
we perform research and/or test the formulation and production of our products,
we will sponsor only limited clinical studies or rely on other outside
published data.

If larger companies with greater access to
capital and product markets enter our segment of the nutritional products
market, we may be materially adversely affected.

Because
the nutritional products industry generally has low barriers to entry,
additional competitors could enter the market at any time. Potential
competitors could be larger than we are, have greater access to capital than we
do and may be better able to withstand volatile market conditions than we are.
Although the nutritional products industry to date has been characterized by
many relatively small participants, national or international companies (which
may include pharmaceutical companies or other suppliers to mass merchandisers)
may seek to enter or to increase their presence in this industry or to
consolidate it.  Increased competition
in the industry could have a material adverse effect on our business and
financial condition.

Our failure to obtain necessary
approvals or otherwise comply with government regulations could have a material
adverse effect on our business and financial condition.

Our
current and potential functional foods and nutraceutical products may become
subject to governmental regulation in the future. The burden of such regulation
could add materially to the costs and risks of our development and marketing
efforts. There can be no assurance that we could obtain the required approvals
or comply with new regulations if our products are subject to additional
governmental regulation in the future.

Some
of our products in development may be subject to regulation by one or more
federal agencies, principally the Food and Drug Administration and the Federal
Trade Commission, and to a lesser extent the Consumer Product Safety Commission
and the United States Department of Agriculture regarding the formulation,
manufacturing, processing, packaging, labeling, advertising, distribution and
sale of nutritional supplements.  These
activities are also regulated by various governmental agencies for the states
and localities in which the Company's products are sold, as well as by
governmental agencies in certain foreign countries in which the Company's
products are sold.  Among other matters,
regulation of the Company by the FDA and FTC is concerned with claims made with
respect to a product which refer to the value of the product in treating or
preventing disease or other adverse health conditions.

Risks
Specific to Critical Care Nutrition Products

If Hormel HealthLabs does not increase the sales
volume of our critical care nutrition products, our business and financial
condition may be materially adversely affected.

We
rely on Hormel HealthLabs and its distribution network to sell and distribute
our critical care products.  Because we
entered into our sales and distribution arrangement with Hormel HealthLabs in
August of 1999, we cannot be sure that its sales force will actively promote
our critical care products or that the sales force will be successful in
generating increased sales of those products. 
If the sales volume of our critical care nutrition products is not
increased, our business and financial condition may be materially adversely
affected.

If marketing efforts do not generate the name
recognition for our critical care products necessary to significantly enhance
revenues, our business and financial condition may be materially adversely affected.

We
cannot be sure that our marketing efforts, or the marketing efforts of Hormel
Health Labs, will achieve the name recognition of our critical care nutrition
products necessary to significantly enhance revenues.  If they do not, our business and financial condition could be
materially adversely affected.  Our
products, with the exception of Glutasorb, are designed to be substantially
equivalent to existing branded competitive products.  Although we believe that the quality and efficacy of our critical
care nutrition products are comparable to branded competitive products, no
independent comparison between our critical care nutrition products and
competitive products has been completed. 
We cannot be sure that the efficacy or quality of our critical care
nutrition products is, or will be perceived by our consumers to be, comparable
to branded competitive products. 
Furthermore, our products are relatively unknown to large segments of
our target markets.

Price reductions by competitors could have a material
adverse effect on our business and financial condition.

Much
of our marketing strategy for our critical care nutrition products is focused
on the price advantage of our critical care nutrition products.  If a competitor reduces or eliminates the
price advantage of our products, we cannot be sure that we will be able to
compete successfully with the competitor, or operate profitably under such
conditions.  If we could not, our
business and financial condition could be materially adversely affected.  We believe that the principal advantage of
our critical care nutrition products, with the exception of Glutasorb, is cost
effectiveness.  We believe that any
selective price reductions by a competitor may result in lost sales of our
competing products.

If the contract manufacturers that produce our
products cannot do so adequately, our business and financial condition may be
materially adversely affected.

We
rely on contract manufacturers to produce our critical care nutrition products
according to our specifications.  Any
interruption in supply from these manufacturers of any of our products could
have a material adverse effect on our business and financial condition. We
cannot be sure that contract manufacturers will consistently supply adequate
quantities of our products on a timely basis or that the quality of such
products will be consistently maintained. 
We also rely on these manufacturers to comply with all applicable
government regulations and manufacturing guidelines.  We cannot be sure these contract manufacturers will consistently
comply with government regulations.  In
the event of a sale of a defective product, we would be exposed to product
liability claims and could lose customer confidence.  In addition, minimum quantity order requirements imposed by
manufacturers may result in excess inventory levels, requiring additional
working capital and increasing exposure to losses from inventory obsolescence.

Because the way we distribute our products
may result in a relatively small number of customers, the loss of particular
customers could have a material adverse effect on our business and financial
condition.

Our
critical care nutrition product sales may become concentrated with a few large
distributors and certain customers.  We
cannot be sure that orders from such customers will continue or that our future
orders will not significantly decline, which could have a material adverse
effect on our business and financial condition.

We may become involved in litigation with
competitors that may have a material adverse effect on our business and
financial condition.

Companies
in the private label industry are commonly the subject of claims and lawsuits
brought by brand name competitors alleging that the private label products have
formulas, labeling or packaging similar to competing brand name products. Such
litigation may require the commitment of substantial management time and legal
fees.  Accordingly, such litigation may
have a material adverse effect on our business and financial condition.  Certain of the critical care nutrition
products we acquired from NMI were the subject of a lawsuit alleging patent
infringement.  The suit was favorably
resolved before we acquired the products. 
Similar claims may be made against us by competitors in the future.  Competitors may also respond to our
marketing strategy by more aggressively seeking patents on their products to
limit our future product development efforts. 
If similar infringement allegations are made against us in the future,
some of our current and future products may need to be reformulated or
repackaged in order for us to continue to market products that are comparable
to competitors' patented products. We may be unable to effectively reformulate
certain of our products.  Furthermore,
we cannot be sure that a reformulated product would be viewed by customers to
be essentially equivalent to the patented product. Moreover, we cannot be sure
that any future lawsuits could be satisfactorily settled by reformulating,
relabeling or repackaging a product.

Direct competition from larger companies with
significant financial resources may have a material adverse effect on our
business and financial condition.

Our
competitors in the critical care nutrition products market are established
companies that sell branded products that have achieved a high level of
customer awareness.  If we are not able
to compete successfully or operate profitably, our business and financial
condition could be materially adversely affected. Other companies may also
enter this market.

If we cannot enforce the trademarks used with
our critical care nutrition products our business and financial condition may
be materially adversely affected.

We  acquired certain of the trademarks used with
our critical care nutrition products from third parties and cannot be sure that
such trademarks do  not violate the
proprietary rights of others.  Nor can
we be sure  that our proprietary rights
in the marks would be upheld if challenged. 
If we were prevented from using the marks for any reason, our business
and financial condition may be materially adversely affected.  In addition, we cannot be sure that we will
have the financial resources necessary to enforce or defend our trademarks,
which could also have a material adverse effect on our business and financial
condition.   Under their previous
ownership, certain of the 
trademarks  that we have acquired  were not registered.  Instead 
their owner relied on common law trademark rights. The lack of  registration may impair  our ability 
to successfully register the trademarks or to prosecute successfully an
infringement action against other users of these trademarks.

Our failure to obtain necessary approvals or
otherwise comply with government regulations could have a material adverse effect
on our business and financial condition.

Our
critical care products and potential critical care products are, or will be,
subject to government regulation.  Our
current products are regulated as food and medical food by the FDA and are
subject to certain labeling requirements, current good manufacturing practice
regulations and certain other regulations designed to ensure the safety of the
products.

Our
current and potential products may become subject to further governmental
regulation in the future.  The burden of
such regulation could add materially to the costs and risks of our development
and marketing efforts. There can be no assurance that we could obtain the
required approvals or comply with new regulations if our products are subject
to additional governmental regulation in the future.

Claims
we make in labeling and advertising our products are subject to regulation by
the FDA, the FTC and various state agencies under their general authority to
prevent false, misleading and deceptive trade practices.  These regulations involve stringent
tracking, testing and documentation standards. 
Failure to comply with such requirements can result in adverse
regulatory action, including injunctions, civil or criminal penalties, product
recalls or the relabeling, reformulation or possible termination of certain
products.

Item 2.        Properties

The
Company leases approximately 6,800 square feet of administrative space from
Carlson Real Estate Company in Minneapolis, Minnesota. In addition, the Company
leases approximately 1000 square feet of manufacturing and lab space at the
Land OLakes corporate office located in Arden Hills, Minnesota. Some of the
office space is utilized by Hormel HealthLabs to sell its licensed critical
care products. The Company rents, on an as-needed basis, public warehouse space
to store inventory.  Management believes
that the Companys facilities are suitable and adequate for current office,
research, manufacturing and storage requirements.

Item 3.        Legal
Proceedings

The Company is not a party to any material
legal proceeding.

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

None.

Item 4(a).    Executive
Officers of Registrant

The executive officers of the Company are:

Name
  Age
  PositionRobert A. Hoerr, M.D., Ph.D.
  51
  Chairman of the Board of Directors and
  Chief Technology OfficerHenry J. Cardello
  49
  President, Chief Executive Officer and
  DirectorEileen F. Bostwick, Ph.D.
  50
  Vice President, Research and DevelopmentMichael
  E. Cady
  48
  Vice President, Manufacturing and EngineeringFranklin L. Kuhar
  44
  Vice President, Chief Financial Officer,
  Secretary and Treasurer

Robert A. Hoerr, M.D., Ph.D.,was named Chairman of the Board and Chief Technology Officer in March
2000.  Prior thereto, Dr. Hoerr served
as Vice President, Medical and Regulatory Affairs of the Company from
January 1993 to December 1993, Senior Vice President from
December 1993 to February 1994,President
and Chief Operating Officer of the Company from February 1994 to September
1994, President and Chief Executive Officer
from September 1994 to November 1998 and Chairman of the Board and Chief
Executive Officer from November 1998 to March 2000. Dr. Hoerr was Director
of Medical Affairs for Sandoz Nutrition Corporation, a research–based
nutrition company, from March 1990 to January 1993. From 1986 to 1990,
Dr. Hoerr was Research Scientist and Assistant Program Director at the
Clinical Research Center, Massachusetts Institute of Technology (MIT).
Dr. Hoerr received his A.B. in Biology from Indiana University, his M.D.
from Indiana University School of Medicine and his Ph.D. in Nutritional
Biochemistry and Metabolism from MIT.

Henry J. Cardellowas named President and Chief Executive Officer in March 2000.  Mr. Cardello served as President from
January 1999 to March 2000, andhad been advising the Company since April
1998 through Marketing Ventures of America, Inc. ("MVA"), a
consumer-marketing firm that specializes in commercializing consumer-based
products, of which he has been Chairman and President since July 1987.  Prior to July 1987, Mr. Cardello was
President of Sunkist Soft Drinks, Inc., a unit of Cadbury Schweppes, Vice
President of Marketing for Cadburys Canada Dry business and Director of
Marketing for Coca-Cola USA.  
Additionally, Mr. Cardello has held several brand management positions
with Anheuser-Busch and General Mills, Inc. Mr. Cardello received his B.S.
degree in engineering from Lehigh University and his M.B.A. from The Wharton
Graduate School of Business.

Eileen
F. Bostwick, Ph.D.,has served as
Manager of Research and Development since July 1992, Director of Research
and Development since September 1993 and Vice President of Research and
Development since March 1997.  Dr.
Bostwick joined the Companys predecessor, Procor Technologies, Inc. (Procor)
in 1988 as Immunology Group Leader. Prior thereto, Dr. Bostwick was a
Senior Immunologist in the Biotechnology Section at Minnesota Mining &
Manufacturing. Dr. Bostwick received her B.S. and M.S. degrees from
Michigan State University in Dairy Science, and her Ph.D. in immunology and
physiology from the University of Minnesota.

Michael
E. Cadyhas served as Vice President,
Manufacturing and Engineering of the Company since July 1992.  From January 1988 to July 1992, Mr. Cady
served as Director of Operations for Procor. 
From 1979 to 1988, Mr. Cady held engineering and planning positions
within several operating groups at Land OLakes.  Mr. Cady was a member of the Land OLakes group that
evaluated and implemented the polyclonal antibody technology used as a basis
for the Companys manufacturing process. 
Prior to joining Land OLakes Mr. Cady was an engineer at
Swift & Company, a food processing company.  Mr. Cady received his B.S. in Engineering from the
University of Iowa and earned his M.B.A. from the University of St. Thomas.

Franklin
L. Kuharwas named Chief Financial Officer of
the Company in July 1999.  From December
1998 to March 1999 Mr. Kuhar served as Consultant/Chief Financial Officer at
OnHand Network, an internet provider of maintenance services which liquidated
in March 1999.  From October 1997 to
November 1998 Mr. Kuhar served as Chief Financial Officer at Harmonic Systems
Inc., a credit card transaction processing and network consulting company.  From May 1996 to November 1997, Mr. Kuhar
served as Senior Vice President, Chief Financial Officer of GE Capital
Information Technology Solutions.  Mr.
Kuhar functioned as Chief Financial Officer at Education Alternatives, Inc., an
educational management consulting firm, from September 1992 to January
1996.  From 1978 to 1992, he worked for
Ernst & Young LLP as a senior executive. 
Mr. Kuhar has a variety of experiences ranging from quality and process
improvement, negotiation of customer and vendor contracts, investor relations
and financing company operations.  Mr.
Kuhar received his Bachelor of Arts in Accounting from the University of St.
Thomas in St. Paul, MN and is a CPA.

Officers
of the Company are chosen by and serve at the discretion of the Board of
Directors.  There are no family
relationships among any of the directors, officers or key employees of the
Company.

PART II

Item 5.Market for Registrants Common Equity and Related
Stockholder Matters

The
Companys common stock, par value $.01 per share, has been publicly traded since
the closing of the Companys initial public offering on April 1, 1996.  During 2000 the common stock traded on the
Nasdaq National Market tier of The Nasdaq Stock Market under the symbol GGEN
through October 1, 2000 and then was traded on the Nasdaq SmallCap tier through
December 31, 2000. The common stock was delisted in early January 2001 and now
trades on the Over the Counter Bulletin Market under the symbol GGEN.  At March 27, 2001 the number of holders of the
common stock was approximately 2,353, consisting of 153 record holders and
2,200 stockholders whose stock is being held by a bank, broker or other
nominee.  On March 29, 2001, the closing
sale price of a share of the common stock was $0.625.

The high and low sale prices per share of the
common stock for the four quarters during the years ended December 31, 2000 and
1999 were as follows:

2000
  
  1999High
  Low
  
  High
  LowFirst Quarter
  $5.250
  $1.563
  
  $2.625
  $1.750Second Quarter
  $3.125
  $1.656
  
  $2.406
  $1.438Third Quarter
  $2.688
  $ .938
  
  $2.750
  $1.625Fourth Quarter
  $1.000
  $ .188
  
  $2.125
  $1.375

The Company has never
paid cash dividends on the common stock. 
The Board of Directors does not anticipate paying cash dividends in the
foreseeable future.

Item 6.        Selected
Financial Data

The selected financial data set forth below
as of December 31, 2000 and 1999 and for each of the three years ending
December 31, 2000, 1999 and 1998 are derived from the audited financial
statements of the Company which are included herein.  The selected financial data as of December 31, 1998,1997 and
1996 and for each of the two years 
ending December 31, 1997 and 1996 are derived from audited
financial statements, which are not included herein. The data set forth below
should be read in conjunction with the financial statements and notes thereto
included in Item 8 and with Managements Discussion and Analysis of Financial
Condition and Results of Operations, included in item 7 hereof.

Year Ended December 312000
  1999
  1998
  1997
  1996(in thousands, except share numbers and per
  share data)Statements of
  Operations:Revenues
  $889
  $3,181
  $876
  $-
  $-Operating expenses:Cost of
  goods sold
  5
  704
  244
  -
  -Selling,
  general and administrative
  2,356
  2,942
  2,235
  1,541
  1,480Product
  development
  2,302
  1,619
  1,914
  3,760
  5,258Depreciation
  and amortization
  520
  679
  768
  601
  409Operating loss
  (4,294)
  (2,762)
  (4,285)
  (5,902)
  (7,147)Interest income
  107
  176
  338
  448
  605Interest expense
  (1)
  (11)
  (573)
  (181)
  (945)Net loss before
  accounting change
  (4,188)
  (2,596)
  (4,520)
  (5,635)
  (7,487)Cumulative effect of change in accounting
  principle
  (732)
  -
  -
  -
  -Net loss
  (4,920)
  (2,596)
  (4,520)
  (5,635)
  (7,487)Preferred stock dividend
  -
  -
  -
  -
  (7,297)Net loss applicable to
  common stockholders
  $(4,920)
  $(2,596)
  $(4,520)
  $(5,635)
  $(14,784)Net loss per share 
  basic and dilutedNet
  loss before accounting change
  $(.38)
  $(.26)
  $(.56)
  $(.78)
  $(2.24)Cumulative
  effect of change in accounting principle
  $(.07)
  -
  -
  -
  -Net loss per
  share
  $(.45)
  $(.26)
  $(.56)
  $(.78)
  $(2.24)Weighted average number
  of common shares  outstandingBasic
  and diluted
  10,926,376
  9,957,306
  8,067,564
  7,184,722
  6,604,902

December 312000
  1999
  1998
  1997
  1996(in thousands)Balance Sheet Data:Cash and cash equivalents
  $827
  $205
  $4,082
  $156
  $3,870Available-for-sale
  securities
  -
  2,783
  -
  7,512
  7,498Working capital
  600
  3,271
  3,725
  7,028
  9,776Total assets
  2,610
  4,732
  6,293
  9,530
  12,959Note payable
  -
  -
  -
  1,162
  -Convertible
  notes
  -
  -
  193
  1,072
  -Total liabilities
  1,810
  464
  1,217
  2,877
  1,724Stockholders equity
  $800
  $4,268
  $5,076
  $6,653
  $11,235

Item 7.        Managements
Discussion and Analysis of Financial Condition and Results of Operations

Disclosure
Regarding Forward-Looking
Statements

The information contained in the Managements Discussion and Analysis
of Financial Condition and Results of Operations contains certain forward
looking statements within the meaning of Section 21E of the Exchange
Act.  Such forward-looking statements
are based on the beliefs of the Companys management as well as on assumptions
made by and information currently available to the Company at the time such
statements were made.  When used here ,
the words anticipate, believe, estimate, expect, intend and similar
expressions, as they relate to the Company, are intended to identify such
forward-looking statements.  Although
the Company believes these statements are reasonable, readers of this Annual
Report should be aware that actual results could differ materially from those
projected by such forward-looking statements as a result of the risk factors
listed below and set forth herein, under the caption Risk Factors.  The Company cautions the reader, however,
that such list of factors under the caption Risk Factors may not be
exhaustive and that those or other factors, many of which are outside of the
Companys control, could have a material adverse effect on the Company and its
results of operations.  Factors that
could cause actual results to differ include, without limitation, the Companys
ability to generate sufficient working capital and obtain necessary financing
to meet capital requirements, the Companys ability to form strategic alliances
with marketing and distribution partners, the Companys exposure to product
liability claims, consumers perception of product safety and quality, the
Companys reliance on flawed market research, potential competitors that are
larger and financially stronger, the Companys ability to receive regulatory
approval for its products and the Companys ability to manufacture an
acceptable product on a commercial scale.



General

GalaGens
mission is to become the leading presence in foods, beverages and dietary
supplements that help enhance the immune system and to take advantage of all of
colostrums benefits.  A critical factor
for success of the Company is its immune-enhancing ingredient, which has been
branded ProventraäBrand
Natural Immune Components (Proventra). 
Proventra is derived from colostrum; the highly nutritious first milk
from a dairy cow after its calf is born. 
The primary components found in Proventra are naturally occurring
broad-spectrum antibodies or specialized proteins that enhance the bodys own
immune system to provide protection against harmful micro-organisms.  Additional immune-enhancing components found
in Proventra include lactoperoxidase, lactoferrin, growth factors and other
substances to bolster the bodys resistance.

The
Company, in conjunction with strategic partners, continues to expand
applications for its technology and is developing a portfolio of
Proventra-based products that target the needs of consumers and the healthcare
market.

In
1998, the Company entered into a collaboration and license agreement and a
manufacturing and supply agreement with Wyeth-Ayerst Laboratories
(Wyeth-Ayerst), a division of American Home Products Corporation.  The two companies will develop and commercialize
a proprietary ingredient with unique antibacterial properties for use in
pediatric formula and other nutritional products.  The collaboration, during the research and development phase of
the product, will be funded by Wyeth-Ayerst through payments to the Company.

In
January 1999, the Company entered into a collaboration agreement with General
Nutrition Corporation, Inc. for product development, manufacturing, supply and
retail marketing of its Proventra.  The
agreement calls for the two companies to develop and market a range of
immune-enhancing dietary supplements and nutrition formulas.

In
March 1999, the Company entered into an agreement with Tropicana Products,
Inc., a division of PepsiCo Inc.  Under
the agreement, which expired in December 1999, the two companies were  exploring development of nutritious
beverages for the health-conscious consumer. 
Subsequent to the expiration of the exploratory agreement in December
1999, the Company and Tropicana are continuing to work together on various
potential products. Additional studies are underway that may lead to product
introduction opportunities with Tropicana.

In
March 1999, the Company also entered into a licensing and distribution
agreement with Hormel HealthLabs (HHL), a wholly owned subsidiary of Hormel
Foods Corporation.  HHL licensed the
manufacturing and distribution rights for a new, clinically tested, cultured
dairy beverage the Company developed to improve the gastrointestinal health of
patients in hospitals and nursing homes. 
The product includes a patented ingredient combination and will also
incorporate the Companys Proventra.

In
July 1999, the Company licensed its line of critical care nutrition products,
previously acquired from NM Holdings, Inc. (NMI), to HHL.  The licensing agreement granted HHL
worldwide rights to manufacture, distribute, market and sell the Companys
critical care products.  Under the terms
of the agreement HHL will pay royalties, subject to an annual minimum royalty,
to the Company based upon net sales of the specified products.  HHL commenced selling the Companys critical
care products on a limited basis in September 1999, and on an exclusive basis
effective October 1999.

In
October 1999, the Company entered into a collaborative licensing agreement with
Novartis Consumer Health Inc. (Novartis) whereby the Company granted Novartis
certain rights to defined Proventra technology.  Also in October, the Company and Novartis entered into a supply
agreement for which the Company will supply the Proventra ingredients.

In December 1999, the Company and Novartis
entered into a development agreement for various product development and
research projects.  Novartis will pay
for pre-approved activities related to the research projects.  The Company will initially record payments
received as an advance, and recognize revenue as the Company incurs the
associated expense.  The Company also
will receive a royalty from future Novartis sales as additional compensation.
No royalties were due in 2000 or 1999.

The
Company, in conjunction with Land O Lakes, has worked with a marketing/testing
firm to develop a yogurt containing Proventra. 
The Company believes that the future success of a Proventra yogurt
product will be enhanced by continuing to follow its strategy of introduction
of products through large market leaders. 
Accordingly, the Company has obtained rights from Land OLakes to pursue
an alliance with major yogurt manufacturers. 
The Company is currently exploring alliance relationships with these
major companies and any yogurt product introductions will be dependent upon
successful completion of a yogurt license agreement.

In July 2000, the Company entered into a
supply agreement with Estee Lauder Inc., 
to supply its colostrum-based ingredient for use in cosmetic skin care
products.

Results of Operations

Years ended December 31, 2000, 1999 and
1998

General.The net loss in 2000 was $4,920,000 compared to a net loss of $2,596,000
in 1999, an increase of $2,324,000.  The
loss increase in 2000 was due primarily to decreased product sales and
licensing revenue and increased product development expense in support of the
Companys consumer product programs. 
This loss was partially offset by decreases in cost of goods sold and a
decrease in selling, marketing, general and administrative expense.
Additionally, the Company adopted SAB 101 and recorded a cumulative effect of
accounting change adjustment in 2000 of $732,000 related to license revenues
recorded in 1999. The loss in 1999 was $2,596,000 compared to a net loss of
$4,520,000 in 1998, an improvement of $1,924,000. The decrease in 1999 was due
primarily to increased product sales, increased licensing and product
development revenue, decreased interest expense and decreased product
development expense offset by increased selling, marketing, general and
administrative expense.

Revenues. 
Revenues decreased $2,292,000, or 72%, in 2000 to $889,000 from
$3,181,000 in 1999.  The decrease in
2000 was due primarily to a $1,708,000 decrease in product sales from the
Companys critical care product line, which was licensed to HHL in July 1999,
offset by a $93,000 increase in royalty revenue primarily due to the HHL
licensing agreement. License revenue in 2000 also includes the amortization of
approximately $107,000 relating to the cumulative effect adjustment. Revenue
increased in 1999 to $3,181,000 from $876,000 in 1998, an increase of
$2,305,000. The increase in 1999 was due to increased sales of the critical
care products of approximately $776,000; increased licensing revenues of
approximately $500,000, relating to the Companys license agreements; increased
product development revenue of approximately $614,000, related to the Companys
separate research agreements; increased sales of the Companys Proventra product
of approximately $327,000 and increased royalty revenue of approximately
$88,000.

Cost of Goods Sold.  Cost of goods sold decreased $699,000, or
99%, in 2000 to $4,600 from $703,600 in 1999 and increased $459,500, or 188%,
in 1999 to $703,600 from $244,100 in 1998. The decrease in 2000 corresponds
with the decrease in sales related to critical care nutritional products being
licensed to HHL in July 1999.  The
increase in 1999 was due to increased cost of goods sold related to sales of
the critical care  and Proventra
products of approximately $294,000 and $165,000 respectively.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses
decreased $585,966, or 20%, in 2000 to $2,355,845 from $2,941,811 in 1999 and
increased $706,449, or 32%, in 1999 from $2,235,362 in 1998. Approximately
$812,000 of the decrease in 2000 is due to decreased sales, marketing and
personnel expense related to the Companys critical care nutrition products
that were licensed to HHL in July 1999, decreased legal and consulting expense
of $226,000, offset by increased expenses of approximately $452,000 associated
with the consumer product programs. The increase in 1999 was due to increased
sales, marketing and personnel expense for the Companys critical care
nutrition products of approximately $531,000, increased marketing and personnel
expense for the Companys consumer products of approximately $199,000 and
increased legal expense of approximately $66,000 offset by decreased
shareholders relation expense of approximately $90,000.

Product Development Expenses.Expenses for product development increased
$683,600, or 42%, in 2000 to $2,302,100 from $1,618,500 in 1999 and decreased
$295,800, or 15%, in 1999 from $1,914,300 in 1998. The increase in 2000 was due
primarily to  $628,000 in increased
associated personnel expenses and $110,000 in outside consulting expenses
related to the continuing research in support of the Companys consumer product
efforts. In 1999, approximately $312,000 of the decrease was from decreased
personnel expense and approximately $305,000 of the decrease was from decreased
expenses related to the pharmaceutical program terminated during 1998.  These decreases were offset by increased consumer
research and development expense of approximately $71,000 and the receipt of
$250,000, for return of license rights, which reduced 1998 product development
expense.

Depreciation and Amortization.Depreciation and amortization decreased
$158,911, or 23%, in 2000 to $520,210 from $679,121 in 1999 and decreased
$88,353, or 12%, in 1999 from $767,474 in 1998. The decrease in 2000 was
primarily due to decreased amortization of warrants and options issued for
services of approximately $159,000 and a decrease in deferred compensation
amortization of approximately $54,000 offset by increased intangible asset
amortization of approximately $49,000. 
The decrease in 1999 was due to decreased deferred compensation expense
of approximately $125,000, decreased depreciation expense of approximately $109,000
related to the Companys note payable conversion and decreased deferred expense
amortization of approximately $89,000 offset by increased intangible asset
amortization of approximately $234,000 related to the Companys asset
acquisitions.

Interest Income. 
Interest income for 2000 decreased $69,727, or 40%, to $106,575 from
$176,302 in 1999 and decreased $161,705, or 48%, from $338,007 in 1998. The
decreases were primarily attributable to the decreased levels of invested
funds.

Interest Expense.Interest expense decreased $9,625, or 90%,
in 2000 to $1,102 from $10,727 in 1999 and decreased $562,316, or 98%, from
$573,043 in 1998. Interest expense in 2000 related primarily to a capital
lease, which started in October. The decrease in interest expense in 1999 is
due to the conversion of the Companys convertible debt as well as the
conversion of the Companys note payable into an operating lease.

Liquidity and Capital Resources; Cash Flow
Analysis

Cash
used in operating activities increased by $1,045,879, or 44%, in 2000 to
$3,406,560 from $2,360,681 in 1999 and decreased $1,180,173, or 33%, in 1999
from $3,540,854 in 1998. Cash used in operations during 2000 went primarily to
fund operating losses.  Cash used in
operations during 1999 was used primarily to fund operating losses as well as
repayment of current obligations.

In 2000, the Company sold $2,782,790 of its
available-for-sale securities. The Company invested $2,782,790 in 1999 in
available-for-sale securities, and in 1998, the Company redeemed $7,511,619 of
its available-for-sale securities.  The
Company invested $3,975 in 2000, $2,093 in 1999 and $39,365 in 1998 in
equipment and tenant improvements related to the Companys pilot plant
manufacturing facility.  The Company
invested $94,143 in 2000, $13,857 in 1999 and $50,475 in 1998 in lab equipment,
computer equipment and software and furniture used primarily to support the
Companys operations. In 1999, the Company invested $227,802 in purchased
product development technology relating to an asset purchase agreement with
Marketing Ventures of America, Inc., of which the Chief Executive Officer of
the Company is a 100% shareholder.  In
1998, the Company invested $141,363 in fixed assets and inventory received
relating to the asset purchase agreement with NMI.

The Company received proceeds of $223,471 and
$262,210 in 2000 and 1998 respectively from the exercise of stock options and
warrants.  Also in 1999, the Company
repurchased warrants for $375,000.

On October 11, 2000, the Company completed the
sale of 1,750,000 shares of common stock at a price of $.80 per share to
certain investors, previous investors and their affiliates, in a private
placement and issued the investors warrants to purchase an additional 175,000
shares of common stock at a price of $.80 per share.  The aggregate proceeds of the private placement, net of placement
commission and related expenses were $1,189,271.  Pursuant to the Subscription Agreement and Investment letter
related to the private placement, the Company filed a Registration Statement on
Form S-3 on November 9, 2000 to register the resale of the shares of common
stock, and the shares of common stock underlying the warrants, issued in the
private placement. In 1999, the Company received net private placement funding
proceeds of $1,903,000.

During the third quarter of 2000, the Company
relocated its administrative headquarters, due to space constraints of Land
OLakes, its previous landlord.  The
Company signed a four-year lease for its new administrative headquarters..

On November 1, 2000, the Company entered into
a $75,000 capital lease arrangement for office furniture and telephone
equipment. The lease requires  24
monthly payments of $3,707 beginning in November 2000 and ending in October
2002.

The Companys operating lease for select
pilot plant, manufacturing equipment and office equipment calls for future
payments of approximately $171,000 through May 2001 with a final payment
of  $165,000 in June 2001.  The Companys seven-year operating lease for
additional select manufacturing equipment requires annual payments of
approximately $131,000 through 2003. 
Additionally, the Companys five-year lease agreement for specified
manufacturing space requires future annual payments of approximately $43,000
through June 2001.

The Company anticipates that its existing
resources and interest thereon will not be sufficient to satisfy its
anticipated cash requirements through the year ending December 31, 2001. The
Companys working capital and capital requirements will depend upon numerous
factors, including revenue from product sales and collaboration arrangements,
the progress of the Companys market research, product development and ability
to obtain partners with the appropriate manufacturing, sales, distribution and
marketing capabilities.  The Companys
capital requirements also will depend on the levels of resources devoted to the
development of manufacturing capabilities, technological advances, the status
of competitive products and the ability of the Company to establish partners or
strategic alliances to provide funding to the Company for certain
manufacturing, sales, product development and marketing activities.

The Company expects to incur substantial
additional marketing expense and product development expense.  Capital expenditures may be necessary to
establish additional commercial scale manufacturing facilities.  The Company will need to raise substantial
additional funds for longer-term product development, manufacturing and
marketing activities that may be required in the future.  The Companys ability to continue funding
its planned operations is dependent upon its ability to generate product
revenues or to obtain additional funds through equity or debt financing, strategic
alliances, license agreements or from other financing sources.  A lack of adequate revenues or funding could
eventually result in the insolvency or bankruptcy of the Company.  At a
minimum, if adequate funds are not available, the Company may be required to
delay or to eliminate expenditures for certain of its product development
efforts or to license to third parties the rights to commercialize products or
technologies that the Company would otherwise seek to develop itself.  Because of the Company's significant long–term
capital requirements, it may seek to raise funds when conditions are favorable,
even if the Company does not have an immediate need for such additional capital
at such time.  If the Company has not
raised funds prior to when its needs for funding become immediate, the Company
may be forced to raise funds when conditions are unfavorable, which could
result in significant dilution for current stockholders.

Item 7A.      Quantitative
and Qualitative Disclosures About Market Risk

The Companys market risk is unlikely to have
a material adverse effect on the Companys business, results of operations or
financial condition.

Item 8. Financial Statements and Supplementary Data

BALANCE
SHEETS

ASSETS
  December 31,
  2000
  December 31,
  1999Current assets:Cash and cash equivalents
  $826,943
  $204,817Available-for-sale
  securities
  -
  2,782,790Accounts receivable, net
  of allowance of $13,136 in 2000 and $18,951 in 1999
  554,760
  499,606Inventory
  224,746
  56,372Prepaid expenses
  206,886
  146,023Total
  current assets
  1,813,335
  3,689,608Property and equipment
  860,864
  687,746Less accumulated
  depreciation
  (536,262)
  (400,301)324,602
  287,445Customer list, net
  270,000
  360,000Other intangible assets, net
  106,373
  300,872Restricted cash
  77,679
  -Deferred expenses
  18,000
  93,750472,052
  754,622Total assets
  $2,609,989
  $4,731,675LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
  $949,872
  $273,717Development contract
  advance
  89,275
  125,850Current portion of
  deferred revenue
  107,140
  -Current portion of
  capital lease obligation
  34,584
  -Other current liabilities
  32,364
  19,036Total current liabilities
  1,213,235
  418,603CommitmentsCapital lease obligations
  34,104
  -Deferred revenue
  517,716
  -Other long–term
  liabilities
  45,000
  45,000Total Long-term Liabilities
  596,820
  45,000Stockholders equity:Preferred stock, $.01 par
  value:Authorized shares – 15,000,000Issued
  and outstanding shares – none in 2000 and 1999
  -
  -Common stock, $.01 par
  value:Authorized
  shares – 40,000,000Issued
  and outstanding shares  12,275,448 in 2000; 10,416,462 in 1999
  122,754
  104,165Additional paid–in
  capital
  65,532,809
  64,099,393Accumulated deficit
  (64,855,629)
  (59,935,486)Total stockholders
  equity
  799,934
  4,268,072Total liabilities and stockholders equity
  $2,609,989
  $4,731,675

See accompanying
notes.

GALAGEN
INC.

STATEMENTS
OF OPERATIONS





Year ended December
  312000
  1999
  1998Revenues:Product sales
  $10,661
  $1,718,781
  $616,168Product licensing revenue
  107,144
  750,000
  250,000Product development
  revenue
  590,154
  624,238
  9,911Royalty revenue
  181,335
  88,259
  -889,294
  3,181,278
  876,079Operating expenses:Cost of goods sold
  4,723
  703,606
  244,141Selling, general and
  administrative
  2,355,845
  2,941,811
  2,235,362Product development
  2,302,132
  1,618,518
  1,914,295Depreciation and
  amortization
  520,210
  679,121
  767,4745,182,910
  5,943,056
  5,161,272Operating loss
  (4,293,616)
  (2,761,778)
  (4,285,193)Interest income
  106,575
  176,302
  338,007Interest expense
  (1,102)
  (10,727)
  (573,043)Net loss before accounting change
  (4,188,143)
  (2,596,203)
  (4,520,229)Cumulative effect of change in accounting
  principle
  (732,000)
  -
  -Net loss
  $(4,920,143)
  $(2,596,203)
  $(4,520,229)Net loss per share  basic and dilutedNet loss before
  accounting change
  $(.38)
  $(.26)
  $(.56)Cumulative effect of
  change in accounting principle
  $(.07)
  -
  -Net loss per share
  $(.45)
  $(.26)
  $(.56)Weighted average number of common shares
  outstanding  Basic and diluted
  10,926,376
  9,957,306
  8,067,564

See accompanying notes.

GALAGEN
INC.



STATEMENTS
OF CHANGES IN STOCKHOLDERS EQUITY





Common
  Stock
  Additional
  Paid-In
  Deferred
  Compen-
  AccumulatedShares
  Amount
  Capital
  Sation
  Deficit
  TotalBalance
  at January 1, 1998
  7,234,974
  $72,350
  $59,669,586
  $(269,804)
  $(52,819,054)
  $6,653,078Amortization
  of deferred compensation
  -
  -
  -
  185,404
  -
  185,404Deferred
  compensation adjustment, canceled options
  -
  -
  (24,000)
  24,000
  -
  -Exercise
  of stock options and warrants
  111,325
  1,113
  261,097
  -
  -
  262,210Conversion
  of convertible debentures
  1,260,073
  12,601
  1,330,882
  -
  -
  1,343,483Valuation
  of issued warrants
  -
  -
  488,750
  -
  -
  488,750Common
  stock issued for asset purchase
  318,800
  3,188
  621,812
  -
  -
  625,000Stock
  issued through employee stock purchase plan
  23,274
  232
  38,165
  -
  -
  38,397Net
  loss for the year
  -
  -
  -
  -
  (4,520,229)
  (4,520,229)Balance
  at December 31, 1998
  8,948,446
  89,484
  62,386,292
  (60,400)
  (57,339,283)
  5,076,093Amortization
  of deferred compensation
  -
  -
  
  60,400
  -
  60,400Issuance
  of common stock, net of fees
  1,315,000
  13,150
  1,889,850
  -
  -
  1,903,000Warrant
  repurchase
  -
  -
  (375,000)
  -
  -
  (375,000)Conversion
  of convertible debentures
  139,927
  1,400
  176,981
  -
  -
  178,381Stock
  issued through employee stock purchase plan
  13,089
  131
  21,270
  -
  -
  21,401Net
  loss for the year
  -
  -
  -
  -
  (2,596,203)
  (2,596,203)Balance
  at December 31, 1999
  10,416,462
  104,165
  64,099,393
  -
  (59,935,486)
  4,268,072Issuance
  of common stock, net of fees
  1,750,000
  17,500
  1,171,771
  -
  -
  1,189,271Stock
  issued through employee stock purchase plan
  16,321
  163
  15,101
  -
  -
  15,264Exercise
  of stock options and warrants
  92,665
  926
  222,544
  -
  -
  223,470Valuation
  of issued warrants
  -
  -
  24,000
  -
  -
  24,000Net
  loss for the year
  -
  -
  -
  -
  (4,920,143)
  (4,920,143)Balance
  at December 31, 2000
  12,275,448
  $122,754
  $65,532,809
  -
  $(64,855,629)
  $799,934

See accompanying notes.

GALAGEN
INC.

STATEMENTS
OF CASH FLOWS



Year ended December 312000
  1999
  1998Operating
  activities:Net loss
  $(4,920,143)
  $(2,596,203)
  $(4,520,229)Adjustments to reconcile net loss to cash
  used in operating activities:Depreciation expense
  135,961
  129,884
  238,918Deferred expense
  amortization
  -
  -
  112,893Amortization of warrants
  issued for services
  99,750
  253,105
  230,259Amortization of
  intangible assets
  284,499
  235,732
  -Noncash interest cost of
  convertible debentures
  -
  10,727
  464,998Cumulative effect of
  accounting change
  732,000
  -
  -Deferred compensation
  amortization
  -
  60,400
  185,404Changes in operating assets and
  liabilities:Inventory
  (168,374)
  270,418
  (237,634)Accounts receivable
  (55,154)
  (207,623)
  (314,579)Prepaid expenses
  (60,863)
  29,775
  (82,171)Deferred revenue
  (107,144)
  -
  -Accounts payable and accrued
  expenses
  652,908
  (546,896)
  381,287Net cash used in operating activities
  (3,406,560)
  (2,360,681)
  (3,540,854)Investing
  activities:Purchase of property and equipment
  (98,118)
  (15,950)
  (89,840)Payment for asset purchase
  -
  (227,802)
  (141,363)Increase in restricted cash
  (77,679)
  -
  -Sale (purchase) of available-for-sale
  securities, net)
  2,782,790
  (2,782,790)
  7,511,619Net cash provided by (used in) investing
  activities
  2,606,993
  (3,026,542)
  7,280,416Financing
  activities:Proceeds from issuance of common stock, net
  of costs
  1,189,271
  1,903,000
  -Proceeds from common stock options
  exercised
  223,470
  -
  262,210Proceeds from convertible notes, net of
  issuance costs
  -
  (39,094)
  -Payments on capital lease
  (6,312)
  -
  -Payment for warrant repurchase
  -
  (375,000)
  -Payment on note payable
  -
  -
  (114,344)Proceeds from Employee Stock Purchase Plan
  15,264
  21,401
  38,397Net cash provided by financing activities
  1,421,693
  1,510,307
  186,263Increase (decrease) in cash
  622,126
  (3,876,916)
  3,925,825Cash and cash equivalents at beginning of
  year
  204,817
  4,081,733
  155,908Cash and cash equivalents at end of year
  $826,943
  $204,817
  $4,081,733Schedule of noncash
  investing and financing activities:Valuation of issued options and warrants
  $24,000
  $-
  $488,750Stock issued for asset purchase
  -
  -
  625,000Conversion of note payable to operating
  lease
  -
  -
  1,047,904Deferred compensation adjustment, canceled
  options
  -
  -
  24,000Conversion of convertible debentures plus
  related  accrued interest, to common
  stock
  -
  178,381
  1,343,483Purchase of leased equipment
  75,000
  -
  -

See accompanying
notes.



GALAGEN
INC.

NOTES
TO FINANCIAL STATEMENTS

1.Description of Business

GalaGen Inc. is a nutritional products
company that is utilizing its proprietary immune-enhancing ingredients and
patented manufacturing processes to commercialize health-promoting foods,
beverages and supplements. These immune-enhancing ingredients, including
ProventraÔBrand
Natural Immune Components ("Proventra"), are comprised of antibodies
and other proteins that are derived from the milk collected in the first few
milkings of a dairy cow after its calf is born. The Company continues to expand
applications for its technology and is developing a portfolio of
immune-enhancing products that target the needs of consumers and the healthcare
market.  The Company operates in a
single business segment.

2.       Going
Concern and Managements Plan

The Company has had recurring losses and
negative cash flows from operations, including a net loss of $4,920,143 and
negative cash flow from operations of $3,406,560 in fiscal 2000. These
conditions raise substantial doubt about the Companys ability to continue as a
going concern.

The Company needs additional equity capital
to achieve its business objectives and strategies until such time as the
operation becomes cash flow positive. Management has hired an investment bank
to assist in raising additional capital through various financing vehicles. The
Company is currently negotiating terms of a proposed financing transaction. If
this financing does not occur, the Companys viability as a going concern could
be in question. While there can be no assurance that the proposed transaction
will occur, management believes that acceptable terms for a financing
transaction can be negotiated and completed on a timely basis to meet the
Companys cash flow requirements.

3.       Summary
of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.

Revenue Recognition

Revenues from product sales are recognized at
the time of shipment and transfer of title. Revenues from product development
fees are recognized as services are rendered and as milestones are achieved.
Revenues from non-refundable up-front license fees are recognized over the term
of the development agreement unless the fee is in exchange for products
delivered or services performed that represent the culmination of a separate
earnings process.

Effective January 1, 2000, the Company changed
its method of accounting for revenue recognition in accordance with Staff
Accounting Bulletin  (SAB) No. 101,
Revenue Recognition in Financial Statements. Previously, the Company had
recognized revenue for nonrefundable, up-front license fees as revenue upon
receipt and signing of the agreement. Under the new accounting method adopted
retroactive to January 1, 2000, the Company now recognizes revenue from
nonrefundable up-front license fees over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process. The cumulative effect of the
change on prior years resulted in a charge to income of $732,000, which is
included in the loss for the year ended December 31, 2000. The effect of the
change on the year ended December 31, 2000 was to decrease the loss before the
cumulative effect of the accounting change by approximately $107,000 ($.01 per
share). The pro forma amounts, calculated assuming the accounting change was
made retroactively to prior periods, result in net loss of $4,188,143 ($.38 per
share) for 2000 and a net loss of $3,328,303 ($.33 per share) for 1999. The pro
forma effects for 1998 were not material.

For
each of the quarters ended March 31, June 30, September 30, and December 31,
2000, the Company recognized $26,786 in revenue that was included in the
cumulative effect adjustment as of January 1, 2000.  Additionally, the Company will recognize in revenue $107,144
annually for the years ending December 31, 2001 through 2006 for amounts
included in the cumulative effect adjustment.

Product Development
Costs

All product development costs are charged to
operations as incurred.

Net Loss Per Share

Basic loss per share is computed by dividing
the net loss by the weighted average number of common shares outstanding for
the year.  Diluted loss per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock and
resulted in the issuance of common stock. 
Basic and diluted loss per share are the same in all years presented as
all potential common shares were antidilutive.

Income Taxes

Income taxes are accounted for using the
liability method. Deferred income taxes are provided for temporary differences
between financial reporting and tax bases of assets and liabilities.

Cash Equivalents

Cash equivalents include short-term highly
liquid investments purchased at cost, 
which approximates market, with remaining maturities of three months or
less.

Investments

Investments in corporate debt securities with
a remaining maturity of more than three months at the date of purchase are
classified as available-for-sale. The book value of the investments
approximated their estimated market value as of December 31, 1999.  All investments had a contractual maturity
of less than one year.

Inventory

Inventories are stated at the lower of cost
or market using the first-in, first-out method.  The Company evaluates the need for reserves associated with
obsolete inventory as needed.  Inventory
at December 31 consisted of the following:

2000
  1999Raw materials
  $46,674
  $46,660Finished goods
  178,072
  9,712$224,746
  $56,372

Property and Equipment

Property and equipment are recorded at cost
and depreciated on a straight–line basis over their estimated useful
lives of three to seven years. Lease amortization is included in depreciation
expense. Property and equipment at December 31 consisted of the following:



2000
  1999Information
  systems
  $198,774
  $182,919Furniture and fixtures
  176,528
  40,419Equipment
  468,203
  464,408Leasehold improvements
  17,359
  -$860,864
  $687,746Impairment

The Company evaluates its long-lived assets
for impairment losses when indications of impairment are present by comparing
the non-discounted cash flows to the assets carrying amount.  An impairment loss is recorded if necessary.

Customer List and
Other Intangible Assets

Customer list represents the value of an acquired
customer database of their critical care product line.  The customer list is amortized over the
useful life of the asset of five years. The accumulated amortization at
December 31, 2000 and 1999 was $180,000 and $90,000, respectively.  Other intangible assets consist of purchased
technology and goodwill.  Purchased
technology represents the value of an acquired food product and is being
amortized over three years.  Goodwill
represents the excess of purchase price and related costs over the value assigned
to net assets of its critical care product line acquired.  Goodwill is amortized on a straight-line
basis over two-years.  The accumulated
amortization at December 31, 2000 and 1999 was $340,231 and $145,732,
respectively.

Stock Based Compensation

The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation
(Statement 123), but applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its stock plans.  Under APB 25, when the exercise price of stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

Major Customers

In 2000, revenues from two major customers
were $590,154 and $181,335 respectively, or 66% and 20% of total revenues of
which $473,578 and $45,431, respectively, were included in December 31, 2000
accounts receivable. In 1999, revenues from two major customers were $1,358,851
and $750,000 representing 43% and 24% of total revenues, respectively. In 1998,
two major customer revenues were 
$583,841 and $259,911 or 67% and 30% of total revenues, respectively.

4.       Related
Party Transactions

The Company entered into the following
agreements with Land OLakes, its former parent and a continuing shareholder:

Royalty Agreement

The Company will pay to Land OLakes a
royalty on net receipts from any product, other than infant formula, which is
based on existing technology or technology improvements, as defined by the
agreement.  The Company will pay an
additional royalty on net receipts from infant formula based on existing or
improved technology and an additional royalty on net receipts from infant formula
based on new technology, as defined by the agreement.  This agreement will continue until terminated by both
parties.  Royalty payments range from
one to two percent of net receipts. 
Royalty expense recognized based on the royalty agreement was not significant.

License Agreement

The Company has licensed to Land OLakes the
rights to use the Companys existing technologies and technology improvements,
as defined by the agreement, for Land OLakes use in animal products,
functional foods and infant formula. 
The Company has agreed not to compete for fifteen years in the area of
animal products and functional foods based on milk and colostrum based
immunoglobulin technology. Land OLakes has agreed not to compete for fifteen
years in the areas of prescription drugs and over–the–counter drugs
regulated by the Food and Drug Administration. The term of this agreement is
perpetual.

In 1997, Land
OLakes granted a five-year license, an amendment to the license above, in the
area of functional foods to use existing
technology and future technology improvements in the development, formulation,
manufacture, marketing, distribution and sale of kefir-based products, as
defined in the granted license.  In
consideration of granting the Company this license, Land OLakes will receive a
royalty of five percent from food components or ingredients sold by the Company
to be included in a kefir-based product and one percent of net receipts from a
kefir-based finished product sold by the Company.

In 1998, the Company and Land OLakes signed
an amended and restated license agreement in which the Company has
significantly broadened its rights to develop and market functional foods.   Under the restated license agreement, the
Company can use, improve, exploit, license or share existing technology,
technology improvements and new technologies, as defined, in all areas except
under certain reserved food and first refusal food product categories.

Supply Agreement

The Company entered into an agreement with
Land OLakes in 1992 whereby the Company was to purchase and Land OLakes was
to supply, at their option, all of the Companys commercial requirements for
colostrum and milk.  As part of the
agreement, Land OLakes was to provide expertise in dairy herd selection, on–farm
management, membership relations and procurement to the Company for the
manufacture of antibody material.  In
August 1999, the Company and Land OLakes terminated the supply agreement.

Master Services Agreement

In 1992, the Company entered into an
agreement with Land OLakes whereby the Company may purchase services from Land
OLakes for certain administrative and research and development
activities.  The agreement currently
remains in effect for 2001 but has been adjusted appropriately for the
reduction in office space and related services used due to the relocation of
the Companys administrative offices. 
The Company was charged approximately $357,000, $377,000 and $375,000 in
2000, 1999 and 1998, respectively, in accordance with the Master Services
Agreement.

Lease Agreements

In 1996, the Company entered into a five–year lease agreement with
Land OLakes for specified space within the Land OLakes facility in connection
with the Companys manufacturing facility. 
Also in 1996, the Company entered into an equipment-operating lease,
which was guaranteed by Land OLakes. 
See Note 8.

5.Capital Stock

Financings

In October 2000, the Company raised
$1,400,000 through the private placement of 1,750,000 shares of common stock at
a fixed price of $.80 per share.  Costs
associated with the private placement were $210,729. As part of the private
placement, warrants were issued to purchase 175,000 shares of common stock at
$.80 per share. The warrants are exercisable immediately and have a ten-year
term.

In April 1999, the Company raised $1,972,500
through the private placement of 1,315,000 shares of common stock.  The shares sold in the private placement
were at an 8% discount to the closing price of the common stock on the Nasdaq
Stock Market on the closing date.  Costs
associated with the private placement were $69,500.

In November 1997, the Company raised
$1,500,000 through the private placement sale of 6% convertible debentures (the
Debentures) to three institutional investors.  In 1999 and 1998, $200,000 and $1,300,000 of Debenture principal
plus accrued interest were converted into the aggregate maximum of 139,927 and
1,260,073 shares of common stock, respectively.  Under the terms of the Debentures, there was a limitation on the
maximum number of shares of common stock that could be issued upon conversion
of the Debentures.  That maximum was
reached through the conversions in 1999 and as a result the Company repaid
remaining Debenture principal plus accrued interest of approximately $39,000 in
1999.

Employee Stock
Purchase Plan

The Company has an Employee Stock Purchase Plan for
which 270,833 shares of common stock have been reserved.  All employees who have met the service
eligibility requirements may contribute from one to ten percent of their
compensation during a purchase period for the purchase of shares under the
plan.  Purchases are made at the lower
of 85% of the fair market value of the Companys common stock on the first day,
or the last day, of the applicable purchase period.  In 2000, 1999 and 1998, 16,321, 13,089 and 20,004 shares of
common stock, respectively, were purchased and issued to employees. In 1998,
3,270 shares were issued to employees relating to purchases made in 1997.

6.Product and Licensing Agreements

Critical Care Product Agreements

In
1998, Galagen purchased substantially all of Nutrition Medical Inc.s (NMI)
critical care enteral nutrition products and formulas, all related inventory
valued at $65,516, certain other fixed assets valued at $31,000 and the
existing customer base of over 500 hospitals and home healthcare facilities
valued at $450,000.  Total consideration
for the transaction was $696,516, exclusive of closing costs of $69,847,
comprised of $71,516 cash and 318,800 shares of the Company's common stock,
which was valued at $625,000.  Goodwill
of $219,847 was recorded.  The Company will pay to NMI a royalty of nine percent of net
U.S. sales, as defined, of the critical care products in excess of (i)
$5,000,000 during the year ending December 31, 2000, (ii) $6,000,000 during the
year ending December 31, 2001, and (iii) $7,500,000 during the year ending
December 31, 2002.  Additionally, the
Company will pay to NMI a royalty on certain international sales of the
critical care products of (i) five percent of net international sales in excess
of $200,000 through December 1999, and (ii) two and one half percent of net
international sales in excess of $200,000 during the year ending in December
2000.  No royalties were due in 2000 or
1999.

Subsequently, in 1999, the Company entered
into a licensing and distribution agreement with a subsidiary of Hormel Foods
Corporation.  The licensing agreement
granted worldwide rights to manufacture, distribute, market and sell the
Companys previously acquired line of critical care enteral nutrition products
and formulas.  Under the terms of the
agreement Hormel HealthLabs (HHL) will pay monthly royalties subject to an
annual minimum royalty to the Company based upon net sales of the specified products.  HHL commenced selling the critical care
products on a limited basis in September 1999, and on an exclusive basis
effective October 1999.

American Home Products Corporation Agreement

In 1998, the Company entered into a
collaboration and license agreement and a manufacturing and supply agreement
with Wyeth-Ayerst Laboratories, a division of American Home Products
Corporation ("AHP").  The
companies will develop and commercialize a proprietary ingredient with unique
antibacterial properties for use in pediatric formula and other nutritional
products.  The companies will
collaborate during the research and development phase of the product, which
will be funded by Wyeth-Ayerst through payments to the Company. Additionally,
Wyeth-Ayerst will have financial and oversight responsibilities for all
clinical trials and regulatory compliance related to the use of the ingredient
in pediatric formula products. 
Wyeth-Ayerst will have worldwide rights to the use of the ingredient in
its pediatric formula and other nutritional products. The Company will retain
its right to manufacture the ingredient and has the right to request a
sublicense from Wyeth-Ayerst to develop and commercialize non-pediatric formula
nutritional products. Related to the agreement, warrants were issued to AHP to purchase 200,000 shares of common stock at
$2.45 per share.  The warrants will
expire in 2005.  The fair value of the
warrants was determined as $250,000 using the Black Scholes pricing model, which
the Company amortized over the initial 2-year term of the research and development
program. In 1998, the Company received a non-refundable licensing fee
and a research and development advance from AHP. In 1998, the Company recorded
the licensing fee as revenue.  In 1999,
the Company received an additional advance from AHP for research and
development.  The entire research and
development advance was recorded as a contract payable, which will be
recognized as product development revenue when the Company incurs the
associated expenses. Similar advances totaling $203,578 were received in 2000
and were treated consistent with advances received in 1999.  In 2000, 1999 and 1998, respectively,
$240,154, $324,238 and $9,911 was recorded as product and development revenue.
In addition, the Company recognized $350,000 of product development revenue
related to performance of research and development tasks completed in 2000 to
assist AHP in reaching the ability to begin clinical studies.

Tropicana
Products, Inc.

In February 1999, the Company entered into an
agreement with Tropicana Products Inc. to explore product development
opportunities.  The agreement expired in
December 1999.  The nonrefundable fee
received was recorded as product development revenue in 1999.

Novartis Consumer Health, SA Agreements

In October 1999, the Company entered into a
license agreement with Novartis Consumer Health, SA (Novartis).  In return for granting Novartis exclusive
rights to certain products and proprietary technology the Company received a
nonrefundable license fee, which was recorded as revenue in 1999 (see Note
3).  The agreement specifies an
additional payment to the Company upon the date of first sale, and milestone
payments based on aggregate sales levels. 
As further consideration for the license, Novartis shall pay specified
royalties, during the royalty period, on annual net sales.

Also in October 1999, the Company entered
into a supply agreement with Novartis to manufacture and supply Proventra to
Novartis on a cost-plus basis.  The
Company has the responsibility to ensure continuity of supply.

In December 1999, the Company and Novartis
entered into a development agreement for various product development and
research projects.  Novartis shall pay
for pre-approved activities related to the research projects.  The Company will initially record payments
received as an advance, and recognize revenue as the Company incurs the
associated expense.  The Company also
receives a royalty from future Novartis sales as additional compensation. No
royalties were due in 2000 or 1999.

Estee Lauder

In July of 2000, the Company entered into a
non-exclusive supply agreement with Estee Lauder to supply one of its
proprietary colostrums for use in skin care products. No sales of this product
occurred in 2000.



7.Options and Warrants

Stock Option Plan

The Company has a 1992 Stock Plan (the 1992
Plan) and a 1997 Incentive Plan (the 1997 Plan), under which incentive and
non–qualified options may be granted, and has reserved 880,210 and
1,250,000 shares of common stock, respectively, for issuance.  The Company uses these plans as an incentive
for employees, directors and technical advisors.  Stock awards of up to 100,000 shares of common stock may also be
granted under the 1997 Plan. Options are granted at fair market value as
determined on the date of grant and normally vest over three to five years.

The following plan and non–plan options
are outstanding at December 31, 2000:



1992 Plan
  Options
  Outstanding
  1997 Plan
  Options
  Outstanding
  Non
  Plan
  Options
  Outstanding
  Weighted
  Average
  Option
  PriceBalance at December 31, 1997
  549,731
  319,300
  167,769
  $4.96Granted
  475,088
  798,962
  166,687
  2.70Exercised
  (27,248)
  (10,000)
  (1,082)
  2.37Canceled
  (682,533)
  (355,540)
  (208,524)
  4.54Balance at December 31, 1998
  315,038
  752,722
  124,850
  2.79Granted Granted
  349,083
  542,500
  -
  1.97Canceled
  (48,231)
  (186,003)
  (16,249)
  2.71Balance at December 31, 1999
  615,890
  1,109,219
  108,601
  2.40Exercised
  -
  (2,500)
  (15,165)
  2.50Canceled
  (15,652)
  (8,710)
  -
  2.48Balance at December 31, 2000
  600,238
  1,098,009
  93,436
  $2.40

The following table summarizes information about the stock options
outstanding at December 31, 2000:



Options Outstanding
  Options ExercisableRange of Exercise Price
  Number Outstanding
  Weighted-Average Remaining Contractual Life
  Weighted Average Exercise Price
  Number Exercisable
  Weighted Average Exercise Price$1.50
  31,000
  8
  years
  $1.50
  11,000
  $1.501.56
  30,000
  8
  years
  1.56
  10,000
  1.561.63
  60,000
  9
  years
  1.63
  20,000
  1.631.66
  5,500
  9
  years
  1.66
  1,100
  1.661.72
  25,000
  8
  years
  1.72
  5,000
  1.721.88
  338,882
  9
  years
  1.88
  67,776
  1.881.94
  30,000
  8
  years
  1.94
  10,000
  1.941.97
  7,500
  8
  years
  1.97
  1,500
  1.972.09
  250,000
  8
  years
  2.09
  90,000
  2.092.19
  25,000
  8
  years
  2.19
  16,666
  2.192.38
  41,500
  8
  years
  2.38
  37,600
  2.382.53
  100,000
  9
  years
  2.53
  20,000
  2.532.56
  517,951
  5
  years
  2.56
  468,149
  2.563.13
  300,809
  8
  years
  3.13
  121,788
  3.133.25
  15,000
  6
  years
  3.25
  15,000
  3.257.39
  13,541
  3
  years
  7.39
  13,541
  7.39$1.50
  - 7.39
  1,791,683
  
  $2.40
  909,120
  $2.55

Options expire in five years and three months
to ten years from the original grant date. Fully vested and exercisable options
were 909,120, 603,955 and 437,686 as of December 31, 2000, 1999 and 1998,
respectively. The weighted average exercise prices for the fully vested and
exercisable options as of December 31, 2000, 1999 and 1998 were $2.55,  $2.69 and $2.72, respectively.

In 1998, a consultant was granted ten-year
options from the 1997 Plan for 35,000 shares of common stock at the fair market
value of the date of grant for services to be provided, of which 26,666 are
fully vested at December 31, 2000. 
Consulting expense recognized based on the fair values of the
instruments granted was not significant.

Warrants

A summary of the
warrants outstanding at December 31, 2000:

Granted to:
  Warrants
  Outstanding
  Expiration Date
  Exercise PriceLine of Credit Guarantors
  192,012
  February 2001
  $7.00Consultants
  10,000
  March 2002
  $2.13TransAmerica
  40,000
  June 2002
  $2.50Former Debenture Holders
  77,000
  November 2002
  $2.34Financial Consultants
  40,000
  December 2002
  $3.00Officer and Director
  137,500
  April-September
  2003
  $1.38 - $3.00Investor Relations
  50,000
  August 2003
  $3.13Licensee
  200,000
  October 2005
  $2.452000  Private Placement Investors
  175,000
  October 2010
  $.80Carlson Real Estate
  10,000
  June 2002
  $5.00931,512

In 1995, Chiron Corporation was issued
warrants to purchase 200,000 shares of the Companys Series F preferred stock
for $150,000.  Chiron exercised some of
the warrants in March 1996.  In May of
1999, the Company repurchased the remaining warrants from Chiron for $375,000.

In 1996, the Company granted warrants to
purchase 162,011 shares of common stock at $7.00 per share to six parties, one
of which is a company, which has a representative on the Companys Board.  The Company also granted warrants to
purchase 7,500 and 22,501 shares of the Companys common stock at $7.00 per
share to certain investment funds associated with a representative on the
Companys Board in return for their issuance of two convertible promissory
notes.  These warrants expire February
2001.

In 1997, the Company issued warrants to
purchase 10,000 shares of common stock, granted at $2.13, which was the fair
market value on the date of grants, for certain services to be rendered.  The warrants expire in March 2002.The fair
value of the warrant, approximately $5,000, was amortized and expensed in 1997.

In 1997, the Company issued warrants to financial consultants to
purchase 25,000 and 40,000 shares of common stock at $2.50 and $3.00,
respectively, which was greater than the market value of the common stock at
the date of grant.  The warrants expire
in December 2002.  These warrants have a
fair value of $50,450, which was amortized over the term of the consulting
relationship. In February 2000, warrants to purchase 25,000 shares at $2.50 per
share were exercised.

In
1998, the Company issued warrants to purchase 75,000, 25,000, 25,000 and 12,500
shares of common stock at $1.38, $2.63, $3.00 and $1.81 per share, respectively,
to an officer and director of the Company for services performed while under a
consulting agreement.  The warrants
expire from April through September 2003. 
The fair value of the warrants was
$68,750, which was amortized over the term of the consulting agreement.

In
1998, warrants were issued to individuals of
an investor relations firm to purchase 50,000 shares of common stock at $3.125
per share.  The warrants expire in
August 2003.  The fair value of the
warrants was $100,000, which was amortized over the term of the investor
relations agreement.

In
2000, warrants were issued to the Lessor of
the Companys administrative office facility to purchase 10,000 shares of
common stock at $5.00 per share. The warrants expire in June 2002.  The fair value of the warrants was $24,000,
which will be amortized over the four year term of the facility lease.

Stock Option
Revisions

In 1998, the Company canceled all directors
and employees common stock option agreements, totaling 941,075 shares of common
stock under the 1992 Plan, the 1997 Plan and non-plan options, that were issued
with a grant price greater than the fair market value at the date of
re-grant.  New stock option agreements
were issued with an exercise price of $2.56 per share and a ten-year term.

Stock-Based Compensation

Pro
forma information regarding net loss and loss per share is required as if the
Company had accounted for its employee stock options under the fair value
method of Statement 123.  The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions for 1999 and 1998:
risk-free interest rates approximating 5.5% and 5.0%, respectively; volatility
factor of the expected market price of the Companys common stock of .894 and
1.08, respectively; expected dividend yield of 0%; and an expected life of the
option of two to seven years.  The weighted average fair value of the
options granted in 1999 and 1998 was$1.61 and $2.36 per share, respectively, as
computed as described above. No option grants were made in 2000.

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly
subjective assumptions.  Because the
Companys employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion the existing models may not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period.  The Companys pro forma information is as
follows:

2000
  1999
  1998Pro forma amortized expense
  $698,926
  $746,350
  $566,859Pro forma net loss
  $(5,619,069)
  $(3,342,553)
  $(5,087,088)Pro forma net loss per share, basic and
  diluted
  $(0.51)
  $(0.34)
  $(.63)

Deferred
Compensation

In 1995, the Company canceled certain stock
option agreements within the Plans and certain stock options that were outside
of the Plans that had grant prices ranging from $7.38 per share to $11.07 per
share and issued new stock option agreements with the same terms and conditions
except that the grant prices were $3.69 per share. The Company recorded
$1,657,000 as deferred compensation for the difference between the new grant
price per share of common stock and the fair market value of the common stock
per share on the date of grant, as determined by the board of directors,
multiplied by the total number of options affected.  In December 1998 the Company adjusted the deferred compensation
balance by $24,000 to account for terminated employee options that were not
vested. The deferred compensation is amortized ratably over the vesting period
of the options and was fully amortized in 1999.  In 1999 and 1998, $60,400, and $185,404, respectively, was
amortized.

8.       Commitments

In addition to royalty commitments disclosed
elsewhere, the Company has commitments under the following agreements:

License Agreements

In 1998, the Company received a $250,000 fee
from a company for the re-licensing of previously licensed technology.  Pursuant to this agreement, the Company is
entitled to receive royalties on the net sales of certain GalaGen ingredients
and certain GalaGen nutritional products that incorporate its technology.

In 1995, the Company entered into a License
and Collaboration Agreement with Chiron Corporation involving the licensing of
Chiron adjuvant technology for certain products. Pursuant to this agreement,
Chiron has granted an exclusive worldwide license for certain of Chirons
proprietary adjuvant technology to the Company.

The royalties on the above agreements range
from one-half to five percent, depending on the volume, of certain net sales.

Lease Commitments

The Company leases certain office equipment
under a one-year operating lease.

In
1996, the Company entered into a five-year lease agreement with Land OLakes
for specified space within the Land OLakes facility in connection with the
Companys manufacturing facility.  The
lease calls for annual payments of approximately $87,000 and can be extended
for additional one-year periods at the option of the Company.  See Note 4.

In
1996, the Company entered into an equipment-operating lease.  Lease payments of approximately $11,000 per
month will continue through 2003 with the Companys option to extend for an
additional 12 months.  The lease is
guaranteed by Land OLakes.

In
1997, the Company established a note payable for approximately $1,319,000 for
fixed assets with Transamerica Business Credit Corporation
(Transamerica).In 1998, the
Company converted the note payable into an operating lease.  At the time of the conversion the net book
value of the associated assets approximated the note payable balance. Terms of the operating lease include monthly payments
through May 2001 of approximately $36,000 with a final payment of $165,000 in
June 2001. The Companys property and equipment secure the operating lease.
Transamerica received warrants to purchase 40,000 shares of common stock
exercisable at $2.50 per share.  The
warrants expire June 2002.  The warrants
were valued at approximately $79,000, which was amortized to interest expense
over the term of the note payable.

In 2000, the Company entered into a capital
lease for office furniture and telephone equipment. Terms of the capital lease
include monthly payments through October 2002 of $3,707. The furniture and
telephone equipment secure the lease. The equipment and furniture can be
purchased at the end of the lease for $1.00. Additionally, in 2000, the Company
entered into operating leases. The operating leases relate to computer
equipment and office furniture. Both operating leases have three-year terms
with monthly payments of $4,800 and $1,716 respectively.

During the third quarter of 2000, the Company
relocated its administrative headquarters due to space constraints of its
previous landlord Land OLakes, Inc. The Company signed a four-year lease for
6,814 square feet of administrative office space. The lease requires payments
of approximately $14,500 per month. The Lessor required the Company to post a
letter of credit, secured by cash of $77,679 at December 31, 2000 which is
shown as restricted cash on the Balance Sheet.

The total lease expense was $702,538,
$648,343 and $441,972, respectively, for the years ended December 31,
2000, 1999, and 1998. The future minimum annual lease payments are as follows:

Capital
  OperatingLeases
  Leases2001
  $44,500
  $769,0002002
  37,100
  390,0002003
  -
  372,0002004
  -
  122,0002005
  -
  5,00081,600
  $1,658,000Amount representing interest
  (12,900)Present value of net minimum lease payments
  68,700Less current portion of capital lease
  obligation
  (34,600)Long-term portion
  $34,100

9.       Income
Taxes

As of December 31, 2000, Galagen has
operating loss carryforwards to offset future taxable income of approximately
$43,000,000 and a carryforward for research and development tax credits of
$943,000. These carryforwards will begin to expire in 2007. No benefit has been
recorded for such carryforwards, and utilization in future years may be
limited, if significant ownership changes have occurred.

Components of deferred tax assets are as
follows:

December 312000
  1999
  1998Loss carryforwards
  $15,909,000
  $14,579,000
  $13,445,000Research and development tax creditCarryforwards
  943,000
  888,000
  894,000Deferred revenue
  231,000
  -
  -Deferred compensation
  494,000
  494,000
  472,000Depreciation
  156,000
  (23,000)
  -Amortization of intangibles
  151,000
  66,000
  -Other
  16,000
  23,000
  -17,900,000
  16,027,000
  14,811,000Less valuation allowance
  (17,900,000)
  (16,027,000)
  (14,811,000)Net deferred tax assets
  $-
  $-
  $-

10.Quarterly Financial Data (Unaudited)

Fourth Quarter Ended December 31,  2000First Quarter Ended
  March 31, 2000
  Second Quarter Ended
  June 30, 2000
  Third Quarter Ended
  September 30, 2000As Previously
  As
  As Previously
  As
  As Previously
  AsReported
  Restated
  Reported
  Restated
  Reported
  RestatedRevenues
  $146,915
  $173,701
  $124,001
  $150,787
  $104,829
  $131,615
  $433,191Gross Profit
  146,915
  173,701
  121,195
  147,981
  102,853
  129,639
  433,250Net
  loss before accounting change
  (1,114,986)
  (1,088,200)
  (1,081,271)
  (1,054,485)
  (1,256,820)
  (1,230,034)
  (815,424)Cumulative
  effect of change in accounting principle
  -
  (732,000)
  -
  -
  -
  -
  -Net
  Loss
  $(1,114,986)
  $(1,820,200)
  $(1,081,271)
  $(1,054,485)
  $(1,256,820)
  $(1,230,034)
  $(815,424)Net
  loss per share  basic and dilutedNet
  loss before accounting change
  $(0.10)
  $(0.10)
  $(0.10)
  $(0.10)
  $(0.12)
  $(0.12)
  $(0.07)Cumulative
  effect of change in accounting principle
  -
  (0.07)
  -
  -
  -
  -
  -Net
  loss per share
  $(0.11)
  $(0.17)
  $(0.10)
  $(0.10)
  $(0.12)
  $(0.12)
  $(0.07)First Quarter
  Second Quarter
  Third Quarter
  Fourth QuarterEnded
  Ended
  Ended
  EndedMarch 31, 1999
  June 30, 1999
  Sept 30, 1999
  Dec 31, 1999Revenues
  $583,533
  $608,442
  $896,833
  $1,092,470Gross
  Profit
  396,672
  406,232
  650,213
  1,024,555Net
  loss
  (860,404)
  (995,896)
  (736,026)
  (3,877)Net
  loss per share
  $(0.10)
  $(0.10)
  $(0.07)
  $-

Revenues and net loss for the quarters
ended March 31, June 30, and September 30,2000 have been restated from the
amounts previously reported in the Companys Form 10-Qs. The restated amounts
reflect the adoption of SAB No. 101, retroactive to the beginning of 2000. The
effect of the restatement was to recognize in the quarter ended March 31, 2000,
the cumulative effect of this change in accounting principle, which increased
net loss by $732,000, and to recognize in each of the quarters ended March 31,
June 30 and September 30, 2000, revenue of $26,786 that was included in the cumulative
effect adjustment as of January 1, 2000.

REPORT OF INDEPENDENT AUDITORS

Board of
Directors

GalaGen Inc.

We have audited the accompanying balance
sheets of GalaGen Inc. as of December 31, 2000 and 1999, and the related
statements of operations, changes in stockholders equity and cash flows for
each of the three years in the period ended December 31, 2000.  Our audits also included the financial
statement schedule listed in the index at Item 14(a).  These financial statements and schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements  and schedule based
on our audits.

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

In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of GalaGen Inc. at December 31, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.  
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

The accompanying financial statements and
schedule have been prepared assuming Galagen Inc. will continue as a going
concern. As more fully described in Note 2, the Company has experienced
recurring operating losses and is dependent upon raising additional capital to
continue its operations. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. The financial statements and
schedule do not include any adjustments that might result from the outcome of
this uncertainty.

As discussed in Note 3 to the financial
statements, in 2000 the Company changed its method of accounting for revenue
recognition.



/s/ Ernst & Young LLP



Minneapolis,
MinnesotaFebruary 16, 2001



Item 9.        Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART III

Item 10.      Directors
and Executive Officers of the Registrant

Incorporated herein by reference is the
information appearing under the headings Election of Directors and Section
16(a) Beneficial Ownership Reporting Compliance in the Companys definitive
Proxy Statement for the annual meeting of stockholders to be held on June 6, 2001  (the Proxy Statement).  See also Part I hereof under the heading
Item 4A.  Executive Officers of
Registrant.

Item 11.      Executive
Compensation

Incorporated
herein by reference is the information appearing under the headings Executive
Compensation in the Companys Proxy Statement.

Item 12.      Security
Ownership of Certain Beneficial Owners and Management

Incorporated herein by reference is the
information appearing under the heading Security Ownership of Principal
Stockholders and Management in the Companys Proxy Statement.

Item 13.      Certain
Relationships and Related Transactions

Incorporated herein by reference is the
information appearing under the heading Certain Relationships and Related
Transactions in the Companys Proxy Statement.

PART IV

Item 14.Exhibits and 
Reports on Form 8-K

(a)(1) The
following financial statements are filed herewith in Item 8.

(i)       Balance Sheets as of December 31, 2000
and 1999
(ii)      Statements of Operations for the
years ended December 31, 2000, 1999 and 1998.
(iii)     Statements of Changes in
Stockholders Equity for the years ended December 31, 2000, 1999 and 1998.
(iv)     Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998.
(v)      Notes to financial statements at
December 31, 2000.

(a)(2) Financial
Statement Schedules:

SCHEDULE II:  VALUATION AND QUALIFYING ACCOUNTS

GALAGEN INC.

December 31, 2000



Description
  Balance at
  Beginning of Period
  Charged to Costs
  and Expenses
  Deductions
  Balance at
  End of PeriodYear Ended December 31, 2000:Allowance for returns and
  doubtful accounts
  $18,951
  $87
  $(5,902)
  $13,136Total
  $18,951
  $87
  $(5,902)
  $13,136Year Ended December 31, 1999:Allowance for returns and
  doubtful accounts
  $14,020
  $4,931
  -
  $18,951Total
  $14,020
  $4,931
  -
  $18,951Year Ended December 31, 1998:Allowance for returns and
  doubtful accounts
  $-
  $14,020
  -
  $14,020Total
  $-
  $14,020
  -
  $14,020Financial statement schedules other than
those provided have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.(b)      Reports on Form 8-KForm 8-K dated October 11, 2000 regarding the transfer of the listing
of the Companys stock to the Nasdaq SmallCap Market on October 2, 2000 and the
sale of 1,750,000 shares of common stock and warrants to purchase 175,000
shares on October 11, 2000.Form 8-K dated December
6, 2000 regarding approval and adoption of the Second Restated By-Laws of the
Company.

(c)      Exhibits:

The
following exhibits are filed as part of this Annual Report on Form 10-K for the
year ended December 31, 2000.

Exhibit No.
  Description
  
  Method of Filing3.1
  Second Restated Bylaws of the Company.(10)
  
  Incorporation By  Reference3.2
  Restated Certificate of Incorporation of
  the Company.(3)
  
  Incorporated By Reference4.1
  Specimen Common Stock Certificate.(1)
  
  Incorporated By Reference4.2-4.5
  Intentionally left blank.4.6
  Form of Common Stock Warrant to purchase shares
  of Common Stock of the Company, issued in connection with the sale of
  Convertible Promissory Notes.(1)
  
  Incorporated By Reference4.7-4.10
  Intentionally left blank.4.11
  Warrant to purchase 18,250 shares of Common
  Stock of the Company issued to IAI Investment Funds VI, Inc. (IAI Emerging
  Growth Fund), dated January 30, 1996.(1)
  
  Incorporated By Reference4.12
  Warrant to purchase 6,250 shares of Common
  Stock of the Company issued to IAI Investment Funds IV, Inc. (IAI Regional
  Fund), dated January 30, 1996.(1)
  
  Incorporated By Reference4.13
  Warrant to purchase 25,000 shares of Common
  Stock of the Company issued to John Pappajohn, dated February 2, 1996.(1)
  
  Incorporated By Reference4.14
  Warrant to purchase 25,000 shares of Common
  Stock of the Company issued to Edgewater Private Equity Fund, L.P., dated
  February 2, 1996.(1)
  
  Incorporated By Reference4.15
  Warrant to purchase 10,000 shares of Common
  Stock of the Company issued to Joseph Giamenco, dated February 2, 1996.(1)
  
  Incorporated By Reference4.16
  Warrant to purchase 25,000 shares of Common
  Stock of the Company issued to Gus A. Chafoulias, dated February 2, 1996.(1)
  
  Incorporated By Reference4.17
  Warrant to purchase 25,000 shares of Common
  Stock of the Company issued to JIBS Equities, dated February 2, 1996.(1)
  
  Incorporated By ReferenceExhibit No.
  Description
  
  Method of Filing4.18
  Warrant to purchase 25,000 shares of Common
  Stock of the Company issued to Land OLakes, Inc., dated February 2, 1996.(1)
  
  Incorporated By Reference4.19
  Form of Subscription Agreement and
  Investment Letter (8)
  
  Incorporated By Reference4.20-4.23
  Intentionally left blank.4.24
  Stock Purchase Warrant issued to CPR (USA)
  Inc. dated November 18, 1997.(13)
  
  Incorporated By Reference4.25
  Stock Purchase Warrant issued to
  Libertyview Plus Fund dated November 18, 1997.(14)
  
  Incorporated By Reference4.26
  Stock Purchase Warrant issued to
  Libertyview Fund, LLC dated November 18, 1997.(15)
  
  Incorporated By Reference4.27
  Warrant issued to CLARCO Holdings dated as
  of December 1,1997.(16)
  
  Incorporated By Reference4.28
  Warrant issued to CLARCO Holdings dated as
  of December 1,1997.(17)
  
  Incorporated By Reference4.29
  Intentionally left blank.4.30
  Warrant issued to Henry J. Cardello dated
  as of April 13, 1998. (20)
  
  Incorporated By Reference4.31
  Warrant issued to Henry J. Cardello dated
  as of April 30, 1998. (20)
  
  Incorporated By Reference4.32
  Warrant issued to Henry J. Cardello dated
  as of June 19, 1998. (20)
  
  Incorporated By Reference4.33
  Warrant issued to William Young and Rebecca
  Young dated as of August 12, 1998.(24)
  
  Incorporated By Reference4.34
  Warrant issued to Henry J. Cardello dated as
  of September 30, 1998.(24)
  
  Incorporated By Reference4.35
  Warrant issued to American Home Products
  Corporation dated as of October 15, 1998.(24)
  
  Incorporated By Reference4.36
  Form of Registration Rights Agreement dated
  April 20, 1999.(25)
  
  Incorporated By Reference4.37
  Subscription Agreement and Investment
  Letter dated April 20, 1999 (Lombard Odier & Cie).(26)
  
  Incorporated By Reference4.38
  Subscription Agreement and Investment
  Letter dated April 20, 1999 (H. Leigh Severance).(27)
  
  Incorporated
  By Reference

Exhibit No.
  Description
  
  Method of Filing4.39
  Subscription Agreement and Investment
  Letter dated April 20, 1999 (H. L. Severance, Inc. Profit Sharing Plan and
  Trust).(28)
  
  Incorporated By Reference4.40
  Subscription Agreement and Investment
  Letter dated April 20, 1999 (H. L. Severance, Inc. Pension Plan and
  Trust).(29)
  
  Incorporated By Reference4.41
  Subscription Agreement and Investment
  Letter dated April 20, 1999 (Winston R. Wallin).(30)
  
  Incorporated By Reference4.42
  Warrant issued to Carlson Real Estate
  Company, Inc. dated June 12, 2000 (34)
  
  Incorporated By Reference#10.1
  License Agreement between the Company and
  Land OLakes dated May 7, 1992.(1)
  
  Incorporated By Reference#10.2
  Royalty Agreement between the Company and
  Land OLakes dated May 7, 1992.(1)
  
  Incorporated By Reference10.3
  Intentionally left blank.10.4
  Master Services Agreement between the
  Company and Land OLakes dated May 7, 1992.(1)
  
  Incorporated By Reference*10.5
  GalaGen Inc. 1992 Stock Plan, as amended.
  (5)
  
  Incorporated By Reference10.6-10.7
  Intentionally left blank.#10.8
  License and Collaboration Agreement between
  the Company and Chiron Corporation dated March 20, 1995.(1)
  
  Incorporated By Reference*10.9
  GalaGen Inc. Employee Stock Purchase Plan,
  as amended. (2)
  
  Incorporated By Reference10.10-10.11
  Intentionally left blank.10.12
  Master Equipment Lease between the Company
  and Cargill Leasing Corporation, dated June 6, 1996. (2)
  
  Incorporated By Reference10.13
  Agreement for Progress Payments between the
  Company and Cargill Leasing Corporation, dated June 6, 1996. (2)
  
  Incorporated By Reference10.14
  Agreement for Lease between the Company and
  Land OLakes, dated June 3, 1996. (2)
  
  Incorporated By Reference10.15-10.18
  Intentionally left blank.*10.19
  GalaGen Inc. Annual Short Term Incentive
  Cash Compensation Plan. (4)
  
  Incorporated By Reference*10.20
  GalaGen Inc. Annual Long Term Incentive
  Stock Option Compensation Plan. (4)
  
  Incorporated By Reference*10.21
  GalaGen Inc. 1997 Incentive Plan. (6)
  
  Incorporated By ReferenceExhibit No.
  Description
  
  Method of Filing10.22
  Master Loan and Security Agreement with
  TransAmerica Business Credit Corporation dated June 8, 1997. (7)
  
  Incorporated By Reference10.23
  Amended and Restated License Agreement
  between the Company and Land O' Lakes dated March 11, 1998. (19)
  
  Incorporated By Reference#10.24
  License Agreement between the Company and
  Metagenics, Inc. dated April 7, 1998. (20)
  
  Incorporated By Reference10.25
  Intentionally left blank.10.26
  Asset Purchase Agreement between the
  Company and Nutrition Medical, Inc., dated September 1, 1998.(21)
  
  Incorporated By Reference10.27
  Intentionally left blank.10.28
  Asset Purchase Agreement Amendment 1
  between the Company and Nutrition Medical, Inc., dated October 28, 1998.(22)
  
  Incorporated By Reference10.29
  Asset Purchase Agreement Amendment 2
  between the Company and Nutrition Medical, Inc., dated December 23, 1998.(23)
  
  Incorporated By Reference#10.30
  Collaboration and License Agreement between
  the Company and American Home Products Corporation acting through its Wyeth-Ayerst
  Laboratories Division, dated October 15, 1998. (24)
  
  Incorporated By Reference#10.31
  Manufacturing and Supply Agreement between
  the Company and American Home Products Corporation acting through its
  Wyeth-Ayerst Laboratories Division dated October 15, 1998.(24)
  
  Incorporated By Reference#10.32
  Product Development Collaboration,
  Manufacturing and Supply, and Retail Marketing Agreement between the Company
  and General Nutrition Corporation, dated December 22, 1998.(24)
  
  Incorporated By Reference*10.33
  Letter agreement with Henry J. Cardello,
  dated January 1, 1999.(31)
  
  Incorporated By Reference10.34
  Repurchase Agreement by and between GalaGen
  Inc. and Chiron Corporation, dated April 1, 1999. (31)
  
  Incorporated By Reference#10.35
  Licensing and Distribution Agreement by and
  between GalaGen Inc. and American Institutional Products, Inc., dated March
  15, 1999.(31)
  
  Incorporated By Reference*10.36
  Letter agreement with Frank L. Kuhar, dated
  June 3, 1999 (32).
  
  Incorporated By Reference10.37
  Licensing and distribution agreement
  between GalaGen Inc. and American Institutional Products, Inc., dated July
  15, 1999. (32)
  
  Incorporated By Reference#10.38
  Licensing Agreement by and between GalaGen
  Inc. and Novartis Consumer Health, Inc., dated October 25, 1999. (33)
  
  Incorporation By Reference#10.39
  Supply Agreement by and between GalaGen
  Inc. and Novartis Consumer Health, Inc., dated October 25, 1999. (33)
  
  Incorporation By Reference



Exhibit No.
  Description
  
  Method of Filing#10.40
  Development Agreement by and between
  GalaGen Inc. and Novartis Consumer Health, Inc., dated December 17, 1999.
  (33)
  
  Incorporation By Reference10.41
  301 Carlson Parkway Lease between Carlson
  Real Estate Company and Galagen, Inc. dated June, 2000. (34)
  
  Incorporation By Reference#10.42
  Supply Agreement between Estee Lauder, Inc.
  and
  Galagen, Inc. (34)
  
  Incorporation By Reference23.1
  Consent of Ernst & Young LLP.
  
  Electronic Transmission

(1)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys
  Registration Statement on Form S-1 (Registration No. 333-1032).(2)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the quarterly period ended June 30, 1996 (File No.
  0-27976).(3)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the quarterly period ended September 30, 1996 (File
  No. 0-27976).(4)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Annual
  Report on Form 10-K for the period ended December 31, 1996 (File No.
  0-27976).(5)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the quarterly period ended March 31, 1997 (File No.
  0-27976).(6)
  
  Incorporated
  herein by reference to Appendix A to the Companys 1997 Definitive Proxy
  Statement on Schedule 14A (File No. 0-27976).(7)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No.
  0-27976).(8)
  
  Incorporated
  herein by reference to Exhibit No. 99 to the Companys Report on Form 8-K,
  dated October 13, 2000 (File No. 0-27976).(9)
  
  Intentionally
  not used.(10)
  
  Incorporated
  by reference to the same numbered exhibit to the Companys Current Report on
  Form 8-K dated December 6, 2000 (File No. 0-27976).(11)
  
  Intentionally
  not used.(12)
  
  Intentionally
  not used.(13)
  
  Incorporated
  herein by reference to Exhibit No. 4.9 to the Companys Registration
  Statement on Form S-3 (Registration No. 333-41151).(14)
  
  Incorporated
  herein by reference to Exhibit No. 4.10 to the Companys Registration
  Statement on Form S–3(Registration No. 333-41151).(15)
  
  Incorporated
  herein by reference to Exhibit No. 4.11 to the Companys Registration
  Statement on Form S–3 (Registration No. 333-41151).(16)
  
  Incorporated
  herein by reference to Exhibit No. 4.12 to Amendment No. 1 to the Companys
  Registration Statement on Form S-3 (Registration No. 333-41151).(17)
  
  Incorporated
  herein by reference to Exhibit No. 4.13 to Amendment No. 1 to the Companys
  Registration Statement on Form S-3 (Registration No. 333-41151).(18)
  
  Intentionally
  not used.(19)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Annual
  Report on Form 10-K for the period ended December 31, 1997 (File No.
  0-27976).(20)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the period ended June 30, 1998 (File No. 0-27976).(21)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the period ended September 30, 1998 (File No.
  0-27976).(22)
  
  Incorporated
  herein by reference to Exhibit No. 2.2 to the Companys Report on Form 8-K,
  dated December 23, 1998 (File No. 0-27976).(23)
  
  Incorporated
  herein by reference to Exhibit No. 2.3 to the Companys Report on Form 8-K,
  dated December 23, 1998 (File No. 0-27976).(24)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Annual
  Report on Form 10-K for the period ended December 31, 1998 (File No.
  0-27976).(25)
  
  Incorporated
  herein by reference to Exhibit No. 4.5 to Amendment No. 2 to the Companys
  Registration Statement on Form S-3/A (Registration No. 333-71883).(26)
  
  Incorporated
  herein by reference to Exhibit No. 4.6 to Amendment No. 2 to the Companys Registration
  Statement on Form S-3/A (Registration No. 333-71883).(27)
  
  Incorporated
  herein by reference to Exhibit No. 4.7 to Amendment No. 2 to the Companys
  Registration Statement on Form S-3/A (Registration No. 333-71883).(28)
  
  Incorporated
  herein by reference to Exhibit No. 4.8 to Amendment No. 2 to the Companys
  Registration Statement on Form S-3/A (Registration No. 333-71883).(29)
  
  Incorporated
  herein by reference to Exhibit No. 4.9 to Amendment No. 2 to the Companys
  Registration Statement on Form S-3/A (Registration No. 333-71883).(30)
  
  Incorporated
  herein by reference to Exhibit No. 4.10 to Amendment No. 2 to the Companys
  Registration Statement on Form S-3/A (Registration No. 333-71883).(31)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the period ended March 31, 1999 (File No. 0-27976).(32)
  
  Incorporation
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the period ended September 30, 1999 (File No.
  0-27976).(33)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Annual
  Report on Form 10-K for the Year Ended December 31, 2000. ( File No. 0-27976)(34)
  
  Incorporated
  herein by reference to the same numbered Exhibit to the Companys Quarterly
  Report on Form 10-Q for the period ended September 30, 2000. ( File No.
  0-27976)*
  
  Management
  contract or compensatory plan or arrangement required to be filed as an
  exhibit to this Form 10-K.#
  
  Contains portions for which confidential
  treatment has been granted to the Company.

SIGNATURESPursuant 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, on March 30, 2001.

GALAGEN INC.By
  /s/ Henry J. CardelloHenry J. CardelloChief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2000.

/s/ Henry J. CardelloHenry J. CardelloPresident, Chief Executive Officer
  (Prinicipal Executive Officer) and Director/s/ Robert A. HoerrRobert A. Hoerr, Chairman, Chief Technology
  Officer and Director/s/ Franklin L. KuharFranklin L. Kuhar, Vice President, Chief
  Financial Officer, Secretary (Principal Financial Officer and Principal
  Accounting Officer)Helmet Breuer, Director/s/ Austen S. Cargill IIAusten S. Cargill, II, DirectorWinston R. Wallin, Director