<PAGE>

                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington D.C. 20549


                   Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                       for the Quarter Ended June 30, 1998
                          Commission file number 1-9613
                                                --------

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




              Delaware                              36-3258753
----------------------------------------------------------------------------
       (State of incorporation)        (I.R.S. Employer Identification No.)



6730 Mesa Ridge Road, Suite A, San Diego, CA              92121
----------------------------------------------------------------------------
   (Address of principal executive offices)             (Zip Code)



                                 (619) 550-3900
               --------------------------------------------------
              (Registrant's Telephone number, including area code)



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
                                                   -----   -----

As of August 14, 1998, there were 11,271,856 shares of the registrant's Common
Stock, $.02 par value outstanding.

<PAGE>



                 PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                         INCORPORATED SEPTEMBER 23, 1983


                                      INDEX

<TABLE>

<S>                                                                                   <C>
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995..........................................................1

Part I - Financial Information

     Item 1.      Consolidated Financial Statements:

                  Consolidated Balance Sheets -
                  June 30, 1998 and March 31, 1998 ....................................2

                  Consolidated Statements of Operations Three Months Ended June
                  30, 1998 and 1997 (as restated) and from September 23, 1983
                  (Inception) to
                  June 30, 1998........................................................3


                  Consolidated Statements of Stockholders' Equity/(Deficiency) -
                  Three Months Ended June 30, 1998 and 1997 (as restated)..............4

                  Consolidated Statements of Cash Flows Three Months Ended June
                  30, 1998 and 1997 and from September 23, 1983 (Inception) to
                  June 30, 1998........................................................5

                  Notes to Consolidated Financial Statements...........................6



     Item 2.      Management's Discussion and Analysis of
                  Financial Condition and Results of Operations.......................10


Part II - Other Information

     Item 2.      Changes in Securities...............................................13

     Item 6.      Exhibits and Reports on Form 8-K....................................13

SIGNATURE         ....................................................................13

</TABLE>

<PAGE>

               CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES 
                        LITIGATION REFORM ACT OF 1995


Statements in this Quarterly Report on Form 10-Q under the caption 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations" and in the "Notes to Consolidated Financial Statements", as well 
as oral statements that may be made by the Company or by officers, directors 
or employees of the Company acting on the Company's behalf, that are not 
historical fact constitute "forward-looking statements" within the meaning of 
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 
Securities Exchange Act of 1934, as amended. These forward-looking statements 
involve risks and uncertainties, including, but not limited to, the risk that 
the Company may not be able to obtain additional financing, if necessary; the 
risk that the Company may not be able to maintain its listing on the American 
Stock Exchange; and the risk that the Company may not be able to continue the 
necessary development of its operations on a profitable basis. In addition, 
the Company's business, operations and financial condition are subject to 
reports and statements filed from time to time with the Securities and 
Exchange Commission, including the Company's Annual Report on Form 10-K for 
the fiscal year ended March 31, 1998 and this Quarterly Report on Form 10-Q.

                                       1

<PAGE>

PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)

CONSOLIDATED BALANCE SHEETS (unaudited)

<TABLE>
<CAPTION>

                                                                                 JUNE 30, 1998      March 31, 1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                                         $   5,007,767     $   3,290,176
Accounts receivable, net                                                                 11,333                 -
Inventory                                                                                54,587            38,637
Prepaid expenses                                                                        128,061            85,053
------------------------------------------------------------------------------------------------------------------
      Total current assets                                                            5,201,748         3,413,866

Property and equipment, net                                                              68,907            71,840
Patent costs, net                                                                       154,105           104,981
------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                      $   5,424,760     $   3,590,687
------------------------------------------------------------------------------------------------------------------


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                                  $     663,756     $     661,371
Accrued expenses                                                                        211,300           201,125
Current portion of capital leases                                                         4,167             4,066
------------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                         879,223           866,562
------------------------------------------------------------------------------------------------------------------

Capital leases                                                                           21,504            22,584
Minority interest                                                                     4,806,063                 -
------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY/(DEFICIENCY):
Convertible preferred stock, $25 par value, 2,000,000 shares authorized; 38,446
      and 40,090 issued and outstanding at June 30,1998
      and March 31, 1998, respectively                                                  961,188         1,002,288
      (liquidation preference $9,995,960 and $10,423,400, respectively)
Commonstock, $.02 par value, 100,000,000 shares authorized; 11,357,021 and
      10,777,234 shares issued and outstanding at
      June 30, 1998 and March 31, 1998, respectively                                    227,138           215,545
Capital in excess of par value                                                       48,100,899        46,969,197
Deficit accumulated during the development stage                                    (49,571,255)      (45,485,489)
------------------------------------------------------------------------------------------------------------------
      Total stockholders' equity/(deficiency)                                         (282,030)         2,701,541
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICENCY)                            $  5,424,760      $   3,590,687
------------------------------------------------------------------------------------------------------------------

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       2

<PAGE>

PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>

                                              Three Months Ended        
                                                   June 30,                   September 23, 1983
                                        --------------------------------        (inception) to
                                             1998            1997                June 30, 1998
------------------------------------------------------------------------    ----------------------
                                                         (as restated)
<S>                                     <C>              <C>                <C>
REVENUES

   Product sales                            $     4,016     $       700              $  2,023,757
   License fees and royalties                         -              95                   486,612
   Contract research                                  -               -                   268,063
   Marketing rights                                   -               -                 1,311,500
   Interest and other                            42,141         100,488                 1,955,799
------------------------------------------------------------------------      --------------------
Total revenues                                   46,157         101,283                 6,045,731
------------------------------------------------------------------------      --------------------

COSTS AND EXPENSES

   Cost of product sales                         20,017          14,002                 3,158,412
   Product development                          385,643         360,899                17,546,604
   General and administrative                   401,330         534,775                18,253,077
   Business development
     and marketing                               17,825          73,858                 3,794,714
   Interest and other                            12,727          53,198                   646,701
------------------------------------------------------------------------      --------------------
Total costs and expenses                        837,542       1,036,732                43,399,507
------------------------------------------------------------------------      --------------------

Net loss                                       (791,385)       (935,449)              (37,353,776)
------------------------------------------------------------------------      --------------------

Convertible preferred stock
   dividends                                  3,294,381       1,815,050                12,217,477

Net loss applicable to
   common shareholders                      $(4,085,766)    $(2,750,499)             $(49,571,253)
------------------------------------------------------------------------      --------------------

Net loss per share
   of common stock-basic and diluted             ($0.37)         ($0.34)
------------------------------------------------------------------------

Weighted average common
   stock outstanding                         11,068,068       8,158,227
------------------------------------------------------------------------

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3

<PAGE>

PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY) (unaudited)
<TABLE>
<CAPTION>
                                                                   Convertible
                                                                 Preferred Stock                     Common Stock            
                                                        ----------------------------------- ---------------------------------
                                                            Shares          Par Value          Shares         Par Value      
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                 <C>                <C>            <C>
Balance at March 31, 1997                                        50,000      $  1,250,038       8,151,029         $163,021   
Exercise of warrants                                                                               41,250              825   
Preferred stock unit purchase option
  compensation for financial advisory services                                                                               
Convertible preferred stock dividends (as restated)                                                                          
Net  loss                                                                                                                    
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (as restated)                           50,000      $  1,250,038       8,192,279         $163,846   
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998                                        40,090      $  1,002,288      10,777,234         $215,545   
EXERCISE OF WARRANTS                                                                                1,563               31   
COMMON STOCK ISSUED FOR SERVICES                                                                  100,000            2,000   
PREFERRED STOCK UNIT PURCHASE OPTION AS
  COMPENSATION FOR FINANCIAL ADVISORY SERVICES                                                                               
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK                  (1,644)          (41,100)        478,224            9,562   
CONVERTIBLE PREFERRED STOCK DIVIDENDS                                                                                        
PROCEEDS FROM SUBSIDIARY PREFERRED STOCK ISSUANCE                                                                            
NET  LOSS                                                                                                                    
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998                                         38,446        $  961,188      11,357,021         $227,138   
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                            Deficit
                                                                           Accumulated
                                                          Capital           During the
                                                         in Excess         Development
                                                        of Par Value          Stage              Total
-------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>                   <C>
Balance at March 31, 1997                                  $38,274,539       ($33,356,189)        $6,331,409
Exercise of warrants                                            37,950                                38,775
Preferred stock unit purchase option
  compensation for financial advisory services                  82,900                                82,900
Convertible preferred stock dividends (as restated)          1,815,050         (1,815,050)                 -
Net  loss                                                                        (935,449)         (935,449)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (as restated)                     $40,210,439       ($36,106,688)        $5,517,635
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998                                  $46,969,197       ($45,485,489)        $2,701,541
EXERCISE OF WARRANTS                                             1,438                                 1,469
COMMON STOCK ISSUED FOR SERVICES                                73,000                                75,000
PREFERRED STOCK UNIT PURCHASE OPTION AS
  COMPENSATION FOR FINANCIAL ADVISORY SERVICES                  82,900                                82,900
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK                 31,538                                     -
CONVERTIBLE PREFERRED STOCK DIVIDENDS                          374,056         (3,294,381)        (2,920,325)
PROCEEDS FROM SUBSIDIARY PREFERRED STOCK ISSUANCE              568,770                               568,770
NET  LOSS                                                                        (791,385)          (791,385)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998                                   $48,100,899       ($49,571,255)         ($282,030)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

<TABLE>
<CAPTION>

                                                                     Three Months Ended       
                                                                          June 30,                 September 23, 1983
                                                            ----------------------------------       (inception) to
                                                                 1998               1997              June 30, 1998
----------------------------------------------------------------------------------------------  ----------------------
<S>                                                         <C>                 <C>              <C>
OPERATING ACTIVITIES
Net loss                                                         ($791,385)         ($935,449)           ($37,353,776)
Adjustments to reconcile net loss to net cash
used by operating activities:
    Depreciation and amortization                                   17,587             24,393               1,682,588
    Non-cash expense upon issuance of common stock
       options, common stock and warrants                           82,900             82,900                 934,761
    Net book value of asset disposals                                    -             58,534                 241,692
    Option income from retirement of stock
       or amounts previously advanced by customer                        -                  -                (400,000)
    Changes in assets and liabilities:
       Accounts receivable                                         (11,333)          (273,242)                (11,333)
       Inventory                                                   (15,950)              (726)                (54,590)
       Prepaid expenses and other assets                           (43,008)          (134,252)               (139,036)
       Accounts payable                                              2,385           (200,852)                663,756
       Accrued expenses                                             10,175             56,765                  67,277
       Customer advances                                                 -                  -                 140,863
       Other liabilities                                               102                 73                  (4,764)
----------------------------------------------------------------------------------------------  ----------------------
    Net cash used by operating activities                         (748,527)        (1,321,856)            (34,232,562)

INVESTING ACTIVITIES
Purchases of short-term investments                                      -             (4,629)            (10,461,867)
Maturities of short-term investments                                     -                  -              10,461,867
Capital expenditures                                                (3,627)            (2,545)               (851,556)
Patent costs                                                       (60,151)           (17,614)             (1,037,523)
Other                                                                    -                  -                   7,829
----------------------------------------------------------------------------------------------  ----------------------
    Net cash provided used by investing activities                 (63,778)           (24,788)             (1,881,250)

FINANCING ACTIVITIES
Issuance of notes payable                                                -                  -               2,183,867
Repayment of notes payable                                               -                  -              (1,965,124)
Repayment of capital lease obligations                              (1,081)            (1,259)               (184,628)
Long-term customer advances                                              -                  -                 100,000
Issuance of common and preferred stock                             645,239             38,775              39,101,726
Minority interest investment in subsidiary                       1,885,738                  -               1,885,738
----------------------------------------------------------------------------------------------  ----------------------
    Net cash provided by financing activities                    2,529,896             37,516              41,121,579
----------------------------------------------------------------------------------------------  ----------------------
Net increase (decrease) in cash
    and cash equivalents                                         1,717,591         (1,309,128)              5,007,767
Cash and cash equivalents at beginning of period                 3,290,176          1,784,599                       -
----------------------------------------------------------------------------------------------  ----------------------
Cash and cash equivalents at end of period                      $5,007,767         $  475,471             $ 5,007,767
----------------------------------------------------------------------------------------------  ----------------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       5

<PAGE>

                 PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  PRINCIPLES OF INTERIM PERIOD REPORTING

The consolidated financial statements include the accounts of Pacific 
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc., 
XYX Acquisition Corp. and BG Development Corp., a majority owned subsidiary, 
(collectively the "Company"). All significant intercompany balances and 
transactions have been eliminated.

The Company has not earned significant revenues from planned principal 
operations. Accordingly, the Company's activities have been accounted for as 
those of a "Development Stage Enterprise" as set forth in Financial 
Accounting Standards Board Statement No. 7 ("FAS 7"). Among the disclosures 
required by FAS 7 are that the Company's financial statements be identified 
as those of a development stage enterprise, and that certain consolidated 
financial statements disclose activity since the date of the Company's 
inception.

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

In the opinion of the Company, the unaudited consolidated financial 
statements contain all of the adjustments, consisting only of normal 
recurring adjustments and accruals, necessary to present fairly the financial 
position of the Company as of June 30, 1998 and March 31, 1998, results of 
operations for the three months ended June 30, 1998 and 1997 and from 
September 23, 1983 (inception) to June 30, 1998 and cash flows for the three 
months ended June 30, 1998 and 1997 and from September 23, 1983 (inception) 
to June 30, 1998. The results of operations for the three months ended June 
30, 1998 are not necessarily indicative of the results to be expected in 
subsequent periods or for the year as a whole. For further information, refer 
to the consolidated financial statements and footnotes thereto as set forth 
in the Company's Annual Report on Form 10-K for the year ended March 31, 1998.

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 
128, EARNINGS PER SHARE (EPS). This statement requires the presentation of 
earnings per share to reflect both "Basic EPS" as well as "Diluted EPS" on 
the face of the statement of operations. In general, Basic EPS is a function 
of weighted average number of common shares outstanding for the periods. 
Diluted EPS does reflect the potential dilution created by stock issuable 
pursuant to outstanding options, warrants, convertible debt or equity 
securities and other contingently issuable shares. The requirements of SFAS 
128 have been applied retroactively to all periods presented. There was no 
impact on reported net loss per common share as a result of the adoption of 
this SFAS.

2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST

During the quarter ended June 30, 1998, the Company entered into a placement 
agency agreement with Paramount Capital Inc. ("Paramount). Under the terms of 
the agreement, Paramount was to use its best efforts to sell up to 60 Units 
(with an overallotment option for an additional 40 Units) for $100,000 each, 
which consist of 50,000 shares of Series A Convertible Preferred Stock ("BGDC 
Units"), valued at $2.00 per share of BG Development Corp. ("BGDC"). The BGDC 

                                       6

<PAGE>

Units are redeemable in cash by BGDC. The BGDC Units may be exchanged for 
common stock of the Company under certain circumstances. Pursuant to the 
subscription agreement, seventy-five percent of the net proceeds are 
allocated to BGDC for development costs associated with O6 Benzylguanine 
technology. Twenty-five percent of the net proceeds of the BDGC private 
placement went to the Company to be used for general purposes.

The BGDC Units accrue dividends as follows:

<TABLE>
<CAPTION>

     Dividend Date                              Dividend Amount
     -------------                              ---------------
<S>                                             <C>
Upon final closing                              $1.99 per share
30-36 months after closing                      $0.82 per share
36-42 months after closing                      $0.82 per share
42-48 months after closing                      $1.16 per share
48-60 months after closing                      $1.16 per share
After 60 months                                 Compounded rate of 35%

</TABLE>

On June 22, 1998, the Company completed a closing on 29.35 BGDC Units of the 
private placement for gross proceeds of $2,900,000 (net proceeds of 
$2,455,000). Paramount, who is affiliated with certain significant 
shareholders of the Company, received an aggregate dollar commission of 
$264,000 and a non-accountable expense allowance of $117,000 as compensation 
for the BGDC private placement. Additionally, Paramount received warrants to 
purchase 10% of the number of BGDC Units issued in private placement at 
$110,000 per unit. BGDC and Paramount also entered into a 24 month Financial 
Advisory Services Agreement in which BDGC will pay Paramount $3,000 per month 
for such services plus warrants to purchase 15% of the number of BGDC Units 
issued in the private placement at $110,000 per Unit.

Subsequent to the closing of the private placement, BGDC Preferred 
Stockholders own 16.4% of voting rights in BGDC. This minority interest, as 
reflected in the accompanying Consolidated Balance Sheet as of June 30, 1998, 
includes the initial net preceeds to BGDC of $1,886,000, plus the initial 
dividend of $2,920,000, or $1.99 per preferred share outstanding.

BGDC and the Company have entered into a one-year renewable Corporate 
Services and Management Agreement pursuant to which the Company will provide 
financial/accounting, administrative, advisory and managerial support to 
BGDC. For such services, the Company will receive from BGDC a management fee 
equal to $500,000 per year, payable in equal monthly installments. The 
Company does not expect any further closings to occur for the private 
placement.

3. POTENTIAL DELISTING FROM THE AMERICAN STOCK EXCHANGE

On June 24, 1998, the Company received notice from the American Stock 
Exchange ("AMEX") that Amex intends to take action to remove the Company's 
Common Stock from the AMEX because the Company no longer satisfies all of the 
financial guidelines of the AMEX for continued listing. The Company notified 
the Board of Governors of AMEX that it intends to appeal the decision to 
remove the Company's Common Stock from the AMEX. There can be no assurance 
that the appeal by the Company will be successful, and that the listing will 
be continued. The Company is taking measures to ensure that in the event of 
an unsuccessful appeal, an orderly transition will occur and that its Common 
Stock will commence trading on the NASD Electronic Bulletin Board.

4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDENDS

In fiscal year 1997, the Company completed a private equity financing ("1997 
Private Placement") in two stages with the initial closing completed on 
December 19, 1996 (the "Initial Closing") and the final 

                                       7

<PAGE>

closing completed on March 7, 1997 (the "Final Closing") in which it raised 
$8,542,000, net of offering expenses.

The Company sold 100 Premium Preferred Units ("Units") at a price per Unit of 
$100,000, each Unit consisting of 500 shares of Convertible Preferred Stock 
("Preferred Stock"), par value $25 per share, and 50,000 detachable Common 
Stock Purchase Warrants ("Warrants"), to accredited individuals and 
institutional investors pursuant to Regulation D under the Securities Act of 
1933, as amended. Each Warrant entitles the holder to purchase one share of 
Common Stock at a price of $1 per share and may be exercised until March 7, 
2007.

The initial conversion ratio for the Preferred Stock was 208.33 shares of 
Common Stock for each share of Preferred Stock. The 1997 Private Placement 
contained an adjustment provision to reset the conversion ratio under certain 
conditions. For Preferred Stock converted after March 7, 1998, the new 
conversion ratio is 290.89 shares of common stock for each share of Preferred 
Stock.

The subscribers to the Private Placement purchased the Units at a discount 
from the closing prices of the Company's common stock on the Initial Closing 
date of 23% and the Final Closing date of 36%. The detachable stock purchase 
warrants issued as part of the Units had a fair value at the date of issuance 
of $1,967,000. The aggregate value of the beneficial conversion feature and 
warrants at the date of issuance was $6,721,000 and has been recognized as a 
return to the Preferred Stockholders from the date of issuance of the 
Preferred Stock to the date in which the Preferred Stock was eligible for 
conversion into Common Stock. The reset of the conversion ratio during March 
1998 generated an additional non-cash dividend of $2,576,000.

As discussed in Note 2, the BGDC private placement includes a provision that 
the subscribers are entitled to receive $1.99 per share dividends declared by 
to Board of Directors of BGDC. The dividends of $2,920,000, which were 
credited to minority interest during the three months ended June 30, 1998, 
accumulate until paid in cash or common stock by BGDC.

Below is a summary of Preferred Stock Dividends recognized during the periods 
indicated:

<TABLE>
<CAPTION>

                                                                                            
                                                           Three Months Ended June 30,         September 23, 1983
                                                      --------------------------------------     (inception) to
                                                            1998              1997               June 30, 1998
                                                      ----------------- ------------------   -----------------------
<S>                                                   <C>               <C>                  <C>
                                                                           (as restated)
Dividend from beneficial conversion feature                    128,036          1,296,362                 4,754,075
Dividend from reset of conversion                              194,752                  -                 2,576,077
Dividend from warrant valuation                                 51,268            518,688                 1,967,000
Dividends from BGDC preferred stock                          2,920,325                  -                 2,920,325
                                                      ----------------- ------------------   -----------------------
                                                Total        3,294,381          1,815,050                12,217,477
                                                      ----------------- ------------------   -----------------------
                                                      ----------------- ------------------   -----------------------

</TABLE>

                                       8

<PAGE>

5.    1997 RESTATEMENT

Subsequent to the issuance of the Company's 1997 financial statements, the 
Company's management determined that the accounting for the convertible 
Preferred Stock issued in the fiscal year did not reflect the value of the 
detachable stock purchase warrants issued in connection with the 1997 Private 
Placement described in Note 4. The fair value of such warrants, as calculated 
by an independent valuation consulting firm, was $1,967,000, and is being 
recorded as a return to the Preferred Stockholders from the date of issue of 
the Preferred Stock to the date in which the Preferred Stock was eligible for 
conversion into Common Stock. As a result, net loss applicable to Common 
Shareholders and net loss per share for the quarter ended June 30, 1997 have 
been restated from the amounts previously reported. Such restatement also 
resulted in a $518,688 increase in both capital in excess of par value and 
the deficit accumulated in development stage.

A summary of the effect of the restatement is as follows:

<TABLE>
<CAPTION>

                            Quarter           Quarter
                             ended             ended
                         June 30, 1997     June 30, 1997
                         As Previously          As
                           Reported          Restated
                        ----------------  ----------------
<S>                     <C>               <C>
Convertible
  preferred stock
  Dividends                 $ 1,296,362       $ 1,815,050
                        ----------------  ----------------
Net loss applicable
  to common
  Shareholders              $(2,231,811)      $(2,750,499)
                        ----------------  ----------------
Net loss per
  share of
  common stock-
  basic and diluted         $     (0.27)      $     (0.34)
                        ----------------  ----------------

</TABLE>

                                       9

<PAGE>

                 PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                         INCORPORATED SEPTEMBER 23, 1983

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

RESULTS OF OPERATIONS

Total revenues were $46,000 for the first quarter of FY 1999, a $55,000 
decrease from revenues of $101,000 recorded during the same period of the 
prior year. Current year revenue decreased over the prior year because 
interest income decreased during the current period because invested cash was 
lower in the current period compared to the same period of the prior year.

The Company continued work on its first human clinical trial for its 
Photodynamic Therapy (PDT) cancer treatment, Boronated Porphyrin (BOPP). The 
Company also continued its evaluation and due diligence of a compound 
acquired during FY 1998, O6 Benzlyguanine ("BG"). Product development costs 
for the first quarter of FY 1999 increased by $25,000 or 7% to $386,000 
compared to the same period of the prior year. The increase related to the 
following areas: (i) a decrease of $78,000 in funding of product development 
expenses for BOPP; (ii) an increase of $129,000 on expenses for the 
acquisition and evaluation of BG (iii) $21,000 increase in expenses related 
to Cancer Immunotherapy technology; (iv) a decrease of $47,000 in expenses 
related to PTM product development, as the PTM product was approved by the 
FDA during the first quarter of the prior year and has moved out of the 
product development phase.

Business development costs for the first quarter of FY 1999 totaled $18,000, 
a decrease of $56,000, or 76%, from the same quarter of the prior year. 
Expenses decreased as the Company spent less time and resources in developing 
corporate partnerships for its various products compared to the prior year.

General and administrative expenses for the first quarter of FY 1999 
decreased 25% to $401,000 from the same period of the prior year. During the 
first quarter of FY 1998, the Company incurred significant legal and 
accounting fees related to the registration of the securities sold in the 
1997 Private Placement. No such expenses were incurred during the first 
quarter of FY 1999. Also, personnel costs attributable to general and 
administrative expenses were lower in the first quarter of FY 1999 compared 
to the same period of the prior year.

Interest and other expenses were $13,000 for the first quarter of FY 1999 
compared to $53,000 for the same period of the prior year. The prior year 
included a charge relating to the write-off of the remaining unamortized 
portion of Kephra patent costs. No such cost was incurred during the current 
year.

Net loss was $791,000 for the first quarter of FY 1999, a decrease of 
$144,000 over the same period of the prior year. Net loss applicable to 
common stockholders was $4,086,000 for the first quarter of FY 1999 compared 
to $2,750,000 (as restated) in the same period of the prior year. Non-cash 
convertible preferred stock dividends of $3,294,000 were recorded during the 
current quarter compared to $1,815,000 in the first quarter of FY 1998 (as 
restated), in conjunction with a private equity financing completed during FY 
1997.

                                       10

<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

Cash and cash equivalents at June 30, 1998 totaled $5,008,000, an increase of 
$1,718,000 from the March 31, 1998 balance. Working capital at June 30, 1998 
increased by $1,775,000 from March 31, 1998 to $4,323,000. These increase 
were primarily due to the closing on net proceeds of $2,455,000 of the BGDC 
private placement financing offset by the net loss before convertible 
preferred stock dividends for the three month period ending June 30, 1998. 
Seventy five percent of the net proceeds of the BGDC private placement will 
be used by BGDC for development costs associated with BG and 25 % will go to 
the Company to be used for general purposes.

Since inception, the Company has experienced negative cash flow from 
operations, and the Company considers it prudent to anticipate that negative 
cash flow from operations will continue for the foreseeable future, and that 
outside sources of funding will continue to be required. Without significant 
future revenues, the Company's financial resources are anticipated to be 
adequate through March 1999, based on a continuation of the pattern of 
expenses which have prevailed during fiscal years 1998 and 1997. 
Unanticipated expenses or working capital requirements could, however, 
shorten that period.

The Company has two distribution agreements with Steri-Oss, Inc. to 
distribute the Company's Periodontal Tissue Monitor kit ("PTM") worldwide, 
except Japan. In the event the Company begins selling material quantities of 
the PTM, the Company may need additional working capital, and additional 
personnel and space, all of which may cause an increase in the net 
utilization of cash. However, there can be no assurance that any of its 
existing or future marketing partners will order the PTM products in 
significant quantities.

In March 1998, the Company signed a license agreement for the drug compound 
O6 Benzylguanine ("BG") with the owners of the patents: Pennsylvania State 
University, the National Institutes of Health (NIH), the University of 
Chicago, and Case Western Reserve University, (collectively, the 
"Co-Owners"), and in turn, assigned it to its subsidiary BGDC.

The Company entered into a Cooperative Research and Development Agreement 
("CRADA") with the NIH to fund studies and clinical trials. Under the terms 
of the CRADA, the Company would be obligated to provide funding of $125,000 
per year for five years for joint research. If the Company elects to continue 
to develop the BG technology, it would be obligated to make additional 
milestone, royalty and patent reimbursement payments to the Co-Owners during 
the term of the License Agreement. The agreement also has a provision in 
which the Company may make certain portions of the aforementioned payments in 
common stock of the Company.

In connection with the license agreement for BG, the Company entered into an 
introduction agreement with Paramount Capital Investments LLC ("PCI"). The 
Company paid PCI a commission of $100,000 plus 100,000 shares of the 
Company's common stock valued at $75,000 and reimbursed PCI $100,000 for its 
expenses in connection with the acquisition of the BG technology. The Company 
is obligated to make milestone payments to

                                        11

<PAGE>

PCI in the Company's common stock of up to 900,000 shares if the BG compound 
successfully reaches certain milestones. The Company recorded $129,000 in 
product development expenses during first quarter of FY 1999 and $429,000 
since inception of the program to develop the BG technology.

In June 1996 the Company entered into an agreement which granted the Company 
the option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately 
held, development stage enterprise holding certain technologies for the PDT 
treatment of cancer. Under the agreement as amended, the Company recorded 
expenses of $173,000 during the first quarter of FY 1999 and $3,078,000 since 
inception of the agreement, and is currently funding substantially all 
expenses of BTI. The company expects to continue funding such expenses until 
the Company determines if it will elect to exercise its option to acquire 
BTI. There can be no assurance that the Company will exercise its option to 
acquire BTI.

The Company has an agreement with Wound Healing of Oklahoma ("WHO") under 
which it acquired an exclusive license to certain proprietary technology for 
Cancer Immunotherapy. The Company incurred $65,000 during the first quarter 
of FY 1999 and $693,000 in product development expenses since the acquisition 
of the license and expects to continue funding such efforts associated with 
the commercialization of the licensed technology, including the commencement 
of human clinical trials, which will increase the Company's net utilization 
of cash. However, there can be no assurance that FDA and other regulatory 
approval required to commence such trials will be forthcoming.

The Company received notice from the American Stock Exchange ("AMEX") that 
AMEX intends to take action to remove the Company's Common Stock from the 
AMEX because the Company no longer satisfies all of the financial guidelines 
of the AMEX for continued listing. The Company notified the Board of 
Governors of AMEX that it will appeal the decision to remove the Company's 
Common Stock from the AMEX. There can be no assurance that the appeal by the 
Company will be successful, and that the listing will be continued. The 
Company is taking measures to ensure that in the event of an unsuccessful 
appeal, an orderly transition will occur and that its Common Stock will 
commence trading on the NASD Electronic Bulletin Board. If the Company were 
to lose it's listing on the AMEX, the Company's ability to raise additional 
capital might be impaired.

YEAR 2000 COMPLIANCE. The Company recognizes the need to ensure its 
operations will not be adversely impacted by the inability of the Company's 
systems to process data having dates on or after January 1, 2000 ("Year 
2000"). Processing errors due to software failure arising from calculations 
using the Year 2000 date are recognized as a risk. The Company is currently 
addressing the risk, with respect to the availability and integrity of its 
financial systems and the reliability of its operating systems, and is in the 
process of communicating with suppliers, customers, financial institutions 
and others with whom it conducts business to assess whether they are or will 
be Year 2000 compliant. While the Company believes its planning efforts are 
adequate to address its Year 2000 concerns, there can be no assurance that 
the systems of other companies on which the Company's systems and operations 
rely will be converted on a timely basis and will not have a material effect 
on the Company. In addition, the potential impact of the Year 2000 on others 
with whom the Company does business and any resulting effects on the Company 
cannot be reasonably estimated at this time. The cost of the Company's Year 
2000 initiatives is not expected to be material to the Company's results of 
operations or financial position.

                                        12

<PAGE>

PART II-OTHER INFORMATION

ITEM 2.CHANGES IN SECURITIES
         (c) RECENT SALES OF UNREGISTERED SECURITIES

On June 22, 1998, the Company's subsidiary, BG Development Corp. ("BGDC"), 
issued 1,467,500 shares of Series A Convertible Preferred Stock (the "BGDC 
Convertible Stock") for gross proceeds of $2,900,000 (net proceeds of 
$2,600,000) in a private placement to accredited investors, exempt from 
registration under the Securities Act of 1933, as amended, pursuant to 
Section 4(2) and Regulation D thereunder. The BGDC Convertible Stock may be 
converted at the option of the holder into shares of BGDC common stock at an 
initial conversion price of $2.00 per share of BGDC common stock (the 
"Conversion Price"). The Initial Conversion Price is subject to adjustment 
upon the occurrence of issuances of BGDC securities at below market price or 
below the Conversion Price, a merger, reorganization, consolidation, 
reclassification, stock dividend or stock split which results in an increase 
or decrease in the number of BGDC common stock outstanding. Additionally, the 
Conversion Price is subject to adjustment in the event that BGDC securities 
are subject to an underwritten initial public offering or otherwise commence 
trading on a national securities exchange or on the National Association of 
Securities Dealers, Inc. Automated Quotation System. Paramount Capital Inc. 
served as the placement agent in the offering. See Note 2 to the Consolidated 
Financial Statements.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>

 Date of Report                      Item Reported                    Financial Statements Filed
-----------------                  ------------------             ----------------------------------
<S>                        <C>                                    <C>
June 26, 1998              Item 5-Other Events (Announcing notice                  No
                           From AMEX)

</TABLE>

Pursuant to the requirements 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.

                                            Pacific Pharmaceuticals, Inc.



Date:  August 14, 1998                       /s/  James Hertzog
                                            -------------------
                                            James Hertzog
                                            Controller
                                            (Principal Accounting Officer and
                                            duly authorized to sign this report
                                            on behalf of the registrant)


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