<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 December 31, 1997
                           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 RD., 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 February 12, 1998, there were 10,323,427 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

Cautionary Statement Under the Private Securities 
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . .1
                                          
PART I - FINANCIAL INFORMATION

     Item 1.   Financial Statements (unaudited)
     
               Consolidated Balance Sheets -
               December 31, 1997 and March 31, 1997. . . . . . . . . . . .2
     
               Consolidated Statements of Operations -
               Three Months and Nine Months Ended 
               December 31, 1997 and 1996 and from
               September 23, 1983 (Inception) to
               December 31, 1997 . . . . . . . . . . . . . . . . . . . . .3

               Consolidated Statements of Stockholders' Equity-
               Nine Months Ended December 31, 1997 and 1996  . . . . . . .4
     
               Consolidated Statements of Cash Flows -
               Nine Months Ended December 31, 1997 and 1996
               and from September 23, 1983 (Inception) to
               December 31, 1997 . . . . . . . . . . . . . . . . . . . . .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 6.   Exhibits and Reports on Form 8-K. . . . . . . . . . . . . .13

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

                                      
<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, 1997, the Registration 
Statement on Form S-3 declared effective on September 4, 1997, 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>

                                                                             December 31, 1997  March 31, 1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                                             $416,942    $1,784,599 
Short-term investments                                                               3,496,647     4,981,435 
Accounts receivable, net                                                                75,070        99,066 
Inventory                                                                               38,637        41,677 
Prepaid expenses                                                                       107,622        87,311 
--------------------------------------------------------------------------------------------------------------
     Total current assets                                                            4,134,918     6,994,088 

Property and equipment, net                                                             78,993        82,563 
Patent costs, net                                                                      126,753       157,597 
--------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                        $4,340,664    $7,234,248 
--------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                                      $236,772      $723,523 
Accrued expenses                                                                       249,221       161,574 
Current portion of capitalized leases                                                    3,967         4,670 
--------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                         489,960       889,767 
--------------------------------------------------------------------------------------------------------------

Capital leases, net of current portion                                                  23,593        13,072 
--------------------------------------------------------------------------------------------------------------


STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 2,000,000 shares authorized;
     41,606 and 50,002 shares issued and outstanding at December 31
     and March 31, 1997, respectively (liquidation preference $10,818,000)          1,040,188     1,250,038 
Common stock, $.02 par value, 100,000,000 shares authorized;
     10,321,237 and 8,151,029 shares issued and outstanding at 
     December 31 and March 31, 1997, respectively                                     206,422       163,021 
Capital in excess of par value                                                     42,199,926    38,274,539 
Deficit accumulated during the development stage                                  (39,619,425)  (33,356,189)
--------------------------------------------------------------------------------------------------------------
     Total stockholders' equity                                                     3,827,111     6,331,409 
--------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                         $4,340,664    $7,234,248 
--------------------------------------------------------------------------------------------------------------
</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            Nine Months Ended     
                                                December 31                  December 31        September 23, 1983 
                                         ------------------------      ----------------------     (inception) to    
                                            1997           1996          1997            1996    December 31, 1997
-----------------------------------------------------------------      ---------------------------------------------
<S>                                      <C>             <C>           <C>            <C>       <C>
REVENUES

   Product sales                         $  68,810       $  8,294      $  69,510      $  20,991          $2,019,741 
   License fees and royalties                  145            836            332            836             481,539 
   Contract research                             -         17,500              -         39,172             268,063 
   Marketing rights                              -              -              -              -           1,311,500 
   Interest and other                       59,175          3,562        224,834         25,123           1,864,947 

--------------------------------------------------------------------------------------------------------------------
Total revenues                             128,130         30,192        294,676         86,122           5,945,790 
--------------------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES

   Cost of product sales                    87,471         29,642        122,792         50,810           3,120,727 
   Product development                     411,042        482,872      1,433,306      1,772,293          16,397,834 
   General and administrative              474,538        219,667      1,672,782        773,717          17,438,280 
   Business development
     and marketing                          36,888          9,677        159,128        139,560           3,717,414 
   Interest and other                        1,598         33,622         55,725         50,393             611,520 

--------------------------------------------------------------------------------------------------------------------
Total costs and expenses                 1,011,537        775,480      3,443,733      2,786,773          41,285,775 
--------------------------------------------------------------------------------------------------------------------

Net loss before convertible
   preferred stock dividends              (883,407)      (745,288)    (3,149,057)    (2,700,651)        (35,339,985)
--------------------------------------------------------------------------------------------------------------------

Convertible preferred stock
   dividends                               665,786        138,259      3,114,179        138,259           4,279,440 

Net loss applicable to 
   common shareholders                 $(1,549,193)     $(883,547)   $(6,263,236)   $(2,838,910)       $(39,619,425)
--------------------------------------------------------------------------------------------------------------------
Net loss per share
   of common stock                          ($0.16)        ($0.11)        ($0.70)        ($0.35)
------------------------------------------------------------------   ---------------------------

Weighted average common
   stock outstanding                     9,986,058      8,131,736      8,906,236      8,087,737 
------------------------------------------------------------------   ---------------------------
</TABLE>

See Notes to Consolidated Financial Statements.




                                                           3
<PAGE>

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

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) 

                                                                                                            Deficit
                                                                                                         Accumulated
                               Convertible Preferred Stock           Common Stock           Capital       During the
                               -----------------------------  ---------------------------  in Excess      Development
                                    Shares      Par Value       Shares       Par Value    of Par Value       Stage          Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>          <C>             <C>          <C>            <C>             <C>
Balance at March 31, 1996                                      8,051,029       $161,021    $29,680,590   ($28,293,562)   $1,548,049
Exercise of warrants                                              81,250          1,625         74,750                       76,375
Issuance of warrants                                                                            45,000                       45,000
Private placement of 
 convertible preferred stock        16,725        418,125                                    2,492,025                    2,910,150
Convertible preferred stock 
 dividends                                                                                     138,259       (138,259)          -  
Net loss                                                                                                   (2,700,651)   (2,700,651)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,1996         16,725     $  418,125      8,132,279       $162,646    $32,430,624   ($31,132,472)   $1,878,923
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------


BALANCE AT MARCH 31, 1997           50,000     $1,250,038      8,151,029       $163,021    $38,274,539   ($33,356,189)   $6,331,409
EXERCISE OF WARRANTS                                             420,312          8,406        386,687                      395,093
ISSUANCE OF COMMON STOCK FOR 
 SERVICES                                                          1,143             20            980                        1,000 
CONVERSION OF PREFERRED STOCK
 INTO COMMON STOCK                  (8,394)      (209,850)     1,748,753         34,975        174,875                          -   
PREFERRED STOCK UNIT PURCHASE 
 OPTION AS COMPENSATION FOR 
 FINANCIAL ADVISORY SERVICES                                                                   248,666                      248,666 
CONVERTIBLE PREFERRED STOCK 
 DIVIDENDS                                                                                   3,114,179     (3,114,179)          -   
NET LOSS                                                                                                   (3,149,057)   (3,149,057)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997        41,606     $1,040,188     10,321,237       $206,422    $42,199,926   ($39,619,425)   $3,827,111 
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
</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>

                                                          Nine Months Ended
                                                             December 31,        September 23, 1983 
                                                      ---------------------------  (inception) to   
                                                          1997          1996      December 31, 1997
--------------------------------------------------------------------------------- -----------------
<S>                                                   <C>            <C>           <C>
OPERATING ACTIVITIES
Net loss                                              ($3,149,057)   ($2,700,651)  ($35,339,985)
Adjustments to reconcile net loss to net cash 
used by operating activities:
     Depreciation and amortization                         62,742         82,794      1,646,486 
     Non-cash expense upon issuance of common stock
          options, common stock and warrants              248,666         45,000        768,962 
     Net book value of disposal of long-term assets        58,534          2,648        223,850 
     Option income from retirement of stock
          or amounts previously advanced by customer            -              -       (400,000)
     Changes in assets and liabilities:
          Accounts receivable                              23,996             53        (75,071)
          Inventory                                         3,040        (31,288)       (38,640)
          Prepaid expenses and other assets               (20,311)      (167,143)      (118,597)
          Accounts payable                               (486,751)       621,677        236,772 
          Accrued expenses                                 87,647       (146,608)       105,198 
          Customer advances                                     -              -        140,863 
          Other liabilities                                 1,506         (2,976)        (3,360)
---------------------------------------------------------------------------------------------------
     Net cash used by operating activities             (3,169,988)    (2,296,494)   (32,853,522)

INVESTING ACTIVITIES
Purchases of short-term investments                             -              -    (10,461,867)
Maturities of short-term investments                    1,484,788      1,288,106      6,965,220
Capital expenditures                                      (16,637)        (4,927)      (848,064)
Patent costs                                              (58,321)       (23,508)      (970,748)
Other                                                           -              -          7,829 
---------------------------------------------------------------------------------------------------
     Net cash provided (used) by investing activities   1,409,830      1,259,671     (5,307,630)

FINANCING ACTIVITIES
Issuance of notes payable                                       -        218,966      2,183,868 
Repayment of notes payable                                      -       (144,062)    (2,474,824)
Repayment of capitalized lease obligations                 (3,592)       (11,341)      (183,199)
Issuance of line of credit                                               509,700        509,700 
Long-term customer advances                                     -              -        100,000 
Issuance of common and preferred stock                    396,093      2,986,525     38,380,049 
Issuance of warrants                                            -              -         62,500 
---------------------------------------------------------------------------------------------------
     Net cash provided by financing activities            392,501      3,559,788     38,578,094 
---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
     and cash equivalents                              (1,367,657)     2,522,965        416,942 
Cash and cash equivalents at beginning of period        1,784,599        409,651              - 
---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period               $416,942     $2,932,616       $416,942 
---------------------------------------------------------------------------------------------------
</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. and 
XYX Acquisition Corp. (collectively the "Company").  All significant 
intercompany balances and transactions have been eliminated. On August 7, 
1997, the Company's stockholders approved a name change to Pacific 
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc.

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 Statement of 
Financial Accounting Standards ("SFAS") No. 7. Among the disclosures required 
by SFAS No. 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 December 31, 1997 and March 31, 1997, and the 
results of operations for the three months and nine months ended December 31, 
1997 and 1996 and from September 23, 1983 (inception) to December 31, 1997. 
The results of operations for the three months and nine months ended 
December 31, 1997 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, 1997.

In February 1997, the Financial Accounting Standards Board issued SFAS 
No. 128, EARNINGS PER SHARE (EPS). This statement requires the presentation 
of earnings per share to reflect both "Basic EPS" as well as "Dilutive EPS" 
on the face of the statement of operations. In general, Basic EPS excludes 
dilution created by stock equivalents and is a function of the weighted 
average number of common shares outstanding for the periods. Diluted EPS does 
reflect the potential dilution created by stock equivalents as if such 
equivalents are converted into common stock and is calculated in 
substantially the same manner as fully Diluted EPS illustrated in Accounting 
Principals Board Opinion No. 15 "EARNINGS PER SHARE".

The Company adopted the new method of reporting EPS starting with this 
quarter ended December 31, 1997. Because the Company's common stock 
equivalents are anti-dilutive, the result of implementing SFAS No. 128 
reflects net loss per share in materially the same manner as previously 
reported. 

                                      6
<PAGE>


2.  PRODUCT APPROVAL AND DISTRIBUTION AGREEMENT

On June 23, 1997, the Company received approval from the United States Food 
and Drug Administration ("FDA") to begin commercial sales and distribution in 
the United States for its Periodontal Tissue Monitor ("PTM") product. During 
the current year, the Company also signed two agreement with Steri-Oss, Inc., 
for the exclusive five-year distribution of PTM worldwide, except in Japan. 
The Company's agreement with Hawe Neos for distribution of PTM in Europe 
terminated in November 1997.

3.  OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.

On June 4, 1996 the Company entered into an agreement with Binary 
Therapeutics, Inc. ("BTI") under which the Company was granted an option to 
acquire BTI, a development stage company with certain technologies in the 
area of Photodynamic Therapy ("PDT") treatment for cancer.  The agreement, as 
amended,  gives the Company the right to acquire BTI by a merger of BTI into 
a wholly-owned subsidiary of the Company. In February 1997, the Company and 
BTI agreed to extend the period during which the Company may exercise its 
option to acquire BTI from April 30, 1997 until such time as BTI has 
completed human clinical trials of Boronated Porphyrin Compound ("BOPP") at 
an agreed upon dose level (the "Option Period"). The Option Period was 
extended at the Company's request to enable BTI to complete pre-clinical 
studies, to commence clinical trials in humans and to demonstrate that a 
given dose level of BOPP in humans would not cause certain adverse events. 
Accordingly, the Company has deferred its election to exercise the option.
 
The agreement calls for the Company to issue common stock to the BTI 
stockholders with an aggregate acquisition value of $6,000,000. The number of 
shares of the Company's common stock to be issued will be determined based 
upon the market value of the Company's common stock prior to the date of 
exercise, although the value of the common stock cannot be less than $2.00 or 
more than $6.00 per share. The agreement has been approved by a majority of 
the stockholders of BTI. The Board of Directors voted to approve the merger, 
however the merger is also subject to shareholder approval for  the issuance 
of additional shares of common stock. One of the Company directors is also a 
director of BTI.

Under the agreement, the Company will assist BTI during the option period in 
preparing the PDT products for advancement into human clinical trials. In 
order to exercise its rights to consummate the merger, the Company will have 
to satisfy certain conditions, including funding expenses incurred by BTI 
during the option period.  These expenses represent the majority of BTI's 
expenditures for the option period and are comprised primarily of product 
development costs. The Company is also required to advance to BTI funds to 
repay $653,000 in indebtedness, including accrued interest as part of the 
acquisition price of BTI. Certain holders of such indebtedness are 
shareholders of the Company.  In exchange for such funding, BTI will issue 
convertible notes to the Company which may be converted into BTI equity at 
the Company's option.  The Company is recording all advances to BTI as 
product development expense in the period incurred due to uncertainties 
regarding the ultimate value to be realized from the convertible notes. 
During the nine months ended December 31, 1997 and 1996, the Company advanced 
$901,000 and $635,000, respectively to BTI and such advances are included in 
product development expense. During the Option Period, the Company has 
advanced $2,182,000 to BTI. 

4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDEND

In fiscal year 1997, the Company completed a private placement of Premium 
Preferred Units ("Units"), each Unit consisting of 500 shares of Convertible 
Preferred Stock ("Preferred Stock"), par value $25.00 per share, and 
50,000 Common Stock Purchase Warrants ("Warrants"). Subscribers to the private


                                      7
<PAGE>

placement purchased the Units at a discount from the closing prices of the 
Company's common stock on December 19, 1996 and March 7, 1997. The resulting 
discount of $4,754,000 is considered a non-cash dividend ("Dividend") and is 
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 is 
eligible for conversion into Common Stock. During the year ended March 31, 
1997 and the nine months ended December 31, 1997, the Company recognized a 
non-cash Dividend to Preferred Stockholders of $1,165,000 and $3,114,000, 
respectively. All of the subscribers to the Private Placement entered into a 
Lock-up Agreement ("Lock-up") with the Company. In the Lock-up, each 
subscriber agreed not to sell or exercise any of the securities contained in 
the Units until the underlying common stock was registered with the 
Securities and Exchange Commission. A Registration Statement on Form S-3 
became effective on September 4, 1997 and 50% of the underlying common stock 
is eligible for trading. 75% of the underlying common stock will be eligible 
for trading on March 4, 1998 and 100% on June 4, 1998. 

The Preferred Stock is convertible into Common Stock upon issuance, except 
that most of the subscribers to the Private Placement signed a letter 
amending the initial Subscription Agreement, in which they agreed not to 
convert any of the Preferred Stock until the underlying Common Stock was 
registered. The amendment provides that they may convert the Preferred Stock 
into Common Stock in accordance with the Lock-up mentioned in the prior 
paragraph. For the nine months ended December 31, 1997, the estimated 
effective date of the registration statement was revised from July 1, 1997 to 
September 1, 1997. This change in estimate resulted in the reduction of 
$235,000 of convertible preferred stock dividends, or $.03 per common share 
for the nine months ended December 31, 1997. The registration statement was 
declared effective on September 4, 1997.

5. FINANCIAL ADVISORY SERVICES

Under the terms of the Placement Agency Agreement the Company signed with 
Paramount Capital Inc.("Paramount"), Paramount will provide financial 
advisory services to the Company for an 18 month period beginning March 8, 
1997. The Company pays Paramount $2,500 per month and has agreed to sell 
to Paramount 2.5 Units at a price equal to 110% of the unit price paid by 
investors in the 1997 Private Placement. The convertible Preferred Stock 
contained in the Units converts into 260,417 shares of  the Company's common 
stock ("Advisory Stock"). There are also warrants ("Advisory Warrants") to 
purchase 125,000 shares of the Company's common stock at $1.00 per share 
attached to the Units, which are exercisable until March 7, 2007. The market 
price of the Company's common stock on March 7, 1997 was $1.50 per share. The 
Company valued the Advisory Stock at $335,000 and the Advisory Warrants at 
$162,000 using a generally accepted valuation method. The Company recorded 
$249,000 in general and administrative expenses as amortization of such value 
for the nine months ended December 31, 1997 related to this agreement.

                                     8
<PAGE>


6. RELATED PARTY TRANSACTION

Under the terms of the employment agreement with the Company's Chairman and 
President, Dr. H. Laurence Shaw, the Company paid all of Dr. Shaw's 
relocation expenses, which totaled $182,000 during the nine months ended 
December 31, 1997. The Board of Directors also approved an interest free 
bridge loan of $300,000 to Dr. Shaw for the purpose of acquiring a new 
residence in California prior to the sale of his New Jersey residence. The 
loan, which was made in May 1997 was paid back in September 1997. 

7. CHANGE IN AUTHORIZED CAPITAL

On August 7, 1997, the Company's stockholders approved an increase in the 
authorized number of common stock from 30,000,000 to 100,000,000 shares and 
preferred stock from 300,000 to 2,000,000 shares.

                                     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

QUARTER ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996

Total revenues were $128,000 for the quarter ended December 31, 1997, a 
$98,000 increase from revenues of $30,000 recorded during the same period of 
the prior year. Current quarter revenues relate primarily to sales of $69,000 
of the Company's Periodontal Tissue Monitor ("PTM") kits and interest income 
of $59,000 generated on the Company's cash balances. In the same period of 
the prior year, the Company had product sales and contract research revenue 
related to its Kephra products. 

Cost of product sales was $87,000, relating to manufacturing and quality 
assurance costs on the Company's PTM sales. Costs of product sales during the 
same period in the prior year related to manufacturing costs for the 
Company's Kephra products sold.

As the Company moves toward its first human clinical trials, spending on 
product development was concentrated on its photodynamic therapy cancer 
treatment, BOPP and Cancer Immunotherapy. Total product development costs 
were $411,000 for the current quarter, a decrease of $72,000 or 15% over the 
prior year third quarter costs of $483,000.  The decrease relates to the 
following areas:  (i) an increase of $64,000 in funding of product 
development expenses in accordance with the Agreement and Plan of Merger with 
Binary Therapeutics, Inc. ("BTI"), the holder of certain technologies in the 
area of Photodynamic Therapy ("PDT") for the treatment of cancer; (ii) a 
decrease of $32,000 in expenses related to Cancer Immunotherapy technology;  
(iii) a decrease of $37,000 in expenses related to PTM product development, 
as the PTM product was approved by the FDA during the current year and has 
moved out of the product development phase; and (iv) a decrease of $67,000 in 
product development expenses related to the Company's Kephra product line and 
general product development costs. The Company is not actively seeking 
licensing opportunities or making product development expenditures for the 
Kephra product line. 

General and administrative expenses for the current quarter were $475,000, an 
increase of $255,000 from the same period of the prior year. The Company 
recognized an expense of $83,000 under the terms of a financial advisory 
agreement with the Company's placement agent, in which it granted a preferred 
stock purchase option in exchange for such services. The Company incurred 
higher general and administrative labor costs during the current quarter 
compared to the same period of the prior year.

Business development costs for the current quarter totaled $37,000, an 
increase of $27,000 from the same quarter of the prior year.  


                                     10
<PAGE>

Net loss before convertible preferred stock dividends for the quarter ended 
December 31, 1997 totaled $883,000 or a 19% increase over the prior year's 
third quarter loss of $745,000.  This increase, as explained above, is a 
result of greater general and administrative expenses, somewhat offset by 
greater revenue. Net loss per share of common stock for the quarter ended 
December 31, 1997 was $.16 compared to $.11 in the same quarter in the 
previous year. During the quarter ended December 31, 1997, the Company 
recognized a non-cash convertible preferred stock dividend of $666,000 
compared to $138,000 during the same period of the prior year. 

NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996

Total revenues aggregated $295,000 for the nine months ended December 31, 
1997, a $208,000 increase from revenues of $86,000 recorded during the same 
period of the prior year. Current year revenues relate primarily to interest 
income of $225,000 generated on the Company's cash balances and sales of the 
Company's PTM product. In the prior year, the Company had product sales of 
$21,000 and contract research revenue of $39,000 related to its Kephra 
products. 

Cost of product sales was $123,000, relating to manufacturing and quality 
assurance costs on the Company's PTM product. The Company completed product 
validation studies required by the FDA during the current year and began 
producing PTM for distribution in the United States. Costs of product sold 
during the same period in the prior year relate to manufacturing costs for 
the Company's Kephra products sold.

Product development costs for the current year were $1,433,000, a decrease of 
$339,000 or 19% over the prior year costs. The decrease relates primarily to 
the following areas:  (i) an increase of $244,000 in funding of BTI's product 
development expenses related to PDT; (ii) a decrease of $105,000 in expenses 
related to Cancer Immunotherapy technology for the treatment of cancer; 
(iii) a decrease of $241,000 in expenses related to PTM product development; and
(iv) a decrease of $237,000 in product development expenses related to the 
Company's Kephra product line and general product development expenses. 

General and administrative expenses for the current year were $1,673,000, an 
increase of $899,000 from the same period of the prior year. The Company 
incurred significant legal and accounting fees related to the registration of 
the securities sold in the recent private placement and began the recognition 
of an 18 month financial advisory agreement in which the Company has granted 
a preferred stock purchase option in exchange for such services. The Company 
also incurred $182,000 in relocation expenses during the nine months ended 
December 31, 1997 in connection with the relocation of its Chairman, 
President and Chief Executive Officer from New Jersey to California. There 
were no such costs incurred during the same period of the prior year.  

Business development costs for the current year totaled $159,000, a decrease 
of $20,000, or 14%, from the same period of the prior year.  

Net loss before convertible preferred stock dividends for the nine months 
ended December 31, 1997 totaled $3,149,000 or a 17% increase over the prior 
year loss of $2,701,000.  This increase is a result of greater general and 
administrative expenses somewhat offset by lower product development costs 
and increased revenue. Net loss per share of common stock for the nine months 
ended December 31, 1997 was $.70 compared to $.35 in the same period in the 
previous year. During the nine months ended December 31, 1997, the Company 
recognized a non-cash convertible preferred stock dividend of $3,114,000 
compared to $138,000 during the same period of the prior year.


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<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

Cash, cash equivalents and short-term investments at December 31, 1997 
totaled $3,914,000, a $2,853,000 decrease from the March 31, 1997 balance. 
Working capital at December 31, 1997 decreased by $2,459,000 from March 31, 
1997 to $3,645,000. These decreases were primarily due to the net loss before 
convertible preferred stock dividends for the nine months ended December 31, 
1997 and payment of certain current liabilities. 

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 September 1998, based on a continuation of the pattern of 
expenses which have prevailed during fiscal years 1997 and 1998. 
Unanticipated expenses or working capital requirements could, however, 
shorten that period.

In August  and December 1997 the Company signed exclusive five year renewable 
distribution agreements with Steri-Oss, Inc. to distribute the Company's PTM 
product worldwide, except in  Japan. In the event the Company begins selling 
material quantities of the PTM, the Company may need additional working 
capital 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 May 1996 the Company entered into an agreement with Wound Healing of 
Oklahoma ("WHO"), a privately held corporation, under which it acquired an 
exclusive license to certain proprietary technology in the treatment of 
cancer.  The Company has incurred $535,000 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.

In June 1996 the Company entered into an agreement which granted the Company 
the option to acquire Binary Therapeutics, Inc. ("BTI"). Under the agreement 
as amended,  the Company has spent $2,550,000 and is currently funding 
substantially all expenses of BTI, which consist primarily of product 
development expenses, and 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.


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<PAGE>

PART II-OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A)   EXHIBITS

EXHIBIT NUMBER                       DESCRIPTION OF EXHIBIT

    10.56               Exclusive Distribution Agreement for European 
                        Territory dated December 1, 1997 between 
                        Pacific Pharmaceuticals, Inc. and Steri-Oss, 
                        Inc. Portions of this exhibit have been omitted 
                        pursuant to request for confidential treatment.

    10.57               Consulting Agreement dated November 14, 1997 between 
                        Pacific Pharmaceuticals, Inc. and Frank Barnes.


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:  February 12, 1998              /S/  JAMES HERTZOG
                                      -------------------------------
                                      James Hertzog
                                      Chief Accounting Officer   
                                      (Principal Accounting Officer and Officer
                                      duly authorized to sign this report on 
                                      behalf of the registrant)


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