<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, 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 February 11, 1999, there were  14,671,924 shares of the registrant's 
Common Stock, $.02 par value outstanding.


<PAGE>


                   PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE ENTERPRISE)
                           INCORPORATED DECEMBER 23, 1983
                                          
                                          
                                          
                                       INDEX
                                          
Cautionary Statement Under the Private Securities 
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . . . 1
                                          
PART I - FINANCIAL INFORMATION

     Item 1.   Consolidated Financial Statements:
     
               Consolidated Balance Sheets -
               December 31, 1998 and March 31, 1998  . . . . . . . . . . . . 2

               Consolidated Statements of Operations -
               Three Months and Nine Months Ended 
               December 31, 1998 and 1997 (as restated)
               and from September 23, 1983 (inception) to
               December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . 3

               Consolidated Statements of Stockholders'
               Equity/(Deficiency)-Nine Months Ended 
               December 31, 1998 and 1997 (as restated). . . . . . . . . . . 4
     
               Consolidated Statements of Cash Flows -
               Nine Months Ended December 31, 1998 and 1997
               and from September 23, 1983 (inception) to
               December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . 5
     
               Notes to Consolidated Financial Statements. . . . . . . . . . 6
     
     Item 2.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations . . . . . . . .11


PART II - OTHER INFORMATION

     Item 5.   Proposed Merger . . . . . . . . . . . . . . . . . . . . . . .15

     Item 6.   Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .15

SIGNATURE      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16


<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" in the "Notes to Consolidated Financial Statements", and in Item 
5, "Proposed Merger", 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 continue the necessary development of its operations on a 
profitable basis, or that the merger between the Company and Procept, Inc. 
will be consummated and, if consummated, be successful.  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/A 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>

                                                                                   December 31, 1998       March 31, 1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                  <C>
ASSETS
Current Assets:
Cash and cash equivalents                                                               $3,561,557           $3,290,176
Accounts receivable, net                                                                    15,236                    -
Inventory                                                                                        -               38,637
Prepaid expenses                                                                            63,261               85,053
-----------------------------------------------------------------------------------------------------------------------------
       Total current assets                                                              3,640,054            3,413,866

Property and equipment, net                                                                 48,050               71,840
Patent costs, net                                                                          105,322              104,981
-----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                            $3,793,426           $3,590,687
-----------------------------------------------------------------------------------------------------------------------------


LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                                                        $  654,271           $  661,371
Accrued expenses                                                                           476,864              201,125
Current portion of capital leases                                                            4,381                4,066
-----------------------------------------------------------------------------------------------------------------------------
       Total current liabilities                                                         1,135,516              866,562
-----------------------------------------------------------------------------------------------------------------------------

Capital leases                                                                              19,261               22,584
Minority interest                                                                        4,665,323                    -
-----------------------------------------------------------------------------------------------------------------------------

Stockholders' Equity/(Deficiency):
Convertible preferred stock, $25 par value, 2,000,000 shares authorized;
       36,196 and 40,090 issued and outstanding at December 31,1998
       and March 31, 1998, respectively                                                    904,938            1,002,288
       (liquidation preference $9,410,960 and $10,423,400, respectively)
Common stock, $.02 par value, 100,000,000 shares authorized;
       12,513,656 and 10,777,234 shares issued and outstanding at
       December 31, 1998 and March 31, 1998, respectively                                  250,269              215,545
Capital in excess of par value                                                          48,384,983           46,969,197
Deficit accumulated during the development stage                                       (51,566,865)         (45,485,489)
-----------------------------------------------------------------------------------------------------------------------------
       Total stockholders' equity/(deficiency)                                          (2,026,674)           2,701,541
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICENCY)                                  $3,793,426          $ 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                        Nine Months Ended    
                                  --------------------------------    ------------------------------------       September 23, 1983
                                        December 31                                December 31                     (inception) to
                                  1998                1997                  1998                 1997             December 31, 1998
------------------------------------------------------------------    --------------------------------------------------------------
<S>                               <C>               <C>                   <C>               <C>                       <C>
REVENUES                                            (as restated)                            (as restated)
   Product sales              $      2,120        $     68,810         $      6,136        $     69,510             $   2,025,877
   License fees and royalties            -                 145                    -                 332                   486,612
   Contract research                     -                   -                    -                   -                   268,063
   Marketing rights                      -                   -                    -                   -                 1,311,500
   Interest and other               50,609              59,175              149,963             224,834                 2,063,621
------------------------------------------------------------------    ------------------------------------   ---------------------
Total revenues                      52,729             128,130              156,099             294,676                 6,155,673
------------------------------------------------------------------    ------------------------------------   -----------------------
COSTS AND EXPENSES
   Cost of product sales            13,497              87,471               41,075             122,792                 3,179,470
   Product development             331,856             411,042            1,312,324           1,433,306                18,473,285
   General and administrative      812,724             474,538            1,590,292           1,672,782                19,442,039
   Business development
     and marketing                   4,345              36,888               26,901             159,128                 3,803,790
   Interest and other              112,963               1,598              131,585              55,725                   765,560
------------------------------------------------------------------    ------------------------------------   -----------------------
Total costs and expenses         1,275,385           1,011,537            3,102,177           3,443,733                45,664,144
------------------------------------------------------------------    ------------------------------------   -----------------------
Loss applicable to
  minority interest                 73,608                   -              159,083                   -                   159,083

Net loss                        (1,149,048)           (883,407)          (2,786,995)         (3,149,057)              (39,349,388)
----------------------------------------------  ------------------    --------------------------------------------------------------
Convertible preferred stock
   dividends                             -             932,170            3,294,381           4,360,158                12,217,477

Net loss applicable to
   common shareholders        $ (1,149,048)       $ (1,815,577)        $ (6,081,376)       $ (7,509,215)            $ (51,566,865)
------------------------------------------------------------------    --------------------------------------------------------------
Net loss per share of common
    stock-basic and diluted         ($0.09)             ($0.18)              ($0.52)             ($0.84)
------------------------------------------------------------------    ------------------------------------
Weighted average common
   stock outstanding            12,356,069           9,986,058           11,681,950           8,906,236
------------------------------------------------------------------    ------------------------------------
</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>




                                                                                                             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, 1997
  (as restated)                  50,000       $1,250,038        8,151,029   $163,021     $38,805,489     ($33,887,139) $ 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 compensation for
  financial advisory services                                                                248,666                       248,666
Convertible preferred stock
  dividends (as restated)                                                                  4,360,158       (4,360,158)           -
Net loss                                                                                                   (3,149,057)  (3,149,057)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997
  (as restated)                  41,606       $1,040,188       10,321,237   $206,422     $43,976,855      ($41,396,354) $3,827,111
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------

Balance at March 31, 1998        40,090       $1,002,288       10,777,234   $215,545     $46,969,197      ($45,485,489) $2,701,541
Exercise of warrants                                                1,563         31           1,438                         1,469
Common stock issued for services                                  571,172     11,423         251,194                       262,617
Preferred stock unit purchase
  option as compensation for
  financial advisory services                                                                138,165                       138,165
Conversion of preferred stock
  into common stock              (3,894)         (97,350)       1,163,687     23,270          74,080                             -
Convertible preferred
  stock dividends                                                                            374,056        (3,294,381) (2,920,325)
Proceeds from subsidiary
  preferred stock issuance                                                                   576,853                       576,853
Net loss                                                                                                    (2,786,995) (2,786,995)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998     36,196         $904,938       12,513,656   $250,269     $48,384,983      ($51,566,865)($2,026,674)
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
</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
                                                            1998                  1997           December 31, 1998
---------------------------------------------------------------------------------------         ------------------
<S>                                                         <C>            <C>                    <C>
OPERATING ACTIVITIES
Net loss                                                    ($2,786,995)   ($3,149,057)           ($39,349,386)
Adjustments to reconcile net loss to net cash
  used by operating activities:
     Depreciation and amortization                               53,357         62,742               1,718,358
     Loss allocated to minority interest                       (159,083)             -                (159,083)
     Non-cash expense upon issuance of common stock
         options, common stock and warrants                     400,782        248,666               1,252,643
     Net book value of asset disposals                           70,871         58,534                 312,563
     Option income from retirement of stock
         or amounts previously advanced by customer                   -              -                (400,000)
     Changes in assets and liabilities:
         Accounts receivable                                    (15,236)        23,996                 (15,236)
         Inventory                                               38,637          3,040                       -
         Prepaid expenses and other assets                       21,792        (20,311)                (74,236)
         Accounts payable                                        (7,100)      (486,751)                654,271
         Accrued expenses                                       275,739         87,647                 332,841
         Customer advances                                            -              -                 140,863
         Other liabilities                                            -          1,506                  (4,869)
--------------------------------------------------------------------------------------  -------------------------
     Net cash used by operating activities                   (2,107,236)    (3,169,988)            (35,591,271)

INVESTING ACTIVITIES
Purchases of short-term investments                                   -              -             (10,461,867)
Maturities of short-term investments                                  -      1,484,788              10,461,867
Capital expenditures                                             (6,213)       (16,637)               (854,142)
Patent costs                                                    (94,566)       (58,321)             (1,071,938)
Other                                                               316              -                   8,145
--------------------------------------------------------------------------------------  -------------------------
     Net cash provided (used) by investing activities          (100,463)     1,409,830              (1,917,935)

FINANCING ACTIVITIES
Issuance of notes payable                                             -              -               2,183,867
Repayment of notes payable                                            -              -              (1,965,124)
Repayment of capital lease obligations                           (3,324)        (3,592)               (186,871)
Long-term customer advances                                           -              -                 100,000
Issuance of common and preferred stock                          578,322        396,093              39,034,809
Minority interest investment in subsidiary                    1,904,082              -               1,904,082
--------------------------------------------------------------------------------------  -------------------------
     Net cash provided by financing activities                2,479,080        392,501              41,070,763
--------------------------------------------------------------------------------------  -------------------------
Net increase (decrease) in cash
     and cash equivalents                                       271,381     (1,367,657)              3,561,557
Cash and cash equivalents at beginning of period              3,290,176      1,784,599                       -
--------------------------------------------------------------------------------------  -------------------------
Cash and cash equivalents at end of period                   $3,561,557       $416,942              $3,561,557
--------------------------------------------------------------------------------------  -------------------------
</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 December 31, 1998 and March 31, 1998, results 
of operations for the nine months ended December 31, 1998 and 1997 (as 
restated) and from September 23, 1983 (inception) to December 31, 1998 and 
cash flows for the nine months ended December 31, 1998 and 1997 and from 
September 23, 1983 (inception) to December 31, 1998. The results of 
operations for the nine months ended December 31, 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 and 10-K/A for the year ended March 31, 1998.

The Company adopted Financial Accounting Standards Board Statement No. 128 
("FAS 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 
FAS 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 FAS.


                                       6

<PAGE>


2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST 

During the nine months ended December 31, 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 per unit, 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 Units are redeemable in cash  by BGDC and the BGDC 
Units may be exchanged for cash or common stock of the Company under the 
circumstances described in the subscription agreement between the Company and 
shareholders of BGDC. 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 BGDC private placement went to the Company to be used for 
general purposes. 

The BGDC Units accrue dividends as follows:

                 Dividend Date              Dividend Amount
           --------------------------      ----------------
           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%

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 the 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 ("Advisory Warrants") to purchase 15% of the 
number of BGDC Units issued in the private placement at $110,000 per Unit. 
The Company valued the Advisory Warrants at $88,000 and is amortizing these 
advisory services over a 24 month period ending in June 2000.

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 December 31, 
1998, includes the initial net proceeds to BGDC of $1,886,000, plus the 
initial dividend of $2,920,000, or $1.99 per preferred share outstanding, 
paid in capital associated with the amortization of the Advisory Warrants and 
16.4% of BGDC's operating loss through December 31, 1998.

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.


                                       7

<PAGE>


3.  TERMINATION OF PTM PRODUCT

During the quarter ended December 31, 1998, the Company determined that it 
would no longer continue to sell its Periodontal Tissue Monitor ("PTM") 
product. In that connection, the Company recorded an expense of  $113,000, 
which consists of the following:

                                      Amount
                                     -------
           Inventory                  $55,000
           Unamortized patent costs    58,000
                                     --------
                              Total  $113,000
                                     --------

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 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 have been 
credited to minority interest during the nine months ended December 31, 1998, 
accumulate until paid in cash or common stock by BGDC.


                                       8

<PAGE> 


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

<TABLE>
<CAPTION>

                                   Three Months Ended December 31,  Nine Months Ended December 31,       September 23, 1983
                                   -------------------------------  -----------------------------          (inception) to
Description                              1998            1997             1998             1997           December 31, 1998
                                        ------          ------           ------           ------         ------------------
                                                     (as restated)                    (as restated)
<S>                                      <C>          <C>                <C>          <C>                       <C>
Dividend from beneficial
   Conversion feature                     -            665,786             128,036     3,114,179                  4,754,075
Dividend from reset of conversion         -                  -             194,752             -                  2,576,077
Dividend from warrant valuation           -            266,384              51,268     1,245,979                  1,967,000
BGDC Preferred Stock dividends            -                  -           2,920,325             -                  2,920,325
                                        ------         -------           ---------     ---------                 ----------
                             Total        -            932,170           3,294,381     4,360,158                 12,217,477
                                        ------         -------           ---------     ---------                 ----------
</TABLE>

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 during 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 
has been 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 December 
31, 1997 and nine months ended December 31, 1997 have been restated from the 
amounts previously reported. Such restatement resulted in increases of 
$461,000 and $980,000 in both capital in excess of par value and the deficit 
accumulated in development stage for the quarter and nine months ended 
December 31, 1997, respectively. 

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

<TABLE>
<CAPTION>

                             Quarter                        Nine Months
                              ended          Quarter           ended         Nine Months
                          December 31,        Ended        December 31,         Ended
                              1997        December 31,         1997         December 31,
                          As Previously       1997         As Previously        1997
                            Reported       As Restated       Reported        As Restated
                          -------------   ------------     -------------    --------------
<S>                       <C>             <C>              <C>              <C>
Convertible
  Preferred stock
  Dividends                $   665,786     $   932,170      $ 3,114,179      $  4,360,158
                          -------------   ------------     -------------    --------------
Net loss applicable
  To common
  Shareholders             $(1,549,193)    $(1,815,577)     $(6,263,236)     $ (7,509,215)
                          -------------   ------------     -------------    --------------
Net loss per
  Share of
  Common stock-
  Basic and diluted        $     (0.16)    $     (0.18)     $     (0.72)     $      (0.86)
                          -------------   ------------     -------------    --------------
</TABLE>

                                       9

<PAGE>


6.   PROPOSED MERGER

On December 10, 1998, the Company entered into an Agreement and Plan of 
Merger ("Merger Agreement") with Procept, Inc. ("Procept"), a 
biopharmaceutical company engaged in the development of novel drugs for the 
prevention of infectious diseases. The Merger Agreement provides that each of 
the Company's shares of common stock (including preferred stock on an as 
converted basis into common stock) will convert into 0.11 shares of Procept 
common stock or a total of 2,755,000 Procept shares (of which 1,151,048 
shares of Procept common stock to be issued in the merger to the holders of 
the Company's preferred stock shall be accompanied by certain contractual 
rights identical to contractual rights held by purchasers in Procept's 1998 
private placement, and as a result of such contractual rights, the holders of 
the Company's preferred stock will also receive 470,137 additional Procept 
shares). In addition, Procept has agreed to assume an approximately $7.3 
million obligation of the Company's subsidiary, BG Development Corp., and 
Procept has agreed to exchange all of the Company's outstanding warrant, unit 
purchase option and stock option obligations into like instruments of 
Procept. The merger remains contingent upon the final approval by both 
companies' shareholders. Both Companies' have scheduled Special Shareholders 
Meetings in mid-March 1999 to vote on the proposed merger. 

In conjunction with the Merger Agreement, the Company entered into a 
severence agreement with its former Chairman and President and recorded 
$325,000 liability under such agreement.
 
7.   SUBSEQUENT EVENTS

On February 4, 1999, the Company completed the merger with Binary 
Therapeutics, Inc. ("BTI"). The Company issued 2,158,268 shares of its common 
stock and assumed notes payable and accrued interest totaling $727,000. The 
Company also assumed a common stock warrant obligation and an obligation to 
issue shares of its common stock to a licensor in the event certain 
regulatory milestones are achieved. The transaction will be accounted for as 
a purchase.


                                       10

<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, 1998 COMPARED TO DECEMBER 31, 1997

Total revenues aggregated $53,000 for the quarter ended December 31, 1998, a 
$75,000 decrease from revenues of $128,000 recorded during the same period of 
the prior year. Current year revenues relate primarily to interest income 
generated on the Company's cash balances. Revenues for the same period in the 
prior year consisted of $59,000 in interest income and $69,000 in sales of 
the Company's Periodontal Tissue Monitor kit ("PTM").
 
Cost of product sales in the current quarter were $13,000 or a $74,000 
decrease from the same quarter in the prior year. The current year cost of 
product sales are fixed costs which relate to the PTM product, even though 
the Company had no sales of the PTM product in the current quarter. During 
the same quarter of the prior year, the Company sold approximately 1,000 PTM 
kits and incurred manufacturing and quality assurances costs associated with 
the PTM product. As described in Note 3, during the quarter ended December 
31, 1998, the Company determined it would no longer continue to sell the PTM 
product.

Product development costs totaled $332,000 for the current quarter, a 
decrease of $79,000 or 19% over the prior year second quarter costs of 
$411,000.  The decrease relates to the following areas:  (i) decrease of 
$110,000 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 $52,000 in expenses related 
to Cancer Immunotherapy technology; (iii) a decrease of $21,000 in expenses 
related PTM product development; (iv) an increase of $96,000 in expenses 
related to the development of the Company's O(6) Benzylguanine ("BG") 
technology acquired in March 1998 and (v) a decrease of $1,000 in general 
product development expenses. 

General and administrative expenses for the current quarter were $813,000, an 
increase of $338,000 from the same period of the prior year. During the 
current year quarter, the Company signed a Merger Agreement with Procept and 
recorded $325,000 for a severence agreement with its former Chairman and 
President. Also during the quarter, the Company incurred significant legal 
and accounting fees in connection with the Merger Agreement. There were no 
such expenses incurred during the same quarter of the prior year. 

During the quarter ended December 31, 1998, the Company determined that it 
would no longer continue to sell it's PTM product. In that connection, the 
Company recorded as an other expense,  $113,000 to write-off inventory and 
unamortized patent costs. There were no such other expenses incurred during 
the same quarter of the prior year.  


                                       11

<PAGE>


Net loss for the quarter ended December 31, 1998 totaled $1,149,000 or a 30% 
increase over the prior year's third quarter loss of $883,000. This increase 
is primarily the  result of greater general and administrative and other 
expenses described above. Basic and diluted net loss per share of common 
stock for the quarter ended December 31, 1998 was $.09 compared to $.18 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 $932,000, as restated. No such dividend was recognized during the current 
year quarter.

NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997

Total revenues were $156,000 for the nine months ended December 31, 1998, a 
$137,000 decrease from revenues of $295,000 recorded during the same period 
of the prior year. Current revenues relate primarily to interest income 
generated on the Company's cash balances. Revenues for the same period in the 
prior year consisted of $225,000 in interest income and $70,000 in sales of  
PTM kits.
 
Cost of product sales was $41,000, relating to quality assurance and patent 
amortization expenses on the Company's PTM product. During the same period of 
the prior year, the Company sold approximately 1,000 PTM kits and incurred 
manufacturing and quality assurances costs associated with the PTM product. 
As described in Note 3, during the quarter ended December 31, 1998, the 
Company determined it would no longer continue to sell the PTM product.

The Company continued work on its first human clinical trial for its PDT 
cancer treatment, Boronated Porphyrin (BOPP). The Company also continued the 
development of the BG compound. Product development costs for the nine months 
ended December 31, 1998 decreased by $121,000 or 8% to $1,312,000 compared to 
the same period of the prior year. The decrease related to the following 
areas: (i) a decrease of $525,000 in funding of product development expenses 
for BOPP; (ii) an increase of $633,000 on expenses for the acquisition and 
development of BG (iii) $103,000 decrease in expenses related to Cancer 
Immunotherapy technology; (iv) a decrease of $120,000 in expenses related to 
PTM product development. 

General and administrative expenses for the nine months ended December 31, 
1998 were $1,590,000, a decrease of $82,000 from the same period of the prior 
year. In December 1998, the Company signed a Merger Agreement with Procept 
and recorded $325,000 for a severence agreement with its former Chairman and 
President. Also during the nine months period of the current year, the 
Company incurred significant legal and accounting fees in connection with the 
Merger Agreement.

Business development costs for the nine month period of the current year 
totaled $27,000, a decrease of $132,000, from the same period 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. 

During the quarter ended December 31, 1998, the Company determined that it 
would no longer continue to sell it's PTM product. In that connection, the 
Company recorded as an other expense,  $113,000 to write-off inventory and 
unamortized patent costs. There were no such other expenses incurred during 
the same period of the prior year.  


                                       12

<PAGE>


Net loss for the nine months ended December 31, 1998 totaled $2,787,000 or a 
13% decrease over the prior year loss of $3,149,000. This decrease is 
primarily the result of lower general and administrative and product 
development expenses described above. Basic and diluted net loss per share of 
common stock for the nine months ended December 31, 1998 was $.52 compared to 
$.84 in the same period in the previous year. During the nine months ended 
December 31, 1998, the Company recognized a non-cash convertible preferred 
stock dividend of $3,294,000 compared to $4,360,000 (as restated) during the 
same period in the prior year.

CAPITAL RESOURCES AND LIQUIDITY

As described in Note 6 to the Consolidated Financial Statements, the Company 
has entered into a Merger Agreement with Procept, Inc. The merger is subject 
to approval by both companies' shareholders. 

Cash and cash equivalents at December 31, 1998 totaled $3,562,000, an 
increase of $271,000 from the March 31, 1998 balance. Working capital at 
December 31, 1998 decreased by $43,000 from March 31, 1998 to $2,504,000. 
These increases were primarily due to the closing on net proceeds of 
$2,455,000 of a private placement financing for the Company's majority owned 
subsidiary, BG Development Corp. ("BGDC"), offset by the net loss before 
convertible preferred stock dividends for the nine months ending December 31, 
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. In order to conserve cash, 
the Company has instituted a plan to reduce its cash burn rate.  

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 June 1999, based on a continuation of the pattern of 
expenses which have prevailed during fiscal years 1998 and 1997.

In March 1998, the Company signed a license agreement for the drug compound 
O(6) 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 is obligated to provide funding of $125,000 per 
year for five years for joint research. The Company is also 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 also obligated to make milestone payments to PCI in the


                                       13

<PAGE>


Company's common stock of up to 900,000 shares if the BG compound 
successfully reaches certain milestones. The Company recorded $96,000 in 
product development expenses during the third quarter of FY 1999 and $933,000 
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"). Under the agreement 
as amended, the Company recorded expenses of $195,000 during the third 
quarter of FY 1999 and $3,426,000 since inception of the agreement, the 
Company  is currently funding substantially all expenses of BTI. As described 
in Note 7, the Company completed the merger of BTI into a wholly owned 
subsidiary of the Company in February 1999.

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 $19,000 during the third quarter 
of FY 1999 and $738,000 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 September 1998, the Company's common stock was removed from trading on the 
American Stock Exchange ("AMEX") because the Company no longer satisfies all 
of the financial guidelines of the AMEX for continued listing. The Company's 
common stock began trading on the NASD Electronic Bulletin Board under the 
ticker symbol PHAA.

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 
assessing 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.

The Company's information technology systems consist of a series of personal 
computers which  process data using purchased software programs produced and 
maintained by large software vendors. All of the software presently installed 
on the Company's systems is Year 2000 compliant.

The Company has contacted all of its vendors to determine each vendors' 
compliance with Year 2000 issues. As of December 31, 1998, 80% of all of the 
Company's vendors have responded that they are now Year 2000 compliant. The 
Company is continuing to determine the Year 2000 compliance status of the 
remaining vendors. The Company hopes to have responses from all vendors and 
institutions with whom it does business by March 31, 1999. The Company's 
critical suppliers and financial institutions are large organizations and the 
Company believes all are now or will be Year 2000 compliant by December 31, 
1999.   


                                       14

<PAGE>


The Company believes its exposure to any material Year 2000 problems is 
relatively small because its financial and operating systems have been 
produced and maintained by large software vendors which are Year 2000 
compliant and the Company relies on very large Year 2000 compliant vendors 
for its critical services. However,  there can be no assurance that the 
Company's systems or systems of other companies on which the Company's 
operations rely will be converted on a timely basis and will not have a 
material effect on the Company. 

The cost of the Company's Year 2000 initiatives has not been or is not 
expected to be material to the Company's results of operations or financial 
position.

PART II-OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

On December 10, 1998, the Company entered into an Agreement and Plan of 
Merger ("Merger Agreement") with Procept, Inc. ("Procept"), a 
biopharmaceutical company engaged in the development of novel drugs for the 
prevention of infectious diseases. The Merger Agreement provides that each of 
the Company's shares of common stock (including preferred stock on an as 
converted basis into common stock) will convert into approximately 0.11 
shares of Procept common stock or a total of 2,755,000 Procept shares (of 
which 1,151,048 shares of Procept common stock to be issued in the merger to 
the holders of the Company's preferred stock shall be accompanied by certain 
contractual rights identical to contractual rights held by purchasers in 
Procept's 1998 private placement, and as a result of such contractual rights, 
the holders of the Company's preferred stock will also receive 470,137 
additional Procept shares). In addition, Procept has agreed to assume an 
approximately $7.3 million obligation of the Company's subsidiary, BG 
Development Corp., and Procept has agreed to exchange all of the Company's 
outstanding warrant, unit purchase option and stock option obligations into 
like instruments of Procept. The merger remains contingent upon the approval 
by both companies' shareholders.

On February 4, 1999, the Company completed the merger with BTI. The Company 
issued 2,158,268 shares of its common stock and assumed notes payable and 
accrued interest totaling $727,000. The Company also assumed a common stock 
warrant obligation and an obligation to issue shares of its common stock to a 
licensor in the event certain regulatory milestones are achieved. 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     EXHIBITS


  Exhibit
  Number            Description of Exhibit
------------        ----------------------
   10.44        Agreement and Plan of Merger Between Procept, Inc., Procept
                Acquisition Corp. and Pacific Pharmaceuticals, Inc., dated
                December 10, 1998
   10.45        Amendment to Agreement and Plan of Merger


     REPORTS ON FORM 8-K

          None



                                       15

<PAGE>


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, 1999            /s/  James Hertzog
                                    ------------------
                                    James Hertzog
                                    Controller     
                                    (Principal Accounting Officer and 
                                    duly authorized to sign this report on 
                                    behalf of the registrant)



                                       16