<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

--------------------------------------------------------------------------------
                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934



For Quarter Ended DECEMBER 31, 1996                  Commission File No. 0-18734


                              LIDAK PHARMACEUTICALS
             (Exact name of registrant as specified in its charter)


             CALIFORNIA                                    33-0314804
   (State or other jurisdiction of             (IRS Employer Identification No.)
   incorporation or organization)

     11077 N. TORREY PINES ROAD
        LA JOLLA, CALIFORNIA                                    92037
(Address of principal executive office)                       (Zip Code)

Registrant's telephone number, including area code (619) 558-0364

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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                                    Yes /X/ No / /

Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.

             Class                              Outstanding at February 7, 1997

Class A common stock, no par value                          36,453,476
Class B common stock, no par value                             283,000
<PAGE>   2
LIDAK Pharmaceuticals




                                    FORM 10-Q

                     For the quarter ended December 31, 1996

                                      Index


<TABLE>
<CAPTION>

PART I.       FINANCIAL INFORMATION                                             Page
<S>           <C>                                                               <C>
Item 1.       Financial Statements

              Balance Sheets at September 30, 1996 and
              December 31, 1996................................................. 3

              Statements of Operations for the three month periods
              ended December 31, 1995 and 1996 and for the period
              from August 31, 1988 (inception) to December 31, 1996............. 4

              Statements of Stockholders' Equity (Deficit) from August 31, 1988
              (inception) to December 31, 1996.................................. 5

              Statements of Cash Flows for the three month periods ended
              December 31, 1995 and 1996 and for the period
              from August 31, 1988 (inception) to December 31, 1996.............10

              Notes to Financial Statements.....................................11

Item 2.       Management's Discussion and Analysis of Financial
              Condition and Results of Operations...............................15

PART II.      OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K..................................19

SIGNATURES......................................................................20
</TABLE>



                                       2
<PAGE>   3
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


<TABLE>
<CAPTION>

BALANCE SHEETS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
                                                                                      SEPTEMBER 30,     DECEMBER 31,
ASSETS                                                                                    1996              1996
<S>                                                                                   <C>               <C>

CURRENT ASSETS:
  Cash and cash equivalents                                                           $ 13,347,508      $ 10,037,664
  Short-term investments                                                                 7,026,502         5,993,727
  Interest receivable                                                                      338,403           189,873
  Prepaid and other                                                                        825,924           494,280
                                                                                      ------------      ------------

           Total current assets                                                         21,538,337        16,715,544

PROPERTY - at cost (less accumulated depreciation of $266,668 and $295,480)                275,972           267,455

PATENT COSTS (less accumulated amortization of $39,654 and $46,623)                        581,770           595,438

DEBT ISSUE COSTS                                                                           185,015            38,615

OTHER ASSETS                                                                               265,785           265,785
                                                                                      ------------      ------------

TOTAL                                                                                 $ 22,846,879      $ 17,882,837
                                                                                      ============      ============


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Convertible notes payable                                                           $  5,721,087      $  1,458,049
  Accounts payable                                                                       1,329,418         1,194,693
  Accrued compensation and payroll taxes                                                   206,445           257,540
  Due to MBI                                                                                21,810            13,494
  Deferred revenue                                                                         500,000
                                                                                      -------------     ------------

           Total current liabilities                                                     7,778,760         2,923,776
                                                                                      -------------     ------------



STOCKHOLDERS' EQUITY:
  Common stock - no par value:
    Class A - 99,490,000 shares authorized;
      34,054,022 and 36,225,736 shares issued and outstanding                           49,216,569        52,328,269
    Class B - 510,000 shares authorized;  283,000 shares
      issued and outstanding (convertible to Class A Common Stock)                         147,748           147,748
  Deficit accumulated during the development stage                                     (34,296,198)      (37,516,956)
                                                                                      ------------      ------------

           Total stockholders' equity                                                   15,068,119        14,959,061
                                                                                      ------------      ------------

TOTAL                                                                                 $ 22,846,879      $ 17,882,837
                                                                                      ============      ============

</TABLE>



                        See notes to financial statements

                                        3
<PAGE>   4
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------------------------------------
                                                                          
                                            THREE MONTHS ENDED          AUGUST 31, 1988
                                               DECEMBER 31,             (INCEPTION) TO 
                                     -------------------------------      DECEMBER 31,  
                                         1995              1996               1996
<S>                                  <C>                <C>               <C>
REVENUES:
  License fees/Contract research                        $    500,000      $  4,482,625
  Federal research grants            $      6,500             57,500           856,277
  Interest and other                      190,035            217,072         3,436,686
                                     ------------       ------------      ------------

           Total revenues                 196,535            774,572         8,775,588
                                     ------------       ------------      ------------

EXPENSES:
  Research and development              1,441,423         2,179,395         26,568,204
  General and administrative              650,143         1,136,959         15,413,301
  Cost of contract research                                                    533,270
  Interest                                175,374           678,976          3,777,769
                                     ------------      ------------       ------------

           Total expenses               2,266,940         3,995,330         46,292,544
                                     ------------      ------------       ------------

NET LOSS                             $ (2,070,405)     $ (3,220,758)     $ (37,516,956)
                                     ============      ============      =============


NET LOSS PER SHARE                   $      (0.07)     $      (0.09)
                                     ============      ============

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING            30,457,152        35,301,227
                                     ============      ============

</TABLE>


                        See notes to financial statements


                                        4
<PAGE>   5

LIDAK PHARMACEUTICALS

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                               CONVERTIBLE PREFERRED STOCK                           COMMON
                                                                                                      STOCK           
                                           -----------------------------------    -----------------------------------------------
                                                SERIES A           SERIES B               CLASS A                   CLASS B   
                                            ------    ------    ------   ------   --------    ----------        ------     ------  
                                            SHARES    AMOUNT    SHARES   AMOUNT    SHARES        AMOUNT         SHARES     AMOUNT 
                                            ------    ------    ------   ------   --------    ----------        ------     ------  
<S>                                        <C>         <C>     <C>       <C>      <C>         <C>             <C>        <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)

Issuance of common stock for notes
  receivable and cash in September 1988
  at $.0125 per share                                                                                        4,235,000   $ 52,937
Issuance of preferred stock in October                                                              
  1988 for license and other rights         2,000,000     $1
Issuance of common stock for cash in       
  October 1988 at $.05 per share                                                                                80,000      4,000 
Issuance of common stock for cash in
  January 1989 at $.05 per share                                                                                80,000      4,000
Issuance of stock options effective in
  August 1989 to purchase 600,000 shares
  of Class B common stock at $.0125
  per share (with an estimated fair market
  value of $.05 per share)                                                                                                 22,500
Issuance of common stock for cash in
  September 1989 at $.0125 per share
  (with an estimated fair market value
  of $.05 per share)                                                                                           400,000     20,000
Collection on notes receivable                                                        
Net loss                                                                             
                                           ---------     --    ------   ------    ---------   ----------     ---------    -------

BALANCE, SEPTEMBER 30, 1989                2,000,000      1                                                  4,795,000    103,437

Conversion of advances to common stock in
  October 1989 at $.50 per share                                                                               250,000    125,000 
Issuance of common stock for cash in May
  1990 at $1.00 per share (net of stock
  issue costs totalling $1,033,280)                                               5,000,000   $3,966,820
Issuance of common stock for cash in June
  1990 at $1.00 per share (net of stock
  issue costs totalling $97,500)                                                    750,000      652,500 
Exercise of stock options in July and
August 1990 at $.50 per share                                                                                   21,500     10,750 
Forgiveness of compensation obligation                                                                                     66,923
Collection on notes receivable                                                                                                  
Net loss                                                                                                                        
                                           ---------     --    ------   ------    ---------     --------    ----------   --------

BALANCE, SEPTEMBER 30, 1990                2,000,000      1                       5,750,000    4,619,320      5,066,500   306,110
</TABLE>                                                 




<TABLE>
<CAPTION>
                                                         
                                                                  DEFICIT
                                                                ACCUMULATED         NOTES
                                                                 DURING THE       RECEIVABLE
                                                                DEVELOPMENT          FROM
                                                                    STAGE        STOCKHOLDERS    TOTAL
                                                                -----------      ------------    -----
                                                                <C>               <C>             <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)

Issuance of common stock for notes
  receivable and cash in September 1988
  at $.0125 per share                                                       $ (14,525)       $ 38,412
Issuance of preferred stock in October
  1988 for license and other rights                                                                 1
Issuance of common stock for cash in
  October 1988 at $.05 per share                                                                4,000
Issuance of common stock for cash in
  January 1989 at $.05 per share                                                                4,000
Issuance of stock options effective in
  August 1989 to purchase 600,000 shares
  of Class B common stock at $.0125
  per share (with an estimated fair market
  value of $.05 per share)                                                                     22,500
Issuance of common stock for cash in
  September 1989 at $.0125 per share
  (with an estimated fair market value
  of $.05 per share)                                                                           20,000
Collection on notes receivable                                                  1,635           1,635
Net loss                                                    $(409,718)                       (409,718)
                                                            ---------        --------        --------

BALANCE, SEPTEMBER 30, 1989                                  (409,718)        (12,890)       (319,170)

Conversion of advances to common stock in
  October 1989 at $.50 per share                                                              125,000
Issuance of common stock for cash in May
  1990 at $1.00 per share (net of stock
  issue costs totalling $1,033,280)                                                         3,966,820
Issuance of common stock for cash in June
  1990 at $1.00 per share (net of stock
  issue costs totalling $97,500)                         
Exercise of stock options in July and
August 1990 at $.50 per share                                                                  10,750
Forgiveness of compensation obligation                                                         66,923
Collection on notes receivable                                                12,890           12,890
Net loss                                                                  (2,319,231)      (2,319,231)
                                                          ----------      -----------      ----------
BALANCE, SEPTEMBER 30, 1990                               (2,728,949)               -       2,196,482
</TABLE>                                                 
                                                      

                                                                  5
<PAGE>   6



LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                            CONVERTIBLE PREFERRED STOCK                         
                                                            ------------------------------------------------------------        
                                                                      SERIES A                         SERIES B                 
                                                            ----------------------------    ----------------------------        
                                                               SHARES          AMOUNT        SHARES            AMOUNT           
                                                               ------          ------        ------            ------           
<S>                                                           <C>               <C>       <C>                  <C>
      BALANCE, SEPTEMBER 30, 1990                             2,000,000         $ 1

      Exercise of stock options in November
        1990 at $.50 per share
      Issuance of preferred stock in July 1991
        for cash (net of stock issue costs
        totalling $130,339)                                                                    960,003        $  769,670
      Conversion of common stock
      Net loss
                                                       ----------------         ---  -----------------        ----------

      BALANCE, SEPTEMBER 30, 1991                             2,000,000           1            960,003           769,670

      Issuance of preferred stock in February 1992
        for cash (net of stock issue costs
        totalling $428,605)                                                                  4,266,680         3,571,395
      Exercise of stock options in March 1992 at
        $.50 per share
      Exercise of Class A warrants in May 1992 at
        $1.50 per share for cash (net of stock issue
        costs totalling $317,930)
      Conversion of common stock
      Net loss
                                                       ----------------         ---  -----------------        ----------

      BALANCE, SEPTEMBER 30, 1992                             2,000,000           1          5,226,683         4,341,065

      Exercise of Unit Purchase Options between October
        1992 and September 1993 for cash
      Exercise of Class A Warrants between October 1992
        and September 1993 at $.9450 per share for cash
      Exercise of Class B Warrants between October 1992
        and September 1993 at $2.25 per share for cash
        (net of stock issue costs totalling $8,720)
      Exercise of Class C Warrants between October 1992
        and September 1993 at $1.00 per share for cash
        (net of stock issue costs totalling $4,122)
      Exercise of Class D Warrants between October 1992
        and September 1993 at $1.50 per share for cash
        (net of stock issue costs totalling $42,125)
      Exercise of Class E Warrants between October 1992
        and September 1993 at $.20 per share for cash
      Exercise of Class F Warrants between October 1992
        and September 1993 at $100,000 per warrant for
        cash                                                                                   320,000           300,000
</TABLE>




<TABLE>
<CAPTION>
                                                                                        COMMON STOCK                      
                                                                --------------------------------------------------------- 
                                                                           CLASS A                       CLASS B          
                                                                -----------------------------   ------------------------- 
                                                                  SHARES          AMOUNT            SHARES        AMOUNT  
                                                                  ------          ------            ------        ------  
<S>                                                               <C>          <C>            <C>              <C>
      BALANCE, SEPTEMBER 30, 1990                                 5,750,000    $  4,619,320      5,066,500      $ 306,110

      Exercise of stock options in November
        1990 at $.50 per share                                                                       2,000          1,000
      Issuance of preferred stock in July 1991
        for cash (net of stock issue costs
        totalling $130,339)
      Conversion of common stock                                    115,000           5,750       (115,000)        (5,750)
      Net loss
                                                               ------------    ------------      ---------      ---------

      BALANCE, SEPTEMBER 30, 1991                                 5,865,000       4,625,070      4,953,500        301,360

      Issuance of preferred stock in February 1992
        for cash (net of stock issue costs
        totalling $428,605)
      Exercise of stock options in March 1992 at
        $.50 per share                                                                             119,000         59,500
      Exercise of Class A warrants in May 1992 at
        $1.50 per share for cash (net of stock issue
        costs totalling $317,930)                                 5,650,200       8,157,370
      Conversion of common stock                                    395,000           6,250       (395,000)        (6,250)
      Net loss 
                                                               ------------    ------------      ---------      ---------

      BALANCE, SEPTEMBER 30, 1992                                11,910,200      12,788,690      4,677,500        354,610

      Exercise of Unit Purchase Options between October
        1992 and September 1993 for cash                            793,645         600,010
      Exercise of Class A Warrants between October 1992
        and September 1993 at $.9450 per share for cash             793,645         749,995
      Exercise of Class B Warrants between October 1992
        and September 1993 at $2.25 per share for cash
        (net of stock issue costs totalling $8,720)                  96,897         209,298
      Exercise of Class C Warrants between October 1992
        and September 1993 at $1.00 per share for cash
        (net of stock issue costs totalling $4,122)                 103,050          98,928
      Exercise of Class D Warrants between October 1992
        and September 1993 at $1.50 per share for cash
        (net of stock issue costs totalling $42,125)                836,335       1,212,376
      Exercise of Class E Warrants between October 1992
        and September 1993 at $.20 per share for cash               315,000          63,000
      Exercise of Class F Warrants between October 1992
        and September 1993 at $100,000 per warrant for
        cash
</TABLE>

<TABLE>
<CAPTION>
                                                                    DEFICIT
                                                                  ACCUMULATED           NOTES
                                                                  DURING THE         RECEIVABLE
                                                                  DEVELOPMENT           FROM
                                                                     STAGE          STOCKHOLDERS          TOTAL
                                                                     -----          ------------          -----
<S>                                                              <C>                  <C>           <C>
      BALANCE, SEPTEMBER 30, 1990                                $  (2,728,949)          -           $  2,196,482

      Exercise of stock options in November
        1990 at $.50 per share                                                                              1,000
      Issuance of preferred stock in July 1991
        for cash (net of stock issue costs
        totalling $130,339)                                                                               769,670
      Conversion of common stock
      Net loss                                                      (1,949,588)                        (1,949,588)
                                                                 -------------         ---           ------------

      BALANCE, SEPTEMBER 30, 1991                                   (4,678,537)          -              1,017,564

      Issuance of preferred stock in February 1992
        for cash (net of stock issue costs
        totalling $428,605)                                                                             3,571,395
      Exercise of stock options in March 1992 at
        $.50 per share                                                                                     59,500
      Exercise of Class A warrants in May 1992 at
        $1.50 per share for cash (net of stock issue
        costs totalling $317,930)                                                                       8,157,370
      Conversion of common stock
      Net loss                                                      (2,361,855)                        (2,361,855)
                                                                  ------------         ---           ------------

      BALANCE, SEPTEMBER 30, 1992                                   (7,040,392)            -           10,443,974

      Exercise of Unit Purchase Options between October
        1992 and September 1993 for cash                                                                  600,010
      Exercise of Class A Warrants between October 1992
        and September 1993 at $.9450 per share for cash                                                   749,995
      Exercise of Class B Warrants between October 1992
        and September 1993 at $2.25 per share for cash
        (net of stock issue costs totalling $8,720)                                                       209,298
      Exercise of Class C Warrants between October 1992
        and September 1993 at $1.00 per share for cash
        (net of stock issue costs totalling $4,122)                                                        98,928
      Exercise of Class D Warrants between October 1992
        and September 1993 at $1.50 per share for cash
        (net of stock issue costs totalling $42,125)                                                    1,212,376
      Exercise of Class E Warrants between October 1992
        and September 1993 at $.20 per share for cash                                                      63,000
      Exercise of Class F Warrants between October 1992
        and September 1993 at $100,000 per warrant for
        cash                                                                                              300,000
</TABLE>
                                         
                       

                                        6
<PAGE>   7



LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     CONVERTIBLE PREFERRED STOCK
                                                           --------------------------------------------------------
                                                                    SERIES A                     SERIES B          
                                                           --------------------------    --------------------------
                                                             SHARES          AMOUNT        SHARES          AMOUNT  
                                                             ------          ------        ------          ------  
<S>                                                          <C>             <C>           <C>          <C>       
Exercise of Preferred Stock Units between October 1992
  and September 1993 for cash                                                                 96,000    $    90,000     
Exercise of stock options in August 1993 and
  September 1993 at exercise prices ranging from
  $0.81 to $1.53 per share                                                                                        
Compensation expense related to stock options
  granted at an exercise price below fair market
  value                                                                                                           
Cancellation of Series A Preferred and Class B
  Common Stock in July 1993                                 (1,500,000)                                            
Issuance of Class A Common Stock in July 1993 in
   connection with amendment to a license agreement                                                               
Conversion of preferred and common stock                      (100,000)                   (5,642,653)    (4,731,065)    
Cancellation of partial shares                                                                   (30)
Net loss                                                                                                          
                                                           -----------       ----        -----------    -----------

BALANCE, SEPTEMBER 30, 1993                                    400,000       $  1                  -              -     
Exercise of non-redeemable Class B Warrants in
  April 1994 at $1.4175 per share for cash                                                                        
Exercise of redeemable Class B Warrants between
  October 1993 and June 1994 at $2.25 per share for
  cash (net of stock issue costs totalling $541,340)                                                              
Exercise of Class C Warrants between October 1993
  and September 1994 at $1.00 per share for cash
  (net of commissions totalling $4,414)                                                                           
Exercise of Class D Warrants between October 1993
  and September 1994 at $1.50 per share for cash
  (net of commissions totalling $2,875)                                                                           
Exercise of Class F Warrants between October 1993
  and November 1993 at $100,000 per warrant for cash                                         106,666        100,000
Exercise of stock options between October 1993 and
  September 1994 at exercise prices ranging from
  $0.50 to $2.4375 per share                                                                                      
Compensation expense related to stock options granted
  at an exercise price below fair market value                                                                    
Issuance of Class A Common Stock in connection with
  Stock Purchase Agreement in September 1994 (net
  of issue costs of $192,215)                                                                                     
Conversion of preferred and common stock                      (400,000)            (1)      (106,666)      (100,000)
Cancellation of Class A Common and Class B Common
  Stock between January 1994 and May 1994                                                                         
Cancellation of partial shares                                                                                    
Net loss                                                                                                          
                                                           -----------       ----        -----------    -----------

BALANCE, SEPTEMBER 30, 1994                                          -          -                  -              -
                                                           -----------       ----        -----------    -----------
</TABLE>

<TABLE>
                                                                                  COMMON STOCK                     
                                                           -------------------------------------------------------- 
                                                                    CLASS A                       CLASS B           
                                                           --------------------------    -------------------------- 
                                                             SHARES          AMOUNT        SHARES          AMOUNT   
                                                             ------          ------        ------          ------   
<S>                                                        <C>           <C>            <C>             <C>      
Exercise of Preferred Stock Units between October 1992
  and September 1993 for cash                                                                                       
Exercise of stock options in August 1993 and
  September 1993 at exercise prices ranging from
  $0.81 to $1.53 per share                                      27,480    $    37,480                               
Compensation expense related to stock options
  granted at an exercise price below fair market
  value                                                                       163,333                               
Cancellation of Series A Preferred and Class B
  Common Stock in July 1993                                                    28,003     (2,240,250)   $   (28,003)
Issuance of Class A Common Stock in July 1993 in
   connection with amendment to a license agreement          1,500,000      2,670,000                               
Conversion of preferred and common stock                     6,040,653      4,790,121       (298,000)       (59,056)
Cancellation of partial shares                                                           
Net loss                                                                                                            
                                                           -----------    -----------    -----------    -----------

BALANCE, SEPTEMBER 30, 1993                                 22,416,905     23,411,234      2,139,250        267,551
Exercise of non-redeemable Class B Warrants in
  April 1994 at $1.4175 per share for cash                      17,202         24,384
Exercise of redeemable Class B Warrants between
  October 1993 and June 1994 at $2.25 per share for
  cash (net of stock issue costs totalling $541,340)         4,312,060      9,160,795
Exercise of Class C Warrants between October 1993
  and September 1994 at $1.00 per share for cash
  (net of commissions totalling $4,414)                        106,340        101,926
Exercise of Class D Warrants between October 1993
  and September 1994 at $1.50 per share for cash
  (net of commissions totalling $2,875)                         78,335        114,627
Exercise of Class F Warrants between October 1993
  and November 1993 at $100,000 per warrant for cash           
Exercise of stock options between October 1993 and
  September 1994 at exercise prices ranging from
  $0.50 to $2.4375 per share                                   113,267        156,048
Compensation expense related to stock options granted
  at an exercise price below fair market value                                245,000
Issuance of Class A Common Stock in connection with
  Stock Purchase Agreement in September 1994 (net
  of issue costs of $192,215)                                  522,449      1,807,785                 
Conversion of preferred and common stock                       653,416        113,911       (146,750)       (13,910)
Cancellation of Class A Common and Class B Common
  Stock between January 1994 and May 1994                      (70,000)        20,794     (1,546,500)       (20,794)
Cancellation of partial shares                                      (3)
Net loss                                               
                                                           -----------    -----------    -----------    -----------

BALANCE, SEPTEMBER 30, 1994                                 28,149,971     35,156,504        446,000        232,847
                                                           -----------    -----------    -----------    -----------
</TABLE>

<TABLE>
                                                             DEFICIT
                                                           ACCUMULATED           NOTES
                                                            DURING THE         RECEIVABLE
                                                           DEVELOPMENT            FROM
                                                              STAGE           STOCKHOLDERS          TOTAL
                                                              -----           ------------          -----
<S>                                                        <C>             <C>                   <C> 
Exercise of Preferred Stock Units between October 1992
  and September 1993 for cash                                                                    $    90,000
Exercise of stock options in August 1993 and
  September 1993 at exercise prices ranging from
  $0.81 to $1.53 per share                                                                            37,480
Compensation expense related to stock options
  granted at an exercise price below fair market
  value                                                                                              163,333
Cancellation of Series A Preferred and Class B
  Common Stock in July 1993                               
Issuance of Class A Common Stock in July 1993 in
   connection with amendment to a license agreement                                                2,670,000
Conversion of preferred and common stock                     
Cancellation of partial shares                               
Net loss                                                   $(6,139,223)                           (6,139,223)
                                                           -----------         -----------       -----------

BALANCE, SEPTEMBER 30, 1993                                (13,179,615)                  -        10,499,171
Exercise of non-redeemable Class B Warrants in
  April 1994 at $1.4175 per share for cash                                                            24,384
Exercise of redeemable Class B Warrants between
  October 1993 and June 1994 at $2.25 per share for
  cash (net of stock issue costs totalling $541,340)                                               9,160,795
Exercise of Class C Warrants between October 1993
  and September 1994 at $1.00 per share for cash
  (net of commissions totalling $4,414)                                                              101,926
Exercise of Class D Warrants between October 1993
  and September 1994 at $1.50 per share for cash
  (net of commissions totalling $2,875)                                                              114,627
Exercise of Class F Warrants between October 1993
  and November 1993 at $100,000 per warrant for cash                                                 100,000
Exercise of stock options between October 1993 and
  September 1994 at exercise prices ranging from
  $0.50 to $2.4375 per share                                                                         156,048
Compensation expense related to stock options granted
  at an exercise price below fair market value                                                       245,000
Issuance of Class A Common Stock in connection with
  Stock Purchase Agreement in September 1994 (net
  of issue costs of $192,215)                                                                      1,807,785
Conversion of preferred and common stock                      
Cancellation of Class A Common and Class B Common
  Stock between January 1994 and May 1994                   
Cancellation of partial shares                                                 
Net loss                                                    (4,813,341)                           (4,813,341)
                                                           -----------         -----------       -----------

BALANCE, SEPTEMBER 30, 1994                                (17,992,956)                  -        17,396,395
                                                           -----------         -----------       -----------
</TABLE>




                                        7


<PAGE>   8
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            CONVERTIBLE PREFERRED STOCK
                                                            ------------------------------------------------------------  
                                                                      SERIES A                         SERIES B           
                                                            ----------------------------    ----------------------------  
                                                               SHARES          AMOUNT        SHARES            AMOUNT     
                                                               ------          ------        ------            ------     
<S>                                                         <C>                  <C>        <C>                <C>        
      OCTOBER 1, 1994 TO SEPTEMBER 30, 1995 
      Exercise of non-redeemable Class B
        Warrants in January and February, 1995 at
         $1.4175 per share for cash                                                                                         
      Exercise of Class C Warrants between October,
        1994 and June, 1995 at $1.00 per share for
        cash (net of commissions totaling $26,743)                                                                        
      Exercise of Class D Warrants between April, 1995
        and September, 1995 at $1.50 per share for cash                                                                   
      Exercise of Class E Warrants in April and August,
        1995 at $0.20 per share for cash                                                                                  
      Exercise of stock options between October, 1994
        and September, 1995 at exercise prices ranging
        from $0.50 per share to $3.56 per share                                                                           
      Compensation expense related to stock options
        granted at an exercise price below fair market
        value                                                                                                             
      Conversion of common stock                                                                                          
      Net loss                                                                                                            
                                                            -----------         --------    ----------        ----------  

      BALANCE, SEPTEMBER 30, 1995                            -                     -         -                         -  
                                                            -----------         --------    ----------        ----------  

      OCTOBER 1, 1995 TO SEPTEMBER 30, 1996
      Exercise of Class D Warrants between October, 1995
        and September, 1996 at $1.50 per share for cash                                                                   
      Exercise of Class E Warrants in March, 1996
        at $0.20 per share for cash                                                                                       
      Issuance of Class A Common Stock in connection with
        Stock Purchase Agreement in November 1995 (net
        of issue costs of $83,495)                                                                                        
      Conversion of Convertible Notes to Class A Common
        Stock between February and September, 1996
        (including interest and discount applied of
        $2,263,276 and net of issue costs of $402,268)                                                                    
       Exercise of stock options between October, 1995
        and September, 1996 at exercise prices ranging
        from $0.50 per share to $3.56 per share                                                                           
      Conversion of common stock                                                                                          
      Net loss                                                                                                            
                                                            ----------          -------    -----------        ----------  

      BALANCE, SEPTEMBER 30, 1996                            -                     -        -                          -   
                                                            ==========          =======    ===========        ==========  


<CAPTION>
                                                                                    COMMON STOCK                      
                                                            --------------------------------------------------------- 
                                                                       CLASS A                       CLASS B          
                                                            -----------------------------   ------------------------- 
                                                              SHARES          AMOUNT            SHARES        AMOUNT  
                                                              ------          ------            ------        ------  
<S>                                                          <C>            <C>              <C>           <C>     
      OCTOBER 1, 1994 TO SEPTEMBER 30, 1995 
      Exercise of non-redeemable Class B
        Warrants in January and February, 1995 at 
        $1.4175 per share for cash                               97,202         137,783                               
      Exercise of Class C Warrants between October,
        1994 and June, 1995 at $1.00 per share for
        cash (net of commissions totaling $26,743)              415,600         388,857                               
      Exercise of Class D Warrants between April, 1995
        and September, 1995 at $1.50 per share for cash         153,335         230,003                               
      Exercise of Class E Warrants in April and August,
        1995 at $0.20 per share for cash                         85,000          17,000                               
      Exercise of stock options between October, 1994
        and September, 1995 at exercise prices ranging
        from $0.50 per share to $3.56 per share                 842,956       1,121,771                               
      Compensation expense related to stock options
        granted at an exercise price below fair market
        value                                                                   129,792                               
      Conversion of common stock                                103,000          53,774        (103,000)      (53,774)
      Net loss                                                                                                        
                                                            -----------    ------------      ----------     --------- 

      BALANCE, SEPTEMBER 30, 1995                            29,847,064      37,235,484         343,000       179,073 
                                                            -----------    ------------      ----------     --------- 

      OCTOBER 1, 1995 TO SEPTEMBER 30, 1996
      Exercise of Class D Warrants between October, 1995
        and September, 1996 at $1.50 per share for cash          78,334         117,500                               
      Exercise of Class E Warrants in March, 1996
        at $0.20 per share for cash                              25,000           5,000                               
      Issuance of Class A Common Stock in connection with
        Stock Purchase Agreement in November 1995 (net
        of issue costs of $83,495)                              481,651       1,416,505                               
      Conversion of Convertible Notes to Class A Common
        Stock between February and September, 1996
        (including interest and discount applied of
        $2,263,276 and net of issue costs of $402,268)        3,419,166      10,147,676                               
       Exercise of stock options between October, 1995
        and September, 1996 at exercise prices ranging
        from $0.50 per share to $3.56 per share                 142,807         263,079                               
      Conversion of common stock                                 60,000          31,325          (60,000)     (31,325)
      Net loss                                                                                                        
                                                            -----------    ------------     ------------    --------- 

      BALANCE, SEPTEMBER 30, 1996                            34,054,022     $49,216,569          283,000     $147,748  
                                                            ===========     ===========     ============    ========= 

<CAPTION>
                                                               DEFICIT
                                                             ACCUMULATED
                                                              DURING THE       RECEIVABLE
                                                             DEVELOPMENT           FROM
                                                                STAGE          STOCKHOLDERS          TOTAL
                                                             -----------       ------------          -----
<S>                                                          <C>                <C>           <C>
      OCTOBER 1, 1994 TO SEPTEMBER 30, 1995 
      Exercise of non-redeemable Class B
        Warrants in January and February, 1995 at
        $1.4175 per  share for cash                                                                137,783
      Exercise of Class C Warrants between October,
        1994 and June, 1995 at $1.00 per share for
        cash (net of commissions totaling $26,743)                                                 388,857
      Exercise of Class D Warrants between April, 1995
        and September, 1995 at $1.50 per share for cash                                            230,003
      Exercise of Class E Warrants in April and August,
        1995 at $0.20 per share for cash                                                            17,000
      Exercise of stock options between October, 1994
        and September, 1995 at exercise prices ranging
        from $0.50 per share to $3.56 per share                                                  1,121,771
      Compensation expense related to stock options
        granted at an exercise price below fair market
        value                                                                                      129,792
      Conversion of common stock                            
      Net loss                                                  (10,173,001)                   (10,173,001)
                                                             ---------------    -------        ----------- 

      BALANCE, SEPTEMBER 30, 1995                               (28,165,957)       -             9,248,600
                                                             ---------------    -------        -----------

      OCTOBER 1, 1995 TO SEPTEMBER 30, 1996
      Exercise of Class D Warrants between October, 1995
        and September, 1996 at $1.50 per share for cash                                            117,500
      Exercise of Class E Warrants in March, 1996
        at $0.20 per share for cash                                                                  5,000
      Issuance of Class A Common Stock in connection with
        Stock Purchase Agreement in November 1995 (net
        of issue costs of $83,495)                                                               1,416,505
      Conversion of Convertible Notes to Class A Common
        Stock between February and September, 1996
        (including interest and discount applied of
        $2,263,276 and net of issue costs of $402,268)                                          10,147,676
       Exercise of stock options between October, 1995
        and September, 1996 at exercise prices ranging
        from $0.50 per share to $3.56 per share                                                    263,079
      Conversion of common stock                            
      Net loss                                                   (6,130,241)                    (6,130,241)
                                                             ---------------      -------      ----------- 

      BALANCE, SEPTEMBER 30, 1996                              $(34,296,198)         -         $15,068,119 
                                                             ==============       =======      =========== 
</TABLE>



See notes to financial statements.   




                                        8



<PAGE>   9
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>

                                                                                                                               
                                                                                                                               
                                                          CONVERTIBLE PREFERRED STOCK                COMMON STOCK (1)
                                                    -----------------------------------    ------------------------------------
                                                        SERIES A           SERIES B           CLASS A               CLASS B
                                                    ----------------    ---------------    ----------------    ----------------
                                                    SHARES    AMOUNT    SHARES   AMOUNT    SHARES    AMOUNT    SHARES    AMOUNT
                                                    ------    ------    ------   ------    ------    ------    ------    ------
<S>                                                 <C>       <C>       <C>      <C>       <C>       <C>       <C>       <C>

OCTOBER 1, 1996 TO DECEMBER 31, 1996 (Unaudited)
  Exercise of Class E Warrants in
  October, 1996 at $0.20 per share for cash                                                  75,000       15,000
Conversion of Convertible Notes to
  Class A Common Stock between October and
  December, 1996 (including interest and
  discount applied of $634,448 and net
  of issue costs of $79,854)                                                              2,092,514    3,092,388
Exercise of stock options between October,
  1996 and December, 1996 at exercise
  prices ranging from $0.9375 per share
  to $1.0625 per share                                                                        4,200        4,312
Net loss
                                                    ------    ------    ------   ------  ----------  -----------  -------  --------
BALANCE, DECEMBER 31, 1996                               -         -         -        -  36,225,736  $52,328,269  283,000  $147,748
                                                    ======    ======    ======   ======  ==========  ===========  =======  ========
</TABLE>

<TABLE>
<CAPTION>

                                                
                                                
                                                              DEFICIT
                                                             ACCUMULATED
                                                             DURING THE     RECEIVABLE
                                                             DEVELOPMENT       FROM
                                                               STAGE       STOCKHOLDERS     TOTAL
                                                             -----------   ------------     -----
<S>                                                         <C>            <C>              <C>

OCTOBER 1, 1996 TO DECEMBER 31, 1996 (Unaudited)
  Exercise of Class E Warrants in
  October, 1996 at $0.20 per share for cash                                                       15,000
Conversion of Convertible Notes to
  Class A Common Stock between October and
  December, 1996 (including interest and
  discount applied of $634,448 and net
  of issue costs of $79,854)                                                                   3,092,388
Exercise of stock options between October,
  1996 and December, 1996 at exercise
  prices ranging from $0.9375 per share
  to $1.0625 per share                                                                             4,312
Net loss                                                      (3,220,758)                     (3,220,758)
                                                            ------------   -------          ------------
BALANCE, DECEMBER 31, 1996                                  $(37,516,956)        -          $ 14,959,061
                                                            ============   =======          ============
</TABLE>




See notes to financial statements.                               (Concluded)-5


                                       9
<PAGE>   10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                                   
                                                                                     THREE MONTHS ENDED            AUGUST 31, 1988
                                                                                         DECEMBER 31,              (INCEPTION) TO 
                                                                                  --------------------------         DECEMBER 31, 
                                                                                  1995              1996                 1996
<S>                                                                              <C>             <C>              <C>
OPERATING ACTIVITIES:
  Net loss                                                                       $(2,070,405)    $(3,220,758)     $(37,516,956)
  Adjustments to reconcile net loss to net cash used for operating activiites:
    Technology license fee                                                                                           3,545,713
    Depreciation and amortization                                                     24,897         102,326           699,209
    Non-cash interest expense                                                        175,374         284,744         3,055,774
    Compensation paid with common stock and stock options                                                              575,625
    Compensation forgiven by stockholder                                                                                66,923
    Imputed interest under technology license fees                                                                      82,613
    Changes in assets and liabilities:
      Interest receivable                                                            (11,174)         148,530         (189,873)
      Prepaid and other                                                              (32,006)         331,644         (760,065)
      Patent costs                                                                   (17,047)         (20,637)        (642,061)
      Organizational costs                                                                                             (20,242)
      Accounts payable                                                              (230,767)        (134,725)       1,194,693
      Accrued compensation and payroll taxes                                          24,091           51,095          257,540
      Due to MBI                                                                      (3,434)          (8,316)          13,494
      Deferred revenue                                                                               (500,000)
                                                                                 -----------      -----------     ------------ 
           Net cash used for operating activities                                 (2,140,471)      (2,966,097)     (29,637,613)
                                                                                 -----------      -----------     ------------ 
INVESTING ACTIVITIES:
  Short-term investments                                                           2,582,559        1,032,775       (5,993,727)
  Capital expenditures                                                               (17,165)         (20,295)        (562,935)
                                                                                 -----------      -----------     ------------ 
           Net cash provided by (used for) investing activities                    2,565,394        1,012,480       (6,556,662)
                                                                                 -----------      -----------     ------------ 
FINANCING ACTIVITIES:
  Proceeds from issuance of common and preferred stock                             1,672,948           19,312       38,697,583
  Stock issue costs                                                                  (83,495)                       (2,913,703)
  Advances for purchase of common stock                                                                                125,000
  Collection of notes receivable for common stock                                                                       14,525
  Proceeds from stockholder loans                                                                                      322,788
  Repayment of stockholder loans                                                                                      (322,788)
  Proceeds from the issuance of convertible notes payable                         10,500,000                        13,500,000
  Debt issue costs                                                                  (584,467)                         (771,351)
  Repayment of convertible notes payable                                                           (1,375,539)      (1,375,539)
  Proceeds from issuance of subordinated notes payable-net of issue costs                                              538,750
  Repayment of subordinated notes payable                                                                             (625,000)
  Payment on technology license fee                                                                                   (958,326)
                                                                                 -----------      -----------      ------------ 
           Net cash provided by (used for) financing activities                   11,504,986       (1,356,227)      46,231,939
                                                                                 -----------      -----------      ----------- 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              11,929,909       (3,309,844)      10,037,664

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   4,244,575       13,347,508
                                                                                 -----------      -----------      ----------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $16,174,484      $10,037,664      $10,037,664
                                                                                 ===========      ===========      ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Interest paid                                                                                   $   446,092      $   655,631
                                                                                                  -----------      -----------

</TABLE>



SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING AND FINANCING ACTIVITIES:
In October 1989, advances of $125,000 were converted into 250,000 shares of
Class B Common Stock. In May 1990 and September 1992, the Company recorded an
expense and a liability in the amount of $817,387 and $58,326, respectively,
related to the technology license agreement and the grant-in-aid agreement with
MBI. During 1993, the Company recorded expense and equity in the amount of
$2,670,000 related to the amendment of the technology license agreement with
MBI. During 1993, 1994 and 1995, the Company recorded expense and equity in the
amount of $163,333, $245,000 and $81,666, respectively, related to the issuance
of stock options (below fair market value) as compensation for services provided
under a consulting agreement, and $48,126 in 1995 related to compensation to an
employee.

                       See notes to financial statements.


                                       10
<PAGE>   11


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1.   BASIS OF PRESENTATION

     The unaudited financial statements presented herein have been prepared in
     accordance with the instructions to Form 10-Q. These statements should be
     read in conjunction with the Company's audited financial statements and
     notes thereto included in the Company's Annual Report on Form 10-K for the
     year ended September 30, 1996. In the opinion of management, the financial
     statements include all adjustments, consisting only of normal recurring
     accruals, necessary to summarize fairly the Company's financial position as
     of December 31, 1996 and results of operations for the three months ended
     December 31, 1996 and from August 31, 1988 (Inception) to December 31,
     1996. The results of operations for the three months ended December 31,
     1996 may not be indicative of the results that may be expected for the year
     ending September 30, 1997.

2.   ESTIMATES

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

3.   PRIOR YEAR QUARTERLY INFORMATION

     Interest expense, net loss and net loss per share for the quarter ended
     December 31, 1995 have been restated from amounts previously disclosed by
     the Company in its Quarterly Report on Form 10-Q for the quarter ended
     December 31, 1995. This restatement reflects the impact on those amounts of
     an adjustment made in the fourth fiscal quarter for the year ended
     September 30, 1996, (as reported in the Company's Annual Report Form 10-K
     for the fiscal year ended September 30, 1996), to record an adjustment to
     recognize non-cash interest expense associated with the Convertible Notes
     (See Note 4). The effect of the adjustment on amounts previously disclosed
     was to increase interest expense and net loss for the quarter by $175,374
     (.01 per share).

4.   CONVERTIBLE NOTES PAYABLE

     A total of $13.5 million of Convertible Notes Payable ("Notes") were
     originally issued by the Company as part of a private placement to
     institutional investors in November 1995, December 1995 and January 1996.
     The Notes accrued interest at an annual rate of 7%, beginning six months
     from the date of issue, with the principal due and payable two years from
     the date of issue if and to the extent the Notes were not previously
     converted. The Notes were convertible at the option of the holder (subject
     to the


                                       11
<PAGE>   12
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4.   CONVERTIBLE NOTES PAYABLE (CONTINUED)

     maximum share limitations) into Class A Common Stock at a price equal to
     80% of the average closing bid price for the Class A Common Stock on the
     NASDAQ for the seven trading days prior to the conversion. The $13.5
     million original principal amount of the Notes were convertible into an
     aggregate maximum of 5,513,018 shares of the Company's Class A Common Stock
     at the option of the holders, with each individual note limited to a
     pro-rata amount of such number of shares.

     From October 1, 1996 through December 31, 1996, the Company issued a total
     of 2,092,514 shares of its Class A Common Stock in connection with the
     conversion of $2,537,794 of the original principal amount of the Notes.
     Including these issuances, a total of 5,511,680 shares of Class A Common
     Stock were issued in connection with these Notes as of December 31, 1996.
     On December 19, 1996, the Company repaid certain noteholders a total of
     $1,728,393 representing $1,375,539 of original principal and $352,854 of
     premium and accrued interest in accordance with the provisions of this
     note.

     The conversion of the Notes at 80% of the average closing bid price of the
     Company's Class A Common Stock results in the Notes being issued at a 25%
     discount (the "Conversion Discount"). The Conversion Discount is being
     recognized by the Company as non-cash interest expense over the term of the
     Notes with a corresponding increase to the original principal amount of the
     Notes. Any portion of the Conversion Discount not recognized upon
     conversion of the Notes is recorded as interest expense on that date. In
     addition, the stated 7% annual interest was recognized over the term of the
     notes until the notes were repaid. During the quarter ended December 31,
     1996, a total of $678,976 was recorded as interest expense relating to the
     Notes, including $348,840 relating to the Conversion Discount.

     On January 10, 1997, the Company issued 1,338 shares of its Class A Common
     Stock in connection with the conversions of $2,322 in principal amounts of
     Notes resulting in an aggregate issuance of 5,513,018 shares of stock to
     date pursuant to the Notes. As a result of this transaction, the noteholder
     reached their pro-rata portion of the maximum share limitation as described
     above. On January 10, 1997, the Company repaid $1,635,810 representing
     $1,297,678 of original principal and $338,132 of premium and accrued
     interest to such noteholder pursuant to the terms of the Notes, thus
     retiring the entire balance of the principal and interest on the Notes. The
     Company has no further obligations under the Notes.


                                       12
<PAGE>   13
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5.   DEBT ISSUE COSTS

     Debt issue costs represent costs related to the issuance of the Notes which
     will be amortized over the life of the Notes, for a maximum of two years
     from the date of issuance. As of December 31, 1996, $250,613 of the debt
     issue costs have been amortized and $482,122 have been reclassified to
     stock issue costs in connection with the conversion of the Notes into
     common stock. (See Notes 4 & 6).

6.   STOCKHOLDERS' EQUITY

     Between October and December 1996, the Company issued and aggregate of
     2,092,514 shares of Class A Common Stock from the conversion of $2,537,794
     principal amount of the Notes. The amount recorded as Stockholders' Equity
     in connection with these conversions included $634,448 of interest and
     discount associated with the converted principal and was reduced by $79,854
     due to the reclassification of previously recorded debt issue costs (See
     Notes 4 & 5).

     On January 28, 1997, the Company extended the expiration of its Class D
     Warrants from February 26, 1997 to December 31, 1997.

7.   NET LOSS PER SHARE

     Net loss per share is computed using the weighted average number of common
     shares outstanding during the period. Common equivalent shares have been
     excluded from the number of shares used in the calculation of weighted
     average number of common shares outstanding as their inclusion would be
     anti-dilutive.

8.   ACCOUNTING FOR STOCK-BASED COMPENSATION

     In October 1995, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
     Stock-based Compensation," which requires the Company to adopt disclosure
     provisions for stock based compensation effective January 1, 1996. The
     standard defines a fair value method of accounting for stock options and
     other equity instruments. Under the fair value method, compensation is
     measured at the grant date based on the fair value of the award and is
     recognized over the service period, which is usually the vesting period.
     This standard encourages rather than requires companies to adopt the fair
     value method of accounting for employee stock-based transactions. Companies
     are permitted to continue to account for such transactions under Accounting
     Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
     Employees," but will be required to disclose in a note to the financial
     statements pro forma net income (loss) and net


                                       13
<PAGE>   14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

8.   ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)

     income (loss) per share as if the new method of accounting had been
     applied. The Company has elected to continue to apply APB Opinion No. 25 in
     its financial statements and will disclose the required pro forma
     information in a footnote in the Company's annual report for the year ended
     September 30, 1997.

9.   LICENSE AGREEMENT

     In November 1996, the Company reacquired from Bristol-Myers Squibb Company
     the rights to market n-docosanol 10% cream (LIDAKOL (R)) in all territories
     covered in the license agreement, except the United States, Canada and
     Mexico.

10.  DEFERRED REVENUE

     During the quarter ended December 31, 1996, the Company realized $500,000
     of revenue that was previously classified as deferred due to the
     achievement of certain milestones under a licensing agreement.


                                       14
<PAGE>   15
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

        This Form 10-Q contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider various factors identified in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996, including the matters set forth under the caption "Risk Factors" contained
therein as well as factors in this Form 10-Q, which could cause actual results
to differ materially from those indicated by such forward-looking statements.

OVERVIEW

        The Company is a development stage company engaged in the research,
development and commercialization of innovative pharmaceutical products. The
Company is currently focusing its efforts primarily on the commercialization of
n-docosanol 10% cream (LIDAKOL (R)) and its Large Multivalent Immunogen (LMI)
technology. The Company has not generated any significant product revenues and
has been unprofitable since inception in August 1988. For the period from
inception to December 31, 1996, the Company incurred a cumulative net loss of
$37.5 million. The Company's research and development, clinical trial and
general and administrative expenses will continue to be substantial and the
Company expects to continue to incur operating losses during the next several
years.

        In 1996, the Company reported results from three Phase 3 clinical trials
comparing LIDAKOL cream to placebo cream as a treatment of recurrent oral herpes
episodes. In these trials, LIDAKOL demonstrated clinical effectiveness compared
to historical episode features reported by the patients in the study, including
reduced healing times, episode abortion and shortening of pain symptoms.
However, similar results were obtained with the cream used as the intended
placebo in the trials. If these trials had shown statistically significant
advantage of LIDAKOL versus placebo, the Company could have filed a New Drug
Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for
marketing approval of LIDAKOL as a treatment of recurrent oral herpes. As a
result of the inconclusive outcome, the Company obtained FDA approval to use an
alternative placebo to conduct additional Phase 3 clinical trials to prove the
efficacy of LIDAKOL versus an alternative placebo in order to complete final
requirements to file an NDA for marketing approval.

        In July and September 1996, the Company initiated two additional Phase 3
clinical trials of LIDAKOL in the United States. The Company estimates that
during fiscal 1997, it will incur direct costs for these two studies of
approximately $2.5 million to $3.0 million. The Company anticipates completion
of these studies including data availability, around the summer of 1997.

         The Company's business is subject to significant risks including, but
not limited to, the success of its research and development efforts,
uncertainties associated with obtaining and enforcing patents important to the
Company's business and lengthy and expensive regulatory approval processes and
competition from pharmaceutical and biotechnology



                                       15
<PAGE>   16
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

companies, increasing pressure on pharmaceutical pricing from payors, patients,
and government agencies and limitations on the availability of capital. Even if
the Company's products appear promising at an early stage of development, they
may not reach the market for a number of reasons. Such reasons include, but are
not limited to, the possibilities that the potential products will be found
ineffective or toxic during clinical trials, fail to receive the necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to market, or be precluded from commercialization by proprietary
rights of third parties, or that the Company may not have sufficient financial
resources to complete final development and/or marketing. Additional expenses,
delays and losses of opportunities that may arise out of these and other risks
could have a material adverse effect on the Company's financial condition and
results of operations.

RESULTS OF OPERATIONS

NET LOSSES

         During the three months ended December 31, 1996 ("the 1996 three
months"), the Company incurred net losses of $3.2 million compared to $2.1
million during the three months ended December 31, 1995 ("the 1995 three
months").

REVENUES

         Total revenues for the 1996 three months were $774,500 consisting of
license fee/contract research revenue of $500,000, interest and other income of
$217,000 and federal research grant income of $57,500. Total revenues for the
1995 three months were $196,500, consisting of $190,000 of interest and other
income and $6,500 of federal research grant income.

         The increase in revenues in the 1996 three months was due primarily to
license fees earned during the period that were previously recorded by the
Company as Deferred Revenue. The revenue from these license fees was earned due
to the achievement of certain milestones in connection with a license agreement.
Also contributing to the increased revenues during the period are increased
revenues from federal research grants issued by the National Institutes of
Health which were not in place during the 1995 three months, and increased
interest income.

EXPENSES

         Research and development expenses for the 1996 three months increased
to $2.2 million from $1.4 million in the 1995 three months. The increase in
expenses during the 1996 three months was attributable primarily to increased
activities related to the on-going U.S. Phase 3 clinical trials of LIDAKOL.

         General and administrative expenses for the 1996 three months increased
to $1.1 million from $650,000 during the 1995 three months. The increase in
expenses during the 1996 three months is attributable primarily to non-recurring
expenses incurred in the period




                                       16
<PAGE>   17
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

related to reacquiring the rights to market LIDAKOL in all territories except
the U.S., Canada and Mexico from Bristol-Myers Squibb Company. See Note 9 to the
Financial Statements. Also contributing to the increased expenses in the 1996
three months are non-cash expenses in the amount of $66,545 from the
amortization of deferred debt issue costs related to the Convertible Notes
Payable (the "Notes"). See Note 5 to the Financial Statements. Partially
offsetting the overall increase in expenses are decreased costs of investor
relations activities and lower legal expenses during the 1996 period.

         Interest expense recorded during the 1996 three months represents
interest associated with the Notes. Of the $679,000 of interest expense,
$285,000 represents non-cash interest expense from the recognition of the
conversion discount on the Notes. See Note 4 to the Financial Statements.


LIQUIDITY AND CAPITAL RESOURCES

         Since inception, the Company has financed its operations primarily
through the sale of equity and debt securities and stockholder loans. Net cash
provided from financing activities through December 31, 1996 was $46.2 million.

         At December 31, 1996, the Company had cash, cash equivalents and
short-term investments totaling $16.0 million and working capital of $13.8
million, as compared to $20.4 million and $13.8 million, respectively, at
September 30, 1996. The decreases in cash, cash equivalents and short-term
investments during the 1996 three months is attributable primarily to net cash
used to fund operating activities, as discussed below.

         Net cash used by the Company to fund operating activities during the
1996 three months increased to $3.0 million from $2.1 million during the 1995
three months. This increase is attributable primarily to the increased net loss
during the 1996 period as discussed in "Results of Operations". In addition,
$21,000 of cash was used for capital expenditures during the period. Also
contributing to cash used during the period is the repayment of $1.7 million of
the Notes to certain noteholders. See Note 4 to the Financial Statements.

         The Company anticipates that, on average, future cash requirements to
fund the operating activities for each of the quarters in the fiscal year ending
September 30, 1997 will be consistent with, and similar to, the expenditures of
the quarter ended December 31, 1996 as a result of continuing research and
development, clinical trials and general and administrative expenses.

         As discussed above, the results of the clinical studies reported in
1996 of the Company's most developed drug candidate, LIDAKOL, do not support the
filing of an NDA at this time. The Company has recently initiated two additional
clinical studies to prove the


                                       17
<PAGE>   18
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

efficacy of LIDAKOL versus an alternative placebo which, if successful, would
enable it to file an NDA. The Company estimates that during fiscal 1997, it will
incur direct costs for these two additional clinical studies of approximately
$2.5 million to $3.0 million.

         A total of $13.5 million of the Notes were originally issued by the
Company as part of a private placement to institutional investors in November
1995, December 1995 and January 1996. None of these Notes remain outstanding as
of January 10, 1997. See Note 4 to the Financial Statements.

         On January 10, 1997, the Company issued 1,338 shares of its Class A
Common Stock in connection with the conversions of $2,322 in principal amounts
of Notes resulting in an aggregate issuance of 5,513,018 shares of stock to date
pursuant to the Notes. As a result of this transaction, the noteholder reached
their pro-rata portion of the maximum share limitation as described above. On
January 10, 1997, the Company repaid $1,635,810 representing $1,297,678 of
original principal and $338,132 of premium and accrued interest to such
noteholder pursuant to the terms of the Notes, thus retiring the entire balance
of the principal and interest on the Notes. The Company has no further
obligations under the Notes.

         The Company expects to continue to incur substantial operating losses
for the foreseeable future. The Company's available funds may not be sufficient
to permit the Company to successfully complete development or commercialize any
of its proposed pharmaceutical products. Accordingly, the Company may be
required to raise substantial additional capital or to collaborate with one or
more large pharmaceutical or biotechnology companies which could provide the
necessary financing and expertise to complete clinical development, manufacture
and package finished product and obtain regulatory approvals to market its
products. There can be no assurance that the Company can successfully obtain
such additional capital, enter into the collaborative arrangements necessary to
fully develop or commercialize any of its proposed products on acceptable terms.




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<PAGE>   19
                           PART II. OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS

         27.1    Financial Statement Data Schedule

(b)      Reports on Form 8-K

         The following reports on Form 8-K were filed during the quarter ended
         December 31, 1996:

         Report on Form 8-K was filed on October 15, 1996- reporting under Item
         5 the issuance of 523,643 shares of Class A Common Stock in connection
         with the conversion of $763,000 principal amount of Convertible Notes.

         Report on Form 8-K was filed on November 20, 1996- reporting under Item
         5 the issuance of 211,492 shares of Class A Common Stock in connection
         with the conversion of $244,000 principal amount of Convertible Notes.

         Report on Form 8-K was filed on December 2, 1996- reporting under Item
         5 the issuance of 150,630 shares of Class A Common Stock in connection
         with the conversion of $170,000 principal amount of Convertible Notes.

         Report on Form 8-K was filed on December 3, 1996- reporting under Item
         5 that the Company had reacquired from Bristol-Myers Squibb Company the
         rights to manufacture, market and sell LIDAKOL for the treatment of
         oral herpes in all territories except the U.S., Canada and Mexico.

         Report on Form 8-K was filed on December 5, 1996- reporting under Item
         5 the issuance of 502,558 shares of Class A Common Stock in connection
         with the conversion of $560,000 principal amount of Convertible Notes.

         Report on Form 8-K was filed on December 24, 1996- reporting under Item
         5 the issuance of 704,171 shares of Class A Common Stock in connection
         with the conversion of $800,794 principal amount of Convertible Notes.

         Report on Form 8-K was filed on December 30, 1996- reporting under Item
         5 the results of the Company's fiscal year ended September 30, 1996.
         Included in the report were restatements of the operating results for
         the first, second and third quarters of the year ended September 30,
         1996 due to the recognition of non-cash interest expense associated
         with the Convertible Notes that was not previously included in the
         quarterly reports.

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<PAGE>   20
                                   SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                      LIDAK Pharmaceuticals

Date:  February 14, 1997           By:/s/David H. Katz
                                      -----------------------------------------
                                      David H. Katz, M.D., President and
                                      Chief Executive Officer
                                      (Duly Authorized Officer)
                                      (Principal Executive Officer and Principal
                                      Financial and Accounting Officer)


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