<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 JUNE 30, 1997                  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 August 8, 1997

Class A common stock, no par value                 37,694,442
Class B common stock, no par value                    283,000


<PAGE>   2


                                    FORM 10-Q

                       For the quarter ended June 30, 1997

                                      Index


<TABLE>
<CAPTION>
<S>                                                                                                 <C>
PART I.              FINANCIAL INFORMATION                                                           Page

Item 1.              Financial Statements

                     Balance Sheets at June 30, 1997 and September 30, 1996............................3

                     Statements of Operations for the three and nine month
                     periods ended June 30, 1997 and 1996 and for the period
                     from August 31, 1988 (inception) to June 30, 1997.................................4

                     Statements of Stockholders' Equity (Deficit) from August
                     31, 1988 (inception) to June 30, 1997.............................................5

                     Statements of Cash Flows for the nine month periods ended
                     June 30, 1997 and 1996 and for the period
                     from August 31, 1988 (inception) to June 30, 1997.................................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>




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


<TABLE>
<CAPTION>

BALANCE SHEETS (UNAUDITED)
-------------------------------------------------------------------------------------------------------------

                                                                                  JUNE 30,      SEPTEMBER 30,
                                                                                    1997            1996    

<S>                                                                             <C>              <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                     $ 14,727,009     $ 13,347,508
  Short-term investments                                                           1,100,101        7,026,502
  Interest receivable                                                                121,876          338,403
  Prepaid and other                                                                   97,962          825,924       
                                                                                ------------     ------------

        Total current assets                                                      16,046,948       21,538,337

PROPERTY - at cost (less accumulated depreciation of $345,476 and $266,668)          233,481          275,972

PATENT COSTS (less accumulated amortization of $60,514 and $39,654)                  584,586          581,770

DEBT ISSUE COSTS                                                                     243,473          185,015   

OTHER ASSETS                                                                         265,785          265,785  
                                                                                ------------     ------------
TOTAL                                                                           $ 17,374,273     $ 22,846,879       
                                                                                ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:     

  Convertible notes payable                                                     $  5,488,589     $  5,721,087
  Accounts payable                                                                   651,765        1,329,418
  Accrued compensation and payroll taxes                                             267,646          206,445
  Due to MBI                                                                          46,097           21,810
  Deferred revenue                                                                                    500,000       
                                                                                ------------     ------------
        Total current liabilities                                                  6,454,097        7,778,760
                                                                                ------------     ------------

COMMITMENTS - (Note 4)

STOCKHOLDERS' EQUITY:
  Common stock - no par value:
    Class A - 99,490,000 shares authorized;
      36,873,300 and 34,054,022 shares issued and outstanding                    54,467,826       49,216,569                  
    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                               (43,695,398)     (34,296,198)
                                                                                ------------     ------------
        Total stockholders' equity                                                10,920,176       15,068,119
                                                                                ------------     ------------
TOTAL                                                                           $ 17,374,273     $ 22,846,879 
                                                                                ============     ============
</TABLE>


                       See notes to financial statements
<PAGE>   4


LIDAK PHARMACEUTICALS
(A DEVELOMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                             AUGUST 31, 1988
                                                THREE MONTHS ENDED                NINE MONTHS ENDED          (INCEPTION) TO    
                                                      JUNE 30,                         JUNE 30,                 JUNE 30, 
                                            -----------------------------     ---------------------------     
                                                1997             1996            1997            1996             1997
<S>                                         <C>                 <C>             <C>            <C>              <C>
REVENUES:

  License fees/Contract research                                              $   500,000     $ 3,000,000     $  4,482,625
  Federal research grants                   $      7,869     $     25,168         120,369          43,000          919,146
  Interest and other                             243,669          306,050         668,725         775,421        3,888,339
                                            ------------     ------------     -----------     -----------     ------------

    Total revenues                               251,538          331,218       1,289,094       3,818,421        9,290,110
                                            ------------     ------------     -----------     -----------     ------------
EXPENSES:

  Resarch and development                      1,299,578          920,336       6,326,120       3,477,105       30,714,929
  General and administrative                     520,405          636,654       2,391,649       2,188,506       16,667,991
  Cost of contract research                                                                                        533,270
  Interest                                       745,601        1,115,124       1,970,525       2,505,128        5,069,318
                                            ------------     ------------     -----------     -----------     ------------

    Total expenses                             2,565,584        2,672,114      10,688,294       8,170,739       52,985,508
                                            ------------     ------------     -----------     -----------     ------------

NET LOSS                                    $ (2,314,046)    $ (2,340,896)    $(9,399,200)    $(4,352,318)    $(43,695,398)
                                            ============     ============     ===========     ===========     ============

NET LOSS PER SHARE                          $      (0.06)    $      (0.07)    $     (0.26)    $     (0.14)
                                            ============     ============     ===========     ===========

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING                          36,854,063       32,488,397      36,286,375      31,358,952
                                            ============     ============     ===========     ===========
</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 JUNE 30, 1997
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                                                                                   
                                                                                                                                   
                                                               CONVERTIBLE PREFERRED STOCK                          COMMON STOCK   
                                                     -------------------------------------------------      -----------------------
                                                           SERIES A                     SERIES B                     CLASS A       
                                                     ----------------------    -----------------------      -----------------------
                                                      SHARES        AMOUNT      SHARES         AMOUNT          SHARES      AMOUNT  
                                                     -------        ------      ------         ------          ------      ------  

<S>                                                  <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                                                                                                        
      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                                                                                             
      Issuance of common stock for cash in
        January 1989 at $.05 per share                                                                                             
      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)                                                                                                   
      Issuance of common stock for cash in
        September 1989 at $.0125 per share
        (with an estimated fair market value
        of $.05 per share)                                                                                                         
      Collection on notes receivable                                                                                               
      Net loss                                                                                                                     
                                                     -------        ------      ------         ------          ------      ------  

      BALANCE, SEPTEMBER 30, 1989                    2,000,000        1                                                            

      Conversion of advances to common stock in
        October 1989 at $.50 per share                                                                                             
      Issuance of common stock for cash in May
        1990 at $1.00 per share (net of stock
        issue costs totaling $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 totaling $97,500)                                                                         750,000       652,500
      Exercise of stock options in July and
        August 1990 at $.50 per share                                                                                              
      Forgiveness of compensation obligation                                                                                       
      Collection on notes receivable                                                                                               
      Net loss                                                                                                                     
                                                     ---------     -------       -------     ----------    ---------     ----------

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



<TABLE>
<CAPTION>
                                                          COMMON STOCK             DEFICIT
                                                    ------------------------     ACCUMULATED        NOTES        
                                                            CLASS B              DURING THE       RECEIVABLE
                                                    ------------------------     DEVELOPMENT         FROM                        
                                                     SHARES          AMOUNT         STAGE        STOCKHOLDERS      TOTAL
                                                    ---------       --------      ----------     --------       ----------

<S>                                                 <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                     $(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                 80,000          4,000                                         4,000
      Issuance of common stock for cash in
        January 1989 at $.05 per share                 80,000          4,000                                         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                                        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                                        20,000
      Collection on notes receivable                                                                1,635            1,635
      Net loss                                                                    $(409,718)                      (409,718)
                                                    ---------       --------      ---------      --------       ----------

      BALANCE, SEPTEMBER 30, 1989                   4,795,000        103,437       (409,718)      (12,890)        (319,170)

      Conversion of advances to common stock in
        October 1989 at $.50 per share                250,000        125,000                                       125,000
      Issuance of common stock for cash in May
        1990 at $1.00 per share (net of stock
        issue costs totaling $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 totaling $97,500)                                                                              652,500
      Exercise of stock options in July and
        August 1990 at $.50 per share                  21,500         10,750                                        10,750
      Forgiveness of compensation obligation                          66,923                                        66,923
      Collection on notes receivable                                                               12,890           12,890
      Net loss                                                                    (2,319,231)                   (2,319,231)
                                                    ---------       --------      ----------     --------       ----------

      BALANCE, SEPTEMBER 30, 1990                   5,066,500        306,110      (2,728,949)           -        2,196,482
</TABLE>



                                                                (Continued) - 1.


                                       5


<PAGE>   6


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                                                                   
                                                                                                                                   
                                                               CONVERTIBLE PREFERRED STOCK                       COMMON STOCK      
                                                    ---------------------------------------------------     -----------------------
                                                           SERIES A                     SERIES B                     CLASS A       
                                                    ------------------------   ------------------------     -----------------------
                                                      SHARES        AMOUNT      SHARES         AMOUNT        SHARES        AMOUNT  
                                                      ------        ------      ------         ------        ------        ------  
<S>                                                 <C>              <C>        <C>          <C>            <C>         <C>        

      BALANCE, SEPTEMBER 30, 1990                   2,000,000        $1                                     5,750,000   $ 4,619,320

      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 totaling $130,339)                                           960,003      $ 769,670                           
      Conversion of common stock                                                                              115,000         5,750
      Net loss                                                                                                                     
                                             ----------------        -----     ---------      ---------    ----------    ----------

      BALANCE, SEPTEMBER 30, 1991                   2,000,000         1          960,003        769,670     5,865,000     4,625,070

      Issuance of preferred stock in 
        February 1992 for cash
        (net of stock issue costs
        totaling $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 totaling $317,930)                                                                            5,650,200     8,157,370
      Conversion of common stock                                                                              395,000         6,250
      Net loss                                                                                                                     
                                             ----------------        -----     ---------      ---------    ----------   -----------

      BALANCE, SEPTEMBER 30, 1992                   2,000,000         1        5,226,683      4,341,065    11,910,200    12,788,690

      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 
        totaling $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 
        totaling $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 
        totaling $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                                                                     320,000        300,000                            
</TABLE>


<TABLE>
<CAPTION>
                                                                     
                                               COMMON STOCK            DEFICIT
                                         ----------------------      ACCUMULATED         NOTES
                                                 CLASS B              DURING THE       RECEIVABLE 
                                         ----------------------       DEVELOPMENT         FROM                        
                                             SHARES     AMOUNT           STAGE        STOCKHOLDERS       TOTAL
                                             ------     ------           -----        ------------       -----



<S>                                        <C>          <C>           <C>              <C>          <C>       
      BALANCE, SEPTEMBER 30, 1990          5,066,500    $306,110      $(2,728,949)         -         $2,196,482

      Exercise of stock options in 
        November 1990 at $.50 per share        2,000       1,000                                          1,000
      Issuance of preferred stock in 
        July 1991 for cash (net of
        stock issue costs
        totaling $130,339)                                                                              769,670
      Conversion of common stock           (115,000)     (5,750)
      Net loss                                                         (1,949,588)                   (1,949,588)
                                           -------      -------       -----------        ---         ----------

      BALANCE, SEPTEMBER 30, 1991          4,953,500    301,360        (4,678,537)         -          1,017,564

      Issuance of preferred stock in 
        February 1992 for cash (net
        of stock issue costs
        totaling $428,605)                                                                            3,571,395
      Exercise of stock options in 
        March 1992 at $.50 per share         119,000     59,500                                          59,500
      Exercise of Class A warrants 
        in May 1992 at $1.50 per share
        for cash (net of stock issue
        costs totaling $317,930)                                                                      8,157,370
      Conversion of common stock            (395,000)    (6,250)
      Net loss                                                         (2,361,855)                   (2,361,855)
                                           -------      -------        ----------        ---         ----------

      BALANCE, SEPTEMBER 30, 1992          4,677,500    354,610        (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 
        totaling $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 
        totaling $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 
        totaling $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>
                                                                (Continued) - 2.

                                       6


<PAGE>   7


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997 
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                                                                   
                                                                                                                                   
                                                               CONVERTIBLE PREFERRED STOCK                      COMMON STOCK       
                                                    ---------------------------------------------------     -----------------------
                                                           SERIES A                     SERIES B                     CLASS A       
                                                    ------------------------   ------------------------     -----------------------
                                                      SHARES        AMOUNT      SHARES         AMOUNT        SHARES        AMOUNT  
                                                      ------        ------      ------         ------        ------        ------ 

     <S>                                              <C>          <C>          <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                                                                               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                  (1,500,000)                                                               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                            (100,000)                (5,642,653)     (4,731,065)   6,040,653     4,790,121
      Cancellation of partial shares                                                 (30)
      Net loss                                                                                                                     
                                               --------------        ------    ----------     ---------    ----------    ----------

      BALANCE, SEPTEMBER 30, 1993                     400,000           $ 1            -              -    22,416,905    23,411,234
      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 
        totaling $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 
        totaling $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 
        totaling $2,875)                                                                                       78,335       114,627
      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                                                                            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                                 (400,000)         (1)      (106,666)      (100,000)      653,416       113,911
      Cancellation of Class A Common 
        and Class B Common
        Stock between January 1994 
        and May 1994                                                                                          (70,000)       20,794
      Cancellation of partial shares                                                                              (3)
      Net loss                                                                                                                     
                                               --------------        ------    ----------     ---------    ----------    ----------

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


<TABLE>
<CAPTION>
                                                                                                                                    
                                                                                                                                    
                                                      COMMON STOCK             DEFICIT                        
                                                 ----------------------      ACCUMULATED         NOTES  
                                                        CLASS B               DURING THE      RECEIVABLE 
                                                 ----------------------      DEVELOPMENT         FROM
                                                    SHARES      AMOUNT          STAGE        STOCKHOLDERS      TOTAL 
                                                 ------------  ---------     ------------    ------------   ----------

<S>                                              <C>             <C>               <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                (2,240,250)   $ (28,003)
      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                          (298,000)     (59,056)
      Cancellation of partial shares         
      Net loss                                                               $ (6,139,223)                  (6,139,223)
                                                 ------------  ---------     ------------    ------------   ----------

      BALANCE, SEPTEMBER 30, 1993                 2,139,250      267,551      (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 
        totaling $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 
        totaling $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 
        totaling $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                               (146,750)     (13,910)
      Cancellation of Class A Common 
        and Class B Common
        Stock between January 1994 
        and May 1994                             (1,546,500)     (20,794)
      Cancellation of partial shares         
      Net loss                                                                 (4,813,341)                  (4,813,341)
                                                 -----------   ----------    ------------    ------------   ----------

      BALANCE, SEPTEMBER 30, 1994                   446,000       232,847     (17,992,956)             --   17,396,395
                                                 -----------   ----------    ------------    ------------   ----------

                                                          (CONTINUED) - 3

</TABLE>


                                       7


<PAGE>   8


Lidak PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997


<TABLE>
<CAPTION>
                                                                                                                                   
                                                                                                                                   
                                                                                                                                   
                                                               CONVERTIBLE PREFERRED STOCK                             COMMON STOCK
                                                      -------------------------------------------------     -----------------------
                                                           SERIES A                     SERIES B                     CLASS A       
                                                      ----------------------   ------------------------     -----------------------
                                                      SHARES        AMOUNT      SHARES         AMOUNT        SHARES        AMOUNT  
                                                      ------        ------      ------         ------        ------        ------  
     <S>                                              <C>          <C>         <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
      Net loss                                                                                                                      
                                                      ------        ------      ------          ------     ----------   ----------- 
      BALANCE, SEPTEMBER 30, 1995                        --            --          --              --      29,847,064    37,235,484
                                                      ------        ------      ------          ------     ----------   ----------- 



      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
      Net loss                                                                                                                     
                                                      ------        ------      ------          ------     ----------   ----------- 
      BALANCE, SEPTEMBER 30, 1996                        --            --          --              --      34,054,022   $49,216,569
                                                      ======        ======      ======          ======     ==========   =========== 
</TABLE>


<TABLE>
<CAPTION>
                                                                                                   
                                                           COMMON STOCK            DEFICIT        
                                                        ------------------       ACCUMULATED        NOTES
                                                            CLASS B               DURING THE      RECEIVABLE
                                                        ------------------       DEVELOPMENT         FROM
                                                        SHARES     AMOUNT           STAGE        STOCKHOLDERS       TOTAL
                                                        ------     ------           -----        ------------       -----
     <S>                                               <C>         <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                                                                             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                       (103,000)   (53,774)
      Net loss                                                                  (10,173,001)                  (10,173,001)
                                                       --------   --------     ------------      -----------  -----------
      BALANCE, SEPTEMBER 30, 1995                       343,000    179,073      (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
         1,807,785
      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                        (60,000)   (31,325)
      Net loss                                                                   (6,130,241)                   (6,130,241)
                                                       --------   --------     ------------      -----------  -----------
      BALANCE, SEPTEMBER 30, 1996                       283,000   $147,748     $(34,296,198)             --   $15,068,119
                                                       ========   ========     ============      ===========  ===========
</TABLE>


                                                                (Continued) - 4.


                                        8


<PAGE>   9


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997


<TABLE>
<CAPTION>


                                                               CONVERTIBLE PREFERRED STOCK                 
                                                      -------------------------------------------------    
                                                           SERIES A                  SERIES B              
                                                      ----------------------   ------------------------    
                                                       SHARES       AMOUNT       SHARES        AMOUNT      
                                                      --------     ---------   ---------     ----------    
<S>                                                   <C>          <C>         <C>           <C>           
OCTOBER 1, 1996 TO JUNE 30, 1997                                                                           
  (Unaudited)                                                                                              
Exercise of Class D Warrants                                                                               
  between January and                                                                                      
  June, 1997 at $1.50 per share                                                                            
  for cash                                                                                                 
Exercise of Class E Warrants in                                                                            
  October, 1996                                                                                            
  at $0.20 per share for cash                                                                              
Conversion of Convertible Notes                                                                            
  to Class A Common Stock                                                                                  
  between October,                                                                                         
  1996 and January, 1997 (including                                                                        
  interest and discount applied of                                                                         
  $635,029 and net of issue costs                                                                          
  of $79,922)                                                                                              
Exercise of stock options between                                                                          
  October, 1996                                                                                            
  and June, 1997 at exercise                                                                               
  prices ranging                                                                                           
  from $0.9375 per share to $1.0625                                                                        
  per share                                                                                                
Compensation expense related to                                                                            
  valuation of                                                                                             
  stock options granted to                                                                                 
  non-employees between                                                                                    
  October 1996 and March 1997                                                                              
Discount on Convertible Notes issued                                                                       
  in February, 1997                                                                                        
Conversion of Convertible Note                                                                             
  to Class A Common Stock in                                                                               
  June, 1997 (including interest                                                                           
  of $9,721 and net of                                                                                     
  issue costs of $23,463)                                                                                  
Net loss                                                                                                   
                                                     ----------   ----------   ---------      ---------    
                                                                                                           
BALANCE, JUNE 30, 1997                                     -            -           -              -       
                                                     ==========   ==========   =========      =========    
</TABLE>


<TABLE>
<CAPTION>
                                                                COMMON STOCK                   DEFICIT
                                              --------------------------------------------   ACCUMULATED        NOTES              
                                                    CLASS A                 CLASS B          DURING THE      RECEIVABLE            
                                              ----------------------     -----------------   DEVELOPMENT        FROM               
                                               SHARES      AMOUNT        SHARES    AMOUNT       STAGE       STOCKHOLDERS   TOTAL   
                                              --------   -----------     ------    ------       -----       ------------ --------- 
<S>                                           <C>        <C>             <C>        <C>       <C>            <C>         <C>       
OCTOBER 1, 1996 TO JUNE 30, 1997                                                                                                   
  (Unaudited)                                                                                                                      
Exercise of Class D Warrants                                                                                                       
  between January and                                                                                                              
  June, 1997 at $1.50 per share                                                                                                    
  for cash                                      321,085  $   481,628                                                     $ 481,628 
Exercise of Class E Warrants in                                                                                                    
  October, 1996                                                                                                                    
  at $0.20 per share for cash                    75,000       15,000                                                        15,000 
Conversion of Convertible Notes                                                                                                    
  to Class A Common Stock                                                                                                          
  between October,                                                                                                                 
  1996 and January, 1997 (including                                                                                                
  interest and discount applied of                                                                                                 
  $635,029 and net of issue costs                                                                                                  
  of $79,922)                                 2,093,852    3,095,221                                                     3,095,221 
Exercise of stock options between                                                                                                  
  October, 1996                                                                                                                    
  and June, 1997 at exercise                                                                                                       
  prices ranging                                                                                                                   
  from $0.9375 per share to $1.0625                                                                                                
  per share                                      16,800       16,750                                                        16,750 
Compensation expense related to                                                                                                    
  valuation of                                                                                                                     
  stock options granted to                                                                                                         
  non-employees between                                                                                                            
  October 1996 and March 1997                                 86,167                                                        86,167 
Discount on Convertible Notes issued                                                                                               
  in February, 1997                                        1,058,823                                                     1,058,823 
Conversion of Convertible Note                                                                                                     
  to Class A Common Stock in                                                                                                       
  June, 1997 (including interest                                                                                                   
  of $9,721 and net of                                                                                                             
  issue costs of $23,463)                       312,541      497,666                                                       497,666 
Net loss                                                                                       (9,399,200)              (9,399,200)
                                             ----------  -----------    --------   --------  ------------   --------    ---------- 
                                                                                                                                   
BALANCE, JUNE 30, 1997                       36,873,300  $54,467,826     283,000   $147,748  $(43,695,398)      -       10,920,176 
                                             ==========  ===========    ========   ========  ============   ========    ========== 
</TABLE>


                                        9

See notes to financial statements                                  (Concluded-5)
<PAGE>   10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                                        NINE MONTHS ENDED       AUGUST 31, 1988
                                                                                             JUNE 30,           (INCEPTION) TO
                                                                                 ----------------------------       JUNE 30,
                                                                                     1997            1996            1997
<S>                                                                              <C>            <C>              <C>
OPERATING ACTIVITIES:
  Net loss                                                                       $ (9,399,200)  $  (4,352,318)   $ (43,695,398)
  Adjustments to reconcile net loss to net cash used for operating activities:
    Technology license fee                                                                                           3,545,713
    Depreciation and amortization                                                     236,226         239,504          833,109
    Non-cash interest expense                                                       1,841,778       2,473,344        4,612,808
    Compensation paid with common stock and stock options                              86,167                          661,792
    Compensation forgiven by stockholder                                                                                66,923
    Imputed interest under technology license fees                                                                      82,613
    Changes in assets and liabilities:
      Interest receivable                                                             216,527        (269,319)        (121,876)
      Prepaid and other                                                               727,962          55,300         (363,747)
      Patent costs                                                                     (3,676)        (93,601)        (625,100)
      Organizational costs                                                                                             (20,242)
      Accounts payable                                                               (677,653)     (1,178,507)         651,765
      Accrued compensation and payroll taxes                                           61,201          87,626          267,646
      Due to MBI                                                                       24,287           1,629           46,097
      Deferred revenue                                                               (500,000)        500,000
                                                                                 ------------   -------------    -------------
        Net cash used for operating activities                                     (7,386,381)     (2,536,342)     (34,057,897)
                                                                                 ------------   -------------    -------------
INVESTING ACTIVITIES:
  Short-term investments                                                            5,926,401     (12,919,607)      (1,100,101)
  Capital expenditures                                                                (36,317)        (49,488)        (578,957)
                                                                                 ------------   -------------    -------------
        Net cash provided by (used for) investing activities                        5,890,084     (12,969,095)      (1,679,058)
                                                                                 ------------   -------------    -------------
FINANCING ACTIVITIES:
  Proceeds from issuance of common and preferred stock                                513,378       1,885,579       39,191,649
  Proceeds from the issuance of convertible notes payable                           6,000,000      13,500,000       19,500,000
  Debt issue costs                                                                   (296,059)       (771,351)      (1,067,410)
  Repayment of convertible notes payable                                           (3,341,521)                      (3,341,521)
  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 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 financing activities                                   2,875,798      14,530,733       50,463,964
                                                                                 ------------   -------------    -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                1,379,501        (974,704)      14,727,009

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   13,347,508       4,244,575
                                                                                 ------------   -------------    -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $ 14,727,009   $   3,269,871    $  14,727,009
                                                                                 ============   =============    =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                           0
  Interest paid                                                                  $    784,224                    $     993,763
                                                                                 ============   =============    =============
</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 and the Company's unaudited Quarterly
      Reports on Form 10-Q for the quarters ended December 31, 1996 and March
      31, 1997. 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 June 30, 1997
      and results of operations for the three and nine months ended June 30,
      1997 and from August 31, 1988 (Inception) to June 30, 1997. The results of
      operations for the three and nine months ended June 30, 1997 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 three and nine
      months ended June 30, 1996 have been restated from amounts previously
      disclosed by the Company in its Quarterly Report on Form 10-Q for the
      quarter ended June 30, 1996. This restatement reflects the impact on those
      amounts of an adjustment made in the fourth fiscal quarter of the year
      ended September 30, 1996, (as reported in the Company's Annual Report on
      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
      three and nine months ended June 30, 1997 by $1,083,340 ($0.03 per share)
      and $2,473,344 ($0.08 per share), respectively.

4.    CONVERTIBLE NOTES PAYABLE

      Note Issued in February, 1997 - On February 26, 1997, the Company issued a
      Convertible Note in the amount of $6.0 million (the "1997 Note") as part
      of a private placement to an institutional investor. The 1997 Note accrues
      interest at an annual rate of 7%, beginning


                                       11


<PAGE>   12


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

4.    CONVERTIBLE NOTES PAYABLE (CONTINUED)

      August 26, 1997 and is due and payable on February 26, 2000 if and to the
      extent the 1997 Note is not previously converted pursuant to its terms.
      The Company is recognizing the stated 7% annual interest ratably over the
      term of the 1997 Note. The 1997 Note is convertible (subject to certain
      maximum share limitations discussed below) at the option of the holder
      into shares of Class A Common Stock at a price equal to 85% of the Market
      Price per share (as defined in the 1997 Note) on the date of conversion.
      Pursuant to the terms of the 1997 Note, the holder is entitled to receive
      (i) a Class G Stock Purchase Warrant for each two shares of Class A Common
      Stock issued to the holder upon conversion of the 1997 Note, and (ii) a
      certain number of Class G Stock Purchase Warrants in the event that the
      Company prepays the 1997 Note. Each Class G Stock Purchase Warrant is
      exercisable beginning August 26, 1997, or the first date after February
      26, 1997 when the trading price of the Class A Common Stock is $6.00 or
      more, for a period of five years from the date of issue into one share of
      Class A Common Stock at an exercise price of $2.97 per share.

      The option to convert the 1997 Note at 85% of the average closing bid
      price of the Class A Common Stock effectively results in the issue of the
      1997 Note at an 18% discount. This discount, totaling $1,058,823, was
      recorded by the Company as equity in connection with the issuance of the
      1997 Note (See Note 6). The discount was being amortized as non-cash
      interest expense during the 90 days prior to the period in which the
      discount on conversion applies, with a corresponding increase to the
      principal amount of the 1997 Note. Through June 30, 1997, the total
      discount of $1,058,823 was amortized as non-cash interest expense on the
      1997 Note.

      The $6.0 million principal amount of the 1997 Note is convertible into an
      aggregate maximum of 7,257,465 shares of Class A Common Stock. Through
      June 30, 1997, 312,541 shares of Class A Common Stock and 156,271 Class G
      Stock Purchase Warrants were issued in connection with the conversion of
      $511,411 in principal amount of the 1997 Note. Subsequent to June 30,
      1997, 821,142 shares of Class A Common Stock and 410,571 Class G Stock
      Purchase Warrants were issued in connection with the conversions of
      $1,423,129 in principal amount of the 1997 Note. To date, a total of
      1,133,683 shares of Class A Common Stock and 566,842 Class G Stock
      Purchase Warrants have been issued in connection with the conversions of
      $1,924,539 in principal amount of the 1997 Note. In the event that the
      shares of Class A Common Stock underlying the 1997 Note cannot be issued
      upon request for conversion due to the above referenced maximum share
      limitation, the Company is immediately obligated to repay the original
      principal of that portion of the 1997 Note which is presented for
      conversion and cannot be converted, together with (i) a premium equal to
      17.64% of such principal plus any accrued and unpaid interest, and (ii)
      that number of Class G Stock Purchase Warrants equal to 50% of the
      principal plus interest divided by the conversion price on the date of
      payment.

      Notes Issued in Fiscal Year 1996 - Between November 1995 and January 1996,
      the Company issued $13.5 million of Convertible Notes Payable (the "95/96
      Notes") as part of a private placement to institutional investors. The
      $13.5 million original principal amount of the 95/96 Notes was convertible
      into an aggregate maximum of 5,513,018 shares of 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.


                                       12


<PAGE>   13


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

4.    CONVERTIBLE NOTES PAYABLE (CONTINUED)

      From October 1, 1996 through January 10, 1997, the Company issued a total
      of 2,093,852 shares of Class A Common Stock in connection with the
      conversion of $2,540,116 of the original principal amount of the 95/96
      Notes resulting in an aggregate issuance of 5,513,018 shares of stock to
      date pursuant to the 95/96 Notes. The Company repaid certain holders of
      the 95/96 Notes $1,728,393 on December 19, 1996 and $1,635,810 on January
      10, 1997, representing a total of $2,673,217 of original principal and
      $690,986 of premium and accrued interest in accordance with the provisions
      of the 95/96 Notes, thus retiring the entire balance of the principal and
      interest on the 95/96 Notes. The Company has no further obligation under
      the 95/96 Notes.

      The conversion of the 95/96 Notes at 80% of the average closing bid price
      of the Company's Class A Common Stock resulted in the 95/96 Notes being
      issued at a 25% discount (the "Conversion Discount"). The Company
      recognized the Conversion Discount as non-cash interest expense over the
      term of the 95/96 Notes with a corresponding increase to the original
      principal amount of the 95/96 Notes. Any portion of the Conversion
      Discount not recognized upon conversion of the Notes was recorded as
      interest expense on that date. In addition, the stated 7% annual interest
      was recognized over the term of the 95/96 Notes until the 95/96 Notes were
      repaid. Through January 10, 1997, a total of $847,781 was recorded as
      interest expense relating to the 95/96 Notes, including $349,139 relating
      to the Conversion Discount.

5.    DEBT ISSUE COSTS

      Debt issue costs represent costs related to the issuance of the 1997 Notes
      and the 95/96 Notes (the "Convertible Notes"). The debt issue costs are
      amortized over the life of the Convertible Notes, to the extent that the
      notes are not converted or repaid (See Note 4). To date, the Company has
      recorded debt issue costs in the amount of $296,059 in connection with the
      1997 Note. Through June 30, 1997, $29,304 of debt issue costs were
      amortized and $23,463 were reclassified to stock issue costs in connection
      with conversion of the 1997 Note. Through January 10, 1997, $289,160 of
      debt issue costs were amortized and $482,191 were reclassified to stock
      issue costs in connection with the conversion of the 95/96 Notes into
      Common Stock. (See Notes 4 & 6)

6.    STOCKHOLDERS' EQUITY

      In June 1997, the Company issued 312,541 shares of Class A Common Stock
      from the conversion of 511,411 in principal amount of the 1997 Note. The
      amount recorded in Stockholder's Equity in connection with this conversion
      included $9,721 of interest expense and was reduced by a $23,463
      reclassification of debt issue costs. (See Notes 4 & 5).

      Between October 1996 and January 1997, the Company issued an aggregate of
      2,093,582 shares of Class A Common Stock from the conversion of $2,540,116
      in the principal amount of the 95/96 Notes. The amount recorded as
      Stockholders' Equity in connection with these


                                       13


<PAGE>   14


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

6.    STOCKHOLDERS' EQUITY (CONTINUED)

      conversions included $635,029 of interest and discount associated with the
      converted principal and was reduced by $79,923 due to the reclassification
      of previously recorded debt issue costs (See Note 4).

      On January 28, 1997, the Company extended the expiration of its Class D
      Warrants from February 26, 1997 to December 31, 1997. Between January and
      March, 1997, the Company received proceeds totaling $481,628 from the
      exercise of 321,085 Class D Warrants.

      In February 1997, the Company recorded equity in the amount of $1,058,823
      representing the discount related to the conversion feature on the 1997
      Note. (See Note 4).

      During the nine months ended June 30, 1997, the Company issued 56,500
      stock options for the purchase of shares of Class A Common Stock to
      non-employees for services rendered. In connection with such issuances,
      the Company has recorded compensation expense and equity in the amount of
      $86,167 representing the fair market valuation of the stock options on the
      date of grant pursuant to Statement of Financial Accounting Standards
      ("SFAS") No. 123, "Accounting for Stock-based Compensation".

7.    NET LOSS PER SHARE

      In February 1997, the Financial Accounting Standards Board issued SFAS No.
      128, "Earnings per Share" ("EPS"). This Statement requires the
      presentation of earnings per share to reflect both "Basic EPS" as well as
      "Diluted EPS" on the face of the statement of operations. In general,
      Basic EPS excludes dilution created by stock equivalents and is a function
      of the weighted average number of common shares outstanding for the
      period. Diluted EPS reflects the potential dilution from common stock
      equivalents if such equivalents are converted into common stock and is
      calculated in the same manner as fully diluted EPS illustrated in
      Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB No.
      15").

      The Company will be required to adopt the new method of reporting EPS for
      the quarter ending December 31, 1997. In this quarterly report on Form
      10-Q, the Company has presented its net loss per share under APB No. 15.
      This presentation is consistent with the Basic EPS method as the inclusion
      of common stock equivalents in the Diluted EPS calculation would be
      anti-dilutive. Based on the Company's continuing net losses, the
      anticipated results of implementing SFAS No. 128 is not expected to have a
      material impact on the Company's net loss per share.


                                       14


<PAGE>   15


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

           This Form 10-Q contains certain forward-looking statements relating
to future events or the future performance of the Company. Prospective and
current investors are cautioned that such statements are only predictions and
that actual events or results may differ materially. In evaluating such
statements, prospective and current 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 June 30, 1997, the Company incurred a cumulative net loss of $43.7
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 has
recently completed the enrollment and treatment portion of these studies and
anticipates availability of data during 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
from pharmaceutical and biotechnology 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


                                       15


<PAGE>   16


ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

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 and nine months ended June 30, 1997, (the "1997
three and nine months"), the Company incurred net losses of $2.3 million and
$9.4 million, respectively, compared to net losses of $2.3 million and $4.4
million, respectively, during the three and nine months ended June 30, 1996 (the
"1996 three and nine months").

REVENUES

           Total revenues for the 1997 three and nine months were $252,000 and
$1.3 million, respectively. For the three months ended June 30, 1997, (the "1997
three months"), total revenues consisted of interest and other income of
$244,000 and federal research grant income of $8,000. For the nine months ended
June 30, 1997, (the "1997 nine months"), total revenues consisted of license
fee/contract research revenue of $500,000, interest and other income of $669,000
and federal research grant income of $120,400. For the three months ended June
30, 1996, (the "1996 three months"), total revenue consisted of interest and
other income of $306,000 and federal research grant income of $25,000. For the
nine months ended June 30, 1996, (the "1996 nine months"), total revenue
consisted of license fees/contract research revenue of $3,000,000, interest and
other income of $775,000 and federal research grant income of $43,000.

           The decrease in revenues in the 1997 three months was due primarily
to lower interest income earned in the 1997 period due to a lower average cash
balance during the 1997 period and to the completion of. federal research grants
issued by the National Institutes of Health during the 1997 three months. For
the 1997 nine months, decreased revenues were due primarily to license fees
earned in the 1996 period in connection with certain licensing agreements and
lower interest income as a result of a lower average cash balance in the 1997
nine months. Partially offsetting the overall decrease in revenues in the 1997
nine months are increased revenues from federal research grants.

EXPENSES

           Research and development expenses for the 1997 three and nine months
increased to $1.3 million and $6.3 million, respectively, from $920,000 and $3.5
million in the 1996 three and nine months. The increase in expenses during the
1997 three and nine months was attributable primarily to increased activities
related to the on-going U.S. Phase 3 clinical trials of LIDAKOL. During the 1997
nine months, the Company's clinical trial expense increased to $3.6 million,
from $1.0 million in the 1996 period.

           General and administrative expenses for the 1997 three months
decreased to $520,000 from $637,000 in the 1996 three month period. The decrease
in expenses in the 1997 three


                                       16


<PAGE>   17


ITEM 2:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS (continued)

month period, compared to the 1996 three month period, is due primarily to lower
legal fees, and decreased costs of consulting services. Also contributing to the
decreased expenses in the 1997 period are decreased non-cash expenses in the
amount of $54,000 from the amortization of deferred debt issue costs related to
the convertible notes payable. See Note 4 to the Financial Statements. Partially
offsetting the decreased expenses in the 1997 period are increased occupancy
expenses due to an expansion of administrative office space in the 1997 three
months.

           During the 1997 nine months, general and administrative expenses
increased to $2.4 million from $2.2 million in the 1996 nine month period. The
increase in expenses during the 1997 nine months, compared to the 1996 nine
months, is attributable primarily to non-recurring expenses incurred in the 1997
period related to reacquiring from Bristol-Myers Squibb Company the rights to
market LIDAKOL in all territories except the U.S., Canada and Mexico. Also
contributing to the increased expenses in the 1997 nine months are increased
non-cash expenses in connection with the recording of compensation expense
related to the issuance of stock options to non-employees. See Note 6 to the
Financial Statements. Partially offsetting the increased expenses in the 1997
nine months, are lower costs of legal fees, investor relations activities and
decreases from non-recurring taxes paid in the 1996 period associated with
license fees earned in the 1996 period. Also partially offsetting the overall
increased expenses in the 1997 nine months are lower non-cash expenses in the
amount of $27,000 from the amortization of deferred debt issue costs.

           Interest expense for the 1997 three and nine months decreased to
$746,000 and $2.0 million, respectively, from $1.1 million and $2.5 million,
respectively, in the 1996 three and nine months. Interest expense recorded in
these periods consists primarily of the non-cash amortization of the discount on
the convertible notes as discussed in Note 4 to the Financial Statements. The
decrease in interest expense during the 1997 three and nine months is due
primarily to lower non-cash expenses associated with the amortization of the
discount on the convertible notes and lower interest expense due to a lower
convertible notes payable balance in the 1997 periods.

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 June 30, 1997 was $50.5 million.

           At June 30, 1997, the Company had cash, cash equivalents and
short-term investments totaling $15.8 million and working capital of $9.6
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 1997 nine months is attributable primarily to net cash
used to fund operating activities, as discussed below. Also contributing to the
decrease in cash, cash equivalents and short-term investments is the repayment
of $3.4 million of principal and interest of convertible notes payable, offset
by the receipt of $6.0 in principal amount from the issuance of a convertible
note in February 1997. See Note 4 to Financial Statements.


                                       17


<PAGE>   18


ITEM 2:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS (concluded)

           Net cash used by the Company to fund operating activities during the
1997 nine months increased to $7.4 million from $2.5 during the 1996 nine
months. This increase is attributable primarily to increased expenses and
decreased revenues during the 1997 period as discussed in "Results of
Operations". In addition, $36,000 of cash was used for capital expenditures
during the period.

           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 completed the enrollment
and treatment stage of two additional clinical studies to prove the efficacy of
LIDAKOL versus an alternative placebo which, if successful, would enable it to
file an NDA. Through June 30, 1997, the Company has recorded expenses of
approximately $3.5 million in connection with the recently completed trials. The
Company does not anticipate substantial additional expenses related to these
trials.

           The Company anticipates that, it's cash requirements to fund 
operating activities for the remainder of the fiscal year ending September 30,
1997 will be lower than the average expenditures of the nine months ended June
30, 1997, due to the fact that the majority of the clinical trial expenses
incurred in the 1997 nine months have been paid. The Company estimates its
current cash, cash equivalents and short-term investments will be sufficient to
fund operating activities for at least the next 12 months.

           On February 26, 1997, the Company issued a Convertible Note Payable
in the amount of $6.0 million as part of a private placement to an institutional
investor, (the "1997 Note"). The 1997 Note is convertible at the option of the
holder into shares of Class A Common Stock at a price equal to 85% of the Market
Price per share (as defined in the 1997 Note) on the date of conversion,
provided, however, that in no event can the total shares issued from the
conversion of the 1997 Note be more than 7,257,465. In the event that the shares
of Class A Common Stock underlying the 1997 Note cannot be issued upon request
for conversion due to the above referenced maximum share limitations, the
Company is immediately obligated to repay the original principal of that portion
of the 1997 Note which is presented for conversion and cannot be converted,
together with (i) a premium equal to 17.64% of such principal plus any accrued
and unpaid interest, and (ii) that number of Class G Stock Purchase Warrants
equal to 50% of the principal plus interest divided by the conversion price on
the date of payment. See Note 4 to the Financial Statements.

           Between November 1995 and January 1996, the Company issued a total of
$13.5 million of convertible notes as part of a private placement to
institutional investors. The Company has no further obligations under these
notes. See Note 4 to the Financial Statements.

           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, or enter into the collaborative arrangements necessary
to fully develop or commercialize any of its proposed products on acceptable
terms.


                                       18


<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

           There were no reports on Form 8-K filed during the quarter ended June
           30, 1997. Since that date and prior to the date of filing this
           report, the following reports on Form 8-K were filed:

           Report on Form 8-K filed on July 9, 1997 - reporting the issuance of
           312,541 and 245,100 shares of the Company's Class A Common Stock in
           connection with two conversions of $920,923 in total principal
           amount of Convertible Notes. The Company also reported the issuance
           of 278,820 Class G Stock Purchase Warrants to purchase a like number
           of shares of the Company's Class A Common Stock at an exercise price
           of $2.97 per share in connection with these conversions.

           Report on Form 8-K filed on July 23, 1997 - reporting that the
           Company had received notification of allowance from the U.S. Patent
           and Trademark Office for its patent application #08/543,449 for Human
           Immue System in Non-Human Animal.

           Report on Form 8-K filed on July 24, 1997 - reporting the issuance of
           301,648 shares of the Company's Class A Common Stock in connection
           with the conversion of $513,616 in principal amount of Convertible
           Notes. The Company also reported issuance of 150,824 Class G Stock
           Purchase Warrants to purchase a like number of shares of the
           Company's Class A Common Stock at an exercise price of $2.97 per
           share in connection with this conversion.

           Report on Form 8-K filed on July 30, 1997 - reporting the issuance of
           274,394 shares of the Company's Class A Common Stock in connection
           with the conversion of $500,000 in principal amount of Convertible
           Notes. The Company also reported the issuance of 137,197 Class G
           Stock Purchase Warrants to purchase a like number of shares of the
           Company's Class A Common Stock at an exercise price of $2.97 per
           share in connection with this conversion.

           Report on Form 8-K filed on August 7, 1997 - reporting the
           appointment of Susan Yeagley Sullivan to the position of Vice
           President and Chief Financial Officer of the Company.

           Report on Form 8-K filed August 11, 1997 - reporting an agreement
           with Aurora Biosciences ("Aurora") whereby Aurora receives an
           exclusive license, with rights to sublicense, the Company's
           proprietary fluorescent one-step unbound free fatty acid
           determination method (ADIFAB) for the field of screening for
           therapeutic compounds.


                                       19


<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:  August 13, 1997      By:/s/David H. Katz
                            ----------------
                            David H. Katz, M.D., President and
                            Chief Executive Officer
                            (Duly Authorized Officer )
                            (Principal Executive Officer)


Date:  August 13, 1997      By:/s/Susan Yeagley Sullivan
                            ----------------
                            Susan Yeagley Sullivan, Vice President,
                            Chief Financial Officer and Secretary
                            (Principal Financial and Accounting Officer)


                                       20