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

   
                                    FORM 10-Q/A
    

--------------------------------------------------------------------------------

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934



For Quarter Ended MARCH 31, 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.

<TABLE>
<CAPTION>
              Class                                 Outstanding at May 9, 1997
<S>                                                             <C>       
Class A common stock, no par value                              36,560,759
Class B common stock, no par value                                 283,000
</TABLE>


<PAGE>   2

LIDAK Pharmaceuticals

                                    FORM 10-Q

                      For the quarter ended March 31, 1997

                                      Index

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

Item 1.           Financial Statements

<S>               <C>                                                                    <C>
                  Balance Sheets at March 31, 1997 and September 30, 1996...............  3

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

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

                  Statements of Cash Flows for the six month periods
                  ended March 31, 1997 and 1996 and for the period
                  from August 31, 1988 (inception) to March 31, 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>



                                       2
<PAGE>   3

LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 MARCH 31,         SEPTEMBER 30,
ASSETS                                                                             1997                1996
<S>                                                                           <C>               <C>             
CURRENT ASSETS:
  Cash and cash equivalents                                                   $   15,781,404    $     13,347,508
  Short-term investments                                                           2,470,708           7,026,502
  Interest receivable                                                                186,202             338,403
  Prepaid and other                                                                  183,801             825,924
                                                                              --------------    ----------------

           Total current assets                                                   18,622,115          21,538,337

PROPERTY - at cost (less accumulated depreciation of $321,665 and $266,668)          249,266             275,972

PATENT COSTS (less accumulated amortization of $53,186 and $39,654)                  589,646             581,770

DEBT ISSUE COSTS                                                                     282,755             185,015

OTHER ASSETS                                                                         265,785             265,785
                                                                              --------------    ----------------
TOTAL                                                                         $   20,009,567    $     22,846,879
                                                                              ==============    ================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Convertible notes payable                                                   $    5,341,176    $      5,721,087
  Accounts payable                                                                 1,705,412           1,329,418
  Accrued compensation and payroll taxes                                             216,940             206,445
  Due to MBI                                                                           9,485              21,810
  Deferred revenue                                                                                       500,000
                                                                              --------------    ----------------
           Total current liabilities                                               7,273,013           7,778,760
                                                                              --------------    ----------------

COMMITMENTS - (Note 4)

STOCKHOLDERS' EQUITY:
  Common stock - no par value:
    Class A - 99,490,000 shares authorized;
      36,560,759 and 34,054,022 shares issued and outstanding                     53,970,158          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                               (41,381,352)        (34,296,198)
                                                                              --------------    ----------------
           Total stockholders' equity                                             12,736,554          15,068,119
                                                                              --------------    ----------------
TOTAL                                                                         $   20,009,567    $     22,846,879
                                                                              ==============    ================
</TABLE>


                       See notes to financial statements


                                       3

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


STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                      AUGUST 31, 1988
                                         THREE MONTHS ENDED               SIX MONTHS ENDED            (INCEPTION) TO
                                              MARCH 31,                       MARCH 31,                  MARCH 31,
                                   -------------    -------------   -------------    -------------    ---------------
                                       1997             1996            1997             1996               1997
<S>                                <C>              <C>             <C>              <C>              <C>
REVENUES:
  License fees/Contract research                    $   3,000,000   $     500,000    $   3,000,000    $     4,482,625
  Federal research grants          $      55,000           11,332         112,500           17,832            911,277
  Interest and other                     207,984          279,336         425,056          469,371          3,644,670
                                   -------------    -------------   -------------    -------------    ---------------

           Total revenues                262,984        3,290,668       1,037,556        3,487,203          9,038,572
                                   -------------    -------------   -------------    -------------    ---------------

EXPENSES:
  Research and development             2,847,147        1,115,346       5,026,542        2,556,769         29,415,351
  General and administrative             734,285          901,709       1,871,244        1,551,852         16,147,586
  Cost of contract research                                                                                   533,270
  Interest                               545,948        1,214,630       1,224,924        1,390,004          4,323,717
                                   -------------    -------------   -------------    -------------    ---------------

           Total expenses              4,127,380        3,231,685       8,122,710        5,498,625         50,419,924
                                   -------------    -------------   -------------    -------------    ---------------

NET INCOME (LOSS)                  $  (3,864,396)   $      58,983   $  (7,085,154)   $  (2,011,422)   $   (41,381,352)
                                   =============    =============   =============    =============    ===============

NET INCOME (LOSS) PER SHARE        $       (0.11)   $        0.00   $       (0.20)   $       (0.07)
                                   =============    =============   =============    =============

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING           36,719,420       32,655,301      36,002,531       30,797,315
                                   =============    =============   =============    =============
</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 MARCH 31, 1997


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                CONVERTIBLE PREFERRED STOCK                  COMMON STOCK(1)
                                                        ---------------------------------------------   ------------------------   
                                                               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, 1988                              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(1)         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                                       60,000        4,000                                         4,000
Issuance of common stock for cash in January 1989
 at $.05 per share                                            60,000        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, 1988                                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                                5,056,500      306,110      (2,728,949)          --        2,196,482

                                                                                                                  (Continued) - 1.
</TABLE>


                                       5
<PAGE>   6

LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                CONVERTIBLE PREFERRED STOCK                  COMMON STOCK(1)
                                                        ---------------------------------------------   ------------------------   
                                                               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(1)         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)                                                                                                   760,670
Conversion of common stock                                   (115,000)     (5,750)
Net loss                                                                               (1,949,588)                  (1,949,586)
                                                            ---------     -------    ------------       ------      ----------
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                                                                               (2,361,655)                  (2,361,655)
                                                            ---------     -------    ------------       ------      ----------
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
                                                                                                                   (Continued) - 2.
</TABLE>
                                       6
<PAGE>   7
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                CONVERTIBLE PREFERRED STOCK                  COMMON STOCK(1)
                                                        ---------------------------------------------   ------------------------   
                                                               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)                                                      4,312,860     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
                                                        ----------   ------  ----------   -----------   ----------   -----------   

                                                                                                                  (Continued) - 3.
</TABLE>
<TABLE>
<CAPTION>
                                                                                                 
                                     [continuation of]         COMMON STOCK(1)         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 MARCH 31, 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                               NOTES
                       CONVERTIBLE PREFERRED STOCK                     COMMON STOCK(1)              DEFICIT    RECEIV-            
                       ----------------------------       --------------------------------------  ACCUMULATED  ABLE              
                         SERIES A       SERIES B                 CLASS A             CLASS B      DURING THE   FROM
                       -------------  -------------       ---------------------  ---------------  DEVELOPMENT  STOCK-           
                       SHARES AMOUNT  SHARES AMOUNT         SHARES     AMOUNT    SHARES   AMOUNT     STAGE     HOLDERS     TOTAL
                       ------ ------  ------ ------       ----------  ---------  ------   ------  -----------  -------  -----------
<S>                    <C>    <C>     <C>    <C>          <C>          <C>       <C>      <C>     <C>          <C>      <C>
OCTOBER 1, 1994 TO
 SEPTEMBER 30, 1995
Exercise of non-
 redeemable Class B
 Warrants in January
 and Febraury, 1995
 at $1.4175 per share
 for cash                                                   97,202     137,783                                             137,783
Exercise of Class C
 Warrants between
 October, 1994 and
 June, 1995 at $1.00
 per share for cash
 (net of commissions
 totaling $28,743)                                         415,600     388,857                                             388,857
Exercise of Class D
 Warrants between
 April, 1995 and
 September, 1995 at
 $1.50 per share for
 cash                                                      153,335     230,003                                             230,003
Exercise of Class E
 Warrants in April
 and August, 1995 at
 $0.20 per share for
 cash                                                       85,000      17,000                                              17,000
Exercise of stock
 options between
 October, 1994 and
 September, 1995 at
 exercise prices
 ranging from $0.50
 per share to $3.58
 per share                                                 842,956   1,121,771                                           1,121,771 
Compensation expense
 related to stock
 options granted at
 an exercise price
 below fair market
 value                                                                 129,792                                             129,792
Conversion of common
 stock                                                     103,000      53,774 (103,000)  (53,774)
Net loss                                                                                           (10,173,001)        (10,173,001)
                            ------ ----- ------ ------  ----------  ----------  -------  -------- ------------  ------ -----------
BALANCE, SEPTEMBER 30,
 1995                           --    --     --     --  29,847,064  37,235,484  343,000   179,073  (28,165,057)     --   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                                                       78,334     117,500                                             117,500
Exercise of Class E
 Warrants in March,
 1996 at $0.20 per
 share for cash                                             25,000       5,000                                               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                                           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
 issue costs of $402,268)                                3,419,166  10,147,676                                          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                                             263,079
Conversion of common stock                                  60,000      31,325  (60,000)  (31,325)
Net loss                                                                                            (6,130,241)         (6,130,241)
                            ------ ----- ------ ------  ----------  ----------  -------  -------- ------------  ------ -----------
BALANCE, SEPTEMBER 30,
 1996                           --    --     --     --  34,054,022 $49,216,569  283,000  $147,748 $(34,296,198)     -- $15,086,119
                            ====== ===== ====== ======  ==========  ==========  =======  ======== ============  ====== ===========
</TABLE>
                                                                (Continued) - 4.



                                       8
<PAGE>   9


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997

<TABLE>
<CAPTION>
                                                                                                               NOTES
                       CONVERTIBLE PREFERRED STOCK                     COMMON STOCK(1)              DEFICIT    RECEIV-            
                       ----------------------------       --------------------------------------  ACCUMULATED  ABLE              
                         SERIES A       SERIES B                 CLASS A             CLASS B      DURING THE   FROM
                       -------------  -------------       ---------------------  ---------------  DEVELOPMENT  STOCK-           
                       SHARES AMOUNT  SHARES AMOUNT         SHARES     AMOUNT    SHARES   AMOUNT     STAGE     HOLDERS     TOTAL
                       ------ ------  ------ ------       ----------  ---------  ------   ------  -----------  -------  -----------
<S>                    <C>    <C>     <C>    <C>          <C>          <C>       <C>      <C>     <C>          <C>      <C>
OCTOBER 1, 1996 TO
 MARCH 31, 1997
 (Unaudited)
Exercise of Class D
 Warrants between
 January and March,
 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
 March, 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
Net loss                                                                                              (7,085,154)        (7,085,154)
                       ------ ----- ------ ------         ---------- -----------  -------  -------- ------------ ------ -----------
BALANCE, MARCH 31,
 1997                      --    --     --     --         36,560,759 $53,970,158  283,000  $147,748 $(41,381,352)    -- $12,736,554
                       ====== ===== ====== ======         ========== ===========  =======  ======== ============ ====== ===========
</TABLE>

See notes to financial statements.

                                                                (Concluded)  - 5



                                       9
<PAGE>   10

LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                SIX MONTHS ENDED                AUGUST 31, 1988
                                                                                    MARCH 31,                    (INCEPTION) TO
                                                                        --------------------------------           MARCH 31,
                                                                                1997              1996                1997
<S>                                                                     <C>               <C>                 <C>             
OPERATING ACTIVITIES:
  Net loss                                                              $    (7,085,154)  $    (2,011,422)    $   (41,381,352)
  Adjustments to reconcile net loss to
   net cash used for operating activiites:
    Technology license fee                                                                                          3,545,713
    Depreciation and amortization                                               181,548           151,770             778,431
    Non-cash interest expense                                                 1,066,679         1,390,004           3,837,709
    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                                                       152,201          (109,520)           (186,202)
      Prepaid and other                                                         642,123            66,894            (449,586)
      Patent costs                                                              (21,408)          (36,611)           (642,832)
      Organizational costs                                                                                            (20,242)
      Accounts payable                                                          502,729          (732,639)          1,832,147
      Accrued compensation and payroll taxes                                     10,495             1,439             216,940
      Due to MBI                                                                (12,325)            6,441               9,485
      Deferred revenue                                                         (500,000)          500,000
                                                                        ----------------  ----------------    ----------------
           Net cash used for operating activities                            (4,976,945)         (773,644)        (31,648,461)
                                                                        ----------------  ----------------    ----------------

INVESTING ACTIVITIES:
  Short-term investments                                                      4,555,794         3,865,597          (2,470,708)
  Capital expenditures                                                          (28,291)          (41,406)           (570,931)
                                                                        ----------------  ----------------    ----------------
           Net cash provided by (used for) investing activities               4,527,503         3,824,191          (3,041,639)
                                                                        ----------------  ----------------    ----------------

FINANCING ACTIVITIES:
  Proceeds from issuance of common and preferred stock                          513,378         1,842,203          39,191,649
  Proceeds from the issuance of convertible notes payable                     6,000,000        13,500,000          19,500,000
  Debt issue costs                                                             (288,519)         (771,351)         (1,059,870)
  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                          2,883,338        14,487,357          50,471,504
                                                                        ----------------  ----------------    ----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                     2,433,896        17,537,904          15,781,404

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             13,347,508         4,244,575
                                                                        ----------------  ----------------    ----------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $    15,781,404   $    21,782,479     $    15,781,404
                                                                        ================  ================    ================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  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 Report
     on Form 10-Q for the quarter ended December 31, 1996. In the opinion of
     management, the financial statements include all adjustments, consisting
     only of normal recurring accruals, necessary to summarize fairly the
     Company's financial position as of March 31, 1997 and results of operations
     for the three and six months ended March 31, 1997 and from August 31, 1988
     (Inception) to March 31, 1997. The results of operations for the three and
     six months ended March 31, 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 six
     months ended March 31, 1996 have been restated from amounts previously
     disclosed by the Company in its Quarterly Report on Form 10-Q for the
     quarter ended March 31, 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 six months ended by $1,214,630 ($0.04 per share) and $1,390,004
     ($0.04 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 (i) the Market Price per share,
     (as defined in the 1997 Note) of the Class A Common Stock on the date of
     conversion if conversion takes place prior to the 90th day following the
     date of issue or (ii) 85% of the Market Price per share on the date of
     conversion, if the conversion takes place after May 26, 1997. 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 is 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 March 31, 1997, $400,000 of the discount 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. 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.

     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 $288,519 in connection with the
     1997 Note, of which $5,763 was amortized through March 31, 1997. 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

     Between October 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 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).



                                       13
<PAGE>   14

LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.   STOCKHOLDERS' EQUITY (CONTINUED)

     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 six months ended March 31, 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 INCOME (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 year ending September 30, 1997. In this quarterly report on Form 10-Q,
     the Company has presented its net income (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 EPS.



                                       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 March 31, 1997, the Company incurred a cumulative net loss of $41.4
million. The Company's research and development, clinical trial and general and
administrative expenses will continue to be substantial and the Company expects
to continue to incur operating losses during the next several years.

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

         In July and September 1996, the Company initiated two additional Phase
3 clinical trials of LIDAKOL in the United States. The Company estimates that
during fiscal 1997, it will incur direct costs for these two studies of
approximately $3.0 to $3.5 million. The Company anticipates completion of these
studies including data availability, in 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 six months ended March 31, 1997, (the "1997 three
and six months"), the Company incurred net losses of $3.9 million and $7.1
million, respectively, compared to net income of $59,000, and net loss of $2.0
million, respectively, during the three and six months ended March 31, 1996 (the
"1996 three and six months").

REVENUES

         Total revenues for the 1997 three and six months were $263,000 and $1.0
million, respectively. For the three months ended March 31, 1997, (the "1997
three months"), total revenues consisted of interest and other income of
$208,000 and federal research grant income of $55,000. For the six months ended
March 31, 1997, (the "1997 six months"), total revenues consisted of license
fee/contract research revenue of $500,000, interest and other income of $425,000
and federal research grant income of $112,500. For the three months ended March
31, 1996, (the "1996 three months"), total revenue consisted of license
fee/contract research income of $3,000,000, interest and other income of
$279,000 and federal research grant income of $11,000. For the six months ended
March 31, 1996, (the "1996 six months"), total revenue consisted of license
fee/contract research revenue of $3,000,000, interest and other income of
$469,000 and federal research grant income of $18,000.

         The decrease in revenues in the 1997 three and six months was due
primarily to license fees earned in the 1996 period in connection with certain
licensing agreements. Partially offsetting the decreased revenues in the 1997
periods, are increased revenues during the 1997 periods from federal research
grants issued by the National Institutes of Health.

EXPENSES

         Research and development expenses for the 1997 three and six months
increased to $2.8 million and $5.0 million, respectively, from $1.1 million and
$2.6 million in the 1996 three and six months. The increase in expenses during
the 1997 three and six months was attributable primarily to increased activities
related to the on-going U.S. Phase 3 clinical trials of LIDAKOL. During the 1997
six months, the Company's clinical trial expense increased to $3.0 million, from
$1.0 million in the 1996 period.

         General and administrative expenses for the 1997 three months decreased
to $734,000 from $902,000 in the 1996 three month period. The decrease in
expenses in the 1997 three month period, compared to the 1996 three month
period, is due primarily to lower legal fees, decreased costs of the mailing of
proxy material to the Company's shareholders, decreased investor relations
expenses, and decreases from non-recurring taxes paid in the 1996 period
associated with license fees earned in the 1996 period. Also contributing to the



                                       16

<PAGE>   17

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

decreased expenses in the 1997 period are decreased non-cash expenses in the
amount of $55,000 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
expenses in connection with the recording of non-cash compensation expense
related to the issuance of stock options to non-employees. See Note 6 to the
Financial Statements.

         During the 1997 six months, general and administrative expenses
increased to $1.9 million from $1.6 million in the 1996 six month period. The
increase in expenses during the 1997 six months, compared to the 1996 six
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 six months are increased
non-cash expenses in the amount of $11,000 from the amortization of deferred
debt issue costs and increased compensation expense as referenced above.
Partially offsetting the increased expenses in the 1997 six months are decreased
expenses as noted above.

         Interest expense for the 1997 three and six months decreased to
$546,000 and $1.2 million, respectively, from $1.2 million and $1.4 million,
respectively, in the 1996 three and six 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 six months is due
primarily to lower non-cash expenses associated with 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 March 31, 1997 was $50.5 million.

         At March 31, 1997, the Company had cash, cash equivalents and
short-term investments totaling $18.3 million and working capital of $11.3
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 six 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.

         Net cash used by the Company to fund operating activities during the
1997 six months increased to $5.0 million from $774,000 during the 1996 six
months. This increase is attributable primarily to increased expenses and
decreased revenues during the 1997 period as discussed in "Results of
Operations". During the 1997 period, net cash used to fund operating activities
included $500,000 attributable to the recognition of revenue which was received
and recorded as deferred revenue in the 1996 period. See "Results of Operations,
Revenues". In addition, $28,000 of cash was used for capital expenditures during
the period.



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<PAGE>   18

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

         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 is conducting 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 March 31, 1997, the Company
has recorded expenses of approximately $3.0 million in connection with these
trials. The Company estimates it will incur additional direct costs for these
two additional clinical studies of approximately $250,000 to $500,000 during
fiscal 1997.

         Future clinical trial expenses notwithstanding, the Company anticipates
that, on average, cash requirements to fund the operating activities for the
remainder of the fiscal year ending September 30, 1997 will be consistent with,
and similar to, the expenditures of the six months ended March 31, 1997, due to
the fact that certain of the clinical trial expenses incurred in the 1997 six
months will be paid in the subsequent period. 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 (i) the Market
Price per share, (as defined in the 1997 Note), of the Class A Common Stock on
the date of conversion, if conversion takes place prior to the 90th day
following the date of issue or (ii) 85% of the Market Price per share on the
date of conversion, if the conversion takes place after May 26, 1997, 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.



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<PAGE>   19

                           PART II. OTHER INFORMATION

   
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         At the Annual Meeting of Shareholders held March 15, 1997, the
Company's shareholders re-elected four directors of the Company to hold office
until the 1999 Annual Meeting of Shareholders, and approved the following
proposals:

1)  To amend the Company's 1994 Stock Option Plan to provide for an increase
    in the number of shares of Common Stock authorized for issuance under such
    plan from 1,350,000 to 2,000,000. 

    There were cast 29,494,985 votes in favor of this proposal, 2,812,722 votes
    against this proposal, 322,311 votes abstained and 5,071,790 unvoted votes.

2)  To ratify the selection of Deloitte & Touche LLP as the Company's
    independent auditors for the fiscal year ending September 30, 1997.

    There were cast 35,632,215 votes in favor of this proposal, 163,234 votes
    against this proposal, 187,998 votes abstained, and 1,718,361 unvoted
    votes.
    

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS

         27.1         Financial Statement Data Schedule

(b)      Reports on Form 8-K

         The following reports on Form 8-K were filed during the quarter ended
         March 31, 1997:

         Report on Form 8-K filed on January 15, 1997 - reporting the issuance
         of 1,338 shares of the Company's Class A Common Stock in connection
         with the conversion of $2,322 in principal amount of Convertible Note,
         and the repayment of $1,635,810 representing $1,297,678 of original
         principal, and $338,132 of premium and accrued interest to the
         noteholders pursuant to the terms of the convertible note.

         Report on Form 8-K filed on February 11, 1997 - reporting the extension
         of the expiration date of the Company's Class D Warrants from February
         26, 1997 to December 31, 1997.

         Report on Form 8-K filed on March 10, 1997 - reporting the completion
         of a $6.0 million private financing of a three-year Convertible Note to
         an institutional investor.

         Report on Form 8-K filed on March 24, 1997 - reporting preliminary
         results of a clinical trial using LIDAKOL(R)as a topical treatment for
         Kaposi's Sarcoma.

         Report on Form 8-K filed on March 24, 1997 - reporting the appointment
         of James E. Berg to the position of Vice President of Clinical Affairs
         and Product Development, and the Company's drug development highlights
         as presented at the Company's Annual Meeting of Shareholders.



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<PAGE>   20

                                   SIGNATURES



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


                                         LIDAK Pharmaceuticals

   
Date:  June 5, 1997                   By: /s/ David H. Katz
                                         ---------------------------------------
                                         David H. Katz, M.D., President and
                                         Chief Executive Officer
                                         (Duly Authorized Officer)
                                         (Principal Executive Officer 
                                         and Principal Financial and 
                                         Accounting Officer)
    




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