<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 MARCH 31, 1998                     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 April 24, 1998
<S>                                              <C>
Class A common stock, no par value                               39,812,017
Class B common stock, no par value                                   49,000
</TABLE>



<PAGE>   2


LIDAK Pharmaceuticals


                                    FORM 10-Q

                      For the quarter ended March 31, 1998

                                      Index



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

        Balance Sheets at September 30, 1997 and
        March 31, 1998 ..................................................      3

        Statements of Operations for the three and six month periods
        ended March 31, 1997 and 1998, and the period
        from August 31, 1988 (inception) to March 31, 1998 ..............      4

        Statements of Stockholders' Equity (Deficit) for the period
        August 31, 1988 (inception) to March 31, 1998 ...................      5

        Statements of Cash Flows for the six month periods
        ended March 31, 1997 and 1998, and the period
        from August 31, 1988 (inception) to March 31, 1998 ..............     10

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

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations .............................     16

PART II. OTHER INFORMATION

Item 1. Legal Proceedings ...............................................     19

Item 5. Other Information ...............................................     19

Item 6. Exhibits and Reports on Form 8-K ................................     23

SIGNATURES ..............................................................     24
</TABLE>



                                       2
<PAGE>   3


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

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

<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 30         MARCH 31
ASSETS                                                                               1997               1998
<S>                                                                              <C>                <C>         
CURRENT ASSETS:
  Cash and cash equivalents                                                      $ 14,428,834       $ 10,650,684
  Interest receivable                                                                 109,528             97,282
  Prepaid and other                                                                   231,834            371,295
                                                                                 ------------       ------------

           Total current assets                                                    14,770,196         11,119,261

PROPERTY - at cost (less accumulated depreciation of $372,951 and $434,645)           219,748            260,231

PATENT COSTS (less accumulated amortization of $68,028 and $83,243)                   607,841            599,202

DEBT ISSUE COSTS                                                                       93,758             29,124

OTHER ASSETS                                                                           35,952                265
                                                                                 ------------       ------------

TOTAL                                                                            $ 15,727,495       $ 12,008,083
                                                                                 ============       ============


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Convertible notes payable                                                      $  2,415,461       $  1,000,001
  Accounts payable                                                                    765,917            486,154
  Accrued compensation and payroll taxes                                              225,493            196,571
  Due to MBI                                                                           26,698             11,628
                                                                                 ------------       ------------

  Total current liabilities                                                         3,433,569          1,694,354
                                                                                 ------------       ------------


STOCKHOLDERS' EQUITY:

  Common stock - no par value:
    Class A - 99,490,000 shares authorized;
     38,589,399 and 39,805,850 shares issued and outstanding                       57,551,618         59,110,620
    Class B - 510,000 shares authorized; 283,000 and
     49,000 shares issued and outstanding (convertible to
     Class A Common Stock)                                                            147,748             25,582
  Deficit accumulated during the development stage                                (45,405,440)       (48,822,473)
                                                                                 ------------       ------------

           Total stockholders' equity                                              12,293,926         10,313,729
                                                                                 ------------       ------------

TOTAL                                                                            $ 15,727,495       $ 12,008,083
                                                                                 ============       ============
</TABLE>



See notes to financial statements.



                                       3
<PAGE>   4


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

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

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED                    SIX MONTHS ENDED              AUGUST 31,1988
                                                  MARCH 31,                            MARCH 31,                 (INCEPTION) TO
                                      -------------------------------       -------------------------------          MARCH 31,
                                          1997               1998                1997              1998                1998
<S>                                   <C>                <C>                <C>                <C>                <C>          
REVENUES:
  License fees/Contract research                                            $    500,000                          $  4,507,625
  Federal research grants             $     55,000                               112,500                               940,646
  Interest and other                       207,984       $    132,372            425,056       $    352,132          4,452,431
                                      ------------       ------------       ------------       ------------       ------------

          Total revenues                   262,984            132,372          1,037,556            352,132          9,900,702
                                      ------------       ------------       ------------       ------------       ------------


EXPENSES
  Research and development               2,847,147            751,764          5,026,542          1,635,325         33,651,263
  General and administrative               734,285          1,426,907          1,871,244          2,068,913         19,303,790
  Interest                                 545,948             29,688          1,224,924             64,927          5,234,852
  Cost of contract research                                                                                            533,270
                                      ------------       ------------       ------------       ------------       ------------

           Total expenses                4,127,380          2,208,359          8,122,710          3,769,165         58,723,175
                                      ------------       ------------       ------------       ------------       ------------

NET LOSS                              $ (3,864,396)      $ (2,075,987)      $ (7,085,154)      $ (3,417,033)      $(48,822,473)
                                      ============       ============       ============       ============       ============

NET LOSS PER SHARE                    $      (0.11)      $      (0.05)      $      (0.20)      $      (0.09)
                                      ============       ============       ============       ============

WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING              36,719,420         39,458,510         36,002,531         39,175,597
                                      ============       ============       ============       ============
</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, 1998
--------------------------------------------------------------------------------


<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>
                                                                           DEFICIT
                                                                         ACCUMULATED     NOTES
                                                    COMMON STOCK         DURING THE   RECEIVABLE
                                                       CLASS B           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 MARCH 31, 1998
--------------------------------------------------------------------------------

<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 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>
                                                                                   DEFICIT
                                                                                  ACCUMULATED      NOTES
                                                           COMMON STOCK           DURING THE     RECEIVABLE
                                                              CLASS B             DEVELOPMENT       FROM
                                                       SHARES          AMOUNT        STAGE       STOCKHOLDERS      TOTAL
                                                    ------------   ------------   ------------   ------------  ------------
<S>                                                 <C>            <C>           <C>             <C>           <C>
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 MARCH 31, 1998
-------------------------------------------------------------------------------
<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>
                                                                         DEFICIT
                                                                       ACCUMULATED      NOTES
                                                COMMON STOCK            DURING THE    RECEIVABLE
                                                   CLASS B              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
</TABLE>



                                                                 (Continued) - 3



                                       7

<PAGE>   8

LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1998
-------------------------------------------------------------------------------

<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 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

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

Exercise of Class D Warrants
  between October, 1995 and
  September, 1996 at $1.50 per
  share for cash                                                                                          117,500

Exercise of Class E Warrants
  in March, 1996 at $0.20 per
  share for cash                                                                                            5,000

Issuance of Class A Common
  Stock in connection with Stock
  Purchase Agreement in
  November 1995 (net of issue
  costs of $83,495)                                                                                     1,416,505

Conversion of Convertible
  Notes to Class A Common Stock
  between February and September,
  1996 (including interest and
  discount applied of $2,263,276
  and net of issue costs of $402,268)                                                                  10,147,676

Exercise of stock options
  between October, 1995 and
  September, 1996 at exercise
  prices ranging from $0.50
  per share to $3.56 per share                                                                            263,079

Conversion of common stock                    (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 MARCH 31, 1998
--------------------------------------------------------------------------------

<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 Class D Warrants
  between January and September,
  1997 at $1.50 per share for cash                                                                     321,085     $  481,628

Exercise of Class E Warrants in
  October, 1996 at $0.20 per share
  for cash                                                                                              75,000         15,000

Conversion of Convertible Notes
  to Class A Common Stock between
  October, 1996 and January, 1997
  (including interest and discount
  applied of $684,383 and net of
  issue costs of $79,922)                                                                            2,093,852      3,144,577

Exercise of stock options between
  October, 1996 and September,
  1997 at exercise prices ranging
  from $0.9375 per share to
  $1.0625 per share                                                                                     33,800         34,564

Compensation expense related to
  valuation of 86,167 stock options
  granted to non-employees between
  October 1996 and March 1997                                                                                          86,167

Discount on Convertible Notes
  issued in February, 1997                                                                                          1,058,823

Conversion of Convertible Note to
  Class A Common Stock between
  June, 1997 and September, 1997
  (including interest of $86,345
  and net of issue costs of $156,593)                                                                2,011,640      3,514,290

Net loss
                                                                                                                             
                                      ------------   ------------   ------------   ------------   ------------   ------------
BALANCE, SEPTEMBER 30, 1997                      -              -              -              -     38,589,399     57,551,618

OCTOBER 1, 1997 TO MARCH 31, 1998
  (Unaudited) Exercise of stock
  options in October, 1997 at an
  exercise price of $.9625 per share                                                                     5,000          4,813

Exercise of Class D warrants in
  November, 1997 at $1.50 per share
  for cash                                                                                              19,400         29,100

Conversion of Convertible Note to
  Class A Common Stock between
  December,1997 and February 1998
  (including interest of $35,223
  and net of issue costs of $47,758)                                                                   958,051      1,402,923

Conversion of Common Stock                                                                             234,000        122,166

Net loss                                                                                                                     
                                      ------------   ------------   ------------   ------------   ------------   ------------

BALANCE,  MARCH 31, 1998                         -              -              -              -     39,805,850    $59,110,620
                                      ============   ============   ============   ============   ============   ============
</TABLE>


<TABLE>
<CAPTION>
                                                                       DEFICIT
                                                                      ACCUMULATED      NOTES
                                              COMMON STOCK            DURING THE     RECEIVABLE
                                                CLASS B               DEVELOPMENT       FROM
                                          SHARES          AMOUNT         STAGE       STOCKHOLDERS      TOTAL
                                        ------------   ------------   ------------   ------------   ------------
<S>                                     <C>            <C>            <C>            <C>            <C>
Exercise of Class D Warrants
  between January and September,
  1997 at $1.50 per share for cash                                                                    $  481,628

Exercise of Class E Warrants in
  October, 1996 at $0.20 per share
  for cash                                                                                                15,000

Conversion of Convertible Notes
  to Class A Common Stock between
  October, 1996 and January, 1997
  (including interest and discount
  applied of $684,383 and net of
  issue costs of $79,922)                                                                              3,144,577

Exercise of stock options between
  October, 1996 and September,
  1997 at exercise prices ranging
  from $0.9375 per share to
  $1.0625 per share                                                                                       34,564

Compensation expense related to
  valuation of 86,167 stock options
  granted to non-employees between
  October 1996 and March 1997                                                                             86,167

Discount on Convertible Notes
  issued in February, 1997                                                                             1,058,823

Conversion of Convertible Note to
  Class A Common Stock between
  June, 1997 and September, 1997
  (including interest of $86,345
  and net of issue costs of $156,593)                                                                  3,514,290

Net loss
                                                                                     $(11,109,242)   (11,109,242)
                                        ------------   ------------   ------------   ------------   ------------
BALANCE, SEPTEMBER 30, 1997                  283,000        147,748    (45,405,440)             -     12,293,926

OCTOBER 1, 1997 TO MARCH 31, 1998
  (Unaudited) Exercise of stock
  options in October, 1997 at an
  exercise price of $.9625 per share                                                                       4,813

Exercise of Class D warrants in
  November, 1997 at $1.50 per share
  for cash                                                                                                29,100

Conversion of Convertible Note to
  Class A Common Stock between
  December,1997 and February 1998
  (including interest of $35,223
  and net of issue costs of $47,758)                                                                   1,402,923

Conversion of Common Stock                  (234,000)      (122,166)

Net loss                                                                (3,417,033)                   (3,417,033)
                                        ------------   ------------   ------------   ------------   ------------

BALANCE,  MARCH 31, 1998                      49,000        $25,582   $(48,822,473)             -    $10,313,729
                                        ============   ============   ============   ============   ============
</TABLE>

                                                                   (Concluded)-5



See notes to financial statements.


                                       9
<PAGE>   10



LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)

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

<TABLE>
<CAPTION>
                                                                                                                    AUGUST 31, 1988
                                                                                       SIX MONTHS ENDED              (INCEPTION) TO
                                                                                          MARCH 31,                    MARCH 31,
                                                                               -------------------------------      ---------------
                                                                                  1997                1998                1998
<S>                                                                            <C>                <C>                <C>          
OPERATING ACTIVITIES:
  Net loss                                                                     $ (7,085,154)      $ (3,417,033)      $(48,822,473)
  Adjustments to reconcile net loss to net cash used
    for operating activiites:
    Depreciation and amortization                                                   181,548            121,454            855,157
    Non-cash interest expense                                                     1,066,679                             4,241,464
    Technology license fee                                                                                              3,545,713
    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             12,246            (97,282)
      Prepaid and other                                                             642,123           (103,774)          (371,560)
      Patent costs                                                                  (21,408)               975           (674,894)
      Organizational costs                                                                                                (20,242)
      Accounts payable                                                              502,729           (279,763)           486,154
      Accrued compensation and payroll taxes                                         10,495            (28,922)           196,571
      Due to MBI                                                                    (12,325)           (15,070)            11,628
      Deferred revenue                                                             (500,000)
                                                                               ------------       ------------       ------------

           Net cash used for operating activities                                (4,976,945)        (3,709,887)       (39,838,436)
                                                                               ------------       ------------       ------------

INVESTING ACTIVITIES:
  Short-term investments                                                          4,555,794
  Capital expenditures                                                              (28,291)          (102,176)          (694,875)
                                                                               ------------       ------------       ------------

           Net cash provided by (used for) investing activities                   4,527,503           (102,176)          (694,875)
                                                                               ------------       ------------       ------------

FINANCING ACTIVITIES:
  Proceeds from issuance of common and preferred stock                              513,378             33,913         39,243,376
  Proceeds from issuance of convertible notes payable                             6,000,000                            19,500,000
  Debt issue costs                                                                 (288,519)                           (1,067,410)
  Repayment of convertible notes payable                                         (3,341,521)                           (2,673,217)
  Stock issue costs                                                                                                    (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             33,913         51,183,995
                                                                               ------------       ------------       ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              2,433,896         (3,778,150)        10,650,684

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                 13,347,508         14,428,834
                                                                               ------------       ------------       ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     $ 15,781,404       $ 10,650,684       $ 10,650,684
                                                                               ============       ============       ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Interest paid                                                                $    784,224       $     79,016       $  1,072,779
                                                                               ============       ============       ============
</TABLE>



See notes to financial statements.



                                       10
<PAGE>   11


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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/A for the year ended
September 30, 1997 and the Company's unaudited Quarterly Report on Form 10-Q for
the quarter ended December 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
March 31, 1998 and results of operations for the three and six months ended
March 31, 1998 and from August 31, 1988 (Inception) to March 31, 1998. The
results of operations for the three and six months ended March 31, 1998 may not
be indicative of the results that may be expected for the year ending September
30, 1998.

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.   CONVERTIBLE NOTES PAYABLE

Note Issued in February, 1997 - On February 26, 1997, the Company issued a $6
million Convertible Note Payable (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 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 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 issuance of the 1997 Note at
an 18% discount. This



                                       11

<PAGE>   12

LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

3.   CONVERTIBLE NOTES PAYABLE (continued)

discount, totaling $1,058,823, was recorded by the Company as equity in
connection with the issuance of the 1997 Note. The discount was amortized as
non-cash interest expense over the 90 days from the date of issuance with a
corresponding increase to the principal amount of the 1997 Note.

The $6 million principal amount of the 1997 Note is convertible into an
aggregate maximum of 7,257,465 shares of Class A Common Stock. Through March 31,
1998, 2,969,691 shares of Class A Common Stock and 1,484,846 Class G Stock
Purchase Warrants were issued in connection with the conversion of $5,000,000 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. See Note 5.

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. 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 the issuance of the maximum 5,513,018 shares of stock 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.



                                       12
<PAGE>   13


LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

3.   CONVERTIBLE NOTES PAYABLE (continued)

4.   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 have been
amortized over the life of the Convertible Notes, to the extent that the notes
are not converted or repaid (see Note 3). To date, the Company has recorded debt
issue costs in the amount of $296,059 in connection with the 1997 Note. Through
March 31, 1998, $62,584 of debt issue costs were amortized and $204,351 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 3 and 5.

5.   STOCKHOLDERS' EQUITY

On January 12, 1998, David H. Katz, former President and Chief Executive Officer
("CEO"), a director of the Company sold 308,100 shares of Class A Common Stock
and 70,200 shares of Class B Common Stock to HealthMed, Inc., a Nevada
corporation ("HealthMed"), for a total purchase price of $1,528,235. The
purchase price was paid in the form of a promissory note maturing on January 12,
2000. In addition, Dr. Katz transferred 718,903 shares of Class A Common Stock
and 163,800 shares of Class B Common Stock into a voting trust controlled by
HealthMed. Upon these transfers, the 70,200 shares of Class B Common Stock sold
and the 163,800 shares of Class B Common Stock transferred automatically
converted to 234,000 shares of Class A Common Stock. The term of the voting
trust is ten (10) years.

In December 1997 the Company issued 128,712 shares of Class A Common Stock and
64,356 Class G Stock Purchase Warrants from the conversion of $200,000 in
principal amount of the 1997 Note. The amount recorded in Stockholder's Equity
in connection with this conversion included $1,898 of interest expense and was
reduced by a $7,228 reclassification of debt issue costs. See Notes 3 and 4.

In February 1998 the Company Issued 829,339 shares of Class A Common Stock and
414,670 Class G Stock Purchase Warrants from the conversion of $1,215,460 in
principal amount of the 1997 Note. The amount recorded in Stockholder's Equity
in connection with this conversion included $33,325 of interest expense and was
reduced by a $40,530 reclassification of debt issue costs. See Notes 3 and 4.

Between October 1,1997 and March 31, 1998, the Company issued 5,000 and 19,400
shares of Class A Common Stock from the exercise of stock options and Class D
Warrants, respectively.



                                       13
<PAGE>   14



LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)


NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

6.   NET LOSS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("EPS").
This Statement requires the presentation of EPS to reflect both the "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, as if such
equivalents are converted into common stock, and is calculated substantially in
the same manner as fully diluted EPS in accordance with Accounting Principles
Board Opinion ("APB") No. 15, "Earnings Per Share".

The Company has adopted the new method of reporting EPS for the three and six
months ended March 31, 1998. In the accompanying statements of operations for
the three and six months ended March 31, 1997 and 1998, the Company has
presented its net loss per share under SFAS No. 128. Net loss per share is
computed using 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, implementing SFAS No. 128 has not had a
material impact on the Company's net loss per share.

7.   LICENSE AGREEMENT

In February 1996, the Company entered into a license agreement with
Bristol-Myers Squibb Company ("BMS") for the manufacture, marketing and
distribution of LIDAKOL as a topical treatment for oral herpes exclusively in
the U.S., Canada and all remaining major territories throughout the world which
are not currently licensed to other parties, including Mexico, China, South and
Central America, Australia and India, and portions of the Far East. In
connection with this agreement, the Company received an initial license fee with
a portion recorded as revenue in the year ended September 30, 1996 and the
remainder recorded as deferred revenue at September 30, 1996 . In the fiscal
year ended September 30, 1997, the Company recognized the deferred revenue due
to achievement of certain milestones. In November 1996 the Company reacquired
from BMS the rights to market LIDAKOL in all territories covered in the license
agreement, except the United States, Canada and Mexico, and on December 29,
1997, the BMS agreement was cancelled by BMS.

In addition, in February 1998, Grelan Pharmaceuticals, LIDAK's Japanese
licensee, notified the Company that Takeda Chemical Industries Ltd. had acquired
a controlling interest in their company. As a result, Grelan indicated that it
could no longer commit the resources needed to develop the LIDAKOL product.
Grelan has agreed to work with the Company to find a new Japanese licensing
partner



                                       14
<PAGE>   15



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

This Form 10-Q contains certain statements of a forward-looking nature relating
to future events or the future performance of the Company. Prospective investors
are cautioned that such statements are only predictions and that actual events
or results may differ materially. In evaluating such statements, prospective
investors should specifically consider various factors identified in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997, 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. Since inception in August 1988, the
Company has operated in one business segment -- the conduct of biomedical
research directed towards the development and commercialization of innovative
pharmaceutical products. The Company has moved closest to the commercialization
endpoint with n-docosanol 10% cream (LIDAKOL(R)) as a topical treatment for oral
herpes (cold sores or fever blisters). LIDAKOL is a therapeutic compound,
developed by Company scientists, which has demonstrated a broad spectrum of
anti-viral activities and other therapeutic properties in promoting wound
healing and in reducing acute inflammatory reactions. The Company filed a New
Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") on
December 22, 1997, for marketing approval of LIDAKOL in the U.S. as a treatment
of recurrent oral herpes. The Company is also developing several other potential
therapeutic products derived from an exclusive license agreement with the
Medical Biology Institute, a non-profit research organization. These include a
technology known as Large Multivalent Immunogen ("LMI") which has also reached
the clinical testing phase as an immunotherapeutic vaccine for malignant
melanoma, and potential new drugs for treatment of allergies and asthma,
inflammatory diseases and other human cancers. 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, 1998, the Company incurred a
cumulative net loss of $48.8 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.

The Company's business is subject to significant risks including, but not
limited to, the success of its research and development efforts, uncertainties
associated with obtaining and enforcing patents important to the Company's
business and lengthy and expensive regulatory approval processes and competition
from pharmaceutical and biotechnology companies, increasing pressure on
pharmaceutical pricing from payors, patients, and government agencies and
limitations on the availability of capital. Even if the Company's products
appear promising at an early stage of development, they may not reach the market
for a number of reasons. Such reasons include, but are not limited to, the
possibilities that the potential products will be found ineffective or toxic
during clinical trials, fail to receive the necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical to market, or be
precluded from commercialization by proprietary rights of third parties, or that
the Company may not have sufficient financial resources. Additional expenses,
delays and losses of opportunities that



                                       15

<PAGE>   16

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

OVERVIEW (continued)

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, 1998 (the "1998 three and six
months"), the Company incurred net losses of $2.1 million and $3.4 Million,
respectively, compared to net losses of $3.9 million and $7.1 million,
respectively, during the three and six months ended March 31, 1997 (the "1997
three and six months").

REVENUES

Total revenues for the 1998 three and six months, consisting of interest and
other income, were $132,000 and $352,000, respectively. 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 $113,000.

The decrease in revenues in the 1998 six months compared to the 1997
six months was attributable primarily to license fees earned during
the 1997 period due to the achievement of certain milestones in connection with
a license agreement. Also contributing to the decreased revenues during the 1998
three and six months are decreased revenues from federal research grants issued
by the National Institutes of Health which were not in place during the 1998
three and six months.

EXPENSES

Research and development expenses for the 1998 three and six months,
respectively, decreased to $752,000 and $1.6 million, respectively, from $2.8
million and $5.0 million in the 1997 three and six months. The decrease in
expenses during the 1998 three and six months was attributable primarily to
decreased activities relating to the U.S. Phase 3 clinical trials of LIDAKOL
that were on-going in the 1997 three and six months.

General and administrative expenses for the 1998 three and six months increased
to $1.4 million and $2.1 million, respectively, from $734,000 and $1.9 million,
respectively, in the 1997 three and six months. The increase in expenses during
the 1998 three and six months was attributable primarily to legal and other
expenses incurred in connection with the January 1998, financing proposal
presented by HealthMed.



                                       16

<PAGE>   17


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

Interest expense for the 1998 three and six months decreased to $30,000 and
$65,000, respectively, from $546,000 and $1.2 million, respectively, in the 1997
three and six months. The decrease in expense was attributable primarily to the
Company having reduced interest obligations due to reduction of outstanding
debt, during the 1998 three and six months, due to the retirement of the
unconverted 95/96 Notes in January of 1997 and the subsequent early conversion
of a majority of the 1997 Notes. See Note 3 to the Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through the
sale of equity and debt securities and stockholder loans. Net cash provided from
financing activities through March 31, 1998 was $51.2 million.

At March 31, 1998, the Company had cash and cash equivalents totaling $10.7
million and working capital of $9.4 million, as compared to $14.4 million and
$11.3 million, respectively, at September 30, 1997. The decrease in cash and
cash equivalents during the 1998 six months is attributable primarily to net
cash used to fund operating activities, as discussed below.

Net cash used by the Company to fund operating activities during the 1998 six
months decreased to $3.7 million from $5.0 million during the 1997 six months.
This decrease is attributable primarily to the decreased expenses and revenues
during the 1998 six months as discussed in "Results of Operations". In addition,
$102,000 of cash was used for capital expenditures during the 1998 six months.

The Company anticipates its cash requirements for the year ending September 30,
1998 to be less than cash used to fund operating activities during the year
ended September 30, 1997, as the clinical trials of LIDAKOL have been completed.

On February 26, 1997, the Company issued the 1997 Note in the amount of $6.0
million as part of a private placement to an institutional investor. 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
7,257,467. 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: 1) a premium equal to
17.64% of such principal plus any accrued and unpaid interest, and 2) 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. As of March 31,
1998, the outstanding principal balance of the 1997 Note was $1.0. See Notes 3
and 5 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 3
to the Financial Statements.



                                       17

<PAGE>   18

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

LIQUIDITY AND CAPITAL RESOURCES (continued)

At March 31, 1998 the Company had exercisable warrants and options outstanding
which, if fully exercised, would result in the aggregate issuance of
approximately 8.7 million shares of the Company's Class A Common Stock and would
result in approximate gross proceeds to the Company of $21.2 million. Included
in such warrants and options are Class D Warrants, exercisable on or before June
30, 1999 into approximately 1.4 million shares of the Company's Class A Common
Stock at an exercise price of $1.50 per share. Such warrants are redeemable by
the Company, at a price of $.05 per warrant, upon 30 days notice if the average
closing bid price of the Company's Class A Common Stock for the 30 days prior to
the notice exceeds $3.45 per share. In the event the Company does call the Class
D Warrants for redemption, there can be no assurance regarding the number of
warrants which would be exercised or the amount of proceeds which the Company
would receive. Also included in such warrants and options are Class G Stock
Purchase Warrants exercisable into approximately 1.5 million shares of the
Company's Class A Common Stock at an exercise price of $2.97 per share. Such
warrants expire on various dates through 2002 and are not redeemable by the
Company. The remaining exercisable options and warrants are not redeemable by
the Company and can be exercised by the holders at various times through 2007.
The average exercise price of the remaining exercisable options and warrants is
approximately $2.52 per share which is higher than the market price of the
Company's Class A Common Stock on March 31, 1998. There can be no assurance that
voluntary option and warrant exercises will continue to occur in the future.

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



                                       18
<PAGE>   19


                           PART II. OTHER INFORMATION


ITEM 1:  LEGAL PROCEEDINGS

On April 1, 1998, the Company filed a Complaint for Declaratory Relief against
Medical Biology Institute ("MBI") in the San Diego County, California Superior
Court (Case No. 719403). The Complainant alleged that in February of 1998, MBI
wrote LIDAK a letter asserting an equitable lien and constructive trust on any
proceeds from the Company's development of LIDAKOL. In its Complaint, the
Company asserted that Dr. David H. Katz was the owner of the initial patent for
the topical use of docosanl in the treatment of viral and inflammatory disease,
and Dr. Katz had directly assigned that patent to Lidak on Mach 29, 1990. As a
consequence, the Company contends that LIDAK is the sole owner of all right,
title and interest in LIDAKOL, and the Complaint asks that the Court affirm
LIDAK's ownership. In response, MBI has denied that LIDAK is the owner of
LIDAKOL, and in its own Cross-complaint, MBI has alleged that LIDAKOL was
developed through the efforts of its own employees working in conjunction with
LIDAK scientists. The Cross-complaint asserts that Dr. Katz breached the terms
of his Employment Agreement with MBI when he assigned the LIDAKOL patent to
LIDAK, and as a consequence, MBI asserts its own ownership interest in LIDAKOL.
Further, the Cross-complaint alleges that LIDAK has not proceeded diligently to
develop other technologies that have been licensed by MBI to LIDAK. As a result,
MBI contends that LIDAK is in violation of its obligations under the License
Agreement; the Cross-complaint asks that the licensed technologies be returned
to MBI and that its rights to share in the proceeds of LIDAKOL be determined.
LIDAK believes these allegations of a breach under the License Agreement are
governed by an arbitration clause in that agreement; the Company has demanded
that those issues be remanded to arbitration and dismissed from the
Cross-complaint.

ITEM 5:  OTHER INFORMATION

On January 13, 1998, the Company received a preliminary proposal from HealthMed,
Inc. ("HealthMed"), a Nevada corporation based in Beverly Hills, California,
relating to the possibility of a substantial loan to the Company by HealthMed
and other lenders affiliated with HealthMed. The Company engaged in discussions
with HealthMed regarding its proposal until March 2, 1998, when discussion
ended.

On March 16, 1998, a group consisting of HealthMed, Mitchell J. Stein, George P.
Rutland, Wallace O. Raubenheimer and David H. Katz, M.D., filed with the
Securities and Exchange Commission (the "Commission") an Amendment No. 1 to the
Schedule 13D of HealthMed, which stated that they had formed a group which might
seek to obtain voting control over a majority of the Company's outstanding
securities through open market purchases, privately negotiated transactions,
placement of shares into voting trusts over which HealthMed would have voting
control, the solicitation of proxies or otherwise.

On March 17, 1998, a group known as the LIDAK Pharmaceuticals Shareholders
Committee (the "Shareholders Committee"), consisting of HealthMed and Wallace O.
Raubenheimer, filed a preliminary proxy statement with the Commission. In its
preliminary proxy statement, the Shareholders Committee indicated that it
intended to solicit proxies from the Company's



                                       19
<PAGE>   20



PART II.  ITEM 5:  OTHER INFORMATION (continued)

shareholders to be voted in favor of an alternate slate of nominees at the 1998
Annual Meeting, consisting of Edward L. Hennessy Jr., George P. Rutland and
Wallace O. Raubenheimer, for election as directors to hold office until the
Company's 2000 Annual Meeting. If elected, the three nominees of the
Shareholders Committee, together with Dr. Katz, the former President and CEO and
a Director of the Company until the 1999 Annual Meeting, would have constituted
a majority of the Company's seven-member Board of Directors.

Between March 18, 1998 and March 24, 1998, the Company engaged in discussions
with representatives of the Shareholders Committee and its nominees. On March
24, 1998, in order to avoid the probable disruption to the Company's business
and the substantial expenses associated with a proxy contest, the Company's
Board of Directors approved the terms of a proposed settlement with the
Shareholders Committee and its nominees. On March 25, 1998, the Company and the
Shareholders Committee jointly announced that they had entered into an Agreement
of Settlement and Compromise dated as of March 24, 1998 (the "Settlement
Agreement"), pursuant to which the Shareholders Committee and its nominees
agreed to withdraw the preliminary proxy statement and also agreed to certain
other covenants and limitations.

The Settlement Agreement provides for an expanded LIDAK Board of Directors to be
comprised of nine members, including four existing LIDAK directors, three
additional independent nominees (at least one of whom would have significant
pharmaceutical industry experience) (the "Independent Nominees") to be mutually
agreed upon by a joint search committee of the parties, and two nominees of the
Shareholders Committee, Messrs. Rutland and Hennessy. In connection with the
increase in the size of the Board of Directors, the Board adopted, subject to
shareholder approval, a Bylaw amendment expanding the number of authorized
directors to a range with a minimum of five and a maximum of nine directors
(with the exact number of directors to be fixed from time to time within these
limits by the Board of Directors). The Board also adopted, subject to
shareholder approval, an additional Bylaw amendment increasing the number of
classes of directors from two classes to three classes, with Class I serving an
initial term until the 1999 Annual Meeting, Class II serving an initial term
until the 2000 Annual Meeting, and a new Class III serving an initial term until
the 2001 Annual Meeting. The initial terms for all Classes would be followed by
full three-year staggered terms for each such Class. Under the Settlement
Agreement, the Company agreed that the three Classes of the reconstituted Board
of Directors would include the following persons: Class I--Dr. Katz, one
Independent Nominee and one incumbent director; Class II--Mr. Hennessy, one
Independent Nominee and one incumbent director; and Class III--Mr. Rutland, one
Independent Nominee and one incumbent director. The directors in Class I are not
up for election at the 1998 Annual Meeting, except for the vacant director's
seat which is to be filled by one of the Independent Nominees. The proposals to
approve the Bylaw amendments and to elect the nominees to fill the one vacant
directors' seat in Class I, the three directors' seats up for election in Class
II and the three directors' seats up for election in the newly created Class
III, are presented for shareholder approval in the Proxy Statement for
the 1998 Annual Meeting. The Company and the Shareholders Committee and its
nominees have agreed to vote all shares owned by them or as to which they have
the right to direct the vote in favor of these proposals and nominees at the
1998 Annual Meeting.



                                       20
<PAGE>   21



PART II.  ITEM 5:  OTHER INFORMATION (continued)

The Settlement Agreement further provides that until the completion of the 1998
Annual Meeting, the Company will not, subject to the Board's fiduciary duties,
engage in any extraordinary business combinations, nor enter into any employee
retention agreements except in the ordinary course of business or with certain
specified senior managers of the Company. The Company has agreed to permit Mr.
Rutland to attend meetings of the Company's Board of Directors as an observer
until the completion of the 1998 Annual Meeting, subject to his executing a
customary confidentiality agreement.

Under the Settlement Agreement, the parties have agreed to certain other
covenants and limitations. Until the Company's 2001 Annual Meeting HealthMed and
Mr. Stein will not acquire, or offer or agree to acquire, directly or
indirectly, by purchase or otherwise, beneficial ownership of any LIDAK
securities (or rights, options or warrants to acquire LIDAK securities), other
than those LIDAK securities beneficially owned by them as of the date of the
Settlement Agreement, or encourage any person to acquire, or advise any person
with respect to the acquisition or proposed acquisition of LIDAK securities
other than attempts to dispose of their LIDAK securities, subject to certain
exceptions, including HealthMed's permitted acquisition of LIDAK securities in
amounts necessary to maintain its existing percentage ownership in LIDAK Class A
Common Stock and its permitted acquisition of certain LIDAK securities upon the
exercise of stock options by Dr. Katz, pursuant to a Purchase Rights Agreement
dated January 12, 1998 between HealthMed and Dr. Katz. In addition, until the
Company's 2001 Annual Meeting, the members of the Shareholders Committee and
their nominees will not: (i) solicit, or encourage or assist any other person to
solicit, or become a participant or otherwise engage in any solicitation of, any
proxy, consent or other shareholder solicitations with respect to LIDAK
securities, advise or seek to advise any person with respect to voting LIDAK
securities, submit or encourage or advise or assist any other person with
respect to the submission of any nominations or proposals for consideration by
the Company's shareholders, or take any action to request a special meeting of
any holders of LIDAK securities; (ii) sell or otherwise convey (singly or
collectively) more than five percent of LIDAK's then-current outstanding
securities to any person or group, unless such person or group, and every
member there of, agrees in writing to be bound by the terms of the Settlement
Agreement; (iii) deposit any LIDAK securities into a voting trust or subject
such securities to a voting trust or similar arrangement, or otherwise form or
join a partnership, limited partnership, syndicate or group for the purpose of
acquiring, holding, voting or disposing of any LIDAK securities, except for
the LIDAK securities held in voting trust by the parties as of the date of the
Settlement Agreement; (iv) engage in or offer, agree or propose to engage in
any business combinations involving the Company, (other than to participate as
a shareholder on terms generally available to all shareholders), or arrange or
in any way participate in the financing of any business combination or
purchase, by any person, of LIDAK securities or assets, except for a financing
or investment proposal presented privately to the Company's Board of Directors
or a tender of shares in response to a third party tender offer for all
outstanding shares of a class of LIDAK securities; (v) otherwise act alone or
in concert with others to seek representation on the Company's Board of
Directors or to acquire control of the Company or any of its securities or
assets; (vi) publicly request any amendment of the "standstill" provisions of
the Settlement Agreement; or (vii) assist or advise, or enter into any
agreement or arrangement to assist or advise, any person in taking any of the
foregoing actions. If the Company's Board of Directors invites offers from
third parties for a business combination that would result in a change
of control of the Company, the



                                       21

<PAGE>   22

PART II.  ITEM 5:  OTHER INFORMATION (CONTINUED)

Settlement Agreement would not prohibit the members of the Shareholders
Committee and their nominees from competing on equal terms with any such third
party.

The Settlement Agreement does not contemplate any changes to the Company's
current executive management. Under the settlement agreement, the members of the
Shareholders Committee and their nominees have agreed, subject to the fiduciary
duties of any such party who may be a member of the Company's Board of
Directors, (i) not to propose, encourage others to propose, or assist or support
in any way, directly or indirectly, the employment or appointment of Dr. Katz in
any capacity as an employee or consultant of the Company, and (ii) except for
the completion of his current term as a director, not to nominate, encourage
others to nominate, vote for the nomination of or assist or support in any way
the nomination or elevation, directly or indirectly, Dr. Katz as a director of
the Company, through the completion of the Company's 2001 Annual Meeting, or
election.

The Settlement Agreement provides that the Company will reimburse HealthMed for
75% of the third party expenses related to its proxy contest, with such payment
not to exceed $150,000. These moneys have been placed in escrow pending the
completion of the 1998 Annual Meeting, and will be disbursed to HealthMed if the
proposals to amend the Bylaws and elect the specified nominees are approved by
the Company's Shareholders at the 1998 Annual Meeting. In the event the
proposals are not approved, the moneys will be returned to the Company, and the
parties will be relieved of all their obligations under the Settlement
Agreement, except for the mutual releases by the parties contained herein. The
Settlement Agreement does not restrict HealthMed from making financing or
investment proposals presented privately to the Board of Directors of the
Company.

The Settlement Agreement also provides that none of the parties will make
publicly any negative statements regarding the other parties, the Company's
Board of Directors, the process by which the Company's Board may seek to enhance
shareholder value, or any proposed, pending or consummated business combination
involving the Company. Each of the parties also has agreed that, subject to his
or its right to pursue legitimate business objectives independently and in good
faith, he or it will not, directly or indirectly, take any action or encourage
any person to take any action, the intent or direct foreseeable result of which
is to interfere with or adversely affect the business activities, contractual
relationships or business opportunities of the other parties to the Settlement
Agreement or their affiliates and associates.

Dr. Katz did not vote in favor of the proposed settlement and was not a party to
the Settlement Agreement. On March 30, 1998, Dr. Katz filed with the Commission
Amendment No. 1 to his schedule 13D, in which he objected to the Settlement
Agreement and disclaimed any further membership in the HealthMed group of
shareholders. On April 11, 1998, Dr. Katz filed a suit against Mitchell J.
Stein, HealthMed and others, seeking recission of his transfer of shares to
HealthMed (including his transfer into the voting trust he entered into with
HealthMed (the "Katz Voting Trust")), monetary damages and other relief. See
Note 5 to Financial Statements.



                                       22

<PAGE>   23


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 31,1998

         Report on Form 8-K filed on January 2, 1998 - press release reporting
         the cancellation of the Bristol-Myers Squibb Company licensing
         agreement.

         Report on Form 8-K filed on January 21, 1998 - press release reporting
         the resignation of Daniel J. Paracka as chairman of the board and a
         director of the Company.

         Report on Form 8-K filed on January 21, 1998 - press release announcing
         receipt of a preliminary proposal from HealthMed, Inc. expressing an
         interest in providing capital to the Company in the form of a
         non-dilutive debt instrument.

         Report on Form 8-K filed on March 3, 1998 - press release reporting the
         results of operations for the quarter ended December 31, 1998 (the
         first quarter of FYE 1998).

         Report on Form 8-K filed on March 12, 1998 - reporting the receipt of
         correspondence from HealthMed unilaterally terminating all discussions
         in regard to loan transaction.

         Report on Form 8-K filed on March 12, 1998 - reporting Gerald J.
         Yakatan was appointed President and CEO of LIDAK.

         Report on Form 8-K filed on March 18, 1998 - reporting a LIDAK board
         action adopting a Fourth Amendment and restated Bylaws of LIDAK
         Pharmaceuticals.

         Report on 8-K filed on March 27, 1998 - reporting that LIDAK had
         entered into an Agreement of Compromise with HealthMed Inc., Mitchell
         J. Stein, George P. Rutland, Edward l. Hennessy, Jr. and Wallace O.
         Raubenheimer.



                                       23

<PAGE>   24


                                   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:  April 24, 1998
                                      By:/s/Gerald O. Yakatan
                                         ---------------------------------------
                                            Gerald O. Yakatan, President and
                                            Chief Executive Officer
                                            (Duly Authorized Officer )
                                            (Principal Executive Officer)



Date:   April, 1998                   By: /s/Jeffery B. Weinress
                                         ---------------------------------------
                                             Jeffery B. Weinress, Vice President
                                             Chief Financial Officer and
                                             Secretary



                                       24