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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549
           _________________________________________________________
                                       
   
                                  FORM 10-K/A
    
                                       
               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                                       
For the fiscal year ended March 31, 1997 Commission File No. 1-9613
           _________________________________________________________
                                       
   
                         PACIFIC PHARMACEUTICALS, INC.
                           (formerly Xytronyx, Inc.)
    
            (Exact Name of Registrant as specified in its charter)
                                       
           Delaware                     36-3258753
(State or other jurisdiction of      (I.R.S. Employer
gincorporation or organization)    Identification Number)

                         6730 Mesa Ridge Rd., Suite A
                             San Diego, CA  92121
                                (619) 550-3900
              (Address, including zip code, and telephone number,
       including area code, of Registrant's principal executive offices)
                                       
           _________________________________________________________
                                       
          Securities registered pursuant to Section 12(b) of the Act:
                                  Name of each exchange
       Title of each class          on which registered
 Common Stock, $.02 Par Value    American Stock Exchange

          Securities registered pursuant to Section 12(g) of the Act:
                                      None
                               (Title of Class)
           _________________________________________________________
                                       
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X  No ___

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [  ]

   
     The aggregate market value of the voting stock held by persons considered
by the registrant for this purpose to be nonaffiliates of the registrant was
approximately $27,424,000 on August 25, 1997, when the closing price of such
stock, as reported in the American Stock Exchange, was $1.6875.*
    

     *(Market value includes value of Series A Convertible Preferred Stock
based upon conversion rate into Common Stock).

   
     The number of shares outstanding of the registrant's common stock, $.02
par value, as of August 25, 1997 was 8,467,279 shares.
    
         _____________________________________________________________
                                       
                      DOCUMENTS INCORPORATED BY REFERENCE
                                       

   
1. Certain portions of the Registrant's Proxy Statement for its Annual Meeting
   of Stockholders held on August  7, 1997, which was mailed on July 9, 1997 
   are incorporated into Part III hereof.
    

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                                    PART 1
                                       
ITEM 1.   BUSINESS

SUMMARY

   
     Pacific Pharmaceuticals, Inc. and Subsidiaries (collectively, the 
"Company"), a development stage enterprise, is engaged primarily in the 
development and commercialization of medical products based on 
biotechnological research regarding the treatment and detection of cancer and 
other diseases. On August 7, 1997, the Company's stockholders approved an 
amendment to the Certificate of Incorporation to change the name of the 
Company to Pacific Pharmaceuticals, Inc. The Company was formerly known as 
Xytronyx, Inc.
    

     During the fiscal year ended March 31,1997 the Company completed two 
transactions under which it acquired or otherwise gained rights to 
proprietary technologies in the areas of cancer therapy.  First was the 
acquisition of an exclusive license to the Photodynamic Immunotherapy 
("PDIT") technology for treatment of cancer.  Second was an agreement which 
granted Xytronyx an option to acquire Binary Therapeutics, Inc., the holder 
of certain proprietary technologies, also for the treatment of cancer, in the 
Photodynamic Therapy ("PDT") area.  The Company believes that these two 
separate technologies and product development opportunities complement each 
other and offer the Company efficiencies and other strategic benefits due to 
their similar development requirements and expected uses.  These transactions 
represented a significant expansion of the scope of the Company's product 
development activities, and are described in more detail below.

     Prior to the expansion into the cancer therapy area, much of the 
Company's efforts were directed toward the commercialization of (i) the 
Periodontal Tissue Monitor (the "PTM"), a disposable test used to assist with 
the diagnosis and monitoring of the treatment of periodontitis, a serious 
form of periodontal disease and the most common cause of tooth loss in 
adults, and (ii) the Company's photochromic technology.

     Reference is made to Items 7 and 8 of this Report for further 
information about the business of the Company during the past fiscal year.

PHOTODYNAMIC IMMUNOTHERAPY-TM- (PDIT-TM-) TREATMENT 
(BREAST, LUNG AND PROSTATE CANCER)

     OVERVIEW OF CANCER MARKET.  Cancer comprises a large and diverse group 
of diseases resulting from the uncontrolled proliferation of abnormal 
(malignant) cells.  Most cancer will spread beyond its original site and 
invade surrounding tissue, and may also metastasize to more distant sites and 
ultimately cause death in the patient unless effectively treated.  To be 
effective, cancer treatment must target not only the primary site or tumor 
but also its metastases.

     Traditional methods of treating cancer generally include surgery 
(including laser surgery), radiation therapy, and chemotherapy.  Although 
these techniques have achieved a high rate of success for many cancers, 
particularly when detected in the early stages, each has drawbacks which may 
significantly limit their success in treating certain types and stages of 
cancer.  For example, surgery may be successful in removing visible tumors 
but may leave smaller nests of cancer cells in the patient which continue to 
proliferate. Radiation or chemotherapy are relatively imprecise (can kill 
both cancer cells and normal cells) and thus have toxic side effects which 
may themselves be lethal to the patient; these toxic side effects may limit 
the application of these treatment modes to less than optimal levels required 
to ensure eradication of the cancer.  Despite the successes of traditional 
therapies, the high numbers of cancer-related deaths indicate the need for 
more efficacious therapies for many patients.

                                    1
<PAGE>

     PHOTODYNAMIC IMMUNOTHERAPY ("PDIT") The Company's proprietary 
Photodynamic Immunotherapy treatment for cancer is in preparation for human 
clinical trials and may initially target breast cancer.  PDIT treatment 
consists of the co-injection of an infrared absorbing dye (photosensitizing 
drug) and an immunoadjuvant directly into a tumor followed by illumination 
with an infrared laser.  The Company believes that the potential of PDIT 
therapy to destroy metastatic tumors offers an improved methodology for 
treatment of cancers such as breast, lung and prostate, particularly when in 
the more advanced stages. PDIT therapy is intended to produce tumor tissue 
destruction in the primary area of treatment.  An important distinction of 
PDIT treatment, however, is that this therapy is also intended to trigger an 
immune reaction in the patient to complete the destruction of the primary 
tumor and to also concomitantly destroy any metastases.
     
     Many experts believe that long-term control or elimination of cancer 
requires the utilization of the patient's own immune surveillance and defense 
systems. An optimal cancer treatment would be one that fully restores and 
stimulates the body's normal immunobiological responses against the growth of 
malignant cells.  For reasons not completely understood, the body's immune 
response in cancer patients is not fully stimulated or developed to the 
extent necessary to halt the proliferation of malignant cells. Attempts have 
been made using stimulants (immunoadjuvants) to activate the immune system to 
activate the immune system.  However, the use of a nonspecific immunoadjuvant 
may only "activate" the body's immune system without specifically targeting 
the cancer cells. Immunotherapy using an immunoadjuvant alone appears to 
achieve only limited success in the treatment of cancer.

     PRECLINICAL STUDIES OF PDIT TREATMENT. Preclinical studies of PDIT 
treatment conducted with animals indicate that the therapy induces a specific 
immune response which appears to destroy primary and metastatic tumors, and 
may provide longer-term protection against recurrence of the cancer.  As 
indicated above, PDIT treatment is initiated with the injection of a 
combination of an infrared absorbing dye and an immuno-adjuvant directly into 
a tumor.  The light absorbed by the dye raises the temperature within the 
tumor and produces photothermal destruction of tumor tissue.  This 
photothermal destruction is only the precursor of what is believed to be the 
more significant component of PDIT therapy, the immune response.

     The hypothesis of the Company's scientific collaborators is that this 
response proceeds as follows:  The immuno-adjuvant stimulates an immune 
response directed against the specific antigen unmasked by the photothermal 
treatment of the tumor, resulting in an immunological attack against the 
tumor cell population. Even more significantly, a systemic immune response 
can also stimulated, which may destroy tumors distant from the site of 
treatment, namely metastases. The immune response appears to provide 
long-term immunity toward the cancer and the prospect for a "true cure."

     Preclinical testing of PDIT therapy has included treatment of rats 
inflicted with a sub-surface chemically-induced breast cancer tumor.  The 
breast cancer model tested, the DMBA-4 cell line, is an extremely challenging 
model which is characterized by rapid proliferation of the primary tumor and 
the formation of metastatic tumors throughout the body. Of the untreated 
rats, 99% die within 30 days of tumor implantation.  The model has proven to 
be unresponsive to traditional treatments including surgery, chemotherapy, 
radiation and laser therapy.

     With the application of what the principal researchers currently believe 
to be optimal dosing, PDIT treatment has generated success (measured by both 
tumor eradication and long-term survival) in a proportion of the animals 
treated.  Importantly, tumor eradication appeared to be achieved for both the 
primary tumor treated, and possibly the metastases which were not directly 
subject to the injection treatment. This supports the hypotheses that the 
regression of the metastases has been caused by stimulation of an immune 
response. Upon rechallenge (reintroduction of  tumor cells  to the animals 
subsequent to the original tumor eradication) the "second generation" tumors 
are also eradicated, indicating the existence of longer-term immunity against 
cancer.

                                    2
<PAGE>

     HUMAN CLINICAL STUDIES. The Company has targeted breast cancer for the 
initial human clinical studies, in part, because of the preclinical success 
achieved with breast cancer studies in animals.  The Company's current plan 
is to commence a Phase 1 clinical study of breast cancer patients who have 
been nonresponsive to other treatment methodologies.

     EXCLUSIVE LICENSE TO PDIT FROM WOUND HEALING OF OKLAHOMA ("WHO"). The 
Company obtained an exclusive worldwide license to the PDIT technology in May 
1996 under an agreement with WHO, a privately held company. The agreement 
calls for the Company to pay WHO royalties based on sales of products 
incorporating the PDIT technology, including a minimum royalty of $50,000 per 
year.  The Company has also entered into a research agreement (see - "Product 
Development Strategy") with WHO under which the principal developers of the 
PDIT technology are assisting with the preparation of the IND application to 
the FDA and performing additional studies to investigate the mechanism of 
PDIT.
     
     PATENTS. WHO was assigned the rights by the holders thereof to patent 
applications encompassing the PDIT technology in the United States and the 
countries covered by the Patent Cooperative Treaty ("PCT") by the holders.

PHOTODYNAMIC THERAPY (PDT) - BINARY THERAPEUTICS, INC.

     PHOTODYNAMIC THERAPY (PDT) OVERVIEW. Photodynamic Therapy is an emerging 
mode of treatment for cancer which uses the combination of light-activated 
drugs and nonthermal light to achieve selective, photochemical destruction of 
cancer cells with minimal effect on surrounding normal tissues.  PDT 
typically has two primary components:

  1. DRUG ADMINISTRATION:  A light-absorbing dye or other "photosensitizing
     drug" is injected into the patient. (PDT drugs are designed to be 
     "selective," i.e., taken up and retained in cancerous cells while, 
     conversely, quickly clearing from normal cells.

  2. ILLUMINATION WITH LIGHT:  After administration of the PDT drug, a laser or
     other source is used to illuminate the area of treatment with light at the
     specific wavelength required for absorption by the drug.  The light is non-
     thermal and, similar to the drug, has no therapeutic effect by itself.

     The absorption of light energy by the drug generates biochemical 
reactions which destroy the cancer cells; the reaction is highly controlled 
and will end upon cessation of the light energy.

The potential advantages of PDT in the treatment of cancer are expected to be 
as follows:

     - Selectivity:  Selective to cancer cells with minimal effect on normal
       healthy tissue, a significant benefit over chemotherapy and radiation
       treatment.

     - More Extensive Eradication:  Facilitates the treatment of not only the
       larger, easily identifiable tumors but also other cancerous cells which 
       are in the field of illumination.

     - Controllable:  The photosensitizing drugs are inactive until excited by
       light within their specific absorption band.  Photodynamic activity 
       begins only when the drug-saturated cells are exposed to light and ends 
       when the light is terminated.

     Among the clinical applications expected for PDT is as an adjunct to 
surgery;  PDT has the potential of increasing the effectiveness of surgery by 
destroying cancerous cells missed by surgery.  In other instances, PDT might 
serve as an alternative to surgery.  PDT may represent a less invasive 
technique for primary removal of a tumor where surgery is not indicated (for 
example, inoperable tumors located close to nerves, major blood vessels or 
other critical tissue).  PDT may be integrated with the patient's total 
treatment regimen, used in combination with or as an alternative to 
traditional treatment to palliate more advanced disease.  The Company expects 
that the applications will develop as PDT becomes more proven and the range 
of clinical utility is demonstrated.

                                    3
<PAGE>

     A limited number of drug compounds and systems have been approved by the 
applicable regulatory agencies both in the United States and internationally. 
PDT products or systems currently approved for use, however, are limited to 
treatment of superficial or surface tumors due to inherent limitations in the 
technologies.

     BORONATED PORPHYRIN COMPOUND ("BOPP") FOR TREATMENT OF BRAIN AND OTHER 
CANCERS. BOPP is currently undergoing preparation for human clinical trials 
as a photosensitizing drug for PDT treatment of brain cancer.  The Company 
believes, based upon the results of preclinical studies, that BOPP may be 
useful as a photosensitizing drug for PDT treatment of other tumors.  BOPP is 
also suitable for use in another form of cancer treatment, Boron Neutron 
Capture Therapy, in which a neutron radiation beam is used instead of light 
as the activating energy source.  However, in this case, the neutron beam 
causes the disintegration of the boron atoms within BOPP and the release of 
alpha particles which are lethal to the cancer cells.
     
     OPTION TO ACQUIRE BINARY THERAPEUTICS, INC. On June 4, 1996 the Company 
entered into an agreement with Binary Therapeutics, Inc. ("BTI") under which 
the Company was granted an option to acquire BTI, a development stage company 
and the holder of certain technologies in the area of Photodynamic Therapy 
("PDT") for cancer.  The agreement, as amended,  gives the Company the right 
to acquire BTI by a merger of BTI into a wholly-owned subsidiary of the 
Company. In February 1997, the Company and BTI agreed to extend the period 
during which the Company may exercise its option to acquire BTI from April 
30, 1997 until such time as BTI has completed human clinical trials of 
Boronated Porphyrin Compound ("BOPP") at an agreed upon dose level (the 
"Option Period"). The Option Period was extended at the Company's request to 
enable BTI to complete pre-clinical studies, to commence clinical trials in 
humans and to demonstrate that a given dose level of BOPP in humans would not 
cause certain adverse events. Accordingly, the Company has deferred its 
election to exercise the option.

     The agreement calls for the Company to issue common stock to the BTI 
stockholders with an aggregate acquisition value of $6,000,000. The number of 
shares of the Company's common stock to be issued will be determined based 
upon the market value of the Company's common stock prior to the date of 
exercise, although the value of the common stock cannot be less than $2.00 or 
more than $6.00 per share. The agreement has been approved by a majority of 
the stockholders of BTI. The Board of Directors voted to approve the merger, 
however the merger is also subject to shareholder approval for  the issuance 
of additional shares of common stock. One of the Company directors is also a 
director of BTI.

     Under the agreement, the Company will assist BTI during the option 
period in preparing the PDT products for advancement into human clinical 
trials.  In order to exercise its rights to consummate the merger, the 
Company will have to satisfy certain conditions, including funding up to 
$1,250,000 in expenses budgeted to be incurred by BTI during the option 
period.  These expenses represent the majority of BTI's budgeted expenditures 
for the period and are expected to be comprised primarily of product 
development costs. The Company is also required to advance to BTI funds to 
repay $615,000 in indebtedness, including accrued interest as part of the 
acquisition price of BTI. Certain holders of such indebtedness are 
shareholders of the Company.  In exchange for such funding BTI will issue 
convertible notes to the Company which may be converted into BTI equity at 
the Company's option.  The Company has elected to record all advances to BTI 
as product development expense in the period incurred due to uncertainties 
regarding the ultimate value to be realized from the convertible notes.  
During the year ended March 31, 1997 the Company advanced $1,282,000 to BTI 
and such advances are included in product development expense.
     
     PATENTS. Patents encompassing the BOPP technology have been issued to 
the Regents of the University of California in the United States and 
Australia, Ireland and South Africa.  Patent applications are pending in 
Canada, the European Patent Organization, Japan, Norway and Israel.  Rights 
related to the above patents were licensed to BTI under an Exclusive License 
Agreement dated July 1, 1992, as amended August 29, 1995, pursuant to which 
BTI is obligated to make certain payments.

                                    4
<PAGE>

     PRECLINICAL TESTING OF BOPP. Preclinical testing of BOPP in the United 
States and Australia, including testing of the compound with various animal 
models, has indicated that BOPP has the following advantages over certain 
existing PDT agents (including hematoporphyrin derivative, or "HpD") in the 
treatment of certain cancers:

     - Selective (as much as 400 in tumors to 1 in healthy tissue) retention of
       BOPP in brain tumor models, compared to a 30 to 1 or less for existing 
       known compounds.

     - Intracellular localization in mitochondria  (the energy center of the
       cell) for more efficient tumor cell killing.

     - Highly water soluble and stable under physiological conditions.

     BOPP is selectively taken up in rapidly growing tissues and may find 
applications in many hyperproliferative disorders, such as vascular and 
coronary restenosis following angioplasty or bypass surgery, psoriasis and 
rheumatoid arthritis.  PDT therapy is being studied in academic centers for 
conditions as diverse as acute macular degeneration of the retina, removing 
microbial contaminants from blood and cleansing bone marrow of leukemic cells.

     HUMAN CLINICAL STUDIES. BTI and the Company have agreed to target brain 
cancer for the initial human clinical studies, which will be conducted in 
Australia, in part because of the success with preclinical brain tumor models 
in animals. BTI's current plan is to commence a Phase 1 clinical study of PDT 
treatment with BOPP in brain cancer patients in Australia after seeking IND 
approval from the FDA.

AST TECHNOLOGY - PERIODONTAL TISSUE MONITOR (PTM)

     PERIODONTAL DISEASE. A World Health Organization report estimates that 
the incidence of periodontal disease worldwide averages 33% of the total 
adult population, or approximately 1.5 billion people.  In the United States 
alone, surveys by the American Dental Association indicate that approximately 
16 million "scaling and root planing" sessions (a common treatment for 
periodontitis) are held each year at an average cost of $200 to $800 per 
session.  Prevalence of the disease and expenditures for treatment are also 
significant in many international markets.

     Because of the difficulty in diagnosing active periodontitis, and the 
fact that all current diagnosis methods are retrospective, the dental 
practitioner is often forced to treat the disease relatively late in its 
progression and may treat the entire mouth of a patient even though the 
disease is active in only a few specific sites.  Treating the patient's full 
mouth in such instances results in unnecessary cost and patient discomfort, 
and late treatment may result in the need for more extensive, and costly, 
treatment techniques.

     PTM PRODUCT. The Company's proprietary PTM is an eye-readable, chairside 
disposable test designed for use within the dental office to assist 
practitioners (dentists and periodontists) in the diagnosis of periodontitis 
and in the monitoring of the effectiveness of their efforts to treat the 
disease.  The PTM works by identifying the enzyme aspartate aminotransferase 
("AST") which is found in crevicular fluid when cells die.

     The PTM is designed to be simple, easy to use, and is performed 
chairside in the dental office.  The dental professional initiates the test 
by touching a small strip of paper to the neck of the tooth to collect a 
fluid sample.  The paper strip is then placed in a solution which changes 
color if the active disease is present.  This process takes approximately 8 
to 12 minutes.  Since the PTM has such a short turn-around time, the test can 
be initiated at the start of an office visit with results available before 
the patient leaves the dental chair.  The PTM requires no special equipment, 
has a long shelf-life and is disposable.  The most important benefits the 
Company expects from use of the PTM are:

  -  Assistance with early detection of the disease, facilitating earlier
     treatment and less extensive treatment techniques.

                                    5
<PAGE>

  -  Testing for active periodontal disease on a site-by-site basis, allowing
     the clinician to treat only those sites with active disease and avoiding
     unnecessary extensive therapy.

  -  Evaluation of the effectiveness of treatment within weeks of such
     treatment, facilitating immediate follow-up treatment if necessary.

     Periodontitis is usually chronic, in some patients reappearing from time 
to time, and in others persisting for extended time periods.  It is expected 
that several PTM tests may be used on a patient throughout a year; one PTM 
prior to treatment, and one or more following treatment to determine if the 
treatment has been effective. It is anticipated that PTM will be used to 
monitor patients over an extended period of time.

     PTM PATENTS AND REGULATORY APPROVAL.  The Company licensed certain 
technology from the University of Illinois ("U of I") on the use of AST as an 
adjunct to the diagnosis and monitoring of treatment of periodontal disease. 
Two U.S. patents relating to the licensed technology have been issued; 
international patent protection was only available on one of the 
technologies, and patents have been received in major international markets. 
In addition to the U of I patents, patents encompassing the PTM have been 
issued in the United States, and in Australia, Canada, Hong Kong, Israel, 
Japan, New Zealand, Singapore, South Africa, and with the European Patent 
Organization.  A patent application has been filed pursuant to the PCT.

The Company completed 28-day clinical trials with an earlier-generation PTM 
at three centers in June 1989.  In August 1989 the Company filed a PMA 
application with the FDA, and received a unanimous recommendation for 
approval in May 1990 from an FDA dental advisory panel.  Subsequently, the 
Company received a series of letters from the FDA requesting additional 
information and clinical testing, and responded with a series of amendments 
to the PMA application attempting to demonstrate adequacy of the original 
clinical trial and results.  In mid-1993 the Company initiated the process of 
designing long-term clinical studies to meet new FDA requirements.  During 
this period the Company developed a 2nd-generation version of PTM which it 
believes greatly increased ease of use, readability, accuracy, shelf-life and 
other performance characteristics.  In November 1993 the FDA approved the 
Company's protocol for a 12-month clinical study to be conducted at three 
sites.  In April 1994 the Company and the clinical sites, University of 
Washington, Harvard University and University of North Carolina, completed 
planning for the clinicals and signed clinical research agreements.  In June 
1994 enrollment of patients in the clinical studies commenced, and full 
enrollment was reached in March 1995, and the study was completed in March 
1996 and the Company submitted a PMA application to the FDA in September 
1996. On June 5, 1997, the Company received an "approvable letter" from the 
FDA in respect of its PMA for the PTM contingent upon certain manufacturing 
requirements and labeling issues being met.  On June 23, 1997, the Company 
received final approval from the FDA for commercial distribution of the PTM.
     
     PTM MARKETING. In May 1997, the Company signed a letter of intent with 
Steri-Oss, a leading dental implant company, for the exclusive five-year 
distribution of PTM in North America and other countries. The PTM is approved 
for sale in Europe, Canada and China.  In May 1996 the Company entered into 
an agreement with Hawe-Neos Dental to distribute the PTM in Europe.  
Hawe-Neos launched the PTM at the International Dental Fair held in Cologne, 
Germany in April, 1997. Also, in January, 1995 the Company entered into an 
agreement with Shofu, Inc, of Japan under which Shofu is to fund and manage 
clinical trials of PTM in Japan and market the product in Japan after 
obtaining approval in that country.

PHOTOCHROMIC TECHNOLOGY ("KEPHRA")

     KEPHRA TECHNOLOGY AND MARKET APPLICATIONS.  The name "Kephra" 
encompasses the Company's family of dyes which react with sunlight or other 
sources of UV light ("photochromic dyes").  The Kephra dyes are colorless 
when viewed under room fluorescent or incandescent light, but become very 
colorful when exposed to UV light.  The Kephra process is reversible such 
that when the dyes are removed from sun light they return to their original 
colorless appearance. Kephra dyes have a relatively long lifetime, and the 
colorless to color process can be repeated numerous times depending upon the 
application.  Kephra 

                                    6
<PAGE>

dyes can be used in numerous printing processes, including lithography, 
flexography, and silk screen.  The dyes can also be incorporated into 
water-based inks.

     Potential applications for Kephra include consumer  health, apparel, 
promotional and advertising programs, and other products benefiting from the 
potential additional consumer appeal of the color-change feature. In January 
1996 the Company entered into an agreement under which it granted a major 
international soft drink company exclusive use of the Kephra technology in 
the U.S. and Canadian soft drink markets for a period of 18 months.  The 
Company received a payment of $150,000 under the agreement. No additional 
royalties above the minimum royalty have been received and the agreement is 
not expected to be renewed. In July 1995, the Company entered into a two year 
exclusive license agreement with an international watch company who 
commenced marketing watches produced with the Kephra technology. The Company 
receives a royalty on any sales of the watches, however, the royalties have 
been minimal.

The Company is not actively developing opportunities to sell products using 
Kephra technology. The Company is,  however,  trying to sell or license its 
photochromatic technology to others in order to focus completely on 
development of its other products. The Company is not expecting its Kephra 
technology to generate significant revenues.

     Patent applications for the Company's Kephra photochromic technology 
have been filed in Australia, Brazil, Canada, the European Patent 
Organization, Japan and Taiwan.
     

PRODUCT DEVELOPMENT STRATEGY

     The Company conducts its research and other product development efforts 
through a combination of internal and collaborative programs.  The Company 
currently does and will rely upon research arrangements with universities, 
contract research organizations, and similar institutions and persons for a 
significant portion of its product development efforts, particularly for 
preclinical work being conducted in the PDT and PDIT areas.  The Company 
expects to increase its internal product development resources as its efforts 
related to the PDIT and PDT areas increase.  Product development efforts 
related to the PTM and photochromic technologies (Kephra) technologies have 
been  conducted primarily by the Company's internal personnel. No further 
product development work is underway for PTM and Kephra products. The Company 
incurred product development costs of $2,566,000, $1,854,000 and $2,118,000 
in the years ended March 31, 1997, 1996 and 1995, respectively.  BTI relies 
almost exclusively on such collaborative research arrangements for its PDT 
product development efforts.  The Company has relied upon licensing and other 
transactions to gain access to proprietary technologies. See - "Photodynamic 
Immunotherapy ("PDIT") Treatment," "Photodynamic Therapy (PDT)-Binary 
Therapeutics, Inc.--.," and "AST Technology - Periodontal Tissue 
Monitor"("PTM").

PATENTS AND PROPRIETARY RIGHTS

     The Company believes that patents and other proprietary rights are 
important to its business.  The Company's policy is to file patent 
applications to protect technology, inventions and improvements to its 
inventions that are considered important to the development of its business.  
The Company also relies upon trade secrets, know-how, continuing 
technological innovations and licensing opportunities to develop and maintain 
its competitive position.

     To date, the Company has received a number of patents, and filed a 
number of other patent applications, relating to the Company's technologies 
in the United States and internationally.  The Company has also benefited 
from such issuances or filings of others as a licensee.  In addition, a 
potential acquisition candidate of the Company, Binary Therapeutics, Inc., 
has also benefited from such patent 

                                    7
<PAGE>

issuances or filings of others as a licensee (see discussions of specific 
patents throughout this "BUSINESS" section).

     The patent positions of biotechnology firms and other high-tech firms, 
including the Company, are uncertain and involve complex legal and factual 
questions for which important legal principles are largely unresolved.  In 
addition, the coverage claimed in a patent application can be significantly 
reduced before a patent is issued.  Consequently, the Company does not know 
whether any patent applications will result in the issuance of patents. 
Additionally, the Company does not know whether its existing patents (and any 
patents related to its patent applications which subsequently may be issued) 
will provide significant proprietary protection or will be circumvented or 
invalidated.  Since patent applications in the United States are maintained 
in secrecy until foreign counterparts, if any, publish or issue patents and 
since publication of discoveries in the scientific or patent literature often 
lag behind actual discoveries, the Company cannot be certain that it or any 
licenser was the first creator of inventions covered by existing patents or 
pending patent applications or that it or such licenser was the first to file 
patent applications for such inventions.  Moreover, the Company might have to 
participate in interference proceedings declared by the U.S. Patent and 
Trademark Office to determine priority of inventions, which could result in 
substantial cost to the Company, even if the eventual outcome were favorable 
to the Company.  There can be no assurance that the Company's current 
patents, or patents relating to its patent applications, if issued, would be 
held valid by a court or that a competitor's technology or product would be 
found to infringe such patents.

     A number of biotechnology and high-tech companies and research and 
academic institutions have developed technologies, filed patent applications 
or received patents on various technologies that may be related to the 
Company's business.  Some of these technologies, applications or patents may 
conflict with the Company's technologies, patents or patent applications.  
Such conflict could limit the scope of the patents (if any) that the Company 
has or may be able to obtain or result in the denial of the Company's patent 
applications. In addition, if patents that cover the Company's activities are 
issued to other companies, there can be no assurance that the Company would 
be able to obtain licenses to these patents at a reasonable cost or be able 
to develop or obtain alternative technology.

     The Company also relies upon trade secret protection for its 
confidential and proprietary information.  There can be no assurance that 
others will not independently develop substantially equivalent proprietary 
information and techniques or otherwise gain access to the Company's trade 
secrets or disclose such technology or that the Company can meaningfully 
protect its trade secrets.

     It is the Company's policy to require its employees, consultants, and 
other parties to collaborative agreements to execute confidentiality 
agreements upon the commencement of employment or consulting relationships or 
a collaboration with the Company.  These agreements provide that all 
confidential information developed or made known during the course of the 
relationship with the Company is to be kept confidential and not disclosed to 
third parities except in specific circumstances.  In the case of employees, 
the agreements provide that all inventions resulting from work performed for 
the Company, utilizing property of the Company or relating to the Company's 
business and conceived or completed by the individual during employment shall 
be the exclusive property of the Company to the extent permitted by 
applicable law. There can be no assurance, however, that these agreements 
will provide meaningful protection of the Company's trade secrets or adequate 
remedies in the event of unauthorized use or disclosure of such information.

MANUFACTURING AND MARKETING

     The Company engages primarily in the development of biotechnological 
products, and intends, through marketing agreements, sublicenses or other 
means, to rely upon relationships with domestic and/or international 
companies for the marketing of such products.  The Company has relied upon 
contract manufacturers for its products under development and for its limited 
commercial production requirements to date, although the Company has retained 
certain quality control and managerial responsibility.  The 

                                    8
<PAGE>

Company may elect to internalize more of the manufacturing and marketing 
responsibilities at such time as such a strategy is determined to be 
economically advantageous and as its financial resources and personnel permit 
such efforts. The commercial success of some of the Company's products (if 
successfully developed) may, to a large extent, depend upon the manufacturing 
and marketing efforts of others.

GOVERNMENT REGULATION AND GOVERNMENT APPROVALS

     The manufacturing and marketing of the Company's medical products are 
subject to regulation for safety and efficacy by governmental authorities in 
the United States and other countries.  In the United States, pharmaceuticals 
are subject to rigorous FDA regulation.  The Federal Food, Drug and Cosmetic 
Act and the Public Health Service Act govern the testing, manufacture, 
safety, efficacy, labeling, storage, record keeping, approval, advertising 
and promotion of the Company's medical products.  Product development and 
approval within this regulatory framework takes a number of years and 
involves the expenditure of substantial resources.

     The steps required before a pharmaceutical agent, such as the proposed 
PDIT or PDT products, may be marketed in the United States include (i) 
preclinical laboratory and animal tests, (ii) the submission to the FDA of an 
IND, which must become effective before human clinical trials may commence, 
(iii) adequate and well-controlled human clinical trials to establish the 
safety and efficacy of the drug, (iv) the submission of the New Drug 
Application ("NDA") to the FDA, and (v) the FDA approval of the NDA prior to 
any commercial sale or shipment of the drug. In addition to obtaining FDA 
approval for each product, each domestic drug manufacturing establishment 
must be registered with the FDA.  Domestic manufacturing establishments are 
subject to biennial inspections by the FDA and must comply with current Good 
Manufacturing Practices ("GMP") for drugs.  To supply products for use in the 
United States, foreign manufacturing establishments must comply with GMP and 
are subject to periodic inspection by the FDA or by regulatory authorities in 
such countries under reciprocal agreements with the FDA.

     Preclinical tests include laboratory evaluation of product chemistry and 
animal studies to assess the safety and efficacy of the product and its 
formulation.  The results of the preclinical tests are submitted to the FDA 
as part of an IND, and unless the FDA objects, the IND will become effective 
30 days following its receipt by the FDA.

     Clinical trials involve the administration of the pharmaceutical product 
to healthy volunteers or to patients identified as having the condition for 
which the pharmaceutical is being tested.  The pharmaceutical is administered 
under the supervision of a qualified principal investigator.  Clinical trials 
are conducted in accordance with protocols previously submitted to the FDA as 
part of the IND that detail the objectives of the study, the parameters used 
to monitor safety and the efficacy criteria evaluated.  Each clinical study 
is conducted under the auspices of the independent Institutional Review Board 
("IRB") at the institution at which the study is conducted.  The IRB 
considers, among other things, ethical factors, the safety of the human 
subjects and the possible liability for the institution.

     Clinical trials are typically in three sequential phases that may 
overlap. In Phase I, the initial introduction of the pharmaceutical into 
healthy human volunteers, the emphasis is on testing for safety (adverse 
effects), dosage tolerance, metabolism, distribution, excretion and clinical 
pharmacology. Phase II involves studies in a limited patient population to 
determine the efficacy of the pharmaceutical for specific targeted 
indications, to determine dosage tolerance and optimal dosage and to identify 
possible adverse side effects and safety risks.  Once a compound is found to 
be effective and to have an acceptable safety profile in Phase II 
evaluations, Phase III trials are undertaken to evaluate clinical efficacy 
further and to further test for safety within an expanded patient population 
at multiple clinical study sites.  The FDA reviews both the clinical plans 
and the results of the trials and may discontinue the trials at any time if 
there are significant safety issues.

     The results of the preclinical and clinical trials are submitted to the 
FDA in the form of an NDA for marketing approval.  The testing and approval 
process is likely to require substantial time and effort 

                                    9
<PAGE>

and there can be no assurance that any approval will be granted on a timely 
basis, if at all.  The approval process is affected by a number of factors, 
including the severity of the disease, the availability of alternative 
treatments and the risks and benefits demonstrated in clinical trials.  
Additional animal studies or clinical trials may be requested during the FDA 
review process and may delay marketing approval.  After FDA approval for the 
initial indications, further clinical trials would be necessary to gain 
approval for the use of the product for any additional indications.  The FDA 
may also require post-marketing testing to monitor for adverse effects, which 
can involve significant expense.

     The Company's Periodontal Tissue Monitor is categorized as a medical 
device under the FDA regulations and therefore a Premarket Approval 
application has been filed and approved by the FDA and the Company intends to 
commence marketing of the product in the United States and other countries.  
See - PTM PATENTS AND REGULATORY APPROVAL - for a description of the status 
of the FDA approval relating to the PTM.

     For both currently marketed and future products, failure to comply with 
applicable regulatory requirements after obtaining regulatory approval can, 
among other things, result in the suspension of regulatory approval, as well 
as possible civil and criminal sanctions.  In addition, changes in 
regulations could have a material adverse effect on the Company.

COMPETITION

     The PDIT and PDT drugs and systems which the Company is developing will 
be competing with existing therapies.  In addition, a number of companies are 
pursuing the development of novel pharmaceuticals which target the same 
diseases that the Company is targeting.  A number of pharmaceutical and 
biotechnology companies, academic institutions, government  agencies, and 
other public and private organizations conducting research are pursuing 
PDT-related approaches to cancer therapy.  A number of such organizations are 
also developing potentially competitive products for diagnosing periodontal 
disease. Furthermore, academic institutions, government  agencies, and other 
public and private organizations conducting research may seek patent 
protection with respect to potentially competing products or technologies and 
may establish collaborative arrangements with competitors of the Company.

     Many of the Company's existing or potential competitors, particularly 
large pharmaceutical companies, have substantially greater financial, 
technical and human resources than the Company and may be better equipped to 
develop, manufacture and market products.  In addition, many of these 
companies have extensive experience in preclinical testing and human clinical 
trials.  These companies may develop and introduce products and processes 
competitive with or superior to those of the Company.  The development by 
others of new treatment methods for those indications for which the Company 
is developing products could render these products noncompetitive or obsolete.

     The Company's products under development are expected to address a broad 
range of markets.  The Company's competition will be determined in part by 
the potential indications for which the Company's products are developed and 
ultimately approved by regulatory authorities.  For certain of the Company's 
potential products, an important factor in competition may be the timing of 
market introduction of the Company's or competitors' products.  Accordingly, 
the relative speed at which the Company or its existing or its future 
corporate partners can develop products, complete the clinical trials and 
regulatory approval processes, and supply commercial quantities of the 
products to the market are expected to be important competitive factors.  The 
Company expects that competition among products approved for sale will be 
based, among other things, on product efficacy, safety, reliability, 
availability, price and patent position.

                                    10
<PAGE>

     The Company's competitive position also depends upon its ability to 
attract and retain qualified personnel, obtain patent protection or otherwise 
develop proprietary products or processes and secure sufficient capital 
resources for the often substantial period between technological conception 
and commercial sales.

RESEARCH AND DEVELOPMENT

     The Company incurred product development costs of $2,566,000 and 
$1,854,000 in the fiscal years ended March 31, 1997and 1996 for work on its 
PDT, PDIT and PTM products.

COMPLIANCE WITH ENVIRONMENTAL LAWS

     The Company believes that it is in compliance with all federal, state 
and local environmental laws and regulations. To the extent that the 
Company's management can determine, there are no federal, state of local 
provisions regulating the discharge of materials into the environment or 
otherwise relating to the protection of the environment, with which 
compliance by the Company has had or is expected to have a material effect 
upon the capital expenditures, earnings or competitive position of the 
Company.

PERSONNEL

     As of March 31, 1997, the Company had 6 full-time employees, none of 
whom were covered by a collective bargaining agreement.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

     Certain of the information provided by the Company in its reports and 
registration statements filed with the Securities and Exchange Commission or 
provided by its spokespersons from time to time, including information set 
forth under the captions "Item 1 - Business" and "Item 7 - Management's 
Discussion and Analysis of Financial Condition and Results of Operations" and 
elsewhere in this Report on Form 10-K for the Fiscal year ended March 31, 
1997, constitute "Forward Looking Statements" within the meaning of Section 
27A of the Securities Act of 1933, as amended, which are intended to be 
covered by the safe harbors from liability created thereby.  All such forward 
looking statements involve risks and uncertainties, including those 
statements regarding risks of new product development; the lengthy and 
uncertain process for FDA and other regulatory approval of the PTM, PDT and 
PDIT; the dependence on the WHO license agreement; the Company's option to 
acquire BTI pursuant to the BTI Agreement; and the dependence on others for 
marketing and manufacturing.  Many other important factors affect the 
Company's ability to achieve the stated outcomes and to successfully develop 
and commercialize its products, including those statements regarding the 
Company's status as a development stage company; potential need for 
substantial additional funds. and other factors.  As a result, there can be 
no assurance that the forward looking statements in this Report or made from 
time to time will prove to be accurate. In light of the significant 
uncertainties inherent in the forward looking statements included herein, the 
inclusion of such information should not be regarded as a representation by 
the Company or any other person that the objectives and plans of the Company 
will be achieved.

ITEM 2.  PROPERTIES

     At March 31, 1997, the Company occupied approximately 3,400 square feet 
of office and laboratory space in San Diego, California under a sub-lease 
which expires in February 1998 and includes two one-year renewal options.  
The Company has no current plans for any expansion of its facilities, but 
believes that increases in its internal product development efforts related 
to the PDIT and PDT product development projects and product marketing and 
manufacturing efforts for its PTM product may increase the Company's facility 
requirements.

                                    11
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     None.

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

     None.

ADDITIONAL ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company, their positions with the Company
and principal occupations and experience are set forth below.

                                                                   Year in
                                                                   which he
                                                                   became an
Name                     Position(s)                      Age       Officer
----                     ----------                       ---      ---------
Dr. H. Laurence Shaw     Chairman, President and Chief     51        1996
                         Executive Officer

Anil Singhal, Ph.D. (1)  Vice President-Research and       45        1997
                         Development

(1) Joined the Company on April 21, 1997.

     The officers of the Company hold office at the discretion of the Board 
of Directors of the Company.  During Fiscal 1997, the officers of the Company 
devoted substantially all of their business time to the affairs of the 
Company, and they intend to do so during Fiscal 1998.
     
     From 1995 until joining the Company, Dr. Shaw served as Corporate Vice 
President Research & Development of C.R. Bard.  Prior to that, from 
1993-1995, Dr. Shaw served as Chief Executive Officer, President and Director 
of Atlantic Pharmaceuticals, Inc. and Chief Executive Officer of each of 
Atlantic's operating companies from their inception in 1993.  From 1984-1993, 
he was Vice President, Medical and Regulatory Affairs and Advanced Research 
at Abbott Laboratories.  Previously, from 1981-1984, he was a board member of 
Revlon Health Care, Ltd. (UK) and Director, Medical and Technical Affairs.  
At Revlon, he was responsible for pharmaceutical formulation and development, 
new business development and clinical research for Revlon's major research 
unit outside of the USA.  Prior to Revlon, he served as International Medical 
Director for Meadox Medical Inc.;  Medical Director for Merck in the U.K.; 
and as Associate Director for SmithKline Corporation.  Dr. Shaw is a graduate 
of the University College Hospital Medical School, London, UK and has worked 
in clinical practice in the UK and in the USA.  He is a Fellow of the Faculty 
of Pharmaceutical Medicine of the Royal College of Physicians, a Fellow of 
the American College of Clinical Pharmacology and a member of many 
professional associations.

     Anil Singhal, Ph.D., was President, BioNexus Pharmaceuticals 1994 to 
1997. From 1986 to 1994 Dr. Singhal was Chief Operating Officer at The 
Biomembrane Institute. From 1979 to 1983, Dr. Singhal was Assistant Professor 
at Mt. Sinai School of Medicine. Dr. Singhal received his Ph.D. from the 
Wakemans Institute of Microbiology from Rutgers University, M. S. Degree from 
St. John's University and an MBA at the University of Washington. Dr. Singhal 
is the author of 40 published papers on oncology and inflammatory disorders.

                                    12
<PAGE>

                                 PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED MATTERS

The following presents the high and low closing prices and trading volumes 
for the periods indicated as reported by AMEX. The Company has never paid any 
cash dividends and does not contemplate the payment of cash dividends in the 
forseeable future.

<TABLE>
<CAPTION>
                                                                  Year ended March 31, 1996
                                              -------------------------------------------------------------
                                                First       Second        Third       Fourth        Year
-----------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>         <C>           <C>         <C>
1996 Market price range of common stock
       High                                   $    1.94     $  3.00     $    3.38     $  2.75     $    3.38
       Low                                    $    1.25     $  1.38     $    1.25     $  1.38     $    1.25
     Shares traded                              487,300     970,900     1,075,000     899,800     3,433,000
-----------------------------------------------------------------------------------------------------------

<CAPTION>
                                                                  Year ended March 31, 1997
                                              -------------------------------------------------------------
                                                First       Second        Third       Fourth        Year
-----------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>         <C>           <C>         <C>
1997 Market price range of common stock
       High                                   $    3.69     $  2.50     $    2.06     $  1.75     $    3.69
       Low                                    $    1.63     $  1.75     $    1.06     $  1.06     $    1.06
     Shares traded                            1,810,100     834,300     1,309,100     827,400     4,780,900
-----------------------------------------------------------------------------------------------------------

</TABLE>


                                    13
<PAGE>

   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE 
ENTERPRISE)
    

ITEM 6. SUPPLEMTARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                          Sept. 23,1983
                                                         Years ended March 31,            (inception) to
                                              ------------------------------------------     March 31, 
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)       1997     1996     1995     1994     1993        1997
-------------------------------------------------------------------------------------------------------
<S>                                           <C>      <C>      <C>      <C>      <C>        <C>
Total revenues                                $  275   $  379   $1,201   $  585   $  536     $ 5,651
Product development costs                      2,566    1,854    2,118    1,218      657      14,965
Net loss before convertible preferred 
  stock dividends                             (3,897)  (3,256)  (3,755)  (4,613)  (3,738)    (32,191)
Net loss applicable to common stockholders    (5,063)  (3,256)  (3,755)  (4,613)  (3,738)    (33,356)
Net loss per share of common stock             (0.62)   (0.52)   (0.74)   (1.10)   (1.01)


                                                             As of March 31,
                                              ------------------------------------------
                                               1997     1996     1995     1994     1993
                                              ------------------------------------------
Cash, cash equivalents, and
   short-term investments                     $6,766   $1,698   $1,820   $4,504   $2,540
Total assets                                   7,234    2,174    2,305    5,168    3,668
Long-term liabilities                             13       21       24       70      609
Stockholders' equity*                          6,331    1,548    1,884    3,942    2,441
----------------------------------------------------------------------------------------
</TABLE>

*NO DIVIDENDS HAVE BEEN PAID ON THE COMPANY'S COMMON STOCK. CONVERTIBLE 
 PREFERRED STOCK DIVIDENDS ARE NON-CASH. 
 SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)


<TABLE>
<CAPTION>
1996                                                                 Year ended March 31, 1996
                                              --------------------------------------------------------------------
                                                First        Second        Third          Fourth          Year
------------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>           <C>           <C>            <C>
Total revenues                                $ 94,901      $ 50,200      $201,755      $   31,960     $  378,816
Net loss                                      (707,952)     (877,728)     (655,574)     (1,014,649)    (3,255,903)
Net loss per share of common stock               (0.13)        (0.17)        (0.10)          (0.12)         (0.52)
------------------------------------------------------------------------------------------------------------------

<CAPTION>
1997                                                                 Year ended March 31, 1997
                                              --------------------------------------------------------------------
                                                First        Second        Third          Fourth          Year
------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>           <C>          <C>            <C>
Total revenues                               $   24,832     $ 31,098      $ 30,192     $  189,058     $  275,180
Net loss before convertible preferred 
  stock dividends                            (1,059,395)    (895,968)     (745,288)    (1,196,715)    (3,897,366)
Net loss applicable to common stockholders   (1,059,395)    (895,968)     (883,547)    (2,223,717)    (5,062,627)
Net loss per share of common stock                (0.13)       (0.11)        (0.11)         (0.27)         (0.62)
-----------------------------------------------------------------------------------------------------------

</TABLE>

                                    14

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATION

RESULTS OF OPERATIONS. Total revenue decreased by $104,000, or 27% to 
$275,000 in fiscal 1997 (the year ended March 31, 1997).  The majority of the 
prior year revenues related to marketing rights granted to a U. S. soft drink 
company for the Company's Kephra technology. There were no comparable 
revenues in fiscal year 1997.

Sales of the Company's Periodontal Tissue Monitor ("PTM") product comprised 
the majority of  product sales in fiscal year 1997. Product sales increased 
by $87,000 from the prior year. The prior year sales were comprised primarily 
of sales of Kephra materials to Coors Brewing Company. Product sales of 
$14,000 for Fiscal 1996 decreased by $603,000, or 98% over the prior year due 
to sales of the aforementioned Kephra materials. Marketing rights revenues 
for Fiscal 1997 decreased by $55,000, or 92%, to $5,000. Fiscal 1996 
marketing rights revenue is attributable to rights related to a licensing 
agreement with a U.S. soft-drink company for the Company's Kephra technology. 
 Fiscal 1995 revenues were from license fees related to the March 1994 
agreement with Coors Brewing Company. Contract research revenue for fiscal 
1997 decreased by $6,000 from the prior year. Fiscal 1997 revenues related to 
work performed under a joint venture agreement with an ophthalmic company for 
the use of the Company's photochromatic technology. In fiscal year 1996, 
contract research revenue decreased by $54,000 due to the completion of the 
Coors Brewing Company project, and in both years was comprised of research 
related to the Company's Kephra process.

Interest and other revenue for the current fiscal year increased by $19,000, 
or 17%, to $129,000 compared to fiscal year 1996. This increase was the 
result of more cash and short-term investments due to the completion of 
private equity financing during the year and a gain on the sale of assets. 
Interest and other revenue for fiscal year 1996 decreased by $26,000, or 19%, 
to $110,000 compared to fiscal year 1995.  This decrease was the result of a 
decrease in the average balance of invested funds offset by a higher interest 
rate yield on invested Company funds.

Cost of product sales for the year ended March 31, 1997 decreased by $29,000 
or 24% to $95,000. Such decrease was primarily related to the change in the 
nature of products sold. During the fiscal year ended March 31, 1996, cost of 
product sales decreased $295,000 or 70% from the prior year. Fiscal 1995 cost 
of product sales included costs related to sales to Coors Brewing Company; no 
such sales were made in fiscal 1995.

   
Product development costs for fiscal year 1997 increased substantially by 
$712,000 to $2,566,000 or 38% over the prior year. The majority of the 
increase resulted from the initiation of work on two projects in the cancer 
therapy area, including: funding of $1,317,000 in product development 
expenses in accordance with the Agreement and Plan of Merger with BTI, the 
holder of certain technologies in the area of PDT for the treatment of 
cancer, and $323,000 in expenses related to the acquisition of PDIT 
technology for the treatment of cancer, including expenses incurred in 
association with a related research agreement and expenses incurred related 
to in-house product development of the PDIT technology. No such costs were 
incurred in the prior year. The Company also incurred costs in fiscal year 
1997 relating to the filing of a Premarket Application in September 1996 for 
the Company's PTM product, however, product development costs for PTM 
decreased by $827,000 for the year because the product development efforts 
were concluded during the year which culminated with FDA approval for PTM in 
June 1997. Product development costs for fiscal 


                                    15
<PAGE>

1996 decreased $264,000 or 12%, to $1,854,000.  This decrease is the result 
of the cessation of certain projects offset by an increase in costs 
associated with U.S. clinical trials of the PTM kit.
    

In fiscal year 1997, general and administrative costs decreased by $102,000 
over the prior year or 8% to $1,156,000. The decrease is due to continued 
cost reduction measures implemented in the prior year, which includes reduced 
staffing costs and insurance expense, offset by higher professional fees. 
During the fiscal year ended March 31, 1996, general and administrative costs 
decreased $313,000 or 20%, to $1,258,000 from the prior year.  This decrease 
is a result of cost savings measures implemented in March 1995 which included 
reduced staffing and a reduction in other administrative costs.

For the year ended March 31, 1997 business development and marketing expenses 
were $291,000, a decline of $82,000 or $22%. The decline is due to lower 
consultant and travel expenses offset by higher salary and benefit costs. 
Business development and marketing costs for fiscal 1996 decreased $418,000 
or 53%, to $372,000 versus $790,000 in fiscal 1995. Fiscal 1995 amounts 
include costs incurred related to gaining approval of the PTM in the Peoples 
Republic of China and sales commissions incurred relating to the agreement 
with Coors Brewing Company discussed above.  No such costs were incurred in 
fiscal 1996.

Interest and other expenses increased to $66,000 for fiscal year 1997, an 
increase of $39,000. The Company required a bridge loan prior to completion 
of its private equity financing in March 1997. Interest expense incurred on 
the loan accounted for the increase. Interest and other expense in fiscal 
1996 totaled $26,000, a $32,000 decrease from the prior year.

Net loss before convertible preferred stock dividends was $3,897,000 for the 
year ended March 31, 1997 an increase of $641,000 over the prior year. The 
increased loss during the current fiscal year was primarily due to increased 
product development expenses discussed above. The fiscal 1996 net loss 
decreased by $499,000 from fiscal 1995, or 13%, to $3,256,000. This decrease 
is attributable to a reduction of expenditures in all major classifications 
for the fiscal year, partially offset by the fact that revenues from Kephra 
recognized in fiscal 1995 were not repeated in fiscal 1996.

Net loss applicable to common stockholders was $5,063,000 for the current 
fiscal year. A non-cash convertible preferred stock dividend was recorded 
during the current fiscal year in conjunction with a private equity financing 
completed during the year, more fully described in Note 2 to the consolidated 
financial statements.

CAPITAL RESOURCES AND LIQUIDITY.   As of March 31, 1997, cash, cash 
equivalents, and short-term investments increased by $5,068,000 to 
$6,766,000, compared to March 31, 1996, and working capital increased by 
$4,873,000.  This increase is attributable to net proceeds of $8,542,000 from 
a private equity financing completed in March 1997, offset by the net cash 
used in operations for fiscal year 1997. Total assets increased by 
$5,060,000, primarily due to the increase in cash, cash equivalents, and 
short-term investments described above.  Stockholders' equity increased by 
$4,783,000 primarily as a result of the aforementioned private equity sale 
proceeds, less the net operating loss for the year.

Since inception, the Company, has experienced negative cash flow from 
operations, and the Company considers it prudent to anticipate the negative 
cash flow from operations will continue until such time as sales of its 
products under development commence. However, the Company's financial 
resources are anticipated to be adequate, based on the assumption that no 
significant 

                                    16
<PAGE>

revenues are generated through March 1998, and possibly beyond that date, 
based on a continuation of the pattern of expenses which prevailed during 
fiscal 1997.  Unanticipated expenses or the expenses associated with the 
items discussed below could, however, shorten that period.

In March 1996 the Company completed a 12-month U.S. clinical trial of PTM at 
three universities. The Company has compiled and analyzed the data generated 
from the clinical studies.  In September 1996 the Company submitted a 
premarket approval application ("PMA") to the Food and Drug Administration 
("FDA). The Company has received approval from the FDA to begin commercial 
sales and distribution in the United States for its PTM product. The 
completion of the clinical studies and FDA approval have resulted in the 
reduction or elimination of certain product development expenses.

In May 1996 the Company entered into an agreement with Hawe-Neos Dental to 
distribute the PTM in Europe. The Company shipped the initial order to 
Hawe-Neos for $76,000 in March 1997.  In January 1995 the Company entered 
into an agreement with Shofu, Inc. for distribution of the PTM in Japan. 
Shofu is currently conducting Japanese clinical trials of the PTM. As noted 
above, the Company received approval from the FDA for its PTM product. The 
Company also signed a letter of intent with Steri-Oss, a leading dental 
implant company, for the exclusive five-year distribution of PTM in North 
America and other countries, excluding Europe and Japan. In the event the 
Company begins selling material quantities of the PTM, the Company may need 
additional working capital, and additional personnel and space, both of which 
may cause an increase in the net utilization of cash.  However, there can be 
no assurance the Company will complete any new distribution agreements, or 
that any of its marketing partners will order the PTM products in significant 
quantities.

In May 1996 the Company entered into an agreement with Wound Healing of 
Oklahoma ("WHO"), a privately held corporation, under which it acquired an 
exclusive license to certain proprietary technology in the PDIT treatment of 
cancer.  The Company incurred $322,000 in  product development expenses 
during fiscal year 1997 and expects to continue funding such efforts 
associated with the commercialization of the licensed technology, including 
the commencement of human clinical trials, which will increase the Company's 
net utilization of cash.  However, there can be no assurance that FDA and 
other regulatory approval required to commence such trials will be 
forthcoming.

In June 1996 the Company entered into an agreement which granted the Company 
the option to acquire Binary Therapeutics, Inc. ("BTI").  BTI is a privately 
held, development stage enterprise holding certain technologies for the PDT 
treatment of cancer.  Under the agreement as amended,  the Company is 
currently funding substantially all expenses of BTI, which consist primarily 
of product development expenses, and expects to continue funding such 
expenses until the Company determines if it will elect to exercise its option 
to acquire BTI. There can be no assurance that the Company will exercise its 
option to acquire BTI.

The Company has never paid a cash dividend and does not contemplate the 
payment of cash dividends in the foreseeable future.

IMPACT OF INFLATION.  The impact of inflation on the operations of the 
Company during fiscal 1997, 1996 and 1995 was not material.

                                    17
<PAGE>

   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE 
ENTERPRISE)
    

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS:                                    PAGE

Independent Auditors' Report (Deloitte & Touche LLP). . . . . . . . .  19

Consolidated Balance Sheets as of March 31, 1997 and 1996 . . . . . .  20

Consolidated Statements of Operations for the years 
  ended March 31, 1997, March 31, 1996, March 31, 1995 
  and September 23, 1983 (inception) to March 31, 1997. . . . . . . .  21

Consolidated Statements of Stockholders' Equity from 
  September 23, 1983 (inception), to March 31, 1997 . . . . . . . . .  22

Consolidated Statements of Cash Flow for the years 
  ended March 31, 1997, March 31, 1996, March 31, 1995 and 
  September 23, 1983 (inception) to March 31, 1997. . . . . . . . . .  24

Notes to Consolidated Financial Statements. . . . . . . . . . . . . .  25



                                    18
<PAGE>

   
INDEPENDENT AUDITORS' REPORT


Pacific Pharmaceuticals, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Pacific 
Pharmaceuticals, Inc. (formerly Xytronyx, Inc.) and Subsidiaries 
(collectively, the "Company", a development stage enterprise) as of March 31, 
1997 and 1996, and the related consolidated statements of operations, 
stockholders' equity, and cash flows for each of the three years in the 
period ended March 31, 1997 and the period from September 23, 1983 (date of 
incorporation of Pacific Pharmaceuticals, Inc.) to March 31, 1997.  These 
financial statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these financial statements based 
on our audits.
    

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement.  An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements.  
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation.  We believe that our audits provide a 
reasonable basis for our opinion.

   
In our opinion, such consolidated financial statements present fairly, in all 
material respects, the financial position of Pacific Pharmaceuticals, Inc. 
and Subsidiaries at March 31, 1997 and 1996, and the results of their 
operations and their cash flows for each of the three years in the period 
ended March 31, 1997, and for the period from September 23, 1983 (date of 
incorporation of Pacific Pharmaceuticals, Inc.) to March 31, 1997 in 
conformity with generally accepted accounting principles.
    

The Company is in the development stage as of March 31, 1997.  As discussed 
in Note 1 to the consolidated financial statements, the Company's activities 
since inception have been directed primarily toward the development and 
commercialization of products based on biotechnological research.

   
Deloitte & Touche LLP


San Diego, California
May 2, 1997 (June 23, 1997 as to the first paragraph of Note 8 and August 7, 
1997 as to the second paragraph of Note 8)
    

                                    19
<PAGE>


CONSOLIDATED BALANCE SHEETS
   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
    

                                                             As of March 31,
                                                       -------------------------
                                                          1997           1996
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                             $ 1,784,599   $   409,651
Short-term investments                                  4,981,435     1,288,106
Accounts receivable, net                                   99,066         2,668
Inventory                                                  41,677        40,907
Prepaid expenses                                           87,311        95,945
--------------------------------------------------------------------------------
   Total current assets                                 6,994,088     1,837,277

Property and equipment, net                                82,563       135,234
Patent costs, net                                         157,597       190,159
Other assets                                                    -        11,798
--------------------------------------------------------------------------------
TOTAL ASSETS                                          $ 7,234,248   $ 2,174,468
--------------------------------------------------------------------------------


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                      $   723,523   $   214,310
Accrued expenses                                          161,574       378,927
Current portion of capitalized leases                       4,670        12,512
--------------------------------------------------------------------------------
   Total current liabilities                              889,767       605,749
--------------------------------------------------------------------------------

Other liabilities                                          13,072        20,670
--------------------------------------------------------------------------------


Commitments and contingencies  (Note 4)

STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 
 300,000 shares authorized 50,001.5 issued 
 and outstanding at March 31, 1997 (liquidating 
 preference $13,000,390)                                1,250,038             -
Common stock, $.02 par value,  30,000,000 
 shares authorized; 8,151,029 and 8,051,029 
 shares issued and outstanding at March 31, 
 1997 and 1996, respectively                              163,021       161,021
Capital in excess of par value                         38,274,539    29,680,590
Deficit accumulated during the development stage      (33,356,189)  (28,293,562)
--------------------------------------------------------------------------------
   Total stockholders' equity                           6,331,409     1,548,049
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $ 7,234,248   $ 2,174,468
--------------------------------------------------------------------------------


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                    20
<PAGE>


CONSOLIDATED STATEMENTS OF OPERATIONS
   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
    

<TABLE>
<CAPTION>
                                          Years ended March 31,          September 23, 1983
                                  ------------------------------------     (inception) to
                                      1997         1996        1995         March 31, 1997
------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>             <C>
REVENUES
  Product sales                   $  100,485   $   13,657   $  616,200      $  1,950,231
  License fees and royalties           1,207      150,000      330,000           481,207
  Contract research                   39,172       45,000       99,151           268,063
  Marketing rights                     5,000       60,000       20,000         1,311,500
  Interest and other                 129,316      110,159      135,804         1,640,113
------------------------------------------------------------------------------------------
Total revenues                       275,180      378,816    1,201,155         5,651,114
------------------------------------------------------------------------------------------

COSTS AND EXPENSES
  Cost of product sales               95,200      124,530      419,032         2,997,935
  Product development              2,565,664    1,853,899    2,118,247        14,964,528
  General and administrative       1,155,515    1,257,722    1,570,768        15,765,498
  Business development
    and marketing                    290,603      372,316      790,233         3,558,286
  Interest and other                  65,564       26,252       57,843           555,795
------------------------------------------------------------------------------------------
Total costs and expenses           4,172,546    3,634,719    4,956,123        37,842,042
------------------------------------------------------------------------------------------

Net loss before convertible
  preferred stock dividends       (3,897,366)  (3,255,903)  (3,754,968)      (32,190,928)

Convertible preferred stock
  dividends                        1,165,261            -            -         1,165,261
------------------------------------------------------------------------------------------

Net loss applicable to
  common stockholders            $(5,062,627) $(3,255,903) $(3,754,968)     $(33,356,189)

Net loss per share
  of common stock                     ($0.62)      ($0.52)     ($0.74)
------------------------------------------------------------------------

Weighted average common
   stock outstanding               8,115,139    6,222,832    5,106,454
------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                    21
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
    
<TABLE>
<CAPTION>
                                                                                                     Deficit
                                                                                                    Accumulated
                                          Preferred Stock          Common Stock         Capital     During the     Treasury Stock
                                       --------------------- ----------------------    in Excess    Development    -----------------
                                        Shares   Par Value     Shares     Par Value   of Par Value     Stage       Shares     Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>      <C>           <C>        <C>         <C>           <C>            <C>        <C>
Balance at September 23, 1983                -   $      -            -    $       -   $        -    $         -         -     $   -
Original issuance of common 
   stock:
   October 1983 at $.02 
     per share                                                 597,500       11,950
   October 1983 at $2.00 
     per share                                                  55,000        1,100      108,900
Issuance for cash, January 
   1984 at $4.00 per share                                     383,625        7,672    1,325,817
Net loss                                                                                               (137,937)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1984                    -          -    1,036,125       20,722    1,434,717       (137,937)        -        -
Purchase of treasury stock                                                                                        (13,333)     (267)
Adjustment to capital in 
  excess of par value                                                                     5,600
Net loss                                                                                               (692,070)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1985                    -          -    1,036,125       20,722    1,440,317       (830,007)  (13,333)     (267)
Purchase of treasury stock                                                                                         (4,167)      (83)
Initial public offering, 
   October 1985 at $6.00 
   per share                                                   500,000       10,000    2,392,536
Net loss                                                                                               (994,767)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1986                    -          -    1,536,125       30,722    3,832,853     (1,824,774)  (17,500)     (350)
Purchase of treasury stock                                                                                                       (5)
Preferred stock subscribed:
  Series A                               6,000    150,000                                450,000
Net loss                                                                                             (1,445,191)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1987                6,000    150,000    1,536,125       30,722    4,282,853     (3,269,965)  (17,500)     (355)
Issuance of 8.5% convertible
   subordinated notes warrants                                                            62,500
Retirement of treasury stock                                   (17,500)        (350)          (5)                  17,500       355
Preferred stock subscribed/
   (returned):
   Series A                             (3,000)   (75,000)                              (225,000)
   Series B                              1,600     40,000                                120,000
Net loss                                                                                             (1,327,934)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1988                4,600    115,000    1,518,625       30,372    4,240,348     (4,597,899)        -       -
Conversion of 8.5% convertible 
   subordinated notes                                           39,999          800      249,193
Consultant's compensation                                        1,073           22        6,524
Preferred stock subscribed/
   (converted):
   Series A                             (3,000)   (75,000)      35,002          700       74,296
   Series B                             27,180    679,500                              1,556,444
Dividends accrued - Series B                                                            (221,955)
Net loss                                                                                             (1,553,240)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1989               28,780    719,500    1,594,699       31,894    5,904,850     (6,151,139)        -       -
Private placement, November 
   1989 at $8.00 per share                                      75,000        1,500      538,500
Exercise of common stock options                                 3,500           70       13,930
Preferred stock subscribed/
   (converted):
   Series B                            (28,780)  (719,500)     719,500       14,390      705,111
Dividends accrued - Series B                                                            (141,158)
Reverse accrued dividends - 
   Series B                                                                              363,113
Exercise of Series B warrants                                  463,088        9,262    1,611,546
Exercise of other warrants                                       2,000           40       14,360
Net loss                                                                                             (1,512,343)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1990                    -          -    2,857,787       57,156    9,010,252     (7,663,482)        -         -
</TABLE>
                                    22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
    
<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                          Preferred Stock          Common Stock         Capital     During the     Treasury Stock
                                       --------------------- ----------------------    in Excess    Development    -----------------
                                        Shares   Par Value     Shares     Par Value   of Par Value     Stage       Shares     Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>      <C>           <C>        <C>         <C>           <C>            <C>        <C>
Exercise of common stock options                                7,100            142       28,258
Exercise of other warrants                                     98,000          1,960      743,640
Consultant's compensation                                         338              7        2,894
Private placement, October 1990
   at $12.00 per share                                        257,500          5,150    2,765,446
Net loss                                                                                             (2,111,267)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1991                    -          -   3,220,725         64,415   12,550,490    (9,774,749)        -         -
Exercise of common stock options                               10,950            218       40,932
Exercise of other warrants                                     10,000            200      104,800
Private placement, April 1991
   at $17.50 per share                                        214,188          4,284    3,433,816
Net loss                                                                                             (3,156,803)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1992                    -          -   3,455,863         69,117   16,130,038   (12,931,552)        -         -
Exercise of common stock options                                4,300             86       16,139
Private placement, May 1992
   at $11.625 per share                                       277,100          5,542    2,889,461
Net loss                                                                                             (3,738,097)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1993                    -          -   3,737,263         74,745   19,035,638   (16,669,649)        -         -
Exercise of common stock options                               70,227          1,405      292,406
Common stock retired as payment
   for common stock options exercised                         (12,903)          (258)     (99,740)
Grant of stock option below fair m
   arket value                                                                            468,750
Private placements:
   July 1993 at $5.50 per share                               317,093          6,342    1,531,879
   December 1993 at average of $6.12 
     per share                                                427,275          8,546    2,386,770
   January 1994 at average of $6.24 
     per share                                                222,100          4,442    1,259,545
   March 1994 at $5.30 per share                               51,000          1,020      244,088
Common stock issued in payment of 
   offering expenses                                              974             19        8,868
Net loss                                                                                             (4,613,042)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1994                    -          -   4,813,029         96,261   25,128,204   (21,282,691)        -         -
Private placements:
    April 1994 at $4.00 per share                             100,000          2,000      378,000
    August 1994 at $4.485 per share                           100,000          2,000      423,575
    September 1994 at $3.80 per share                         250,000          5,000      886,428
Net loss                                                                                             (3,754,968)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1995                    -          -   5,263,029       $105,261  $26,816,207  ($25,037,659)        -         -
Private placements:
    November 1995 at $1.25 per share                        2,788,000        $55,760   $2,864,383
Net loss                                                                                            ($3,255,903)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996                                   8,051,029       $161,021  $29,680,590  ($28,293,562)        -         -
Private placement of convertible 
  preferred stock                     50,001.5  $1,250,038                              7,291,688
Warrants exercised                                            100,000          2,000       92,000
Issuance of warrants for services                                                          45,000
Convertible preferred stock dividend                                                    1,165,261    (1,165,261)
Net loss                                                                                             (3,897,366)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997             50,001.5  $1,250,038  8,151,029       $163,021  $38,274,539  ($33,356,189)        -         -
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                    23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
    
<TABLE>
<CAPTION>
                                                   Years ended March 31,                September 23, 1983
                                       -------------------------------------------        (inception) to
                                           1997            1996           1995            March 31, 1997
----------------------------------------------------------------------------------------------------------
<S>                                    <C>             <C>             <C>                <C>
OPERATING ACTIVITIES
Net loss before convertible 
  preferred stock dividends            ($3,897,366)    ($3,255,903)    ($3,754,968)        ($32,190,928)
Adjustments to reconcile net loss 
 before convertible preferred 
 stock dividends to net cash 
 used by operating activities:
   Depreciation and amortization           109,731         123,427         171,135            1,583,744
   Non-cash compensation expense 
    upon issuance of common stock, 
    stock options and warrants              45,000               -               -              520,296
   Net book value of asset disposals        17,064           5,506           8,783              165,316
   Option income from retirement 
    of stock or amounts previously 
    advanced by customer                         -               -               -             (400,000)
   Changes in assets and liabilities:
     Accounts receivable                   (96,398)          6,405         219,505              (99,067)
     Inventory                                (770)          7,060         (38,890)             (41,680)
     Prepaid expenses and other assets       8,634           3,349         (35,744)             (98,286)
     Accounts payable                      509,214          (2,505)        (37,937)             723,523
     Accrued expenses                     (217,353)        263,486        (216,845)              17,551
     Customer advances                           -         (30,888)        (11,012)             140,863
     Other liabilities                      (7,842)        (11,895)        (11,895)              (4,866)
----------------------------------------------------------------------------------------------------------
   Net cash used by operating 
    activities                          (3,530,086)     (2,891,958)     (3,707,868)         (29,683,534)
----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of short-term investments     (4,981,435)     (1,288,106)       (992,326)         (10,461,867)
Maturities of short-term investments     1,288,106         992,326       3,200,000            5,480,432
Capital expenditures                        (9,764)        (51,596)        (33,399)            (831,427)
Patent costs                               (31,799)        (61,823)       (112,027)            (912,427)
Other                                        8,825               -               -                7,829
----------------------------------------------------------------------------------------------------------
   Net cash provided by (used in) 
    investing activities                (3,726,067)       (409,199)      2,062,248           (6,717,460)
----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of notes payable                  524,467         325,426         318,172            2,183,868
Repayment of notes payable                (524,467)       (325,426)       (318,172)          (1,965,124)
Repayment of capital lease 
 obligations                                (4,625)        (37,087)        (27,641)            (179,607)
Long-term customer advances                      -               -        (500,000)             100,000
Issuance of common and convertible 
 preferred stock                         8,635,726       2,920,143       1,697,003           37,983,956
Issuance of stock warrants                       -               -               -               62,500
----------------------------------------------------------------------------------------------------------
   Net cash provided by financing 
    activities                           8,631,101       2,883,056       1,169,362           38,185,593
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
 and cash equivalents                    1,374,948        (418,101)       (476,258)           1,784,599
Cash and cash equivalents at 
 beginning of period                       409,651         827,752       1,304,010                    -
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end 
 of period                              $1,784,599        $409,651        $827,752           $1,784,599
----------------------------------------------------------------------------------------------------------
Cash paid for interest                     $36,210         $18,804        $143,909             $495,060
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                    24

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
    

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   
NATURE OF OPERATIONS - The consolidated financial statements include the 
accounts of Pacific Pharmaceuticals, Inc. and its wholly owned subsidiaries, 
Perio Test, Inc. and XYX Acquisition Corp. (collectively, the "Company").  
The Company was incorporated under the laws of the State of Delaware on 
September 23, 1983.  For the period of inception to date, the Company's 
activities have been directed primarily toward the development and 
commercialization of products based on biopharmaceutical research. On August 
7, 1997, the Company's stockholders approved an amendment to the Certificate 
of Incorporation to change the name of the Company to Pacific 
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc. (See 
Note 8).
    

PRINCIPLES OF CONSOLIDATION - All significant intercompany balances and 
transactions have been eliminated in consolidation.

   
DEVELOPMENT STAGE - The Company has not earned significant revenues from 
planned principal operations. Accordingly, the Company's activities have been 
accounted for as those of a "Development Stage Enterprise" as set forth in 
Financial Accounting Standards Board Statement No. 7 ("FAS 7"). Among the 
disclosures required by FAS 7 are that the Company's financial statements be 
identified as those of a development stage enterprise, and that the 
consolidated statements of operations, stockholders' equity and cash flows 
disclose activity since the date of the Company's inception.
    

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

CASH EQUIVALENTS - Cash equivalents consist of money market instruments 
purchased with an original maturity of three months or less.

SHORT-TERM INVESTMENTS - Short term investments represent marketable debt 
securities, which are stated at amortized cost, which approximates market 
value. While the Company's intent is to hold debt securities to maturity, 
they are classified as available for sale because the sale of such securities 
may be required prior to maturity. Unrealized holding gains or losses have 
not been material. At March 31, 1997, the balance of short-term investments 
is comprised of a U. S. Treasury security, which matures in one year.

ACCOUNTS RECEIVABLE, NET - Sales of products to customers, net of allowances 
for doubtful accounts.

INVENTORY - Inventory, which consists principally of raw materials and work 
in process, is valued at the lower of cost (determined by the first-in, 
first-out method) or market.

                                    25
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

PROPERTY AND EQUIPMENT - Depreciation and amortization of property and 
equipment are provided using the straight-line method over the estimated 
useful lives of the related assets, which are principally five and ten years. 
Property and equipment are summarized as follows:

                                                          March 31
                                                     1997         1996
                                                   --------     --------
    Laboratory equipment                           $357,139     $602,613
    Office furniture and equipment                  157,966      169,627
    Leasehold improvements                            3,799       29,186
    Total property and equipment                    518,904      801,426
    Less accumulated
     depreciation and amortization                 (436,341)    (666,192)
                                                   --------     --------
    Total                                          $ 82,563     $135,234
                                                   --------     --------
                                                   --------     --------

PATENT COSTS - Legal expenses incurred in connection with applications for 
patents on research and development projects are capitalized.  The costs are 
amortized using the straight-line method over five years.  Patent costs which 
have no further economic value are written off in the period in which such 
diminution in value occurs.  Patent costs are net of accumulated amortization 
of $360,969 and $296,628 at March 31, 1997 and 1996, respectively.

LONG-LIVED ASSETS - Effective April 1, 1996, the Company adopted Statement of 
Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR THE 
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." 
SFAS 121 requires recognition of impairment of long-lived assets in the event 
the net book value of such assets exceeds the future undiscounted cash flows 
attributable to such assets. The Company annually evaluates the 
recoverability of its long-lived assets based on the estimated future 
undiscounted cash flows. Adoption of SFAS No. 121 had no material effect on 
the Company's financial statements.

ACCRUED EXPENSES - Accrued expenses consist of the following:

                                                         March 31
                                                     1997         1996
                                                   --------     --------
    Accrued compensation                           $ 25,185     $ 67,925
    Accrued clinical trial expenses                 133,438      306,674
    Other                                             2,951        4,328
    Total                                          $161,574     $378,927
                                                   --------     --------
                                                   --------     --------

REVENUE RECOGNITION - Product sales revenue is generally recognized at the 
time of product shipment. License fees and royalties, contract research, and 
marketing rights income are all recognized as earned in accordance with their 
respective agreements. Payments received in advance of shipments or prior to 
the completion of the earnings process are recorded as deferred revenue.

LOSS PER SHARE OF COMMON STOCK - Loss per share of common stock is computed 
by dividing the net loss applicable to common stockholders by the weighted 
average number of shares of common stock outstanding during the period. 
Common stock equivalents have not been included as they are antidilutive.

                                    26
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS 
No. 128, EARNINGS PER SHARE (EPS). This statement requires the presentation 
of earnings per share to reflect both "Basic EPS" as well as "Dilutive EPS" 
on the face of the statement of operations. In general, Basic EPS excludes 
dilution created by stock equivalents and is a function of weighted average 
number of common shares outstanding for the periods. Diluted EPS does reflect 
the potential dilution created by stock equivalents as if such equivalents 
are converted into common stock and is calculated in substantially the same 
manner as fully Diluted EPS illustrated in Accounting Principals Board 
("APB") Opinion No. 15 "EARNINGS PER SHARE".

The Company will be required to adopt the new method of reporting EPS during 
fiscal year 1998. Based on the Company's capital structure, the anticipated 
results of implementing SFAS No. 128 would reflect net loss per share in 
materially the same manner as currently reported.

STOCK-BASED COMPENSATION - In October 1995, the FASB issued SFAS No. 123, 
"Accounting for Stock-Based Compensation," (SFAS 123) which was effective for 
the Company beginning April 1, 1996. SFAS 123 requires expanded disclosure 
for stock-based compensation arrangements with employees and encourages (but 
does not require) compensation cost to be measured based on the fair value of 
the equity instrument awarded. Companies are permitted, however, to continue 
to apply APB Opinion No. 25, which recognizes compensation cost based on the 
intrinsic value of the equity instrument awarded. The Company has elected to 
continue the application of APB Opinion No. 25 to its stock-based 
compensation awards to employees and will disclose the required pro forma 
effect on net loss and net loss per share. See Note 2.

CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in money 
market accounts and short-term investments, primarily in U. S. Treasury 
securities.  The Company has not experienced any significant losses on its 
cash accounts or short-term investments.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's carrying amounts of its 
financial assets and liabilities approximate their fair value due to the 
short-term nature of the assets and liabilities.

MAJOR CUSTOMERS - Export sales, which accounted for 81% of product sales for 
the year ended March 31, 1997, were primarily to one customer in Europe. 
Export sales, all of which were to Japan, accounted for 51% of product sales 
in fiscal year 1996.  Product sales for fiscal year 1995 were virtually all 
to domestic customers. One customer accounted for 75% of product sales for 
the year ended March 31, 1997. Three customers individually accounted for 
21%, 26% and  46%, respectively, of fiscal year 1996 product sales.  One 
customer accounted for 93% of product sales for fiscal year 1995.

SUPPLEMENTAL CASH FLOW INFORMATION - The Company had the following noncash 
financing and investing activities for the period September 23, 1983 
(inception) through March 31, 1997: Common Stock issued upon the conversion 
of $720,000 of Series B preferred stock during fiscal year 1990; Common stock 
issued upon the conversion of long-term debt in the amount of $250,000 in 
fiscal year 1996; option income of $100,000 recognized from an amount 
previously classified as a customer advance during fiscal year 1996; capital 
lease obligations incurred totaling $200,000, of which $24,000 was incurred 
in fiscal year 1996, and; non-cash convertible preferred stock dividends of 
$1,165,000 in fiscal year 1997 (See Note 2).

                                    27
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.   STOCKHOLDERS' EQUITY

   
PRIVATE PLACEMENTS OF EQUITY SECURITIES - In fiscal year 1997, the Company 
completed a private equity financing ("1997 Private Placement") in two stages 
with the initial closing completed on December 19, 1996 (the "Initial 
Closing") and the final closing completed on March 7, 1997 (the "Final 
Closing") in which it raised $10,000,000 (net proceeds to the Company of 
$8,542,000) through the sale of 100 Premium Preferred Units ("Units") at a 
price per Unit of $100,000, each Unit consisting of 500 shares of Convertible 
Preferred Stock ("Preferred Stock"), par value $25.00 per share, and 50,000 
Common Stock Purchase Warrants ("Warrants"), to accredited individuals and 
institutional investors pursuant to Regulation D under the Securities Act of 
1933, as amended.  The placement agent, Paramount Capital Inc. ("Paramount"), 
who is affiliated with certain significant shareholders of the Company, 
received an aggregate dollar commission of $900,000 and a non-accountable 
expense allowance of $410,753. The Company will also pay a commission to 
Paramount of 6% of the gross proceeds received upon any exercise of the 
warrants.  Additionally, in connection with the 1997 Private Placement and in 
connection with its provision of financial advisory services to the Company, 
Paramount received a Unit Purchase Option and an Advisory Option (the 
"Options") which, in the aggregate, entitle Paramount to purchase 25 Units at 
an exercise price equal to 110% of the per unit price paid by investors in 
the 1997 Private Placement. Accordingly, the Options would entitle the 
holders thereof, upon exercise, to receive (i) 12,500 shares of Preferred 
Stock, convertible into 2,604,245 shares of Common Stock, and (ii) Warrants 
to purchase 1,250,038 shares of Common Stock. Each share of Preferred Stock 
may be converted at the option of the holder into 208.33333 shares of Common 
Stock or $0.96 per share of Common Stock which for the Initial Closing is a 
23% discount from the closing market price on December 19, 1996 and a 36% 
discount for the Final Closing from the closing price on March 7, 1997. In 
addition, the conversion price is subject to further adjustment on March 7, 
1998, if the average closing bid price of the common stock for the thirty 
consecutive trading days immediately preceding that date is less than 130% of 
the conversion price as adjusted, subject to a limit on the number of shares 
that may be issued pursuant to such reset.  Each Warrant entitles the holder 
to purchase one share of Common Stock at a price of $1.00 per share and may 
be exercised until March 7, 2007. The securities sold in the 1997 Private 
Placement have not been registered under the Securities Act and may not be 
offered or sold in the United States without registration or an applicable 
exemption from registration requirements. In accordance with the terms of the 
Private Placement, the Company has filed a registration statement with 
respect to resale of certain of the securities to be offered. The Company 
also agreed with the investors in the 1997 Private Placement that it would 
use its best efforts to increase the authorized Common Stock of the Company 
to 100,000,000 shares within 90 days after the Final Closing, but in any 
event no later than 270 days after such date. However, in a letter amendment 
("Letter Amendment") to the Subscription Agreement, approximately 90% of 
subscribers to the Private Placement representing a majority of the voting 
shares agreed to vote in favor of an amendment to the Certificate of 
Incorporation to increase the authorized number of common shares to 
100,000,000 shares at the Company's Annual Meeting held on August 7, 1997, 
making such authorization perfunctory (See Note 8). Holders of the Preferred 
Stock will be entitled to receive dividends, when and if declared by the 
Board of Directors. The Company does not intend to pay cash dividends on the 
Preferred Stock or the underlying Common Stock for the foreseeable future. 
Liquidating rights for preferred stockholders are $260.00 per share plus 
accrued, but unpaid dividends.
    

                                    28
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   
As mentioned above, the subscribers to the Private Placement purchased the 
Units at a discount from the closing prices of the Company's common stock on 
December 19, 1996 and March 7, 1997. The resulting discount of $4,754,000 is 
considered a non-cash dividend and will be recognized as a return to the 
Preferred Stockholders from the date of issuance of the Preferred Stock to 
the date in which the Preferred Stock is eligible for conversion into Common 
Stock. During the year ended March 31, 1997 the Company recognized a non-cash 
dividend to Preferred Stockholders of $1,165,000. All of the subscribers to 
the Private Placement entered into a Lock-up Agreement ("Lock-up") with the 
Company. In the Lock-up, each subscriber agreed not to sell or exercise any 
of the securities contained in the Units until the underlying common stock is 
registered with the Securities and Exchange Commission. When the registration 
statement becomes effective, 25% of the securities become unlocked and 25% 
become unlocked in each 90 day interval following the effective date of the 
registration statement.

The Preferred Stock is convertible into Common Stock upon issuance, except 
that most of the subscribers to the Private Placement signed a Letter 
Amendment prior to March 31, 1997, in which they agreed not to convert any of 
the Preferred Stock until the underlying Common Stock is registered. The 
Letter Amendment provides that they may convert the Preferred Stock into 
Common Stock in accordance with the Lock-up mentioned in the prior paragraph. 
The assumed effective date of the registration statement for the Common Stock 
underlying the Preferred Stock conversion is July 1, 1997.

Under the terms of the Placement Agency agreement the Company signed with 
Paramount, Paramount will provide financial advisory services to the Company 
for an 18 month period beginning after the final closing. The Company will 
pay Paramount $2,500 per month and has agreed to sell to Paramount 2.5 Units 
at a price equal to 110% of the unit price paid by investors in the 1997 
Private Placement. The convertible Preferred Stock contained in the Units 
convert into 260,417 shares of  the Company's common stock ("Advisory 
Stock"). There are also warrants ("Advisory Warrants") to purchase 125,000 
shares of the Company's common stock at $1.00 per share attached to the 
Units, which are exercisable until March 7, 2007. The market price of the 
Company's common stock on March 7, 1997 was $1.50 per share. The Company 
valued the Advisory Stock at approximately $335,000 and the Advisory Warrants 
at approximately $162,000 using a generally accepted valuation program in 
accordance with SFAS 123. The Company began amortizing these advisory 
services over 18 months beginning in April 1997.
    

During November 1995 the Company completed a private placement of 34.85 units 
at $100,000 per unit to "accredited" investors as defined by federal 
securities regulations.  Each unit was comprised of 80,000 shares of the 
Company's common stock and 100,000 warrants to purchase one share of common 
stock per warrant at an exercise price of $1.00 per share for a period of ten 
years.  The Company received net proceeds of $2,920,143 after issuance costs 
of $564,857.  Included among the issuance costs was the payment of $313,650 
in commissions and a non-accountable expense allowance of $139,400 to 
Paramount. The Company will also pay a commission to Paramount of 6% of the 
gross proceeds received upon any exercise of the warrants.  Additionally, 
Paramount received 4.35625 unit purchase warrants at an exercise price equal 
to 110% of the price per unit paid by the investors in the private placement, 
to purchase up to 784,125 shares of common stock.

                                    29
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

WARRANTS - At March 31, 1997, Class A warrants to purchase 13,427,158 shares 
of the Company's Common Stock at a weighted average exercise price of $1.11 
per share were outstanding and expire at various dates through March 7, 2007. 
 Of these warrants, 8,385,150 warrants with an exercise price of $1.00 are 
subject to redemption by the Company at $0.10 per warrant on 60 days prior 
written notice if the market price for the Company's Common Stock exceeds 
$6.00 for a 20-day period ending three days prior to redemption. The Company 
may redeem the warrants if the market price of the Company's Common Stock for 
the 20-day period exceeds $4.00 per share.

In May 1996, the Company entered into an agreement with Wound Healing of 
Oklahoma ("WHO"), a privately held corporation, under which the Company 
acquired an exclusive world-wide license to a certain technology, 
Photodynamic Immunotherapy ("PDIT") treatment for cancer (See Note 4). Under 
the agreement, the Company granted WHO a ten-year warrant to purchase 100,000 
shares of the Company's common stock at an exercise price of $2.25 per share 
valued at $50,000 and must pay a minimum royalty of $50,000 per year. The 
value of the warrant was based upon the negotiated terms of the agreement. 
The first year royalty is payable in two stages, 1) $25,000 due upon 
execution of the agreement and 2) $25,000 due upon submission of an 
Investigational New Drug ("IND") application to the U. S. Food and Drug 
Administration ("FDA"). The value of the warrants will be recognized as an 
expense in similar stages and amounts. During the year ended March 31, 1997, 
the Company recorded $50,000 in product development expense related to the 
agreement which included a $25,000 royalty payment and $25,000 related to the 
issuance of warrants.

In September 1996, the Company entered into a line of credit agreement with 
two of its  stockholders under which the Company may borrow up to $500,000.  
The agreement called for interest at the rate of 12% per annum. In connection 
with the line of credit agreement, the Company granted the two stockholders 
five-year warrants to purchase a total of 150,000 shares of the Company's 
common stock at an exercise price of $0.96. The warrants, which expire in 
October 2001, are valued at $20,000, which was recorded as interest during 
the period the facility was outstanding. The fair market value of the 
warrants was determined based upon rates for lines of credit with similar 
terms available to the Company at the date of grant.

   
As described in Note 4, a stipulated settlement agreement was completed in 
June 1994 under which the Company issued Class B warrants to purchase 309,734 
shares of common stock at an exercise price of $22.00 per share, exercisable 
for a period of five years from date of issuance. The settlement warrants 
were issued on August 11, 1996 and expire in August 2001. The Company valued 
the Class B warrants using a generally accepted valuation program and 
determined that the value was immaterial.
    

STOCKHOLDERS' RIGHTS PLAN - In April 1991, the Company's Board of Directors 
adopted a stockholders' rights plan.  The plan provides for the distribution 
of preferred stock purchase rights to common stockholders which separate from 
the common stock ten business days following: (a) an announcement of an 
acquisition by a person or group ("Acquiring Party") of 15% or more of the 
outstanding common shares of the Company, (b) the commencement of a tender 
offer or exchange offer for 15% or more of the common shares, or (c) a merger 
or asset sale as defined in the agreement. Under the agreement, certain 
related parties are not considered to be an Acquiring Party.  In addition, 
the plan was amended in November 1995 to allow Paramount (and its affiliates) 
associated with the November 1995 private placement to acquire 

                                    30
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

up to 30% of the outstanding common shares of the Company without being 
characterized as an Acquiring Party and was additionally amended on December 
17, 1996 to provide that Paramount (and its affiliates) would not be 
considered an Acquiring Party under the plan. One right attached to each 
share of common stock outstanding as of April 15, 1991 and attaches to all 
shares issued thereafter.  Each right entitles the holder to purchase one 
one-hundredth of one share of Series R junior participating cumulative 
preferred stock, par value $25.00 per share ("unit of preferred stock"), at 
an exercise price of $120 per unit of preferred stock. The units of preferred 
stock are non re-deemable, voting and are entitled to certain preferential 
dividend and liquidation rights. The exercise price and the number of units 
of preferred stock issuable are subject to adjustment to prevent dilution.

If, after the rights have been distributed, the Company is a party to a 
business combination or other specifically defined transaction, each right 
(other than those held by the Acquiring Party) will entitle the holder to 
receive, upon exercise, units of preferred stock or shares of common stock of 
the surviving company with a value equal to two times the exercise price of 
the right. Alternatively, a majority of the independent Directors of the 
Company may direct the Company to exchange all of the then outstanding rights 
for common stock at an exchange ratio of one common share per right.  The 
rights expire April 15, 2001 and are redeemable (at the option of a majority 
of the independent Directors of the Company) at $.01 per right at any time 
until the tenth day following an announcement of the acquisition of 15% or 
more of the Company's Common Stock.

COMMON STOCK OPTIONS - The Company is authorized to issue options on up to 
7,027,400 common shares to directors, consultants and key employees under 
various stock option plans or by direct grant by the Company's Board of 
Directors.  Incentive stock and non-qualified stock options are granted at 
prices not less than the fair market value at the date of grant. There have 
been no options granted below fair market value at the date of grant during 
fiscal years 1997, 1996 and 1995.  The options become exercisable in various 
increments over two through five years. Options expire if not exercised 
within 5-10 years from the date of grant.

The following table summarizes stock option activity for the fiscal years 
ended March 31, 1995, 1996 and 1997:

                                    Number     Weighted Average
                                  of Shares     Exercise Price
                                  ---------     --------------
  Outstanding March 31, 1994        638,353         $11.51
     Granted                        435,000         $ 5.18
     Exercised                            -              -
     Canceled                       (21,713)        $12.72
                                  ---------         ------
  Outstanding March 31, 1995      1,051,640         $ 8.87
     Granted                        182,000         $ 2.21
     Exercised                            -              -
     Canceled                      (320,340)        $11.51
                                  ---------         ------
  Outstanding March 31, 1996        913,300         $ 6.59
     Granted                      1,054,000         $ 1.15
     Exercised                            -              -
     Canceled                      (257,300)        $ 5.10
                                  ---------         ------
  Outstanding March 31, 1997      1,710,000         $ 3.08
                                  ---------         ------
                                  ---------         ------

                                    31
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 1997, 5,317,400 shares remained available for grant under all 
plans.  At March 31, 1997, options for 489,725 shares of common stock were 
exercisable and the remaining 1,220,275 become exercisable through 2000. At 
March 31, 1996, options for 479,900 common shares were exercisable at a 
weighted average exercise price of $6.59.

As discussed in Note 1, the Company has adopted the disclosure only 
provisions of SFAS 123 and continues to account for its stock-based awards 
using the intrinsic value method in accordance with APB Opinion No. 25, 
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and its related interpretations. 
Accordingly, no compensation expense has been recognized during fiscal years 
1997, 1996 and 1995 for employee stock option and purchase plan arrangements.

Under SFAS 123, the fair value of stock-based awards to employees is 
calculated through the use of option pricing models, even though such models 
were developed to estimate the fair value of freely tradable, fully 
transferable options without vesting restrictions, which significantly differ 
from the Company's stock option awards. These models also require subjective 
assumptions, including future stock price volatility and expected life of 
options. A change in those assumptions could result in a significant change 
in the calculated values. Pro forma disclosures as if the Company adopted the 
cost recognition requirements under SFAS 123 in fiscal 1996 and 1997 are 
presented below.

If the computed fair values of the fiscal year 1997 and 1996 awards had been 
amortized to expense over the vesting period of the awards, the proforma 
effect would have been an increase to compensation expense and net loss of 
$113,000 or ($.01) per share for the year ended March 31, 1997 and $40,000 or 
($.01) per share for the year ended March 31, 1996. The proforma effect on 
net loss for fiscal years 1997 and 1996 is not representative of the proforma 
effect on net income or loss in future years because it does not take into 
consideration proforma compensation expense related to grants awarded prior 
to April 1, 1995.

The following table summarizes significant ranges of outstanding and 
exercisable options at March 31, 1997:

                     OPTIONS OUTSTANDING      OPTIONS EXERCISABLE


                                WEIGHTED
                                AVERAGE    WEIGHTED               WEIGHTED
                               REMAINING   AVERAGE                 AVERAGE
   RANGE OF        NUMBER     CONTRACTUAL  EXERCISE    NUMBER     EXERCISE
EXERCISE PRICES   OF SHARES   LIFE (YRS)    PRICE    EXERCISABLE    PRICE 
---------------   ---------   -----------  --------  -----------  --------
  $1.13-$1.75     1,064,000       9.7       $ 1.15     134,325     $ 1.14
   2.25-4.25        348,000       3.7         2.53      87,600       2.81
   5.13-22.00       298,000       3.2        10.58     267,800      10.90
                  ---------                            -------
 $1.13-$22.00     1,710,000       7.4       $ 3.08     489,725     $ 6.78
                  ---------                            -------
                  ---------                            -------

The weighted average fair value of options granted during 1997 and 1996 was 
estimated at $0.57 and $1.42 respectively. The Company's calculations were 
made using the Black Scholes option 

                                    32
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

pricing model recognizing forfeitures as the occur with the following 
weighted average assumptions:

                               1997          1996
                               ----          ----
Expected Life                  2.6            4.0
Interest Rate                  6.0%           6.0%
Volatility                      75%            84%
Dividend Yield                   0%             0%

3.   DISTRIBUTION AND MARKETING AGREEMENTS

In May 1996, the Company entered into a distribution agreement with a 
European dental company for it to become the exclusive European distributor 
for the Company's Periodontal Tissue Monitor ("the PTM") product. The Company 
made an initial shipment to the distributor and recorded revenue of $76,000 
during the year ended March 31, 1997.

During the year ended March 31, 1996 the Company entered into two agreements 
under which it granted exclusive rights relating to its Kephra photochromic 
technology.  One agreement relates to the exclusive use of Kephra in the U.S. 
and Canadian soft-drink markets expires in June 1997, unless renewed for an 
additional eighteen months with a minimum royalty payment. The second relates 
to the exclusive worldwide use of Kephra in the production of watches and 
expires in July 1997.

In January 1996 the Company entered into an agreement under which it licensed 
its Sun Alert technology for exclusive worldwide use. The Sun Alert license 
is renewable each year with a minimum royalty payment.

4.   COMMITMENTS AND CONTINGENCIES

TECHNOLOGY LICENSE AGREEMENTS - The Company has entered into agreements 
relating to certain technologies which obligate the Company to pay royalties 
based on any sales of products incorporating such technologies and upon 
achievement of certain other milestones.  In 1984 the Company entered into an 
agreement with the Board of Trustees of the University of Illinois ("U of I") 
which granted the Company an exclusive license to certain technologies used 
in the PTM product and requires the Company to pay a royalty, subject to 
reduction under certain circumstances, to U of I equal to 5% of any sales of 
PTM.  In addition, in May 1996 the Company entered into an agreement with WHO 
under which it acquired an exclusive worldwide license to PDIT treatment for 
cancer.  The agreement requires the Company to pay WHO a royalty ranging from 
8% to 10% on any sales of products using the licensed technology, or from the 
sale of marketing rights associated with the technology. The Company also 
entered into a research agreement for one year, plus renewal options, with 
WHO. During fiscal year 1997, the Company spent $322,000 under this agreement.

LEASES - The capitalized cost and accumulated depreciation of property under 
capital lease obligations included in property and equipment is as follows:

                                           March 31
                                        1997     1996
                                      -------  ---------
     Laboratory equipment                   -  $ 135,156

                                    33
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Office furniture and equipment   $23,918     23,918
     Less accumulated depreciation     (6,176)  (137,548)
                                      -------  ---------
     Net property under capital 
      lease obligations               $17,742  $  21,526
                                      -------  ---------
                                      -------  ---------


Future minimum lease commitments and rental payments are summarized as 
follows for the year ending March 31:

                                    Capital    Operating
                                     Leases      Lease
                                   --------    ---------
     1998                          $ 5,640      $27,467
     1999                            5,640      -------
     2000                            5,640      -------
     2001                            2,820
     2002                                -
                                   --------
                                    19,740
     Less imputed interest          (1,998)
                                   --------
     Present value of minimum 
      future lease payments        $17,742
                                   --------
                                   --------

At March 31, 1997, the Company occupied approximately 3,400 square feet of 
office and laboratory space in San Diego, California under a sub-lease which 
expires in February 1998. The sub-lease has two one-year renewal options. 
Total rent expense for the fiscal years ended March 31, 1997, 1996 and 1995, 
and the period September 23, 1983 to March 31, 1997 was $136,831, $132,766, 
$144,279 and $1,514,011, respectively.

EMPLOYMENT AGREEMENT - The Company entered into an employment agreement with 
Dr. H. Laurence Shaw, its Chairman, President and Chief Executive Officer for 
an initial two year period beginning December 17, 1996, subject to renewal 
upon mutual agreement. Pursuant to the agreement, the Company has agreed to 
pay Dr. Shaw an initial base salary, subject to certain annual increases.  
Dr. Shaw will also be entitled to receive a minimum annual bonus with an 
additional annual milestone-based bonus at the discretion of the Board of 
Directors of up to an additional 50% of base salary.  In connection with the 
execution of the agreement,  Dr. Shaw was paid a signing bonus. Pursuant to 
the terms of agreement, Dr. Shaw was granted qualified incentive stock 
options  to purchase 675,000 shares of the common stock of the Company, 
exercisable for a period of ten years, at an exercise price equal to the fair 
market value on the date of issuance, with vesting ratably over a three year 
period from the date of grant.

Under the terms of Dr. Shaw's employment agreement which requires the Company 
to pay all of Dr. Shaw's relocation expenses, the Board of Directors approved 
an interest free bridge loan of $300,000 to Dr. Shaw for the purpose of 
acquiring a new residence in California prior to the sale of his New Jersey 
residence. The loan, which was made on May 13, 1997, will be paid back upon 
the  earlier of (i) the sale of Dr. Shaw's New Jersey residence or (ii) 
December 17, 2001.

CONSULTING AGREEMENTS - Effective January 1, 1995, the Company entered into a 
consulting agreement with its former Chairman covering a period of 33 months 
through September 30, 1997.  As compensation for services rendered, the 
Company pays an annual consulting fee payable in equal monthly installments, 
in the amount of $100,000 for the calendar year 1995 and $50,000 for the 
calendar year 1996.  Payments for the fiscal years ended March 31, 1997 and 
1996 were $37,500 and $87,500 respectively.


                                    34
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In December 1996, Dr. Jerry Weisbach was appointed to the Board of Directors 
of the Company. The Company also entered into a consulting agreement with Dr. 
Weisbach to provide advisory services to the Company. The agreement provides 
for annual compensation of $36,000 for these services. Dr. Weisbach was paid 
$9,000 during the fiscal year ended March 31, 1997.

   
LITIGATION - During 1992, the Company was the target of a consolidated 
stockholder class action complaint. Although management believed the claim to 
be without merit, the Company concluded that it was in the best interest of 
the Company to settle the matter. Such action was ultimately settled during 
fiscal 1995 with a cash payment of $2,800,000 to the plaintiff class, all of 
which was paid by the Company's insurers. Additionally, in fiscal year 1997, 
the Company issued to the plaintiff class five year Class B Warrants to 
purchase 309,734 shares of Common Stock at an exercise price of $22.00 per 
share. The Class B Warrants were issued on August 11, 1996 and expire in 
August 2001. The Company valued the Class B warrants using a generally 
accepted valuation program and determined that the value was immaterial.
    

REVIEW OF AMERICAN STOCK EXCHANGE LISTING - The Company has been informed 
that it is out of compliance with certain listing requirements of the 
American Stock Exchange. The Company is in discussions with the Exchange 
regarding the Company's financial condition and the status of its listing, 
however,  there can be no assurance that the listing will be continued.

5.   INCOME TAXES

Significant components of the Company's deferred tax assets and liabilities 
are as follows:

                                                            March 31
                                                       1997           1996
                                                   -----------    -----------
Deferred tax assets:
  Capitalized research expense                     $   276,000    $   202,000
  Accruals not currently deductible                     41,000        179,000
  Net operating loss carryforwards                  11,647,000     10,207,000
                                                   -----------    -----------
  Research and development and other credits           634,000        472,000
     Total deferred tax assets                      12,598,000     11,060,000
Deferred tax liabilities - patent expense              (65,000)       (78,000)
     Total net deferred tax assets                  12,533,000     10,982,000
Valuation allowance for deferred tax assets        (12,533,000)   (10,982,000)
                                                   -----------    -----------
   Net deferred tax assets                         $         0   $          0
                                                   -----------    -----------
                                                   -----------    -----------

A valuation allowance of $12,533,000 and $10,982,000 at March 31, 1997 and 
1996, respectively, has been recognized as an offset to the deferred tax 
assets as realization of such assets is uncertain. At March 31, 1997, the 
Company has federal and California tax net operating loss carryforwards of 
approximately $31,596,000 and $9,733,000, respectively.  The Company also has 
federal and California research and other credit carryforwards of 
approximately $468,000 and $154,000, respectively.  The difference between 
the tax loss and credit carryforwards for federal and California purposes is 
attributable to the capitalization of research and development expenses for 
California tax purposes and a required 50% limitation in the utilization of 
California tax loss carryforwards.  The federal tax loss carryforward and the 
credit 

                                    35
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


carryforwards will begin expiring in 1999 unless previously utilized.  
The California tax loss carryforward and credit carryforwards began expiring 
in 1995.

The Internal Revenue Code ("the Code") includes provisions which 
significantly limit potential use of net operating losses in situations where 
there is a change in ownership of more than 50% during a three-year period.  
Accordingly, if a change in ownership occurs, the ultimate benefit realized 
from these carryovers may be significantly reduced in total, and the amount 
that may be utilized in any given year may be significantly limited. The 
State of California has enacted similar legislation.  The common stock 
issuance of November 27, 1995 in combination with other stock issuances 
completed by the Company during the past three years have resulted in a 
change in ownership as defined in the Code.  Accordingly, the Company has 
federal and California net operating losses in the amount of $25,780,000 and 
$7,131,000 respectively that are currently subject to the annual limitation. 
Approximately $605,000 of these net operating losses become available for use 
each year. The remaining federal and California net operating losses of 
approximately $5,816,000 and $2,602,000, respectively, are not subject to the 
annual limitation since these losses occurred after the ownership changes.

6.   OTHER RELATED PARTY TRANSACTIONS

For the period September 23, 1983 to March 31, 1997, the Company incurred 
expenses,  principally for financial consulting services inclusive of 
finder's fees on Company financings of $861,928 to related entities.  No such 
expenses to related entities were incurred during the fiscal years ended 
March 31,  1997, and 1996.

The Company entered into a consulting agreement with Donna Shaw Ph.D., the 
wife of the Chairman, President and Chief Executive Officer, H. Laurence 
Shaw. Under the agreement, Dr. Donna Shaw will use her pharmaceutical 
licensing background to assist the Company with developing corporate research 
alliances with third parties for the Company's pharmaceutical products. The 
consulting agreement was approved by the Board of Directors and includes a 
monthly consulting fee of $3,000 per month for the initial term of six 
months. Dr. Donna Shaw may also be granted options to purchase 20,000 shares 
of the Company's common stock under the Equity Incentive Plan upon the 
successful introduction of one or more potential partners.

   
7. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
    

On June 4, 1996 the Company entered into an agreement with Binary 
Therapeutics, Inc. ("BTI") under which the Company was granted an option to 
acquire BTI, a development stage company with certain technologies in the 
area of Photodynamic Therapy ("PDT") for cancer.  The agreement, as amended,  
gives the Company the right to acquire BTI by a merger of BTI into a 
wholly-owned subsidiary of the Company. In February 1997, the Company and BTI 
agreed to extend the period during which the Company may exercise its option 
to acquire BTI from April 30, 1997 until such time as BTI has completed human 
clinical trials of Boronated Porphyrin Compound ("BOPP") at an agreed upon 
dose level (the "Option Period"). The Option Period was extended at the 
Company's request to enable BTI to complete preclinical studies, to commence 
clinical trials in humans and to demonstrate that a given dose level of BOPP 
in humans would not cause certain adverse events. Accordingly, the Company 
has deferred its election to exercise the option.

                                    36
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The agreement calls for the Company to issue common stock to the BTI 
stockholders with an aggregate acquisition value of $6,000,000. The number of 
shares of the Company's common stock to be issued will be determined based 
upon the market value of the Company's common stock prior to the date of 
exercise, although the value of the common stock cannot be less than $2.00 or 
more than $6.00 per share. The agreement has been approved by a majority of 
the stockholders of BTI. The Board of Directors voted to approve the merger, 
however the merger is also subject to shareholder approval for  the issuance 
of additional shares of common stock. One of the Company directors is also a 
director of BTI.

Under the agreement, the Company will assist BTI during the option period in 
preparing the PDT products for advancement into human clinical trials. In 
order to exercise its rights to consummate the merger, the Company will have 
to satisfy certain conditions, including funding up to $1,250,000 in expenses 
budgeted to be incurred by BTI during the option period.  These expenses 
represent the majority of BTI's budgeted expenditures for the period and are 
expected to be comprised primarily of product development costs. The Company 
is also required to advance to BTI funds to repay $615,000 in indebtedness, 
including accrued interest as part of the acquisition price of BTI. Certain 
holders of such indebtedness are shareholders of the Company.  In exchange 
for such funding BTI will issue convertible notes to the Company which may be 
converted into BTI equity at the Company's option.  The Company has elected 
to record all advances to BTI as product development expense in the period 
incurred due to uncertainties regarding the ultimate value to be realized 
from the convertible notes.  During the year ended March 31, 1997 the Company 
advanced $1,282,000 to BTI and such advances are included in product 
development expense.

8.   SUBSEQUENT EVENTS

On June 23, 1997, the Company received approval from the FDA to begin 
commercial sales and distribution in the United States for its PTM product. 
The Company also signed a letter of intent with Steri-Oss, a leading dental 
implant company, for the exclusive five-year distribution of PTM in North 
America and other countries, excluding Europe and Japan.

   
On August 7, 1997, the Company's stockholders approved an amendment to the 
Certificate of Incorporation to change the name of the Company to Pacific 
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc. On the 
same date, the stockholders approved increases in the authorized number of 
common shares from 30,000,000 to 100,000,000 and preferred shares from 
300,000 to 2,000,000.
    

                                    37
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

         None.

                                   PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by Items 10, 11, 12 and 13 is incorporated herein 
by reference to the information under the captions "Election of Directors" 
and "Executive Compensation" and "Beneficial and Record Ownership of 
Securities", respectively, set forth in the Company's definitive Proxy 
Statement to be filed with the Securities and Exchange Commission within 120 
days after March 31, 1997, for its Annual Meeting of Stockholders to be held 
on August 7, 1997. Information concerning executive officers is incorporated 
herein by reference to the information included in Part I, Item 4A of this 
report under the caption "Executive Officers of the Registrant."

                                    38
<PAGE>

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
          AND REPORTS ON FORM 8-K

     (a)  (1)  The following documents are filed as a part of this Report:
               Financial Statements--See Index to Consolidated Financial 
               Statements as Item 8 on F-1 of this Report.

               Exhibits
               --------

EXHIBIT
NUMBER         DESCRIPTION OF EXHIBIT
-------        ----------------------
2.1            Agreement and Plan of Merger between the Registrant, XYX
               Acquisition Corp., and Binary Therapeutics, Inc. dated June 4,
               1996. (20)

   
2.2            Letter Agreement dated February 27, 1997 amending the Agreement
               and Plan of Merger (25)
    

3.1            Certificate of Incorporation of the Registrant.  (1)

3.2            Certificate of Amendment of Certificate of Incorporation of the
               Registrant.  (2)

3.3            Certificate of Amendment of Certificate of Incorporation of the
               Registrant.  (3)

3.4            Certificate of Elimination with respect to the Registrant's
               Series A Convertible Preferred Stock. (4)

3.5            Certificate of Designations of Convertible Preferred Stock,
               Revised Series A of the Registrant.  (4)

3.6            Certificate of Designations of Convertible Preferred Stock,
               Series B of the Registrant.  (4)

3.7            Form of Certificate of Designations of Series R Junior
               Participating Cumulative Preferred Stock of the Registrant, as
               filed with the Delaware Secretary of State on April 16, 1991.
               (6)

3.8            Bylaws of the Registrant Amended and Restated as of April 2,
               1991.  (6)

3.9            Certificate of Amendment of Certificate of Designations of
               Preference of Convertible Preferred Stock, Series B filed with
               the Delaware Secretary of State on September 14, 1989.  (13)

3.10           Bylaws of the Registrant amended and restated as of November 6,
               1992.  (16)

3.11           Certificate of Amendment of Certificate of Incorporation filed
               with the Delaware Secretary of State on April 8, 1996. (20)

*Management contract, compensatory plan or arrangement


                                    39
<PAGE>

EXHIBIT
NUMBER         DESCRIPTION OF EXHIBIT
-------        ----------------------
3.12           Certificate of Amendment to Certificate of Designations of
               Series R Junior Participating Cumulative Preferred Stock, $25.00
               par value, filed with the Delaware Secretary of State on
               November 17, 1995.  (19)

4.1            Description of the Registrant's Common Stock, $.02 par value. (7)

4.2            Rights Agreement, dated as of April 2, 1991, by and between the
               Registrant and First Chicago Trust Company of New York.  (6)

4.3            Form of Right Certificate pertaining to the Preferred Stock
               Purchase Rights of the Registrant.  (6)

4.4            Amendment No. 1 to Rights Agreement between Xytronyx, Inc. and
               First Chicago Trust Company of New York as Rights Agent dated 
               November 10, 1995. (19)

4.5            Warrant Agreement for "Class B Warrants" (22)

4.6            Certificate of Designations of Series A Convertible Preferred
               Stock of Xytronyx, Inc. (23)

4.7            Warrant Agreement for "Class B" Warrants including Form of Class
               B Warrant (24)

   
4.8            Amendment No. 2 to Rights Agreement among Xytronyx, Inc., First
               Chicago Trust Company of New York and American Stock Transfer &
               Trust Company dated August 15, 1996. (25)

4.9            Amendment No. 3 To Rights Agreement between Xytronyx, Inc and
               American Stock Transfer & Trust Company dated December 17, 
               1996. (25)
    

10.1           Agreement for Cooperative Investigation dated September 6, 1984
               between the Registrant and the Board of Trustees of the
               University of Illinois.  (1)

10.2           Agreement for Cooperative Investigation dated October 8, 1984
               between the Registrant and the Board of Trustees of the
               University of Illinois.  (1)

10.3           Amendment dated October 3, 1985 to the Agreement for Cooperative
               Investigation dated October 8, 1984 between the Registrant and
               the Board of Trustees of the University of Illinois. (8)

10.4           Agreement dated September 6, 1984 between the Registrant and
               University Patents, Inc.  (1)

10.6           Advice to Holders of the Company Common Stock Issued January 31,
               1984.  (1)

10.8           Research Agreement dated January 28, 1986 between the Company
               and the University of Washington.  (8)

*Management contract, compensatory plan or arrangement

                                    40
<PAGE>


EXHIBIT
NUMBER         DESCRIPTION OF EXHIBIT
-------        ----------------------
10.9           Research Agreement dated March 4, 1987 between the Registrant
               and the University of Washington. (3)

10.10*         Nonqualified Stock Option Plan of the Registrant, as amended. (8)

10.11*         Incentive Stock Option Plan of the Registrant, as amended.  (8)

10.12*         Stock Option Plan for Nonemployee and Non-Consultant Directors
               of the Registrant.  (8)

10.13*         Stock Option Agreement between the Registrant and Morris 
               Weeden.  (8)

10.14*         Stock Option Agreement between the Registrant and William
               Jorgenson.  (8)

10.15          Lease Agreement dated February 19, 1986 between the Registrant
               and McKellar Development of La Jolla.  (8)

10.17          Form of Indemnity Agreement between the Registrant and its
               directors and executive officers. (8)

10.18          Manufacture, Sales and Distribution Agreement dated November 23,
               1987 among the Registrant, Perio Test, Inc., and Colgate-
               Palmolive Company. (4)

10.19          Guaranty and Support Agreement dated November 23, 1987 by and
               between the Registrant and Colgate-Palmolive Company.  (4)

10.20          Security Agreement and Consent dated November 23, 1987 by and
               among the Registrant, Perio Test, Inc., Colgate-Palmolive
               Company, University Patents, Inc., and the University of
               Illinois.  (4)

10.21*         Amendment dated May 8, 1987 to the Incentive Stock Option Plan
               of the Registrant.  (4)

10.24*         1988 Stock Option Plan of the Registrant.  (11)

10.25*         Key Executive Stock Option Plan of the Registrant. (10)

10.28*         1991 Stock Option Plan for Employees and Consultants of the
               Registrant. (14)

10.29*         1991 Stock Option Plan for Non-Employee and Non-Consultant
               Directors of the Registrant. (14)

10.30          April 29, 1992, Unit Purchase Agreement. (15)

10.32          Ladenburg, Thalmann & Co., Inc. Warrant. (15)

10.33          Payne Financial Group, Inc. Stock Subscription Warrant. (15)

10.35          Amendment dated March 29, 1993, to the Manufacture, Sales and
               Distribution Agreement dated as of November 23, 1987 among the 
               Registrant, Perio Test, Inc. and Colgate-Palmolive Company. (16)

*Management contract, compensatory plan or arrangement

                                    41
<PAGE>


EXHIBIT
NUMBER         DESCRIPTION OF EXHIBIT
-------        ----------------------
10.37*         Stock Option Agreement between the Registrant and Dr. Peter
               Baram.  (17)

10.38          Purchase Agreement dated April 30, 1994 between the Registrant
               and Purely Hawaiian Licensing, Inc.  (17)

10.39*         Stock Option Agreement between the Registrant and Larry O.
               Bymaster.  (18)

10.40*         Stock Option Agreement between the Registrant and Rand P.
               Mulford.  (18)

10.41*         Consulting Agreement dated January 1, 1995 between the
               Registrant and Dr. Peter Baram. (18)

10.42          Termination Agreement dated May 11, 1995 between the Registrant
               and Colgate-Palmolive Company. (18)

10.43          License Agreement Between the Registrant and Wound Healing of
               Oklahoma dated May 8, 1996. (20)

10.44*         Employment Agreement dated as of January 1, 1995 between the
               Registrant and Larry O. Bymaster.  (20)

10.45*         Xytronyx, Inc. Equity Incentive Plan (22)

10.46*         Xytronyx, Inc. Stock Option Plan for Non-Employee Directors (22)

   
10.47*         Employment Agreement between Xytronyx, Inc. and H. Laurence Shaw
               dated December 16, 1996 (22)
    

10.48          Form of Placement Agency Agreement between Company and Paramount
               Capital, Inc. (24)

10.49          Form of Amendment No. 1 to Placement Agency Agreement between
               Company and Paramount Capital, Inc. (24)

10.50          Form of Subscription Agreement between Company and certain
               Selling Stockholders. (24)

   
10.51*         Employment Agreement dated January 1, 1997 between the Company
               and Larry O. Bymaster (25)

10.52*         Consulting Agreement dated June 1, 1997 between the Company and
               Donna Shaw, Ph.D. (25)

10.53*         Employment Agreement dated April 18, 1997 between the Company
               and Anil Singhal, Ph.D. (25)

10.54*         Promissory Note dated May 9, 1997 between the Company and Dr. H.
               Laurence Shaw (25)
    

*Management contract, compensatory plan or arrangement

                                    42
<PAGE>


EXHIBIT
NUMBER         DESCRIPTION OF EXHIBIT
-------        ----------------------

   
21.            Subsidiaries of the Registrant.  (25)
    

23.            Independent Auditors' Consent.  (5)

27.            Financial Data Schedule (5)

99.            Independent Auditors'  Report.  (5)

------------------
(1)  Previously filed together with the Registrant's Registration Statement on
     Form S-18 (File No. 2-98072) dated May 30, 1985.

(2)  Previously filed together with Amendment No. 1 to the Registrant's
     Registration Statement on Form S-18 (File No. 2-98072) dated July 29,
     1985.

(3)  Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 0-14838) filed June 29, 1987.

(4)  Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 14838) filed June 17, 1988.

   
(5)  Filed herewith.
    

(6)  Previously filed together with the Registrant's Current Report on Form 8-K
     (File No. 0-14838) on April 3, 1991.

(7)  Incorporated by reference to the Registrants Registration Statement on
     Form 8-A (File No. 0-14838) declared effective Sept. 23, 1986.

(8)  Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 0-14838) dated March 31, 1986.

(9)  Previously filed together with Amendment No. 2 to the Registrant's
     Registration Statement on Form S-18 (File No. 2-98072) dated July 29,
     1985.

(10) Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 0-14838) on June 29, 1989.

(11) Previously filed together with the Registrant's Proxy Statement (File No.
     0-14838) dated August 15, 1988, for the Annual Meeting of Stockholders
     held on September 23, 1988.

(12) Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 0-14838) dated March 31, 1990.

(13) Previously filed together with Registrant's Annual Report on Form 10-K
     (File No. 0-14934) dated March 31, 1991.

(14) Previously filed together with the Registrant's Registration Statement on
     Form S-8 (File No. 33-45073) dated January 13, 1992.


                                    43
<PAGE>

(15) Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 1-9613) dated March 31, 1992.

(16) Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 1-9613) dated March 31, 1993.

(17) Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 1-9613) dated March 31, 1994.

(18) Previously filed together with the Registrant's Annual Report on Form 10-K
     (File No. 1-9613) dated March 31, 1995.

(19) Previously filed together with the Registrant's Current Report on Form 8-K
     (File No. 0-14838) on November 10, 1995.

(20) Previously filed together with the Registrant's Annual Report on
     Form 10-K (File No. 1-9613) dated March 31, 1996

(21) Previously filed together with the Registrant's Current Report on Form 8-K
     (File No. 0-14838) on April 1, 1996.

(22) Previously filed together with the Registrant's Quarterly Report on Form
     10-Q for the quarter     ended September 30, 1996

(23) Previously filed together with the Registrant's Quarterly Report on
     Form 10-Q for the quarter ended December 31, 1996

(24) Previously filed together with the Registrant's Registration
     Statement on Form S-3 (File No. 333- 26109) dated April 28, 1997

   
(25) Previously filed together with the Registrant's Annual Report on
     Form 10-K (File No. 1-9613) dated March 31, 1997
    

     (b)  Reports on Form 8-K.


     A report on Form 8-K, dated March 7, 1997, was filed under Item 5 of 
Form 8-K with respect to the announcement that the Company completed the sale 
of $10,000,000 of Premium Preferred Units and other matters.

   
     A report on Form 8-K, dated June 10, 1997 was filed under Item 5 of Form 
8-K with respect to the announcement that the Company received an approvable 
letter from the U.S. Food and Drug Administration for a premarket application 
for the Periodontal Tissue Monitor (PTM).  The approval is contingent upon 
certain manufacturing requirements and labeling issues and the Company signed 
a letter of intent with Steri-Oss, a leading dental implant company, for the 
distribution of the Company's PTM, under a proposed five year agreement, 
Steri-Oss would be the exclusive distributor of PTM in North America and 
other countries, excluding Europe and Japan.
    

                                    44
<PAGE>

                                  SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the 
Securities Exchange Act of 1934, the registrant has duly caused this report 
to be signed on its behalf by the undersigned, thereunto duly authorized.     

   
                                       PACIFIC PHARMACEUTICALS, INC.
    

                                       By:  /s/ JAMES HERTZOG
                                          --------------------------------
                                          James Hertzog,
                                          Controller and
                                          Principal Financial Officer

   
                                       Date:  August 27, 1997
    


   

    

                                    45