<PAGE>     

                      SECURITIES AND EXCHANGE COMMISSION

                             Washington, DC 20549

                                   FORM 10-Q

[ X ]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended          September 30, 1998
                                                   ----------------------

[   ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from              to             .
                                              -------------  --------------

                       Commission file number 0-28674 .

                       CADUS PHARMACEUTICAL CORPORATION
-------------------------------------------------------------------------------
            (Exact Name of Registrant as Specified in its Charter)

           Delaware                                      13-3660391
---------------------------------          ------------------------------------
  (State or Other Jurisdiction             (I.R.S. Employer Identification No.)
of Incorporation or Organization)

     777 Old Saw Mill River Road, Tarrytown, New York            10591-6705
     ------------------------------------------------            ----------
         (Address of Principal Executive Offices)                (Zip Code)

Registrant's Telephone Number, Including Area Code        (914) 467-6200
                                                   ----------------------------

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
                                -----             -----

The number of shares of registrant's common stock, $.01 par value, outstanding
as of October 21, 1998 was 13,068,940.

<PAGE>



                       CADUS PHARMACEUTICAL CORPORATION

                                     INDEX

<TABLE>
<CAPTION>
                                                                                  Page No.
                                                                                  --------
<S>                                                                               <C>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS                                     3

PART I   --  CONDENSED FINANCIAL INFORMATION

         Item 1   Condensed Financial Statements

                  Condensed Balance Sheets - September 30, 1998 and                   4
                  December 31, 1997                                                
                                                                                   
                  Condensed Statements of Operations - Three and nine months       
                  ended September 30, 1998 and 1997                                   5
                                                                                   
                  Condensed Statements of Cash Flows - Nine months ended           
                  September 30, 1998 and 1997                                         6
                                                                                   
                  Notes to Condensed Financial Statements                          7-10
                                                                                   
         Item 2   Management's Discussion and Analysis of Financial                
                  Condition and Results of Operations                             11-14


PART II  --  OTHER INFORMATION                                                     
                                                                                   
         Item 1   Legal Proceedings                                                  15
                                                                                   
         Item 2   Changes in Securities and Use of Proceeds                          15
                                                                                   
         Item 3   Defaults Upon Senior Securities                                    16
                                                                                   
         Item 4   Submission of Matters to a Vote of Security Holders                16
                                                                                   
         Item 5   Other Information                                                  16
                                                                                   
         Item 6   Exhibits and Reports on Form 8-K                                   16


SIGNATURES                                                                           17

EXHIBIT INDEX                                                                        18
</TABLE>


                                      2

<PAGE>

Special Note Regarding Forward Looking Statements

     Certain statements in this Quarterly Report on Form 10-Q constitute
     "forward-looking statements" within the meaning of Section 21E of the
     Securities Exchange Act of 1934, as amended. Such forward-looking
     statements involve known and unknown risks, uncertainties, and other
     factors which may cause the actual results, performance, or achievements
     of the Company to be materially different from any future results,
     performance or achievements expressed or implied by such forward-looking
     statements. Factors that could cause or contribute to such differences
     include, but are not limited to, the Company's lack of developed
     pharmaceutical products and uncertainties regarding its ability to
     develop safe and efficacious pharmaceutical products, technological
     uncertainties regarding the Company's technologies, uncertainties
     regarding the Company's future acquisition and licensing of technologies,
     the Company's relationship with its collaborative partners and
     uncertainties regarding its ability to enter into future collaborative
     agreements, the Company's capital needs and uncertainty of future
     funding, the Company's history of operating losses, the Company's
     dependence on proprietary technology and the unpredictability of patent
     protection, intense competition in the pharmaceutical and biotechnology
     industries, rapid technological development that may result in the
     Company's technologies and future products becoming obsolete,
     uncertainties regarding the Company's ability to attract and retain key
     officers, employees and consultants, as well as other risks and
     uncertainties discussed in the Company's prospectus dated July 17, 1996.


                                      3

<PAGE>

                       Cadus Pharmaceutical Corporation

                           Condensed Balance Sheets

<TABLE>
<CAPTION>
                                                                               September 30,       December 31,
                                                                                   1998                1997
                                                                               ------------        ------------
<S>                                                                            <C>                 <C>
                                    Assets

Current assets:
     Cash and cash equivalents                                                 $ 34,268,905        $ 36,761,516
     Restricted cash (note 4)                                                       286,000                  --
     Prepaid and other current assets                                               621,475             405,597
                                                                               ------------        ------------
               Total current assets                                              35,176,380          37,167,113

Fixed assets, net of accumulated depreciation and amortization of
    $2,044,835 at September 30, 1998 and $2,582,661 at December 31, 1997          3,087,590           2,646,936


Investments in other ventures (note 3)                                            2,627,393           1,478,229
Other assets, net                                                                 1,282,449             948,912
                                                                               ------------        ------------

               Total assets                                                    $ 42,173,812        $ 42,241,190
                                                                               ============        ============

                     Liabilities and Stockholders' Equity

Current liabilities:
       Deferred revenue                                                        $    902,683        $     94,190
       Accounts payable                                                             693,305             892,636
       Accrued expenses and other current liabilities                               993,318             604,146
       Note payable to partnership                                                  150,000             150,000
                                                                               ------------        ------------
               Total current liabilities                                          2,739,306           1,740,972

Commitments and contingencies

Stockholders' equity:
       Common stock                                                                 132,106             125,001
       Additional paid in capital                                                59,689,446          54,517,519
       Accumulated deficit                                                      (20,086,971)        (13,842,227)
       Treasury stock                                                              (300,075)           (300,075)
                                                                               ------------        ------------

               Total stockholders' equity                                        39,434,506          40,500,218
                                                                               ------------        ------------

               Total liabilities and stockholders' equity                      $ 42,173,812        $ 42,241,190
                                                                               ============        ============
</TABLE>

         See accompanying notes to the condensed financial statements


                                      4

<PAGE>

                       Cadus Pharmaceutical Corporation

                      Condensed Statements of Operations

<TABLE>
<CAPTION>
                                                   Three Months Ended                  Nine Months Ended
                                                      September 30,                       September 30,
                                                 1998              1997              1998              1997
                                             ------------      ------------      ------------      ------------
<S>                                          <C>               <C>               <C>               <C>
Revenues, principally from
    related parties (note 5)                 $  2,508,213      $ 2,402,364       $  9,948,238      $  6,564,150

Costs and expenses:
    Research and development costs              3,743,488         2,962,939        10,980,568         8,331,469
    General and administrative expenses         2,703,682           820,070         5,716,983         2,808,670
                                             ------------      ------------      ------------      ------------

       Total costs and expenses                 6,447,170         3,783,009        16,697,551        11,140,139
                                             ------------      ------------      ------------      ------------

Operating loss                                 (3,938,957)       (1,380,645)       (6,749,313)       (4,575,989)
                                             ------------      ------------      ------------      ------------

Other income and (expenses):
    Net interest income                           470,968           497,342         1,440,222         1,581,731
    Equity in other ventures                     (248,111)         (380,806)         (850,836)         (680,823)
    Net gain on sale of equipment                  12,460              --               1,746              --
                                             ------------      ------------      ------------      ------------

       Total other income and (expenses)          235,317           116,536           591,132           900,908
                                             ------------      ------------      ------------      ------------
Loss before income taxes                       (3,703,640)       (1,264,109)       (6,158,181)       (3,675,081)

State and local taxes                              44,289           (63,165)           86,563           (40,048)
                                             ------------      ------------      ------------      ------------

Net loss                                     $ (3,747,929)     $ (1,200,944)     $ (6,244,744)     $ (3,635,033)
                                             ============      ============      ============      ============

Basic net loss per share (note 2)            $      (0.29)     $      (0.10)     $      (0.49)     $      (0.30)

Shares used in calculation of basic net
    loss per share (note 2)                    13,068,857        12,295,474        12,725,720        12,185,827
</TABLE>

         See accompanying notes to the condensed financial statements


                                      5

<PAGE>

                       Cadus Pharmaceutical Corporation

                      Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                   Nine Months Ended
                                                                                                      September 30,
                                                                                                1998                1997
                                                                                            ------------        ------------
<S>                                                                                         <C>                 <C>
Cash flows from operating activities:
Net loss                                                                                    $ (6,244,744)       $ (3,635,033)
Equity in other ventures                                                                         850,836             680,823
Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization                                                         716,686             980,640
           Net gain on sale of equipment                                                          (1,746)                --
           Changes in assets and liabilities:
                Increase in prepaid and other current assets                                    (215,878)            (80,962)
                (Increase) decrease in other assets                                              (87,570)              2,993
                Increase (decrease) in deferred revenue                                          780,000          (1,000,000)
                Decrease in accounts payable                                                    (199,331)           (172,610)
                Increase (decrease) in accrued expenses and other current liabilities            389,172            (237,801)
                                                                                            ------------        ------------

                         Net cash used in operating activities                                (4,012,575)         (3,461,950)
                                                                                            ------------        ------------

Cash flows from investing activities:
            Acquisition of fixed assets                                                       (2,407,654)         (1,093,283)
            Sale of fixed assets                                                               1,336,092                 --
            (Increase) decrease in restricted cash                                              (286,000)             78,000
            Repayment of stockholder's loan                                                          --                5,822
            Investments in other ventures                                                     (2,000,000)         (2,000,000)
            Patent costs                                                                        (301,506)           (334,192)
                                                                                            ------------        ------------

                         Net cash used in investing activities                                (3,659,068)         (3,343,653)
                                                                                            ------------        ------------

Cash flows from financing activities:
            Payments on bank loans                                                                   --              (29,075)
            Proceeds from issuance of common stock                                               179,032             559,144
            Proceeds from issuance of restricted stock                                         5,000,000                 --
                                                                                            ------------        ------------

                         Net cash provided by financing activities                             5,179,032             530,069
                                                                                            ------------        ------------

                         Net decrease in cash and cash equivalents                            (2,492,611)         (6,275,534)

Cash and cash equivalents at beginning of period                                              36,761,516          43,152,677
                                                                                            ------------        ------------

Cash and cash equivalents at end of period                                                  $ 34,268,905        $ 36,877,143
                                                                                            ============        ============
</TABLE>

         See accompanying notes to the condensed financial statements


                                      6

<PAGE>

                       Cadus Pharmaceutical Corporation

                    Notes to Condensed Financial Statements

(1)  Organization and Basis of Preparation

     The information presented as of September 30, 1998 and for the three and
     nine-month periods then ended, is unaudited, but includes all
     adjustments (consisting only of normal recurring accruals) that
     the Company's management believes to be necessary for the fair
     presentation of results for the periods presented. Certain information
     and footnote disclosures normally included in financial statements
     prepared in accordance with generally accepted accounting principles have
     been omitted pursuant to the requirements of the Securities and Exchange
     Commission, although the Company believes that the disclosures included
     in these financial statements are adequate to make the information not
     misleading. The December 31, 1997 balance sheet was derived from audited
     financial statements. These financial statements should be read in
     conjunction with the Company's annual report on Form 10-K for the year
     ended December 31, 1997.

     The results of operations for the three and nine-month periods ended
     September 30, 1998 are not necessarily indicative of the results to be
     expected for the year ending December 31, 1998.

(2)  Net Loss Per Share

     At December 31, 1997, the Company adopted the provisions of Statement of
     Financial Accounting Standards No. 128, Earnings per Share. For the three
     and nine-month periods ended September 30, 1998 and 1997, basic net loss
     per share is computed by dividing the net loss by the weighted average
     number of common shares outstanding. Diluted net loss per share is the
     same as basic net loss per share since the inclusion of potential common
     stock equivalents (stock options and warrants) in the computation would
     be anti-dilutive.

(3)  Investments in Other Ventures

     In December 1996, the Company issued a $150,000 promissory note bearing
     interest at 7% per annum in exchange for a 42% limited partnership
     interest in Laurel Partners Limited Partnership ("Laurel"), a limited
     partnership of which a shareholder of the Company is the general partner.
     An interest payment of $10,500 was accrued at December 31, 1997 and paid
     in January 1998. The principal amount and interest accrued thereon is
     payable on December 26, 1998. In addition, the Company purchased for
     $160,660 a 47% limited partnership interest in Laurel from Tortoise
     Corporation, a corporation wholly owned by the shareholder. Laurel's
     purpose is to invest, directly or indirectly, in securities of
     biotechnology companies. The Company has the right to require the
     shareholder to match any future investment made by the Company
     in Laurel up to an aggregate investment on the part of the
     shareholder of $5.0 million. This right expires on the earlier of
     December 31, 1999 or such time that neither the shareholder nor one of
     his affiliates is the general partner of Laurel. The Company is not
     required to make any additional investment in Laurel. The
     investment is accounted for under the equity method with the
     recognition of losses limited to the Company's capital contributions. For
     the three and nine-month periods ended September 30, 1998, the Company
     recognized gains of $2,361 and $9,955, respectively. For the three and
     nine-month periods ended September 30, 1997, the Company recognized
     losses of $15,973 and $158,177, respectively. The remaining
     investment in Laurel of $146,651 is included in
     investments in other ventures on the condensed balance sheet.

     In May 1997, the Company purchased $2.0 million of convertible preferred
     stock in Axiom Biotechnologies Inc. ("Axiom"), representing approximately
     26% of the outstanding shares of Axiom on an as converted basis. As part
     of the arrangement, Axiom agreed to deliver and license to the Company
     its first High Throughput Pharmacology System (HT-PS(Trademark)). The
     Company purchased an additional $2.0 million of convertible preferred
     stock in Axiom on June 5, 1998 after the Company received and accepted
     Axiom's HT-PS(Trademark). The Company also made a payment to Axiom for
     the HT-PS(Trademark) which is included in fixed assets in the


                                      7

<PAGE>

                       Cadus Pharmaceutical Corporation

                    Notes to Condensed Financial Statements

     accompanying condensed balance sheet at September 30, 1998. The
     additional investment increased the Company's equity interest in
     Axiom to approximately 30% of Axiom's outstanding shares on an as
     converted basis, after taking into account a recent investment
     in Axiom by JAFCO Co., Ltd., ("JAFCO"), an affiliate of the Nomura Group.
     The Company's investment is accounted for under the equity
     method with the Company recognizing 100% of Axiom's net losses prior to
     the JAFCO investment and 50% after such investment.
     Such percentage represents the extent to which the Company is deemed to
     be funding Axiom's losses. For the three and nine-month periods ended
     September 30, 1998, the Company recognized $250,472 and $860,791,
     respectively in losses generated by Axiom. For the three and nine-month
     periods ended September 30, 1997, the Company recognized losses of
     $364,833 and $522,646, respectively. The remaining investment in
     Axiom of $2,480,742 is included in investments in other ventures
     on the condensed balance sheet.

(4)  Related Party Transaction

     In August 1998, the Company guaranteed the payment of a $286,000 loan
     made to the Director of Research of the Company (who is also a Board
     Member) and secured its guarantee obligation with cash collateral of
     $286,000. The Director of Research indemnified the Company from any
     liabilities arising from its guarantee and pledged securities owned by
     him to secure his indemnification obligation.

(5)  Research Collaborations

     Pursuant to the Bristol-Myers Squibb Company Research Collaboration and
     License Agreement, the Company received and recognized revenue of
     approximately $1.1 million and $3.2 million for the three and nine-month
     periods ended September 30, 1998. The Company also received and
     recognized revenue of approximately $661,000 and $2.0 million, from a
     Research Collaboration and License Agreement with Solvay Pharmaceuticals
     B.V., for the three and nine-month periods ended September 30, 1998.

     Pursuant to the SmithKline Beecham Research Collaboration and License
     Agreement, the Company received $1.6 million in cash and recognized
     research funding of approximately $780,000 for the three-month period
     ending September 30, 1998. For the nine-month period ended September 30,
     1998, the Company received $3.5 million in cash and recognized $2.8 million
     of research funding. In March 1998, the Company also received and
     recognized a one-time technology development fee of $2.0 million from
     SmithKline Beecham. On May 8, 1998, the Company exercised its option to
     sell 660,962 shares of its common stock to SmithKline Beecham p.l.c. and
     SmithKline Beecham Corporation for approximately $7.56 per share or an
     aggregate consideration of $5.0 million. The sale closed on May 15, 1998.

(6)  Research Agreement

     In January 1998, the Company entered into a sponsored research agreement
     with the Massachusetts Institute of Technology ("M.I.T.") pursuant to
     which M.I.T. will use its expertise in micro-robotics to co-develop the
     Living Chip(Trademark), a novel drug discovery screening tool that would
     miniaturize and automate the Company's proprietary hybrid yeast cell
     technology. If developed, the Living Chip(Trademark) could ultimately
     accommodate at least 100,000 yeast-based drug discovery assays on a
     single CD-sized synthetic disc and could permit the testing of thousands
     of compounds on multiple assays at the individual scientist's lab bench.
     The Company is only obligated to provide M.I.T. with research funding for
     1998 but has the option to extend the arrangement through 1999. The
     Company also entered into a license agreement with M.I.T. pursuant to
     which the Company obtained exclusive worldwide rights, for use in
     pharmaceutical, animal health and agricultural businesses, to the
     technology developed under the sponsored research arrangement. In order
     to maintain its exclusive license, the Company must provide M.I.T. with
     research funding in 1998 and 1999 and make a minimum level of
     expenditures thereafter to commercialize the technology until the
     technology is commercialized. The Company is required to pay M.I.T. an
     annual license fee, royalties on the sale or lease of Living
     Chip(Trademark) systems, royalties on the sale of therapeutics and
     diagnostics developed using the Living Chip(Trademark)


                                      8

<PAGE>

                       Cadus Pharmaceutical Corporation

                    Notes to Condensed Financial Statements

     and royalties on services rendered based on the Living Chip(Trademark).
     In lieu of royalty payments on sales by sublicensees of drugs initially
     identified by sublicensees through the use of licensed technology, the
     Company pays an annual fee for each sublicense in effect, provided that a
     license to other technology owned or licensed by the Company was granted
     to the sublicensee at the same time.

(7)  Commitments and Contingencies

     In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") commenced a patent
     infringement action against the Company alleging infringement by the
     Company of a patent relating to an aspect of drug screening techniques
     and seeking injunctive relief and monetary damages. On August 1, 1996,
     the Company filed an Answer and Counterclaim, claiming that the patent is
     not infringed and is invalid and unenforceable, seeking a declaratory
     judgment of patent invalidity, unenforceability and noninfringement, and
     claiming unfair competition and intentional interference with prospective
     economic advantage by SIBIA with respect to the Company's initial public
     offering.

     On August 7, 1998, the court granted SIBIA's summary judgment motion to
     dismiss the Company's counterclaims for unfair competition and
     intentional interference with prospective economic advantage.

     On August 20, 1998, the court denied three motions filed by the Company
     against SIBIA seeking summary judgment that the patent is invalid and
     that the Company does not infringe the patent. The court ruled that the
     Company's motions involve questions of fact which must be decided by a
     jury.

     
     Trial of the action commenced on November 3, 1998.

     On October 9, 1998, the Company filed with the U.S. Patent and Trademark
     Office a Request for Reexamination of the patent owned by SIBIA at issue in
     the lawsuit.
     
     The Company believes, based on advice of counsel, that none of its
     operations infringes any valid claim of the patent and intends to
     vigorously defend the action. The Company also believes that if its
     operations were found to infringe any valid claim of the patent, the
     Company has adequate technical alternatives that would not infringe this
     patent. If injunctive relief is granted, certain aspects of the drug
     discovery and development efforts of the Company and its collaborative
     partners could be delayed. If monetary damages are awarded, the business,
     financial condition and results of operations of the Company could be
     materially adversely affected.

(8)  Supplemental Cash Flow Information

                                                 Nine Months
                                             Ended September 30,
                                          1998                1997
                                    ----------------------------------
        Cash payments for:

        Interest..................           $0              $7,365
                                             ==              ======

        Income taxes..............      $69,563             $25,518
                                        =======             =======


                                      9

<PAGE>

                       Cadus Pharmaceutical Corporation

                    Notes to Condensed Financial Statements

(9)  New Accounting Pronouncements

     Effective January 1, 1998, the Company adopted Statement of Financial
     Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
     Income" and Statement of Financial Accounting Standards No. 131 ("SFAS
     131"), "Disclosures about Segments of an Enterprise and Related
     Information". SFAS 130 requires that all items recognized under
     accounting standards as components of comprehensive income be reported in
     an annual financial statement that is displayed with the same prominence
     as other annual financial statements. Other comprehensive income may
     include foreign currency translation adjustments, minimum
     pension liability adjustments and unrealized gains and losses on
     marketable securities classified as available-for-sale. The adoption of
     SFAS 130 had no impact on the Company's financial statements. SFAS 131
     established standards to report information about operating segments and
     related discussions about products and services, geographic areas and
     major customers and requires that such information be included in the
     Company's 1998 annual report. The adoption of SFAS 131 is not expected to
     affect the Company's reporting of its results of operations and financial
     position.


                                      10

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     The Company was incorporated in 1992 and has devoted substantially all of
     its resources to the development and application of novel yeast-based and
     signal transduction drug discovery technologies. To date, all of the
     Company's revenues have resulted from research funding provided by its
     collaborative partners.

     The Company has incurred operating losses in each year since its
     inception including net losses of approximately $6.2 million during the
     nine-month period ended September 30, 1998. At September 30, 1998, the
     Company had an accumulated deficit of approximately $20.1 million. The
     Company's losses have resulted principally from costs incurred in
     research and development and from general and administrative expenses
     associated with the Company's operations. These costs have exceeded the
     Company's revenues and interest income. The Company expects to incur
     substantial additional operating losses over the next several years as a
     result of increases in its expenses for research and product development.

Results of Operations

     Nine months Ended September 30, 1998 and September 30, 1997

     Revenues

     Revenues for the nine months ended September 30, 1998 increased to $9.9
     million from $6.6 million for the same period in 1997. This increase was
     attributable primarily to a one time $2.0 million technology development
     fee and an increase in the level of research funding from SmithKline
     Beecham ("SmithKline"), one of the Company's collaborative partners. The
     research collaboration with SmithKline began in February 1997.

     Operating Expenses

     The Company's research and development expenses for the nine months ended
     September 30, 1998 increased to $11.0 million from $8.3 million for the
     same period in 1997. This increase was attributable to increases in
     staffing, supplies and facility expenses as well as expenses associated
     with the Company's sponsored research agreement with M.I.T., which began
     in January of 1998.

     General and administrative expenses for the nine months ended September
     30, 1998 increased to $5.7 million from $2.8 million for the same period
     in 1997. This increase was attributable primarily to increased litigation
     expenses.

     Net Interest Income

     Net interest income for the nine months ended September 30, 1998
     decreased to $1.4 million from $1.6 million for the same period in 1997.
     This decrease related primarily to the decrease in the Company's cash
     reserves.

     Equity in Other Ventures

     Equity in other ventures reflects gains and losses associated with the
     Company's two investments. For the nine months ended September
     30, 1998 and 1997, the Company recognized a gain and a loss of $9,955 and
     $158,177, respectively, related to its investment in Laurel
     Partners Limited Partnership. For the nine months ended September 30,
     1998 and 1997, the Company recognized $860,791 and $522,646,
     respectively, in losses 


                                      11

<PAGE>

     generated by Axiom Biotechnologies Inc. ("Axiom"). The Company's
     investment in Axiom is accounted for under the equity method
     with the Company recognizing 100% of Axiom's net losses prior to a recent
     investment made by JAFCO Co., Ltd., ("JAFCO") in Axiom.
     Following the JAFCO investment the Company began recognizing 50%
     of the net losses generated by Axiom which is the extent to which the
     Company is deemed to be funding such losses.

     Net Loss

     The net loss for the nine months ended September 30, 1998 increased to
     $6.2 million from $3.6 million for the same period in 1997. This increase
     can be attributed to an increase in the Company's expenses, which was
     partially offset by an increase in revenues as described above.

     Three months Ended September 30, 1998 and September 30, 1997

     Revenues

     Revenues for the three months ended September 30, 1998 increased to $2.5
     million from $2.4 million for the same period in 1997. This increase was
     attributable primarily to scheduled increases in research funding from
     the Company's research collaborations.

     Operating Expenses

     The Company's research and development expenses for the three months
     ended September 30, 1998 increased to $3.7 million from $3.0 million for
     the same period in 1997. This increase was attributable primarily to
     increases in staffing, supplies, and facility expenses as well as
     expenses associated with the Company's sponsored research agreement with
     M.I.T.

     General and administrative expenses for the three months ended September
     30, 1998 increased to $2.7 million from $820,000 for the same period in
     1997. This increase was attributable primarily to increased litigation
     expenses.

     Net Interest Income

     Net interest income for the three months ended September 30, 1998
     decreased to $471,000 from $497,000 for the same period in 1997. This
     decrease related primarily to the decrease in the Company's cash
     reserves.

     Equity in Other Ventures

     Equity in other ventures reflects losses and gains associated with the
     Company's two investments. For the three months ended September
     30, 1998 and 1997, the Company recognized a gain and a loss of $2,361 and
     $15,973, respectively, related to its investment in Laurel
     Partners Limited Partnership. For the three months ended September 30,
     1998 and 1997, the Company recognized $250,472 and $364,833,
     respectively, in losses generated by Axiom. The Company's
     investment in Axiom is accounted for under the equity method
     with the Company recognizing 100% of Axiom's net losses prior to a recent
     investment made by JAFCO in Axiom. Following the JAFCO
     investment the Company began recognizing 50% of the net losses
     generated by Axiom, which is the extent to which the Company is deemed to
     be funding such losses.

     Net Loss

     The net loss for the three months ended September 30, 1998 increased to
     $3.7 million from $1.2 million for the same period in 1997. This increase
     can be attributed to an increase in the Company's expenses, which was
     partially offset by an increase in revenues and net interest income as
     described above.


                                      12

<PAGE>

     Liquidity and Capital Resources

     At September 30, 1998, the Company held cash and cash equivalents of
     $34.6 million. The Company's working capital at September 30, 1998 was
     $32.4 million.

     For the nine-month period ended September 30, 1998, the Company invested
     approximately $2.4 million in property and equipment and refinanced
     approximately $1.3 million of equipment through a sale leaseback
     arrangement with GE Capital Corporation. The Company expects to finance
     future capital expenditures using its existing lease line of credit with
     GE Capital Corporation or other similar arrangements.

     The Company intends to increase its expenditures substantially over the
     next several years to enhance its technologies and pursue internal
     proprietary drug discovery programs. The Company believes that its
     existing capital resources, together with interest income and future
     payments due under its research collaborations, will be sufficient to
     support its current and projected funding requirements through the end of
     2000. This forecast of the period of time through which the Company's
     financial resources will be adequate to support its operations is a
     forward-looking statement that may not prove accurate and, as such,
     actual results may vary. The Company's capital requirements may vary as a
     result of a number of factors, including the progress of its drug
     discovery programs, competitive and technological developments, the
     continuation of its existing collaborative agreements and the
     establishment of additional collaborative agreements, and the progress of
     the development efforts of the Company's corporate partners. The Company
     expects that it will require significant additional financing in the
     future, which it may seek to raise through public or private equity
     offerings, debt financing or additional corporate partnerships. No
     assurance can be given that such additional financing will be available
     when needed or that, if available, such financing will be obtained on
     terms favorable to the Company. To the extent that additional capital is
     raised through the sale of equity or convertible debt securities, the
     issuance of such securities could result in dilution to the Company's
     stockholders.

     Year 2000

     The Company is aware of challenges associated with the inability of
     certain computer systems to properly format information after December
     31, 1999 (the "Year 2000 Challenge"). The Company is modifying its
     computer systems to address the Year 2000 Challenge and does not expect
     that the cost of modifying such systems will be material. The Company
     believes it will fully remediate any of its Year 2000 Challenges in
     advance of the year 2000 and does not anticipate any material disruption
     in its operations as the result of any failure by the Company to fully
     remediate such challenges. 

     The Company is in the process of contacting all significant suppliers and 
     financial institutions in order to identify potential areas of concern.
     It is anticipated that this inquiry will be complete by the second 
     quarter of 1999.

     Improper or inadequate remediation of Year 2000 problems by parties with
     whom the Company does business could adversely affect the Company's ability
     to conduct its research activities. In addition, administrative functions
     essential to day to day operations of the business could be impaired if
     Year 2000 remediation is not completed in a timely manner. Due to
     uncertainty of the Year 2000 readiness of parties with whom the Company
     does business, the Company is unable to determine at this time whether the
     consequnces of Year 2000 failures will have material adverse impact on the
     Company's results of operations, liquidity or financial condition.

     Based on the responses of our significant suppliers and financial
     institutions, the Company intends to develop a contingency plan to identify
     and document potential business disruptions and continuity planning
     procedures. The focus of this activity is on potential failures of external
     systems required to carry out normal business operations, including
     services provided by the public infrastructure such as electric power and
     telecommunications. The Company expects this activity to be an ongoing
     process well into the third quarter of 1999.

                                      13
<PAGE>

     The above comments on the Year 2000 issue contain forward-looking
     statements relating to the Company's plans, strategies, expectations,
     intentions, and resources that should be read in conjunction with the
     Company's disclosures on Forward-Looking Statements.

     New Accounting Pronouncements

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures about
     Pensions and Other Postretirement Benefits". SFAS No. 132 revises
     disclosures about pension and other postretirement benefit plans.
     Management of the Company does not believe that the implementation of
     SFAS No. 132 will have a significant impact on previously reported
     information regarding its employee retirement plans.


                                      14

<PAGE>

PART II - OTHER INFORMATION

Item 1.        Legal Proceedings

               This Company is not a party to any material legal proceedings
               other than SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical
               Corporation. SIBIA Neurosciences, Inc. ("SIBIA") commenced an
               action on July 9, 1996 in the United States District Court for
               the Southern District of California alleging infringement by
               the Company of a patent relating to an aspect of drug screening
               techniques and seeking injunctive relief and monetary damages.
               On August 1, 1996, the Company filed an Answer and
               Counterclaim, claiming that the patent is not infringed and is
               invalid and unenforceable, seeking a declaratory judgment of
               patent invalidity, unenforceability and noninfringement, and
               claiming unfair competition and intentional interference with
               prospective economic advantage by SIBIA with respect to the
               Company's initial public offering.

               On August 7, 1998, the court granted SIBIA's summary judgment
               motion to dismiss the Company's counterclaims for unfair
               competition and intentional interference with prospective
               economic advantage.

               On August 20, 1998, the court denied three motions filed by the
               Company against SIBIA seeking summary judgment that the patent
               is invalid and that the Company does not infringe the patent.
               The court ruled that the Company's motions involve questions of
               fact which must be decided by a jury.

               Trial of the action commenced on November 3, 1998.

               On October 9, 1998, the Company filed with the U.S. Patent and
               Trademark Office a Request for Reexamination of the patent owned
               by SIBIA at issue in the lawsuit.

               The Company believes, based on advice of counsel, that none of
               its operations infringes any valid claim of the patent and
               intends to vigorously defend the action. The Company also
               believes that if its operations were found to infringe any
               valid claim of the patent, the Company has adequate technical
               alternatives that would not infringe this patent. If injunctive
               relief is granted, certain aspects of the drug discovery and
               development efforts of the Company and its collaborative
               partners could be delayed. If monetary damages are awarded, the
               business, financial condition and results of operations of the
               Company could be materially adversely affected.

Item 2.        Changes in Securities and Use of Proceeds

               The information provided below represents a reasonable
               estimate of the application through September 30, 1998 of
               the net proceeds of $19,783,140 which were received from the
               Company's initial public offering on July 17, 1996:

               Construction of plant, building and facilities        $  684,766
               Purchase and installation of machinery and equipment  $1,428,098
               Research and license payments to others               $  964,930
               Investment in companies complementary to the                 
                  Company's business                                 $2,000.000
               Working capital used to fund operations               $2,924,746

               Except for payments described in the following sentence, the
               application of the net offering proceeds listed above
               represents direct payments to others. No payments were made to
               directors or officers or to their associates except for
               payments made in the ordinary course of 
               business which include, but may not be limited to, the payment
               of officer salaries, fringe benefits, and expense
               reimbursements or compensation paid to directors for their
               services provided to the 

                                      15
<PAGE>

              Company under consulting arrangements. At September 30, 1998, the
              Company had $11,780,600 of net offering proceeds that were still
              not utilized.

Item 3.    Defaults Upon Senior Securities

           Nothing to report.

Item 4.    Submission of Matters to a Vote of Security Holders

           Nothing to report.

Item 5.    Other Information

           Nothing to report.

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

           (a) The exhibits listed in the Exhibit Index are included in this 
               report.

           (b)  Reports on Form 8-K

           None


                                      16

<PAGE>

                                  SIGNATURES

Pursuant to the requirements 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.

                                 CADUS PHARMACEUTICAL CORPORATION
                                  (Registrant)

Date: November 13, 1998           By  /s/ James S. Rielly
                                     -----------------------------------------
                                     James S. Rielly
                                     Vice President of Finance, Treasurer  
                                       and Secretary
                                     (Authorized Officer and 
                                        Chief Accounting Officer)


                                      17

<PAGE>

                                 EXHIBIT INDEX

       The following exhibits are filed as part of this Quarterly
       Report on Form 10-Q:

       Exhibit No.         Description

          10.25            Employment Agreement, dated as of June 30, 1998,
                           between the Company and Charles Woler.

          10.26            Employment Agreement, dated as of September 10, 1998,
                           between the Company and Philip N. Sussman.

             27            Financial Data Schedule


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