<PAGE>
 
                                  FORM 10-QSB

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549


(Mark One)

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

     For the quarterly period ended March 31, 1998

                                      OR

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


                        Commission file number 0-14306


                             INTERCELL CORPORATION
                             ---------------------
       (Exact name of small business issuer as specified in its charter)
<TABLE> 
<CAPTION> 
<S>                                                              <C> 

                        Colorado                                        84-0928627
--------------------------------------------------------------          ----------
(State or other jurisdiction of incorporation or organization)       (I.R.S. employer
                                                                  identification number)
</TABLE> 
                       370 Seventeenth Street, Suite 3580
                             Denver Colorado 80202
                             ---------------------
                    (Address of principal executive offices)

                   Issuer's telephone number: (303) 592-1010

                                   No Change
                                   ---------
  (Former name, former address or former fiscal year, if changed since last 
                                    report)

     Indicate by check mark whether the issuer (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       No X
                                                 ____    ____

     As of September 30, 1998 there were 37,770,634 shares of the registrant's 
sole class of common shares outstanding.

     Transitional Small Business Disclosure Format.  Yes         No X
                                                         ____      ____
<PAGE>
                             INTERCELL CORPORATION
                                     INDEX
 
PART I.       FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

        Condensed Consolidated Balance Sheets
          March 31, 1998.....................................................  1

        Condensed Consolidated Statement of Operations
          For the Three Months and Six Months Ended March 31, 1998 and 1997..  2

        Condensed Consolidated Statement of Changes in Stockholders'
          Equity For the Six Months Ended March 31, 1998.....................  3

        Condensed Consolidated Statement of Cash Flows
          For the Six Months Ended March 31, 1998 and 1997...................  4

        Notes to Condensed Consolidated Financial Statements
          March 31, 1998.....................................................  5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.................................. 10

PART II.      OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES.................................................15

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................16


SIGNATURES....................................................................17


<PAGE>
 
                        PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
                    INTERCELL CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEET
                                  (unaudited)
                                March 31, 1998
ASSETS
Current Assets:
<TABLE> 
<CAPTION> 
  <S>                                                                          <C>
   Cash                                                                           $    285,000
   Accounts receivable, net of reserves                                                 44,000
   Notes receivable                                                                     12,000
   Inventories                                                                         458,000
   Prepaid expenses and other current assets                                           108,000
   Land available for sale                                                           1,424,000
                                                                                  ------------
   Total current assets                                                              2,331,000
 
Property, plant and equipment, net of accumulated depreciation                         634,000
 
Other assets:
   Investments                                                                         210,000
   Notes receivable non-currant portion                                                530,000
   Goodwill and other intangible assets                                                 40,000
                                                                                  ------------
   Total other assets                                                                  780,000
                                                                                  ------------
 
Total assets                                                                      $  3,745,000
                                                                                  ============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable, short term                                                         2,093,000
   Notes payable, related party                                                         80,000
   Accounts payable and accrued liabilities                                          1,866,000
   Contingent liabilities                                                               55,000
   Covenant lease payable                                                               96,000
                                                                                  ------------
   Total current liabilities                                                         4,190,000
 
Long-term liabilities:
   Convertible debenture                                                             1,485,000
   Long-term debt, less current portion                                                 16,000
                                                                                  ------------
   Total long-term liabilities                                                       1,501,000
 
Minority interest in consolidated subsidiary                                            42,000
 
Stockholders' equity:
   Convertible preferred stock; 10,000,000 shares authorized:
   Series C; 147 shares issued and outstanding as of March 31, 1998                  1,119,000
   (liquidation preference of $1,653,750)
   Series D; 1,080 shares issued and outstanding as of March 31, 1998                2,468,000
   (liquidation preference of $2,700,000)
   Warrants to acquire common stock                                                  3,075,000
   Common Stock; no par value; 100,000,000 shares authorized;
   35,760,229 shares outstanding as of March 31, 1998                               21,312,000
   Additional paid in capital                                                        3,221,000
   Deferred compensation                                                                (3,000)
   Accumulated deficit                                                             (33,180,000)
                                                                                  ------------
   Total stockholders' equity                                                       (1,988,000)
                                                                                  ------------
 
Total liabilities and stockholders' equity                                        $  3,745,000
                                                                                  ============
</TABLE>
              See notes to the consolidated financial statements.

                                       1
<PAGE>
 
                    INTERCELL CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)

<TABLE>
<CAPTION> 
                                                THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                    MARCH 31                             MARCH 31
                                           -------------------------------------------------------------------
                                              1998              1997               1998             1997
<S>                                        <C>                  <C>            <C>                <C>
Net sales                                  $  416,000       $  528,000          $ 1,168,000        $ 1,046,000
Cost of goods sold                            598,000          407,000            1,471,000            821,000
                                           -------------------------------------------------------------------
 
Gross profit                                 (182,000)         121,000             (303,000)           225,000
 
General and administrative expense          1,479,000        1,046,000            4,592,000          2,962,000
Research and development expense                    0          815,000                1,000          1,189,000
                                           -------------------------------------------------------------------
 
Loss from operations                       (1,661,000)      (1,740,000)          (4,896,000)        (3,926,000)
 
Other income/ (expense)                      (361,000)          22,000             (371,000)            75,000
                                           -------------------------------------------------------------------
Loss from continuing operations            (2,022,000)      (1,718,000)          (5,267,000)        (3,851,000)
 
Discontinued operations
  Gain/ (loss) from discontinued 
   operations                                (461,000)         259,000             (215,000)           470,000
  Loss on sale of subsidiary                 (350,000)                             (350,000)
                                           -------------------------------------------------------------------
Loss from discontinued operations            (811,000)         259,000             (565,000)           470,000
                                           -------------------------------------------------------------------
 
Net loss                                   (2,833,000)      (1,459,000)          (5,832,000)        (3,381,000)
 
Deemed preferred stock dividend on            (15,000)        (496,000)             (30,000)          (717,000)
  Series b, c and d relating to               
  in-the-money conversion terms
 
Accrued dividends Series d preferred stock    (37,000)                              (37,000)
Accretion on Series b and c preferred stock   (29,000)        (155,000)             (64,000)          (295,000)
                                           -------------------------------------------------------------------
 
Net loss applicable to common 
  stockholders                            ($2,914,000)     ($2,110,000)         ($5,963,000)       ($4,393,000)
                                           ===================================================================
 
Net loss per common share:
   Loss from continuing operations             ($0.07)          ($0.13)              ($0.18)            ($0.29)
   Loss from discontinued operations           ($0.02)           $0.01               ($0.02)             $0.03
                                           -------------------------------------------------------------------
Net loss per applicable to common 
  stockholders                                 ($0.09)          ($0.12)              ($0.20)            ($0.26)
                                           ===================================================================
 
Weighted average number of common 
  shares outstanding                       32,061,656       17,789,405           30,222,670         16,996,221
                                           ===================================================================
</TABLE>

              SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

                                       2
<PAGE>

                    INTERCELL CORPORATION AND SUBSIDIARIES
                 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                    FOR THE SIX MONTHS ENDED MARCH 31, 1998
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 

 
                                                          CONVERTIBLE          WARRANTS TO                               ADDITIONAL
                                                        PREFERRED STOCK          ACQUIRE           COMMON STOCK           PAID-IN
                                                      SHARES        AMOUNT     COMMON STOCK    SHARES        AMOUNT       CAPITAL
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>        <C>             <C>           <C>         <C> 
BALANCES, OCTOBER 1, 1997                             1,252         $3,658,000 $3,050,000      30,371,075    $21,285,000 $2,996,000
CONSTRUCTIVE RETIREMENT OF TREASURY STOCK                                                      (1,100,000)      (385,000)  
WARRANTS ISSUED IN CONNECTION WITH CONVERTIBLE                     
  DEBENTURE                                                                        25,000       
SHARES ISSUED IN LIEU OF INTEREST                                                               1,975,000        185,000 
SHARES ISSUED FOR SERVICES                                                                        266,000         25,000 
AMORTIZATION OF DEEMED DIVIDEND                                         30,000
ACCRUAL OF PREFERRED STOCK DIVIDEND                                     37,000
ACCRETION ON PREFERRED STOCK                                            64,000
CONVERSION OF SERIES B PREFERRED STOCK TO COMMON         
  STOCK                                                  (5)           (40,000)                   678,761         40,000 
CONVERSION OF SERIES C PREFERRED STOCK TO COMMON                                                                            
  STOCK                                                 (20)          (162,000)                 3,569,393        162,000
BENEFICIAL CONVERSION FEATURE RELATED TO SERIES 
  A-1 AND A-2 DEBENTURES                                                                                                    225,000
NET LOSS                                                                                                                            
------------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998                              1,227         $3,587,000 $3,075,000      35,760,229    $21,312,000 $3,221,000
====================================================================================================================================
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                                                    Total
                                                   Deferred        Treasury                Accumulated            Stockholders'
                                                 Compensation       Stock                   Deficit                 Equity 
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                     <C>                    <C>   
BALANCES, OCTOBER 1, 1997                           ($3,000)       ($385,000)              ($27,217,000)           $3,384,000 
CONSTRUCTIVE RETIREMENT OF TREASURY STOCK                            385,000
WARRANTS ISSUED IN CONNECTION WITH CONVERTIBLE                                                                         
  DEBENTURE                                                                                                            25,000
SHARES ISSUED IN LIEU OF INTEREST                                                                                     185,000
SHARES ISSUED FOR SERVICES                                                                                             25,000
AMORTIZATION OF DEEMED DIVIDEND                                                                 (30,000)
ACCRUAL OF PREFERRED STOCK DIVIDEND                                                             (37,000) 
ACCRETION ON PREFERRED STOCK                                                                    (64,000)
CONVERSION OF SERIES B PREFERRED STOCK TO COMMON 
  STOCK                                           
CONVERSION OF SERIES C PREFERRED STOCK TO COMMON 
  STOCK                                            
BENEFICIAL CONVERSION FEATURE RELATED TO SERIES 
  A-1 AND A-2 DEBENTURES                                                                                              225,000 
NET LOSS                                                                                     (5,832,000)           (5,832,000) 
------------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998                            ($3,000)        $      0               ($33,180,000)          ($1,988,000) 
====================================================================================================================================
</TABLE>


              See notes to the consolidated financial statements.

                                       3

<PAGE>
 
 
                    INTERCELL CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                   SIX MONTHS ENDED MARCH 31, 1998 AND 1997
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                                                                                               
                                                                                               1998                   1997 
<S>                                                                                     <C>                     <C> 
Cash flows from operating activities                                                       ($5,832,000)         ($  3,381,000)
Net loss                                                                                
Adjustments to reconcile net loss to net cash from
   continuing operations:
     Loss from discontinued operations                                                         565,000                
     Impairment of ITCO                                                                        845,000
     Depreciation and amortization                                                             164,000                277,000
     Minority interest in loss in consolidated subsidiaries                                    (42,000)
     Gain on sale of property and equipment                                                    (57,000)
     Gain on issuance of stock at subsidiary                                                   (78,000)
     Amortization of discount on convertible debenture                                         225,000
     Amortization of deferred compensation                                                                            662,000
     Common stock and warrants issued for services and interest                                220,000                 43,000
Change in assets and liabilities:
   (Increase) decrease in:
     Accounts receivable                                                                       678,000               (221,000)
     Notes receivable                                                                         (530,000)
     Inventory                                                                                 524,000               (332,000)
     Prepaid expenses and other assets                                                         232,000                (35,000)
     Decrease in accounts payable and accrued liabilities                                     (994,000)               126,000
                                                                                         -----------------------------------------
Net cash used in operating activities                                                       (4,080,000)            (2,861,000)
                                                                                         -----------------------------------------
 
Cash flows from investing activities:
     Purchase of property and equipment                                                                              (962,000)
     Proceeds from sales and maturities of short-term investments                                                   3,063,000
     Acquisition of other assets                                                                                      146,000
     Proceeds from sale of assets                                                            1,557,000
                                                                                         -----------------------------------------
 
Net cash provided by investing activities                                                    1,557,000              2,247,000
                                                                                         -----------------------------------------

Cash flows from financing activities:
     Proceeds from issuance of common stock                                                                          150,000
     Proceeds from convertible debenture                                                     1,500,000
     Proceeds from notes payable                                                             1,551,000
     Proceeds from issuance of Series C preferred stock and warrants                                               4,673,000
     Repayments of notes payable                                                              (180,000)           (1,198,000)
     Payment of debt issuance costs                                                           (170,000)
     Repayment of long-term debt                                                                                    (206,000)
                                                                                         -----------------------------------------
 
Net cash flows provided by financing activities                                              2,701,000             3,419,000
                                                                                         -----------------------------------------
 
Net increase in cash                                                                           178,000             2,805,000
 
Cash, beginning                                                                                107,000             4,224,000
                                                                                         -----------------------------------------
 
Cash, ending                                                                                $  285,000           $ 7,029,000
                                                                                         =========================================
 
Non-cash investing and financing activities
     Series B preferred stock converted to common stock                                     $   40,000           $ 4,225,000
                                                                                         ========================================
     Series C preferred stock converted to common stock                                     $  162,000
                                                                                         ====================
     Transfer of stock options from principal shareholders to Company officer                                    $   530,000
                                                                                                             ====================
</TABLE>

              See notes to the consolidated financial statements.

                                       4

<PAGE>
 
                    INTERCELL CORPORATION AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

          The accompanying consolidated financial statements include the
     accounts of Intercell Corporation and its wholly-owned subsidiaries (the
     "Company").  All intercompany transactions have been eliminated.

          The consolidated financial statements are unaudited and reflect all
     adjustments (consisting only of normal recurring adjustments) which are, in
     the opinion of management, necessary for a fair presentation of the
     financial position of and operating results for the periods presented.  The
     consolidated financial statements should be read in conjunction with the
     September 30, 1997 audited financial statements of the Company and the
     notes thereto.  The results of operations for the three months ended March
     31, 1998 are not necessarily indicative of the results for the entire year
     ended September 30, 1998, or any future period.

2.  NET LOSS PER SHARE

          Net loss per share of common stock is computed based on the weighted
     average number of common shares outstanding during the year.  Stock
     options, warrants and convertible preferred stock are not considered in the
     calculation as the impact of the potential common shares would be to
     decrease loss per share.  Therefore, diluted loss per share is equivalent
     to basic loss per share.

          During the year ending September 30, 1998 the Company adopted SFAS No.
     128 Earnings Per Share.  This statement replaces the presentation of
     primary earnings of loss per share (EPS) with a presentation of basic EPS.
     It also requires dual presentation of basic and diluted EPS for all
     entities with complex capital structures and requires reconciliation of the
     numerator and denominator of the basic EPS computation to the numerator and
     denominator of the diluted EPS computation.  Basic EPS excludes dilution.
     Diluted EPS reflects the potential dilution that could occur if securities
     or other contracts to issue common stock were exercised or converted into
     common stock or resulted in the issuance of common stock that then shared
     in the earnings of the entity.  The adoption of SFAS 128 did not result in
     a change to the previously presented EPS for the year ended September 30,
     1997.

3.   INVENTORIES
     
     Inventories consist of:    March 31, 1998
                                --------------
 
          Raw materials               $ 20,000
          Work in process               15,000
          Finished goods               423,000
                                      --------
                                      $458,000
                                      ========

                                       5
<PAGE>
 
4.  NON-CASH INVESTING AND FINANCING ACTIVITIES

          The Company purchased 90% of the common stock outstanding of Sigma 7
     Corporation ("Sigma 7") for $550,000.  In conjunction with the purchase,
     the Company acquired assets with a fair value of $4,316,000 and assumed
     liabilities and minority interests of $3,766,000.

          In addition, the Company engaged in the following non-cash investing
     and financing activities:

                                             For the six months ending March 31,
                                                      1998         1997
                                                      ----         ----
Series B preferred stock converted to common stock  $ 40,000    $4,225,000
Series C preferred stock converted to common stock  $162,000    $        0

5.  RECENT ACCOUNTING PRONOUNCEMENTS

          In February 1998, the Financial Accounting Standards Board (FASB)
     issued Statement of Accounting Standards (SFAS) No. 132, Employer's
     disclosures about Pensions and Other Post-Retirement Benefits.  This
     statement requires disclosure only and therefore will not impact the
     Company's financial statements.

          In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
     Instruments and Hedging Activities.  Currently, the Company does not have
     any derivative financial instruments and does not participate in hedging
     activities, therefore management believes SFAS No. 133 will not impact the
     Company's financial statements.

6.  YEAR 2000 CONVERSION

          The Company recognizes the need to ensure its operations will not be
     adversely impacted by Year 2000 software failures.  Software failures due
     to processing errors potentially arising from calculations using the Year
     2000 date are a known risk.  The Company is addressing this risk to the
     availability and integrity of financial systems and the reliability of the
     operational systems.  The Company has established processes for evaluating
     and managing the risks and costs associated with this problem.  Management
     believes the total cost of compliance and its effect on the Company's
     future results of operations will be insignificant.

7.  CONVERTIBLE DEBENTURES

          In December 1997, the Company issued convertible debentures and
     attached warrants for $1,500,000.  Of this total, $750,000 is the Series A-
     1 debenture and $750,000 is the Series A-2 debenture.  The convertible
     debentures were, at the time of issue, unsecured obligations of the
     Company.

                                       6

<PAGE>
 
          The $750,000 Series A-1 debenture requires quarterly interest payments
     at 9% per annum, beginning March 1, 1998 with the balance due on December
     1, 1999.  The debenture may be converted at the option of the holder after
     60 days from the date of issuance at a conversion price per share equal to
     the lessor of 85% of the market price as defined in the financing
     agreement, or $0.75.  In connection with the convertible debt, three
     warrants were issued each entitling the holder to purchase 200,000 shares
     of common stock for $0.17, $0.50 and $1.00, respectively.  The warrants
     expire three years from the date of issuance.

          The $750,000 Series A-2 debenture pays interest quarterly at 9% per
     annum, beginning June 1, 1998, with a maturity date of April 1, 1999, at a
     conversion price for each share of common stock at 85% of the market price
     as defined in the financing agreement.

          At the request of the Company, the Series A-2 debenture was
     accelerated to December 31, 1997.  As consideration for the acceleration,
     the Company provided security to the debenture holders for the entire
     $1,500,000.  The Company has assigned a first priority secured lien on the
     assets of Sigma 7, a first deed of trust on property held for sale in
     Arizona and an assignment of the $2,200,000 note from Intercell
     Technologies Corporation to the Company.  In addition, the Company issued
     1,000,000 shares of its common stock to the debenture holders.

8.   COMPREHENSIVE INCOME

          On January 1, 1998, the Company adopted Statement of Financial
     Accounting Standards No. 130, Reporting Comprehensive Income.  This
     standard establishes requirements for disclosure of comprehensive income
     consisting of certain items previously not included in the statements of
     operations including unrealized gains and losses among others.  For the
     three and six months ended March 31, 1998 and 1997, the Company had no
     items of comprehensive income.

9.   SEGMENT REPORTING

          Statement of Financial Accounting Standards No. 131, Disclosures about
     Segments of an Enterprise and Related Information, was effective for
     financial statements for periods beginning after December 15, 1997.  This
     statement establishes standards for the manner in which public business
     enterprises report information about operating segments in interim
     financial reports issued to stockholders.  As the FASB allows, the Company
     will initially apply this standard in its financial statements for the year
     ending September 30, 1998.

10.  DISCONTINUED OPERATIONS

          In February 1998, the Company entered into a stock purchase agreement
     to sell, transfer, assign and deliver all assets, liabilities, rights and
     obligations of the Company related to its wholly-owned subsidiary
     California Tube Laboratory, Inc. ("CTL") to Jaymark Corporation
     ("Jaymark"), in exchange for $1,872,360 in cash, $500,000 in notes
     receivable and an escrow account of $200,000.  This has been accounted for
     as a 

                                       7


<PAGE>
 
     discontinued operation and the results of operations have been excluded
     from continuing operations in the consolidated financial statements of
     operations for all periods presented. The Company recognized a loss on the
     sale of assets of approximately $350,000 consisting of approximately
     $75,000 in investments and approximately $275,000 in retained earnings. The
     Company also recognized a loss from discontinued operations of
     approximately $215,000. The Company has not recognized any income tax
     benefit from the loss due to the uncertainty of the Company to produce any
     future net income.


<TABLE>
<CAPTION>
                                                                    Six months ending                   Year ending
                                                                        March 31,                      September 30,
                                                                          1998                              1997
                                                                          ----                              ----              
<S>                                                                 <C>                                <C>
Net Sales                                                             $1,583,000                         $4,655,000
Cost of goods sold                                                     1,589,000                          3,739,000
                                                                      ----------                         ----------
Gross profit                                                              (6,000)                           916,000
General and administrative expense                                       210,000                            790,000
                                                                      ----------                         ----------
Income from operations                                                  (216,000)                           126,000
Other income                                                               1,000                             30,000
                                                                      ----------                         ----------
Income/loss from discontinued operations                                (215,000)                           156,000
</TABLE>

11.  NANOPIERCE ACQUISITION

          In February 1998, the Company transferred all of the intellectual
     property of its wholly owned subsidiary Particle Interconnect Corporation
     to Nanopierce Technologies, Inc. ("Nanopierce"), formerly known as Sunlight
     Systems, Inc., for 7,250,000 restricted post split shares of common stock
     and 100 Series A, 8%, Voting, Convertible, Cumulative, Participating,
     Preferred shares.  The preferred shares are convertible to 7,250,000
     restricted post split shares of Nanopierce's common stock.  The Company has
     approximately 74% controlling interest in Nanopierce on a fully diluted
     basis.  This transaction was discussed in detail in Form 8-K dated February
     26, 1998 and as disclosed in Form 8-K the historical financial statement of
     Sunlight Systems, Inc. were not included due to their insignificance.  The
     unaudited results of operations on a pro forma basis as though Nanopierce
     had been acquired as of October 1, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                     For the six months ended March 31,
                                                                        1998                   1997
                                                                        ----                   ----             
 
<S>                                                                  <C>                    <C>
Revenue                                                              $ 3,451,000            $ 1,205,000
Net loss                                                             $(4,710,000)           $(5,901,000)
Net loss per share                                                   $     (0.28)           $     (0.20)
</TABLE>

                                       8

<PAGE>
 
12.  SUBSEQUENT EVENTS

          On June 5, 1998, the Company discontinued operations at Sigma 7, its
     San Diego subsidiary, a manufacturer of memory modules.  The Company
     intends to seek protection for Sigma 7 under U.S. bankruptcy laws.


                                       9
<PAGE>
 
Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

     The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
year ended September 30, 1997. This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 31E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "believe," "continue" or similar terms,
variations of those terms or the negative of those terms. Actual results could
differ materially from those anticipated in forward-looking statements.

     On February 6, 1998 the Company entered into a stock purchase agreement to
sell, transfer, and deliver all assets, liabilities, rights and obligations of
the Company related to its wholly-owned subsidiary CTL to Jaymark, in exchange
for $2,015,458 in cash and notes receivable.  The Company recognized a loss from
discontinued operations of approximately $565,000 for the six months ended March
31, 1998, based on the disposition.

     On February 26, 1998 the Company transferred all of the intellectual
property of its wholly owned subsidiary Particle Interconnect Corporation to
Nanopierce for 7,250,000 shares of common stock of Nanopierce and 100 Series A
8% Voting, Convertible, Cumulative, Participating, Preferred shares of
Nanopierce.  The 100 preferred shares are convertible into 7,250,000 shares of
common stock.  The Company owns approximately 60% of the outstanding common
stock of Nanopierce and approximately 74% of the common stock of Nanopierce on a
diluted basis, considering the voting and conversion rights of the Series A
preferred stock.

     The Company discontinued all operations of its majority owned subsidiary
Sigma 7, a manufacturer of memory modules located in San Diego, California, on
June 5, 1998.  The market for Sigma 7's main product line of memory modules
experienced significant price erosion on a worldwide basis.  Sigma 7 did not
have the capitalization to continue and intends to seek protection under U.S.
bankruptcy laws.

     The Company is currently engaged in the design, development and licensing
of products using its patented particle interconnect technology, through its
majority owned subsidiary Nanopierce.

     In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000.  Of this total, $750,000 is the Series A-1 debenture
and $750,000 is the Series A-2 debenture.  The convertible debentures were, at
the time of issue, unsecured obligations of the Company.

     The $750,000 Series A-1 debenture requires quarterly interest payments at
9% per annum, beginning March 1, 1998 with the balance due on December 1, 1999.
The debenture may be converted at the option of the holder after 60 days from
the date of issuance at a conversion price per share equal to the lessor of 85%
of the market price as defined in the 

                                       10

<PAGE>
 
financing agreement, or $0.75. In connection with the convertible debt, three
warrants were issued, each entitling the holder to purchase 200,000 shares of
common stock for $0.17, $0.50, and $1.00 respectively. The warrants expire three
years from the date of issuance. The portion of the proceeds allocable to the
warrants was $15,000.

     The $750,000 Series A-2 debenture pays interest quarterly at 9% per annum,
beginning June 1, 1998, with a maturity date of April 1, 1999.  The debt may be
converted at the option of the holder any time at the end of six business days
following the maturity date, at a conversion price for each share of common
stock at 85% of the market price as defined in the financing agreement.  The
Company has recognized $225,000 in interest expense relating to the beneficial
conversion terms of the debentures.

     At the request of the Company, purchase and payment for the Series A-2
debenture was accelerated to December 31, 1997.  As consideration for the
acceleration, the Company provided security to the debenture holders for the
entire $1,500,000.  The Company assigned a first priority secured lien on the
assets of Sigma 7, a first deed of trust on property held for resale in Arizona
and a $2,200,000 note from Intercell Technologies Corporation to the Company.
In connection with the placement of the convertible debentures, the Company paid
a $180,000 commission to a third-party investment banker and issued the
investment banker warrants to purchase 200,000 shares of common stock at an
exercise price of $0.15 per share.  The warrants were valued at $10,000.  The
$180,000 and $10,000 have been included in general and administrative expense.
In addition, the Company issued 1,000,000 shares of its common stock to the
debenture holders and recognized $71,000 in general and administrative expense.
The Company also issued 1,241,000 shares of common stock for services rendered
and in lieu of interest expense during the six months ended March 31, 1998
recognizing $162,750 in general and administrative expense.

RESULTS OF OPERATIONS

     REVENUES

     Total revenues in the second quarter of 1998 were $416,000 representing a
21% decrease from the second quarter revenues in 1997 of $528,000.  Total
revenues in the first six months of 1998 were $1,168,000 representing a 12%
increase over the first six months revenues of $1,046,000 in the prior fiscal
year.  The increase in revenue for the six months was primarily attributable to
the inclusion of revenues from the Company's memory module manufacturer of
$354,000 which was not included in the six months ended March 31, 1997 revenue.

     Sales of memory modules increased to $354,000 in the first six months of
1998 compared to $0 in the first six months of 1997.  The balance of the
Company's sales in the first six months of 1998 has remained consistent with the
first six months sales of the 1997 fiscal year.

     GROSS PROFIT

     Gross profit was (44%) in the second quarter of the 1998 fiscal year
compared with 23% in the second quarter of the 1997 fiscal year.  For the six
months ended March 31, 1998 gross profits were (26%) compared to 22% for the six
months ended March 31, 1997.  This decrease in margins was primarily
attributable to negative margins experienced in the memory module 

                                       11

<PAGE>
 
market. Prices for memory modules fell drastically during the period causing the
Company to sell products at negative margins. The margins for electronic
components also decreased from 32% for the second quarter of 1997 to 18% in the
second quarter of 1998.

     RESEARCH AND DEVELOPMENT

     Research and development expenses decreased to $1,000 in the first six
months of fiscal 1998 compared to $1,189,000 in the first six months of 1997.
For the second quarter of 1998 the Company had no research and development costs
compared to $815,000 for the second quarter of 1997.  The decrease was primarily
attributable to the suspension of the research and development activities
associated with the Company's particle interconnect technology.  Research and
development costs relating to the particle interconnect technology were reduced
from $956,000 in 1997 to $0 in 1998.  The Company has changed its focus from
creating a manufacturing process and facility to licensing its technology to
companies that already have a manufacturing process in place.

     GENERAL AND ADMINISTRATIVE

     General and administrative expenses increased by 41% to $1,479,000 in the
second quarter of the 1998 fiscal year compared to $1,046,000 in the second
quarter of fiscal 1997.  For the six months ended March 31, 1998 general and
administrative expenses increased by 55% to $4,592,000 compared to $2,962,000 in
the six months ended March 31, 1997.  This increase was primarily attributable
to the inclusion of general and administrative expenses for the Company's new
memory module operations of $935,000 and 100% of the expenses associated with
the antenna technology operations of $900,000 due to impairment concerns of
Intercell Technologies Corporation to pay it's obligation to the Company.  In
addition, the Company incurred additional legal costs associated with the
Company's intellectual property rights to the particle interconnect technology.

     OTHER INCOME/EXPENSE

     The Company earned $117,000 in interest income on its cash and short-term
investments in the first six months of the 1998 fiscal year compared to $146,000
for the first six months in 1997, while incurring interest and other expenses of
$488,000 and $71,000 respectively.

     INCOME TAXES

     As of March 31, 1998 the Company had a net operating loss carryover for
federal and California income tax purposes.  The benefit of these net operating
loss carryforwards has not been recorded by the Company, as it is uncertain that
the Company will generate sufficient income in future periods to utilize the
loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     The independent auditor's report on the Company's financial statements for
the year ended September 30, 1997 included a "going concern" paragraph, meaning
the auditors have expressed substantial doubt about the Company's ability to
continue as a going concern.

                                       12

<PAGE>
 
     The Company has taken several steps regarding future operations, including
those discussed below.  In February 1998, the Company sold its interest in CTL
and A.C. Magnetics, Inc. to raise additional capital for ongoing operations.
The Company received $1,500,000 in cash, $500,000 in a note receivable and
$200,000 in escrow for the sale of CTL.  The Company received $700,000 in cash
for the sale of A.C. Magnetics, Inc. which it used to pay down its debt on the
Series A-1 convertible debenture.

     The Company has also discontinued operations at Sigma 7 and Particle
Interconnect Corporation during June 1998 and will seek protection under the
U.S. bankruptcy laws for Sigma 7.  The intellectual property rights to the
particle interconnect technology have been transferred to Nanopierce resulting
in an approximate 74% ownership of Nanopierce on a diluted basis.  In July 1998,
Nanopierce secured a two-year credit facility to finance its ongoing operations.
This agreement was to supply Nanopierce with $1,500,000 in capital during the
next twelve months with up to a total of $8,500,000 over a 24-month period.  As
of September 30, 1998, Nanopierce has received $750,000 under the original
agreement.  The agreement has been amended to allow Nanopierce to assign the
remaining commitment to other parties.  Nanopierce is currently seeking
substitute investors to fulfill the terms of the agreement.  The Company has
identified a substitute investor for a portion of the financing ($3.5 million).
The Company is still qualifying investors for the remaining $750,000 of the
financing.  If the financing is performed in full, it will provide Nanopierce
with enough capital to meet its plan of operation for the next year.  There is
no assurance, however, that Nanopierce will be able to find a substitute
investor for the remaining $750,000 and, if such substitute investor is not
found, it could impair Nanopierce's ongoing operations due to capital
requirements.  The Company has reduced its costs to a bare minimum and is
currently seeking its own financing.

     During the six months ended March 31, 1997 the Company's cash and cash
equivalents increased by $178,000.  This increase was due primarily to proceeds
from the issuance of $1,500,000 in convertible debentures in December 1997, the
sale of CTL and the sale of A.C. Magnetics, Inc.  A portion of these proceeds
was used to pay off debts of Sigma 7 and the Company.

     In the 1998 fiscal year, the Company intends to make capital expenditures
of approximately $250,000.  These expenditures will provide for an office and
application engineering facility for Nanopierce.  In the first six months of
fiscal 1998 the Company had no capital expenditures.

     The Company believes that if a substitute investor can be found to complete
the entire credit facility of Nanopierce, adequate funding is available to
support operations for the next twelve months.  The Company also believes that
sales of its Nanopierce products and technology licenses will provide sufficient
funds to meet the Company's capital requirements for the next two years.  This
assumption is based on the Company's belief that it will be successful in
entering into a licensing, joint venture, co-manufacturing or other similar
arrangement with connector manufacturers using the Nanopierce technology.  The
failure to secure such a relationship could result in the Company requiring
substantial additional capital and resources to bring Nanopierce products to
market.

                                       13

<PAGE>
 
     To the extent the Company's operations are not sufficient to fund the
Company's capital requirements, the Company may enter into a revolving loan
agreement with a financial institution, or attempt to raise additional capital
through the sale of additional capital stock or through the issuance of debt.
At the present time the Company does not have a revolving loan agreement with
any financial institution nor can the Company provide any assurances that it
will be able to enter into any such agreement in the future or be able to raise
funds through the further issuance of debt or equity in the Company.

     The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures.  Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are known risks.  The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
Management believes the total cost of compliance and its effect on the Company's
future results of operations will be insignificant.

     In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 132, Employer's disclosures about
Pensions and Other Post-Retirement Benefits.  This statement requires disclosure
only and therefore will not impact the Company's financial statements.

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.  Currently, the Company does not have any
derivative financial instruments and does not participate in hedging activities,
therefore management believes SFAS No. 133 will not impact the Company's
financial statements.

                                       14

<PAGE>
 
                          PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

     The Company made the following unregistered sale of its securities from
January 1, 1998 through March 31, 1998:

<TABLE>
<CAPTION>
                             TITLE OF
    DATE OF SALE            SECURITIES             Amount             Consideration                Purchaser
      <S>                  <C>                     <C>                  <C>                      <C>
      1/16/98              Common Stock            250,000              Settlement               Barbara J. Drew
</TABLE>


     Exemption From Registration Claimed.

     This sale by the Company of its unregistered securities was made by the
Company in reliance upon Sections 4(2) and 4(6) of the Securities Act of 1933,
as amended. Ms. Drew was known to the Company and its management, through a pre-
existing business relationship, as a long standing business associate of
management and as a former employee of CTL. She was provided access to all
material information which she requested and all information necessary to verify
such information and was afforded access to management of the Company in
connection with her purchase. She acquired such securities for investment and
not with a view toward distribution, acknowledging such intent to the Company.
All certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.

                                       15

<PAGE>
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     (A)  EXHIBITS:

          Exhibit 11.1:  Statement of computation of earnings per share
          Exhibit 27.1:  Financial Data Schedule

     (B)  REPORTS:

          1)  Form 8-K, filed September 24, 1998, disclosed the disposition of
               California Tube Laboratory.

          2)  Form 8-K, filed September 22, 1998, disclosed the disposition of
               all or substantially all of the assets of Particle Interconnect
               Corporation.

                                       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.

                              INTERCELL CORPORATION
                              (Registrant)


Date: October 30, 1998        By  /s/ Paul Metzinger
                                 -------------------
                                 Paul Metzinger, President and Chief Executive
                                 Officer


Date: October 30, 1998        By  /s/ Thomas Vander Stel
                                 -----------------------
                                 Thomas Vander Stel, Secretary and Chief
                                 Financial Officer

                                       17

<PAGE>
 
                                LIST OF EXHIBITS


          Exhibit 11.1:  Statement of computation of earnings per share
          Exhibit 27.1:  Financial Data Schedule

                                       18