<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


(Mark One)
[ X ]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 for the quarterly period ended June 30, 1998, or

[   ]   Transition Period Pursuant to Section 13 or 15(d) of the Securities 
        Exchange Act of 1934 for the Transition Period From ______ to ______.


                         Commission file number 0-19591

                                CYTEL CORPORATION
             (Exact name of Registrant as specified in its charter)


            Delaware                                     33-0245076
  ------------------------------                 --------------------------
    (State of Incorporation)                          (I.R.S. Employer
                                                     Identification No.)

                             3525 John Hopkins Court
                           San Diego, California 92121
                    ---------------------------------------
                    (Address of principal executive offices)


                                 (619) 552-3000
                         ------------------------------
                         (Registrant's telephone number)


Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                                 Yes    X       No
                                     ------        ------

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

 Common Stock: $.01 par value, 32,870,387 shares outstanding as of June 30, 1998


<PAGE>


                                CYTEL CORPORATION

                                TABLE OF CONTENTS



                                                                           PAGE
                                                                           ----
PART I.  FINANCIAL INFORMATION

        Item 1.    Financial Statements

                   Condensed Consolidated Balance Sheets as of
                   June 30, 1998 and December 31, 1997........................1

                   Condensed Consolidated Statements of Operations
                   for the Three and Six Months Ended June 30, 1998 and 1997..2

                   Condensed Consolidated Statements of Cash Flows
                   for the Three and Six Months Ended June 30, 1998 and 1997..3

                   Notes to Condensed Consolidated Financial Statements.......4

        Item 2.    Management's Discussion and Analysis of Financial
                   Condition and Results of Operations........................7

PART II. OTHER INFORMATION

        Items 1 to 6..........................................................10

        Signatures............................................................13

<PAGE>


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS



<TABLE>
                                CYTEL CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                           June 30,          December 31,
                                                                                             1998                1997
                                                                                        ----------------    ----------------
                                                                                          (unaudited)
<S>                                                                                     <C>                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                            $     8,418,000     $     6,187,000
   Short-term investments                                                                     8,587,000          11,616,000
   Current portion of restricted cash                                                           375,000             375,000
   Prepaids and other current assets                                                          1,654,000           1,312,000
                                                                                        ----------------    ----------------
Total current assets                                                                         19,034,000          19,490,000

Restricted cash                                                                                 519,000             656,000
Property and equipment, net                                                                   2,743,000           1,704,000
Patents, deposits and other assets                                                            7,464,000           6,297,000
                                                                                        ----------------    ----------------

Total assets                                                                            $    29,760,000     $    28,147,000
                                                                                        ================    ================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities                                             $     1,537,000     $       755,000
   Deferred contract revenues                                                                   111,000              78,000
   Accrued payroll and related expenses                                                         481,000             463,000
   Current portion of note payable to bank                                                      375,000             375,000
   Current portion of obligations under capital leases and equipment notes payable                    -              40,000
                                                                                        ----------------    ----------------
Total current liabilities                                                                     2,504,000           1,711,000

Deferred rent payable                                                                         1,238,000           1,388,000

Note payable to bank                                                                            469,000             656,000

Minority interest in consolidated subsidiary                                                  2,031,000                -

Stockholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
    659,898 shares issued and outstanding at June 30, 1998                                        7,000                -
  Common stock, $.01 par value, 75,000,000 and 50,000,000 shares
    authorized at June 30, 1998 and December 31, 1997, respectively;
    32,870,387 and 32,222,497 shares issued and outstanding at
    June 30, 1998, and December 31, 1997, respectively                                          329,000             322,000
  Additional paid-in capital                                                                139,747,000         131,288,000
  Accumulated deficit                                                                      (116,542,000)       (107,188,000)
  Unrealized losses on available-for-sale securities                                            (23,000)            (30,000)
                                                                                        ----------------    ----------------
Total stockholders' equity                                                                   23,518,000          24,392,000
                                                                                        ----------------    ----------------

Total liabilities and stockholders' equity                                              $    29,760,000     $    28,147,000
                                                                                        ================    ================
</TABLE>

Note: The balance sheet at December 31, 1997 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

See notes to condensed consolidated financial statements.



                                      -1-


<PAGE>


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


<TABLE>



                                CYTEL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>


                                                     Three months ended June 30,              Six months ended June 30,
                                                      1998                1997                1998                1997
                                                 ----------------    ----------------   ----------------    ----------------
                                                             (Unaudited)                            (Unaudited)
<S>                                              <C>                 <C>                <C>                 <C> 
REVENUES
Research and development                         $       -           $       -          $       -           $     1,125,000
Research grants and other income                         507,000             394,000            977,000             934,000
                                                 ----------------    ----------------   ----------------    ----------------
                                                         507,000             394,000            977,000           2,059,000


OPERATING EXPENSES
Research and development                               4,616,000           3,971,000          8,402,000           8,498,000
General and administrative                             1,508,000             792,000          2,612,000           1,627,000
                                                 ----------------    ----------------   ----------------    ----------------
                                                       6,124,000           4,763,000         11,014,000          10,125,000

Minority interest in net loss of  
  consolidated subsidiary                                120,000             -                  145,000             -
Interest income, net                                     263,000             178,000            539,000             447,000
                                                 ----------------    ----------------   ----------------    ----------------


Net loss                                         $    (5,234,000)    $    (4,191,000)   $    (9,353,000)    $    (7,619,000)
                                                 ================    ================   ================    ================

Net loss per share - basic and diluted           $         (0.16)    $         (0.17)   $         (0.29)    $         (0.30)
                                                 ================    ================   ================    ================


Shares used in computing net loss per share 
  - basic and diluted                                 32,868,409          25,135,101         32,731,607          25,120,550
                                                 ================    ================   ================    ================

</TABLE>



See notes to condensed consolidated financial statements.




                                      -2-
                                     <PAGE>


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS



<TABLE>



                                CYTEL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                                                   Six months ended June 30,
                                                                                                  1998                  1997
                                                                                            -----------------     -----------------
<S>                                                                                         <C>                   <C>
OPERATING ACTIVITIES                                                                                       (Unaudited)
Net loss                                                                                    $     (9,353,000)     $     (7,619,000)
Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation and amortization                                                                361,000               479,000
        Deferred rent                                                                               (150,000)             (103,000)
        Deferred revenue                                                                              33,000              (732,000)
        Minority interest in consolidated subsidiary                                                (145,000)                    -
        Gain on sale of equipment                                                                     (9,000)              (35,000)
        Changes in operating assets and liabilities:
           Other current assets                                                                     (342,000)               28,000
           Accounts payable and accrued liabilities                                                  782,000              (839,000)
           Accrued payroll and related expenses                                                       18,000              (172,000)
                                                                                            -----------------     -----------------
Net cash used in operating activities                                                             (8,805,000)           (8,993,000)

INVESTING ACTIVITIES
Purchases of available-for-sale securities                                                       (12,903,000)          (16,717,000)
Maturities of available-for-sale securities                                                       10,268,000            12,969,000
Sales of available-for-sale securities                                                             5,670,000            13,207,000
Proceeds from the sale of equipment                                                                    9,000                35,000
Proceeds from the sale of assets of subsidiary                                                             -               161,000
Purchases of property and equipment                                                               (1,400,000)             (182,000)
Patents, deposits and other assets                                                                  (267,000)             (410,000)
                                                                                            -----------------     -----------------
Net cash provided by investing activities                                                          1,377,000             9,063,000

FINANCING ACTIVITIES
Principal payments under capital lease obligations and equipment notes payable                       (40,000)             (249,000)
Principal payments on note payable to bank                                                          (187,000)             (187,000)
Restricted cash for note payable collateral                                                          137,000               187,000
Net proceeds from issuance of preferred stock                                                      9,700,000                     -
Net proceeds from issuance of common stock                                                            49,000                79,000
                                                                                            -----------------     -----------------
Net cash provided by (used in) financing activities                                                9,659,000              (170,000)

Increase (decrease) in cash and cash equivalents                                                   2,231,000              (100,000)
Cash and cash equivalents at beginning of period                                                   6,187,000             3,231,000
                                                                                            -----------------     -----------------
Cash and cash equivalents at end of period                                                  $      8,418,000      $      3,131,000
                                                                                            =================     =================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                               $         40,000      $         68,000
                                                                                            =================     =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized gains on available-for-sale securities                                           $          7,000      $         13,000
                                                                                            =================     =================
Issued common stock for non-exclusive license agreement for patent rights                   $        900,000      $              -
                                                                                            =================     =================
Promissory note and stock received for sale of assets of subsidiary                         $              -      $        800,000
                                                                                            =================     =================
</TABLE>

See notes to condensed consolidated financial statements.



                                      -3-
<PAGE>
                                            


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


                                CYTEL CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.      BASIS OF PRESENTATION

        The interim unaudited condensed consolidated financial statements
contained herein have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In management's
opinion, the unaudited information includes all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Interim results are not necessarily indicative of results to be expected for the
full year. The financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in the
Registrant's Form 10-K for the year ended December 31, 1997.

        The condensed consolidated financial statements include the accounts of
Cytel Corporation and its subsidiaries (Cytel or the Company). All significant
intercompany accounts and transactions have been eliminated. The minority
interest calculation is based on G.D. Searle & Co.'s (Searle) actual ownership
percentage in Epimmune Inc. (Epimmune) of 13.4%. The calculation does not
include the potential additional ownership interest that would result from the
conversion of Searle's investment in Cytel's preferred stock which is
convertible into Epimmune common stock.

        Basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding during the period. All potential
common shares have been excluded from the diluted net loss per share
calculations as they are antidilutive.

        Effective January 1, 1998, the Company adopted the Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments and unrealized gains and losses on investments
shall be reported, net of their related tax effect, to arrive at comprehensive
income. Comprehensive loss is not materially different than net loss for the
periods presented.

        In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
is effective for years beginning after December 15, 1997. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined by SFAS No. 131, are components of an enterprise for which financial
information is available and evaluated regularly by the Company in deciding how
to allocate resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating the


                                      -4-
<PAGE>


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

segment performance. The Company will adopt the new requirements retroactively
in 1998. Management has not completed its review of SFAS No. 131, but
anticipates that its adoption will not affect results of operations or financial
position, but possibly will require disclosure of segment information.

2.      RESEARCH AND DEVELOPMENT AGREEMENTS

        In September 1997 as part of a letter of intent, Searle purchased
2,222,222 shares of Cytel common stock for $5 million for an exclusive right to
negotiate a definitive agreement. The Company then invested $6.5 million in cash
and transferred $1.5 million in other assets to fund Epimmune. In February 1998,
Epimmune entered into a collaborative agreement with Searle to develop
immune-stimulating products for the treatment of cancer. Under the terms of the
agreement, Epimmune has granted Searle exclusive worldwide rights to its epitope
and PADRE technologies in the cancer field, excluding rights previously granted
to Takara Shuzo Co., Ltd. Biomedical Group (Takara) for the ex vivo treatment of
cancer in Japan.

        As part of the agreement, Searle purchased 1,032,149 shares of
Epimmune's convertible preferred stock for $6.1 million and 659,898 shares of
Cytel's convertible preferred stock for $3.9 million. Cytel simultaneously
purchased 659,898 shares of Epimmune's convertible preferred stock for $3.9
million. Searle has the right to convert the Cytel convertible preferred stock
into Cytel common stock after three years or to convert to Epimmune common stock
at any time. In addition to the $15 million investment made to date, Searle will
make milestone payments to Epimmune upon achievement of certain preclinical and
clinical milestones. Searle has the option to deliver shares of the Cytel
convertible preferred stock in lieu of up to 50% of certain milestone payments.
Searle will also pay royalties to Epimmune on product sales. In addition, Searle
has rights of first refusal with respect to newly-issued securities of Cytel,
enabling Searle to maintain its percentage ownership in Cytel. As of June 30,
1998, Cytel owned 86.6% of the outstanding capital stock of Epimmune, and Searle
owned 13.4%.

        In February 1998, the Company entered into a non-exclusive licensing
agreement with Glycomed Incorporated (Glycomed), a wholly-owned subsidiary of
Ligand Pharmaceuticals Incorporated, under which the Company will receive rights
to a family of Glycomed patents relating to certain carbohydrate compounds for
the treatment of acute inflammation, including the Company's most advanced
product, Cylexin. The Company paid a license fee of $900,000 consisting of
591,327 shares of the Company's common stock at $1.52 per share. Glycomed will
receive milestone payments upon the first New Drug Application and the first FDA
approval of each licensed product. These payments may also be made in Company
stock, at the Company's option. Glycomed will also receive royalties on
worldwide net sales of a licensed or sub-licensed product.

        In September 1996, the Company entered into a collaborative agreement
with Baxter Healthcare Corporation's Nextran unit (Nextran) to develop a
carbohydrate product for use in xenotransplantation. Under the agreement, the
Company will manufacture and sell a carbohydrate which Nextran will incorporate
into a xenotransplant product. Nextran made an up-front payment and purchased
shares of the Company's common stock for the right to enter into an exclusive
supply agreement. In January 1997, the Company achieved a milestone with

                                       -5-
<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

delivery of the initial batch of a bioactive carbohydrate to Nextran. As a
result, Nextran made the first milestone payment. In December 1997, Nextran paid
an option fee and purchased additional shares of the Company's common stock for
the right to extend and expand the original agreement. Nextran will make
additional payments to the Company upon option exercise, achievement of
milestones and supply of carbohydrate.

        In December 1995, the Company entered into a collaborative agreement
with Abbott Laboratories (Abbott) to develop manufacturing processes for the
production of certain carbohydrates for use in nutritional products. Abbott paid
a $2 million non-refundable fee in January 1996 for an option to obtain a
worldwide license for limited applications under the Company's patents and
know-how in the area of carbohydrate synthesis. In December 1996, Abbott made
the first milestone payment to the Company in the amount of $2 million. An
additional option fee of $250,000 was earned in August 1997 and paid in two
equal installments in September 1997 and January 1998. Abbott's option to
license certain of the Company's technology under its collaboration with the
Company expired and the collaboration terminated as of July 31, 1998. Abbott and
Cytel are in disagreement regarding certain issues under the collaboration,
including whether certain carbohydrates to be used in Abbott's nutritional
products are covered by the Company's technology. The parties are continuing to
discuss possible resolution of such issues although there can be no assurance
that the parties will be able to reach a mutually acceptable resolution.

        Under two agreements with Takara, which were assigned to Epimmune in
October 1997, Epimmune's technology is being applied to fungal disease targets
and cellular therapy for the treatment of cancer. Under the anti-fungal
collaboration initiated in June 1994, Takara obtained rights to any anti-fungal
products resulting from the collaboration for commercialization in Japan.
Epimmune has the right to develop products in North America, and the companies
share rights in the rest of the world. Research in the anti-fungal field, using
Epimmune technology, is now being conducted independently by Takara in Japan.
Under the cellular therapy collaboration initiated in October 1994, Takara
obtained rights to Epimmune's technology relevant to the development of ex vivo
cellular therapies for the treatment of cancer in Japan. Takara will pay
royalties to Epimmune on sales from products resulting from collaboration under
both agreements.

        In May 1995, the Company entered into a collaborative agreement with
Schwarz Pharma AG (Schwarz) for the development and marketing of carbohydrate
selectin blockers, including Cylexin. Schwarz funded 75% of clinical development
costs associated with the Phase II acute myocardial infarction trial from 1995
until termination of the agreement. In April 1997, the Company and Schwarz
agreed to terminate their collaboration.

        In October 1991, the Company entered into a five-year collaborative
agreement with Sumitomo Pharmaceuticals Co., Ltd. (Sumitomo) to develop drugs
based on the Company's technology for the treatment of white blood cell-mediated
diseases and cancer. Under the terms of the agreement, Sumitomo provided
research support payments of $15 million. In January 1997, the collaborative
research agreement expired. Although Sumitomo has rights to Cylexin in the
Pacific Rim, it has stated that it will not pursue Cylexin for the CPB
indication and may not pursue Cylexin for any indication.

                                       -6-
<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 2.  MANAGEMENT'S DISCUSSION


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

        Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, without limitation, those discussed in this section and those discussed
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.

        Since its inception in July 1987, the Company has devoted substantially
all of its resources to the discovery and development of its potential
therapeutic products. To date, the Company has not received any revenues from
the sale of products. The Company has funded its research and development
primarily from equity-derived working capital and through strategic alliances
with other companies. The Company has been unprofitable since its inception and
expects to incur substantial operating losses for the next several years. As of
June 30, 1998, the Company's accumulated deficit was $116.5 million.

RESULTS OF OPERATIONS

        Revenues for the three and six months ended June 30, 1998 were $0.5
million and $1.0 million as compared to $0.4 million and $2.1 million,
respectively, for the same periods in 1997. There were no research and
development revenues for the first six months of 1998; and for the first quarter
of 1997, research and development revenues mainly consisted of funding received
under the Company's collaborative research agreements with Abbott and Nextran
for milestones achieved. Research and development revenues for 1998 are
dependent upon the achievement of milestones under existing collaboration
agreements or the initiation of new collaborative research and development
relationships. There can be no assurance that the Company will be able to
achieve such milestones on a timely basis, if at all, or to establish or
maintain any such collaborative relationships. Abbott's option to license
certain of the Company's technology under its collaboration with the Company
expired and the collaboration terminated as of July 31, 1998. Abbott and Cytel
are in disagreement regarding certain issues under the collaboration, including
whether certain carbohydrates to be used in Abbott's nutritional products are
covered by the Company's technology. The parties are continuing to discuss
possible resolution of such issues although there can be no assurance that the
parties will be able to reach a mutually acceptable resolution. Research grant
revenues for the three and six months ended June 30, 1998 increased slightly
from the comparable period in 1997. 

        Research and development expenses for the three months ended June 30,
1998 increased by $0.6 million as compared to the same period in 1997, but
reflected an overall decrease of $0.1 million for the six month period ended
June 30, 1998 relative to the same period in 1997. The increase for the quarter
is primarily attributable to increased clinical trial costs due to accelerated
patient recruitment within the clinical program and attendant increased costs
for manufacturing clinical supplies as well as for new manufacturing and
research and development facilities. During the remainder of 1998, clinical
trial costs are expected to further increase as patient enrollment is expected
to accelerate in the Phase II/III study of the Company's lead drug candidate,
Cylexin, for the prevention of reperfusion injury in infants following heart
surgery requiring cardiopulmonary bypass. The Company incurred additional
non-recurring facilities costs in the second quarter related to its recent move
into the new manufacturing facility for Cylexin and due to the preparation for
its move to a new headquarters and research and development facility in
September 1998. General and administrative expenses for the three and six months
ended June 30, 1998 increased $0.7 million and $1.0 million as compared to the
same periods in 1997 due to increased legal costs associated with the Company's


                                      -7-
<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 2.  MANAGEMENT'S DISCUSSION

collaboration agreement with Searle, additional personnel and the non-recurring
expenses associated with moving to the new facilities discussed above. The
majority of the non-recurring facilities expense allocated to both research and
development and general and administrative expense categories, associated with
moving to new facilities, was incurred in the second quarter, although some
additional expense is anticipated in the second half of 1998. These
non-recurring expenditures are expected to result in a significant reduction in
facilities costs in subsequent years.

        Net interest income increased for the three and six months ended June
30, 1998 by $.1 million over the same periods in 1997. The increase in interest
income is due to higher average cash balances in the second quarter of 1998
versus the second quarter of 1997.

        The Company expects to incur substantial operating losses over the next
several years due to continuing and increasing expenses associated with its
research and development programs, including preclinical testing and clinical
trials. Operating losses may fluctuate from quarter to quarter as a result of
differences in the timing of revenues and expenses incurred, and such
fluctuations may be substantial.

LIQUIDITY AND CAPITAL RESOURCES

        The Company has financed operations since inception primarily through
private placements of its equity securities, two public common stock offerings,
revenues under collaborative research and development agreements, grant revenues
and interest income. In February 1998, Searle, one of the Company's research and
development collaborators, made an additional equity investment in the Company
and the Company's subsidiary, Epimmune, totaling $10.0 million. Also in February
1998, the Company issued $0.9 million in common stock in exchange for a
non-exclusive license agreement with Glycomed. Through June 1998, the Company
has raised approximately $142.2 million from the sale of equity securities. The
Company has financed its laboratory equipment and research and office facilities
primarily through capital, debt and lease financing arrangements.

        The Company had net working capital of $16.5 million as of June 30, 1998
compared to $17.8 million at December 31, 1997. Cash, cash equivalents,
short-term investments and restricted cash decreased to $17.9 million as of June
30, 1998 as compared to $18.8 million at December 31, 1997. Net cash used in
operating activities was $8.8 million and $9.0 million for the six months ended
June 30, 1998 and 1997, respectively. The decrease in net cash used in operating
activities was due primarily to the timing of cash receipts from grant funding
in the current year and the pay down of current liabilities in 1997 versus the
increase in accounts payable and accrued liabilities for the same period in
1998.

        For the six months ended June 30, 1998, the Company acquired an
aggregate of $1.4 million in capital equipment as compared to $0.2 million in
the first half of 1997. This increase is attributable to leasehold improvements
and equipment purchases for the new manufacturing facility which was completed
and ready for occupancy at the beginning of June 1998. Most of these capital
additions will be financed through a $2.5 million secured term line of credit
arrangement, with a four-year repayment term, completed in July 1998.

        Subsequent to the quarter ended June 30, 1998, the Company entered into
an exclusive sublicensing and option agreement with Elan International Services
Ltd. (Elan), a subsidiary of Elan Corporation plc, granting Elan rights to a
patent involving use of antibodies that bind the VLA-4 integrin molecule for the
treatment of inflammatory conditions. In connection with this agreement, which
included the grant of an exclusive sublicense, Elan has made a $4.0 million
investment in Cytel. Elan will make additional payments upon achievement of
certain milestones as well as royalty payments on sales. In addition, Elan will
have the option to enter into a non-exclusive sublicense for patent rights to
other VLA-4 blocking compounds.

                                       -8-
<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 2.  MANAGEMENT'S DISCUSSION

        The Company's cash, cash equivalents and short-term investments are
expected to decline primarily due to the continued clinical development of its
therapeutic product candidates and the conduct of its research programs. While
the Company's investments may periodically reflect unrealized losses, management
attempts to schedule the maturities of the Company's investments to coincide
with the Company's expected cash requirements.

        The Company expects to incur substantial additional research and
development expenditures, including costs related to preclinical testing,
clinical trials and manufacturing, as well as marketing and distribution
expenses. It is the Company's intention to seek additional collaborative
research and development relationships with suitable corporate partners. The
suspension or termination of Cytel's collaborations with its existing corporate
partners or the inability to enter into new collaborations, the failure of any
such collaborations to be successful or the delay in their development or
commercialization of products could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that any collaboration agreements to which the Company is or may
become a party will successfully reduce the Company's funding requirements.
Additional equity or debt financing will be required, and there can be no
assurance that these funds will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its drug discovery or development programs or
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to or sell certain of its technologies,
product candidates or products that the Company would not otherwise relinquish
or sell.

        If additional financing is not available, Cytel anticipates its existing
available cash, cash equivalents and short-term investments, investment income
and research and development funding from collaborative agreements and research
grants will be adequate to satisfy its capital requirements and fund operating
losses through late 1998. The estimate for the period for which the Company
expects its available cash balances, investment income and estimated cash flow
from collaborative agreements and research grants to be sufficient to meet its
capital requirements is a forward-looking statement that involves certain risks
and uncertainties as set forth herein and in the Company's Form 10-K for the
year ended December 31, 1997. The Company's future capital requirements depend
on many factors, including continued scientific progress in its drug discovery
programs, the magnitude of these programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, changes in the existing collaborative
research relationships, the ability of the Company to establish and maintain
development arrangements, the cost of manufacturing scale-up and effective
commercialization activities and arrangements.

        The Company is currently reviewing all equipment, systems, facilities
and software applications for Year 2000 readiness status. The Company has
determined that it will need to update some of its off-the-shelf software
applications so that its computer systems will function properly with respect to
dates in the year 2000 and beyond. The Company currently expects the project to
be substantially complete in early 1999. The cost is expected to be immaterial
and absorbed through upgrades and normal operating costs of software maintenance
contracts currently in place for these third party software products. The
project is not expected to have a significant effect on operations. In addition,
the Company will be replacing certain pieces of equipment and software that
cannot be upgraded. These replacement costs are expected to be immaterial.

        As is typical in the biotechnology industry, the commercial success of
the Company will depend in part on the Company neither infringing patents issued
to competitors nor breaching the technology licenses upon which the Company's
products might be based. The Company's business is also subject to other
significant risks, including the uncertainties associated with the lengthy
regulatory approval process and with potential competition from other products.
Even if the Company's products appear promising at an early stage of
development, they may not reach the market for a number of reasons. Such reasons
include, but are not limited to, the possibilities that the potential products
will be found ineffective during clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, or be
uneconomical to market.

                                       -9-
<PAGE>

PART II.  OTHER INFORMATION

1.      Legal Proceedings

        The Company is not a party to any legal proceedings.

2.      Change in Securities

        None.

3.      Defaults Upon Senior Securities

        None.

4.      Submission of Matters to a Vote of Security Holders

        The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on June 12, 1998. At the Annual Meeting, the stockholders of the Company
(i) elected Howard E. Greene, Jr., Virgil Thompson, Dr. Robert L. Roe, Dr. James
C. Paulson, David L. Anderson, Dr. William T. Comer, Nicole Vitullo, David L.
Mahoney and Nancy D. Rasmussen to serve as directors of the Company until the
1999 Annual Meeting of Stockholders, (ii) approved an amendment of the Company's
Amended and Restated Certificate of Incorporation to increase the Company's
authorized shares of Common Stock from 50,000,000 shares to 75,000,000 shares,
(iii) approved an option exchange program, (iv) approved an amendment to the
Company's Employee Stock Purchase Plan to increase the aggregate number of
shares of Common Stock authorized for issuance to 750,000 shares from 500,000
shares, (v) approved amendments to the Company's 1989 Stock Option Plan and the
1994 Non-Employee Directors' Stock Option Plan to increase the aggregate number
of shares of Common Stock authorized for issuance on a combined basis under both
plans to 7,750,000 shares from 6,400,000 shares, (vi) ratified the selection of
Ernst & Young LLP, as the Company's independent auditors for the fiscal year
ending December 31, 1998.

        The Company had 32,867,887 shares of Common Stock outstanding as of
April 17, 1998, the record date for the Annual Meeting. At the Annual Meeting,
holders of a total of 25,743,356 shares of Common Stock were present in person
or represented by proxy. In addition, 66,135 shares of a total 66,135 shares of
Series B Convertible Preferred Stock entitled to vote were represented in person
or by proxy at the meeting. Each such share of Series B Convertible Preferred
Stock was entitled to .788 of a vote. The following sets forth information
regarding the results of the voting at the Annual Meeting:


 Proposal 1: Election of Directors
 ---------------------------------
                                           Shares Voting
        Director                             In Favor            Shares Withheld
        ------------------------           -------------         ---------------
        Howard E. Greene, Jr.               24,965,758               829,712
        Virgil Thompson                     24,965,758               829,712
        Robert L. Roe, M.D.                 24,965,758               829,712
        James C. Paulson, Ph.D.             24,965,758               829,712
        David L. Anderson                   24,965,758               829,712
        William T. Comer, Ph.D.             24,965,758               829,712
        Nicole Vitullo                      24,965,758               829,712
        David L. Mahoney                    24,965,758               829,712
        Nancy D. Rasmussen                  24,965,758               829,712


                                      -10-
<PAGE>


PART II. OTHER INFORMATION


Proposal 2: Approval of an Amendment to the Company's Amended and Restated
Certificate of Incorporation
--------------------------------------------------------------------------

               Votes in favor:                    24,859,944
               Votes against:                        900,753
               Withheld:                              34,773


Proposal 3: Approval of the Option Exchange Program
---------------------------------------------------

               Votes in favor:                    16,920,245
               Votes against:                        954,914
               Withheld:                              65,418


Proposal 4: Approval of an Amendment to the Employee Stock Purchase Plan
------------------------------------------------------------------------

               Votes in favor:                    14,498,277
               Votes against:                      3,190,147
               Withheld:                              59,357

Proposal 5: Approval of Amendments to the 1989 Stock Option Plan and the 1994
Non-Employee Directors' Stock Option Plan
-----------------------------------------------------------------------------

               Votes in favor:                    13,298,905
               Votes against:                      4,365,849
               Withheld:                              83,027


Proposal 6: Ratification of Selection of Ernst & Young LLP, as Independent
Auditors
--------------------------------------------------------------------------

               Votes in favor:                    25,659,144
               Votes against:                        121,384
               Withheld:                              14,942


5.      Other Information

        Pursuant to the Company's bylaws, stockholders who wish to bring matters
or propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide a notice with specific information to the Company and
such notice must be delivered to or mailed and received at the principal
executive offices of the Company not later than January 4, 1999 which is the
120th day prior to the date specified in the Company's proxy statement released
in connection with the 1998 annual meeting of stockholders (unless such matters
are included in the Company's proxy statement pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934, as amended).


                                      -11-
<PAGE>


PART II. OTHER INFORMATION



6.      Exhibits and Reports on Form 8-K

        (a)     Exhibits.

        Exhibit 3.6   Certificate of Amendment of Amended and Restated 
                      Certificate of Incorporation.

        Exhibit 3.7   Certificate of Increase of Series A Junior Participating
                      Preferred Stock.

        Exhibit 10.5  Registrant's 1989 Stock Plan, as amended.

        Exhibit 10.8  Registrant's Employee Stock Purchase Plan, as amended.

        Exhibit 10.37 Registrant's Non-Employee Directors' Stock Option Plan, as
                      amended.

        Exhibit 27    Financial Data Schedule


        (b)     Reports on Form 8-K.

        None.


                                      -12-
<PAGE>



                                CYTEL CORPORATION

                                   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.


                                CYTEL CORPORATION


Date: August 14, 1998                       By: /s/ Edward C. Hall
                                               -----------------------
                                                Edward C.Hall
                                                Vice President-Finance
                                                Chief Financial Officer
                                                (Duly Authorized Officer and 
                                                Principal Financial & Accounting
                                                Officer)


                                      -13-