<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 September 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.)

                             9393 Towne Centre Drive
                           San Diego, California 92121
                           ---------------------------
                    (Address of principal executive offices)

                                 (619) 450-7100
                                 --------------
                         (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, approximately 4,987,026 shares outstanding as of
September 30, 1998 (as adjusted for the one-for-seven reverse stock split
effective November 13, 1998)


<PAGE>

                                CYTEL CORPORATION

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

PART I.  FINANCIAL INFORMATION

         Item 1.   Financial Statements

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

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

                   Condensed Consolidated Statements of Cash Flows
                   for the Three and Nine Months Ended September 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......................................................11-12

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


<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM I.  FINANCIAL STATEMENTS


<TABLE>

                                CYTEL CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                             September 30,    December 31,
                                                                                 1998             1997
                                                                            --------------   --------------
                                                                              (UNAUDITED)
ASSETS
<S>                                                                         <C>              <C>
Current assets:
   Cash and cash equivalents                                                $   7,977,000    $   6,187,000
   Short-term investments                                                       8,114,000       11,616,000
   Current portion of restricted cash                                                 -            375,000
   Prepaids and other current assets                                            1,525,000        1,312,000
                                                                            --------------   --------------
Total current assets                                                           17,616,000       19,490,000

Restricted cash                                                                       -            656,000
Property and equipment, net                                                     2,678,000        1,704,000
Patents                                                                         6,947,000        5,235,000
Deposits and other assets                                                         802,000        1,062,000
                                                                            --------------   --------------

Total assets                                                                $  28,043,000    $  28,147,000
                                                                            ==============   ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities                                 $   2,092,000    $     755,000
   Deferred contract revenues                                                         -             78,000
   Accrued payroll and related expenses                                           430,000          463,000
   Current portion of note payable to bank                                            -            375,000
   Current portion of obligations under equipment loans and notes payable         423,000           40,000
                                                                            --------------   --------------
Total current liabilities                                                       2,945,000        1,711,000

Deferred rent payable                                                                 -          1,388,000

Equipment loans and notes payable                                               1,466,000          656,000

Minority interest in consolidated subsidiary                                    1,896,000              -

Stockholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
   659,898 shares issued and outstanding at September 30, 1998                      7,000              -
  Common stock, $.01 par value, 75,000,000 and 50,000,000 shares
   authorized at September 30, 1998 and December 31, 1997, respectively;
   4,987,026 and 4,603,213 shares issued and outstanding at
   September 30, 1998, and December 31, 1997, respectively                         50,000           46,000
  Additional paid-in capital                                                  142,671,000      131,564,000
  Accumulated deficit                                                        (120,994,000)    (107,188,000)
  Unrealized gains (losses) on available-for-sale securities                        2,000          (30,000)
                                                                            --------------   --------------
Total stockholders' equity                                                     21,736,000       24,392,000
                                                                            --------------   --------------

Total liabilities and stockholders' equity                                  $  28,043,000    $  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 September 30,      Nine months ended September 30,
                                                                 1998               1997              1998               1997
                                                            -------------      -------------      -------------      -------------
                                                                       (UNAUDITED)                           (UNAUDITED)
<S>                                                         <C>                 <C>               <C>                <C>
REVENUES
Research and development                                    $  1,387,000        $ 1,625,000       $  1,387,000       $  2,750,000
Research grants and other income                                 387,000            196,000          1,364,000          1,131,000
                                                            -------------      -------------      -------------      -------------
                                                               1,774,000          1,821,000          2,751,000          3,881,000

OPERATING EXPENSES
Research and development                                       5,690,000          3,807,000         14,092,000         12,305,000
General and administrative                                       885,000            950,000          3,497,000          2,577,000
                                                            -------------      -------------      -------------      -------------
                                                               6,575,000          4,757,000         17,589,000         14,882,000

Minority interest in net loss of consolidated subsidiary         136,000                -              281,000                -
Interest income, net                                             213,000            169,000            752,000            615,000
                                                            -------------      -------------      -------------      -------------

Net loss                                                    $ (4,452,000)      $ (2,767,000)      $(13,805,000)      $(10,386,000)
                                                            =============      =============      =============      =============

Net loss per share - basic and diluted                      $      (0.91)      $      (0.76)      $      (2.91)      $      (2.88)
                                                            =============      =============      =============      =============

Shares used in computing net loss per share - basic
  and diluted                                                  4,868,482          3,635,038          4,740,123          3,604,113
                                                            =============      =============      =============      =============

</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>

                                                                                     Nine months ended September 30,
                                                                                        1998                1997
                                                                                    --------------     --------------
                                                                                               (UNAUDITED)
<S>                                                                                 <C>                <C>
OPERATING ACTIVITIES
Net loss                                                                            $ (13,805,000)     $ (10,386,000)
Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation and amortization                                                     597,000            664,000
        Deferred rent                                                                    (225,000)          (177,000)
        Deferred revenue                                                                  (78,000)          (158,000)
        Minority interest in consolidated subsidiary                                     (281,000)               -
        Gain on sale of equipment                                                         (30,000)           (35,000)
        Changes in operating assets and liabilities:
           Other current assets                                                          (213,000)            97,000
           Accounts payable and accrued liabilities                                     1,337,000           (659,000)
           Accrued payroll and related expenses                                           (33,000)          (260,000)
                                                                                    --------------     --------------
Net cash used in operating activities                                                 (12,731,000)       (10,914,000)

INVESTING ACTIVITIES
Purchases of available-for-sale securities                                            (14,981,000)       (23,923,000)
Maturities of available-for-sale securities                                            12,845,000         17,764,000
Sales of available-for-sale securities                                                  5,670,000         16,594,000
Proceeds from the sale of equipment                                                       104,000             35,000
Proceeds from the sale of assets of subsidiary                                            100,000            211,000
Expenditures related to early lease termination                                          (226,000)               -
Purchases of property and equipment                                                    (1,862,000)          (240,000)
Patents                                                                                  (812,000)          (878,000)
Deposits and other assets                                                                 160,000            207,000
                                                                                    --------------     --------------
Net cash provided by investing activities                                                 998,000          9,770,000

FINANCING ACTIVITIES
Principal payments under capital lease obligations and equipment notes payable            (68,000)          (300,000)
Principal payments on note payable to bank                                             (1,031,000)          (281,000)
Restricted cash for note payable collateral                                             1,031,000            281,000
Proceeds from the issuance of equipment notes payable                                   1,197,000                -
Net proceeds from issuance of preferred stock                                           9,700,000                -
Net proceeds from issuance of common stock                                              2,694,000          3,045,000
                                                                                    --------------     --------------
Net cash provided by financing activities                                              13,523,000          2,745,000

Increase in cash and cash equivalents                                                   1,790,000          1,601,000
Cash and cash equivalents at beginning of period                                        6,187,000          3,231,000
                                                                                    --------------     --------------
Cash and cash equivalents at end of period                                          $   7,977,000      $   4,832,000
                                                                                    ==============     ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                       $      96,000      $      95,000
                                                                                    ==============     ==============

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized gains on available-for-sale securities                                   $      32,000      $      19,000
                                                                                    ==============     ==============
Issued common stock for non-exclusive license agreement for patent rights           $     900,000      $         -
                                                                                    ==============     ==============
Early lease termination - net debt extinguishment and asset abandonment             $     152,000      $         -
                                                                                    ==============     ==============
Promissory note and stock received for sale of assets of subsidiary                 $         -        $     800,000
                                                                                    ==============     ==============
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       3




<PAGE>

                                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.

      A one-for-seven reverse split of the Company's common stock was effected
on November 13, 1998. The reverse split was approved by the Company's Board of
Directors on November 2, 1998 pursuant to authority granted to the Board of
Directors by the Company's stockholders at a special meeting held on October 30,
1998. All common share balances and net loss per share amounts presented in
these financial statements have been retroactively adjusted to reflect the
reverse stock split.

      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

                                        4

<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM I.  FINANCIAL STATEMENTS

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 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 July 1998, the Company entered into an exclusive sublicense 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 VLA-4 integrin for the treatment of inflammatory
conditions. In connection with this agreement, which included the grant of an
exclusive sublicense, Elan made a $4.0 million equity investment in Cytel, of
which $2.6 million was allocated to the purchase price of 285,714 shares of the
Company's common stock and $1.4 million was allocated to the rights granted
under the exclusive sublicense and option agreement. 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.

      In September 1997 as part of a letter of intent, Searle purchased 317,460
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 September
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

                                        5


<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM I.  FINANCIAL STATEMENTS

Incorporated, under which the Company received 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 84,475 shares of the
Company's common stock at $10.65 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 sublicensed 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 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 October 1998, Nextran made a payment upon exercise of an option
to enter into a second exclusive supply agreement with the Company.

        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.

                                        6

<PAGE>

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

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

      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
September 30, 1998, the Company's accumulated deficit was $121.0 million.

Results of Operations

      Revenues for the three and nine months ended September 30, 1998 were $1.8
million and $2.8 million as compared to $1.8 million and $3.9 million,
respectively, for the same periods in 1997. Research and development revenues
for the first nine months of 1998 consist of funds paid by Elan under an
exclusive sublicense and option agreement entered into in July 1998. Research
and development revenues for the first nine months of 1997 consisted of funding
received under the Company's collaborative research agreements with Searle,
Nextran and Abbott. Additional research and development revenues for 1998 are
dependent upon option exercises or the achievement of milestones by the
Company's collaborators under existing collaboration agreements or the
initiation of new collaborative research and development relationships. There
can be no assurance such events will occur on a timely basis, if at all, or that
the Company will be able to establish or maintain any such collaborative
relationships. Subsequent to the quarter ended September 30, 1998, Nextran made
a payment upon exercise of an option to enter into a second exclusive supply
agreement with the Company. 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 nine months ended September 30, 1998 increased slightly from
the comparable periods in 1997.

      Research and development expenses for the three and nine months ended
September 30, 1998 increased by $1.9 million and $1.8 million, respectively,
over the same periods in 1997. The increases in 1998 over 1997 are primarily
attributable to increased clinical trial costs due to accelerated patient
recruitment 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

                                        7

<PAGE>

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

cardiopulmonary bypass 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
remain at the current level or increase slightly as patient enrollment continues
in the Cylexin clinical program. The Company incurred additional non-recurring
facilities costs in the second and third quarters of 1998 related to its recent
moves into the new manufacturing facility for Cylexin and into a new corporate
headquarters and research and development facility in September 1998. General
and administrative expenses for the nine months ended September 30, 1998
increased $0.9 million as compared to the same period in 1997 due to increased
legal costs associated with the Company's collaboration agreements, 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
through the third quarter, although some additional expense is anticipated in
the fourth quarter of 1998. The relocation to new facilities is expected to
result in a significant reduction in facilities costs in subsequent years.

      Net interest income increased slightly for the three and nine months ended
September 30, 1998 over the same periods in 1997. The increase in interest
income is due to higher average cash balances overall in 1998 versus 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 August 1998, Elan made an equity investment in the
Company totaling $4.0 million, of which $2.6 million was allocated to the
purchase price of shares of the Company's common stock and $1.4 million was
allocated to the rights granted under an exclusive sublicense and option
agreement. 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 September 1998, the
Company has raised approximately $144.9 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 $14.7 million as of September 30,
1998 compared to $17.8 million at December 31, 1997. Cash, cash equivalents and
short-term investments decreased to $16.1 million as of September 30, 1998 as
compared to $17.8 million at December 31, 1997. Net cash used in operating
activities was $12.7 million and $10.9 million for the nine months ended
September 30, 1998 and 1997, respectively. The increase in net cash used in

                                       8

<PAGE>

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

operating activities was due primarily to increased expenses on lower revenues
for the first nine months in 1998 as compared to the same period in 1997. This
increase was offset by cash provided through increased accounts payable and
accrued liabilities at September 30, 1998 as compared to the pay down of
accounts payable and accrued liabilities at September 30, 1997. Subsequent to
the quarter ended September 30, 1998, Nextran made a payment upon exercise of an
option to enter into a second exclusive supply agreement with the Company.

      For the nine months ended September 30, 1998, the Company acquired an
aggregate of $1.9 million in capital equipment as compared to $0.2 million in
the first nine months of 1997. This increase is primarily 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 are being financed through two secured
term line of credit arrangements with four-year repayment terms, totaling $3.3
million, completed in July and August of 1998. One of these credit facilities
for $0.8 million was established to finance capital additions of Epimmune.

      The Company's cash, cash equivalents and short-term investments are
expected to decline primarily due to the continued clinical development of
Cylexin and the conduct of its research and development 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. In an effort to maintain
sufficient resources to complete the ongoing Cylexin clinical trials, the
Company has taken numerous cost cutting measures including moving to lower cost
facilities, termination of early-stage research and development programs and a
reduction in force in November 1998.

      The Company will need to raise substantial additional funds soon to
continue its current operations and to conduct research, preclinical development
and clinical trial activities. If additional funding 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 sufficient to enable the
Company to continue operations to the end of 1998. It is the Company's intention
to seek additional funding through equity or debt financing, the sale or license
of certain of its technologies or other assets or collaborative research and
development relationships with suitable corporate partners. There can be no
assurance that any such financing or transaction will be available on favorable
terms, if at all, or that any collaboration agreements to which the Company is
or may become a party will successfully reduce the Company's funding
requirements. 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.
If adequate funds are not available, the Company will be required to delay,
scale back or eliminate one or more of its drug discovery or development
programs; 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; sell itself or certain of its technologies or
other assets to a third party; cease operations; or declare bankruptcy.

                                        9

<PAGE>

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

      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.

      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 Company's inability to fund clinical
development of such products, or 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.

      The rules of the Nasdaq National Market System (Nasdaq NMS) require that
as a condition of the continued listing of a company's securities on the Nasdaq
NMS, a company satisfy at least one of several alternative maintenance
schedules, which generally require that a company meet certain minimum criteria
relating to its financial condition, results of operations and trading market
for its listed securities. One of such criteria is the Nasdaq NMS minimum bid
price requirement of $1.00 per share. Based on the recent trading history of the
Company's common stock, the Company decided to effect a one-for-seven reverse
split of the Company's common stock, which occurred on November 13, 1998 (the
Reverse Split). There can be no assurance that prices for shares of the common
stock after the Reverse Split will be seven times the prices for shares of the
common stock immediately prior to the Reverse Split, that the Company will be
successful in meeting the Nasdaq NMS maintenance criteria or, that, even if
these maintenance criteria are met, Nasdaq will continue to list the Company's
common stock on the Nasdaq NMS. The delisting of the Company's common stock from
the Nasdaq NMS could adversely affect the liquidity of the Company's common
stock and the ability of the Company to raise capital.

      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.

                                       10


<PAGE>

PART II.  OTHER INFORMATION

1.    Legal Proceedings

      The Company is not a party to any legal proceedings.

2.    Change in Securities

      During the period covered by this Form 10-Q, the Company sold and issued
      the following securities which were not registered under the Securities
      Act of 1933, as amended (the Securities Act):

      (1) In July 1998, the Company entered into a Stock Purchase Agreement
      with Elan International Services Ltd. (Elan) in connection with an
      exclusive sublicensing agreement entered with Elan. Pursuant to such
      agreement, the Company issued 2,000,000 shares of common stock (285,714
      shares, as adjusted for the one-for-seven reverse stock split effective
      November 13, 1998) of the Company to Elan for an aggregate purchase price
      of $4.0 million.

      The sale and issuance of securities in the transaction described above
      was deemed to be exempt from registration under the Securities Act by
      virtue of Section 4(2) and/or Regulation D promulgated thereunder.

      The recipient represented their intention to acquire the securities for
      investment purposes only and not with a view to the distribution thereof.
      Appropriate legends are affixed to the stock certificate issued in such
      transaction. The recipient received adequate information about the
      Company.

3.    Defaults Upon Senior Securities

      None.

4.    Submission of Matters to a Vote of Security Holders

      None.

5.    Other Information

      None.

                                       11

<PAGE>

PART II.  OTHER INFORMATION

6.     Exhibits and Reports on Form 8-K

       (a)    Exhibits.

       Exhibit 3.8         Certificate of Amendment of Amended and Restated
                           Certificate of Incorporation.

       Exhibit 10.60       Sublease Agreement, between the Registrant and
                           Amylin Pharmaceuticals, Inc., dated as of June 1,
                           1998.

       Exhibit 10.61       Amended and Restated Sublicense and Option
                           Agreement, between the Registrant and Elan
                           International Services Ltd., dated November 10, 1998
                           (with certain confidential portions deleted) (1). and
                           side letter entered between the Registrant and Elan
                           International Services, Ltd., dated November 10, 1998

       Exhibit 27          Financial Data Schedule

                           (1) Certain confidential portions deleted subject to
                           the Application for Confidential Treatment pursuant
                           to Rule 24b-2 under the Securities Exchange Act of
                           1934 filed by the Registrant with the Commission
                           concurrently herewith.

       (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: November 16, 1998                      By:/s/ Robert L. Roe
                                                --------------------------------
                                                Robert L. Roe
                                                Chief Operating Officer
                                                (Duly Authorized Officer and
                                                Principal Financial Officer)

                                             By:/s/ Paula Moody
                                                --------------------------------
                                                Paula Moody
                                                Controller
                                                (Principal Accounting Officer)

                                       13