================================================================================

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

                              --------------------

                                   FORM 10-QSB
                                   (MARK ONE)

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-27578

                              --------------------

                              SUNPHARM CORPORATION
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

             DELAWARE                                    F593097048             
  (STATE OR OTHER JURISDICTION OF           (I.R.S. EMPLOYER IDENTIFICATION NO.)
  INCORPORATION OR ORGANIZATION)

                             THE VERANDA, SUITE 301
                                 814 HIGHWAY A1A
                           PONTE VEDRA BEACH, FL 32082
                         (ADDRESS OF PRINCIPAL EXECUTIVE
                                    OFFICES)

ISSUER'S TELEPHONE NUMBER: (904) 394-2800

                              --------------------

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 [ ]

         Number  of  shares  of the  issuer's  Common  Stock  outstanding  as of
November 13 , 1998: 6,621,395

================================================================================


<PAGE>


                 STATEMENT REGARDING FORWARD-LOOKING INFORMATION

         This  Quarterly   Report  on  Form  10-QSB   contains   forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933 and
Section 21E of the Securities  Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors.  For a discussion of important factors that could
affect the  Company's  results,  please refer to the  discussions  herein and to
those contained in the Company's Annual Report on Form 10-KSB for the year ended
December  31, 1997 under the  caption  "Item 1.  Description  of Business - Risk
Factors."

                          PART 1. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

         The  following  unaudited  financial   statements  have  been  prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and notes disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to these rules and regulations.  However, the Company
believes that the disclosures  made herein are adequate and,  accordingly,  that
the information  presented is not misleading.  These financial statements should
be read in  conjunction  with the  financial  statements  and notes for the year
ended  December 31, 1997,  which are included in the Company's  Annual Report on
Form  10-KSB  for the year  ended  December  31,  1997,  filed  pursuant  to the
Securities Exchange Act of 1934.


                                       -2-


<PAGE>
                                            SUNPHARM CORPORATION
                                        (A DEVELOPMENT STAGE COMPANY)

                                               BALANCE SHEETS
                                                 (Unaudited)


<TABLE>
<CAPTION>
                                                                               September 30,   December 31,
                                                                                   1998            1997
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
                              ASSETS
Current Assets:
     Cash ..................................................................   $    848,933    $    356,969
     Short-term investments ................................................        497,354       4,268,566
     Receivables ...........................................................          5,648              --
     Other current assets ..................................................         54,621         206,024
                                                                               ------------    ------------
          Total current assets .............................................      1,406,556       4,831,559

Receivable from shareholder ................................................        119,797         106,611
Property and equipment, net ................................................         49,843          30,319
Other assets ...............................................................         34,814           3,250
                                                                               ------------    ------------
                                                                               $  1,611,010    $  4,971,739
                                                                               ============    ============


  LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable ......................................................   $    217,002    $    399,996
     Accrued liabilities ...................................................        197,756         231,754
     Notes payable .........................................................             --         155,271
                                                                               ------------    ------------
          Total current liabilities ........................................        414,758         787,021

Stockholders' Equity:
     Undesignated preferred stock, par value $.0001 per
          share; 2,500,000 shares authorized; 0 shares
          issued and outstanding ...........................................             --              --
     Common stock, par value $.0001 per share;
          25,000,000 shares authorized; 5,767,830
          and 5,737,828 shares issued and
          outstanding, respectively ........................................            577             574
     Additional paid-in capital ............................................     19,704,780      19,687,198
     Accumulated deficit during development stage ..........................    (18,509,105)    (15,503,054)
                                                                               ------------    ------------
          Total stockholders' equity .......................................      1,196,252       4,184,718
                                                                               ------------    ------------
                                                                               $  1,611,010    $  4,971,739
                                                                               ============    ============

                 The accompanying notes are an integral part of these financial statements.
</TABLE>


                                                     -3-
<PAGE>

                              SUNPHARM CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  Three Months Ended September 30,
                                                                        1998           1997
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
REVENUES:
     Sponsored research/sublicensing revenue .....................   $   100,000             --
     Interest income .............................................        32,695         81,444
                                                                     -----------    -----------
          Total revenues .........................................       132,695         81,444

EXPENSES:
     Research and development ....................................       687,770        666,450
     General and administrative ..................................       362,996        434,637
                                                                     -----------    -----------
          Total expenses .........................................     1,050,766      1,101,087
                                                                     -----------    -----------


NET LOSS .........................................................   $  (918,071)   $(1,019,643)
                                                                     ===========    ===========


NET LOSS PER SHARE ...............................................   $     (0.16)   $     (0.18)
                                                                     ===========    ===========


SHARES USED IN COMPUTING LOSS PER SHARE ..........................     5,767,830      5,712,254
                                                                     ===========    ===========

           The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                 -4-

<PAGE>
<TABLE>
<CAPTION>

                                      SUNPHARM CORPORATION
                                  (A DEVELOPMENT STAGE COMPANY)

                                    STATEMENTS OF OPERATIONS
                                           (Unaudited)

                                                                               From Inception
                                                                               (May 3, 1990)
                                              Nine Months Ended September 30,     Through
                                                   1998            1997      September 30, 1998
                                               ------------    ------------  ------------------
<S>                                            <C>                             <C>         
Revenues:
     Sponsored research/sublicensing revenue   $    100,000              --    $  2,985,000
     Interest income .......................        128,726         200,949         644,033
                                               ------------    ------------    ------------
          Total revenues ...................        228,726         200,949       3,629,033

Expenses:
     Research and development ..............      1,852,568       1,805,826      11,838,808
     General and administrative ............      1,382,209       1,281,885       9,809,330
     Royalty expense .......................             --              --         490,000
                                               ------------    ------------    ------------
          Total expenses ...................      3,234,777       3,087,711      22,138,138
                                               ------------    ------------    ------------

Net loss ...................................   $ (3,006,051)   $ (2,886,762)   $(18,509,105)
                                               ============    ============    ============


Net loss per share .........................   $      (0.52)   $      (0.57)
                                               ============    ============

Shares used in computing loss per share ....      5,760,419       5,040,260
                                               ============    ============

           The accompanying notes are an integral part of these financial statements.
</TABLE>


                                              -5-
<PAGE>

<TABLE>
                                                        SUNPHARM CORPORATION
                                                    (A DEVELOPMENT STAGE COMPANY)

                                                  STATEMENT OF STOCKHOLDERS' EQUITY
                                                             (Unaudited)


<CAPTION>
                                         Redeemable Convertible Preferred Stock:                        Additional    Accumulated
                                              Series A            Series B           Common Stock:       Paid-In     Deficit Since
                                          Shares    Amount    Shares    Amount     Shares     Amount     Capital       Inception
                                          -------------------------------------  --------------------------------------------------
<S>                                        <C>       <C>       <C>       <C>      <C>         <C>      <C>            <C>
Balance at December 31, 1997  .........     --        --        --        --       5,737,828   $  574   $ 19,687,198   $(15,503,054)
                                                                                
Issuance of Common Stock ..............     --        --        --        --          30,002        3         17,582             --
                                                                                
Net Loss ..............................     --        --        --        --              --       --             --     (3,006,051)
                                          -------------------------------------   -------------------------------------------------
                                                                                
Balance at September 30, 1998  ........     --        --        --        --       5,767,830   $  577   $ 19,704,780   $(18,509,105)
                                          =====================================   =================================================

                                                                               

                             The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                                 -6-
<PAGE>

                                                     STATEMENTS OF CASH FLOWS
                                                           (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                                FROM INCEPTION
                                                                                                                 (MAY 3, 1990)
                                                                          NINE MONTHS ENDED SEPTEMBER 30,           THROUGH
                                                                               1998            1997           SEPTEMBER 30, 1998
                                                                           ------------    ------------       ------------------
<S>                                                                        <C>             <C>                   <C>
Cash flows from operating activities
   Net loss ............................................................   $ (3,006,051)   $ (2,886,762)         $(18,509,105)
   Adjustments to reconcile net loss to net                                                                   
      cash used in operating activities:                                                                      
          Depreciation and amortization ................................          5,544           2,800                82,942
          Expense related to issuance of                                                                      
             stock for services ........................................             --              --               133,770
          Compensation expense related to                                                                     
             operations, warrants and stock                                                                   
             appreciation rights .......................................             --              --               865,246
          Amortization of deferred offering costs                                                             
             incurred in connection with                                                                      
             issuance of Bridge Notes ..................................             --              --               775,000
          Write-off of patents .........................................             --              --                70,120
          Increase in receivable from shareholder ......................        (13,186)        (93,162)             (119,797)
          Decrease (increase) in accounts receivable                                                          
             and other current assets ..................................        145,755         474,686               (61,910)
          (Decrease) increase in accounts payable ......................       (182,994)        (43,743)              217,002
          (Decrease) increase in accrued liabilities ...................        (33,998)       (438,814)              204,006
          Increase in accrued legal fees ...............................             --              --               300,000
                                                                           ------------    ------------          ------------
             Total adjustments .........................................        (78,879)        (98,233)            2,466,379
                                                                           ------------    ------------          ------------
Net cash used in operating activities ..................................     (3,084,930)     (2,984,995)          (16,042,726)
                                                                           ------------    ------------          ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of short-term investments .................................     (4,694,296)     (6,198,946)          (22,629,348)
   Sales and maturities of short-term investments ......................      8,465,508       2,768,028            22,131,994
   Purchases of property and equipment .................................        (25,068)         (7,485)              (69,090)
   Increase in other assets ............................................        (31,564)             --               (31,564)
   Payment of patent costs .............................................             --              --               (67,424)
                                                                           ------------    ------------          ------------
Net cash provided by (used in) investing activities ....................      3,714,580      (3,438,403)             (665,432)
                                                                           ------------    ------------          ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Repayments of notes payable .........................................       (155,271)       (112,201)             (100,000)
   Increase in deferred offering costs .................................             --              --              (597,348)
   Issuance of Series A preferred stock ................................             --              --               513,525
   Issuance of Series B preferred stock ................................             --              --               450,000
   Issuance of common stock ............................................         17,585       6,522,489            17,290,914
   Proceeds from payable to shareholders ...............................             --              --               542,500
   Repayment of payable to shareholders ................................             --              --              (542,500)
                                                                           ------------    ------------          ------------
Net cash (used in) provided by financing activities ....................       (137,686)      6,410,288            17,557,091
                                                                           ------------    ------------          ------------

Net change in cash .....................................................        491,964         (13,110)              848,933
Cash at beginning of period ............................................        356,969         341,145                    --
                                                                           ------------    ------------          ------------
Cash at end of period ..................................................   $    848,933    $    328,035          $    848,933
                                                                           ============    ============          ============

Supplemental information:
   Cash paid for interest ..............................................   $      3,550    $      2,512          $    171,002
                                                                           ============    ============          ============


                           The accompanying notes are an integral part of these fnancial statements.
</TABLE>
                                                              -7-

<PAGE>

                              SUNPHARM CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (UNAUDITED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The balance  sheet at September  30, 1998,  the related  statements  of
operations  for the three- and nine-month  periods ended  September 30, 1998 and
1997 and the period from inception (May 3, 1990) through September 30, 1998, the
statement of  stockholders'  equity at September 30, 1998, and the statements of
cash flows for the nine-month  periods ended September 30, 1998 and 1997 and the
period from inception  through  September 30, 1998 are unaudited.  These interim
financial statements should be read in conjunction with the financial statements
and related footnotes included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997.  The unaudited  interim  financial  statements
included herein reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented, and
all such adjustments are of a normal recurring  nature.  Interim results are not
necessarily indicative of results for a full year.

NET LOSS PER SHARE

         Net loss per share is computed based on the weighted-average  number of
shares of common stock outstanding for the period.

PATENT COSTS

         The Company  reimburses the University of Florida Research  Foundation,
Inc.  ("UFRFI") for direct expenses  relating to the Company's  patents.  Patent
costs  consist  of legal  fees and other  direct  costs  incurred  in  obtaining
patents.  These costs are  charged to  research  and  development  expense  when
incurred.

RESEARCH AND DEVELOPMENT

         Sponsored  research revenue is recognized as revenue when such payments
are  earned or  received  and the  research  has been  performed.  Research  and
development  expenses  are charged to  operations  when  incurred.  Research and
development expenses include, among other expenses,  consulting fees and cost of
reimbursements to UFRFI.

NEW ACCOUNTING STANDARD

         On  January  1,  1998,  the  Company  adopted  Statement  of  Financial
Accounting  Standards No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130").
SFAS 130 establishes standards for


                                       -8-

<PAGE>

reporting  and display of  comprehensive  income and its  components  (revenues,
expenses,  gains,  and  losses)  in a  full  set  of  general-purpose  financial
statements.  SFAS 130 requires that all items that are required to be recognized
under accounting  standards as components of comprehensive income be reported in
a  financial  statement  that is  displayed  with the same  prominence  as other
financial  statements.  SFAS 130 does not  require a  specific  format  for that
financial   statement  but  requires  that  an  enterprise   display  an  amount
representing  total  comprehensive  income  for the  period  in  that  financial
statement. Additionally, SFAS 130 requires that an enterprise (a) classify items
of other  comprehensive  income by their nature in a financial statement and (b)
display the accumulated  balance of other  comprehensive  income separately from
retained  earnings and  additional  paid-in  capital in the equity  section of a
statement  of  financial  position.  SFAS  130 is  effective  for  fiscal  years
beginning after December 15, 1997.  Reclassification of financial statements for
earlier periods provided for comparative purposes is required.  Adoption of SFAS
130 did not have a material impact on the Company's financial statements.

2.       SUBSEQUENT  EVENT -- PRIVATE  PLACEMENT OF  PREFERRED  STOCK AND COMMON
         STOCK

         On November  13,  1998,  the Company  sold  300,000  shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock") and 853,565 shares of
Common Stock to certain institutions and other accredited investors in a Private
Placement  pursuant  to  Regulation  D under  the  Securities  Act of 1933.  The
purchase  price for the  Preferred  Stock and Common  Stock sold in the  Private
Placement  consisted of $1,200,000 in cash and the surrender by the investors of
redeemable  Common Stock Purchase  Warrants  originally  issued in the Company's
March 1997 private placement  financing.  Shares of Series A Preferred Stock are
initially  convertible to Common Stock on a 1-for-1 basis,  subject to customary
antidilution adjustments. Dividends shall accrue on the Series A Preferred Stock
at the rate of 8% per  annum.  In the  event  of  liquidation,  dissolution,  or
winding up of the  Company,  or, at the option of the  holders of the  Preferred
Stock,  a  consolidation  or  merger  of  the  Company  or  a  sale  of  all  or
substantially all of its assets, the Preferred Stock will be entitled to receive
in  preference  to the  Company's  Common Stock an amount per share equal to the
original purchase price plus any accrued dividends per share.

         Redemption  of the  Preferred  Stock is at the request of holders of at
least 33-1/3% of such shares outstanding,  which request may be made at any time
two years  following  closing  of the  Private  Placement.  In the event of such
request,  the Company  shall be required to redeem all of the Series A Preferred
Stock held by the  requesting  holders at a redemption  price equal to $4.00 per
share  (subject  to  adjustment),  plus any  accrued  dividends  per share.  The
redemption price may be paid, at the Company's  option,  in cash or in shares of
the Company's Common Stock.  The Company's  intention is to make such redemption
in Common Stock,  and accordingly the Series A Preferred Stock has been included
in  Stockholder's  Equity.  Proceeds to the Company from this Private  Placement
were $1,160,000, net of legal fees of $40,000.


                                       -9-

<PAGE>

         Following is a condensed  pro forma  balance sheet of the Company as of
September 30, 1998, after giving effect to the transaction disclosed above.

<TABLE>
<CAPTION>
                                                                                    Pro Forma
                                                                                September 30, 1998
                                                                                ------------------
<S>                                                                                 <C>
ASSETS
Cash and short-term investments                                                     $  2,506,287
Receivables and other current assets                                                      60,269
Property and equipment, net                                                               49,843
Other assets                                                                             154,611
                                                                                    ------------
                                                                                    $  2,771,010
                                                                                    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities                                                                 $    414,758
Stockholders' equity:
Undesignated Preferred Stock, par value $.0001 per share; 2,200,000 shares
    authorized;  0 shares issued and outstanding
Series A Preferred Stock, par value  $.0001 per share; 300,000 shares authorized;
     300,000 shares issued and outstanding                                                    30
Common Stock, par value $.0001 per share; 25,000,000 shares authorized;
     6,621,395 shares issued and outstanding                                                 662
Additional paid-in capital                                                            20,864,665
Accumulated deficit during development stage                                         (18,509,105
                                                                                    ------------
    Total Stockholders' Equity                                                         2,356,252
                                                                                    ------------
                                                                                    $  2,771,010
                                                                                    ============
</TABLE>

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

OVERVIEW

         Since its inception in May 1990,  SunPharm  Corporation  ("SunPharm" or
the  "Company")  has devoted  substantially  all of its efforts and resources to
research and development conducted on its own behalf and through  collaborations
with clinical  institutions.  The Company's drug development strategy emphasizes
conducting most of its research and preclinical  activities at the University of
Florida, with clinical investigations  conducted at various sites, including the
University  of  Florida.  The  Company  has  incurred  cumulative  net losses of
$18,509,000 from its inception  through  September 30, 1998. The Company expects
to incur  additional  significant  operating  losses  for at least  the next two
years,  principally  as a result  of its  continuing  anticipated  research  and
development and clinical trial expenditures.

         The Company has recently  undertaken an assessment of all its financial
and operational systems to ensure Year 2000 compliance and plans to complete the
assessment  by December 31, 1998.  Year 2000 issues result from the inability of
certain  computer  programs or computerized  equipment to accurately  calculate,
store or use a date  subsequent to December 31, 1999.  Typically,  the year 2000
may be  represented  or  interpreted  as the year 1900.  This could  result in a
system failure or miscalculations causing disruptions of operations,  including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business.

         Based on its  review to date and  other  preliminary  information,  the
Company does not anticipate that it will incur any significant costs relating to
the assessment and  remediation of Year 2000 issues.  The Company  believes that
the potential impact, if any, of its systems not being Year

                                      -10-


<PAGE>


2000 compliant should not impact the Company's  ability to continue its research
and development activities. However, there can be no assurance at this time that
the  Company,  its research and  business  partners,  vendors or customers  will
successfully  be able to identify and remedy all potential Year 2000 problems or
that a system  failure  resulting  from a failure to identify any such  problems
would not have a material adverse effect on the Company.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

         Sponsored  research  revenue of  $100,000  was  recorded in the current
period,  representing  preclinical  work  contracted  with a corporate  partner.
Interest  income  decreased to $33,000 for the three months ended  September 30,
1998 from $81,000 for the same period in 1997.  This decrease is attributable to
a lower cash balance available for investment during the current quarter.

         The Company's  research and development  expenses  totaled $688,000 for
the three months ended  September  30, 1998,  a slight  increase  from  $666,000
recorded in the same period in 1997.  Current period expenses  included $100,000
of preclinical  work contracted with a corporate  partner,  as mentioned  above,
which more than offset higher clinical  monitoring and drug testing  expenses in
the  third  quarter  of  1997.  Prior-year  expenses  were  related  to  patient
enrollment  and  data  collection  in  clinical  trials  of the  Company's  lead
compounds,  diethylnorspermine  (DENSPM) and diethylhomospermine  (DEHOP), which
were ongoing at that time.

         General and administrative  expenses were $363,000 for the three months
ended  September  30, 1998, as compared to $435,000 for the same period in 1997.
The 17% decrease resulted  principally from a vacant senior management  position
in the current period and lower corporate legal expenses.

         Net loss for the three months ended September 30, 1998 was $918,000, as
compared to a loss of $1,020,000  for the same period in 1997. The lower loss in
the  current  quarter was due  primarily  to funded  research  revenue and lower
general and  administrative  expenses as discussed above.  Correspondingly,  net
loss per share for the three months ended September 30, 1998 was $0.16, compared
to $0.18 for the same period in 1997.

NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

         Interest  income of $129,000  for the nine months ended  September  30,
1998 was 36% lower than the  $201,000  recorded in the same period in 1997.  The
decrease is  attributable to a lower average balance of invested cash during the
period, as compared to a year earlier.

         Research and  development  expenses of  $1,853,000  for the nine months
ended September 30, 1998 were 3% higher than the $1,806,000 recorded in the same
period  a year  ago.  Higher  expenses  in the  current  period,  as  previously
discussed, were attributable to the inclusion of preclinical expenses contracted
with a  corporate  partner,  as well as to  higher  patent  expenses,  offset by
clinical  investigator and monitoring activity associated with Phase I and Phase
II clinical trials of the Company's lead compounds in the prior-year period.


                                      -11-

<PAGE>


         General and  administrative  expenses of $1,382,000 for the nine months
ended September 30, 1998 were 8% higher than the $1,282,000 recorded in the same
period a year  earlier.  The  increase  is  attributable  to a greater  level of
investor  relations  activity,  the addition of a senior management  position in
September 1997, and a higher level of associated  administrative  expenses.  The
Company  expects  its  general  and  administrative  expenses  to  remain  at  a
relatively constant level into the first quarter of 1999.

         Net loss for the nine months ended  September 30, 1998 was  $3,006,000,
or $0.52 per share,  which  compares to a net loss of  $2,887,000,  or $0.57 per
share,  for the comparable  period a year ago. Net loss per share in the current
period reflected the greater number of weighted average shares  outstanding,  as
compared to a year ago,  due to a private  placement  financing  which closed on
March 28, 1997.

LIQUIDITY AND CAPITAL RESOURCES

         Since its inception,  the Company has financed its operations primarily
through  collaborative  research and  sublicense  agreements  with its strategic
alliance  partners  and the  issuance  of debt and  equity  securities.  Through
September 30, 1998, the Company has received $2,985,000 of cumulative  sponsored
research  and   sublicensing   revenues   and   approximately   $19,700,000   in
consideration  of the  issuance  of debt and equity  securities,  including  net
proceeds of approximately  $7,200,000  related to its initial public offering in
January 1995.

         During the nine  months  ended  September  30,  1998,  net cash used in
operating activities was $3,085,000, compared with $2,985,000 for the comparable
period in 1997.  The greater use of cash in the current  period was  principally
due to the greater net loss,  impacted by revenue and expense factors previously
discussed.  At September 30, 1998, the Company had cash and investments totaling
$1,346,000, compared with $4,626,000 at December 31, 1997. The Company's working
capital was $992,000 at September  30, 1998,  compared to $4,045,000 at December
31, 1997.  These decreases are attributable to the Company's use of cash to fund
its operations over the last nine months.

         On November  13,  1998,  the Company  sold  300,000  shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock") and 853,565 shares of
Common Stock to certain institutions and other accredited investors in a Private
Placement  pursuant  to  Regulation  D under  the  Securities  Act of 1933.  The
purchase  price for the  Preferred  Stock and Common  Stock sold in the  Private
Placement  consisted of $1,200,000 in cash and the surrender by the investors of
redeemable  Common Stock Purchase  Warrants  originally  issued in the Company's
March 1997 private placement  financing.  Shares of Series A Preferred Stock are
initially  convertible to Common Stock on a 1-for-1 basis,  subject to customary
antidilution adjustments. Dividends shall accrue on the Series A Preferred Stock
at the rate of 8% per  annum.  In the  event  of  liquidation,  dissolution,  or
winding up of the  Company,  or, at the option of the  holders of the  Preferred
Stock,  a  consolidation  or  merger  of  the  Company  or  a  sale  of  all  or
substantially all of its assets, the Preferred Stock will be entitled to receive
in  preference  to the  Company's  Common Stock an amount per share equal to the
original purchase price plus any accrued dividends per share.

         Redemption  of the  Preferred  Stock is at the request of holders of at
least 33-1/3% of such shares outstanding,  which request may be made at any time
two years following closing of the Private


                                      -12-


<PAGE>


Placement. In the event of such request, the Company shall be required to redeem
all of the  Series  A  Preferred  Stock  held  by the  requesting  holders  at a
redemption  price  equal to $4.00 per share  (subject to  adjustment),  plus any
accrued  dividends per share. The redemption price may be paid, at the Company's
option,  in cash or in shares  of the  Company's  Common  Stock.  The  Company's
intention is to make such redemption in Common Stock, and accordingly the Series
A Preferred  Stock has been included in  Stockholder's  Equity.  Proceeds to the
Company  from this  Private  Placement  were  $1,160,000,  net of legal  fees of
$40,000.

         The  Company's  future  success is  affected  by a variety of  factors,
including the progress of the  Company's  research and  development  efforts and
results of  preclinical  studies  and  clinical  trials,  the cost and timing of
regulatory approvals,  the Company's ability to obtain patent protection for its
products  on a  cost-effective  and  timely  basis,  the  rate of  technological
advances,  determinations  as to  the  commercial  potential  of  the  Company's
products   under   development,   the  status  of  competitive   products,   the
establishment   of   manufacturing   capacity   or   third-party   manufacturing
arrangements,  its reliance on research institutions and corporate partners, the
uncertainty of health care reform, and the competitive  environment in which the
Company  operates.   The  Company's  existing  capital  resources  will  not  be
sufficient to fund the Company's  operations to the point of  introduction  of a
commercially  successful  product,  if and when  that  time  should  arrive.  No
assurance  can be given that  additional  funds will be available on  acceptable
terms,  if at all. At the present  time,  the  Company  estimates  that its cash
balance,  after completion of the financing transaction described above, will be
sufficient to fund operations through the first quarter of 1999.

         The  Company  expects  to incur  substantial  additional  research  and
development  expenses,  including expenses associated with preclinical  studies,
clinical  trials and drug testing.  The Company  intends to use a portion of its
cash resources, together with funds from its existing collaborative arrangements
with Warner-Lambert and Nippon Kayaku, for these purposes.  The Company's rights
to receive payments from  Warner-Lambert  and Nippon Kayaku,  are dependent upon
the  achievement  of certain  milestones by  Warner-Lambert  and Nippon  Kayaku,
respectively, and are not within the control of the Company. No assurance can be
made  that such  milestones  will be  achieved  or that  such  payments  will be
received by the Company.

         The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1997, the Company had a
net operating loss ("NOL") and tax credit carry forwards for income tax purposes
of  $13,327,000  and  $464,000,  respectively,  which may be available to reduce
future taxable income and future tax liabilities.  These carry forwards begin to
expire in 2008. The Tax Reform Act of 1986 provides for an annual  limitation on
the use of NOL and credit carry forwards  (following  certain ownership changes)
that could  significantly  limit the  Company's  ability to utilize  these carry
forwards.  The Company has made no  determination  concerning  whether there has
been such a cumulative  change in ownership.  It is possible that such change in
ownership  occurred  following the  completion of the Company's  initial  public
offering in 1995 and private placements in 1996, 1997 and 1998. Accordingly, the
Company's ability to utilize the aforementioned  carry forwards to reduce future
taxable income and tax liabilities may be limited. Additionally,  because United
States tax laws limit the time during which these carry  forwards may be applied
against  future  taxes,  the Company may not be able to take full  advantage  of
these attributes for federal income tax purposes.


                                      -13-


<PAGE>

                           PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES.

         During the first nine months of 1998,  the Company  issued an aggregate
of 30,002 shares of Common Stock upon the exercise of options  granted to former
consultants  of  the  Company  in  transactions  exempt  from  the  registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof or Rule 701  thereunder.  The options which were  exercised were granted
prior to the Company's 1995 initial public offering.


ITEM 3.  EXHIBITS AND REPORTS ON FORM 8-K

           (a)    Exhibits

                  10.1* Lease   Agreement   between   the   Company   and  Talon
                        Properties,   a  Florida  General   Partnership,   dated
                        February 9, 1998,  concerning  the lease of 4,788 square
                        feet at The  Veranda,Suite  301, 814 Highway A1A,  Ponte
                        Vedra Beach,  Florida 32082, for occupancy commencing in
                        November 1998

                  11.1* Statement  of  computation  of weighted  average  shares
                        outstanding and net loss per share

                  27.1* Financial Data Schedule


ITEM 5.  OTHER INFORMATION

           On October 26, 1998, the Company  announced that  additional  studies
will be required by the U. S. Food and Drug  Administration  prior to initiating
pivotal  trials of DEHOP for the treatment of  AIDS-related  diarrhea.  Based on
discussions  with the  agency  and its  review of the  Company's  pivotal  trial
protocol,  the  Company  will be  first  required  to  conduct  a Phase II study
designed to generate  additional  safety and  pharmacokinetic  data. The Company
also plans to generate  additional animal data to support further development of
DEHOP.


----------------
*Filed herewith.

                                      -14-


<PAGE>


                                   SIGNATURES

                  Pursuant to the requirements of the Securities Exchange Act of
1934,  the  registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                 SUNPHARM CORPORATION

Date: November 13, 1998          By: /s/ STEFAN BORG
                                     ------------------------------------------
                                        President and Chief Executive Officer
                                            (Principal Executive Officer)


Date: November 13, 1998          By: /s/ PAUL M. HERRON
                                     ------------------------------------------
                                     Vice President and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)



                                      -15-