<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549


                                   FORM 10-Q


               Quarterly report pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934



FOR THE QUARTER ENDED SEPTEMBER 30, 1998          COMMISSION FILE NO. 0-20948
                                                                      -------



                               AUTOIMMUNE INC. 
            (Exact Name of Registrant as Specified in its Charter)



            DELAWARE                                   13-348-9062
     (State of Incorporation)           (I.R.S. Employer Identification No.)



                    128 SPRING STREET, LEXINGTON, MA 02173
                   (Address of Principal Executive Offices)



                                (781) 860-0710
               (Registrant's Telephone No., including Area Code)



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


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



          Number of shares outstanding of the registrant's Common Stock as of
October 31, 1998:

     Common Stock, par value $.01                  16,548,995 shares outstanding

<PAGE>
 
                                AUTOIMMUNE INC.


                        QUARTER ENDED September 30, 1998


                               TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION                                       Page Number

Item 1 - Financial Statements

         Balance Sheet
               December 31, 1997 and September 30, 1998.....................  2

         Statement of Operations
               for the three months ended September 30, 1997 and 1998, 
               the nine months ended September 30, 1997 and 1998 and for
               the period from inception (September 9, 1988) through 
               September 30, 1998...........................................  3

         Statement of Cash Flows
               for the nine months ended September 30, 1997 and 1998
               and for the period from inception (September 9, 1988)
               through September 30, 1998...................................  4 

               Notes to the Unaudited Financial Statements..................  5 

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


PART II - OTHER INFORMATION

Item 6(b) - Reports on Form 8-K.............................................  9

Signatures..................................................................  10

                                       1
<PAGE>
 
                                AUTOIMMUNE INC.
                         (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEET
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,     SEPTEMBER 30,
                                                                                       1997              1998
                                                                                  ---------------   --------------
<S>                                                                               <C>               <C>               
ASSETS
Current assets:
     Cash and cash equivalents                                                    $   13,833,000    $    9,860,000
     Marketable securities                                                            16,192,000        10,120,000
     Interest receivable                                                                 240,000           147,000
     Prepaid expenses and other current assets                                           143,000           530,000
                                                                                  --------------    --------------           
                    Total current assets                                              30,408,000        20,657,000 

Fixed assets, net                                                                      1,060,000           671,000
Other assets                                                                              30,000            54,000
                                                                                  --------------    --------------
                                                                                  $   31,498,000    $   21,382,000       
                                                                                  ==============    ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                             $      476,000    $      841,000
     Accrued expenses                                                                    664,000           485,000
     Current portion of obligations under capital leases                                 285,000           264,000
                                                                                  --------------    --------------
                    Total current liabilities                                          1,425,000         1,590,000 
                                                                                  --------------    -------------- 
Obligations under capital leases                                                         193,000                 -
                                                                                  --------------    -------------- 

Commitments and contingencies                                         
                                                                                  --------------    --------------

Stockholders' equity:
     Common stock, $.01 par value; 25,000,000 shares
       authorized; 16,392,896 and 16,548,995 shares issued and 
       outstanding at December 31, 1997 and September 30, 1998,
       respectively                                                                      164,000           166,000
     Additional paid-in capital                                                      117,330,000       117,551,000
     Deficit accumulated during the development stage                                (87,620,000)      (97,939,000)
     Valuation allowance for marketable securities                                         6,000            14,000
                                                                                  --------------    --------------              
                                                                                      29,880,000        19,792,000  
                                                                                  --------------    -------------- 
                                                                                  $   31,498,000    $   21,382,000     
                                                                                  ==============    ==============
</TABLE> 

                                       2
<PAGE>
 
                                AUTOIMMUNE INC.
                         (A DEVELOPMENT STAGE COMPANY)
                            STATEMENT OF OPERATIONS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                                                   Period from
                                                                                                                    inception
                                                   Three months ended               Nine months ended          (September 9, 1988)
                                             September 30,    September 30,   September 30,    September 30,         through
                                                 1997             1998            1997             1998         September 30, 1998
                                             ------------     ------------    ------------     ------------    ------------------
<S>                                          <C>              <C>             <C>             <C>              <C> 
Revenue:
   Option fees                               $          -     $          -    $          -    $          -     $        2,200,000
   Research and development
    revenue under collaborative
    agreements                                          -                -               -               -                955,000
                                             ------------     ------------    ------------    ------------     ------------------
      Total revenue                                     -                -               -               -              3,155,000
                                             ------------     ------------    ------------    ------------     ------------------

Costs and expenses;
   Research and development:
      Related party                               414,000          384,000       1,486,000         984,000             17,832,000
      All other                                  (166,000)       3,016,000      15,059,000       9,108,000             80,718,000
   General and administrative                     375,000          447,000       1,828,000       1,288,000             12,815,000
                                             ------------     ------------    ------------    ------------     ------------------
      Total costs and expenses                    623,000        3,847,000      18,373,000      11,380,000            111,365,000
                                             ------------     ------------    ------------    ------------     ------------------

Interest income                                   428,000          258,000       1,630,000       1,066,000             10,574,000
Interest expense                                  (16,000)          (2,000)        (65,000)         (6,000)              (300,000)
                                             ------------     ------------    ------------    ------------     ------------------
                                                  412,000          256,000       1,565,000       1,060,000             10,274,000
                                             ------------     ------------    ------------    ------------     ------------------
Net loss                                     $   (211,000)    $ (3,591,000)   $(16,808,000)   $(10,320,000)    $      (97,936,000)
                                             ============     ============    ============    ============     ==================

Net loss per share-basic and diluted         $      (0.01)    $      (0.22)   $      (1.03)   $      (0.63)
                                             ============     ============    ============    ============
Weighted average common
   shares outstanding-basic and diluted        16,390,335       16,504,773      16,383,180      16,472,392
                                             ============     ============    ============    ============
</TABLE>

                                       3

<PAGE>
 
                                AUTOIMMUNE INC.
                         (A DEVELOPMENT STAGE COMPANY)
                            STATEMENT OF CASH FLOWS
               INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                                                                              PERIOD FROM
                                                                                                                INCEPTION
                                                                                                            (SEPTEMBER 9, 1988)
                                                                            NINE MONTHS ENDED                     THROUGH
                                                                 SEPTEMBER 30, 1997    SEPTEMBER 30, 1998    SEPTEMBER 30, 1998
                                                                 ------------------    ------------------   --------------------
<S>                                                              <C>                   <C>                  <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                           $  (16,808,000)       $  (10,320,000)      $  (97,936,000)
Adjustments to reconcile net loss to net cash
  used by operating activities:
  Interest expense related to demand notes
    converted into Series A mandatorily
    redeemable convertible preferred stock                                      -                     -               48,000
  Patent costs paid with junior convertible
    preferred and common stock                                                  -                     -                3,000
  Depreciation and amortization                                           822,000               435,000            4,021,000
  Loss on sale/disposal of fixed assets                                   568,000                 2,000              606,000 
  Decrease in capitalized patent costs                                          -                     -              563,000
  (Increase) decrease in interest receivable                              (56,000)               93,000             (147,000)
  (Increase) decrease in prepaid expenses                                 401,000              (387,000)            (530,000) 
  Increase (decrease) in accounts payable                              (1,539,000)              365,000              841,000
  Increase (decrease) in accrued expenses                                 291,000              (179,000)             485,000
                                                                   --------------         -------------         ------------ 

       Net cash used by operating activities                          (16,321,000)           (9,991,000)         (92,046,000)
                                                                   --------------         -------------         ------------ 

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale marketable securities                  (25,852,000)          (18,011,000)        (251,537,000)
Proceeds from sale/maturity of available-for-sale marketable           41,511,000            24,091,000          230,420,000
  securities
Proceeds from maturity of held-to-maturity marketable                           -                     -           11,011,000
  securities
Proceeds from sale of equipment                                            11,000                 1,000               65,000
Purchase of fixed assets                                                  (80,000)              (48,000)          (5,237,000)
Increase in patent costs                                                        -                     -             (563,000)
Increase in other assets                                                        -               (24,000)            (179,000)
                                                                   --------------         -------------         ------------ 

       Net cash provided (used) by investing activities                15,590,000             6,009,000          (16,020,000)
                                                                   --------------         -------------         ------------  

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale-leaseback of fixed assets                                    -                     -            2,872,000
Payments on obligations under capital leases                             (438,000)             (214,000)          (2,608,000)
Net proceeds from issuance of mandatorily redeemable                            
  convertible preferred stock                                                   -                     -           10,011,000  
Proceeds from bridge notes                                                      -                     -              300,000
Proceeds from issuance of common stock                                     92,000               223,000          105,151,000
Proceeds from issuance of convertible notes payable                             -                     -            2,200,000
                                                                   --------------         -------------         ------------  

       Net cash provided (used) by financing activities                  (346,000)                9,000          117,926,000
                                                                   --------------         -------------         ------------       

Net increase (decrease) in cash and cash equivalents                   (1,077,000)           (3,973,000)           9,860,000

Cash and cash equivalents, beginning of period                          6,432,000            13,833,000                    -
                                                                   --------------         -------------         ------------  
Cash and cash equivalents, end of period                           $    5,355,000        $    9,860,000       $    9,860,000 
                                                                   ==============         =============         ============  
</TABLE> 

                                       4
<PAGE>
 
                                AUTOIMMUNE INC.

                  NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1.   INTERIM FINANCIAL DATA
     
     The interim financial data as of September 30, 1998, for the three month
     periods ended September 30, 1997 and 1998, for the nine month periods ended
     September 30, 1997 and 1998, and for the period from inception (September
     9, 1988) through September 30, 1998 are unaudited; however in the opinion
     of the Company, these interim data include all adjustments, consisting only
     of normal recurring adjustments necessary for a fair presentation of the
     results for these interim periods. These financial statements should be
     read in conjunction with the financial statements and the notes thereto for
     the period ended December 31, 1997 included in the Company's Form 10-K.
     Results for interim periods are not necessarily indicative of results for
     the entire year.

2.   CASH EQUIVALENTS AND MARKETABLE SECURITIES

     The following is a summary of cash equivalents held by the Company. Cash
     equivalents are carried at fair market value, which approximated amortized
     cost at December 31, 1997 and September 30, 1998:

<TABLE> 
<CAPTION> 
                                             DECEMBER 31,        SEPTEMBER 30,
                                                 1997                1998
                                             ------------        -------------
     <S>                                     <C>                 <C> 
     Money market                             $    71,000           $1,752,000
                                                             
     U.S. Government debt securities           12,391,000            7,511,000
                                             ------------        --------------
                                              $12,462,000           $9,263,000
                                             ============        ==============
</TABLE> 

     The following is a summary of available-for-sale marketable securities held
     by the Company at December 31, 1997 and September 30, 1998 which are
     carried at fair market value:

<TABLE> 
<CAPTION> 
                              MATURITY             FAIR       UNREALIZED     UNREALIZED      AMORTIZED
                                TERM              VALUE         GAINS          LOSSES          COST
                          ----------------     -----------    ----------     ----------     -----------
     <S>                  <C>                  <C>            <C>            <C>            <C> 
     DECEMBER 31, 1997                                
                                                      
     U.S. Government                                  
      debt securities       within 1 year      $10,935,000      $ 5,000       $ (1,000)     $10,931,000  
     U.S. Government                                                                                     
      debt securities     between 1-5 years      5,257,000        2,000           -           5,255,000         
                                               -----------    ----------     ----------     -----------
                                               $16,192,000      $ 7,000       $ (1,000)     $16,186,000
                                               ===========    ==========     ==========     ===========
</TABLE> 

<TABLE> 
<CAPTION> 
                              MATURITY             FAIR       UNREALIZED     UNREALIZED      AMORTIZED
                                TERM              VALUE         GAINS          LOSSES          COST
                          ----------------     -----------    ----------     ----------     -----------
    <S>                   <C>                  <C>            <C>            <C>            <C> 
     SEPTEMBER 30, 1998                                
                                                      
     U.S. Government                                  
      debt securities       within 1 year      $ 7,862,000      $11,000       $   -         $ 7,851,000  
     U.S. Government                                                                                     
      debt securities     between 1-5 years      2,258,000        3,000           -           2,255,000         
                                               -----------    ----------     ----------     -----------
                                               $10,120,000      $14,000       $   -         $10,106,000
                                               ===========    ==========     ==========     ===========
</TABLE>  

     Marketable securities which were purchased and sold in periods prior to
     adoption of Statement of Financial Accounting Standards (SFAS) No. 115 on
     January 1, 1994 other than held-to-maturity marketable securities, are 
     included in the category available-for-sale marketable securities in the 
     "period from inception" column of the statement of cash flows.

                                       5








<PAGE>
 
                  NOTES TO THE UNAUDITED FINANCIAL STATEMENTS


3.   FIXED ASSETS

     Fixed assets consist of the following:

<TABLE> 
<CAPTION> 
                                              ESTIMATED                                                  
                                             USEFUL LIFE    DECEMBER 31,   SEPTEMBER 30,                 
                                               (YEARS)          1997           1998                       
                                            -----------     ------------   -------------   
     <S>                                    <C>             <C>            <C> 
     Laboratory equipment                     2 - 5         $  1,359,000   $  1,394,000                  
     Office and computer equipment            4 - 5              425,000        434,000                  
     Leasehold improvements                   5 - 7              461,000        461,000                  
                                                            ------------   -------------                 
                                                                                                         
                                                               2,245,000      2,289,000                  
     Less-accumulated depreciation and                                                                   
       amortization                                            1,185,000      1,618,000                  
                                                            ------------   -------------                 
                                                                                                         
                                                            $  1,060,000   $    671,000                  
                                                            ============   =============                 
</TABLE> 

     During 1998, the Company sold assets with an original cost of $4,000 and a
     net book value of $3,000 for $1,000.

4.   ACCRUED EXPENSES

     Accrued expenses consist of the following:

<TABLE> 
<CAPTION> 
                                                             DECEMBER 31,   SEPTEMBER 30,   
                                                                1997            1998         
                                                            ------------    -------------   
     <S>                                                    <C>             <C>            
     Accrued employee costs                                 $    289,000    $     298,000  
     Accrued professional fees                                   204,000          162,000  
     Accrued restructuring costs                                 146,000                -  
     Other                                                        25,000           25,000  
                                                            ------------    -------------  
                                                                                           
                                                            $    664,000    $     485,000  
                                                            ============    =============   
</TABLE> 

5.   1998 STOCK OPTION PLAN

     On May 28, 1998 the Company's shareholders approved the 1998 stock option
     plan. This plan provides for the granting of incentive stock options and
     non-qualified stock options to employees and other individuals performing
     services on behalf of the Company. The number of shares of common stock of
     the Company reserved for issuance with the terms of the 1998 Stock Option
     Plan is 1,300,000.

6.   COMMITMENTS AND CONTINGENCIES

     In July 1998, the Company terminated its sublease relationship with its
     subtenant. The Company was concurrently released from its lease obligation
     for the same facilities, resulting in no impact upon the Company's future
     net minimum operating lease commitments.

7.   NEW ACCOUNTING PRONOUNCEMENT

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
     (SFAS 130), "Reporting Comprehensive Income." This Statement requires
     disclosure of comprehensive income and its components and is effective for
     the year ended December 31, 1998. Comprehensive income includes all changes
     in stockholders' equity during a period except those resulting from
     investments by stockholders and distributions to stockholders. Accordingly,
     the components of comprehensive income include net income and unrealized
     gains and losses on available-for-sale securities. For the three months
     ended September 30, 1997 and 1998, unrealized gains on available-for-sale
     securities amounted to $6,000 and $9,000, respectively. For the nine months
     ended September 30, 1997 and 1998, unrealized gains (losses) on available-
     for-sale securities amounted to ($13,000) and $8,000, respectively.

                                       6

<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

Since its inception through September 30, 1998, the Company has incurred ongoing
losses from operations and has cumulative losses as of September 30, 1998 
totaling $97,936,000. To date, the Company has not recorded any revenues from 
the sale of products. Revenues recorded through September 30, 1998 were earned 
in connection with contract research and the granting of certain short-term 
rights.

The Company expects to remain in the development stage for the foreseeable 
future and accordingly, expects to continue to incur substantial losses.

The sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" captioned "Overview" and "Liquidity and Capital
Resources" contain forward-looking statements which involve risks and
uncertainties. What may occur in the future may differ significantly from what
is discussed in the forward-looking statements due to a number of important
factors, including, but not limited to, the developmental stage of the Company's
products and uncertainties of clinical trial results and regulatory approval;
the Company's capital requirements, history of operating losses and lack of
product revenue and its limited manufacturing and marketing experience; and the
risks of technological change and competition. These factors are more fully
discussed in the Company's most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission in the section captioned "Business - Factors
to be Considered". The discussion in the Annual Report on Form 10-K is hereby
incorporated by reference into this Quarterly Report.

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998

Research and development expenses were $248,000 and $3,400,000 for the three
month periods ended September 30, 1997 and 1998, respectively. The increase is
due to favorable adjustments made in the third quarter of 1997 in estimated
restructuring costs and other previously accrued expenses. Research and
development expenses were $16,545,000 and $10,092,000 for the nine month periods
ended September 30, 1997 and 1998 respectively. The decrease is due to lower
levels of research and clinical trial activity in 1998 and restructuring costs
in 1997.

General and administrative expenses were $375,000 and $447,000 for the three 
month periods ended September 30, 1997 and 1998, respectively. The increase is 
due to higher levels of corporate activity. General and administrative expenses 
were $1,828,000 and $1,288,000 for the nine month periods ended September 30, 
1997 and 1998, respectively. The decrease in general and administrative expenses
is due primarily to decreased personnel costs and corporate activity and 
restructuring costs recorded in 1997.

Net interest income was $412,000 and $256,000 for the three month periods ended 
September 30, 1997 and 1998, respectively. Net interest income was $1,565,000 
and $1,060,000 for the nine month periods ended September 30, 1997 and 1998, 
respectively. The decrease is due to a lower balance of cash available for 
investment.

The net loss was $211,000 and $3,591,000 for the three month periods ended
September 30, 1997 and 1998, respectively. The change is due to favorable
adjustments made in the third quarter of 1997 in estimated restructuring costs
and other previously accrued expenses. The net loss was $16,808,000 and
$10,320,000 for the nine months ended September 30, 1997 and 1998, respectively.
The change reflects a decrease in personnel costs, research and clinical trial
activity and estimated restructuring costs. The net loss per share increased
from $0.01 for the three months ended September 30, 1997 to $0.22 for the three
months ended September 30, 1998. The net loss per share decreased from $1.03 for
the nine months ended September 30, 1997 to $0.63 for the nine months ended
September 30, 1998.

                                       7
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

The Company's needs for funds have historically increased from period to period 
as it had increased the scope of its research and development activities. Its 
current needs have been reduced, however, as a result of the restructuring which
occurred in the first half of 1997 in which the Company focused its efforts on 
Colloral(R). Since inception, the Company has funded these needs almost entirely
through sales of its equity securities.

The Company's working capital and capital requirements will depend on numerous 
factors, including the progress of the Company's research and development 
activities, the level of resources that the Company devotes to the development, 
clinical, regulatory and marketing aspects of its products, the extent to which 
it proceeds, if at all, by means of collaborative relationships with 
pharmaceutical companies and its competitive environment. Based upon its current
plans, the Company believes that presently available cash and marketable 
securities, and the interest earned from the investment thereof, will be 
sufficient to meet the Company's operating expenses and capital requirements 
through the Phase III clinical program and filing of a Biological License 
Application for Colloral(R).

At the appropriate time, the Company intends to seek additional funding through 
public or private equity or debt financings, collaborative arrangements with 
pharmaceutical companies or from other sources. If adequate funds are necessary 
but not available, the Company will have to reduce certain areas of research, 
product development, manufacturing or marketing activity, or otherwise modify 
its business strategy, and its business will be materially adversely affected.

In order to preserve principal and maintain liquidity, the Company's funds are 
invested in U.S. Treasury obligations and other short-term instruments. As of 
September 30, 1998, the Company's cash and cash equivalents and marketable 
securities totaled $19,980,000. Current liabilities at September 30, 1998 were 
$1,590,000.

                                       8
<PAGE>
 
                                AUTOIMMUNE INC.

PART II - OTHER INFORMATION

Item 6(b). Reports on Form 8-K

          No reports on Form 8-K have been filed during the quarter for which 
this report is filed.


                                       9
     
<PAGE>
 
                                AUTOIMMUNE INC.

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.

                              AUTOIMMUNE INC.

Date:  November 6, 1998       /s/ Robert C. Bishop
                              -------------------------------------------
                              Robert C. Bishop
                              President and Chief Executive Officer


                              /s/ Heather A. Ellerkamp
                              -------------------------------------------
                              Heather A. Ellerkamp
                              Director of Finance and Treasurer

                                      10