<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, 1996      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)



                                 (617) 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 25,
                                     1996:

       Common Stock, par value $.01        16,346,120 shares outstanding

<PAGE>
 
                                AUTOIMMUNE INC.

                        QUARTER ENDED SEPTEMBER 30, 1996

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>

PART I - FINANCIAL INFORMATION                                                 Page Number            
<S>                                                                      <C>  
                       
Item 1 - Financial Statements
Balance Sheet
     December 31, 1995 and September 30, 1996..........................              2
 
Statement of Operations
     for the three months ended September 30, 1995 and 1996, the nine
     months ended September 30, 1995 and 1996 and for the period from
     inception (September 9, 1988) through September 30, 1996..........              3
 
Statement of Cash Flows
     for the nine months ended September 30, 1995 and 1996
     and for the period from inception (September 9, 1988)
     through September 30, 1996........................................              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

</TABLE>

     

                                       1
<PAGE>
 
                                AUTOIMMUNE INC.
                         (A development stage company)
                                 BALANCE SHEET
                                  (Unaudited)

<TABLE> 
<CAPTION> 

                                                                 December 31,        September 30,
                                                                     1995                1996
                                                              ----------------     ---------------- 
<S>                                                          <C>                <C>      
ASSETS
Current assets:
  Cash and cash equivalents                                    $    29,087,000    $      12,019,000
  Marketable securities                                             41,366,000           43,882,000
  Interest receivable                                                  160,000              287,000
  Prepaid expenses and other current assets                            172,000              536,000
                                                              ----------------    -----------------   
      Total current assets                                          70,785,000           56,724,000

Fixed assets, net                                                    2,166,000            2,429,000
Other assets                                                            30,000               30,000
                                                              ----------------    -----------------
                                                               $    72,981,000    $      59,183,000
                                                              ================    =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                             $       944,000    $       3,340,000
  Accrued expenses                                                     588,000              662,000
  Current portion of obligations under capital leases                  462,000              686,000
                                                              ----------------    ----------------- 
      Total current liabilities                                      1,994,000            4,688,000
                                                              ----------------    -----------------
Obligations under capital leases                                       569,000              638,000
                                                              ----------------    -----------------   
Commitments and contingencies                                 
                                                              ----------------    -----------------        

Stockholders' equity:
  Common stock, $.01 par value; 25,000,000 shares
     authorized; 16,282,067 and 16,317,070 shares issued and
    outstanding at December 31, 1995 and September 30, 1996,
    respectively                                                       163,000              163,000
  Additional paid-in capital                                       116,797,000          117,059,000
  Deficit accumulated during the development stage                 (46,611,000)         (63,374,000)
  Valuation allowance for marketable securities                         69,000                9,000
                                                              ----------------    -----------------           
                                                                    70,418,000           53,857,000
                                                              ----------------    ----------------- 
                                                               $    72,981,000    $      59,183,000
                                                              ================    ================= 

</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
                                   1995                1996             1995             1996           September 30, 1996
                                -------------      -------------    -------------     -------------     ------------------
<S>                             <C>                 <C>             <C>               <C>             <C>                   
Revenue:
  Option fees                     $     1,500,000       -            $     1,500,000       -            $     2,200,000
  Research and development
    revenue under collaborative
    agreements                                -         -                    -             -                    955,000
                                  ---------------   -------------    ---------------   ------------     ---------------
    Total revenue                       1,500,000       -                  1,500,000       -                  3,155,000
                                  ---------------   -------------    ---------------   ------------     ---------------

Costs and expenses:
  Research and development:
    Related party                         573,000         543,000          1,713,000      1,613,000          14,423,000
    Other                               2,741,000       6,871,000          9,532,000     15,779,000          49,934,000
  General and administrative              704,000         598,000          1,738,000      1,783,000           8,682,000
                                  ---------------   -------------    ---------------   ------------     ---------------
    Total costs and expenses            4,018,000       8,012,000         12,983,000     19,175,000          73,039,000
                                  ---------------   -------------    ---------------   ------------     ---------------
Interest income                           516,000         793,000          1,010,000      2,462,000           6,716,000
Interest expense                          (13,000)        (17,000)           (42,000)       (50,000)           (202,000)
                                  ---------------   -------------    ---------------   ------------     ---------------
                                          503,000         776,000            968,000      2,412,000           6,514,000
                                  ---------------   -------------    ---------------   ------------     ---------------
Net loss                          $    (2,015,000)  $  (7,236,000)   $   (10,515,000)  $ (16,763,000)   $   (63,370,000)
                                  ===============   =============    ===============   ============     ================   

Net loss per share                $         (0.15)   $      (0.44)   $         (0.84)  $      (1.03)
                                  ===============   =============    ===============   ============     

Weighted average common
  shares outstanding                   13,806,993      16,295,718         12,592,296     16,287,723
                                  ===============   =============    ===============   ============   
   


</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, 1995        September 30, 1996      September 30, 1996
                                                      ------------------        ------------------      -----------------
                                
Cash flows from operating activities:
<S>                                                 <C>                       <C>                       <C>             
Net loss                                              $        (10,515,000)     $        (16,763,000)     $       (63,370,000)
Adjustment to reconcile net loss to net cash
  used by operating activities:
   Interest expense related to demand notes
     converted into Series A mandatorily  
     redeemable covertible preferred stock                            -                         -                      48,000
   Patent costs paid with junior convertible
     preferred and common stock                                       -                         -                       3,000
   Depreciation and amortization                                   508,000                   670,000                2,335,000
   Decrease in capitalized patent costs                               -                         -                     563,000
   Increase in interest receivable                                 (76,000)                 (127,000)                (287,000)
   (Increase) decrease in prepaid expenses                          62,000                  (364,000)                (536,000)
   Increase (decrease) in accounts payable                        (356,000)                2,396,000                3,340,000
   Increase in accrued expenses                                    182,000                    74,000                  662,000
                                                     --------------------      ---------------------     --------------------     

           Net cash used by operating activities               (10,195,000)              (14,114,000)             (57,242,000)
                                                     --------------------      ---------------------     --------------------  

Cash flows from investing activities:

Purchase of available-for-sale marketable securities            (5,062,000)              (30,774,000)            (189,145,000)
Proceeds from sale/maturity of available-for-sale 
   marketable securities                                             -                    28,197,000              134,260,000
Proceeds from maturity of held-to-maturity
   marketable securities                                         5,956,000                     -                   11,011,000
Purchase of fixed assets                                          (123,000)                 (933,000)              (4,639,000)
Increase in patent costs                                             -                         -                     (563,000)
Increase in other assets                                             -                         -                     (155,000)
                                                      --------------------      ---------------------     --------------------     
           Net cash provided (used) by investing
                activities                                         771,000                (3,510,000)             (49,231,000)
                                                      --------------------      ---------------------     --------------------

Cash flows from financing activities:

Proceeds from sale-leaseback of fixed assets                         -                       821,000                2,654,000
Payments on obligations under capital leases                      (332,000)                 (528,000)              (1,330,000)
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                          68,575,000                   262,000              104,656,000
Proceeds from issuance of convertible notes payable                  -                         -                    2,200,000
                                                      --------------------      --------------------      -------------------      
           Net cash provided by financing activities            68,243,000                   555,000              118,491,000
                                                      --------------------      ---------------------     -------------------    
Net increase (decrease) in cash and cash 
   equivalents                                                  58,819,000               (17,069,000)              12,018,000

Cash and cash equivalents, beginning of period                   3,368,000                29,087,000                     -
                                                      --------------------      --------------------     --------------------
Cash and cash equivalents, end of period              $         62,187,000      $         12,018,000      $        12,018,000
                                                      ====================      =====================     ====================


</TABLE> 

                                       4
<PAGE>
 
                                AUTOIMMUNE INC.

                  NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1.  INTERIM FINANCIAL DATA

     The interim financial data as of September 30, 1996 and for the three month
     periods ended September 30, 1995 and 1996, the nine month periods ended
     September 30, 1995 and 1996, and for the period from inception (September
     9, 1988) through September 30, 1996 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, 1995 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, 1995 and September 30, 1996:
<TABLE>
<CAPTION>
 
                                                           December 31,  September 30,
                                                              1995          1996
                                                        --------------- --------------
       <S>                                              <C>            <C>
          Money market                                     $12,736,000    $ 1,528,000
          U.S. Government debt securities                   16,292,000      9,932,000
                                                        --------------- --------------
 
 
                                                           $29,028,000    $11,460,000
                                                        --------------- --------------


          The following is a summary of available-for-sale marketable securities held by the Company at 
          December 31, 1995 and September 30, 1996 which are carried out at fair market value : 
</TABLE>


<TABLE>
<CAPTION>
 
                           Maturity           Fair      Unrealized   Unrealized
                             term            value        gains        losses      Amortized cost
                     ----------------  -------------- -------------- ------------ -----------------
<S>                    <C>                <C>           <C>         <C>          <C>
DECEMBER 31, 1995
U.S. Government
    debt securities      within 1 year     $32,252,000     $23,000   $    -        $32,229,000
 
U.S. Government
    debt securities    between 1-5 years     9,114,000      46,000        -          9,068,000
                                          ------------    --------   ----------     -----------
 
                                           $41,366,000     $69,000  $    -          $41,297,000
                                          ------------    --------   ----------     -----------
 <CAPTION>
                           Maturity           Fair      Unrealized   Unrealized
                             term            value        gains        losses       Amortized cost
                      -----------------   -----------  ------------  -----------  -----------------
<S>                    <C>                <C>           <C>         <C>          <C>
SEPTEMBER 30, 1996
 
U.S. Government
    debt securities      within 1 year     $10,017,000     $ 9,000     $(14,000)    $10,022,000
U.S. Government
    debt securities    between 1-5 years    33,865,000      16,000       (2,000)     33,851,000
                                          ------------    --------   ----------     ----------- 
 
                                           $43,882,000     $25,000     $(16,000)    $43,873,000
                                          ------------    --------   ----------     ----------- 


          Marketable securities which were purchased and sold in periods prior to adoption
          of FAS 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.
</TABLE>

                                       5
<PAGE>
 
                                AUTOIMMUNE INC.

                  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)         1995           1996
                                        -------------  --------------  --------------
 
<S>                                       <C>           <C>           <C>
     Laboratory equipment                       4 - 5     $2,638,000     $3,002,000
     Office and computer equipment              4 - 5        417,000        495,000
     Leasehold improvements                     5 - 7        592,000      1,055,000
                                                         -----------    -----------
 
                                                           3,647,000      4,552,000
 
     Less-accumulated depreciation and
        amortization                                       1,481,000      2,123,000
                                                         -----------    -----------
                                                          $2,166,000     $2,429,000
                                                         ===========    ===========
</TABLE>

     In March and September 1996, the Company sold assets which had a net book
     value of $432,000 and $320,000, respectively, for $480,000 and $341,000,
     respectively, which were immediately leased back to the Company under a
     capital lease agreement.  The gain resulting from these sales has been
     deferred and is being amortized to operations in proportion to the
     amortization of the related leased assets.

 
4.   ACCRUED EXPENSES
 
     Accrued expenses consist of the following:
<TABLE> 
<CAPTION>
                                       December 31,  September 30,
                                           1995           1996
                                       -------------  ------------- 
<S>                                  <C>               <C>           
                                     
     Accrued employee costs                $372,000       $484,000
     Accrued professional fees              216,000        178,000
                                       ------------    -----------
                                           $588,000       $662,000
                                       ============    ===========
 
</TABLE>



                                         

                                       6
<PAGE>
 
                                AUTOIMMUNE INC.



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

RESULTS OF OPERATIONS

OVERVIEW

Since its inception through September 30, 1996, the Company has incurred ongoing
losses from operations and has cumulative losses as of September 30, 1996
totaling $63,370,000.  To date, the Company has not recorded any revenues from
the sale of products.  Revenues recorded through September 30, 1996 were earned
in connection with contract research and the granting of certain short-term
rights.

The Company expects that research and development and sales and marketing
expenses will increase in connection with new product development and the
creation of the Company's sales and marketing organization.  Accordingly, the
Company expects to continue to incur substantial losses for the foreseeable
future.

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996

Revenue of $1,500,000 in 1995 represents fees paid by a Japanese pharmaceutical
company for a short-term exclusive right among Japanese companies to review the
results of the Phase II dosing study of Colloral/R/. There was no revenue during
the nine months ended September 30, 1996.

Research and development expenses were $3,314,000 and $7,414,000 for the three
month periods ended September 30, 1995 and 1996, respectively.  Research and
development expenses were $11,245,000 and $17,392,000 for the nine month periods
ended September 30, 1995 and 1996, respectively.  The increase is due to the
advancement of clinical trial activity.

General and administrative expenses were $704,000 and $598,000 for the three
month periods ended September 30, 1995 and 1996, respectively.  General and
administrative expenses were $1,738,000 and $1,783,000 for the nine month
periods ended September 30, 1995 and 1996, respectively.  The change in general
and administrative expense is due primarily to personnel costs and the timing of
corporate activity.

Net interest income was $503,000 and $776,000 for the three month periods ended
September 30, 1995 and 1996, respectively.  Net interest income was $968,000 and
$2,412,000 for the nine month periods ended September 30, 1995 and 1996,
respectively.  The increase is due to a higher balance of cash available for
investment.

The net loss was $2,015,000 and $7,236,000 for the three month periods ended
September 30, 1995 and 1996, respectively.  The net loss was $10,515,000 and
$16,763,000 for the nine month periods ended September 30, 1995 and 1996,
respectively.  The net loss per share increased from $0.15 for the three months
ended September 30, 1995 to $0.44 for the three months ended September 30, 1996.
The net loss per share increased from $0.84 for the nine months ended September
30, 1995 to $1.03 for the nine months ended September 30, 1996. The changes
reflect the continued increase in research and development activity levels
offset by a higher number of weighted average shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

The Company 's needs for funds have increased from period to period as it has
increased the scope of its research and development activities.  Since
inception, the Company has funded these needs almost entirely through sales of
its equity securities.

     

                                       7
<PAGE>
 
                                AUTOIMMUNE INC.


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 current 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 filing of
the Company's Product License Application for its lead product.  Thereafter, the
Company will need to raise substantial additional capital to fund its
operations.  The Company intends to seek such additional funding through public
or private equity or debt financings, collaborative arrangements with
pharmaceutical companies or from other sources.  If adequate funds are 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
December 31, 1995, and September 30, 1996, the Company's cash and cash
equivalents and marketable securities totaled $70,453,000 and $55,901,000,
respectively.  Current liabilities at December 31, 1995, and September 30, 1996
were $1,994,000 and $4,688,000, respectively.

                                       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 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, 1996            /s/ Robert C. Bishop
                                   ---------------------------------------
                                   Robert C. Bishop
                                   President and Chief Executive Officer
       

                                   /s/ Michael W. Rogers  
                                   ----------------------------------------  
                                   Michael W. Rogers
                                   Vice President, Chief Financial Officer
                                   and Treasurer

                                       10