SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


   
                                   FORM 10-K/A
    

|X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended September 30, 1996

                                       or

| |  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE TRANSITION PERIOD FROM     ______ to  _______

                           Commission File No. 0-18728

                        INTERNEURON PHARMACEUTICALS, INC.
                        ---------------------------------
             (Exact name of registrant as specified in its charter)

Delaware                                                     043047911
--------                                                     ---------
(State or other jurisdiction of                             (I.R.S. Employer
Identification incorporation or organization)                 Number)


One Ledgemont Center, 99 Hayden Avenue, Lexington, MA           02173
-----------------------------------------------------           -----
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:  (617) 861-8444

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 
par value

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 twelve (12) months (or for such shorter period that the registrant
was  required to file such  report(s)),  and (2) has been  subject to the filing
requirements for the past ninety (90) days. YES X NO
                                               ---   ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].

The  aggregate  market  value of the voting  stock  (excluding  preferred  stock
convertible  into and having  voting  rights on certain  matters  equivalent  to
622,222  shares of common stock) held by  non-affiliates  of the  registrant was
approximately $477,000,000, based on the last sales price of the Common Stock as
of December 13, 1996.

As of December 13, 1996,  41,017,875 shares of Common Stock, $.001 par value, of
the registrant were issued and outstanding.


PART II

ITEM 8.  Financial Statement and Supplemental Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Audited Financial Statements                                              Page
----------------------------                                              ----

Report of Independent Accountants..........................................F-2

Consolidated Balance Sheets -- September 30, 1996 and 1995.................F-3

Consolidated Statements of Operations -- For the years ended
  September 30, 1996, 1995 and 1994........................................F-4

Consolidated Statements of Stockholders' Equity -- For the years
  ended September 30, 1996, 1995 and 1994..................................F-5

Consolidated Statements of Cash Flows -- For the years ended
  September 30, 1996, 1995 and 1994........................................F-6

Notes to Consolidated Financial Statements.................................F-7


                                      F-1




                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:

We have audited the  accompanying  consolidated  balance  sheets of  Interneuron
Pharmaceuticals,  Inc.  as of  September  30,  1996  and  1995  and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996.  These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position of  Interneuron
Pharmaceuticals,  Inc. as of September 30, 1996 and 1995,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.



COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
November 8, 1996


                                      F-2





                        INTERNEURON PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>

                                                                                 September 30,        September 30,
                                                                                     1996                 1995
                                                                                  -------------       -------------
<S>                                                                           <C>                 <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents                                                         $145,901            $16,781
     Marketable securities                                                               17,068             18,208
     Accounts receivable                                                                  4,338                237
     Inventories                                                                          8,376                  -
     Prepaids and other current assets                                                    1,324                190
                                                                                ---------------     --------------
             Total current assets                                                       177,007             35,416

Marketable securities                                                                     6,639                  -
Property and equipment, net                                                               2,689              1,671
Other assets                                                                                103                429
                                                                               ----------------     --------------
                                                                                       $186,438            $37,516
                                                                               ================     ==============

                                                    LIABILITIES

Current liabilities:
     Accounts payable                                                                   $ 2,575         $    1,161
     Accrued expenses                                                                    11,604              7,994
     Deferred revenue                                                                     6,921                  -
     Current portion of capital lease obligations                                           661                506
                                                                               ----------------     --------------
             Total current liabilities                                                   21,761              9,661

Long-term portion of capital lease obligations                                              526                782
Other long-term liabilities                                                                  16                 43

Minority interest                                                                        19,373              5,638

                                               STOCKHOLDERS' EQUITY

Preferred stock; $.001 par value, authorized 5,000,000 shares: 
     Series B, 239,425 shares issued and outstanding at September 30, 1996 
     and September 30, 1995, respectively (liquidation preference at
     September  30, 1996 $3,026)                                                          3,000              3,000
     Series C, 5,000 shares issued and outstanding at September 30, 1996
     and September 30, 1995, respectively (liquidation preference at
     September  30, 1996 $502)                                                              500                500
Common stock,  par value $.001;  60,000,000  shares  authorized;  
     41,015,969 and 33,284,006 shares issued and outstanding at
     September  30, 1996 and September 30, 1995, respectively                                41                 33
Additional paid-in capital                                                              247,999             96,651
Accumulated deficit                                                                    (106,778)           (78,792)
                                                                               ----------------     --------------
     Total stockholders' equity                                                         144,762             21,392
                                                                               ----------------     --------------
                                                                                       $186,438            $37,516
                                                                               ================     ==============

 The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>

                                       F-3





                        INTERNEURON PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (Amounts in thousands except per share data)


<TABLE>
<CAPTION>


                                                                    For the years ended September 30,

                                                             1996                 1995                 1994
                                                             ----                 ----                 ----
<S>                                                     <C>                <C>                  <C>
Revenues:
     Product revenue                                      $14,162              $     -              $     -
     Contract and license fee revenue                       8,335                3,463                  101
     Investment income                                      4,465                1,039                  505
                                                        ---------         ------------        -------------
         Total revenues                                    26,962                4,502                  606


Costs and expenses:
     Cost of product revenue                               11,617                    -                    -
     Research and development                              17,824               15,168               17,737
     Selling, general and administrative                   17,497                7,878                8,403
     Purchase of in-process research and development        8,584                    -                1,852
                                                        ---------         ------------        -------------
         Total costs and expenses                          55,522               23,046               27,992



Net loss from operations                                  (28,560)             (18,544)             (27,386)

Minority interest                                             574                  563                    -
                                                      -----------           ----------        -------------

Net loss                                                 ($27,986)            ($17,981)            ($27,386)
                                                      ===========           ==========        =============

   
Net loss per common share                                  ($0.76)              ($0.59)              ($0.98)
                                                      ===========           ==========        =============
    

Weighted average common shares
outstanding                                                37,004               30,604               27,873
                                                      ===========           ==========        =============




 The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>

                                       F-4








                        INTERNEURON PHARMACEUTICALS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                          (Dollar amounts in thousands)
<TABLE>
<CAPTION>

                                                       Common  Stock         Preferred Stock                           
                                                -------------------------  -------------------- Additional                Total
                                                    Number of   Par Value   Number of            Paid-in   Accumulated Stockholders'
                                                     Shares       Amount     Shares     Amount   Capital     Deficit      Equity
                                                -------------------------  ---------- ---------- ---------  ----------- -----------

<S>                                            <C>             <C>        <C>         <C>       <C>        <C>           <C>    
Balance at September 30, 1993.................      26,851,867  $    27     244,425    $3,500   $51,125     ($33,426)      $21,226

Proceeds from exercise of Class B 
  Warrants......... ..........................         177,000                                      841                        841
Proceeds from exercise of stock options.......         110,500                                      465                        465
Private placements of common stock, 
  net of issuance costs of $1,609.............       1,707,000        2                          13,752                     13,754
Issuance of warrants..........................                                                      180                        180
Issuance of common stock for technology 
  rights..... ................................         170,000                                      759                        759
Dividends on preferred stock..................                                                      (63)                       (63)
Net loss......................................                                                               (27,385)      (27,385)
                                                ---------------  ------  ----------   -------  --------      --------      --------
      Balance at September 30, 1994...........      29,016,367       29     244,425     3,500    67,059      (60,811)        9,777

Proceeds from exercise of Class B Warrants....         257,107                                    1,221                      1,221
Proceeds from exercise of stock options.......          61,200                                      151                        151
Private placement of common stock, net of  
  issuance costs of $1,244 ...................       3,009,045        3                          24,698                     24,701
Dividends on preferred stock..................                                                      (35)                       (35)
Proceeds from offering of Employee Stock 
  Purchase Plan........... ...................          10,287                                       70                         70
Proceeds from exercise of unit purchase 
  options and Class A warrants                         930,000        1                           2,324                      2,325
Proceeds from issuance of Put Protection 
  Rights and warrants...... ..................                                                    1,163                      1,163
Net loss......................................                                                               (17,981)      (17,981)
                                                 -------------  -------  ----------   -------  --------    ----------   ----------  
      Balance at September 30, 1995...........      33,284,006       33     244,425     3,500    96,651      (78,792)       21,392
Proceeds from exercise of Class B and other 
  warrants.............. .....................       3,524,897        4                          13,124                     13,128
Proceeds from exercise of stock options.......         740,022        1                           3,141                      3,142
Public offering  of common stock, net of 
  issuance costs  of $850.. ..................       3,000,000        3                         109,127                    109,130
Proceeds from offering of Employee Stock 
  Purchase Plan............ ..................          16,672                                      146                        146
Dividends on preferred stock..................                                                      (35)                       (35)
Shares issued in payment of dividends.........           9,935                                      105                        105
Issuance of common stock for technology 
  rights .....................................         342,792                                    8,827                      8,827
Shares and payments pursuant to private 
  placement agreements...... .................          97,645                                      (35)                       (35)
Gain on sale of stock by subsidiary...........                                                   16,348                     16,348
Stock-based compensation......................                                                      600                        600
Net loss......................................                                                               (27,986)      (27,986)
                                                 -------------  -------  ----------   -------  --------   ----------    ----------  
      Balance at September 30, 1996...........      41,015,969      $41     244,425    $3,500  $247,999    ($106,778)     $144,762
                                                 =============  =======  ==========    ======  ========    =========    ==========

The accompanying notes are an integral part of the consolidated financial statements
</TABLE>

                                       F-5





                        INTERNEURON PHARMACEUTICALS, INC.
                                  CONSOLIDATED
                            STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                 For the years ended September 30,

                                                              1996                   1995               1994
                                                            ---------            ----------         ----------
<S>                                                         <C>                  <C>                <C>      
Cash flows from operating activities:
     Net loss                                               ($27,986)              ($17,981)          ($27,386)
     Adjustments to reconcile net loss to net cash
     used by operating activities:
             Depreciation and amortization                      889                     715                685
             (Gain) loss on disposal of fixed assets             38                     (34)                46
             Amortization of bond premium                         -                       -                 24
             Minority interest in net loss of consolidated
                subsidiaries                                    (574)                  (563)                 -
             Noncash license fee expense                           -                      -                180
             Purchase of in-process research and
                development                                    8,098                      -                759
             Noncash compensation                              1,422                      -                326
             Change in assets and liabilities:
                Accounts receivable and other assets          (4,909)                  (186)               851
                Inventories                                   (8,376)                     -                  -
                Accounts payable                               1,414                     44                535
                Deferred revenue                               6,921                      -                  -
                Accrued expenses and other liabilities         3,649                  2,129              4,124
                                                               -----                  -----              -----
Net cash (used) by operating activities                      (19,414)               (15,876)           (19,856)
                                                              ------                 ------             ------
Cash flows from investing activities:
     Capital expenditures                                     (1,850)                  (504)            (1,178)
     Purchase of marketable securities                       (56,641)               (22,465)           (12,621)
     Proceeds from maturities and sales of
             marketable securities                            51,141                  8,614             22,736
     Proceeds from sale of fixed assets                           63                     47                  -
                                                               -----                 ------             ------
Net cash provided (used) by investing activities              (7,287)               (14,308)             8,937
                                                               -----                 ------             ------
Cash flows from financing activities:
     Net proceeds from issuance of stock and
             other financing activities                      125,510                 29,630             14,671
     Net proceeds from issuance of stock by
             subsidiaries                                     30,569                  6,070                  -
     Proceeds from sale/leaseback                                313                    324              1,498
     Principal payments of capital lease obligations            (571)                  (416)              (118)
                                                             -------                 ------             ------
Net cash provided by financing activities                    155,821                 35,608             16,051
                                                             -------                 ------             ------

Net change in cash and cash equivalents                      129,120                  5,424              5,132

Cash and cash equivalents at beginning of period              16,781                 11,357              6,225
                                                              ------                 ------              -----

Cash and cash equivalents at end of period                  $145,901                $16,781            $11,357
                                                            ========                =======            =======


 The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>



                                       F-6









                        INTERNEURON PHARMACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A.  Nature of the Business:

Interneuron   Pharmaceuticals,   Inc.   (the   "Company")   is   a   diversified
biopharmaceutical  company engaged in the development and commercialization of a
portfolio of products and product  candidates  primarily  for  neurological  and
behavioral  disorders,  including  obesity,  stroke,  anxiety and insomnia.  The
Company  focuses   primarily  on  developing   products  that  mimic  or  affect
neurotransmitters,  which are chemicals that carry messages  between nerve cells
of the central  nervous system ("CNS") and the peripheral  nervous  system.  The
Company is also developing products and technologies,  generally outside the CNS
field,  through  four  subsidiaries  (the  "Subsidiaries"):   Intercardia,  Inc.
("Intercardia"),   focuses   on   cardiovascular   disease;   Progenitor,   Inc.
("Progenitor"),  focuses on developmental genomics; Transcell Technologies, Inc.
("Transcell"),  focuses on carbohydrate-based  drug discovery;  and InterNutria,
Inc. ("InterNutria"), focuses on dietary supplement products.

B.  Summary of Significant Accounting Policies:

Basis  of  Presentation:  The  consolidated  financial  statements  include  the
accounts of the Company and its  wholly- and  majority-owned  Subsidiaries.  All
significant intercompany accounts and transactions have been eliminated.

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles  requires  management to make certain
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Marketable Securities:  The Company invests available
cash  in  short-term  bank  deposits,  money  market  funds,  U.S.  and  foreign
commercial  paper and U.S.  and  foreign  government  securities.  Cash and cash
equivalents includes investments with maturities of three months or less at date
of  purchase.  Marketable  securities  consist  of  investments  purchased  with
maturities  greater than three months and are  classified as non-current if they
mature one year or more beyond the balance  sheet date.  The Company  classifies
its   investments   in   debt   securities   as   either   held-to-maturity   or
available-for-sale  based on facts  and  circumstances  present  at the time the
investments  are  purchased.  At September 30, 1995, all  investments  held were
classified as  "held-to-maturity."  At September 30, 1996, all investments  held
were classified as "available-for-sale."

Property and  Equipment:  Property and equipment are stated at cost. The Company
provides  for  depreciation  using  the  straight-line  method  based  upon  the
following estimated useful lives:

Estimated Useful Lives:

Office equipment. . . . . . . . . . . . . . . . .. . . . . . . .  2 to 5 years

Laboratory equipment..  . . . . . . . . . . . . . . . . . . . . . . .  5 years

Leasehold improvements. . . . . . Shorter of lease term or estimated useful life




                                       F-7





Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed and the related  accumulated
depreciation  are removed from the accounts  and any  resulting  gain or loss is
credited or charged, respectively, to operations.

Inventories:  Inventories are valued at the lower of cost  (first-in,  first-out
method) or market. Drug inventory costs are capitalized commencing from the time
the pertinent drug is recommended  for approval by an Advisory  Committee of the
U.S.  Food and Drug  Administration  ("FDA")  for drugs that are  subject to FDA
approval  and  from the time  product  is  manufactured  with the  intention  of
commercial sale for products not requiring FDA approval.

Revenue  Recognition:  Product  revenue  consists  of  product  sales  which are
recognized  at the later of shipment or acceptance  and royalties  from licensed
products  which are  recognized  when the amount of and basis for such royalties
are reported to the Company in accordance with the related  license  agreements.
Cash  received  in advance of product  shipments  or  acceptance  is recorded as
deferred  revenue.  Contract  and license fee  revenue  consists of  contractual
research  milestone  payments,  sales  and  marketing  payments,   research  and
development  grants and  contractual  research  and  development  funding and is
recognized when services are performed or when contractual obligations are met.

Research and  Development:  Research and  development  costs are expensed in the
period incurred.

Income  Taxes:  Deferred  tax  liabilities  and assets are  recognized  based on
temporary  differences  between the financial  statement  basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation  allowance
against  net  deferred  tax assets is  established  if,  based on the  available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized (see Note I).

Accounting  for  Stock-Based  Compensation:   In  October  1995,  the  Financial
Accounting  Standards  Board  ("FASB")  issued  SFAS  No.  123,  Accounting  for
Stock-Based Compensation, which changes measurement,  recognition and disclosure
standards for  stock-based  compensation.  The Company will adopt the disclosure
requirements  of SFAS No. 123 in fiscal  year 1997 and will  continue to measure
stock-based  compensation in accordance with present  accounting rules. As such,
the  adoption  of SFAS No.  123 will not impact the  financial  position  or the
results from operations of the Company.

Issuance of Stock by a  Subsidiary:  Gains on the  issuance of common stock by a
subsidiary  are included in net income  unless the  subsidiary is a research and
development,  start-up or development stage company or an entity whose viability
as a going  concern is under  consideration.  In those  situations  the  Company
accounts  for the  change in its  proportionate  share of the  subsidiary's  net
assets  resulting  from the  additional  equity  raised by the  subsidiary as an
equity transaction and credits any resulting gain to additional paid-in capital.

Uncertainties:  The  Company  is  subject to risks  common to  companies  in the
biotechnology  industry,  including,  but not  limited  to,  development  by the
Company or its competitors of new technological  innovations,  dependence on key
personnel,  protection  of  proprietary  technology,  and  compliance  with  FDA
government regulations.

Reclassification:  Certain prior year amounts have been  reclassified to conform
with fiscal 1996 classifications.


                                       F-8




C.   Marketable Securities:

Investments in marketable securities consisted of the following at September 30,
1996 and 1995:

<TABLE>
<CAPTION>
                                                          1996                               1995
                                                 ------------------------          --------------------------
                                                                  Market                            Market
                                                   Cost           Value               Cost           Value
                                                   ----           -----               ----           -----
<S>                                          <C>            <C>                <C>            <C>
U.S. government treasury
     and agency obligation .................  $2,005,000      $2,033,000          $4,953,000     $4,950,000
Foreign government and
     corporate obligations .................   3,260,000       3,193,000                   -              -
U.S. corporate notes .......................  18,442,000      18,503,000          13,255,000     13,255,000
                                               ----------      ----------          ----------     ----------
Total ..................................... $ 23,707,000     $23,729,000         $18,208,000    $18,205,000
                                            ============     ===========         ===========    ===========
</TABLE>

At September  30, 1996,  marketable  securities  representing  $6,639,000 of the
total cost mature between September 30, 1997 and 1998 and marketable  securities
representing $17,068,000 of the total cost mature within one year from September
30, 1996. At September 30, 1996 and 1995,  marketable securities were carried at
cost due to insignificant  differences from market value. At September 30, 1996,
gross unrealized gains and loses were $144,000 and $122,000, respectively.

D.   Inventories:

Inventories at September 30, 1996 consisted of:

Raw materials                                                     $5,420,000
Finished goods                                                     2,956,000
                                                                   ---------
                                                                  $8,376,000
                                                                  ==========

Raw materials consist primarily of dexfenfluramine  drug substance and  finished
goods consist primarily of finished Redux(TM).

E.  Property and Equipment:

At  September  30,  1996 and  1995,  property  and  equipment  consisted  of the
following:

                                                     1996              1995
                                                     ----              ----
Office equipment ............................     $1,622,000       $  796,000
Laboratory equipment ........................      2,612,000        2,036,000
Leasehold improvements ......................        242,000          337,000
                                                 -----------       ----------
                                                   4,476,000        3,169,000
Less:  accumulated depreciation
           and amortization .................     (1,787,000)      (1,498,000)
                                                   ---------        ---------
                                                  $2,689,000       $1,671,000
                                                  ==========       ==========

Included in the above  amounts is property and  equipment  under  capital  lease
obligations  of  $2,169,000  and  $1,890,000  at  September  30,  1996 and 1995,
respectively,  and related accumulated  depreciation of $845,000 and $619,000 at
September 30, 1996 and 1995,  respectively.  Leased assets consist  primarily of
laboratory equipment. The Company paid $158,000 and $146,000 in interest expense
during the years ended  September  30, 1996 and 1995,  respectively,  related to
these capital lease obligations.


                                       F-9




F.  Accrued Expenses:

At September 30, 1996 and 1995 accrued expenses consisted of the following:

                                               1996                    1995
                                         ----------------            ---------
Professional fees. . . . . . . . . .       $    947,000            $   526,000
Clinical and sponsored research. . .          5,490,000              3,737,000
Compensation related . . . . . . . .          3,058,000              1,504,000
Shared manufacturing costs . . . . .                  -                701,000
Other. . . . . . . . . . . . . . . .          2,109,000              1,526,000
                                            -----------              ---------
                                            $11,604,000             $7,994,000
                                           ============            ===========

G.  Commitments:

The Company leases its facilities,  as well as certain laboratory  equipment and
furniture,  under  non-cancelable  operating  leases.  Rent expense  under these
leases was approximately $1,195,000, $1,055,000 and $913,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. The Company also leases certain
property and equipment under capital leases.

At  September  30, 1996,  the  Company's  future  minimum  payments  under lease
arrangements are as follows:

     Fiscal Year                Operating Leases                Capital Leases
     -----------                ----------------                --------------
     1997                            $ 1,022,000                    $ 777,000
     1998                              1,078,000                      329,000
     1999                              1,059,000                      204,000
     2000                              1,050,000                       47,000
     2001                                997,000                            -
     Thereafter                        5,093,000                            -
                                   -------------                --------------
Total lease payments                 $10,299,000                    $1,357,000
                                     ===========

Less: amount representing interest                                    (170,000)
                                                                   -----------
Present value of net minimum lease payments                        $ 1,187,000
                                                                   ===========

H.  Stockholders' Equity:

Preferred Stock: The Certificate of Incorporation of the Company  authorizes the
issuance of 5,000,000  shares of Preferred Stock. The Board of Directors has the
authority to issue  preferred stock in one or more series and to fix the rights,
preferences,  privileges and restrictions,  including the dividend,  conversion,
voting,  redemption  (including  sinking  fund  provisions),  and other  rights,
liquidation  preferences,  and the number of shares  constituting any series and
the  designations  of such  series,  without any  further  vote or action by the
stockholders of the Company.  In fiscal 1993 the Company issued shares of Series
B and Series C Preferred  Stock in  connection  with an agreement  with American
Home Products Corp. (see Note K).

Common Stock and  Warrants:  In March 1990,  the Company  completed  its initial
public  offering of  securities.  The offering  consisted of 1,782,500  units at
$6.00 per unit, each unit consisting of three shares of Common Stock,  $.001 par
value,  and three Class A Warrants.  Each Class A Warrant entitled the holder to
purchase one share of Common Stock and one Class B Warrant at an exercise  price
of $2.20.  As of February  1992,  all such Class A Warrants had been  exercised.
Each Class B Warrant  entitled  the holder to purchase one share of Common Stock
at $4.75 per share,  from the date of issuance  through  March 15, 1996.  During
fiscal  1995,   257,107  Class  B  Warrants  were   exercised  and  proceeds  of
approximately  $1,221,000 were realized by the Company.  In fiscal 1996, Class B
Warrants were  exercised  (including  165,000 that were  exercised on a cashless
basis by an affiliate of the Company resulting in the issuance of 138,432 shares
of Common  Stock of the  Company)  resulting  in net  proceeds to the Company of
approximately  $10,612,000 and the issuance of approximately 2,375,000 shares of
Common Stock.


                                      F-10




In connection  with the initial public  offering,  the Company also provided the
underwriter with Unit Purchase Options to purchase up to 155,000 units for $8.40
per unit. In fiscal 1995, all 155,000 Unit Purchase Options and underlying Class
A Warrants were  exercised  resulting in proceeds of $2,325,000  and issuance of
930,000 shares of the Company's Common Stock and 465,000 Class B Warrants, which
were exercised in full in fiscal 1996.

In fiscal 1994, the Company completed a private placement of 1,707,000 shares of
its Common Stock resulting in net proceeds of approximately $13,754,000.

In fiscal 1995, the Company completed private  placements of 3,009,045 shares of
its Common  Stock,  at prices  ranging  from  $3.75 to $13.08  per share,  which
resulted in net proceeds of approximately  $24,701,000.  Additionally as part of
the private  placements,  the Company  issued  warrants to purchase  500,000 and
62,500 shares of its Common Stock at $10.00 and $12.77 per share,  respectively,
which are exercisable through June 1,2002 and August 16, 2000, respectively.  In
connection with these private placements, 91,000 additional warrants to purchase
shares  of  the  Company's  Common  Stock  were  issued  to  certain   financial
intermediaries  at prices ranging from $5.00 to $13.08 per share which expire at
various  dates from July 5, 2000 to February 3, 2005.  At  September  30,  1996,
70,000 of these warrants were  outstanding at prices ranging from $5.00 to $7.88
per share and expire from June 1, 2002 to February 3, 2005.

Pursuant to certain  placement  agreements,  an additional  97,645 shares of the
Company's Common Stock were issued during the year ended September 30, 1996.

In January  1996,  the Company  issued  342,792  shares of Common  Stock for the
purchase  of the  remaining  20% of  outstanding  capital  stock of  CPEC,  Inc.
("CPEC") not owned by Intercardia (see Note L).

In June 1996,  the Company  completed a public  offering of 3,000,000  shares of
Common Stock at $39.00 per share and received  proceeds,  net of issuance costs,
of approximately $109,130,000.

During fiscal 1995,  certain  Subsidiaries  issued  convertible  preferred stock
through  private  placements  which  resulted in net  proceeds of  approximately
$7,233,000 (the "Subsidiaries' Private Placements").  In connection with certain
of the Subsidiaries'  Private  Placements the Company issued 218,125 warrants to
purchase  shares of the Company's Common Stock  exercisable  at $4.625 per share
until June 30, 1998 (the  "Warrants") of which 41,250 Warrants were  outstanding
at September 30, 1996.  Additionally,  investors in the private  placements have
the ability on June 30, 1998 to cause the Company to purchase  from them certain
amounts of the  convertible  preferred  stock  deemed to be  illiquid  but in no
circumstance for an amount greater than that initially paid by the investor (the
"Put Protection Rights"). The Company received approximately $1,163,000 from the
proceeds of the offerings as consideration  for its issuance of the Warrants and
the Put  Protection  Rights,  which was  recorded  as an equity  issuance by the
Company.  The  Company  may pay cash or issue its  Common  Stock to  settle  any
obligations  arising  from the Put  Protection  Rights  and  intends  to  choose
settlement  through  issuance of its Common Stock. The Company could be required
to issue up to a maximum  aggregate of approximately  2,181,250 shares of Common
Stock under certain circumstances if the Put Protection Rights were exercised in
full and the  Company's  Common  Stock is  valued  at $2.00  per  share or less.
Investors also received  registration  rights relating to the shares  underlying
the  Warrants  and Put  Protection  Rights.  In  connection  with these  private
placements,  the Company issued to designees of the Placement  Agent which is an
affiliate of the Company (see Note J), warrants to purchase approximately 21,813
shares of Common Stock at $4.625 per share, exercisable through June 30, 1998.

In connection with the Subsidiaries'  Private Placements,  Interneuron converted
the  amounts  owed  to  Interneuron  by  these   Subsidiaries  as  a  result  of
Interneuron's funding of the Subsidiaries' operations into convertible preferred
stock of these Subsidiaries.  In fiscal 1996,  Intercardia  completed an initial
public  offering of 2,530,000  shares of Intercardia  common stock (see Note M).
The Company's  percentage of ownership in Progenitor,  Transcell and Intercardia
changed from approximately 78%, 79% and 88%, respectively, at September 30, 1995
to approximately 76%, 78% and 60%, respectively, at September 30, 1996.



                                      F-11




Stock  Options and  Warrants:  Under the  Company's  1989 Stock Option Plan (the
"1989 Plan"), incentive or non-qualified options to purchase 3,000,000 shares of
the Company's Common Stock may be granted to employees. Under the Company's 1994
Long-Term Incentive Plan (the "1994 Plan"), employees, directors and consultants
to the Company may be granted incentive or non-qualified  options to purchase up
to  2,700,000  shares of the Common  Stock of the Company and  restricted  stock
awards of up to 300,000  shares of the Common Stock of the  Company.  Restricted
stock awards may be made without payment of  consideration  by the recipient and
may be subject to performance criteria and restriction  periods.  Under the 1989
and 1994 Plans ("the  Plans") the exercise  price of incentive  options  granted
must not be less than the fair market value of the Common Stock as determined on
the date of grant and the term of each grant cannot exceed ten years.

The Company has also granted  outside of the Plans options to purchase shares of
the Company's Common Stock ("Non-Plan Options").  At September 30, 1996, 100,000
Non-Plan Options were outstanding.

The Company  has issued  warrants to  purchase  shares of the  Company's  Common
Stock,  certain  of which  were  issued in  connection  with  various  financing
arrangments and have been disclosed in this and other Notes to the  Consolidated
Financial Statements.


                                      F-12




Presented  below under the  caption  "Stock  Options"  is all Plan and  Non-Plan
option  activity  and under the  caption  "Warrants"  is all  warrant  activity,
certain  of  which  may  also  be  disclosed  in this  and  other  Notes  to the
Consolidated Financial Statements:

<TABLE>
<CAPTION>

                                        Stock Options                            Warrants
                                   ---------------------------      --------------------------------
                                                   Option                                 Warrant
                                                   ------                                 -------
                                    Shares          Price                 Shares           Price
                                    ------          -----                 ------           -----

<S>                         <C>                 <C>                <C>               <C>   
Outstanding at
September 30, 1993                2,127,441       $ .83-$12.63          1,020,000       $4.00-$9.00

  Granted                           916,500       $5.12-$10.00            125,000       $5.12-$14.00

  Exercised                       ( 110,500)      $0.00-$ 6.25                 -

 Canceled                           (13,600)      $4.38-$ 9.63                 -
                                     ------                        ---------------
Outstanding at
September 30, 1994                2,919,841       $ .83-$12.63          1,145,000       $4.00-$14.00

  Granted                         1,225,200       $4.88-$12.75            893,438       $4.63-$13.08

  Exercised                         (61,200)      $.83-$ 7.12                  -

  Canceled                           (2,400)      $5.12-$ 7.12                 -
                                ------------                       ---------------
Outstanding at
September 30, 1995                4,081,441       $ .83-$12.63          2,038,438       $4.00-$14.00

  Granted                           848,300       $14.75-$42.00            75,000       $23.25-$29.75

  Exercised                        (740,021)      $2.00-$10.00         (1,309,125)      $4.00-$14.00

  Canceled                         (298,000)      $6.50-$42.00                 -
                                    -------                       ----------------
Outstanding at
September 30, 1996                3,891,720       $ .83-$32.00            804,313       $4.63-$29.75
                                  =========                       ================

</TABLE>


At September 30, 1996,  outstanding  stock options and warrants were exercisable
as follows:

<TABLE>
<CAPTION>

Exercise Price Per Share:             Under $5.00      $5.00 to $10.00          Over $10.00         Total
                                      -----------      ---------------          -----------        --------

<S>                                   <C>                <C>                  <C>             <C>      
     Stock options                        127,315            3,066,705            697,700         3,891,720
     Warrants                              61,813              605,000            137,500           804,313
                                          -------        -------------           --------        ----------

                                          189,128            3,671,705            835,200        4,696,033
                                          =======        =============          =========        =========

</TABLE>

At  September  30,  1996,  2,210,998  stock  options and 740,980  warrants  were
exercisable  and there  were no  awards of  restricted  stock.  All  outstanding
options vest at various rates over periods up to six years and expire at various
dates from August 1, 1999 to September 26, 2006. All outstanding warrants expire
at various dates from June 30, 1998 to February 3, 2005.



                                      F-13





Employee Stock Purchase Plan: On March 22, 1995, the  stockholders  approved the
Company's  1995  Employee  Stock  Purchase  Plan (the "1995  Plan")  covering an
aggregate  of  100,000  shares of Common  Stock  which is  offered  in  one-year
offerings (an "Offering"), the first of which began April 1, 1995. Each Offering
is  divided  into two  six-month  Purchase  Periods  (the  "Purchase  Periods").
Employees may  contribute  up to ten percent (10%) of gross wages,  with certain
limitations, via payroll deduction, to the 1995 Plan. Stock will be purchased at
the end of each Purchase Period with employee  contributions at the lower of 85%
of the last  sale  price of the  Company's  Common  Stock on the first day of an
Offering  or the last day of the  related  Purchase  Period.  In fiscal 1995 and
1996, 10,287 and 16,672 shares, respectively, of Common Stock had been purchased
pursuant to the 1995 Plan.

Other:  In addition to the  41,016,000  shares of Common  Stock  outstanding  at
September 30, 1996, there were  approximately  14,000,000  potentially  issuable
shares of Common Stock  ("Reserved  Common  Shares").  Included in the number of
Reserved Common Shares are the following:  (i) 4,756,000  shares of Common Stock
reserved for issuance upon  conversion of the Company's  authorized but unissued
Preferred Stock; (ii) 622,222 shares of Common Stock issuable upon conversion of
issued and outstanding  Preferred Stock; (iii) 2,181,250 shares reserved for the
maximum number of shares issuable under the Put Protection Rights, which assumes
exercise  for the full amount  possible;  (iv)  4,900,000  shares  reserved  for
issuance  under  the  Plans  and the 1995  Plan (of  this  amount  approximately
3,800,000  has been  granted,  not all of which was  vested);  (v) an  estimated
250,000  shares  issuable in  connection  with  certain  acquisitions;  and (vi)
approximately  804,000 shares reserved for issuance from exercise of outstanding
warrants.

I.  Income Taxes:

At September  30, 1996 and 1995,  the  significant  components  of the Company's
deferred tax asset consist of the following:

<TABLE>
<CAPTION>
                                                                 1996              1995
                                                                 ----              ----
<S>                                                      <C>                 <C>
Federal and state net operating loss
         carryforwards                                      $38,798,000          $28,315,000
Federal and state tax credit carryforwards                    3,721,000            3,527,000
Deferred revenue and accrued expenses                         3,723,000            2,555,000
                                                             ----------         ------------
Total deferred tax asset before
         valuation allowance                                 46,242,000           34,397,000
Valuation allowance against total
         deferred tax asset                                 (46,242,000)         (34,397,000)
                                                            ------------        -------------

Net deferred tax asset                                      $         -         $         -
                                                            ============        =============
</TABLE>

At  September  30,  1996,  the  Company  had net  operating  loss  carryforwards
available for federal income tax purposes of  approximately  $100,000,000  which
expire at  various  dates  from  2004 to 2011.  In  addition,  the  Company  had
approximately  $3,700,000  of tax credit  carryforwards  for federal  income tax
purposes  expiring at various dates through 2011.  The Company's  ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.

J.  Related Party Transactions:

The  Company  licensed  certain  patents  and  technologies  from  Massachusetts
Institute of Technology ("MIT") relating to research of a principal  shareholder
and director and his  associates.  The Company is obligated to reimburse MIT for
one half of any patent  prosecution and maintenance costs to maintain certain of
these licenses.



                                      F-14





During fiscal 1995,  Paramount Capital,  Inc.  ("Paramount") served as placement
agent  for the  Subsidiaries'  Private  Placements  (see  Note  H).  Lindsay  A.
Rosenwald,  M.D.,  the Chairman of the Board and a principal  stockholder of the
Company,  is the  Chairman,  Chief  Executive  Officer and sole  stockholder  of
Paramount.

Paramount earned $657,000 in commissions  related to the  Subsidiaries'  Private
Placements. In addition, the Company issued to Dr. Rosenwald and other designees
of  Paramount  warrants  to purchase a total of 21,813  shares of the  Company's
Common Stock at $4.625 per share,  exercisable  through June 30, 1998,  of which
20,583 were outstanding at September 30, 1996.

D.H. Blair and Co., Inc.  ("Blair") was a selected  dealer  associated  with the
Subsidiaries'  Private Placements.  Blair is substantially owned by relatives of
the sole  stockholder  of the parent of D.H. Blair  Investment  Banking Corp., a
principal  stockholder  of the  Company.  Blair earned  $113,000 in  commissions
related  to  the  Subsidiaries'  Private  Placements.   Designees  of  Paramount
(including  Dr.  Rosenwald)  and Blair also  received  warrants  to  purchase an
aggregate  of  10% of the  preferred  stock  of  the  Subsidiaries  sold  in the
Subsidiaries'  Private Placements.  These warrants represent less than 1% of the
subsidiaries outstanding stock at September 30, 1996.

Under consulting agreements with two directors and a party related to a director
to  provide  scientific  advice  and  administrative  services,  the  Company is
obligated to make monthly  payments,  generally for a one year period subject to
annual  renewals.  Payments were  $180,000,  $174,000 and $163,000 for the years
ended  September  30,  1996,  1995 and 1994,  respectively.  Also,  one of these
directors  received  additional  payments  aggregating   approximately  $103,000
related to certain  patent  matters  and the April 1996 FDA  approval  of Redux.
Another  director  has a three year  consulting  agreement  with the  Company to
provide  services for a total of up to $120,000.  Payments  under this agreement
were $32,000, $36,000, and $11,000 in fiscal 1996, 1995, and 1994, respectively.

In  fiscal  1996,   InterNutria   acquired   certain   technology   from  Walden
Laboratories,  Inc. of which the Company's  Chairman is a stockholder  (see Note
L).

Advances were provided to several  employees of the Company and its Subsidiaries
for moving and relocation  costs. As of September 30, 1996 and 1995, these loans
totaled approximately $204,000 and $560,000  respectively.  Certain amounts will
be repaid and certain  amounts  will be forgiven  upon  achievement  of specific
milestones;  remaining balances will be repaid by the earlier of four years from
the date of the loan or termination of the executive's employment.

The Company made  contributions of $182,000,  $147,000 and $134,000 in the years
ended September 30, 1996, 1995 and 1994,  respectively,  to The Center for Brain
Science and Metabolism  Charitable Trust of which one of the Company's directors
is the scientific director.

K.  Agreements:

Servier:  In February  1990,  as amended,  the Company  entered into a series of
agreements with Les Laboratoires  Servier  ("Licensor")  under which the Company
agreed  to  pursue   activities   designed   to   obtain   approval   to  market
dexfenfluramine, a prescription drug developed by the Licensor for the treatment
of  obesity  associated  with  carbohydrate  craving.  Under  the  terms  of the
agreements,  the  Company  obtained  U.S.  marketing  rights to the  product  in
exchange for future royalty  payments based upon net product sales,  as defined.
These agreements required non-refundable  royalties of $100,000 paid in February
1991, and $300,000 in each subsequent February, until approval of the NDA, which
occurred on April 29, 1996.  Additionally,  under the terms of these agreements,
the Company is required to purchase the bulk  compound  from an affiliate of the
Licensor.  The Company is obligated to pay to the Licensor 11.5% of net sales by
"AHP" (see below).  During fiscal 1996,  the Company  incurred an expense of and
paid to the Licensor  royalties of  approximately  $3,800,000 which fulfills the
Company's  initial annual minimum royalty  obligation to the Licensor.  Payments
will continue to be made quarterly based upon sales of Redux.

American Home Products:  In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by American Home
Products Corp.) ("AHP") for the


                                      F-15





development  and  marketing in the U.S. of  dexfenfluramine  for use in treating
obesity associated with carbohydrate craving. On this date, the Company received
$2,000,000  for a  patent  license  and  sold  to  AHP  239,425  shares  of  its
convertible  Series B  Preferred  Stock  for  $3,000,000.  Holders  of  Series B
Preferred Stock are entitled to receive mandatory  dividends of $.1253 per share
payable at the election of the Company in cash or Common Stock.  Such  dividends
are payable  annually  on April 1 of each year,  accrue on a daily basis and are
cumulative.  Holders  of  Series  B  Preferred  Stock  are  also  entitled  to a
liquidation  preference  of  $12.53  per  share,  plus  accumulated  and  unpaid
dividends.  Holders of Series B Preferred  Stock are  entitled  to convert  such
shares into an aggregate of 533,333  shares of Common Stock (a conversion  price
of $5.625 per share) subject to adjustment in the event of future dilution.  The
agreement  provides for  additional  cash  payments  for the patent  license and
additional  purchases of  convertible  Preferred  Stock based upon the Company's
achievement of certain milestones. Additionally, the agreement with AHP provides
for royalty payments to the Company based upon net sales of dexfenfluramine  and
for AHP to share  equally  with the Company  certain  research  and  development
expenses.

In June 1993,  the Company  received  payments  from AHP in connection
with the  submission  of a New Drug  Application  ("NDA")  for  dexfenfluramine,
consisting  of  $2,500,000  in a  milestone  payment  and  $500,000  through the
purchase of 5,000 shares of  convertible  Series C Preferred  Stock.  Holders of
Series C Preferred  Stock are entitled to receive  mandatory  dividends of $1.00
per share  payable  annually on April 1, of each year,  which  accrue on a daily
basis and are cumulative.  Holders of Series C Preferred Stock are also entitled
to a  liquidation  preference  of $100 per share,  plus  accumulated  and unpaid
dividends.  Holders of Series C Preferred  Stock are  entitled  to convert  such
shares  into an  aggregate  of 88,888  shares of Common  Stock of the Company (a
conversion  price of $5.625 per  share)  subject  to  anti-dilution  adjustment.
Holders  of the  Series B and C  Preferred  Stock  are  entitled  to vote on all
matters  submitted  to a vote  of  stockholders,  other  than  the  election  of
directors,  generally  holding the number of votes equal to the number of shares
of Common Stock into which such shares of Preferred Stock are convertible.

On September 29, 1995  dexfenfluramine was recommended for removal from Schedule
IV of the Controlled Substances Act (the "Descheduling") by a joint committee of
the  Endocrinologic  and Metabolic  Advisory  Committee and Drug Abuse  Advisory
Committee of the FDA and on April 29, 1996 received clearance for marketing as a
twice-daily  prescription drug for the treatment of obesity. If the Descheduling
is  effected  within  one  year  of NDA  approval,  the  Company  would  receive
$6,000,000 as a milestone  payment and $3,500,000 as an equity  investment  from
AHP. The Company is  uncertain  whether the  Descheduling  will occur within the
time required to receive this payment and investment.

AHP has the right to terminate its  sublicense  upon twelve months notice to the
Company.  The AHP agreements  provide that Servier has the right to withdraw its
consent to the  sublicense  in the event that any entity  acquires  stock in AHP
sufficient to elect a majority of AHP's Board of Directors or otherwise  obtains
control of AHP,  provided  that no such  termination  shall  occur if AHP or its
successor  achieves minimum net sales of $75,000,000 in the first marketing year
or  $100,000,000  thereafter or pays Servier amounts to which it would have been
entitled if AHP had achieved  such minimum net sales.  Servier  consented to the
AHP acquisition of American Cyanamid Company.

On April 29, 1996,  dexfenfluramine  received FDA clearance for marketing  under
the name Redux.  The  Company's  License  Agreement  with AHP  provides for base
royalties  equal to 11.5% of AHP's net sales and  additional  royalties  ranging
from 5% of the  first  $50,000,000  of  AHP's  annual  net  sales  if Redux is a
scheduled  drug to 11% of AHP's  annual net sales over  $200,000,000,  providing
Redux  is  supplied  to AHP by the  Company  and is  descheduled.  Royalties  of
approximately  $5,500,000 on net sales  through June 30, 1996 were  reflected as
product revenue in fiscal 1996. AHP will make quarterly  royalty payments to the
Company  for net sales of Redux.  The  Company  manufactures  Redux  through  an
arrangement with Boehringer Ingleheim Pharmaceuticals, Inc. (see Boehringer) and
is the exclusive supplier of Redux to AHP.

Boehringer:   In  November   1995,   the  Company   entered  into  an  exclusive
manufacturing   agreement  with  Boehringer  Ingleheim   Pharmaceuticals,   Inc.
("Boehringer")  under which Boehringer agreed to supply,  and the Company agreed
to  purchase   from   Boehringer,   all  of  the  Company's   requirements   for
dexfenfluramine  capsules.  The  contract,  which  expires  December  31,  1998,
contains certain minimum  purchase and insurance  commitments by the Company and
requires conformance by Boehringer to the FDA's Good Manufacturing Practices


                                      F-16




regulations.  The  agreement  provides  for the  Company to be able to qualify a
second source manufacturer under certain conditions.

Ferrer:  The Company has  licensed  from Ferrer  International,  S.A.  exclusive
rights to  citicoline,  a drug for  potential  treatment  for  memory  and motor
impairment due to ischemic stroke,  for  commercialization  in the U.S.,  Puerto
Rico and Canada.  A license fee and future  royalties on net sales of citicoline
were consideration provided to Ferrer.

Rhone-Poulenc  Rorer:  In  February  1994,  the Company  entered  into a license
agreement  with  Rhone-Poulenc   Rorer  S.A.,  granting  the  Company  worldwide
exclusive rights to an anti-anxiety  compound  (pagoclone).  The Company paid an
upfront  license fee of $250,000  upon  execution of the  agreement.  Additional
payments totaling  $1,250,000  relating to the initiation of clinical trials and
submission of an NDA are required based upon achievement of milestones,  certain
of which were  achieved in fiscal 1996.  Payments to be made by the Company upon
approval of an NDA will range from  $3,000,000 to  $5,000,000,  depending on the
number of countries in which approval is achieved.  Additional royalties will be
paid based on sales.

Bristol-Myers  Squibb:  Intercardia  acquired  CPEC (see Note L), which holds an
exclusive  worldwide  license  to  bucindolol,  for  use  in  the  treatment  of
congestive heart failure,  which CPEC acquired from Bristol-Myers Squibb Company
("BMS"). Royalties will be due to BMS based upon net sales of the product.

Astra Merck: In December 1995,  Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck,  Inc. ("Astra Merck") to provide for the  development,  commercialization
and marketing in the U.S. of a  twice-daily  formulation  of bucindolol  for the
treatment of congestive  heart failure.  Intercardia  received  $5,000,000  upon
execution of the Astra Merck Collaboration, which was recognized as contract and
license  fee  revenue  in the first  quarter  of fiscal  1996,  and may  receive
additional  payments based upon achievement of certain  milestones and royalties
based on net sales of bucindolol in the U.S. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997 and to reimburse Astra Merck for one-third of
certain  product  launch  costs,  up to a total  of  $11,000,000.  In the  event
Intercardia elects not to make these payments, future royalties payable by Astra
Merck to  Intercardia  will be  substantially  reduced.  During  the year  ended
September  30,  1996,  Astra  Merck  made  payments  or assumed  liabilities  of
approximately  $4,300,000  on  Intercardia'  behalf.  These amounts did not flow
through the  Consolidated  Statement of Operations,  as they were offset against
related expenses.  Astra Merck had paid approximately  $2,900,000 of this amount
by September 30, 1996 and  approximately  $1,400,000  was included as offsetting
accounts  receivable and accrued  expenses on the Balance Sheet at September 30,
1996.

Chiron:  In  April  1995,  Progenitor  entered  into an  agreement  with  Chiron
Corporation  ("Chiron") to collaborate in the development and  commercialization
of Progenitor's proprietary gene therapy technology.

Progenitor  received  an initial  payment of  $2,500,000  in April 1995 and paid
$750,000 for certain start-up  manufacturing  costs to Chiron during fiscal 1995
and 1996.  These amounts have been  recognized as contract  revenue and research
and development  expense,  respectively,  in the year ended  September  30,1995.
Progenitor  received an additional  $500,000  payment in January 1996, which was
recognized as contract revenue in fiscal 1996.

L.  Acquisitions:

In May  1994,  Intercardia  entered  into an  agreement  to  acquire  80% of the
outstanding  common stock of CPEC, Inc.  (formerly  Cardiovascular  Pharmacology
Engineering and  Consultants,  Inc.) ("CPEC"),  subject to conditions which were
met on September 26, 1994,  the effective date of the  acquisition.  CPEC has an
exclusive  worldwide  license  in North  America  and  Europe to  bucindolol,  a
non-selective  beta-blocker  currently under  development  for congestive  heart
failure.  Bucindolol began a Phase 3 clinical trial, the Beta-blocker Evaluation
of Survival Trial (the "BEST Study"),  for treatment of congestive heart failure
in  cooperation  with the  National  Institutes  of Health  (the  "NIH") and The
Department  of Veteran  Affairs  (the "VA") in April  1995.  The NIH and VA have
agreed to provide up to  $15,750,000  throughout the study and CPEC is obligated
to provide up to an additional


                                      F-17





$2,000,000,  of which  $1,250,000 has been paid through  September 30, 1996, and
fund other costs of the study including drug supply and clinical monitoring.

The purchase  price of CPEC was  approximately  $1,852,000  comprised of 170,000
shares of Common Stock of the Company, payments to stockholders of CPEC, assumed
liabilities,  and other  related  expenses.  Additionally,  future  issuances of
Interneuron's  Common Stock are required upon achieving the milestones of filing
an NDA and  receiving  an  approval  letter  from  the FDA.  The  value of these
additional  shares is not included in the purchase  price because their issuance
is contingent upon achieving these milestones. Substantially all of the purchase
price has been allocated to the bucindolol technology rights.  However,  because
bucindolol  was  not  a  currently  commercializable  product  at  the  time  of
acquisition  and future  benefits are dependent  upon  successful  completion of
clinical  trials and FDA approval,  the Company  recorded a charge to operations
for the costs associated with this transaction. Future issuances of Common Stock
will result in additional charges.

Intercardia and CPEC also entered into a consulting agreement with a corporation
owned  by the  minority  stockholders  of CPEC  providing  for  consulting  fees
aggregating $300,000 over a three year period beginning October 1994.

In January  1996,  the Company  acquired the  remaining  20% of the  outstanding
capital  stock of CPEC not owned by  Intercardia  by  issuing  an  aggregate  of
342,792 shares of Common Stock to the former CPEC minority stockholders. For the
same reasons as stated above, the Company, recorded a charge for the purchase of
in- process research and development of approximately $6,084,000 in fiscal 1996.

In  December  1995,   InterNutria  acquired  from  Walden   Laboratories,   Inc.
("Walden"),  the  technology  and  know-how  to produce a  specially  formulated
dietary supplement for women's use during their pre-menstrual  period called PMS
Escape in exchange for $2,400,000  payable in two  installments of Common Stock,
the first in late  calendar  1996 and the second in late  calendar  1997, at the
then-prevailing  market  price.  Certain  affiliates  of the Company are or were
stockholders  of Walden but will not  receive  any of the  purchase  price.  The
Company  recorded  a  charge  of  approximately  $2,150,000  in  fiscal  1996 in
connection  with this  transaction  for the purchase of in-process  research and
development  as the future  benefits from this  technology  will depend upon the
successful completion of certain clinical trials.

M.  Intercardia:

In February 1996,  Intercardia completed an initial public offering of 2,530,000
shares of  Intercardia  common stock at $15.00 per share  resulting in proceeds,
net of offering costs, of approximately $35,000,000 (the "Intercardia IPO"). The
Company  purchased  333,333  shares  of the  Intercardia  IPO for  approximately
$5,000,000.  The Company's  ownership of Intercardia's outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% as a
result of the Intercardia  IPO, without giving effect to exercise of options and
warrants.  In  certain  circumstances,  the  Company  has the right to  purchase
additional  shares of  Intercardia  common stock at fair market value to provide
that the Company's equity ownership in Intercardia does not fall below 51%. As a
result of the Intercardia IPO, Put Protection  Rights that could have caused the
Company  to issue in June 1998 up to  approximately  1,914,000  shares of Common
Stock expired.  As a result of the Intercardia IPO and the Company's purchase of
333,333  shares  thereof,  the Company  recognized a gain on its  investment  in
Intercardia of approximately  $16,350,000 which has been recorded as an increase
to the Company's Additional paid-in capital.



                                      F-18




                                   SIGNATURES

         Pursuant  to the  requirements  of  Section  13 of the  Securities  and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
   
                                      INTERNEURON PHARMACEUTICALS, INC.

Date:  December 19, 1996              By:  /s/ Glenn L. Cooper
                                           -------------------
                                           Glenn L. Cooper, M.D.,
                                           President and Chief Executive Officer