<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q
                                _______________

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended December 31, 1999

[ ] 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                                   04-3047911
(State or other jurisdiction of            (I.R.S. Employer Identification
incorporation or organization)             Number)

One Ledgemont Center, 99 Hayden Avenue     02421
Lexington, Massachusetts                   (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code (781) 861-8444

(Former name, former address and former fiscal year, if changed since last
report): Not Applicable

Indicate by check 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
            ------                            ------
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.

Class                                     Outstanding at February 11, 2000:
Common Stock $.001 par value              42,358,162 shares


<PAGE>

                       INTERNEURON PHARMACEUTICALS, INC.

                              INDEX TO FORM 10-Q



PART I. FINANCIAL INFORMATION                                               PAGE

Item 1. Financial Statements

Consolidated Balance Sheets as of December 31, 1999
  and September 30, 1999...................................................... 3

Consolidated Statements of Operations for the Three Months
  ended December 31, 1999 and 1998............................................ 4

Consolidated Statements of Cash Flows for the Three Months
  ended December 31, 1999 and 1998............................................ 5

Notes to Unaudited Consolidated Financial Statements.......................... 6

Item 2. Management's Discussion and Analysis of Financial
  Condition and Results of Operations.........................................10

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings....................................................16

Item 6.  Exhibits and Reports on Form 8-K.....................................19

SIGNATURES....................................................................20

                                       2
<PAGE>

Item 1.  Financial Statements

                       INTERNEURON PHARMACEUTICALS, INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
                   (Amounts in thousands except share data)
<TABLE>
<CAPTION>
                                                                                  December 31,  September 30,
                                                                                       1999          1999
                                                                                   -----------   ------------

                                                                ASSETS
        <S>                                                                         <C>           <C>
        Current assets:
           Cash and cash equivalents                                                $   36,963    $   19,354
           Marketable securities                                                         3,482         2,457
           Accounts receivable                                                           1,724           785
           Prepaids and other current assets                                             1,779         1,812
                                                                                    ----------    ----------
             Total current assets                                                       43,948        24,408

        Investment in unconsolidated subsidiary                                          2,064         1,827
        Property and equipment, net                                                        344           403
                                                                                    ----------    ----------
                                                                                    $   46,356    $   26,638
                                                                                    ==========    ==========

                                                              LIABILITIES

        Current liabilities:
           Accounts payable                                                         $      175    $      157
           Accrued expenses                                                             19,226        20,100
           Deferred revenue                                                              3,000            --
           Current portion of capital lease obligations                                     49            68
                                                                                    ----------    ----------
                 Total current liabilities                                              22,450        20,325

        Long-term portion of capital lease obligations                                      --             2

        Minority interest                                                                  189           189

                                                         STOCKHOLDERS' EQUITY

        Preferred stock; $.001 par value, 5,000,000 shares authorized;
           Series B, 239,425 shares issued and outstanding (liquidation
           preference at December 31, 1999 $3,034)                                       3,000         3,000
           Series C, 5,000 shares issued and outstanding at (liquidation
            preference at December 31, 1999 $503)                                          500           500
        Common stock; $.001 par value, 80,000,000 shares authorized;
           42,097,262 and 42,019,426 shares issued and outstanding
           at December 31, 1999 and September 30, 1999, respectively                        42            42
        Additional paid-in capital                                                     272,834       272,337
        Accumulated deficit                                                           (252,899)     (269,758)
        Accumulated other comprehensive income                                             240             1
                                                                                    ----------    ----------
           Total stockholders' equity                                                   23,717         6,122
                                                                                    ----------    ----------
                                                                                    $   46,356    $   26,638
                                                                                    ==========    ==========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.

                                       3
<PAGE>

                       INTERNEURON PHARMACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             For the three months ended December 31, 1999 and 1998
                                  (Unaudited)
                 (Amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                                          Three months ended December 31,
                                                                        ---------------------------------
                                                                           1999                    1998
                                                                        -----------             ---------
       <S>                                                              <C>                     <C>

       Contract and license fee revenues                                $    23,751             $     691

       Costs and expenses:
       Cost of revenues                                                       2,050                    --
       Research and development                                               2,660                11,653
       Selling, general and administrative                                    2,473                 3,245
                                                                        -----------             ---------
             Total costs and expenses                                         7,183                14,898
                                                                        -----------             ---------

       Income (loss) from operations                                         16,568              (14,207)

       Investment income, net                                                   291                   777
       Minority interest                                                         --                 2,345
                                                                        -----------             ---------

       Net income (loss)                                                $    16,859             $(11,085)
                                                                        ===========             ========
       Net income (loss) per common share - basic and diluted:
       Net income (loss) per common share - basic                       $      0.40             $  (0.27)
       Net income (loss) per common share - diluted                     $      0.39             $  (0.27)

       Weighted average shares outstanding - basic                           42,031               41,817
                                                                        ===========             ========
       Weighted average shares outstanding - diluted                         43,345               41,817
                                                                        ===========             ========
</TABLE>

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

                                       4
<PAGE>

                       INTERNEURON PHARMACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the three months ended December 31, 1999 and 1998
                                  (Unaudited)
                            (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                                     Three months ended
                                                                                   -----------------------
                                                                                        December 31,
                                                                                  ------------------------
                                                                                      1999         1998
                                                                                   ---------    ----------
      <S>                                                                          <C>          <C>
      Cash flows from operating activities
         Net income (loss)                                                         $  16,859    $  (11,085)
         Adjustments to reconcile net income (loss) to net cash provided
              (used) by operating activities:
              Depreciation and amortization                                               59           290
              Minority interest in net loss of consolidated subsidiaries                  --        (2,345)
              Noncash compensation                                                       506         1,463
         Change in assets and liabilities:
              Accounts receivable                                                        (939)         830
              Prepaid and other assets                                                    33          (772)
              Accounts payable                                                            18           249
              Deferred revenue                                                         3,000            --
              Accrued expenses and other liabilities                                    (883)       (1,246)
                                                                                   ---------    ----------

         Net cash provided (used) by operating activities                             18,653       (12,616)
                                                                                   ---------    ----------

      Cash flows from investing activities:
         Capital expenditures                                                             --          (265)
         Purchase of marketable securities                                            (4,915)       (2,520)
         Proceeds from maturities and sales of marketable securities                   3,892         8,471
                                                                                   ---------    ----------
      Net cash (used) provided by investing activities                                (1,023)        5,686
                                                                                   ---------    ----------

      Cash flows from financing activities:
         Net proceeds from issuance of stock by subsidiaries                              --            49
         Principal payments of capital lease obligations                                 (21)          (91)
         Principal payments of notes payable                                              --           (33)
                                                                                   ---------    ----------
      Net cash (used) by financing activities                                            (21)          (75)
                                                                                   ---------    ----------

      Net change in cash and cash equivalents                                         17,609        (7,005)
      Cash and cash equivalents at beginning of period                                19,354        39,330
                                                                                   ---------    ----------

      Cash and cash equivalents at end of period                                   $  36,963     $  32,325
                                                                                   =========    ==========
</TABLE>


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

                                       5
<PAGE>

              INTERNEURON PHARMACEUTICALS, INC. AND SUBSIDIARIES

             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


A.  BASIS OF PRESENTATION
    ---------------------

     The consolidated financial statements included herein have been prepared by
Interneuron Pharmaceuticals, Inc. ("Interneuron" or the "Company) without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company. The unaudited consolidated
financial statements included herein should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Form 10-K for the fiscal year ended September 30, 1999.

     Interneuron is a biopharmaceutical company engaged in the development and
commercialization of a portfolio of products and product candidates primarily
for central nervous system and other disorders.

B.  BASIC AND DILUTED INCOME (LOSS) PER SHARE
    -----------------------------------------

The following table sets forth the computation of basic and diluted income
(loss) per share:

<TABLE>
<CAPTION>
                                                                     Three Months  Ended December 31,
                                                                     ----------------------------------
                                                                        1999                   1998
                                                                     ------------          ------------
<S>                                                               <C>                   <C>
               Numerator for basic and diluted income (loss)
                 per share:
                   Net income(loss)                                  $ 16,859,000          $(11,085,000)
                                                                     ============          ============
               Denominator for basic income (loss) per share:
                   Weighted average shares outstanding - basic         42,031,000            41,817,000
                                                                     ============          ============

               Denominator for diluted income (loss)
                 per share:
                   Weighted average shares outstanding                 42,031,000            41,817,000
                   Dilutive effect of:
                    Shares issuable in connection with
                      stock option plans                                   39,000                    --
                    Shares issuable in connection with
                      restricted stock awards                             653,000                    --
                    Shares issuable in connection with
                      convertible preferred stock                         622,000                    --
                                                                     ------------          ------------
                   Weighted average shares outstanding - diluted       43,345,000            41,817,000
                                                                     ============          ============

               Net income (loss) per common share - basic                   $0.40                $(0.27)
                                                                     ============          ============

               Net income (loss) per common share - diluted                 $0.39                $(0.27)
                                                                     ============          ============

</TABLE>


                                       6
<PAGE>

      During the three month period ended December 31, 1999, securities not
included in the computation of diluted earnings per share, because their
exercise price exceeded the average market price during the period were as
follows: (i) options to purchase 6,405,084 shares of Common Stock at prices
ranging from $3.13 to $20.13 with expiration dates ranging up to March 17, 2009;
(ii) warrants to purchase 812,500 shares of Common Stock with exercise prices
ranging from $5.00 to $12.77 and with expiration dates ranging up to July 17,
2006; and (iii) call options sold by the Company for 2,000,000 shares of Common
Stock with an exercise price of $36.00 and expiration dates ranging to December
31, 1999.

       During the three month period ended December 31, 1998, securities not
included in the computation of diluted earnings per share, because their
exercise price exceeded the average market price during the period were as
follows: (i) options to purchase 6,314,508 shares of Common Stock at prices
ranging from $3.56 to $20.13 with expiration dates ranging up to March 3, 2008;
(ii) warrants to purchase 812,500 shares of Common Stock with exercise prices
ranging from $5.00 to $12.77 and with expiration dates ranging up to July 17,
2006; and (iii) call options sold by the Company for 2,000,000 shares of Common
Stock with an exercise price of $36.00 and expiration dates ranging up to
December 31, 1999. Additionally, during the three month period ended December
31, 1998, securities not included in the computation of diluted earnings per
share, because they would have an antidilutive effect due to the net loss for
the period, were as follows: (i) options to purchase 17,400 shares of Common
Stock at prices ranging from $0.83 to $3.13 with expiration dates ranging up to
August 3, 2005; (ii) Series B and C preferred stock convertible into 622,222
shares of Common Stock; and (iii) unvested Restricted Stock Awards to acquire
725,146 shares of Common Stock granted pursuant to the Company's 1997 Equity
Incentive Plan.

         Certain of the securities listed above contain anti-dilution
provisions.

C.  COMPREHENSIVE INCOME
    --------------------

Comprehensive income (loss) for the three month periods ended December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
                                                        1999                        1998
                                                     -----------                ------------
         <S>                                         <C>                        <C>
         Net income (loss)                           $16,859,000                $(11,085,000)
         Change in unrealized net gain on
            marketable securities                        239,000                     (21,000)
                                                     -----------                ------------
         Comprehensive income (loss)                 $17,098,000                $(11,106,000)
                                                     ===========                ============
</TABLE>
D. WITHDRAWAL OF REDUX(TM), LEGAL PROCEEDINGS, AND RELATED CONTINGENCIES
   ---------------------------------------------------------------------

     On September 27, 1999, the Company announced that the U.S. District Court
for the Eastern District of Pennsylvania (the "District Court") rejected a
proposed agreement among the Company and the Plaintiffs' Management Committee
("PMC") to settle all product liability litigation and claims against the
Company related to Redux. The District Court found that the proposed settlement
did not meet the requirements for limited fund class actions, as described by
the Supreme Court in its June 23, 1999 decision in Ortiz v. Fibreboard Corp.
                                                   ------------------------
("Ortiz"). The District Court also vacated the stays of pending and future
litigation that were previously in effect. The Company filed a petition with the
U.S. Court of Appeals for the Third Circuit on October 12, 1999, seeking review
of the District Court's ruling. That petition is still pending.

                                       7
<PAGE>

     Interneuron is named, together with other pharmaceutical companies, as a
defendant in approximately 2,160 product liability legal actions, many of which
purport to be class actions, in federal and state courts involving the use of
Redux and other weight loss drugs. As a result of the District Court's rejection
of the proposed settlement agreement, the ongoing Redux-related litigation is
proceeding against the Company. The existence of such litigation, including the
time and expenses associated with the litigation, may materially adversely
affect the Company's business, including its ability to obtain sufficient
financing to fund operations. Although the Company is unable to predict its
expense, or the outcome of, any such litigation, such outcome may materially
adversely affect the Company's future business, results of operations and
financial condition.

     On November 20, 1998, December 30, 1998 and February 5, 1999, the Company's
three product liability insurers filed interpleader actions against Les
Laboratoires Servier ("Servier") and the Company in the District Court.
Insurance policies issued by the insurers to the Company have an aggregate limit
of $40,000,000 in three tiers: a primary level of $20,000,000, then $5,000,000
in excess of $20,000,000 and a third tier of $15,000,000 in excess of
$25,000,000. The insurers allege that both the Company and Servier have asserted
claims against these policies, a substantial portion of which has been used in
the Company's defense of the litigation. The insurers have deposited the
available proceeds up to the limits of their policies, which is subject to
ongoing claims by the Company and Servier, into the registry of the District
Court.

     On November 23, 1999, the District Court preliminarily approved a proposed
nationwide settlement of American Home Products Corp.'s ("AHP") product
liability litigation related to Redux and Pondimin. The Company is not a
released party under this settlement.

     On January 24, 2000, the Company announced it has filed a complaint against
AHP in the Superior Court of the Commonwealth of Massachusetts. The complaint
seeks unspecified but substantial damages and attorney's fees pursuant to
Massachusetts law for AHP's knowing and willful deceptive acts and practices,
fraud and misrepresentations. AHP has not filed an answer to such complaint and
the Company cannot predict its costs relative to this litigation or the duration
or the outcome of the proceedings.

     The Company and certain present or former directors and/or officers of the
Company were named as defendants in several lawsuits filed by alleged purchasers
of the Company's Common Stock purporting to be class actions, claiming violation
of the federal securities laws. On February 2, 2000, the Massachusetts Federal
Court entered an Order of Final Settlement Approval and Final Judgment of
Dismissal, which, among other things, granted final judgment to and an approval
of the settlement of the lawsuits on a class-wide basis, covering a class period
of March 24, 1997 to July 8, 1997. The settlement is for a de minimus amount
and will be entirely funded by insurance proceeds.

E.   AGREEMENTS

     In November 1999, the Company licensed exclusive U.S. rights from Madaus AG
("Madaus") to develop and market trospium, an orally administered prescription
drug product currently marketed as a treatment for overactive bladder in several
European countries. In exchange, the Company has agreed to pay Madaus regulatory
milestone, royalty and sales milestone payments. The Company will be responsible
for all clinical development and regulatory activities and costs related to the
compound in the U.S.

     In December 1999, the Company entered into an agreement with Takeda
Chemical Industries, Ltd. ("Takeda") under which the Company licensed to Takeda
exclusive U.S. and Canadian commericalization rights to citicoline (the "Takeda
Agreement") in exchange for $13,000,000 in licensing and other guaranteed
payments, of which approximately $11,500,000 has been received to date, up to
$60,000,000 in payments

                                       8
<PAGE>

contingent upon the achievement of future regulatory milestones in the U.S. and
Canada, and royalties on net sales. Takeda also agreed to fulfill the royalty
payment obligations of Interneuron to Ferrer Internacional, S.A. ("Ferrer"),
pursuant to Interneuron's agreement with Ferrer, and to fund any future Phase 4
studies of citicoline in stroke and Phase 3 studies for additional indications.
The Takeda Agreement also provides an option to Takeda to negotiate a license
for any one alternative Interneuron compound, excluding pagoclone, in the event
Takeda decides to terminate the citicoline license following a review of the
results of the 899-person Phase 3 clinical trial. In the three months ended
December 31, 1999, the Company recognized $10,000,000 of the Takeda payments as
license fee revenue and $3,000,000 related to the technology option as deferred
revenue.

     In December 1999, the Company entered into an agreement with Warner-Lambert
Company ("Warner-Lambert"), under which it licensed to Warner-Lambert exclusive
worldwide rights to commercialize pagoclone (the "Warner-Lambert Agreement").
Under the Warner-Lambert Agreement, the Company received $13,750,000 recognized
as license fee revenue, and is entitled to receive up to $60,000,000 in
additional payments contingent upon the achievement of clinical and regulatory
milestones. Warner-Lambert also agreed to pay Interneuron royalties on net
sales. Under the Warner-Lambert Agreement, Warner-Lambert would be responsible
for conducting and funding all further clinical development, regulatory review,
manufacturing and marketing of pagoclone for all indications on a worldwide
basis. Under the Company's agreement with Rhone-Poulenc Rorer ("RPR"), RPR is
entitled to receive approximately $2,050,000 of the payment received by the
Company from Warner-Lambert which was reflected as cost of revenue and a
liability in the three months ended December 31, 1999.

F.   OTHER:
     -----

     Call options held by Swiss Bank Corporation, London Branch for the purchase
of 1,000,000 shares of the Company's Common Stock at an exercise price of $36.00
per share on each of December 30 and 31, 1999 expired without exercise.

                                       9
<PAGE>

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
         ----------------------------------------------------------------
         RESULTS OF OPERATIONS:
         ---------------------

     Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by the Company or its representatives include, without
limitation, statements regarding the Redux-related litigation, the Company's
ability to successfully develop, obtain regulatory approval for and
commercialize any products, to enter into corporate collaborations or obtain
sufficient additional capital to fund operations, and are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements as they involve risks and uncertainties, and actual results
could differ materially from those currently anticipated due to a number of
factors, including those set forth under "Risk Factors" and elsewhere in, or
incorporated by reference into, the Company's Form 10-K for its fiscal year
ended September 30, 1999. These risk factors include, but are not limited to,
risks relating to the Redux-related litigation by and against the Company,
uncertainties relating to clinical trials, regulatory approval and
commercialization of any products; need for additional funds and corporate
partners; substantial losses from operations and expected future losses; minimal
revenues; product liability; dependence on third parties for manufacturing and
marketing; competition; government regulation; contractual arrangements; patents
and proprietary rights; dependence on key personnel; uncertainty regarding
pharmaceutical pricing and reimbursement and other risks. The forward-looking
statements represent the Company's judgment and expectations as of the date of
this Report. The Company assumes no obligation to update any such forward-
looking statements.

   The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this report and audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999. Unless the context indicates otherwise, all references
to the Company include Interneuron and its subsidiaries.

GENERAL
-------

Redux

     On September 27, 1999, the Company announced that the U.S. District Court
for the Eastern District of Pennsylvania (the "District Court") rejected a
proposed agreement among the Company and the Plaintiffs' Management Committee
("PMC") to settle all product liability litigation and claims against the
Company related to Redux. The District Court found that the proposed settlement
did not meet the requirements for limited fund class actions, as described by
the Supreme Court in its June 23, 1999 decision in Ortiz v. Fibreboard Corp.
("Ortiz"). The District Court also vacated the stays of pending and future
litigation that were previously in effect. The Company filed a petition with the
U.S. Court of Appeals for the Third Circuit on October 12, 1999, seeking review
of the District Court's ruling. That petition is still pending.

     Interneuron is named, together with other pharmaceutical companies, as a
defendant in approximately 2,160 product liability legal actions, many of which
purport to be class actions, in federal and state courts

                                      10
<PAGE>

involving the use of Redux and other weight loss drugs. As a result of the
District Court's rejection of the proposed settlement agreement, the ongoing
Redux-related litigation is proceeding against the Company. The existence of
such litigation, including the time and expenses associated with the
litigation, may materially adversely affect the Company's business, including
its ability to obtain sufficient financing to fund operations. Although the
Company is unable to predict the outcome of any such litigation, such outcome
may materially adversely affect the Company's future business, results of
operations and financial condition.

     On November 20, 1998, December 30, 1998 and February 5, 1999, the Company's
three product liability insurers filed interpleader actions against Les
Laboratoires Servier ("Servier") and the Company in the District Court.
Insurance policies issued by the insurers to the Company have an aggregate limit
of $40,000,000 in three tiers: a primary level of $20,000,000, then $5,000,000
in excess of $20,000,000 and a third tier of $15,000,000 in excess of
$25,000,000. The insurers allege that both the Company and Servier have asserted
claims against these policies, a substantial portion of which has been used in
the Company's defense of the litigation. The insurers have deposited the
available proceeds up to the limits of their policies, which is subject to
ongoing claims by the Company and Servier, into the registry of the District
Court.

     On November 23, 1999, the District Court preliminarily approved a proposed
nationwide settlement of American Home Products Corp.'s ("AHP") product
liability litigation related to Redux and Pondimin. The Company is not a
released party under this settlement.

     On January 24, 2000, the Company announced it has filed a complaint against
AHP in the Superior Court of the Commonwealth of Massachusetts. The complaint
seeks unspecified and substantial damages and attorney's fees pursuant to
Massachusetts law for AHP's knowing and willful deceptive acts and practices,
fraud and misrepresentations. AHP has not filed an answer to such complaint and
the Company cannot predict its costs relative to this complaint or the duration
or the outcome of the proceedings.

     The Company and certain present or former directors and/or officers of the
Company were named as defendants in several lawsuits filed by alleged purchasers
of the Company's Common Stock purporting to be class actions, claiming violation
of the federal securities laws. On February 2, 2000, the Massachusetts Federal
Court entered an Order of Final Settlement Approval and Final Judgment of
Dismissal, which, among other things, granted final judgment to and an approval
of the settlement of the lawsuits on a class-wide basis, covering a class period
of March 24, 1997 to July 8, 1997. The settlement is for a de minimus amount and
will be entirely funded by insurance proceeds.

     Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to devote significant
management time and resources to these legal actions and, in the event of
successful uninsured or insufficiently insured claims, or in the event a
successful indemnification claim were made against the Company, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, the uncertainties and costs associated with
these legal actions have had, and may continue to have, an adverse effect on the
market price of the Company's Common Stock and on the Company's ability to
obtain additional financing to satisfy cash requirements, to retain and attract
qualified personnel, to develop and commercialize products on a timely and
adequate basis, to acquire or obtain rights to additional products, to enter
into certain corporate partnerships, or to obtain product liability insurance
for other products at costs acceptable to the Company, or at all, any or all of
which may adversely affect the Company's business and financial condition.

                                      11
<PAGE>

Citicoline

     In December 1999, the Company entered into the Takeda Agreement under which
the Company licensed to Takeda exclusive U.S. and Canadian commercialization
rights to citicoline in exchange for $13,000,000 in licensing and other
guaranteed payments, of which approximately $11,500,000 has been received to
date, up to $60,000,000 in payments contingent upon the achievement of future
regulatory milestones in the U.S. and Canada, and royalties on net sales. Takeda
also agreed to fulfill the royalty payment obligations of Interneuron to Ferrer,
pursuant to Interneuron's agreement with Ferrer, and to fund any future Phase 4
studies of citicoline in stroke and Phase 3 studies for additional indications.

     On January 10, 2000 the Company announced that a preliminary analysis of
the 899-patient Phase 3 clinical trial with citicoline failed to meet its
primary endpoint, a measure of improvement in neurological function among
patients suffering from moderate to severe ischemic stroke. The pre-specified,
primary outcome measurement of the trial was the comparison of the percentages
of patients treated with citicoline or placebo who achieved at least a 7-point
improvement on the national Institutes of Health Stroke Scale ("NIHSS") scores
from enrollment through the combined 12-week treatment and follow-up period.
Secondary outcomes included additional comparisons of neurological function and
infarct volume measurements among citicoline and placebo patients at the end of
the study.

     Although improvement in the primary outcome measurement was not achieved,
certain secondary endpoints were positive. At the end of the 12-week trial
period, a statistically significantly higher proportion of citicoline-treated
patients achieved complete or near-complete recovery of neurological function
compared to placebo-treated patients, as measured by the Rankin Scale. Likewise,
at the same time point, NIHSS scores indicated a strongly positive trend in the
number of citicoline-treated patients who achieved full neurological recovery.
Although not statistically significant, a higher percentage of citicoline-
treated patients achieved reduction in the size of their cerebral infarct
compared to placebo-treated patients. In addition, preliminary review of
findings from this study indicates that there were no significant adverse safety
issues associated with citicoline.

     The Takeda Agreement also provides an exclusive option to Takeda to
negotiate a license for any one alternative Interneuron compound, excluding
pagoclone, in the event Takeda decides to terminate the citicoline license
following a review of the results of the 899-person Phase 3 clinical trial.
Takeda has until April 30, 2000, or later if the Company does not provide Takeda
with reports from certain of its clinical studies, to exercise its option and
ten months from the date of exercise of the option to negotiate the license for
the chosen compound. In the event Takeda and the Company are unable to negotiate
a license agreement by the end of such ten-month period, there will be an
additional six month period during which the Company must provide Takeda with a
right of first refusal for any licensing arrangement the Company may wish to
offer a third party. If Takeda exercises its option, all rights to citicoline
will be returned to the Company.

     In the three month period ended December 31, 1999, the Company recognized
$10,000,000 as license fee revenue from Takeda and $3,000,000 related to the
option as deferred revenue.

Pagoclone

    In December 1999, the Company entered into the Warner-Lambert Agreement,
under which it licensed to Warner-Lambert exclusive worldwide rights to develop
and commercialize pagoclone. Under the Warner-Lambert Agreement, the Company
received $13,750,000 in December 1999 and is entitled to received up to

                                      12
<PAGE>

$60,000,000 in additional payments contingent upon the achievement of clinical
and regulatory milestones. Warner-Lambert also agreed to pay Interneuron
royalties on net sales. Under the Warner-Lambert Agreement, Warner-Lambert would
be responsible for conducting and funding all further clinical development,
regulatory review, manufacturing and marketing of pagoclone for all indications
on a worldwide basis. Under the Company's agreement with RPR, RPR is entitled to
receive a portion of the payments to be received by the Company from Warner-
Lambert. In the three months ended December 31, 1999, the Company recognized
$13,750,000 received from Warner-Lambert in December 1999 as contract and
license fee revenue and $2,050,000 paid to RPR in January 2000 from the initial
payment as cost of revenue.

Trospium

     In November 1999, the Company licensed exclusive U.S. rights from Madaus to
trospium, an orally administered prescription drug product for treatment for
overactive bladder in several European countries. In exchange the Company has
agreed to pay Madaus regulatory milestone, royalty and sales milestone payments.
The Company will be responsible for all clinical development and regulatory
activities and costs related to the compound in the U.S. The Company currently
intends to file an IND in 2000. The Company does not have adequate current funds
to fully develop and market trospium and will require additional capital and/or
a collaborative partner for the development and marketing of trospium.


RESULTS OF OPERATIONS
---------------------

    For the three month period ended December 31, 1999, the Company had net
income of $16,859,000 compared to a net loss of $11,085,000 in the three month
period ended December 31, 1998. This substantial increase was the result of
$23,750,000 of contract and license fee revenue from the Takeda and Warner-
Lambert Agreements entered into in December 1999 and the absence in fiscal 2000
of the results of operations of Incara Pharmaceuticals Corp. ("Incara") which
resulted in a net loss in the three month period ended December 31, 1998. In
July 1999, the Company exchanged its majority position in Incara for a majority
position in CPEC LLC, after which the Company no longer consolidates the results
of Incara's operations. The Company expects the results of its consolidated
operations to result in losses for the balance of fiscal 2000.

    Revenues, consisting of contract and license fee revenue, increased
$23,060,000 to $23,751,000 in the three month period ended December 31, 1999
from $691,000 in the three month period ended December 31, 1998. Contract and
license fee revenue in fiscal 1999 consisted of $10,000,000 received from Takeda
pursuant to the Takeda Agreement and $13,750,000 received from Warner-Lambert
pursuant to the Warner-Lambert Agreement. Contract and license fee revenue in
fiscal 1998 consisted primarily of a milestone payment received by the Company
from Eli Lilly and Company ("Lilly") relating to the development of Lilly's
drug, Prozac(R) for the treatment of premenstrual syndrome.

    Cost of revenues of $2,050,000 in the three month period ended December 31,
1999 consists of the amount due to RPR from the initial payment received from
Warner-Lambert. This amount was paid in January 2000.

    Research and development expense decreased $8,993,000, or 77%, to $2,660,000
in the three month period ended December 31, 1999 from $11,653,000 in the three
month period ended December 31, 1998. This decrease was primarily due to the
absence in fiscal 2000 of Incara expenses. Also, the Company incurred less
expense related to citicoline due to the completion of the 899-person Phase 3
citicoline clinical trial in the first quarter of fiscal 2000 and reduced
expenses related to pagoclone as the Company curtailed pagoclone development
while pursuing a collaborative development and marketing partner.

                                      13
<PAGE>

    Selling, general and administrative expense decreased $772,000, or 24%, to
$2,473,000 in the three month period ended December 31, 1999 from $3,245,000 in
the three month period ended December 31, 1998. This decrease was primarily due
to the absence in fiscal 2000 of Incara expenses.

    Investment income decreased $486,000, or 63%, to $291,000 in the three month
period ended December 31, 1999 from $777,000 in the three month period ended
December 31, 1998 primarily due to lower balances of cash and marketable
securities resulting from funds used in Company operations and the absence in
fiscal 2000 of Incara investment income.

    Minority interest in fiscal 1999 was attributed to the consolidation of
Incara. As described above, Incara's results of operations are not consolidated
with the Company's in fiscal 2000.

    LIQUIDITY AND CAPITAL RESOURCES
    -------------------------------

    Cash, Cash Equivalents and Marketable Securities

    At December 31, 1999, the Company had consolidated cash, cash equivalents
and marketable securities of $40,445,000 compared to $21,811,000 at September
30, 1999. This increase is primarily due to approximately $25,250,000 received
from Takeda and Warner-Lambert pursuant to the Takeda and Warner-Lambert
Agreements less amounts used to fund operations in the three month period ended
December 31, 1999.

    While the Company believes it has sufficient cash for currently planned
expenditures through 2000 based on certain assumptions relating to operations
and other factors, excluding any settlements of the Redux-related litigation by
and against the Company, it will require additional funds after such time. The
Company is evaluating its ongoing business strategy, investigating other
potential business opportunities, and reducing its overhead and expenditures. In
February 2000, the Company reduced its workforce by 11 people to bring its
current number of employees to 24. The Company will require additional funds for
the development and commercialization of trospium and its other compounds and
technologies, as well as any new businesses, products or technologies acquired
or developed in the future. The Company has no commitments or arrangements to
obtain such funds. If such funds are not available, the Company will be required
to further reduce its operations and delay development and regulatory efforts.
As a result of the uncertainties and costs associated with the Redux-related
litigation, including the fact that no settlement agreements exist or are
pending and the stays of pending and future product liability litigation and
claims against the Company have been vacated by the court, market conditions and
other factors generally affecting the Company's ability to raise capital, there
can be no assurance that the Company will be able to obtain additional financing
to satisfy future cash requirements or that any financing will be available on
terms favorable or acceptable to the Company.


                                      14
<PAGE>

Product Development

    There can be no assurance that results of any on-going current or future
preclinical or clinical trials will be successful, that additional trials will
not be required, that any drug under development will receive FDA approval in a
timely manner or at all, or that such drug could be successfully manufactured in
accordance with cGMP or successfully marketed in a timely manner, or at all, or
that the Company will have sufficient funds to commercialize any of its
products, any of which events could materially adversely affect the Company.

    ANALYSIS OF CASH FLOWS
    ----------------------

    Cash provided by operating activities during the three months ended December
31, 1999 of $18,653,000 consisted primarily of net income of $16,859,000 and
$3,000,000 of deferred revenue related to cash received pursuant to the Takeda
Agreement.

    Cash used by investing activities of $1,023,000 during the three months
ended December 31, 1999 consisted of net proceeds from maturities and sales of
marketable securities.

    Included in accounts receivable and accrued expenses is approximately
$1,500,000 relating to obligations of the Company to vendors which supplied
services to the Company related to the 899-person citicoline phase 3 clinical
trial and which Takeda agreed to pay on behalf of the Company pursuant to the
Takeda Agreement. This amount will be reduced as Takeda makes such payments.

    OTHER
    -----

    Year 2000 Compliance:

    The Company's Year 2000 compliance programs were completed on time. The
Company's business has not been adversely affected due to the failure of key
third parties to successfully complete the Year 2000 conversion. Although there
can be no assurance that all of the Company's material third-party relationships
had successful conversion programs, management does not expect that any such
failure would have a material

                                      15
<PAGE>

adverse effect on the financial position, results of operations or liquidity of
the Company. The costs of the Company's Year 2000 program to date have not been
material, and the Company knows of no further required modifications to its
information technology or embedded technology systems that would have a material
impact on its financial position, results of operations or liquidity.

    Investment in Incara:

    In February 2000, the Company is due to receive its third and final
installment from Incara for the sale of Transcell Technologies, Inc. to Incara
in May 1998. The Company will receive Incara common stock valued at
approximately $1,600,000 as the final payment. As of December 31, 1999, the
Company owned approximately 6% of Incara's issued and outstanding shares of
common stock as reported on Incara's Form 10-Q for the three months ended
December 31, 1999.

         Other:

    In November 1998, pursuant to an agreement with Les Laboratoires Servier to
resolve a withholding tax issue on Redux-related payments to Servier, the
Company paid to the U.S. Internal Revenue Service approximately $1,700,000 for
withholding tax and interest. Servier agreed to reimburse the Company for a
portion of the withholding taxes upon Servier's receipt of a related tax refund
from the French tax authorities. The Company is unable to predict with certainty
whether or when this reimbursement will be obtained.

     Call options held by Swiss Bank Corporation, London Branch for the purchase
of 1,000,000 shares of the Company's Common Stock at an exercise price of $36.00
per share on each of December 30 and 31, 1999 expired without exercise.

    General

    The Company's current business strategy includes evaluation of various
technologies, product or company acquisitions, licensing and/or financing
opportunities and Interneuron engages from time to time in discussions relating
to such opportunities. The Company is evaluating and exploring new strategic
business opportunities which would result in a reallocation of management and
financial resources. Any such initiatives may involve the issuance of
securities, which would dilute existing stockholders, and/or financial
commitments for licensing fees and/or to fund product development or debt
financing, any of which may adversely affect the Company's consolidated
financial condition or results of operations. The Company's in-licensing
agreements generally require the Company to undertake general or specific
development efforts or risk the loss of the license and/or incur penalties.

    PART II - OTHER INFORMATION

    Item 1.       LEGAL PROCEEDINGS
                  -----------------

    PRODUCT LIABILITY lITIGATION: Subsequent to the market withdrawal of Redux
    ----------------------------
in September 1997, the Company has been named, together with other
pharmaceutical companies, as a defendant in approximately 2,160 legal actions,
many of which purport to be class actions, in federal and state courts relating
to the use of Redux. The actions generally have been brought by individuals in
their own right or on behalf of putative classes of persons who claim to have
suffered injury or who claim that they may suffer injury in the future due to
use of one or more weight loss drugs including Pondimin (fenfluramine),
phentermine and Redux.

                                      16
<PAGE>

Plaintiffs' allegations of liability are based on various theories of recovery,
including, but not limited to, product liability, strict liability, negligence,
various breaches of warranty, conspiracy, fraud, misrepresentation and deceit.
These lawsuits typically allege that the short or long-term use of Pondimin
and/or Redux, independently or in combination (including the combination of
Pondimin and phentermine popularly known as "fen-phen"), causes, among other
things, PPH, valvular heart disease and/or neurological dysfunction. In
addition, some lawsuits allege emotional distress caused by the purported
increased risk of injury in the future. Plaintiffs typically seek relief in the
form of monetary damages (including economic losses, medical care and monitoring
expenses, loss of earnings and earnings capacity, other compensatory damages and
punitive damages), generally in unspecified amounts, on behalf of the individual
or the class. In addition, some actions seeking class certification ask for
certain types of purportedly equitable relief, including, but not limited to,
declaratory judgments and the establishment of a research program or medical
surveillance fund. On December 10, 1997, the federal Judicial Panel on
Multidistrict Litigation issued an Order allowing for the transfer or potential
transfer of the federal actions to the Eastern District of Pennsylvania for
coordinated or consolidated pretrial proceedings.

    On September 25, 1998, the District Court preliminarily approved the
Settlement Agreement relating to a proposed settlement of all product liability
litigation and claims against Interneuron related to Redux, which was later
rejected by the District Court as described below. The District Court also
conditionally certified a limited fund class action and, thereafter, issued
stays halting all Redux product liability litigation against the Company,
pending and future, in federal and state courts. The District Court conducted a
fairness hearing in the second quarter of fiscal 1999 regarding the proposed
Settlement Agreement.

    The Settlement Agreement required Interneuron to deposit a total of
approximately $15,000,000 in three installments into a settlement fund. In
addition, the Settlement Agreement provided for Interneuron to cause all
remaining and available product liability insurance proceeds related to Redux to
be deposited into the settlement fund. Interneuron also agreed to make royalty
payments to the settlement fund, in the total amount of $55,000,000, based upon
revenues related to Interneuron products, over a seven year period commencing
after the settlement would have become final. If, at the end of that seven-year
period, the amount of royalty payments made by Interneuron were less than
$55,000,000, the settlement fund would be entitled to receive the number of
shares of Interneuron Common Stock equal to the unpaid balance divided by $7.49
per share, subject to adjustment in certain circumstances.

    Following a decision from the Supreme Court overturning a putative "limited
fund" class action settlement relating to asbestos litigation in Ortiz vs.
                                                                 --------
Fibreboard Corporation, the District Court, on September 27, 1999, rejected the
----------------------
Settlement Agreement, finding that it did not meet the requirements for limited
fund class actions described by the Supreme Court . The District Court also
vacated the stays of pending and future litigation that were previously in
effect. The Company filed a petition with the U.S. Court of Appeals for the
Third Circuit on October 12, 1999, seeking review of the District Court's
ruling. That petition is still pending.

    On November 23, 1999, the District Court preliminarily approved a proposed
nationwide settlement of AHP's product liability litigation related to Redux and
Pondimin. The Company is not a released party under this settlement.

    On January 24, 2000, the Company announced it has filed a complaint against
AHP in the Superior Court of the Commonwealth of Massachusetts. The complaint
seeks unspecified and substantial damages and attorney's fees pursuant to
Massachusetts law for AHP's knowing and willful deceptive acts and practices,
fraud and misrepresentations. AHP has not filed an answer to such complaint
and the
                                      17
<PAGE>

Company cannot predict its costs relative to this complaint, or the duration or
the outcome of the proceedings.

    INTERPLEADER LITIGATION: On November 20, 1998, December 30, 1998 and
    -----------------------
February 5, 1999, the Company's three product liability insurers filed
interpleader actions against Servier and the Company in the District Court,
pursuant to the federal interpleader statute. The aggregate limits of the three
commercial excess insurance policies issued by the insurers to the Company is
$40,000,000 in tiers of $20,000,000, $5,000,000 in excess of $20,000,000, and
$15,000,000 in excess of $25,000,000. The insurers allege that both the Company
and Servier have asserted claims against these policies, a substantial portion
of which has been used in the Company's defense of the litigation. The insurers
have deposited the available proceeds up to the limits of their policies, which
is subject to ongoing claims by the Company and Servier, into the registry of
the District Court.

    SECURITIES LITIGATION: The Company and certain present or former directors
    ---------------------
and/or officers of the Company were named as defendants in several lawsuits
filed by alleged purchasers of the Company's Common Stock purporting to be class
actions, claiming violation of the federal securities laws. On February 2, 2000,
the Massachusetts Federal Court entered an Order of Final Settlement Approval
and Final Judgment of Dismissal, which, among other things, granted final
judgment to and an approval of the settlement of the lawsuits on a class-wide
basis, covering a class period of March 24, 1997 to July 8, 1997. The settlement
is for a de minimus amount and will be entirely funded by insurance proceeds.

    GENERAL: Pursuant to agreements between the parties, under certain
    -------
circumstances, the Company may be required to indemnify Servier, Boehringer
Ingelheim Pharmaceuticals, Inc. and AHP, and the Company may be entitled to
indemnification by AHP, against certain claims, damages or liabilities incurred
in connection with Redux. The cross indemnification between the Company and AHP
generally relates to the activities and responsibilities of each company.

    Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to be required to
devote significant management time and resources to these legal actions. In the
absence of a settlement and in the event of successful uninsured or
insufficiently insured claims, or in the event a successful indemnification
claim were made against the Company, the Company's business, financial condition
and results of operations could be materially adversely affected. Even if a
settlement is reached, the terms of such settlement may include cash and/or the
issuance of the Company's securities, which may materially adversely affect the
Company's financial condition and results of operations and result in dilution
to the Company's stockholders. The uncertainties and costs associated with these
legal actions have had, and

                                      18
<PAGE>

may continue to have, an adverse effect on the market price of the Company's
Common Stock and on the Company's ability to obtain corporate collaborations or
additional financing to satisfy cash requirements, to retain and attract
qualified personnel, to develop and commercialize products on a timely and
adequate basis, to acquire rights to additional products, or to obtain product
liability insurance for other products at costs acceptable to the Company, or at
all, any or all of which may materially adversely affect the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Risk Factors--The
outcome of the Redux litigation could materially harm us" and Note G of Notes to
Consolidated Financial Statements.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

            (a)   Exhibits

                  10.116   License Agreement between Interneuron
                           Pharmaceuticals, Inc. and Warner-Lambert Company
                           effective as of December 23, 1999 (1)
                  27       Financial Data Schedule
                  -----------------------
                  (1)      Confidential treatment requested.

            (b)   Reports on Form 8-K

                  No reports on Form 8-K were filed by the Company during the
                  three month period ended December 31, 1999.

                                      19
<PAGE>

                                  SIGNATURES


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

                                  INTERNEURON PHARMACEUTICALS, INC.

Date: February 14, 2000           By: /s/ Glenn L. Cooper, M.D.
                                     ----------------------------------------
                                  Glenn L. Cooper, M.D., President, Chairman
                                  and Chief Executive Officer
                                  (Principal Executive Officer)



Date: February 14, 2000           By: /s/ Michael W. Rogers
                                     ----------------------------------------
                                  Michael W. Rogers, Executive Vice President,
                                  Chief Financial Officer and Treasurer
                                  (Principal Financial Officer)

Date: February 14, 2000           By: /s/ Dale Ritter
                                     ----------------------------------------
                                  Dale Ritter, Senior Vice President, Finance
                                  (Principal Accounting Officer)

                                      20