<PAGE>   1
                       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 quarter ended March 31, 1998

[ ]      TRANSACTION 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           02173
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 periods 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 May 14, 1998:
Common Stock $.001 par value                    41,706,050 shares

                                                            

<PAGE>   2







                        INTERNEURON PHARMACEUTICALS, INC.

                               INDEX TO FORM 10-Q
<TABLE>
<CAPTION>



PART I.  FINANCIAL INFORMATION                                                                     PAGE

<S>                                                                                                    <C>
Item 1.   Financial Statements

Consolidated Balance Sheets as of March 31, 1998
         and September 30, 1997........................................................................3

Consolidated Statements of Operations for the Three and Six Months
         ended March 31, 1998 and 1997.................................................................4

Consolidated Statements of Cash Flows for the Six Months ended
         March 31, 1998 and 1997.......................................................................5

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

Item 2.  Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................................11


PART II.  OTHER INFORMATION

Item 1. Legal Proceedings..............................................................................25

Item 4. Submission of Matters to a Vote of Security Holders............................................26

Item 5.  Other Information.............................................................................26

Item 6. Exhibits and Reports on Form 8-K...............................................................27

SIGNATURES.............................................................................................28

</TABLE>







                                        2

<PAGE>   3



                       INTERNEURON PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                    (Amounts in thousands except share data)
<TABLE>
<CAPTION>

                                                                                      March 31,        September 30,
                                                                                       1998                1997
                                                                                    -----------        ------------
                                                          ASSETS
<S>                                                                                    <C>                 <C>
Current assets:
     Cash and cash equivalents                                                         $ 27,782            $ 55,820
     Marketable securities                                                               60,774              64,549
     Accounts receivable                                                                  1,847               1,297
     Inventories                                                                          1,018                 735
     Prepaids and other current assets                                                    2,054               2,056
                                                                                    -----------        ------------
             Total current assets                                                        93,475             124,457

Marketable securities                                                                     8,584              19,683
Investment in unconsolidated subsidiary                                                   2,169               4,040
Property and equipment, net                                                               5,213               4,669
Other assets                                                                                 96                  81
                                                                                    -----------        ------------
                                                                                       $109,537            $152,930
                                                                                    ===========        ============

                                                        LIABILITIES

Current liabilities:
     Accounts payable                                                                  $  3,529            $  1,615
     Accrued expenses                                                                    29,527              39,153
     Deferred revenue                                                                       436                 750
     Current portion of notes payable and capital lease obligations                         689                 710
                                                                                    -----------        ------------
             Total current liabilities                                                   34,181              42,228

Long-term portion of notes payable and capital lease obligations                          1,508               1,734

Minority interest                                                                        11,749              12,959

Commitments and contingencies
                                                   STOCKHOLDERS' EQUITY

Preferred stock; $.001 par value, 5,000,000 shares authorized; Series B, 239,425
     shares issued and outstanding at March 31, 1998
     and September 30, 1997 (liquidation preference at March  31, 1998 $3,011)            3,000               3,000
     Series C, 5,000 shares issued and outstanding at March 31, 1998
     and September 30, 1997  (liquidation preference at March 31, 1998  $500)               500                 500
Common stock; $.001 par value, 80,000,000 shares authorized; 41,308,531 shares
     issued and outstanding at March 31, 1998 and 41,266,293
     shares issued at September 30, 1997                                                     41                  41
Additional paid-in capital                                                              263,071             255,693
Accumulated deficit                                                                    (204,535)           (162,034)
Unrealized net gain on marketable securities                                                 22                  85
Treasury stock; at cost, no shares at March 31, 1998 and 70,483 shares at
     September 30, 1997                                                                      -               (1,276)
                                                                                    -----------        -------------
     Total stockholders' equity                                                          62,099              96,009
                                                                                    -----------        ------------
                                                                                       $109,537            $152,930
                                                                                    ===========        ============
</TABLE>

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

                                        3

<PAGE>   4




                        INTERNEURON PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
           For the three and six months ended March 31, 1998 and 1997
                                   (Unaudited)
                  (Amounts in thousands except per share data)


<TABLE>
<CAPTION>


                                    FOR THE THREE MONTHS ENDED MARCH 31,       FOR THE SIX MONTHS ENDED MARCH 31,
                                    ------------------------------------       ----------------------------------

                                              1998             1997                        1998            1997
                                              ----             ----                        ----            ----

<S>                                     <C>               <C>                        <C>             <C>    
Revenues:
Product revenue                         $      683        $  17,477                  $    1,670      $   31,188
Contract and license fees                      673            2,297                       1,327           6,278
                                        -----------       ----------                 -----------     ----------
   Total revenues                            1,356           19,774                       2,997          37,466

Costs and expenses:
Cost of product revenue                        277           11,999                         669          21,903
Research and development                    11,807            9,966                      20,356          17,484
Selling, general and administrative         14,021            5,827                      26,862          11,344
Purchase of in-process research
  and development                                -            2,261                         500           2,261
                                        -----------       ----------                 -----------     -----------
     Total costs and expenses               26,105           30,053                      48,387          52,992

Net loss from operations                   (24,749)         (10,279)                    (45,390)        (15,526)

Investment income, net                       1,431            2,008                       3,236           4,597
Equity in net loss of unconsolidated
  subsidiary                                  (978)               -                      (1,871)              -
Minority interest                              929              421                       1,524             148
                                        -----------       ----------                 -----------     ----------

Net loss                                $  (23,367)         $(7,850)                 $  (42,501)       $(10,781)
                                        ===========         ========                 ===========     ===========

Net loss per common share - basic       $   ( 0.57)       $  ( 0.19)                 $    (1.03)     $    (0.26)
                                        ===========       ==========                 ===========     ===========

Net loss per common share - diluted     $   ( 0.57)       $  ( 0.19)                 $    (1.03)     $    (0.26)
                                        ===========       ==========                 ===========     ===========

Weighted average common
      shares outstanding                    41,282           41,098                      41,223          41,059
                                        ===========       ==========                 ===========     ===========

</TABLE>










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



                                        4

<PAGE>   5



                        INTERNEURON PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the six months ended March 31, 1998 and 1997
                                   (Unaudited)
                             (Amounts in thousands)

<TABLE>
<CAPTION>

                                                                   SIX MONTHS ENDED MARCH 31,
                                                                   -------------------------
                                                                     1998               1997
                                                                     ----               ----
<S>                                                               <C>                 <C>
Cash flows from operating activities:
     Net loss                                                     $(42,501)           $(10,781)
     Adjustments to reconcile net loss to net cash
          (used) by operating activities:
         Depreciation and amortization                                 844                 646
         Minority interest in net income/loss of
            consolidated subsidiaries                               (1,524)               (148)
         Purchase of in-process research and development                 -               1,861
         Noncash compensation                                        8,380                 176
         Equity in net loss of unconsolidated subsidiary             1,871                   -
     Change in assets and liabilities:
         Accounts receivable                                          (550)              2,412
         Prepaid and other assets                                      (13)             (4,699)
         Inventories                                                  (283)              2,020
         Accounts payable                                            1,913                (326)
         Deferred revenue                                             (314)             (1,227)
         Accrued expenses and other liabilities                     (9,434)              4,452
                                                                  ---------           ---------
Net cash (used) by operating activities                            (41,611)             (5,614)
                                                                  ---------           ---------

Cash flows from investing activities:
     Capital expenditures                                           (1,230)               (726)
     Purchase of marketable securities                             (19,830)            (53,600)
     Proceeds from maturities and sales of
        marketable securities                                       34,641              10,143
     Purchase of Intercardia stock                                       -              (2,436)
                                                                  ---------           ---------
Net cash provided (used) by investing activities                    13,581             (46,619)
                                                                  ---------           ---------

Cash flows from financing activities:
     Net proceeds from issuance of common and treasury stock           222               1,101
     Net proceeds from issuance of stock by subsidiaries               175                 276
     Purchases of treasury stock                                         -              (2,315)
     Proceeds from sale/leaseback transactions                           -               1,050
     Principal payments of capital lease obligations                  (366)               (366)
     Principal payments of notes payable                               (39)                  -
                                                                  ---------           ---------
Net cash (used) by financing activities                                 (8)               (254)
                                                                  ---------           ---------

Net change in cash and cash equivalents                            (28,038)            (52,487)
Cash and cash equivalents at beginning of period                    55,820             145,901
                                                                  ---------           ---------

Cash and cash equivalents at end of period                        $ 27,782            $ 93,414
                                                                  =========           =========
</TABLE>

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



                                        5

<PAGE>   6







               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. 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, 1997.

     The consolidated  financial  statements include the accounts of Interneuron
Pharmaceuticals,  Inc.  ("Interneuron" or the "Company") and its  majority-owned
subsidiaries,  Transcell  Technologies,  Inc. ("Transcell"),  Intercardia,  Inc.
("Intercardia"),  and  InterNutria,  Inc.  ("InterNutria")  and, for the periods
ended March 31, 1997,  Progenitor,  Inc.  ("Progenitor")  (the  "Subsidiaries").
Progenitor,  which as of August 1997 is less than  majority but greater than 20%
owned,  is accounted for using the equity  method of accounting  for all periods
subsequent  to  August  1997.  On May 8,  1998,  the  merger of  Transcell  into
Intercardia  was completed (see Note F). All significant  intercompany  activity
has been eliminated.

B.   SIGNIFICANT ACCOUNTING POLICIES

SFAS 128:

     In Fiscal 1998, the Company adopted Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
All earnings per share amounts for all periods have been presented to conform to
SFAS No. 128 requirements. There was no effect on the earnings per share
disclosures as a result of adoption of SFAS No. 128 due to the antidilutive
effect of the Company's outstanding options, warrants and convertible
securities.

The following table sets forth the computation of basic and diluted earnings per
share:

                                        6

<PAGE>   7
<TABLE>
<CAPTION>



                                          FOR THE THREE MONTHS ENDED MARCH 31,       FOR THE SIX MONTHS ENDED MARCH 31,
                                           1998                    1997               1998                        1997
                                           ----                    ----               ----                        ----
<S>                                     <C>                    <C>                 <C>                       <C>
Numerator for basic and diluted:
     Net loss                           ($23,367,000)          ($7,850,000)        ($42,501,000)             ($10,781,000)
                                        =============          ============        =============             =============

Denominator for basic and diluted:
     weighted average shares
     outstanding                          41,282,000            41,098,000           41,223,000                41,059,000
                                        =============          ============        =============             =============

Net loss per common share - basic             ($0.57)               ($0.19)              ($1.03)                   ($0.26)
                                        =============          ============        =============             =============

Net loss per common share - diluted           ($0.57)               ($0.19)              ($1.03)                   ($0.26)
                                        =============          ============        =============             =============
</TABLE>


     During the three month period ended March 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 4,878,032 shares of Common Stock at prices ranging from $9.50 to
$32.00 with expiration dates ranging up to January 21, 2008; (ii) warrants to
purchase 667,500 shares of Common Stock with exercise prices ranging from $10.00
to $23.25 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 March 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 2,296,017 shares of Common Stock at prices ranging from
$0.83 to $8.75 with expiration dates ranging up to March 3, 2008; (ii) warrants
to purchase 186,157 shares of Common Stock with exercise prices ranging from
$2.75 to $9.00 and with expiration dates ranging up to February 3, 2005; (iii)
Series B and C preferred stock convertible into 622,222 shares of Common Stock;
and (iv) unvested Restricted Stock Awards of 1,328,704 shares of Common Stock
granted pursuant to the Company's 1997 Equity Incentive Plan.

     During the three month period ended March 31, 1997, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period, were options to purchase
350,200 shares of Common Stock at prices ranging from $27.88 to $32.00 with
expiration dates ranging up to March 6, 2007. Additionally, during the three
month period ended March 31, 1997, 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
4,758,474 shares of Common Stock at prices ranging from $0.83 to $26.00 with
expiration dates ranging up to March 24, 2007; (ii) warrants to purchase 882,407
shares of Common Stock with exercise prices ranging from $2.75 to $23.25 and
with expiration dates ranging up to July 17, 2006; and (iii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock.


                                        7

<PAGE>   8



     During the six month period ended March 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 4,211,325 shares of Common Stock at prices ranging from $10.50 to
$32.00 with expiration dates ranging up to January 21, 2008; (ii) warrants to
purchase 167,500 shares of Common Stock with exercise prices ranging from $12.77
to $23.25 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 six month period ended March 31, 1998, securities not
included in the computation of diluted earnings per share, because they would
have an anti-dilutive effect due to the net loss for the period, were as
follows: (i) options to purchase 2,962,724 shares of Common Stock at prices
ranging from $0.83 to $10.00 with expiration dates ranging up to March 3, 2008;
(ii) warrants to purchase 686,157 shares of Common Stock with exercise prices
ranging from $2.75 to $10.00 and with expiration dates ranging up to February 3,
2005; (iii) Series B and C preferred stock convertible into 622,222 shares of
Common Stock; and (iv) unvested Restricted Stock Awards of 1,328,704 shares of
Common Stock granted pursuant to the Company's 1997 Equity Incentive Plan.

     During the six month period ended March 31, 1997, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period, were options to purchase
351,700 shares of Common Stock at prices ranging from $26.00 to $32.00 with
expiration dates ranging up to March 6, 2007. Additionally, during the six month
period ended March 31, 1997, securities not included in the computation of
diluted earnings per share, because they would have an anti-dilutive effect due
to the net loss for the period were as follows: (i) options to purchase
4,756,974 shares of Common Stock at prices ranging from $.83 to $24.25 with
expiration dates ranging up to March 24, 2007; (ii) warrants to purchase 882,407
shares of Common Stock with exercise prices ranging from $2.75 to $23.25 and
with expiration dates ranging up to July 17, 2006; and (iii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock.

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

Redux(TM) Revenue:

     The Company's revenue recognition policy is to record and recognize as
product revenue royalties from licensed products when the amount of and basis
for such royalties are reported to the Company in accurate and appropriate form
and in accordance with the related license agreements. Due to the market
withdrawal of Redux(TM) in September 1997 and related events, the Company did
not receive any royalties relating to the sales of Redux for any period
commencing July 1, 1997 and the Company did not record product revenue relating
to Redux thereafter.

Recent Accounting Pronouncements:

     The  Company  will adopt SFAS No.  130,  "Reporting  Comprehensive  Income"
("SFAS No. 130"),  in the fiscal year ending  September  30, 1999.  SFAS No. 130
establishes  standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management has
not determined the effect of adopting SFAS No. 130.

                                        8

<PAGE>   9



     The Company  will adopt SFAS No.  131,  "Disclosures  about  Segments of an
Enterprise and Related  Information" ("SFAS No. 131"), in the fiscal year ending
September 30, 1999. SFAS No. 131 specifies revised guidelines for determining an
entity's operating  segments and the type and level of financial  information to
be disclosed. Management has not determined the effect of adopting SFAS No. 131.


C.  INVENTORIES

     Inventories consisted of the following:      March 31,        September 30,
                                                   1998               1997
                                                ----------         -------------

     Raw materials                               $207,000            $221,000
     Finished goods                               811,000             514,000
                                                ---------            --------
                                               $1,018,000            $735,000
                                                =========            ========

     At March 31, 1998 and September 30, 1997, inventories consisted primarily
of PMS Escape(TM). At March 31, 1998 and September 30, 1997, the Company has
fully reserved all Redux-related inventories in connection with the market
withdrawal of Redux.

D. OTHER

     As an integral component of a management and employee retention program
designed to motivate, retain and provide incentive to the Company's management
and other employees, the Board of Directors adopted the 1997 Equity Incentive
Plan during the three month period ended December 31, 1997 (the "1997 Plan").
The 1997 Plan provides for the grant of restricted stock awards which entitle
the plan participants to receive up to an aggregate of 1,750,000 shares of the
Company's Common Stock upon satisfaction of specified vesting periods. As of May
14, 1998, restricted stock awards to acquire an aggregate of 1,343,668 shares
had been granted to all employees of the Company in consideration of services
rendered by the employee to the Company and payment of the par value of the
shares, of which 942,419 awards were outstanding.  The number of shares subject
to each employee's award were based primarily on the employee's base
compensation. The shares subject to the awards have been registered under the
Securities Act of 1933 on a registration statement on Form S-8 and, accordingly,
may be sold by the plan participants immediately upon vesting of the shares. In
accordance with the provisions of the 1997 Plan for automatic extension of
vesting during Black-Out Periods, as defined in the 1997 Plan, vesting of the
shares commenced in April 1998 and through May 14, 1998, 397,519 shares have
vested and been issued by the Company under the 1997 Plan. Vesting continues
through May 2000.


     The Company has incurred and will continue to incur compensation expense
from the date of grant through the vesting period of shares subject to
restricted stock awards. The charges relating to the restricted stock awards to
acquire 1,343,668 shares are expected to aggregate approximately $15,500,000,
the fair market value of the shares, of which approximately $11,000,000 is
expected to be incurred in the fiscal year ending September 30, 1998 and the
remainder through the final vesting periods in fiscal 2000. Approximately
$3,300,000 and $7,800,000 of such expense was 

                                        9

<PAGE>   10



recognized  during  the three  and six  month  periods  ended  March  31,  1998,
respectively, and allocated to research and development and selling, general and
administrative expense.

     In fiscal 1997, the Company purchased in a private transaction capped call
options in exchange for the issuance by the Company of call options and the
receipt by the Company of $500,000. Call options on 310,000 shares of Common
Stock, which matured on December 31, 1997, expired without exercise.

     In January 1998, Interneuron sold, subject to repurchase rights expiring in
April 1999, an aggregate of 10% of its InterNutria common stock to four
executive officers of Interneuron for the par value of the InterNutria shares
($.001 per share) which approximated fair market value of these shares at the
time of the transaction.

     In January 1998, the Company's Board of Directors adopted, and in March
1998 the Company's Stockholders approved, the 1998 Employee Stock Option Plan
(the "1998 Plan"). Under the 1998 Plan, options to purchase up to 1,500,000
shares of the Company's Common Stock may be granted to employees, directors and
consultants except persons who were executive officers or directors of the
Company as of the date of adoption of the 1998 Plan. The duration of the 1998
Plan is ten years and the term of options granted thereunder cannot exceed seven
years.


E.   COMMITMENTS AND CONTINGENCIES

     In connection with the September 15, 1997 market withdrawal of Redux,
Interneuron has been named, together with other pharmaceutical companies,
including American Home Products Corp. ("AHP"), as a defendant in approximately
480 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. 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. The Company has also been named as a defendant 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. It is not
possible for the Company to determine its costs related to its defense in these
or potential future legal actions, monetary or other damages which may result
from such legal actions, or the effect on the future operations of the Company.
The withdrawal of Redux and related events may materially adversely affect the
Company and its financial condition.

F.  SUBSEQUENT EVENTS

     On May 5, 1998, the Company's Board of Directors authorized the Company to
offer (the "Exchange Offer") holders of outstanding options to purchase the
Company's Common Stock, issued primarily pursuant to the Company's stock option
plans, which have exercise prices of $10.00 per share or greater, the right to
exchange such options with the Company for options (the "Exchanged Options") to
purchase the same number of shares represented by the existing options at an
exercise price of $6.1875 per share, the fair market value of the Company's
Common Stock determined as of May 5, 1998. The Exchanged 

                                       10

<PAGE>   11



Options will vest in six equal installments  generally commencing six months
from the date of the Exchange Offer. The term of the Exchanged Options will be
the same as the remaining term of the existing options. As of May 14, 1998,
options to purchase an aggregate of approximately 4,200,000 shares were subject
to the Exchange Offer.

     On May 8, 1998, the merger of Transcell with and into Intercardia and the
acquisition of certain related technology rights owned by Interneuron was
completed, and, simultaneously, Interneuron contributed to Transcell's capital
all of Transcell's indebtedness to Interneuron (the "Transcell Acquisition"), in
exchange for (i) Intercardia common stock payable in three installments with an
aggregate market value at closing of approximately $14,200,000, of which
$3,000,000 is payment to Interneuron for certain of its technology rights and
continued guarantee of certain Transcell leases, and (ii) the issuance of
options to purchase approximately 260,000 shares of Intercardia common stock to
Transcell employees and consultants in exchange for their options and warrants
to purchase Transcell capital stock. In connection with the Transcell
Acquisition, Intercardia and Interneuron will incur charges to operations in the
third quarter of fiscal 1998 estimated to be approximately $6,000,000 and will
incur additional future charges relating to certain stock options issued
pursuant to the Transcell Acquisition. Interneuron will allocate a portion of
such charges to minority interest. Interneuron owned approximately 61% and 62%
of the outstanding capital stock of Intercardia before and after the Transcell
transaction, respectively. As a result of the Transcell Acquisition, put
protection rights that could have caused Interneuron to issue up to 232,000
additional shares (assuming Interneuron's Common Stock was $2.00 per share or
less) of Interneuron Common Stock expired.


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

     Statements in this Form 10-Q that are not descriptions of historical facts
are forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth in the Company's filings under the
Securities Act of 1933 and under the Securities Exchange Act of 1934 under "Risk
Factors" and elsewhere including, in particular, risks relating to withdrawal of
Redux and Redux-related litigation; uncertainties relating to CerAxon(TM);
uncertainties relating to regulatory approvals and clinical trials; need for
additional funds and risks relating to funding requirements; product liability;
manufacturing and supply and marketing risks; revenue fluctuations; risks
related to contractual obligations; risks relating to product launches and
managing growth; government regulation; the early stage of products under
development; patent risks; dependence on third parties; dependence on key
personnel; competition; and uncertainties regarding pharmaceutical prices and
reimbursements.

     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, 1997. Unless the context indicates otherwise, all references
to the Company include Interneuron and its Subsidiaries.





                                       11

<PAGE>   12



GENERAL

CERAXON

      In December 1997, the Company submitted a New Drug Application ("NDA") to
the FDA for CerAxon(TM) (cytidine-5'-diphosphate choline, sodium or citicoline),
the Company's principal product under development to treat ischemic stroke. The
NDA was accepted for filing and was assigned priority and fast-track review
status. A priority review status reflects the FDA's commitment to review the NDA
within six months following submission and a fast-track designation indicates
the FDA has determined a drug is intended to treat a serious or life-threatening
condition that currently has an unmet medical need and that the FDA can take
actions to expedite the development and review of the drug. Data in the NDA
included the results of two Phase 3 clinical trials conducted by Interneuron in
the U.S., a Japanese Phase 3 clinical trial conducted by Takeda Chemical
Industries, Ltd. and supportive clinical and post-marketing data from more than
30 countries where citicoline has already been approved.

     In April 1998, the Company announced that a preliminary analysis of a
100-patient trial with CerAxon failed to meet its primary and the principal
secondary endpoint. With respect to the primary endpoint, no difference was
detected in the reduction of infarct size among patients with ischemic stroke
who received 500 milligrams per day of CerAxon as compared with patients who
received placebo. With respect to the principal secondary endpoint, the trial
did not show an improvement in neurological function among drug-treated patients
as compared with patients who received placebo. A placebo response rate
unexpectedly higher than that previously reported in the literature may have
accounted for the inability to detect a difference in infarct size reduction and
neurological function among drug-treated patients, as compared with patients who
received placebo. As a result and considering statutory requirements that would
have mandated an FDA action by June 1998, the Company has withdrawn its NDA for
CerAxon.

     The Company is proceeding with the development of CerAxon by closely
evaluating protocol revisions, including increased dosage amounts, that would
apply to an approximately 900-patient study. This study is expected to commence
in fiscal 1998 and enrollment is expected to continue for approximately 15
months depending upon the rate of enrollment. Depending upon the evaluation of
the results from this trial, the Company will determine whether to re-submit an
NDA for CerAxon to the FDA. Even if the Company does re-submit the NDA, as to
which there is no assurance, the Company is unable to predict whether or when
the FDA would grant authorization to market CerAxon in the U.S.

     As of March 31, 1998, the remaining expenditures for CerAxon of all
currently planned clinical trials and related studies and NDA preparation for
CerAxon are estimated, based upon current trial protocols, to aggregate
approximately $35,000,000. The Company is unable to predict the costs of any
related or additional clinical studies which will depend upon the results of the
on-going trials and upon FDA requirements.

     As a result of the Company's withdrawal of its NDA and the resulting
additional time and expense for product development, the Company is reexamining
a variety of CerAxon marketing strategies. In

                                       12

<PAGE>   13



the event the Company markets CerAxon  directly,  significant  additional  funds
would  be  required  for  manufacturing,  distribution,  marketing  and  selling
efforts.

     The Company is dependent upon third party suppliers of citicoline bulk
compound, finished product and packaging for manufacturing in accordance with
the Company's requirements and U.S. Good Manufacturing Practices ("GMP")
regulations as well as on third party arrangements for the distribution of
CerAxon. Supplies of citicoline finished product used for clinical purposes have
been produced on a contract basis by a third party manufacturer. The Company has
not finalized an agreement with such manufacturer for supply of commercial
quantities of finished product and there can be no assurance such agreement can
be obtained in terms favorable to the Company or at all, which could adversely
affect the Company's ability to commercialize CerAxon on a timely and
cost-effective basis. The Company is subject to an agreement with Grupo Ferrer
("Ferrer"), a Spanish pharmaceutical company which licensed certain patent
rights relating to citicoline to the Company, requiring the Company to purchase
citicoline bulk compound for commercial purposes at fixed prices, subject to
certain conditions. There can be no assurance the Company can or will establish
on a timely basis, or maintain, manufacturing capabilities of bulk compound and
finished product required to obtain regulatory approval of CerAxon, or that any
facilities used to produce citicoline will have complied, or will be able to
maintain compliance, with GMP, or that such suppliers will be able to meet
manufacturing requirements on a timely basis or at all.

     The Company's license agreement with Ferrer provides that Ferrer may
terminate the Ferrer agreement in the event FDA approval of citicoline is not
obtained by January 1999, which date shall be extended if the Company provides
information to Ferrer which tends to establish that the Company has carried out
the steps for obtaining such approval and if such approval has not been obtained
for reasons beyond the Company's control. The Company has provided such
information to Ferrer and is engaged in discussions with Ferrer to establish an
extended date.

REDUX

     On September 15, 1997, the Company announced the withdrawal of the weight
loss medication Redux. On September 12, 1997, the U.S. Food and Drug
Administration ("FDA") provided the Company and Wyeth-Ayerst Laboratories, a
division of American Home Products Corp. ("AHP") and manufacturers and marketers
of phentermine with new, preliminary and summary information, subsequently
updated and revised by the FDA, concerning potential abnormal echocardiogram
findings in patients using these drugs. These patients had been treated with
Pondimin or Redux for up to 24 months, most often in combination with
phentermine. Redux was launched in June 1996.

                                       13
<PAGE>   14


     These observations presented by the FDA reflected a preliminary analysis of
pooled information rather than results of a formal clinical investigation, and
are difficult to evaluate because of the absence of matched controls and
pretreatment baseline data for these patients. Nevertheless, the Company
believes it was prudent, in light of this information, to have withdrawn Redux
from the market.

     As reported in the original preliminary information provided by the FDA,
abnormal  echocardiogram findings were reported in 92 of 291 subjects evaluated.
As originally reported, 271 of the 291 patients had taken fenfluramine in
combination with phentermine (commonly referred to as the "fen/phen"
combination), 11 had taken Redux alone and nine had taken a combination of Redux
and phentermine.  As originally reported, of the 11 who had taken Redux alone,
two had abnormal echocardiograms and, of the nine who had taken a combination of
Redux and phentermine, four had abnormal echocardiograms.

     The FDA has continued to evaluate the data from the original 291 cases. In
a subsequent update, the FDA has reported to the Company that, revising the
originally reported data, of the 291 cases, 15 patients had taken Redux alone
and 21 had taken a combination of Redux and phentermine. Of the 15 who had taken
Redux alone, two patients had abnormal echocardiograms and of the 21 who had
taken a combination of Redux and phentermine, 13 patients had abnormal
echocardiograms. The FDA-approved prescribing information (the label) for Redux
recommended against using Redux in combination with other appetite suppressants.
The Company believes, based on industry data, that over 90% of prescriptions
written for Redux were for Redux alone (without a combination with another
appetite suppressant).

     Additional adverse event reports of abnormal echocardiogram findings in
patients that have used Redux or fenfluramine alone or in combination with other
weight loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the
FDA.

     Additional echocardiogram studies are being conducted to compare patients
who had taken either Redux or the "fen/phen" combination with a matched group of
obese patients who did not receive any anti-obesity drugs. These studies are
being conducted and will be analyzed by independent panels of cardiologists to
compare the incidence of significant heart valve abnormalities in treated
compared to non-treated groups. Patients are selected and assigned to these
groups randomly. Readings of patient echocardiograms are made on a blinded basis
by echocardiologists who do not know from which group individual echocardiograms
were taken.

     Findings from one such placebo-controlled, blinded study were presented at
the 47th Annual Scientific Session of the American College of Cardiology in
March 1998. The study was conducted independently at Georgetown University
Medical Center. Echocardiogram readings were made by one core laboratory using
consistent definitions of cardiac valve abnormalities. Financial support for the
study was provided by AHP. Investigators reported no statistically significant
difference between the prevalence of cardiac valve abnormalities, as defined by
the FDA, among patients who took Redux and placebo-treated patients. It was also
reported that the prevalence of such abnormalities among Redux patients was
significantly less than previously reported estimates. Treated patients took
Redux alone for 2-3 months, which the Company believes reflects the duration of
treatment for an estimated 75-80% of patients who took Redux while it was
marketed, based on market research.

                                       14
<PAGE>   15


     In addition, Interneuron has initiated a separate study which will also be
analyzed by an independent, blinded panel of cardiologists, that is comparing
echocardiograms of patients who took Redux alone for at least three months to
echocardiograms of a control group of patients who did not take any anti-obesity
medication to measure the prevalence and severity of abnormal echocardiogram
observations  among the two sets of patients. Approximately 400 to 600 patients
are expected to be included in the Company-supported study, the remaining costs
of which are estimated to be up to approximately $2,000,000.  Results of this
study are anticipated to become available in fiscal 1998. A number of other
clinical studies relating to the prevalence of abnormal echocardiogram findings
in patients who took Redux (and other anti-obesity agents) have been and may be
conducted by Wyeth-Ayerst and/or others.
                                             
     On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of people
who took Pondimin or Redux. HHS recommended, until more complete information is
available, that patients who took either drug should see their physician to
determine whether there are signs or symptoms of heart or lung disease and if
such person has signs or symptoms of heart or lung disease, such as a new heart
murmur or shortness of breath, have an echocardiogram performed; and that
physicians strongly consider performing an echocardiogram before a patient who
has taken either drug has any invasive procedure for which antibiotic
prophylactic treatment is recommended to prevent the development of bacterial
endocarditis.

     Interneuron has been named, together with other pharmaceutical companies,
including AHP, as a defendant in approximately 480 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. 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. The Company
has also been named as a defendant 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. See "Legal Proceedings."

     Under certain circumstances, the Company may be required to indemnify Les
Laboratoires Servier ("Servier"), Boehringer Ingelheim Pharmaceuticals, Inc.
("Boehringer") (the contract manufacturer of Redux capsules) and AHP, and the
Company may be entitled to indemnification by AHP, Servier and Boehringer
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 may be
required to devote significant management time and resources to these actions
and, in the event of successful uninsured or insufficiently insured claims, or
in the event a successful indemnification claim was made against the Company,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, the uncertainties 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 may impair the Company's ability
to obtain additional financing to satisfy cash requirements, to retain and
attract qualified personnel, to commercialize products on a timely and adequate
basis and to acquire or obtain rights to additional products, any or all of
which may materially adversely affect the Company's business.

                                       15
<PAGE>   16

     Through September 1997, a significant portion of Interneuron's revenues had
been derived from Redux sales. Due to the market withdrawal of Redux in
September 1997 and related events, the Company did not record product revenue
relating to Redux in any fiscal 1998 periods. The Company does not expect to
realize any future revenues related to Redux. See Note B of Notes to Unaudited
Consolidated Financial Statements.

                                   
PAGOCLONE

     The Company is incurring substantial costs to develop pagoclone for the
treatment of panic disorders and anxiety. The results from a Phase 2/3 trial
which commenced in November 1996 are expected in late fiscal 1998. The Company
designates a trial as Phase 2/3 if it is a well-controlled trial which the
Company may utilize, depending upon results, as either a pivotal or supporting
trial in an NDA submission. After completion of this phase 2/3 trial, the
Company expects to commence a second pivotal trial in 1998 and a third pivotal
trial in 1999, both of which will be necessary to include in an NDA submission
for pagoclone. The Company currently estimates the total costs of these and
other clinical studies related to pagoclone, license fees to Rhone-Poulenc Rorer
Pharmaceuticals, Inc., and NDA preparation for pagoclone to be approximately
$50,000,000, which will be incurred over approximately the next three years. The
Company is unable to predict with certainty the costs of any related or
additional studies which may be required by the FDA, whether any such clinical
trials will be successful or result in FDA approval of the product. Further, in
the event the Company markets pagoclone directly, significant additional funds
would be required for manufacturing, distribution and selling efforts. The
Company may explore various funding and commercialization strategies for
pagoclone which may include corporate partnering arrangements.

LIQUIDITY AND CAPITAL RESOURCES

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

     At March 31, 1998, the Company had consolidated cash, cash equivalents and
marketable securities aggregating $97,140,000 (of which approximately
$25,600,000 was held by Intercardia and is not available to Interneuron)
compared to $140,052,000 at September 30, 1997. This decrease is primarily due
to approximately $42,000,000 used to fund operations, including $10,000,000 paid
by CPEC, Inc. ("CPEC"), a majority-owned subsidiary of Intercardia, to Astra
Merck, Inc. ("Astra Merck") (all of which was accrued at September 30, 1997). A
portion of this payment to Astra Merck was funded by Interneuron, which owns
directly approximately 20% of CPEC.

PRODUCT DEVELOPMENT

     The Company expects to continue expending substantial amounts for the
development of CerAxon and pagoclone. In the event the Company does not have
sufficient funds in the future, the Company may be required to delay certain
clinical trials which would adversly affect development of the Company's
products. See "CerAxon" and "pagoclone" above.

     In December 1996, the Company entered into an agreement with Algos
Pharmaceutical Corporation to collaborate in the development and
commercialization of LidodexNS, which combines two drugs that are currently
marketed for other indications. This combination product is in pre-clinical

                                       16
<PAGE>   17

development for the acute intra-nasal treatment of migraine headaches and
toxicological studies are on-going. Depending upon the results of these studies,
the Company will determine whether to file an investigational new drug
application (IND). The development of this and other products, including those
which may be acquired by the Company in the future will require substantial
additional funds.

     In April  1998,  the Company  licensed  from  Tulane  University  exclusive
world-wide  rights to a U.S.  patent and U.S.  and foreign  patent  applications
owned by Tulane  relating  to a novel  neuropeptide,  known as PACAP  (pituitary
adenylate cyclase activating peptide).  Preclinical data suggests PACAP may have
potential  as a  treatment  for stroke, either alone or in combination with
CerAxon, and other  neurodegenerative  diseases in humans.  Consideration  to
Tulane for the  license  includes  an upfront  fee,  research funding, potential
milestone  payments and royalties from products developed from this program.
                                                        
     During the quarter ended December 31, 1997, the Company obtained an
exclusive option to acquire, on specified terms, a private company engaged in
the development of a potential product which is in a Phase 1 clinical trial and
which may have application for diabetes and related disorders. The Company has
received and evaluated the results of this Phase 1 clinical trial and has
decided not to exercise this option. The Company recorded the non-refundable
cash payment of $500,000 in the six months ended March 31, 1998 as a purchase of
in-process research and development because the private company is a development
stage enterprise with unproven technology.

     Consistent with its corporate strategy, the Company continually seeks to
identify technology and product candidates for in-licensing and development. 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.

     There can be no assurance that results of any on-going current or future
preclinical or clinical trial 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 good manufacturing practice regulations or marketed in a timely
manner or at all, any of which events could materially adversely affect the
Company.

ANALYSIS OF CASH FLOWS

     Cash used by operating activities during the six months of fiscal 1998 of
$41,611,000 consisted primarily of a net loss of $42,501,000 and $10,000,000
paid by CPEC in December 1997 to Astra Merck for CPEC's contractual liability
pursuant to the Astra Merck Collaboration recorded as of September 30, 1997,
partially offset by noncash compensation charges of $8,380,000 consisting
primarily of compensation expense relating to grants of Restricted Stock Awards
under the Company's 1997 Equity Incentive Plan and $1,871,000 of equity in the
net loss of the unconsolidated subsidiary, Progenitor.

     Accrued expenses decreased $9,626,000 to $29,527,000 at March 31, 1998 from
$39,153,000 at September 30, 1997 primarily due to CPEC's $10,000,000 payment to
Astra Merck in December 1997, partially funded by Interneuron as a result of
Interneuron's approximately 20% direct ownership of CPEC. In addition, included
in accrued expenses at March 31, 1998 and September 30, 1997, were

                                       17
<PAGE>   18

liabilities  relating to clinical  trials and sponsored  research as well as the
Redux withdrawal and related events. These amounts are reduced when paid.

     Cash provided by investing activities of $13,581,000 during the first six
months of fiscal 1998 consisted primarily of net proceeds from maturities and
sales of marketable securities of $14,811,000.
                                                      
OTHER

     The Company's business strategy includes evaluation of various
technologies, product or company acquisitions, licensing and/or financing
opportunities (including private placements and initial and follow-on equity
offerings) and the Company and certain of its subsidiaries are currently engaged
in discussions relating to such opportunities. Any such initiatives may involve
the issuance of securities of Interneuron or its subsidiaries and/or financial
commitments and would result in increased expenses .

     While the Company believes it has sufficient cash for currently planned
expenditures through 1998, based on certain assumptions relating to subsidiary
expenditures, it will require additional funds after such time and may seek
additional funds prior to such time through equity financings, corporate
collaborations and/or other financings  to provide working capital. Further, the
Company will require additional funds for the development and regulatory review
of CerAxon, pagoclone and its other compounds and technologies. If such funds
are not available, the Company will be required to delay product development and
regulatory efforts. As a result of the uncertainties and costs associated with
the Redux-related litigation and other factors generally affecting the ability
to raise additional funds, there can be no assurance that the Company will be
able to obtain additional financing to satisfy cash requirements or that any
financing will be available on terms favorable or acceptable to the Company, if
at all.

     InterNutria is exploring strategic alternatives, which may include the
possibility of financings, collaborations and/or business combinations in order
to reduce Interneuron's funding of InterNutria. If such efforts are not
successful, Interneuron may continue to fund InterNutria's operations at a
curtailed level.

     In connection with the royalty and license payments made by the Company to
Les Laboratories Servier ("Servier"), a pharmaceutical company based in France,
the Company was required to have withheld certain taxes which were required to
have been paid by Servier. Based on advice from an external tax advisor, the
Company did not withhold or pay these taxes. Reduced withholding rates are
applicable under certain conditions. If Servier does not pay the required
withholding taxes, the Company may be required to pay the amount of such
withholding taxes plus applicable interest and penalties, all or a portion of
which may be recoverable. The Company is currently unable to predict or estimate
the actual or net amounts that may be paid or recovered by the Company.


                                       18
<PAGE>   19


SUBSIDIARIES

     Interneuron is currently funding the operations of InterNutria and has
funded the operations of Transcell until May 8, 1998, when the merger of
Transcell into Intercardia was completed (see "Transcell"  below).  After this
merger, the costs of Transcell's operations are being assumed by Intercardia.
Expenses of the Subsidiaries constitute a significant part of the Company's
overall expenses.  The Subsidiaries' portion of consolidated research  and
development and selling, general, and administrative expenses was approximately
44% and 39%, respectively, not including Progenitor, which is not consolidated
for the 1998 six month period.
                                                      
     Although Interneuron may acquire additional equity in subsidiaries through
participation in financings, purchases from third parties, including open market
purchases and conversion of intercompany debt, equity financings by a subsidiary
will likely reduce Interneuron's percentage ownership of that subsidiary and
funds held by the subsidiaries will not be available to Interneuron. The
Company's goal is for its subsidiaries to establish independent operations and
financing through corporate alliances, third-party financings, mergers or other
business combinations, with Interneuron generally retaining an ongoing equity
interest. The nature of any such transaction and percentage of such equity
interest is expected to vary depending on the business and capital needs of each
subsidiary and the state of development of their respective technologies or
products.

INTERCARDIA

     Pursuant to the Astra Merck Collaboration, CPEC paid Astra Merck
$10,000,000 in December 1997 and CPEC or Intercardia has agreed to pay Astra
Merck up to $11,000,000 for one-third of product launch costs for bucindolol. In
the event Intercardia or CPEC elects not to make any required product launch
payments to Astra Merck, the royalties payable by Astra Merck to Intercardia
would be substantially reduced. There can be no assurance of the success of the
Beta-blocker Evaluation of Survival Trial (the "BEST Study") or that BEXTRA(TM)
(bucindolol) will be successfully commercialized. To date, a substantial portion
of the BEXTRA development costs have been assumed or paid by the National
Institutes of Health, the Department of Veterans Affairs, Astra Merck and/or
BASF Pharma/Knoll AG ("Knoll").

     The Astra Merck Collaboration provides that Astra Merck shall be
responsible for the expenses incurred in development and commercialization of
the twice-daily formulation of bucindolol in the United States, and Astra Merck
has committed an amount up to $15,000,000 to be expended in connection with such
development. Astra-Merck has advised Intercardia that Astra-Merck has expended
$15,000,000 as of April 30, 1998. Intercardia and Astra Merck are discussing
Astra Merck's contractual responsibility to fund such expenses above
$15,000,000. Intercardia believes that in the event Astra Merck does not fund
such expenses, Astra Merck would be in breach of the Astra Merck Collaboration.
The Astra Merck Collaboration provides for arbitration of any disputes, and
Astra Merck has notified Intercardia that Astra Merck intends to institute
arbitration proceedings to resolve the dispute. Under the Astra Merck
Collaboration, the parties are required to attempt to resolve disputes prior to
the actual institution of arbitration proceedings. There can be no assurance as
to the 

                                       19
<PAGE>   20
cost or results of any arbitration.  In the event that Intercardia or CPEC funds
such expenses or a portion of such expenses, in excess of  $15,000,000, the
results of operations and financial position of Intercardia and the Company may
be materially adversely affected.  A portion of such expenses if required to be
paid by CPEC, may be funded by Interneuron, reflecting its 20% direct ownership
interest in CPEC.

     Pursuant to the Knoll Collaboration, Intercardia is responsible for
approximately 40% of the development and marketing costs of bucindolol in the
Territory, which includes all countries other than the United States and Japan,
subject to certain maximum dollar limitations. Intercardia's portion of
development and clinical trial costs for the Territory is estimated to be up to
$10,000,000 over the next several years.  Intercardia is also responsible for
approximately 40% of the once-a-day development costs which relate to
development solely for the Territory and approximately 67% of once-a-day
development costs which have a worldwide benefit.
                                                         
     Intercardia may require additional financing to fund its operations, to
make payments to its collaborative partners, including up to $11,000,000 in
payments for U.S. product launch expenses to Astra Merck under the Astra Merck
Collaboration, to fund any additional costs incurred in connection with the
Astra Merck Collaboration and to fund 40% of development and marketing costs of
bucindolol in the Knoll Territory pursuant to the Knoll Collaboration with
Knoll, to fund the operations of Transcell which merged into Intercardia on May
8, 1998 (see "Transcell"), as well as to fund new business opportunities and
growth. Intercardia intends to seek to raise additional funds through equity
and/or debt financings, although there can be no assurance such funds will be
available on terms acceptable or favorable to Intercardia, or at all.

     In May 1997, the FDA approved the use in the United States of Coreg
(carvedilol), a drug being marketed by SmithKline Beecham for the treatment of
congestive heart failure ("CHF"). Carvedilol's approval for marketing as a
treatment for CHF in the U.S. prior to BEXTRA may have aversely affected the
patient enrollment rate of the BEST Study and could provide a marketing
advantage for Coreg.


Transcell

     On May 8, 1998, the merger of Transcell with and into Intercardia and the
acquisition by Intercardia of certain related technology rights owned by
Interneuron was completed and, simultaneously, Interneuron contributed to
Transcell's capital all Transcell's indebtedness to Interneuron (the "Transcell
Acquisition"), in exchange for (i) Intercardia common stock payable in three
installments with an aggregate market value at closing of approximately
$14,200,000, of which $3,000,000 is payment to Interneuron for certain of its
technology rights and continued guarantee of certain Transcell leases, and (ii)
the issuance of options to purchase approximately 260,000 shares of Intercardia
common stock to Transcell employees and consultants, in exchange for their
Transcell options and warrants. In connection with the Transcell

                                       20
<PAGE>   21
Acquisition, Intercardia and Interneuron will incur charges to operations in the
third quarter of fiscal 1998 estimated to be  approximately  $6,000,000 and will
incur  additional  future  charges  relating  to certain  stock options issued
pursuant to the  Transcell  Acquisition.  The Company will allocate a portion of
such charges to minority interest. Interneuron owned approximately 61% and 62%
of the  outstanding  capital  stock of  Intercardia before and after the
Transcell acquisition, respectively. Transcell's results of operations, assets
and liabilities will continue to be included in the Company's Consolidated
Financial Statements.


InterNutria

     InterNutria  commenced a national launch of PMS Escape(TM) in September
1997, resulting in product revenue of approximately $1,700,000 and selling and
marketing costs of approximately $11,200,000 in the six month period ended March
31, 1998.  Additional selling and marketing costs associated with this product
are estimated to be approximately $8,000,000 through fiscal 1998 assuming no
external funding of InterNutria. To date, InterNutria's operations have been
funded primarily by Interneuron. Although InterNutria is seeking external
funding to reduce Interneuron's funding requirements, there can be no assurance
such funding will be available, in which event Interneuron plans to curtail
InterNutria-related expenditures. InterNutria has ceased utilization of a
contract sales force and no longer has the utilization of the Interneuron sales
force of approximately 25 persons whose employment was terminated effective May
8, 1998 as a result of the postponement of the launch of CerAxon in connection
with the Company's withdrawal of its NDA for CerAxon.  The Company anticipates
that, at least through fiscal 1998, InterNutria will not generate  sufficient
revenues from this product to offset related  costs. See "Results of
Operations".
                                                         
Progenitor

     In August 1997, Progenitor completed an initial public offering and
simultaneous acquisition of Mercator Genetics, Inc. resulting in Interneuron's
ownership in Progenitor's outstanding capital stock decreasing to approximately
37%. Consequently thereafter, the Company ceased consolidating the financial
statements of Progenitor. The Company's consolidated financial statements for
the three and six month periods ended March 31, 1998 include Progenitor using
the equity method of accounting, whereas the Company's Consolidated Statements
of Operations for the three and six month periods ended March 31, 1997 and
Statement of Cash Flows for the six month period ended March 31, 1997 reflect
Progenitor on a consolidated basis. See "Results of Operations".


Recent Accounting Pronouncements

     The  Company  will adopt SFAS No.  130,  "Reporting  Comprehensive  Income"
("SFAS No. 130"),  in the fiscal year ending  September  30, 1999.  SFAS No. 130
establishes  standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management has
not determined the effect of adopting SFAS No. 130.

     The Company  will adopt SFAS No.  131,  "Disclosures  about  Segments of an
Enterprise and Related  Information" ("SFAS No. 131"), in the fiscal year ending
September 30, 1999. SFAS No. 131 specifies revised guidelines for determining an
entity's operating  segments and the type and level of

                                       21
<PAGE>   22

financial information to be disclosed.  Management has not determined the effect
of adopting SFAS No. 131.


Year 2000 Software Issues

     The Company has commenced review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and will develop an
implementation plan to resolve any problems. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Software programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company believes
there will be minimal operational and monetary impact from resolving any
problems to currently used software.

                                                     
RESULTS OF OPERATIONS

     Total revenues decreased substantially to $1,356,000 and $2,997,000 in the
three and six month periods ended March 31, 1998, respectively, from $19,774,000
and $37,466,000 in the three and six month periods ended March 31, 1997,
respectively, primarily due to the $16,794,000 and $29,518,000 decrease in
product revenue over the respective periods. The Company did not recognize any
Redux- related product revenue in the Fiscal 1998 periods (see "Redux" above)
compared to approximately $17,294,000 and $30,910,000 of Redux-related product
revenue recognized in the three month and six month periods ended March 31,
1997, respectively. Product revenue of $683,000 and $1,670,000 in the three
month and six month periods ended March 31, 1998 consists primarily of sales of
PMS Escape by InterNutria.

     Contract and license fee revenue decreased $1,624,000, or 71%, to $673,000
for the three month period ended March 31, 1998 from $2,297,000 for the three
month period ended March 31, 1997 and decreased $4,951,000, or 79%, to
$1,327,000 for the six month period ended March 31, 1998 from $6,278,000 for the
six month period ended March 31, 1997. The fiscal 1997 periods included revenue
recognized by Intercardia pursuant to a collaboration agreement with Knoll,
revenue recognized by the Company pursuant to its Copromotion Agreement with
Wyeth-Ayerst and contract revenue recognized by Progenitor, whose financial
statements were consolidated with the Company's during the 1997 fiscal periods.
Contract revenue in the fiscal 1998 periods consists primarily of revenue
recognized by the Company and Transcell pursuant to the Merck Agreement and by
Intercardia pursuant to the Astra Merck Agreement.

     Cost of product revenue decreased $11,722,000 to $277,000 in the three
month period ended March 31, 1998 from $11,999,000 in the three month period
ended March 31, 1997 and decreased $21,234,000 to $669,000 in the six month
period ended March 31, 1998 from $21,903,000 in the six month period ended March
31, 1997 due to the absence of any Redux-related product revenue. Cost of
product revenue in the fiscal 1998 periods relates to sales of PMS Escape.

     Research and development expenses increased $1,841,000, or 18%, to
$11,807,000 for the three month period ended March 31,1998 from $9,966,000 for
the three month period ended March 31, 1997 and increased $2,872,000, or 16%, to
$20,356,000 for the six month period ended March 31,

                                       22
<PAGE>   23

1998 from  $17,484,000  for the six month  period  ended March 31,  1997.  These
increases are primarily due to an allocation to research and  development of the
noncash compensation expense associated with the Company's 1997 Equity Incentive
Plan,  Intercardia's  increased  spending related to its expanding  research and
development  programs,  and Transcell's  new facility and enhanced  carbohydrate
chemistry  research  and  development  programs,  offset  in part  by  decreases
resulting  from the  absence  of  expense  from  Progenitor,  whose  results  of
operations were not consolidated with the Company's in the fiscal 1998 periods.

     Selling, general and administrative expenses increased $8,194,000, or 141%,
to  $14,021,000  for the three month period ended March 31,1998 from  $5,827,000
for the three month period ended March 31, 1997 and  increased  $15,518,000,  or
137%,  to  $26,862,000  for the six  month  period  ended  March  31,  1998 from
$11,344,000  for the six month  period  ended March 31,  1997.  These  increases
primarily  reflect  approximately  $5,700,000  and  $10,100,000  of  incremental
expenditures  in  the  three  and  six  month  periods  ended  March  31,  1998,
respectively,  for selling and  marketing  activities  relating to the  national
launch of PMS Escape  which  commenced  in  September  1997,  an  allocation  to
selling, general and administrative expenses of the noncash compensation expense
relating  to  the  Company's  1997  Equity  Incentive  Plan,  and  pre-marketing
activities  relating  to the  potential  launch  of  CerAxon  offset  in part by
decreases  resulting from the absence of expense from Progenitor,  whose results
of  operations  were not  consolidated  with the  Company's  in the fiscal  1998
periods.
                                                        
     Investment income, net of interest expense decreased $577,000, or 29%, to
$1,431,000 in the three month period ended March 31, 1998 from $2,008,000 in the
three month period ended March 31, 1997 and $1,361,000, or 30%, to $3,236,000 in
the six month period ended March 31, 1998 from $ 4,597,000 in the six month
period ended March 31, 1997 primarily as a result of a decrease in cash
available for investment and used in the operations of the Company.

     Equity in net loss of unconsolidated subsidiary of $978,000 and $1,871,000
in the three and six month periods ended March 31, 1998 represents the Company's
share of Progenitor's net loss for these respective periods. The results of
Progenitor's operations were reflected in the Company's financial statements on
a consolidated basis until Progenitor's IPO in August 1997 after which
Progenitor was included in the Company's financial statements using the equity
method of accounting. Progenitor's operations resulted in a net loss of
approximately $1,800,000 and $2,800,000, respectively which was included in the
Company's Consolidated Statements of Operations for the three and six month
periods ended March 31, 1997.

     Net loss increased $15,517,000 to $23,267,000 in the three month period
ended March 31, 1998 from $7,850,000 in the three month period ended March 31,
1997 and increased $31,720,000 to $42,501,000 in the six month period ended
March 31, 1998 from $10,781,000 in the six month period ended March 31, 1997
primarily due to the national launch of PMS Escape, noncash expenses relating to
the Company's 1997 Equity Incentive Plan and lack of revenues and related gross
profits from Redux and reduced contract revenue.

     The Company expects to recognize approximately $11,000,000 of noncash
expense in fiscal 1998 as a result of grants of Restricted Stock Awards under
the Company's 1997 Equity Incentive Plan, of which approximately $3,200,000 and
$7,800,000 was recognized in the three and six month periods, respectively,
ended March 31, 1998. In addition, the Company will incur charges to operations
in connection with the acquisition by Intercardia of Transcell, estimated to be
approximately $6,000,000

                                       23
<PAGE>   24

in the third  quarter  of fiscal  1998,  the period of the  closing,  and future
charges  relating to certain option grants in connection  with the  acquisition.
The Company will allocate a portion of such charges to minority interest.

     The Company from time to time explores various technology, product or
company acquisitions and/or business combinations or financing opportunities and
is currently engaged in discussions relating to such opportunities. Any such
initiatives may involve the issuance of shares of Interneuron's Common Stock or
other securities and/or cash and financial commitments for licensing fees and/or
to fund product development, either of which may adversely affect the Company's
consolidated financial condition or results of operations.

                                       24

<PAGE>   25


PART II - OTHER INFORMATION

Item 1.           LEGAL PROCEEDINGS

     The Company has been named, together with other pharmaceutical companies,
including AHP, as a defendant in approximately 480 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.
Plaintiff's 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, primary pulmonary hypertension, 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.

     The Company and certain directors and/or officers of the Company have also
been named as defendants in several lawsuits filed in the United States District
for the District of Massachusetts (the "Court") by alleged purchasers of the
Company's Common Stock, purporting to be class actions, claiming among other
things that the Company publicly disseminated materially false and misleading
statements concerning the prospects and safety of Redux, resulting in the
artificial inflation of the Company's Common Stock price during various alleged
class periods, the earliest commencing December 16, 1996 through September 17,
1997, in violation of the federal securities laws.

     On January 23, 1998, the Court entered an order consolidating all of these
actions for pretrial purposes. The plaintiffs subsequently filed a first amended
and consolidated complaint [Corrected Version] (the "Complaint") containing
substantially similar substantive allegations and alleging a class period of
December 19, 1996 through September 15, 1997. On May 11, 1998, the defendants
moved to dismiss the Complaint, which motion is still pending.

     Under certain circumstances, the Company is required to indemnify Servier,
Boehringer and AHP, and the Company is entitled to indemnification by AHP [and
Boehringer], 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 may be required to devote significant

                                       25

<PAGE>   26



management time and resources to these actions and, in the event of successful
uninsured or insufficiently insured claims, or in the event a successful
indemnification claim was made against the Company, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, the uncertainties 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 may impair the Company's ability to obtain
additional financing to satisfy cash requirements, to retain and attract
qualified personnel, to commercialize products on a timely and adequate basis,
to acquire or obtain rights to additional products, or to obtain product
liability insurance for other products at costs acceptable to the Company, any
or all of which may materially adversely affect the Company's business.

Item 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual meeting of stockholders was held on March 3, 1998. At the
meeting (i) all ten director nominees were elected; (ii) the Company's 1998
Employee Stock Option Plan was approved and ratified; and (iii) the appointment
of Coopers & Lybrand L.L.P. as the independent auditors was ratified.

(i) The following Directors were elected for a one-year term by the votes
indicated:

Lindsay A. Rosenwald, M.D., 34,776,962 for, 432,847 against; Glenn L. Cooper,
M.D., 34,812,980 for, 396,829 against; Harry J. Gray, 34,812,530 for, 397,279
against; Alexander M. Haig, Jr., 34,810,430 for, 399,379 against; Peter Barton
Hutt, 34,813,130 for, 396,679 against; Malcolm Morville, Ph.D., 34,813,130 for,
396,679 against; Robert K. Mueller, 34,812,530 for, 397,279 against; Lee J.
Schroeder, 34,813,030 for, 396,779 against; David B. Sharrock, 34,813,130 for,
396,679 against; Richard Wurtman, M.D., 34,813,130 for, 396,679 against.

(ii) The Company's 1998 Employee Stock Option Plan was approved and ratified by
a vote of 32,531,834 for, 2,539,624 against, and 138,351 abstaining.

(iii) The appointment of Coopers & Lybrand L.L.P. was ratified by a vote of
35,080,512 for, 64,134 against, and 65,162 abstain.

Item 5.  OTHER INFORMATION

     On May 8, 1998, the merger of Transcell with and into Intercardia and the
acquisition by Intercardia of certain related technology rights owned by
Interneuron was completed and, simultaneously, Interneuron contributed to
Transcell's capital all Transcell's indebtedness to Interneuron (the "Transcell
Acquisition"), in exchange for (i) Intercardia common stock payable in three
installments with an aggregate market value at closing of approximately
$14,200,000, of which $3,000,000 is payment to Interneuron for certain of its
technology rights and continued guarantee of certain Transcell leases, and (ii)
the issuance of options to purchase approximately 260,000 shares of Intercardia
common stock to Transcell employees and consultants, in exchange of their
Transcell options and warrants. In connection with the Transcell Acquisition,
Intercardia and Interneuron will incur charges to operations in the third
quarter of fiscal 1998 estimated to be approximately $6,000,000 and will incur
additional future charges relating to certain stock options issued pursuant to
the Transcell Acquisition. The Company will allocate a

                                       26
<PAGE>   27
portion of such charges to minority interest. Prior to the Transcell
Acquisition, Interneuron owned approximately 78% of the outstanding capital
stock of Transcell. Interneuron owned approximately 61% and 62% of the
outstanding  capital stock of  Intercardia  before and after the Transcell
Acquisition, respectively.

                                                         
Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

10.95 -  Agreement  and Plan of  Merger  dated  March 2,  1998 by and  among the
Company,  Intercardia,  Inc.  ("Intercardia") and Transcell  Technologies,  Inc.
("Transcell")

10.95(a) - Waiver and Consent Agreement dated May 8, 1998 by and among the
Company, Intercardia and Transcell

27       Financial Data Schedule

     (b) Reports on Form 8-K

     The Company filed a report on Form 8-K reporting information under "Item 5"
on April 20, 1998.



                                       27

<PAGE>   28




                                                      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: May 15, 1998                 By: /S/ GLENN L. COOPER, M.D.
                                       --------------------------
                                           Glenn L. Cooper, M.D., President
                                           and Chief Executive Officer
                                           (Principal Executive Officer)


Date: May 15, 1998                 By: /S/ THOMAS F. FARB
                                       -------------------
                                           Thomas F. Farb,
                                           Executive Vice President,
                                           Chief Financial Officer and Treasurer
                                           (Principal Financial Officer)


Date: May 15, 1998                 By: /S/ DALE RITTER
                                       ----------------
                                           Dale Ritter
                                           Vice President, Corporate Controller
                                           (Principal Accounting Officer)




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