<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 June 30, 2000

[ ]    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 August 11, 2000:
Common Stock $.001 par value                  42,773,914  shares
<PAGE>

                        INTERNEURON PHARMACEUTICALS, INC.

                               INDEX TO FORM 10-Q


<TABLE>
<CAPTION>


<S>                                                                                                     <C>
PART I.  FINANCIAL INFORMATION                                                                          PAGE

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2000
  and September 30, 1999.........................................................................          3

Consolidated Statements of Operations for the Three and Nine Months
  ended June 30, 2000 and 1999...................................................................          4

Consolidated Statements of Cash Flows for the Nine Months
  ended June 30, 2000 and 1999...................................................................          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.......................................................................         18

Item 6.  Exhibits and Reports on Form 8-K........................................................         21

SIGNATURES.......................................................................................         22
</TABLE>



                                      -2-
<PAGE>

Item 1.  Financial Statements

                        INTERNEURON PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                    (Amounts in thousands except share data)
<TABLE>
<CAPTION>
                                                                                      June 30,    September 30,
                                                                                       2000           1999
                                                                                     ---------    -------------
                                                      ASSETS
<S>                                                                                  <C>          <C>
Current assets:
     Cash and cash equivalents                                                       $   24,598     $  19,354
      Marketable securities                                                               7,464         2,457
      Accounts receivable                                                                   269           785
      Insurance claim receivable                                                          5,111            --
      Prepaids and other current assets                                                     262         1,812
                                                                                     ----------     ---------
           Total current assets                                                          37,704        24,408

Investment in Incara                                                                      1,265         1,827
Property and equipment, net                                                                 238           403
                                                                                     ----------     ---------
                                                                                     $   39,207     $  26,638
                                                                                     ==========     =========
                                                    LIABILITIES

Current liabilities:
      Accounts payable                                                               $        4     $     157
      Accrued expenses                                                                   13,344        20,100
      Deferred revenue                                                                    3,000            --
      Current portion of capital lease obligations                                            9            68
                                                                                     ----------     ---------
           Total current liabilities                                                     16,357        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 at
      June 30, 2000 and September 30, 1999 (liquidation preference at
      June 30, 2000 of $3,019)                                                            3,000         3,000
      Series C, 5,000 shares issued and outstanding at June 30, 2000 and
      September 30,  1999  (liquidation preference at June 30,
      2000 of  $500)                                                                        500           500
Common stock; $.001 par value, 80,000,000 shares authorized; 42,773,914 and
      42,019,426 shares issued and outstanding at June 30,
      2000 and September 30, 1999, respectively                                              43            42
Additional paid-in capital                                                              274,078       272,337
Accumulated deficit                                                                    (254,600)     (269,758)
Accumulated other comprehensive income                                                     (360)            1
                                                                                     ----------     ---------
      Total stockholders' equity                                                         22,661         6,122
                                                                                     ----------     ---------
                                                                                     $   39,207     $  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 and nine months ended June 30, 2000 and 1999
                                   (Unaudited)
                  (Amounts in thousands except per share data)
<TABLE>
<CAPTION>
                                                  Three Months Ended June 30,         Nine Months Ended June 30,
                                                -------------------------------       --------------------------
                                                     2000              1999               2000            1999
                                                -------------    --------------       -------------    ---------

<S>                                             <C>               <C>                 <C>              <C>
Contract and license fee revenues               $      --         $     199           $  23,751        $   1,099

Costs and expenses:
Cost of  revenues                                      24                --               2,075               --
Research and development                              814             8,891               3,090           31,590
Selling, general and administrative                 1,655             3,024               6,281            9,633
                                                ---------         ---------           ---------        ---------
    Total costs and expenses                        2,493            11,915              11,446           41,223

Income (loss) from operations                      (2,493)          (11,716)             12,305          (40,124)

Investment income, net                                510               528               1,303            1,861
Gain on sales of investment securities                 --                --               1,550               --
Minority interest                                      --             1,588                  --            6,344
                                                ---------         ---------           ---------        ---------

Net income (loss)                               $  (1,983)        $  (9,600)          $  15,158        $ (31,919)
                                                =========         =========           =========        =========

Net income (loss) per common share:
Basic                                           $   (0.05)        $   (0.23)          $    0.36        $   (0.76)
Diluted                                         $   (0.05)        $   (0.23)          $    0.35        $   (0.76)

Weighted average common shares outstanding:
Basic                                              42,730            41,914              42,390           41,873
                                                =========         =========           =========        =========
Diluted                                            42,730            41,914              43,803           41,873
                                                =========         =========           =========        =========

</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 nine months ended June 30, 2000 and 1999
                                   (Unaudited)
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                               Nine months ended June 30,
                                                                               --------------------------
                                                                                   2000           1999
                                                                                ---------      ---------
<S>                                                                             <C>            <C>
Cash flows from operating activities:
     Net income (loss)                                                          $  15,158      $ (31,919)
     Adjustments to reconcile net income (loss) to net cash provided
        (used) by operating activities:
        Depreciation and amortization                                                 168            840
        Gain on sales of investment securities                                     (1,550)            --
        Gain on sales of property and equipment                                       (35)            --
        Minority interest in net loss of consolidated subsidiaries                     --         (6,344)
        Noncash compensation                                                        1,255          3,937
     Change in assets and liabilities:
        Accounts receivable                                                           517          1,187
        Insurance claim receivable                                                 (5,111)            --
        Prepaid and other assets                                                    1,550           (818)
        Accounts payable                                                             (153)          (536)
        Deferred revenue                                                            3,000             --
        Accrued expenses and other liabilities                                     (6,753)        (1,445)
                                                                                ---------      ---------
Net cash provided (used) by operating activities                                    8,046        (35,098)
                                                                                ---------      ---------

Cash flows from investing activities:
     Capital expenditures                                                              (8)          (284)
     Proceeds from sales of property and equipment                                     40             --
     Proceeds from sales of investment securities                                   1,756             --
     Purchases of marketable securities                                           (12,378)        (2,520)
     Proceeds from maturities and sales of marketable securities                    7,371         32,645
                                                                                ---------      ---------
Net cash provided (used) by investing activities                                   (3,219)        29,841
                                                                                ---------      ---------

Cash flows from financing activities:
     Net proceeds from issuance of common stock                                       478             49
     Net proceeds from issuance of stock by subsidiaries                               --            167
     Principal payments of capital lease obligations and notes payable                (61)          (555)
                                                                                ---------      ---------
Net cash provided (used) by financing activities                                      417           (339)
                                                                                ---------      ---------

Net change in cash and cash equivalents                                             5,244         (5,596)
Cash and cash equivalents at beginning of period                                   19,354         39,330
                                                                                ---------      ---------

Cash and cash equivalents at end of period                                      $  24,598      $  33,734
                                                                                =========      =========
</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 for
panic/anxiety disorder, overactive bladder, liver disease, prevention of HIV
infection, stroke 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 common share:
<TABLE>
<CAPTION>
                                          Three Months Ended June 30,            Nine Months Ended June 30,
                                       ---------------------------------       ------------------------------
                                           2000                 1999               2000             1999
                                       ------------         -----------        -----------      -------------
<S>                                    <C>                  <C>                <C>              <C>
Numerator for basic and diluted
 income (loss) per share:
   Net income (loss)                   $(1,983,000)         $(9,600,000)       $15,158,000      $(31,919,000)
                                       ===========          ===========        ===========      =============

Denominator for basic income (loss)
 per share:
   Weighted average shares outstanding  42,730,000           41,914,000         42,390,000        41,873,000
                                       ===========          ===========        ===========      ============

Denominator for diluted income (loss)
 per share:
   Weighted average shares outstanding  42,730,000           41,914,000         42,390,000        41,873,000
   Dilutive effect of:
   Shares issuable in connection with
      stock option plans                        --                   --             34,000                --
   Shares issued or issuable in
      connection with restricted
      stock awards                              --                   --            757,000                --
   Shares issuable in connection with
      convertible preferred stock               --                   --            622,000                --
                                       -----------          -----------        -----------      ------------
   Weighted average shares
    outstanding - diluted               42,730,000           41,914,000         43,803,000        41,873,000
                                       ===========          ===========        ===========      ============

Net income (loss) per common share -
    Basic                                   $(0.05)              $(0.23)             $0.36            $(0.76)
                                       ===========          ===========        ===========      ============
    Diluted                                 $(0.05)              $(0.23)             $0.35            $(0.76)
                                       ===========          ===========        ===========      ============
</TABLE>


                                       -6-
<PAGE>

      During the three month period ended June 30, 2000, 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 9,535,150 shares of Common Stock at prices ranging from $2.38 to
$20.13 with expiration dates ranging up to April 5, 2010; and (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. Additionally,
during the three month period ended June 30, 2000, 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 187,801 shares of Common Stock at prices ranging from $1.53
to $1.88 with expiration dates ranging up to June 6, 2007; (ii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock; and (iii)
unvested Restricted Stock Awards of 450,000 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.

      During the three month period ended June 30, 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 7,150,841 shares of Common Stock at prices ranging from $3.06 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 up to December 31, 1999.
Additionally, during the three month period ended June 30, 1999, 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 $2.63 with expiration dates ranging up to April 7, 2006; (ii) Series B
and C preferred stock convertible into 622,222 shares of Common Stock; and (iii)
unvested Restricted Stock Awards of 743,310 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.

      During the nine month period ended June 30, 2000, 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 6,326,979 shares of Common Stock at prices ranging from $3.56 to
$20.13 with expiration dates ranging up to March 9, 2010; (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.

      During the nine month period ended June 30, 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 7,145,841 shares of Common Stock at prices ranging from $3.56 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 up to December 31, 1999.
Additionally, during the nine month period ended June 30, 1999, 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 22,400 shares of Common Stock at prices ranging from
$0.83 to $3.13 with expiration dates ranging up to April 7, 2006; (ii) Series B
and C preferred stock convertible into 622,222 shares of Common Stock; and (iii)
unvested Restricted Stock Awards of 743,310 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.

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


                                       -7-
<PAGE>

C.   Comprehensive Income (Loss)
     ---------------------------

Comprehensive income (loss) for the three and nine month periods ended June 30,
2000 and 1999, respectively, is as follows:
<TABLE>
<CAPTION>
                                           Three Months Ended June 30,                  Nine Months Ended  June 30,
                                       ------------------------------------         ---------------------------------
                                           2000                    1999                2000                 1999
                                       -----------              -----------         -----------          ------------

<S>                                    <C>                      <C>                 <C>                  <C>
    Net income (loss)                  $(1,983,000)             $(9,600,000)        $15,158,000          $(31,919,000)
    Change in unrealized net
      gain or loss on investments       (1,514,000)                 (11,000)           (361,000)              (32,000)
                                       -----------              -----------         -----------          ------------
    Comprehensive income (loss)        $(3,497,000)             $(9,611,000)        $14,797,000          $(31,951,000)
                                       ===========              ===========         ===========          ============
</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 and on April 13, 2000 the Company moved to
dismiss such petition. Such motion was granted on April 25, 2000.

     Interneuron is named, together with other pharmaceutical companies, as a
defendant in approximately 2,500 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 the Company has asserted claims against
these policies, a substantial portion of which has been used in the Company's
defense of the litigation, and Servier, as an additional insured under these
policies, has asserted its right to claim against these policies. The insurers
have deposited the available proceeds up to the limits of their policies (the
"Deposited Funds"), which is subject to ongoing claims by the Company and
Servier, into the registry of the District Court. On May 3, 2000, the Company
moved to dismiss such actions as moot in light of the District Court's rejection
of the Company's proposed settlement and the dismissal of the Company's petition
to appeal from such order. If the District Court dismisses the interpleader
actions the Deposited Funds should be returned to the insurers and be available
to the Company and Servier to pay claims under these policies.


                                       -8-
<PAGE>

      Reflected in insurance claim receivable at June 30, 2000 is $5,111,000
which the Company paid through June 30, 2000 to the group of law firms defending
the Company in the Redux-related product liability litigation (see "Part II,
Item 1. Legal Proceedings"). The Company is currently paying these law firms'
fees while the Deposited Funds are at the District Court. The Company currently
intends to pay such fees until the Company can be reimbursed out of the
Deposited Funds. The Company cannot predict the outcome of the interpleader
actions. If the actions are dismissed and the Deposited Funds returned to the
insurance companies, it is expected that the insurance companies will resume
paying the Company's litigation expenses and reimburse the Company for
litigation expenses previously paid by the Company. If the actions are not
dismissed, Interneuron will seek an order from the District Court determining
its right to the Deposited Funds. The Company expects to be reimbursed for these
advances.

     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 that it filed a complaint
against AHP in the Superior Court of the Commonwealth of Massachusetts. The
complaint seeks unspecified but substantial damages and attorneys' fees pursuant
to common and statutory law for AHP's knowing and willful deceptive acts and
practices, fraud and misrepresentations and breach of contract. AHP has filed an
answer to such complaint. 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, purporting to be class
actions, filed in the United States District Court for the District of
Massachusetts (the "Massachusetts Federal Court") by alleged purchasers of the
Company's Common Stock, 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 (the "Final Judgment"),
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. No appeal was taken from the Final Judgment. The
settlement amount was 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 chloride, an orally-administered
prescription drug product currently marketed as a treatment for overactive
bladder (urinary incontinence) in several European countries. In exchange, the
Company has agreed to pay Madaus regulatory milestone, royalty and sales
milestone payments. The Company is 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"), and effective as of April 2000, the
Company and Takeda amended such agreement, 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 received to date in licensing
and other guaranteed payments, 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 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 and trospium, in the event
Takeda decides to

                                       -9-
<PAGE>

terminate the citicoline license following a review of the results of the
899-person Phase 3 clinical trial. In the nine months ended June 30, 2000, 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 the
Warner-Lambert Company, now Pfizer Inc. ("Pfizer"), under which it licensed to
Pfizer exclusive worldwide rights to commercialize pagoclone (the "Pfizer
Agreement"). Under the Pfizer Agreement, in December 1999 the Company received
$13,750,000 which was recognized as license fee revenue in the nine months ended
June 30, 2000, and the Company is entitled to receive up to $60,000,000 in
additional payments contingent upon the achievement of clinical and regulatory
milestones. Pfizer also agreed to pay Interneuron royalties on net sales. Under
the Pfizer Agreement, Pfizer is 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, now Aventis S.A. ("Aventis"), the Company
paid to Aventis in January 2000 approximately $2,050,000 of the payment received
by the Company from Pfizer which was reflected as cost of revenue in the nine
months ended June 30, 2000.

     In June 2000, the Company licensed exclusive worldwide rights from
HeavenlyDoor.com, Inc., formerly Procept, Inc. ("HDCI"), to develop and market
PRO 2000, a candidate topical microbicide used to prevent infection by the human
immunodeficiency virus (HIV) and other sexually transmitted pathogens, in
exchange for an up front payment of $500,000, which was charged to research and
development expense, as well as future milestone payments and royalties on net
sales. The Company is responsible for all remaining development and
commercialization activities for PRO 2000.

F.   Recent Accounting Pronouncements:
     --------------------------------

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements,"
("SAB 101"), which clarifies the SEC's views related to revenue recognition and
disclosure. In June 2000, the SEC issued SAB 101B which delays the
implementation date of SAB 101. The Company will adopt SAB 101 in the fourth
quarter of fiscal 2001 and is presently determining the effect it will have on
its financial statements.

     In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" ("Interpretation No. 44"), which provides guidance for issues that
have arisen in applying Accounting Principles Board Statement No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). This Interpretation
is generally effective for transactions occurring after July 1, 2000 except for
the provisions related to repricings and the definition of an employee which
apply to awards issued after December 31, 1998. The Company believes that this
interpretation will not have a material impact on net financial results.

G.   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.


                                      -10-
<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 Annual Report on 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 District Court
rejected a proposed agreement among the Company and the 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. 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 and on April 13,
2000 moved to dismiss such petition. Such motion was granted on April 25, 2000.

      Interneuron is named, together with other pharmaceutical companies, as a
defendant in approximately 2,500 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

                                      -11-
<PAGE>

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 Servier and
the Company in the District Court. Product liability 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 the Company has asserted claims against these policies, a substantial
portion of which has been used in the Company's defense of the litigation, and
Servier, as an additional insured under these policies, has asserted its right
to claim against these policies. The insurers have placed the Deposited Funds at
the registry of the District Court. On May 3, 2000, the Company moved to dismiss
such actions as moot in light of the District Court's rejection of the Company's
proposed settlement and the dismissal of the Company's petition to appeal from
such order. If the District Court dismisses the interpleader actions, the
Deposited Funds should be returned to the insurers and be available to the
Company and Servier to pay claims under these policies.

     On November 23, 1999, the District Court preliminarily approved a proposed
nationwide settlement of 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 common
and statutory law for AHP's knowing and willful deceptive acts and practices,
fraud and misrepresentations and breach of contract. AHP has filed an answer to
such complaint. 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, purporting to be class
actions, filed in the Massachusetts Federal Court by alleged purchasers of the
Company's Common Stock, claiming violation of the federal securities laws. On
February 2, 2000, the Massachusetts Federal Court entered the Final Judgment,
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. No appeal was taken from the Final Judgment. The
settlement amount was 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.


                                      -12-
<PAGE>

Pagoclone

    In December 1999, the Company entered into the Pfizer Agreement, under which
it licensed to Pfizer exclusive worldwide rights to develop and commercialize
pagoclone. Pursuant to the Pfizer Agreement, in December 1999 the Company
received $13,750,000 and the Company is entitled to receive up to $60,000,000 in
additional payments contingent upon the achievement of clinical and regulatory
milestones. Pfizer also agreed to pay Interneuron royalties on net sales. Under
the Pfizer Agreement, Pfizer is 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 Aventis, Aventis is entitled to receive a portion of certain of
the payments to be received by the Company from Pfizer. In the nine months ended
June 30, 2000, the Company recognized $13,750,000 received from Pfizer in
December 1999 as contract and license fee revenue and $2,050,000 paid to Aventis
in January 2000 as cost of revenues.

Trospium

     In November 1999, the Company licensed exclusive U.S. rights from Madaus to
trospium chloride, an orally-administered prescription drug product for
treatment for overactive bladder (urinary incontinence) in several European
countries. In exchange, the Company has agreed to pay Madaus regulatory
milestone, royalty and sales milestone payments. The Company is 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 Investigative New
Drug Application ("IND") in 2000 and initiate a Phase 3 clinical trial in the
first quarter of calendar 2001. The Company does not have adequate current funds
to market trospium and will require additional capital and/or a collaborative
partner for the marketing of trospium.

IP501

    The Company has an exclusive option to negotiate a license to a compound
designated as IP501 for the treatment and prevention of liver diseases,
following the Company's review of data from an ongoing Phase 3 clinical trial of
this compound sponsored by the Veterans Administration. The most recent progress
update from this government-sponsored study indicates that results are expected
to be available by the end of 2000. The primary endpoint of the study is
improvement in liver histology, or condition, among drug-treated pre-cirrhotic
patients compared with placebo patients, as measured by serial liver biopsies.

PRO 2000

    In June 2000, the Company licensed exclusive worldwide rights from HDCI to
develop and market PRO 2000, a candidate topical microbicide used to prevent
infection by the human immunodeficiency virus (HIV) and other sexually
transmitted pathogens, in exchange for an up front payment of $500,000, which
was charged to research and development expense, as well as future milestone
payments and royalties on net sales. The Company is responsible for all
remaining development and commercialization activities for PRO 2000. PRO 2000 is
currently in a Phase 1/2 clinical trial in the U.S. and South Africa, sponsored
by the National Institute of Infections Diseases. In addition, two Phase 1
clinical trials with PRO 2000 have been completed, demonstrating its
tolerability in healthy, sexually abstinent women and preliminary results are
expected shortly. One of these trials was supported by the Medical Research
Council of the United Kingdom (MRC).


                                      -13-
<PAGE>

Citicoline

     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, findings from this
study indicate that there were no significant adverse safety issues associated
with citicoline.

     In December 1999, the Company entered into, and in April 2000 amended, 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, all of which 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.

     The Takeda Agreement also provides an exclusive option to Takeda to
negotiate a license for any one alternative Interneuron compound, excluding
pagoclone and trospium, in the event Takeda decides to terminate the citicoline
license following a review of the 899-person Phase 3 clinical trial. If Takeda
exercises such exclusive option, Takeda has the right until April 1, 2001 to
negotiate a license for the chosen compound and 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 nine month period ended June 30, 2000, the Company recognized
$10,000,000 as license fee revenue from Takeda and $3,000,000 related to the
option as deferred revenue.

Sarafem(TM)

     In June 1997, The Company licensed to Eli Lilly & Company ("Lilly")
worldwide, exclusive rights to Interneuron's patent covering the use of
fluoxetine to treat certain conditions and symptoms associated with premenstrual
syndrome. Lilly has received approval for fluoxetine to treat premenstrual
dysphoric disorder ("PMDD") and will market the drug under the trade name
Sarafem. The agreement provides for milestone payments and royalties based on
net sales. The maximum aggregate royalty payments to Interneuron in any calendar
year ranges from three to five million dollars and are conditioned upon the
achievement of net sales above an annually escalating baseline. Royalties to the
Company will terminate at the end of the first two consecutive quarters in which
70% or less of total Prozac prescriptions are "dispensed as written." Based on a
recent federal court of appeals ruling, Lilly's composition of matter patent on
fluoxetine will expire in the summer of 2001. Lilly has announced their
intention to appeal the decision. If Lilly's appeal is not successful, potential
royalty payments to the Company under this agreement may expire in early 2002.

    Results of Operations
    ---------------------

    For the nine month period ended June 30, 2000, the Company had net income
of $15,158,000 compared to a net loss of $31,919,000 for the nine month period
ended June 30, 1999. This substantial change from net loss to net income is
primarily the result of $23,750,000 of contract and license fee revenue from the
Takeda and Pfizer Agreements entered into in December 1999, the substantial
reduction of costs in fiscal 2000 related to the Phase 3 citicoline clinical
trial that ended in January 2000 and the absence in fiscal 2000 of the results
of operations of Incara Pharmaceuticals Corp. ("Incara") which resulted in net
losses in fiscal 1999. 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


                                      -14-
<PAGE>

Incara's operations. Additionally, in the nine month period ended June 30, 2000,
the Company recorded a gain on sales of Incara stock and a credit to research
and development expenses for costs previously accrued relative to the Phase 3
citicoline clinical trial which were determined to be unnecessary. The Company
expects to report losses for its consolidated operations for the balance of
fiscal 2000.

    The Company had no contract and license fee revenue in the three month
period ended June 30, 2000 compared to $199,000 in the three month period ended
June 30, 1999 and $23,751,000 in contract and license fee revenue in the nine
month period ended June 30, 2000 compared to $1,099,000 of contract and license
fee revenue the nine month period ended June 30, 1999. Contract and license fee
revenue in fiscal 2000 included $10,000,000 received from Takeda pursuant to the
Takeda Agreement and $13,750,000 received from Pfizer pursuant to the Pfizer
Agreement. Contract and license fee revenue in fiscal 1999 consisted primarily
of a milestone payment received by the Company from Lilly relating to the
development of Lilly's drug, fluoxetine (Prozac(R), Sarafem(TM)) for the
treatment of PMDD and contract revenue at Incara. In July 2000, Lilly received
approval from the FDA to market Sarafem to treat PMDD in the U.S. As a result,
in August 2000 the Company has received from Lilly a $1,000,000 milestone
payment and expects to receive royalties on future net sales of Sarafem. Based
on a recent federal court of appeals ruling, Lilly's composition of matter
patent on fluoxetine will expire in the summer of 2001. Lilly has announced
their intention to appeal the decision. If Lilly's appeal is not successful,
potential royalty payments to the Company under this agreement may expire in
early 2002.

    Cost of revenues of $2,075,000 in the nine month period ended June 30, 2000
consists of $2,050,000 paid to Aventis in January 2000 for their portion of the
initial payment received by the Company from Pfizer and $24,000 recorded in the
three month period ended June 30, 2000 to fully reserve for the remaining
AnatoMark inventory.

    Research and development expense decreased $8,077,000, or 91%, to $814,000
in the three month period ended June 30, 2000 compared to $8,891,000 in the
three month period ended June 30, 1999 and decreased $28,500,000, or 90%, to
$3,090,000 in the nine month period ended June 30, 2000 from $31,590,000 in the
nine month period ended June 30, 1999. These decreases were substantially due to
the absence in fiscal 2000 of Incara expenses. Also, in the fiscal 2000 periods
the Company incurred less expense related to citicoline due to the completion of
the 899-person Phase 3 citicoline clinical trial at the end of the first quarter
of fiscal 2000 and reduced expenses related to pagoclone. Contributing to the
decrease in research and development expense in the fiscal 2000 periods were
approximately $1,800,000 of credits recorded in the nine month period ended June
30, 2000, approximately $450,000 of which were recorded in the three month
period ended June 30, 2000, reflecting the reversal of costs accrued relative to
the Phase 3 citicoline clinical trial which were determined to be unnecessary
and for a reversal of expense accrued and related to pagoclone development which
was determined to be unnecessary subsequent to the Pfizer Agreement.

    Selling, general and administrative expense decreased $1,369,000, or 45%, to
$1,655,000 in the three month period ended June 30, 2000 from $3,024,000 in the
three month period ended June 30, 1999 and decreased $3,352,000, or 35%, to
$6,281,000 in the nine month period ended June 30, 2000 from $9,633,000 in the
nine month period ended June 30, 1999. These decreases were primarily due to the
absence in the fiscal 2000 periods of Incara expenses and diminished charges for
restricted stock awards granted pursuant to the Company's 1997 Equity Incentive
Plan partially offset by increased legal costs. Additionally, personnel-related
costs decreased in the fiscal 2000 periods as a result of workforce reductions
in fiscal 2000.


                                      -15-
<PAGE>

    Investment income, net decreased $18,000, or 3%, to $510,000 in the three
month period ended June 30, 2000 from $528,000 in the three month period ended
June 30, 1999 and decreased $558,000, or 30%, to $1,303,000 in the nine month
period ended June 30, 2000 from $1,861,000 in the nine month period ended June
30, 1999. The decrease in the three month period is primarily due to the absence
in fiscal 2000 of Incara investment income, net while Interneuron's average
invested cash balances were slightly higher. The decrease in the nine month
period is primarily due to the absence in fiscal 2000 of Incara investment
income, net, and lower average invested cash balances at Interneuron.

    Gain on sales of investment securities of $1,550,000 in the nine month
period ended June 30, 2000 resulted from the Company's sale of 288,000 shares of
Incara stock.

    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 June 30, 2000, the Company had consolidated cash, cash equivalents and
marketable securities of $32,062,000 compared to $21,811,000 at September 30,
1999. This increase is primarily due to approximately $25,250,000 received from
Takeda and Pfizer pursuant to the Takeda and Pfizer Agreements less net amounts
used to fund operations in the nine month period ended June 30, 2000, including
approximately $5,111,000 paid to the group of law firms defending the Company in
the Redux-related product liability litigation and which the Company expects to
be reimbursed by its product liability insurers (see "Analysis of Cash Flows"
below and Part II, Item 1. Legal Proceedings).

    While the Company believes it has sufficient cash for currently planned
expenditures through fiscal 2001 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 and
investigating other potential business opportunities, and has reduced its
overhead and expenditures. In February 2000, the Company reduced its workforce
by 11 people. This reduction and additional attrition has brought the Company's
workforce to 18 employees as of June 30, 2000. The Company will require
additional funds for the development and commercialization of PRO 2000, 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, or at all.

    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 or product under development will receive FDA
approval in a timely manner or at all, or that such drug or product could be
successfully manufactured in accordance with cGMP or successfully marketed in a
timely manner, or at all, or that the


                                      -16-
<PAGE>

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 from operating activities during the nine months ended June
30, 2000 of $8,046,000 consisted primarily of net income and an increase in
deferred revenue offset by payments relating to the Company's temporary funding
of Redux-related product liability defense costs (discussed below) and a
reduction of accrued expenses and other liabilities from payments of and
adjustments to clinical development costs.

    Cash used by investing activities during the nine months ended June 30, 2000
of $3,219,000 consisted primarily of proceeds from the sale of Incara stock and
net proceeds from maturities and sales of marketable securities.

    Reflected in insurance claim receivable at June 30, 2000 is $5,111,000
which the Company paid through June 30, 2000 to the group of law firms defending
the Company in the Redux-related product liability litigation (see "Part II,
Item 1. Legal Proceedings"). The Company is currently paying these law firms'
fees at the rate of approximately $2,600,000 per quarter while the Deposited
Funds are at the District Court. The Company currently intends to pay such fees
until the Company can be reimbursed out of the Deposited Funds. The Company
cannot predict the outcome of the interpleader actions. If the actions are
dismissed and the Deposited Funds returned to the insurance companies, it is
expected that the insurance companies will resume paying the Company's
litigation expenses and reimburse the Company for litigation expenses previously
paid by the Company. If the actions are not dismissed, Interneuron will seek an
order from the District Court determining its right to the Deposited Funds. The
Company expects to be reimbursed for these advances.

    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 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 March 2000, the Company received from Incara approximately 488,000 shares
of Incara common stock valued at approximately $1,600,000 as the third and final
installment for the sale of Transcell Technologies, Inc. to Incara in May 1998.
As of June 30, 2000, the Company owned 482,000 shares of Incara common stock.
The Company's investment in Incara at June 30, 2000 is valued at $1,265,000
using Incara's fair market value as of the close of business on June 30, 2000 of
approimately $2.63 per share. As of the close of business on August 1, 2000, the
fair market value of Incara's common stock was approximately $2.09 per share.


                                      -17-
<PAGE>

    Recent Accounting Pronouncements:

     In December 1999, the SEC issued SAB 101 which clarifies the SEC's views
related to revenue recognition and disclosure. In June 2000, the SEC isued SAB
101B which delays the implementation date of SAB 101. The Company will adopt SAB
101 in the fourth quarter of fiscal 2001 and is presently determining the effect
it will have on its financial statements.

     In March 2000, the FASB issued Interpretation No. 44 which provides
guidance for issues that have arisen in applying APB No. 25. This Interpretation
is generally effective for transactions occurring after July 1, 2000 except for
the provisions related to repricings and the definition of an employee which
apply to awards issued after December 31, 1998. The Company believes that this
interpretation will not have a material impact on net financial results.

    Other:

    In November 1998, pursuant to an agreement with 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. In May 2000, the Company received reimbursement for the
withholding taxes it sought from Servier.

    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 could 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 2,500 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

                                      -18-
<PAGE>

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. 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,
primary pulmonary hypertension ("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 a proposed
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.

    Following a decision from the Supreme Court overturning a putative "limited
fund" class action settlement relating to asbestos litigation in Ortiz, the
District Court, on September 27, 1999, rejected the settlement agreement,
finding that it did not meet the requirements for limited and 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. On April 13, 2000, the
Company moved to dismiss such petition and such motion was granted on April 25,
2000.

    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 that 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 common and statutory law for AHP's knowing and willful deceptive acts and
practices, fraud and misrepresentations and breach of contract. AHP has filed an
answer to such complaint. The 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


                                      -19-
<PAGE>

the Company has asserted claims against these policies, a substantial portion of
which has been used in the Company's defense of the litigation, and Servier, as
an additional insured under these policies, has asserted its right to claim
against these policies. The insurers have placed the Deposited Funds which are
subject to ongoing claims by the Company and Servier, at the registry of the
District Court. On May 3, 2000, the Company moved to dismiss such actions as
moot, in light of the District Court's rejection of the Company's proposed
settlement and the dismissal of the Company's petition from such order. If the
District Court dismisses the Interpleader Action, the Deposited Funds should be
returned to the insurers and be available to the Company and Servier to pay
claims under these policies.

    Securities Litigation: The Company and certain present or former directors
    ----------------------
and/or officers of the Company were named as defendants in several lawsuits,
purporting to be class actions, filed in Massachusetts Federal Court by alleged
purchasers of the Company's Common Stock, claiming violation of the federal
securities laws. On February 2, 2000, the Massachusetts Federal Court entered
the Final Judgment, 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. No appeal was taken from the
Final Judgment. The settlement amount was 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 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," and Note D of Notes to Unaudited
Consolidated Financial Statements.


                                      -20-
<PAGE>

     Item 6.      Exhibits and Reports on Form 8-K
                  --------------------------------
     (a) Exhibits

         10.117   - License Agreement by and between HeavenlyDoor.com, Inc.
                        and Interneuron Pharmaceuticals, Inc.
                        dated June 14, 2000 (1)
         27       -  Financial Data Schedule
    --------------------------------------
           (1)    Confidential treatment requested.

     (b) Reports on Form 8-K

         The Company did not file any reports on Form 8-K during the three month
         period ended June 30, 2000.


                                      -21-
<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: August 11, 2000           By: /s/ Glenn L. Cooper
                                        __________________________________
                                    Glenn L. Cooper, M.D., President, Chairman
                                    and Chief Executive Officer
                                    (Principal Executive Officer)

    Date: August 11, 2000           By: /s/ Michael W. Rogers
                                        __________________________________
                                    Michael W. Rogers, Executive Vice President,
                                    Chief Financial Officer and Treasurer
                                    (Principal Financial Officer)

    Date: August 11, 2000           By: /s/ Dale Ritter
                                        __________________________________
                                    Dale Ritter, Senior Vice President, Finance
                                    (Principal Accounting Officer)





                                      -22-