SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
                              --------------------

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

For the quarter ended March 31, 1997

[ ]      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 (617) 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 13, 1997:
Common Stock $.001 par value                     41,043,708 shares, excluding
                                                 182,585 treasury shares

                                       -1-





                        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, 1997
                  and September 30, 1996......................................................................... 3

                  Consolidated Statements of Operations for the Three and Six Months ended
                  March 31, 1997 and 1996.........................................................................4

                  Consolidated Statements of Cash Flows for the Six Months ended
                  March 31, 1997 and 1996.........................................................................5

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

                  Item 2.           Management's Discussion and Analysis of Financial
                                    Condition and Results of Operations...........................................9


PART II.          OTHER INFORMATION

                  Item 4.           Submission of Matters to a Vote of
                                    Security Holders.............................................................21

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


SIGNATURES.......................................................................................................23

</TABLE>

                                       -2-




<TABLE>
<CAPTION>

                                         INTERNEURON PHARMACEUTICALS, INC.
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                (Dollar amounts in thousands except per share data)

                                                                                   March 31,         September 30,
                                                                                     1997                 1996
                                                                                     ----                 ----
                                                      ASSETS
Current assets:
<S>                                                                                    <C>                 <C>     
     Cash and cash equivalents                                                         $ 93,414            $145,901
     Marketable securities                                                               29,471              17,068
     Accounts receivable                                                                  1,926               4,338
     Inventories                                                                          6,356               8,376
     Prepaids and other current assets                                                    5,961               1,324
                                                                                    -----------        ------------
             Total current assets                                                       137,128             177,007

Marketable securities                                                                    37,475               6,639
Property and equipment, net                                                               3,024               2,689
Other assets                                                                                165                 103
                                                                                   ------------       -------------
                                                                                       $177,792            $186,438
                                                                                       ========           =========

                                                        LIABILITIES

Current liabilities:
     Accounts payable                                                                 $   2,249           $   2,575
     Accrued expenses                                                                    16,268              11,604
     Deferred revenue                                                                     5,694               6,921
     Current portion of capital lease obligations                                           931                 661
                                                                                     ----------       -------------
             Total current liabilities                                                   25,142              21,761

Long-term portion of capital lease obligations                                            1,194                 526
Other long-term liabilities                                                                  19                  16

Minority interest                                                                        19,016              19,373

                                                   STOCKHOLDERS' EQUITY

Preferred stock, $.001 par value, authorized 5,000,000 shares: Series B, 239,425
     shares  issued and  outstanding  at March 31, 1997 and  September  30, 1996
     (liquidation preference at
     March  31, 1997 $3,041)                                                              3,000               3,000
     Series C, 5,000 shares issued and outstanding at March 31, 1997
     and September 30, 1996  (liquidation preference at
     March  31, 1997  $504)                                                                 500                 500
Common stock, $.001 par value, 80,000,000 shares authorized:
     41,226,293 issued and 41,015,969 shares issued and outstanding at
     March  31, 1997 and September 30, 1996, respectively                                    41                  41
Additional paid-in capital                                                              249,020             247,999
Accumulated deficit                                                                    (117,559)           (106,778)
Unrealized losses on marketable securities                                                 (218)                  -
Treasury stock, at cost, 128,835 shares at March 31, 1997 and no
     shares at September 30, 1996                                                        (2,363)                  -
                                                                                    ------------     --------------
     Total stockholders' equity                                                         132,421             144,762
                                                                                      ---------           ---------
                                                                                       $177,792            $186,438
                                                                                       ========            ========

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

</TABLE>

                                       -3-




<TABLE>
<CAPTION>


                                          INTERNEURON PHARMACEUTICALS, INC.
                                                    CONSOLIDATED
                                              STATEMENTS OF OPERATIONS
                             For the three and six months ended March 31, 1997 and 1996
                                                     (Unaudited)
                                     (Amounts in thousands except per share data)


                                    For the three months ended March 31,       For the six months ended March 31,
                                    ------------------------------------       ----------------------------------

                                              1997             1996                        1997            1996
                                              ----             ----                        ----            ----

Revenues:
<S>                                       <C>         <C>                              <C>         <C>         
Product revenue                           $ 17,477    $           -                    $ 31,188    $          -
Contract and license fees                    2,297              905                       6,278           6,249
                                        ----------        ---------                    --------       ---------
   Total revenues                           19,774              905                      37,466           6,249

Costs and expenses:
Cost of product revenue                     11,999                -                      21,903               -
Research and development                     9,966            3,599                      17,484           6,726
Selling, general and administrative          5,827            4,170                      11,344           6,881
Purchase of in-process research
  and development                            2,261            6,084                       2,261           8,234
                                         ---------         --------                   ---------       ---------
     Total costs and expenses               30,053           13,853                      52,992          21,841

Net loss from operations                   (10,279)         (12,948)                    (15,526)        (15,592)

Investment income, net                       2,008              555                       4,597             989

Minority interest                              421              432                         148            (542)
                                         ---------        ---------                  ----------       ----------

Net loss                                   $(7,850)        $(11,961)                   $(10,781)       $(15,145)
                                           ========        =========                   =========       =========

Net loss per common share                 $ ( 0.19)       $  ( 0.34)                 $   ( 0.26)     $    (0.44)
                                          =========       ==========                 ===========     ===========

Weighted average common
      shares outstanding                    41,098           35,308                      41,059          34,411
                                           =======         ========                     =======        ========




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

</TABLE>


                                       -4-



<TABLE>
<CAPTION>
                                          INTERNEURON PHARMACEUTICALS, INC.
                                                    CONSOLIDATED
                                              STATEMENTS OF CASH FLOWS
                                   For the six months ended March 31, 1997 and 1996
                                                     (Unaudited)
                                            (Dollar amounts in thousands)

                                                                    Six months ended March 31,
                                                                    --------------------------
                                                                    1997                  1996
                                                                    ----                  ----

Cash flows from operating activities:
<S>                                                            <C>                 <C>         
     Net loss                                                  $   (10,781)        $   (15,145)
     Adjustments to reconcile net loss to net cash
     used by operating activities:
         Depreciation and amortization                                 646                 381
         Gain on disposal of fixed assets                                -                  (6)
         Minority interest in net income/loss of
            consolidated subsidiaries                                 (148)                542
         Purchase of in-process research and development             1,861               8,098
         Noncash compensation                                          176                 896
         Change in assets and liabilities:
             Accounts receivable                                     2,412                (908)
             Inventories                                             2,020              (3,629)
             Prepaids and other current assets                      (4,637)               (281)
             Other assets                                              (62)                 97
             Accounts payable                                         (326)                937
             Deferred revenue                                       (1,227)              1,942
             Accrued expenses and other liabilities                  4,452                (559)
                                                           ---------------     ----------------
Net cash (used) by operating activities                             (5,614)             (7,635)
                                                             --------------      --------------

Cash flows from investing activities:
     Capital expenditures                                             (726)               (141)
     Purchase of marketable securities                             (53,600)            (36,233)
     Proceeds from maturities and sales of
        marketable securities                                       10,143              21,789
     Purchases of Intercardia stock                                 (2,436)                  -
     Proceeds from disposal of fixed assets                              -                  40
                                                          -----------------     ---------------
Net cash (used) by investing activities                            (46,619)            (14,545)
                                                              -------------    ----------------

Cash flows from financing activities:
     Net proceeds from issuance of common and treasury stock         1,101              13,608
     Net proceeds from issuance of stock by subsidiaries               276              30,362
     Purchase of treasury stock                                     (2,315)                  -
     Proceeds from sale/leaseback                                    1,050                 132
     Principal payments of capital lease obligations                  (366)               (244)
                                                            ---------------    ----------------
Net cash (used) provided by financing activities                      (254)             43,858
                                                            ---------------     ---------------

Net change in cash and cash equivalents                            (52,487)             21,678
Cash and cash equivalents at beginning of period                   145,901              16,781
                                                             -------------      --------------

Cash and cash equivalents at end of period                     $    93,414       $      38,459
                                                               ===========       -------------
</TABLE>




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

                                       -5-





                        INTERNEURON PHARMACEUTICALS, INC.

              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, 1996.

     The unaudited  consolidated  financial  statements  include the accounts of
Interneuron  Pharmaceuticals,  Inc.  ("Interneuron"  or the  "Company")  and its
subsidiaries (the "Subsidiaries"),  Progenitor,  Inc. ("Progenitor"),  Transcell
Technologies,  Inc.  ("Transcell"),   Intercardia,  Inc.  ("Intercardia"),   and
InterNutria,  Inc.  ("InterNutria").  All significant  intercompany activity has
been eliminated.

     The Company will adopt Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") in the quarter  ending  December 31, 1997.  SFAS
128  requires  the  Company to change its method of  computing,  presenting  and
disclosing earnings per share information.  Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS 128.
Management has not determined the effect of adopting SFAS 128.

B.   Significant Accounting Policies:

     Certain  prior year amounts have been  reclassified  to conform with fiscal
1997 classifications.

C.  Inventories:

<TABLE>
<CAPTION>

     Inventories consisted of:                                 March 31,         September 30,
                                                                1997                 1996
                                                            ------------          ----------

<S>                                                           <C>                 <C>       
     Raw materials                                            $4,168,000          $5,420,000
     Finished goods                                            2,188,000           2,956,000
                                                            ------------          ----------
                                                              $6,356,000          $8,376,000
                                                              ==========          ==========
</TABLE>

     Raw materials  consisted  primarily of  dexfenfluramine  drug substance and
finished goods consisted primarily of finished and packaged Redux(TM) capsules.


                                       -6-





D.  Subsidiaries:

     In December 1996,  Progenitor  entered into an agreement  with Amgen,  Inc.
("Amgen") (the "Amgen  Agreement"),  granting Amgen certain exclusive rights for
the  development and  commercialization  of products using  Progenitor's  leptin
receptor  technology.  Amgen paid  Progenitor a $500,000  initial license fee in
January 1997, which was reflected in contract and license fee revenue in the six
month  period  ended March 31,  1997.  Progenitor  may also  receive  from Amgen
certain development and regulatory milestone payments and potential royalties on
sales.  Amgen also agreed to purchase  Progenitor common stock in the event of a
Progenitor initial public offering.

     In December 1996,  Intercardia executed an agreement with BASF Pharma/Knoll
AG  ("Knoll")  ("the  Knoll  Collaboration")  to  provide  for the  development,
manufacture  and marketing of bucindolol in all countries  with the exception of
the United States and Japan (the "Territory").  The Knoll Collaboration  relates
to both the twice-daily  bucindolol  formulation  and the once-daily  bucindolol
formulation   currently  under  development.   Under  the  terms  of  the  Knoll
Collaboration,  Knoll made in December 1996 a $2,143,000  payment to CPEC,  Inc.
("CPEC",  Intercardia's majority-owned subsidiary, of which Interneuron owns the
minority  portion)  which was  recognized as contract and license fee revenue in
the six month period ended March 31, 1997,  and a $1,000,000  payment to CPEC in
January  1997 which was  recognized  as contract  and license fee revenue in the
three  and six month  periods  ended  March 31,  1997.  Knoll  will make  future
payments to CPEC upon the achievement of product approval and sales milestones.

     Knoll and  Intercardia  will share the  development  and marketing costs of
bucindolol in the Territory.  In general,  Knoll shall pay  approximately 60% of
the  development  and marketing  costs prior to product  launch and  Intercardia
shall pay  approximately  40% of such costs,  subject to certain  maximum dollar
limitations.  CPEC will be entitled to a royalty equal to 40% of net profits, as
defined in the Knoll  Collaboration,  and would be  responsible  for, and pay to
Knoll, 40% of any net loss, as defined.

     In February 1997,  Progenitor  announced an agreement to acquire  Mercator,
Inc.  ("Mercator")  a  privately-held  genomics  company,   subject  to  certain
conditions, including completion of an initial public offering by Progenitor for
approximately  $22,000,000,   payable  in  Progenitor  common  stock,  plus  the
assumption of Mercator  liabilities.  Progenitor also agreed to provide Mercator
with an interim  operating line of credit through July 1997 of up to $6,600,000,
funding for which will be provided by Interneuron.  At March 31, 1997,  advances
under this line of credit totaled approximately  $1,300,000 and are reflected in
prepaids and other current assets.

     In March 1997, Progenitor filed registration statements with the Securities
and  Exchange  Commission  relating  to a proposed  initial  public  offering of
2,750,000  shares of Progenitor  common stock (plus up to an additional  412,500
shares to cover  over-allotments)  and the proposed acquisition by Progenitor of
Mercator.  Based on the  proposed  terms of the  offering  and the  acquisition,
assuming the  completion  of the offering  and the Mercator  acquisition  on the
filed terms,  Interneuron will own approximately 43% of Progenitor's outstanding
common stock without giving effect to any exercise of the over-allotment  option
or any options or  warrants,  and subject to change based upon the timing of the
offering, the offering price, the number of Progenitor shares


                                       -7-





issued  in  connection   with  the  Mercator   acquisition  and  the  amount  of
Progenitor's  indebtedness to Interneuron.  In connection with the  acquisition,
Progenitor will incur non-recurring charges to operations currently estimated to
aggregate  approximately  $30,000,000,  a portion of which are non-cash  charges
related to the  purchase  of  in-process  research  and  development  subject to
increase based upon several factors including the timing of the transactions and
unanticipated  costs.  Due to market  conditions and other factors,  there is no
assurance that  Progenitor's  initial public offering or acquisition of Mercator
will be completed, in which case Progenitor will incur charges to operations for
amounts  expended in connection  with the two proposed  transactions,  including
funds  advanced under the line of credit.  Interneuron  will record a portion of
these charges based on its ownership interest in Progenitor.

E.   Other:

     In February  1997,  the Company  announced  that its Board of Directors had
authorized it to purchase from time to time through open-market  transactions up
to 200,000 shares of the common stock of Intercardia.  As of March 31, 1997, the
Company  had  purchased  104,400  shares  of  Intercardia  common  stock  for an
aggregate  purchase price of approximately  $2,436,000,  of which  approximately
$1,861,000  was recorded as purchase of in-process  research and  development in
the three and six  month  periods  ended  March 31,  1997.  As a result of these
purchases,  the  Company's  ownership  of  Intercardia  increased  from 59.6% at
September  30,  1996 to  61.0% at March  31,  1997  based  upon  the  number  of
outstanding shares of Intercardia at such dates.

     At the Company's  annual  meeting of  stockholders,  on March 5, 1997,  the
Company's  stockholders  approved an increase to the number of authorized shares
of Common Stock from 60,000,000 to 80,000,000.

     In March  1997,  the  Company  announced  that its Board of  Directors  had
authorized it to repurchase from time to time through  open-market  transactions
up to 1,500,000  shares of the Company's Common Stock. As of March 31, 1997, the
Company  had  repurchased  142,500  shares for an  aggregate  purchase  price of
approximately  $2,619,000,  of which  13,665  shares were  reissued  pursuant to
employee  stock  option  and stock  purchase  plans.  Such  repurchases  and re-
issuances are recorded as treasury stock transactions.

     At March 31, 1997,  the Company had  outstanding a Standby Letter of Credit
for $800,000 to secure  certain  facility and laboratory  build-out  costs being
incurred by a subsidiary as part of a lease for its  headquarters.  This Standby
Letter of Credit is  collateralized  by a certificate of deposit and expires the
sooner of September 15, 1997 or receipt by the subsidiary's  landlord of payment
of the build-out costs.

F.   Subsequent Event:

     On May 9, 1997, the Company  purchased in private  transactions  from Swiss
Bank  Corporation,  London  Branch  ("SBC")  capped call options on  Interneuron
Common Stock. These call options give Interneuron the right to purchase from SBC
up to a total of 1,240,000 shares of Interneuron  Common Stock at a strike price
of $17.75. The call options are exercisable only at their maturities,  which are
September  24, 1997,  March 9, 1998,  May 21, 1998 and August 24, 1998 each with
respect to 310,000 shares, and are subject to caps of $26.00, $34.00, $38.00 and
$40.00,  respectively,  which limit the economic benefit to the Company of these
call options.  The call options  which the Company  purchased are expected to be
settled,  if exercised,  with cash in an amount equal to the difference  between
the  strike  price and the  market  price,  subject to caps which will limit the
total amount of cash the Company  could receive or increase the strike prices in
the case of stock settlement when the market price of the Company's Common Stock
exceeds the applicable cap price.




                                       -8-






     In  exchange  for the  purchases  of these  call  options,  in lieu of cash
purchase prices,  the Company sold to SBC call options entitling SBC to purchase
from the  Company  at a strike  price of  $40.30  per  share,  an  aggregate  of
2,000,000 shares of Interneuron Common Stock, 1,000,000 shares on each of May 21
and May 24,  1999.  The Company will have the right to settle these call options
with cash or stock,  subject to certain  conditions.  If exercised,  the Company
expects to settle the call options that it sold through issuances by the Company
to SBC of up to an  aggregate  of 2,000,000  authorized  and unissued  shares of
Common Stock, subject to the effectiveness of a registration  statement covering
the resale of these shares. The sale or potential sale of such shares could have
an adverse effect on the market price of the Company's Common Stock.

     SBC has  advised  that it has  engaged,  and may engage,  in  transactions,
including buying and selling shares of the Company's Common Stock, to offset its
risk relating to the options.  Purchases and sales could affect the market price
of the Company's Common Stock.

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  "Risk
Factors"  and  elsewhere,   including,  in  particular  risks  relating  to  the
commercialization of Redux, such as marketing and revenue fluctuations,  safety,
regulatory,  competition  patent,  product  liability,  supply and other  risks;
uncertainties  relating to clinical trials;  manufacturing and supply risks; the
early  stage  of  products  under  development;  risks  related  to  contractual
obligations;  risks relating to product launches and managing growth; government
regulation, patent risks, dependence on third parties and competition.

     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, 1996. Unless the context indicates otherwise, all references
to the Company include Interneuron and its Subsidiaries.

Redux

     On April 29,  1996,  the  Company's  first  pharmaceutical  product,  Redux
(dexfenfluramine  hydrochloride  capsules)  C-IV received  clearance by the U.S.
Food and Drug Administration ("FDA") for marketing as a twice-daily prescription
therapy to treat  obesity.  The approved  indication  is for the  management  of
obesity,  including  weight loss and maintenance of weight loss in patients on a
reduced calorie diet who have a body mass index ("BMI") of greater than or equal
to 30 kg/m2 or greater  than or equal to 27 kg/m2 in the  presence of other risk
factors, such as hypertension,  diabetes and elevated cholesterol. Under license
and co-promotion agreements, Redux is being marketed in the U.S. by Wyeth-Ayerst
Laboratories ("Wyeth-Ayerst"), a division

                                       -9-





of American Home Products Corp. ("AHP")  and co-promoted by the Company.

     The Company's  revenues  relating to Redux are currently  primarily derived
from:  (1) royalties  paid by AHP to the Company based on the net sales of Redux
capsules by AHP to  distributors;  (2) sales of Redux  capsules to AHP;  and (3)
financial support of the Company's sales force provided by AHP.

     The  Company's  license  agreement  with AHP provides for  royalties to the
Company  consisting of (i) "base"  royalties  equal to 11.5% of AHP's net sales,
(an amount  equal to the total  royalties  required to be paid by the Company to
Les Laboratoires Servier ("Servier"),  and (ii) "additional"  royalties based on
net sales of Redux by AHP.  The  percentage  of  "additional"  royalties  varies
depending  upon (x) the status of Redux as a scheduled or  descheduled  drug and
(y) whether or not the Company  supplies the finished  capsules of Redux to AHP.
At March 31, 1997, Redux was scheduled as a controlled substance and the Company
manufactures  the finished  dosage  formulation  of the drug. In April 1997, the
Drug Enforcement  Agency ("DEA")  published a recommendation  for the removal of
fenfluramine and its isomers including  dexfenfluramine from Schedule IV and all
other controls of the Controlled  Substances  Act. If after a comment period the
DEA were to issue a final rule consistent with its proposal, then Redux would no
longer  carry the C-IV  designation  and would no longer be  subject to such DEA
controls.  Certain states will  deschedule the drug  automatically  upon federal
descheduling while other states have varying proceedures for descheduling.

     The following sets forth the applicable  "additional"  royalties payable to
the Company based on annual net sales, on an annual contract basis commencing in
May of each contract year,  assuming the Company is supplying  finished capsules
of Redux,  based on the status of  dexfenfluramine as a scheduled or descheduled
drug:

         Scheduled
         ---------
         First $50,000,000                                        5.0%
         Next $100,000,000                                        8.0%
         Over $150,000,000                                       10.0%

         Descheduled
         -----------
         First $150,000,000                                       8.0%
         Next $ 50,000,000                                       10.0%
         Over $200,000,000                                       11.0%

     Royalty  rates are subject to a 50%  reduction if generic drug  competition
exceeds a 10% market share in two consecutive  quarters.  The Company recognizes
royalty revenue and associated expense in the fiscal quarter when AHP reports to
Interneuron  AHP's  shipments  to  distributors. Accordingly, royalty revenue is
reported  by the  Company in the  quarter  following  actual  shipments  by AHP.
Pursuant to the Company's  agreement with AHP, if the potential  descheduling of
Redux were to occur within a year of FDA approval, AHP would be required to make
a milestone payment to, and equity investment in, the Company. Due to the timing
of the potential descheduling, the

                                      -10-





Company believes it may not receive the  descheduling-related  milestone payment
and equity investment from AHP.

     Under a copromotion agreement with Wyeth-Ayerst effective June 1, 1996, the
Company's sales force is promoting Redux to selected specialists,  in return for
financial support of the sales force and a percentage of resulting revenues less
certain  expenses.  The copromotion  agreement with AHP calls for a reduction of
the Redux  sales  force  costs paid by AHP to  Interneuron  from 100% during the
first year of the  agreement  to 50% during  the second  year of the  agreement.
Total maximum payments from AHP will be reduced to approximately  $1,650,000 for
the twelve month period  beginning June 1997 from  approximately  $3,300,000 for
the twelve month period which commenced in June 1996. The copromotion  agreement
is cancelable by Wyeth-Ayerst  under certain  conditions.  There is no assurance
the  Company  will  meet  such  conditions  which  includes  a  minimum  revenue
requirement for which sufficient information is currently not available.

     The  Company  has  a  manufacturing  agreement  with  Boehringer  Ingelheim
Pharmaceuticals,  Inc.  ("Boehringer")  under which Boehringer  manufactures and
packages  finished  capsules  of Redux on behalf of the Company for sale to AHP.
This  agreement  obligates  Boehringer to provide,  and the Company to purchase,
manufactured Redux capsules to the extent defined in the agreement,  through the
current  contract  expiration  date of December 31, 1998.  At the  expiration or
termination  of the  agreement,  the Company would be obligated to purchase from
Boehringer  any unused  manufacturing  materials,  work in process,  or finished
product and to assume any unfilled  Boehringer  purchase  commitments that could
not be canceled prior to the expiration or termination of the agreement.  If the
Boehringer  agreement is not extended,  the Company will be required to obtain a
replacement  good  manufacturing   practices  ("GMP")  qualified   manufacturing
facility  for  Redux.   The  Company  is  currently   evaluating   manufacturing
alternatives.  There can be no  assurance  a  replacement  manufacturer  will be
approved  by the  FDA  in  sufficient  time  to  avoid  an  interruption  in the
commercial  supply of Redux.  The Company  recognizes  revenue  from the sale of
these capsules upon acceptance by AHP, typically 45 days after shipment.

     Included in the  FDA-approved  labeling for Redux are references to certain
risks that may be associated  with  dexfenfluramine  and which were  highlighted
during the FDA's review of the drug.  One issue  relates to whether  there is an
association between appetite suppressants,  including  dexfenfluramine,  and the
development of primary pulmonary  hypertension  ("PPH"), a rare but serious lung
disorder  estimated to occur in the general  population  at one to two cases per
million  adults per year. An  epidemiologic  study  conducted in Europe known as
IPPHS (International Primary Pulmonary Hypertension Study) examined risk factors
for PPH and showed that among other factors,  weight reduction drugs,  including
dexfenfluramine,  and obesity itself were  associated with a higher risk of PPH.
In the final report of IPPHS,  published in the New England  Journal of Medicine
(August 29, 1996), the authors  estimated yearly  occurrence of PPH for patients
taking  appetite  suppressants  for  greater  than three  months  duration to be
between 23 and 46 cases per million  patients per year. The revised labeling for
Redux discloses this revised estimate.

     The FDA-approved  labeling for Redux also includes discussion as to whether
dexfenfluramine is associated with certain  neurochemical  changes in the brain.
Certain studies conducted by third parties related to this issue purport to show
that very high doses of dexfenfluramine  cause prolonged  serotonin depletion in
certain   animals,   which  some   researchers   believe  is  an  indication  of
neurotoxicity.   The  Company  has  presented  data  relating  to  the  lack  of
neurocognitive effects in patients taking Redux to the FDA and believes that, as
demonstrated in human trials, these animal



                                      -11-





studies  are  clinically   irrelevant  to  humans  because  of   pharmacokinetic
differences  between  animals and humans and because of the high dosages used in
the animal  studies.  The Company and Wyeth-  Ayerst have agreed with the FDA to
conduct a certain  Phase 4, or  post-marketing,  study of Redux.  This study and
related costs are estimated to be approximately  $10,000,000 and are expected to
be incurred  primarily by Interneuron  over an  approximately  two to three year
period. Wyeth-Ayerst is responsible to pay for 50% of these estimated costs.

     The use  patent  on  dexfenfluramine  currently  expires  in mid  2000.  In
accordance  with the  Waxman-Hatch Act, the U.S.  Patent  and  Trademark  Office
("PTO") is currently  considering an extension of the dexfenfluramine  patent to
compensate  the  Company  for a portion  of the time  dexfenfluramine  was being
tested and  considered for approval.  The PTO has instituted a petition  period,
which ends on August 27, 1997,  during which it will accept  comments  regarding
such  extension.  If such  extension is granted by the PTO, the  dexfenfluramine
patent will be extended for  approximately  an additional  3.5 years.  Also, the
Company  believes it is entitled under the  Waxman-Hatch  Act to a minimum three
year  period  of  exclusivity  from  the  date  of FDA  approval,  during  which
applications for generic versions of the drug may not be approved,  although the
Company  has  applied  for a five year  period of  exclusivity.  There can be no
assurance  of  receipt  of such  exclusivity  or patent  extension  on  a timely
basis or at all.

     Redux may be subject to substantial competition. AHP also sells Pondimin to
treat  obesity.  In May 1997,  an FDA  advisory  panel  recommended  approval of
Xenical,  a Hoffman-La  Roche,  Inc.  drug,  for the  treatment  of obesity.  In
addition,  other drugs, including sibutramine,  for which an NDA has been filed,
and technologies are under regulatory review or development to treat obesity.

     Inventories  of  $6,356,000  at  March  31,  1997  consisted  primarily  of
dexfenfluramine  drug  substance  and finished  and packaged  capsules of Redux.
Inventories  decreased from $8,376,000 at September 30, 1996.  Inventory  levels
depend to a large extent on sales forecasts provided by AHP, AHP's management of
its  inventory  levels,  production  planning  by the  Company,  and  production
capabilities  of Boehringer.  There can be no assurance that  Boehringer will be
able to manufacture product in adequate quantities or on a timely basis, or that
AHP's sales  forecasts and the Company's  production  planning will be accurate,
which may  result in higher  inventory  costs to the  Company or  inadequate  or
excessive supplies of the product.  In addition,  there can be no assurance that
the  manufacture of the capsules and their sale to AHP will result in profits to
Interneuron.  Because of the relativity  limited (less than one year)  marketing
experience  with Redux,  the Company is unable to predict with certainty  trends
for Redux sales or AHP and Interneuron inventory balances. Further, there may be
fluctuations in Redux sales which could

                                      -12-





affect inventory  balances as a result of many factors,  including  seasonality,
promotion and advertising,  publicity, the introduction of competitive products,
and other factors.  AHP pays the Company for certain portions of dexfenfluramine
drug substance prior to its incorporation into the manufacturing  process.  Such
payments  are  included  in, and are the  majority  components  of, the deferred
revenue balance of $5,694,000 at March 31, 1997.

Results of Operations

     Total revenues  increased  substantially in the three and six month periods
ended March 31, 1997 over the same periods in the prior fiscal year primarily as
a result of the launch of Redux in June 1996.  Total  revenues of $19,774,000 in
the three month period ended March 31, 1997  consisted of $17,477,000 of product
revenue and  $2,297,000  of contract  and license  fees,  and total  revenues of
$37,466,000  in  the  six  month  period  ended  March  31,  1997  consisted  of
$31,188,000 of product revenue and $6,278,000 of contract and license fees.

     Product  revenue of  $17,477,000  in the three month period ended March 31,
1997 consists primarily of royalty revenue of approximately $10,200,000 based on
AHP's  net sales of Redux  and  approximately  $7,100,000  of  revenue  from the
Company's sale of Redux capsules to AHP.  Product  revenue of $31,188,000 in the
six month period ended March 31, 1997 consists  primarily of royalty  revenue of
approximately  $17,000,000  based on AHP's net sales of Redux and  approximately
$13,900,000  of revenue from the  Company's  sale of Redux  capsules to AHP. The
Company  recognizes  Redux  royalty  revenue  when net sales are reported to the
Company by AHP,  which  occurs in the quarter  after AHP  shipments  of Redux to
distributors.  The Company did not report any product  revenue in the comparable
fiscal 1996 periods.

     Contract  and license  fee  revenue  increased  $1,392,000,  or 154%,  from
$905,000 for the three month period ended March 31, 1996 to  $2,297,000  for the
three month  period  ended March 31, 1997 and was  $6,278,000  for the six month
period ended March 31, 1997,  essentially  unchanged from $6,249,000 for the six
month period  ended March 31, 1996.  The increase in the 1997 three month period
reflects  primarily CPEC's contract payment from Knoll and the Company's revenue
from  Wyeth-Ayerst  supporting the Interneuron Redux sales force pursuant to the
Copromotion Agreement with Wyeth-Ayerst. Contract and license fee revenue in the
six month period ended March 31, 1996  consisted  primarily of  $5,000,000  CPEC
received  pursuant  to its  agreement  with Astra Merck for the  development  of
bucindolol and in the six month period ended March 31, 1997 consisted  primarily
of  CPEC's  contract   payments  from  Knoll  and  the  Company's  revenue  from
Wyeth-Ayerst  supporting  the  Interneuron  Redux  sales  force  pursuant to the
Copromotion Agreement with Wyeth-Ayerst.

     Total costs and expenses increased  $16,200,000,  or 117%, from $13,853,000
for the three month  period  ended March  31,1996 to  $30,053,000  for the three
month period ended March 31, 1997 and $31,151,000, or 143%, from $21,841,000 for
the six month  period  ended  March 31,  1996 to  $52,992,000  for the six month
period ended March 31, 1997. Cost of product revenue, which did not exist in the
fiscal 1996 periods,  comprised approximately 74% and 70%, respectively,  of the
three and six month period increases in total costs and expenses.  The three and
six month  periods  ended March 31, 1997  included  expense for the  purchase of
in-process  research and development of $2,261,000  resulting primarily from the
Company's open market purchases of Intercardia common stock (see Note E of Notes
to Unaudited Consolidated Financial Statements). The three

                                      -13-





and six month periods ended March 31, 1996 included  expense for the purchase of
in-process research and development of $6,084,000 from the Company's acquisition
of the remaining 20% of CPEC which was not owned by  Intercardia in exchange for
the issuance of Interneuron  Common Stock,  and the six month period ended March
31,  1996  included  expense of  $2,150,000  for  InterNutria's  acquisition  of
technology  and  know-how  related  to PMS  Escape  which is  being  paid by the
issuance of Interneuron Common Stock.

     Research and  development  expenses  increased  $6,367,000,  or 177%,  from
$3,599,000  for the three month period ended March 31,1996 to $9,966,000 for the
three  month  period  ended  March  31,  1997 and  $10,758,000,  or  160%,  from
$6,726,000 for the six month period ended March 31, 1996 to $17,484,000  for the
six month period ended March 31, 1997. Increases in the 1997 three and six month
periods reflect expenses relating to two pivotal Phase 3 citicoline  trials, the
pivotal Phase 2/3  pagoclone  clinical  trial  initiated in the first quarter of
fiscal  1997,   Intercardia's   expenses   relating  to  once-a-day  and  tablet
formulations of bucindolol,  certain post-approval clinical expenses relating to
Redux and  additional  staffing  and  related  expenses  at the  Company and the
Subsidiaries.  Research and development expenses include only a relatively small
amount for bucindolol,  as a substantial portion of the non-government sponsored
development  expenses for bucindolol  have been assumed,  and are being paid, by
Astra Merck.

     Selling, general and administrative expenses increased $1,657,000,  or 40%,
from $4,170,000 for the three month period ended March 31,1996 to $5,827,000 for
the three  month  period  ended  March 31,  1997 and  $4,463,000,  or 65%,  from
$6,881,000 for the six month period ended March 31, 1996 to $11,344,000  for the
six month period ended March 31, 1997.  These  increases  are  primarily  due to
costs relating to the Company's Redux sales force,  increased  personnel  costs,
additional staffing,  consultants and insurance relating to the Company's growth
and promotional  expenses  incurred for regional test launches of PMS Escape(TM)
and  Melzone(TM).  Partially  offsetting  these  increases  was a  non-recurring
expense  recorded in the three month period  ended March 31, 1996 for  severance
and  related  charges  incurred  by  Transcell  relating  to certain  management
changes.

     Investment  income, net of interest expense,  increased  substantially over
the three and six month  periods  herein  reported due to  significantly  higher
invested balances of cash, cash equivalents and marketable  securities resulting
primarily  from  funds  received  from  public   offerings  in  fiscal  1996  by
Interneuron and Intercardia.

     The  Company  from time to time  explores  various  technology,  product or
company acquisitions and/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 and/or financial commitments to
fund product  development,  either of which may  adversely  affect the Company's
consolidated financial condition or results of operations.

Liquidity and Capital Resources

     Cash, Cash Equivalents and Marketable Securities:

     At March 31, 1997, the Company had cash,  cash  equivalents  and marketable
securities aggregating  $160,360,000,  compared to $169,608,000 at September 30,
1996.  Approximately  $4,600,000 of this decrease is the result of the Company's
open-market purchases of Intercardia

                                      -14-





and  Interneuron  Common  Stock (see Note E of Notes to  Unaudited  Consolidated
Financial Statements).




     Clinical Studies:

     The Company is incurring  substantial  expenditures for product development
and clinical  trials.  In  particular,  the Company is performing two additional
pivotal  Phase 3 clinical  trials of  citicoline  (along  with other  supportive
trials),  for  treatment  of  ischemic  stroke,  one of which is  expected to be
completed  during the third  quarter of fiscal  1997 (the  "Fiscal  1997 Phase 3
Trial") and one of which is  expected  to extend  into fiscal 1998 (the  "Fiscal
1998 Phase 3 Trial"). There can be no assurance the Fiscal 1997 Phase 3 Trial or
the Fiscal 1998 Phase 3 Trial will confirm the results of the initial  completed
pivotal Phase 3 trial on  citicoline.  Depending  upon the results of the Fiscal
1997 Phase 3 Trial the Company may file an NDA for  citicoline to treat ischemic
stroke within  approximately  six months after completion of the analysis of the
data.  The Fiscal  1998 Phase 3 Trial may be used to  support  product  labeling
requirements.  Assuming the Company files an NDA after  completion of the Fiscal
1997 Phase 3 Trial, the costs of all currently known clinical trials and related
studies and the  preparation of the NDA are estimated,  based upon current trial
protocols,  to  aggregate  approximately  $17,500,000,  of  which  approximately
$4,400,000  has been paid  through  March 31,  1997.  The  Company  is unable to
predict with certainty the costs of any related or additional  clinical  studies
which  will  depend  upon  the  results  of the  ongoing  trials  and  upon  FDA
requirements. If the Company does not file an NDA after completion of the Fiscal
1997 Phase 3 Trial,  it may conduct  additional  trials which would increase the
total estimated costs relating to the development of citicoline.

     The Company is currently  evaluating the marketing strategy for citicoline.
The Company is  considering  sole marketing of the product to  office-based  and
hospital-based physicians but has also commenced negotiations with certain major
pharmaceutical  companies  regarding the  co-promotion  of the product to market
segments  requiring  extensive  sales force  coverage.  In the event the Company
markets citicoline directly,  significant additional funds would be required for
manufacturing,  distribution,  marketing  and  selling  efforts.  The Company is
dependent  upon  third  party  suppliers  of  citicoline  for  manufacturing  in
accordance  with the Company's and  applicable  regulatory  requirements  and is
subject to an  agreement  requiring  the  Company  to  purchase  citicoline  for
commercial purposes at fixed prices, subject to certain conditions. There can be
no assurance the Company will establish or maintain  marketing or  manufacturing
capabilities required to successfully commercialize citicoline.

     The Company is also incurring  substantial  costs to develop  pagoclone for
which a Phase 2/3 trial  commenced in November  1996.  The Company  designates a
trial as Phase 2/3 if it is a well-controlled trial which the Company may choose
to utilize,  depending upon results,  as a pivotal or supporting trial in an NDA
submission.  The  Company  has  estimated  the total  costs of certain  clinical
studies,  license fees to  Rhone-Poulenc  Rorer  Pharmaceuticals,  Inc., and NDA
preparation  for  pagoclone  to be  approximately  $33,000,000,  which  will  be
incurred  over the next  several  years.  The Company is unable to predict  with
certainty the costs of any related or  additional  studies which may be required
by the FDA.  Further,  in the  event the  Company  markets  pagoclone  directly,
significant  additional funds would be required for manufacturing,  distribution
and selling efforts.

                                      -15-





     In  December  1996,  the  Company  entered  into an  agreement  with  Algos
Pharmaceutical    Corporation   to   collaborate   in   the    development   and
commercialization of LidodexNS(TM),  which combines two drugs that are currently
marketed for other  indications.  This  combination  product is in  pre-clinical
development  for the acute  intra-nasal  treatment  of migraine  headaches.  The
development of this and other products, including those which may be acquired by
the Company in the future will require substantial additional funds.

     There can be no assurance  that results of ongoing  current  preclinical or
clinical trials will be successful, that additional trials will not be required,
that any drug under  development will receive FDA approval in a timely manner or
at all, or that such drug could be successfully  manufactured in accordance with
good  manufacturing  practice  regulations or marketed in a timely manner, or at
all, any of which could materially adversely affect the Company.

     Analysis of Cash Flows:

     Cash used by  operating  activities  during the six months  ended March 31,
1997 of $5,614,000  consisted primarily of a net loss of $10,781,000 and changes
in assets and liabilities as follows:

     (i) a decrease in accounts  receivable  of  $2,412,000  from  $4,338,000 at
September  30, 1996 to  $1,926,000 at March 31, 1997  primarily  resulting  from
collections from AHP and reduced billings to AHP .

     (ii) a decrease in inventories of $2,020,000  from  $8,376,000 at September
30, 1996 to $6,356,000  at March 31, 1997,  reflecting a reduction in production
of Redux capsules and their sale to AHP.

     (iii) an increase of $4,637,000  in prepaid and other  current  assets from
$1,324,000 at September  30, 1996 to $5,961,000 at March 31, 1997  primarily due
to Progenitor's  approximately  $1,700,000 of prepaid and accrued costs relating
to  its  proposed   initial  public   offering  and  Mercator   acquisition  and
approximately  $1,300,000  advanced by  Progenitor  to Mercator  under a line of
credit arrangement.

     (iv) an increase of  $4,452,000 in accrued  expenses and other  liabilities
primarily  due to  increased  accruals  relating  to  research  and  development
contracts,   Progenitor's  accrual  of  initial  public  offering  and  Mercator
acquisition  costs,  and accrued Redux  inventory  purchases.  Accrued  expenses
consist  primarily  of  obligations  related to  clinical  trials and  sponsored
research, consultants and other service providers, compensation and other items.

     Cash used by  investing  activities  during the six months  ended March 31,
1997 of $46,619,000  consisted  primarily of purchases of marketable  securities
(investments purchased with maturities greater than three months) of $53,600,000
resulting  mainly from funds available from maturities of securities  classified
as cash equivalents and the Company's $2,436,000 purchase of Intercardia stock.

     Cash used by  financing  activities  during the six months  ended March 31,
1997 of $254,000  consisted of $2,315,000 used to purchase  treasury stock which
was partially offset by inflows of $1,101,000 from issuances common and treasury
stock and $1,050,000 from proceeds from sales

                                      -16-




and leasebacks of fixed assets.

     Other:

     In February  1997,  Interneuron  announced  that its Board of Directors had
authorized it to purchase  from time to time up to 200,000  shares of the common
stock of  Intercardia.  As of March 31, 1997, the Company had purchased  104,400
shares  of  Intercardia   common  stock  for  an  aggregate  purchase  price  of
approximately  $2,436,000,  of which  approximately  $1,861,000  was recorded as
purchase  of  in-process  research  and  development  in the three and six month
periods  ended March 31, 1997.  As a result of these  purchases,  the  Company's
ownership of Intercardia  increased from 59.6% at September 30, 1996 to 61.0% at
March 31, 1997 based upon the number of  outstanding  shares of  Intercardia  at
such dates.

     In March  1997,  the  Company  announced  that its Board of  Directors  had
authorized it to repurchase from time to time through  open-market  transactions
up to 1,500,000  shares of the Company's Common Stock. As of March 31, 1997, the
Company  had  repurchased  142,500  shares for an  aggregate  purchase  price of
approximately  $2,619,000,  of which 13,665  shares were  re-issued  pursuant to
employee  stock  option  and  stock  purchase   plans.   Such   repurchases  and
re-issuances are recorded as treasury stock transactions.

     On May 9, 1997, the Company  purchased in private  transactions  from Swiss
Bank  Corporation,  London  Branch  ("SBC")  capped call options on  Interneuron
Common Stock. These call options give Interneuron the right to purchase from SBC
up to a total of 1,240,000 shares of Interneuron  Common Stock at a strike price
of $17.75. The call options are exercisable only at their maturities,  which are
September  24, 1997,  March 9, 1998,  May 21, 1998 and August 24, 1998 each with
respect to 310,000 shares, and are subject to caps of $26.00, $34.00, $38.00 and
$40.00,  respectively,  which limit the economic benefit to the Company of these
call options.  The call options  which the Company  purchased are expected to be
settled,  if exercised,  with cash in an amount equal to the difference  between
the  strike  price and the  market  price,  subject to caps which will limit the
total amount of cash the Company  could receive or increase the strike prices in
the case of stock settlement when the market price of the Company's Common Stock
exceeds the applicable cap price.

     In  exchange  for the  purchases  of these  call  options,  in lieu of cash
purchase prices,  the Company sold to SBC call options entitling SBC to purchase
from the  Company  at a strike  price of  $40.30  per  share,  an  aggregate  of
2,000,000 shares of Interneuron Common Stock, 1,000,000 shares on each of May 21
and May 24,  1999.  The Company will have the right to settle these call options
with cash or stock,  subject to certain  conditions.  If exercised,  the Company
expects to settle the call options that it sold through issuances by the Company
to SBC of up to an  aggregate  of 2,000,000  authorized  and unissued  shares of
Common Stock, subject to the effectiveness of a registration  statement covering
the resale of these shares. The sale or potential sale of such shares could have
an adverse effect on the market price of the Company's Common Stock.

     SBC has  advised  that it has  engaged,  and may engage,  in  transactions,
including buying and selling shares of the Company's Common Stock, to offset its
risk relating to the options.  Purchases and sales could affect the market price
of the Company's Common Stock.


     In  February  1997,  the  Company  entered  into a new five year  lease for
approximately  42,000 square feet of space in its current facility in Lexington,
MA to accommodate  current needs and expected  growth.  Total  aggregate  rental
payments under this five year lease is approximately  $3,400,000.  Additionally,
the Company is expending  approximately  $1,000,000 of build-out  costs for this
space.

     The Company's strategy includes evaluation of various  technology,  product
or  company  acquisition  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


                                      -17-





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 for research and development,
on a consolidated basis.

     While the Company  believes it has  sufficient  cash for currently  planned
expenditures in fiscal 1997, it may seek  additional  funds through other equity
and/or debt financings and corporate  collaborations  to provide working capital
financing  and funding for new  business  opportunities  and future  growth.  In
addition,  certain  subsidiaries  are exploring  various  financings  (including
issuances  of  securities  of the  subsidiaries,  possibly in  combination  with
securities  of  Interneuron,   in  public  offerings  or  private   placements),
collaborations  or business  combinations.  If such efforts are not  successful,
certain activities at these subsidiaries may be reduced.

     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 generally 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  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.

     Subsidiaries:

     Interneuron is currently  funding  operations of Progenitor,  Transcell and
InterNutria.  Expenses  of the  Subsidiaries,  including  those  required  under
collaboration agreements, constitute a significant part of the Company's overall
expenses. The Subsidiaries' portion of consolidated research and development and
selling, general and administrative expenses in the six month period ended March
31, 1997 was approximately 39%.

     Intercardia

     Pursuant to the Astra Merck  Collaboration,  Intercardia  has agreed to pay
Astra Merck  $10,000,000 in December 1997 and up to $11,000,000 for one-third of
product launch costs for bucindolol incurred beginning when Intercardia files an
NDA with the FDA for the  twice-daily  formulation  of bucindolol and continuing
through  the first 12 months  subsequent  to the  first  commercial  sale of the
formulation.  In the event  Intercardia  elects not to make these payments,  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  bucindolol  will be  successfully
commercialized.  A substantial  portion of the bucindolol  development costs are
being assumed and paid by the National  Institutes of Health,  the Department of
Veterans Affairs, Astra Merck and Knoll.

     Pursuant  to the  Knoll  Collaboration  (see  Note D of Notes to  Unaudited
Consolidated Financial Statements), 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. The Company's portion of development and

                                      -18-





clinical  trial costs for the  Territory is  estimated to be up to  $10,000,000.
Intercardia  is  also  responsible  for  approximately  40%  of  the  once-daily
development  costs which  relate to  development  solely for the  Territory  and
approximately  67% of  once-daily  development  costs  which  have  a  worldwide
benefit.

     In  February  1997,  an FDA  advisory  committee  recommended  that the FDA
approve the use of carvedilol,  a competitive drug being developed by SmithKline
Beecham for the treatment of congestive heart failure.  The Company is unable to
predict  the final  labeling  for this  product or the impact of this product on
bucindolol, if it is approved by the FDA.

     Progenitor

     In December 1996, Progenitor entered into an agreement with Amgen, granting
Amgen certain  exclusive  rights for the  development and  commercialization  of
products using Progenitor's leptin receptor technology.  Amgen paid Progenitor a
$500,000  initial  license fee in January 1997,  which was reflected in contract
and license fee revenue in the six month period ended March 31, 1997. Progenitor
may also  receive  from  Amgen  certain  development  and  regulatory  milestone
payments  and  potential  royalties  on sales.  Amgen  also  agreed to  purchase
Progenitor Common Stock in the event of a Progenitor initial public offering.

     In February 1997,  Progenitor  announced an agreement to acquire  Mercator,
Inc.  ("Mercator")  a  privately-held  genomics  company,   subject  to  certain
conditions, including completion of an initial public offering by Progenitor for
approximately   $22,000,000   payable  in  Progenitor  common  stock,  plus  the
assumption of Mercator  liabilities.  Progenitor also agreed to provide Mercator
with an interim  operating line of credit through July 1997 of up to $6,600,000,
funding for which will be provided by Interneuron.  At March 31, 1997,  advances
under this line of credit totaled approximately  $1,300,000 and are reflected in
prepaids and other current assets.

     In March 1997, Progenitor filed registration statements with the Securities
and  Exchange  Commission  relating  to a proposed  initial  public  offering of
2,750,000  shares of Progenitor  common stock (plus up to an additional  412,500
shares to cover  over-allotments)  and the proposed acquisition by Progenitor of
Mercator.  Based on the  proposed  terms of the  offering  and the  acquisition,
assuming  completion of the offering and the Mercator  acquisition  on the filed
terms, Interneuron will own approximately 43% of Progenitor's outstanding common
stock, without giving effect to any exercise of the over-allotment option or any
options  or  warrants,  and  subject  to  change  based  upon the  timing of the
offering,  the  offering  price,  the  number  of  Progenitor  shares  issued in
connection  with  the  Mercator  acquisition  and  the  amount  of  Progenitor's
indebtedness to Interneuron. In connection with the acquisition, Progenitor will
incur  non-recurring  charges to  operations  currently  estimated  to aggregate
approximately $30,000,000, a portion of which are noncash charges related to the
purchase of in-process research and development,  subject to increase based upon
several  factors  including  the timing of the  transactions  and  unanticipated
costs.  Due to market  conditions and other factors,  there is no assurance that
Progenitor's  initial  public  offering  or  acquisition  of  Mercator  will  be
completed, in which case Progenitor will incur charges to operations for amounts
expended in  connection  with the two  proposed  transactions,  including  funds
advanced  under the line of credit.  Interneuron  will record a portion of these
charges based on its ownership interest in Progenitor.

     If Progenitor does not complete its initial public offering and acquisition
of Mercator,  the  $1,300,000  advanced to Mercator under the line of credit and
the  approximately  $1,700,000 of  expenditures  relating to the initial  public
offering at March 31,  1997,  plus  additional  amounts  advanced  and  expended
subsequent to March 31, 1997, will result in charges to operations.

                                      -19-



     Transcell

     Transcell has committed to spend  approximately  $800,000 in fiscal 1997 to
build-out certain  newly-leased  facilities.  At March 31, 1997, the Company had
outstanding  a Standby  Letter of Credit for $800,000 to secure these  build-out
costs.  This Standby  Letter of Credit is  collateralized  by a  certificate  of
deposit  and  expires  the  sooner  of  September  15,  1997 or  receipt  by the
subsidiary's landlord of payment of the build-out costs.

     InterNutria

     InterNutria  is assessing  data from a clinical  evaluation  of PMS Escape.
Depending upon the results of this assessment, the test launch of PMS Escape and
the  availability or allocation of sufficient  funds, the Company will determine
whether to  commence  a  commercial  launch of PMS  Escape,  conduct  additional
clinical trials or evaluations, or discontinue clinical or marketing efforts.




                                      -20-




PART II - OTHER INFORMATION

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

     The Company's  annual meeting of stockholders was held on March 5, 1997. At
the  meeting (i) all ten  director  nominees  were  elected;  (ii) the  proposed
amendment  to the Amended  and  Restated  Certificate  of  Incorporation  of the
Company increasing from 60,000,000 to 80,000,000 the number of authorized shares
of Common Stock was approved and ratified;  (iii) the amendment to the Company's
1994  Long-Term  Incentive  Plan,  as  amended,  increasing  from  3,000,000  to
6,000,000  the  number of  shares of Common  Stock  reserved  for  issuance  was
approved and ratified;  and (iv) 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.,  38,644,309 for, 312,239 against;  Glenn L. Cooper,
M.D.,  38,646,840 for, 309,708 against;  Harry J. Gray,  38,642,945 for, 313,603
against;  Alexander M. Haig, Jr., 38,640,145 for, 316,403 against;  Peter Barton
Hutt, 38,005,120 for, 951,428 against; Malcolm Morville,  Ph.D., 38,647,040 for,
309,508  against;  Robert K.  Mueller,  38,642,840  for,  313,708  against;  Lee
J.Schroeder, 38,643,940 for, 312,608 against; David B. Sharrock, 38,646,540 for,
310,008 against; Richard Wurtman, M.D., 38,647,040 for, 309,508 against.

(ii) The amendment to the Amended and Restated  Certificate of  Incorporation of
the Company  increasing  from  60,000,000 to 80,000,000 the number of authorized
shares of Common Stock was approved  and ratified by a vote of  38,106,270  for,
1,185,306 against, and 124,915 abstain.

(iii) The amendment to the Company's 1994 Long-Term  Incentive Plan, as amended,
increasing  from  3,000,000  to  6,000,000  the  number of shares  reserved  for
issuance,  was  approved  and ratified by a vote of  25,466,836  for,  5,310,408
against, and 151,590 abstain.

(iv) The  appointment  of Coopers & Lybrand  L.L.P.  was  ratified  by a vote of
39,474,226 for, 35,332 against, and 69,211 abstain.

Item 6.       Exhibits and Reports on Form 8-K

<TABLE>
<CAPTION>
(a)           Exhibits
              --------

<S>                 <C>                                                                                   
3.5           -       Restated Certificate of Incorporation of Registrant, as amended
10.65(a)      -       1994 Long-Term Incentive Plan, as amended (1)
10.89         -       Form of ISDA Master Agreement by and between the Registrant and Swiss
                      Bank Corporation, London Branch, together with Schedules thereto
10.90(a)      -       Form of Confirmation for Contract A entered into pursuant to ISDA Master
                      Agreement by and between the Registrant and Swiss Bank Corporation,
                      London Branch together with appendix thereto.
10.90(b)      -       Form of Confirmation for Contract B entered into pursuant to ISDA Master
                      Agreement by and between the Registrant and Swiss Bank Corporation,
                      London Branch together with appendix thereto.
10.91         -       Form of Agreement regarding Registration Rights and Related Obligations to


                                      -21-





                      be entered into by and between Registrant and Swiss Bank
                      Corporation, London Branch
27            -       Financial Data Schedule

</TABLE>
----------------

(1)  amends and supersedes Exhibit 10.65

(b)  Reports on Form 8-K

     The Company filed Reports on Form 8-K reporting  information under "Item 5"
     on January 7, 1997, February 18, 1997, March 14, 1997 and May 6, 1997.




                                      -22-









                                   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 14, 1997                        By: /s/ Glenn L. Cooper, M.D.,
                                             --------------------------------
                                          Glenn L. Cooper, M.D., President
                                          and Chief Executive Officer
                                          (Principal Executive Officer)


Date: May 14, 1997                        By: /s/ Thomas F. Farb
                                             ---------------------------------
                                          Thomas F. Farb,
                                          Executive Vice President, Finance
                                          Chief Financial Officer and Treasurer
                                          (Principal Financial Officer)


Date: May 14, 1997                        By: /s/ Dale Ritter
                                             ---------------------------------
                                          Dale Ritter
                                          Vice President, Corporate Controller
                                          (Principal Accounting Officer)





                                      -23-