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 June 30, 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  classes of
common stock, as of the latest practicable date.

Class                                          Outstanding at August 12, 1997:
Common Stock $.001 par value                   41,049,458 shares


                                       -1-





                        INTERNEURON PHARMACEUTICALS, INC.

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



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

                  Item 1.           Financial Statements

                  Consolidated Balance Sheets as of June 30, 1997
                  and September 30, 1996......................................................................... 3

                  Consolidated Statements of Operations for the Three and Nine Months ended
                  June 30, 1997 and 1996..........................................................................4

                  Consolidated Statements of Cash Flows for the Nine Months ended
                  June 30, 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..........................................10

PART II.          OTHER INFORMATION

                  Item 2.           Changes in Securities .......................................................24

                  Item 5.           Other Information............................................................24

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


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

</TABLE>

                                                        -2-





Item 1.  Financial Statements

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


                                                                                   June 30,          September 30,
                                                                                     1997                 1996
                                                                                     ----                 ----
                                                          ASSETS
<S>                                                                              <C>                 <C>
Current assets:
     Cash and cash equivalents                                                         $ 61,062            $145,901
Marketable securities                                                                    58,332              17,068
     Accounts receivable                                                                  3,159               4,338
     Inventories                                                                          4,149               8,376
     Prepaids and other current assets                                                    8,346               1,324
                                                                                    -----------        ------------
             Total current assets                                                       135,048             177,007

Marketable securities                                                                    32,382               6,639
Property and equipment, net                                                               5,947               2,689
Other assets                                                                                214                 103
                                                                                   ------------       -------------
                                                                                       $173,591            $186,438
                                                                                       ========           =========

                                                        LIABILITIES
Current liabilities:
     Accounts payable                                                                $    3,227          $    2,575
     Accrued expenses                                                                    17,794              11,604
     Deferred revenue                                                                     7,135               6,921
     Current portion of other long-term liabilities                                          29                   -
     Current portion of capital lease obligations                                           854                 661
                                                                                     ----------       -------------
             Total current liabilities                                                   29,039              21,761

Long-term portion of capital lease obligations                                            1,289                 526
Other long-term liabilities                                                                 489                  16
Minority interest                                                                        18,372              19,373

                                                   STOCKHOLDERS' EQUITY

Preferred stock, $.001 par value, authorized 5,000,000 shares: Series B, 239,425
     shares  issued and  outstanding  at June 30,  1997 and  September  30, 1996
     (liquidation preference at
      June 30, 1997  $3,018)                                                              3,000               3,000
     Series C, 5,000 shares issued and outstanding at June 30, 1997
     and September 30, 1996 (liquidation preference at
     June 30, 1997  $501)                                                                   500                 500
Common stock, $.001 par value, 80,000,000 shares authorized:
     41,226,293 shares issued and 41,015,969 shares issued and
     outstanding at June 30, 1997 and September 30, 1996, respectively                       41                  41
Additional paid-in capital                                                              248,794             247,999
Accumulated deficit                                                                    (124,733)           (106,778)
Unrealized gains on marketable securities                                                    16                   -
Treasury stock, at cost, 176,835 shares at June 30, 1997 and no
     shares at September 30, 1996                                                        (3,216)                  -
                                                                                    ------------     --------------
     Total stockholders' equity                                                         124,402             144,762
                                                                                      ---------            --------
                                                                                       $173,591            $186,438
                                                                                       ========            ========
</TABLE>


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

                                       -3-







                        INTERNEURON PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
           For the three and nine months ended June 30, 1997 and 1996
                                   (Unaudited)
                  (Amounts in thousands except per share data)

<TABLE>
<CAPTION>



                                    For the three months ended June 30,             For the nine months ended June 30,
                                    -----------------------------------             ----------------------------------

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

<S>                                      <C>         <C>                            <C>              <C>
Revenues:
Product revenue                           $ 15,012   $        1,100                   $  46,200       $   1,167
Contract and license fees                    2,383            1,067                       8,661           7,248
                                        ----------      -----------                  ----------      ----------
   Total revenues                           17,395            2,167                      54,861           8,415

Costs and expenses:
Cost of product revenue                      9,144              661                      31,047             727
Research and development                    10,500            4,955                      27,984          11,615
Selling, general and administrative          7,372            4,297                      18,716          11,178
Purchase of in-process research
  and development                              286                -                       2,547           8,234
                                        ----------    -------------                  ----------      ----------
     Total costs and expenses               27,302            9,913                      80,294          31,754
                                          --------        ---------                    --------        --------

Net loss from operations                    (9,907)         ( 7,746)                    (25,433)        (23,339)

Investment income, net                       2,191            1,129                       6,788           2,119

Minority interest                              542              444                         690             (98)
                                        ----------       ----------                 -----------     ------------

Net loss                                  $ (7,174)         $(6,173)                   $(17,955)       $(21,318)
                                          =========         ========                   =========       =========

Net loss per common share                $  ( 0.17)       $  ( 0.16)                 $   ( 0.44)     $    (0.60)
                                         ==========       ==========                 ===========     ===========

Weighted average common
      shares outstanding                    41,048           38,300                      41,055          35,702
                                         =========        =========                  ==========       =========



</TABLE>








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





                                       -4-





                        INTERNEURON PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the nine months ended June 30, 1997 and 1996
                                   (Unaudited)
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>


                                                                               Nine months ended June 30,
                                                                               --------------------------
                                                                              1997                    1996
                                                                              ----                    ----

<S>                                                                    <C>                 <C>
Cash flows from operating activities:
     Net loss                                                         $   (17,955)        $   (21,318)
     Adjustments to reconcile net loss to net cash
     used by operating activities:
         Depreciation and amortization                                      1,025                 582
         Loss (gain)  on disposal of fixed assets                               7                 (20)
         Minority interest in net income/loss of
            consolidated subsidiaries                                        (690)                 98
         Purchase of in-process research and development                    2,147               8,098
         Noncash compensation                                                 262               1,234
         Change in assets and liabilities:
             Accounts receivable                                            1,179              (2,384)
             Inventories                                                    4,227              (8,663)
             Prepaids and other current assets                             (7,022)               (975)
             Other assets                                                    (112)                112
             Accounts payable                                                 652               1,184
             Deferred revenue                                                 214               2,126
             Accrued expenses and other liabilities                         6,273               4,880
                                                                     ------------      --------------
Net cash (used) by operating activities                                    (9,793)            (15,046)
                                                                     -------------      --------------

Cash flows from investing activities:
     Capital expenditures                                                  (3,258)               (453)
     Purchase of marketable securities                                    (79,381)            (43,169)
     Proceeds from maturities and sales of
        marketable securities                                              12,390              36,108
     Purchases of Intercardia stock                                        (2,837)                  -
     Proceeds from disposal of fixed assets                                     -                  63
                                                                     -------------     ---------------
Net cash (used) by investing activities                                   (73,086)            ( 7,451)
                                                                     -------------     ---------------

Cash flows from financing activities:
     Net proceeds from issuance of common and treasury stock                1,317             124,084
     Net proceeds from issuance of stock by subsidiaries                      276              30,344
     Purchase of treasury stock                                            (3,978)                  -
     Proceeds from sale/leaseback                                           1,050                 131
     Principal payments of capital lease obligations                         (625)               (499)
                                                                     -------------    ----------------
Net cash (used) provided by financing activities                           (1,960)            154,060
                                                                     -------------       -------------
Net change in cash and cash equivalents                                   (84,839)            131,563
Cash and cash equivalents at beginning of period                          145,901              16,781
                                                                     ------------      --------------

Cash and cash equivalents at end of period                           $     61,062        $    148,344
                                                                     ============        ============

</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:

     Inventories consisted of:              June 30,           September 30,
                                            1997               1996

     Raw materials                           $2,844,000          $5,420,000
     Finished goods                           1,305,000           2,956,000
                                           ------------          ----------
                                             $4,149,000          $8,376,000
                                             ==========          ==========

     Raw materials  consisted  primarily of  dexfenfluramine  drug substance and
finished goods

                                       -6-





consisted primarily of finished and packaged Redux(TM) capsules.


D.  Subsidiaries:

     In December 1996,  Progenitor  entered into an agreement  with Amgen,  Inc.
("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 nine month  period  ended
June 30, 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 under certain conditions. See Note G.

     In  December  1996,   Intercardia  entered  into  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-a-day bucindolol  formulation currently under development.  Under the terms
of the Knoll Collaboration,  Knoll made up-front payments to CPEC, Inc. ("CPEC",
Intercardia's  majority-owned subsidiary, of which Interneuron owns the minority
portion)  totaling  $3,143,000 which were recognized as contract and license fee
revenue in the nine month  period  ended June 30,  1997.  Knoll will make future
payments to CPEC contingent  upon the achievement of product  approval and sales
milestones.

     Knoll and  Intercardia  agreed to share the development and marketing costs
of bucindolol in the Territory.  In general,  Knoll agreed to pay  approximately
60% of certain  development  and  marketing  costs  prior to product  launch and
Intercardia  agreed to 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, 40% of any net loss, as defined. Knoll also agreed to pay approximately 60%
of once-a-day formulation  development costs that relate solely to the Territory
and approximately one-third that have worldwide benefit.


E.   Agreement:

     In June 1997, the Company  entered into an agreement with Eli Lilly and Co.
and Eli Lilly S.A. ("Lilly") relating to the licensing by Lilly from the Company
of a use patent for Lilly's antidepressant Prozac(R) (fluoxetine hydrochloride).
Lilly licensed from the Company a U.S. patent and worldwide  patent  application
rights covering the use of fluoxetine to treat disturbances of appetite and mood
associated with premenstrual syndrome. Prozac currently is not approved to treat
this  indication.  The agreement  requires  Lilly to pay the Company an up-front
license fee of $1,000,000 which was recorded as license fee revenue in the three
and nine month periods ended June 30, 1997 and  additional  payments  based upon
achievement of development and regulatory related milestones and royalties based
upon net sales.



                                       -7-





F.   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 June 30, 1997, the
Company had purchased  124,400  shares of  Intercardia  common  stock,  of which
20,000 shares were  purchased in the three month period ended June 30, 1997, for
an aggregate purchase price of approximately  $2,837,000, of which approximately
$286,000  and  $2,147,000  was recorded as purchase of  in-process  research and
development   in  the  three  and  nine  month  periods  ended  June  30,  1997,
respectively.  As a result  of  these  purchases,  the  Company's  ownership  of
Intercardia   increased  from   approximately  60%  at  September  30,  1996  to
approximately  61% at June 30, 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 June 30, 1997, the
Company had repurchased  217,500 shares, of which 75,000 shares were repurchased
in the three month period ended June 30, 1997,  for an aggregate  purchase price
of approximately  $3,978,000,  of which 40,665 shares were re-issued pursuant to
stock option exercises and an employee stock purchase plan.

     In May 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. Under certain  circumstances,  the Company may
delay the  expiration  date of these call options for the payment of  additional
consideration to SBC.


     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 delivered.



                                       -8-



Because the Company has the ability to settle call options  through  issuance or
receipt of Common  Stock,  the Company has accounted for the purchases and sales
of these call options as equivalent and offsetting noncash equity  transactions.
Any gains  realized from  purchased call options will be reflected in additional
paid-in capital.


G.   Subsequent Events:

     On  July  3,  1997,  Transcell  and  Interneuron  entered  into a  Research
Collaboration  and  Licensing  Agreement  with Merck & Co.,  Inc.  ("Merck")  to
discover and  commercialize  certain novel  antibacterial  agents.  Merck has an
option to extend the field of the  collaboration  and  license  to  include  all
antibacterial  pharmaceutical  products. The agreement provides for Transcell to
receive initial payments  totaling  $2,500,000 (which were received in July 1997
and which will be  recognized  as license fee revenue in the three month  period
ending  September 30, 1997) plus research  support during the first two years of
the  agreement.  Additionally,  Transcell  is entitled  to  payments  based upon
achievement of certain defined  clinical  development and regulatory  milestones
and royalties based upon net sales of products resulting from the collaboration.
Certain of the  rights  licensed  to Merck are based on  exclusive  licenses  or
rights held by Transcell and Interneuron from Princeton  University,  which will
be entitled to varying  percentages of certain  payments and royalties  received
from Merck.

     On August 12, 1997,  Progenitor  completed an initial public  offering (the
"Progenitor  IPO") of 2,750,000 units at $7.00 per unit, each unit consisting of
one share of Progenitor  Common Stock and one five-year  warrant to purchase one
share of  Progenitor  Common  Stock at $10.50  per  share.  The  Progenitor  IPO
resulted  in  proceeds  to  Progenitor,   net  of  offering-related   costs,  of
approximately $16,600,000. Interneuron purchased 500,000 units of the Progenitor
IPO for a total of $3,500,000.  Concurrent with the Progenitor  IPO,  Progenitor
sold  1,023,256  shares of Progenitor  Common Stock to Amgen pursuant to a stock
purchase  agreement for a purchase  price of $4,500,000 in cash and a $1,000,000
promissory note. Concurrently with the closing of the Progenitor IPO, Progenitor
completed a merger with Mercator Genetics, Inc. (the "Mercator Acquisition") for
approximately  $22,000,000  paid with the  issuance of  approximately  3,441,000
shares of Progenitor Common Stock,  plus the assumption of Mercator  liabilities
and  forgiveness  of debt  relating to advances  made by Progenitor to Mercator.
Interneuron's ownership in Progenitor's outstanding capital stock decreased from
approximately  76% at  September  30,  1996 to  approximately  37 %  immediately
following the  Progenitor IPO and the Mercator  Acquisition.  As a result of the
Company 's decreased percentage of ownership in Progenitor,  the Company will no
longer  consolidate  the financial  statements  of  Progenitor  but will include
Progenitor  in the  Company's  financial  statements  using the equity method of
accounting.

     In  connection  with  the  Mercator  Acquisition,   Progenitor  will  incur
non-recurring  charges to  operations  in the  quarter  and fiscal  year  ending
September  30,  1997,  related  to the  purchase  of in-  process  research  and
development.   Interneuron  will  include  a  portion  (currently  estimated  at
approximately   $12,000,000)   of  these  charges  in  Equity  in  net  loss  of
unconsolidated subsidiaries, based on its ownership interest in Progenitor. As a
result  of the  Progenitor  IPO and  Interneuron's  purchase  of  500,000  units
thereof,  Interneuron  will  recognize  in the  quarter  and fiscal  year ending
September  30, 1997, a gain on its  investment  in  Progenitor  in the Company's
Additional  paid-in capital but not in the Company's  Consolidated  Statement of
Operations.


                                       -9-





     As a result of the  Progenitor  IPO,  shares of  Interneuron  Common  Stock
potentially  issuable  under certain put protection  rights  exercisable in June
1998  have  decreased  from a maximum  of  approximately  2,181,250  shares to a
maximum of approximately 232,000 shares, if Interneuron's Common Stock is valued
at $2.00 per share or less.  Based upon the closing  market price of Interneuron
Common Stock on August 8, 1997 of $20.25,  the  Company's  potential  obligation
under these put protection rights could cause the Company to issue approximately
22,900 shares of its Common Stock.

       In  certain   circumstances,   Interneuron  has  the  right  to  purchase
additional  shares of  Progenitor  Common Stock at fair market value to maintain
Interneuron's  equity ownership in Progenitor,  and Interneuron may from time to
time  purchase  through  open-market  transactions  Progenitor  common  stock or
warrants.  As of August 13, 1997,  the Company has  purchased  20,000  shares of
Progenitor  common stock for approximately  $105,000.

     In July 1997, the Company relinquished certain conversion price adjustments
relating to Progenitor  Series A Preferred Stock held by the Company in exchange
for an option to acquire an exclusive, worldwide license to manufacture, use and
sell certain aspects of Del-1, a novel cell surface protein encoded by the Del-1
gene which was  discovered  by  Progenitor.  In addition,  at the closing of the
Progenitor  IPO,  the  Company  contributed  to the  capital of  Progenitor  all
outstanding advances made by the Company to Progenitor.

     In  August  1997,  the  Company,  American  Home  Products  Corp.  and  Les
Laboratoires  Servier  entered into  agreements  relating to the development and
commercialization of a sustained-release once-a-day formulation of Redux(TM) for
the management of obesity in the United States. See Item 5. Other Information.

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

     Statements in this Form 10-Q that are not  descriptions of historical facts
are  forward-looking  statements  that are  subject to risks and  uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors,  including those set forth in the Company's filings under the
Securities Act of 1933 and under the Securities Exchange Act of 1934 under "Risk
Factors" and  elsewhere  including,  in  particular,  risks  relating to product
commercialization , such as marketing,  regulatory, safety, competition, patent,
product   liability,   manufacturing   and  supply  and  other  risks;   revenue
fluctuations;  uncertainties  relating  to  clinical  trials;  risks  related to
contractual obligations; risks relating to product launches and managing growth;
government regulation,  patent risks, dependence on third parties,  competition;
and the early stage of products under development.


     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.


                                      -10-





     Citicoline

     The  Company's   principal   product  under   development   is  CerAxon(TM)
(citicoline)  for  the  treatment  of  ischemic  stroke.  The  Company  recently
completed a pivotal Phase 3 clinical trial of citicoline (the "Fiscal 1997 Phase
3 Trial") for treatment of ischemic  stroke and is performing an ongoing Phase 3
clinical  trial which is expected to extend into fiscal 1999 (the "Ongoing Phase
3 Trial") as well as other supportive trials.  These trials are in addition to a
first pivotal, Phase 2/3 dose ranging trial completed in Fiscal 1996.

     The Ongoing Phase 3 Trial is exploring  reduction in brain infarct size and
functional  improvement in citicoline  versus  placebo-treated  stroke  patients
using brain imaging  techniques.  The Company plans to initiate  further studies
beginning  in fiscal  1998 or fiscal 1999 to explore  areas such as  post-stroke
learning and memory,  combination with thrombolytic therapies and other clinical
paradigms  such  as  treatment  or  prevention  of  peri-operative  strokes  and
treatment of head trauma.

     In July 1997,  the Company  announced  that a  preliminary  analysis of the
Fiscal 1997 Phase 3 Trial showed that neurological  function among patients with
moderate  and severe  strokes was  significantly  improved and that the drug was
well tolerated.

      Fiscal 1997 Phase 3 Trial Study Design: Patients over 18 years old with no
upper age limit who met entry  criteria  were  entered  within 24 hours of their
stroke in a 2 to 1 randomization to receive citicoline 500 milligrams or placebo
orally  once daily for six weeks.  Two  hundred  sixty-seven  patients  received
citicoline and 127 patients  received  placebo.  The primary outcome analysis of
this double-blind,  placebo-controlled  trial of 394 patients was improvement in
the Barthel  Index,  a 100 point  rating  scale of  functional  capabilities  in
neurological  patients,  at a time point three months after an ischemic  stroke.
Other  secondary  outcome  measures  were  assessed.  To  account  for  baseline
differences  in stroke  severity,  the primary  analysis  requires  that 3-month
Barthel scores be adjusted for stroke severity using the NIH Stroke Scale.

     The NIH  Stroke  Scale  rates  patients  from 0 to 42  points  for  maximum
severity.  Patients  enrolled  in the study were  required to have an NIH Stroke
Scale score of 5 or greater.  Patients were considered to have achieved complete
or near-complete  functional  recovery if they achieved a Barthel score of 95 or
100 at three months.  Analysis of data was performed on an intent to treat basis
with  assessments  made using two methods:  patients who completed the study and
had a  three-month  observation  point  (observed  cases,  or OC  analysis)  and
patients whose last recorded  scores were carried  forward to the 3 month point,
regardless of their study completion (last observation  carried forward, or LOCF
analysis).

     Fiscal 1997 Phase 3 Trial  Study  Results:  In a  responders  analysis,  41
percent of  citicoline-treated  patients  with an NIH  stroke  scale on entry of
greater than or equal to 8 (moderate to severe strokes) achieved a Barthel Index
of  greater  than or equal  to 95  compared  to 25  percent  of  placebo-treated
patients (OC analysis,  p = 0.02). Thus, patients with moderate to severe stroke
treated  with  citicoline  had  a 64  percent  greater  chance  of  complete  or
near-complete  recovery  relative to  patients  with  moderate to severe  stroke
treated with  placebo.  In the LOCF  analysis,  33 percent of moderate to severe
citicoline  patients  and 21  percent of  moderate  to severe  placebo  patients
achieved a Barthel Index of greater than or equal to 95, a 57 percent  increased
chance of improvement in recovery (p = 0.05).

     Overall,  patients who had mild strokes on entry into the study (NIH Stroke
Scale 5 through 7) had an excellent  clinical  outcome  regardless of placebo or
citicoline  treatment.  For example,  approximately  80 percent of patients with
mild strokes who received placebo and a similar percentage of citicoline-treated
patients with mild strokes  achieved a Barthel score of greater than or equal to
95 at three months.

     There  was an  unexpected  highly  significant  baseline  imbalance  in the
percentage of placebo


                                      -11-





versus  citicoline-treated  patients  who had mild  strokes  on study  entry (34
percent for placebo vs. 22 percent for  citicoline  (p = 0.006),  due to chance.
The study was influenced by the significant  preponderance  of mild cases in the
placebo group. As a result of this imbalance and other statistical  factors, the
primary  analysis of the study,  the  distribution  of Barthel  Index  scores in
citicoline  vs.  placebo-treated  patients as a function of baseline  NIH Stroke
Scale scores, did not achieve statistical  significance.  However,  this primary
analysis  was  statistically  invalid  because the patient  imbalance  and other
statistical factors failed to satisfy the requirements for the correct operation
of the statistical model.  Therefore,  a protocol-defined  responders  analysis,
percentage  of patients who achieve a Barthel Index greater than or equal to 95,
among  patients  with  moderate to severe  strokes,  was  employed  (see results
above).

     In another  protocol-defined  measure of functional  clinical outcome,  the
6-point Rankin scale of physician-rated global assessment was utilized. A Rankin
score of 0 or 1 at study completion  indicated complete or near-complete lack of
disability.  Among  patients  with  moderate  to severe  strokes,  24 percent of
citicoline-treated  patients vs. 11 percent of placebo-treated patients achieved
a Rankin score of 0 or 1, a 118% improvement in outcome (OC analysis, p = 0.02).
In the LOCF analysis,  19 percent of moderate to severe citicoline  patients and
11 percent of moderate to severe placebo  patients had a Rankin scale of 0 or 1,
a 73% improvement in outcome (p = 0.08).

     Other secondary outcome measurements involving NIH Stroke Scales,  duration
of  hospitalization,  rate of recovery and  neurocognitive  ratings have not yet
been analyzed.

     Preliminary  safety review  indicated that  citicoline was well  tolerated.
There did not appear to be any medically serious adverse events that differed in
frequency from  placebo-treated  patients.  Minor  gastrointestinal  complaints,
though  relatively  infrequent,  appear  to have  occurred  more  frequently  in
citicoline  versus  placebo-treated  patients.  A previous  study  indicated  an
increased incidence in dizziness and accidental  injuries in  citicoline-treated
patients.  However,  in  the  present  trial  there  did  not  appear  to be any
differences in dizziness or accidental injuries between drug and placebo-treated
patients. The mortality rates for drug-treated and placebo-treated patients were
identical (approximately 18 percent in each group).

     Future Citicoline Development and Commercialization:  The Company currently
intends to submit a New Drug  Application  ("NDA")  with the U.S.  Food and Drug
Administration  ("FDA")  before the end of 1997.  The NDA will include data from
the Company's  two  completed  pivotal U.S.  trials and  supporting  data from a
Japanese  clinical  trial  conducted  in  stroke  patients  by  Takeda  Chemical
Industries,  Ltd. The Company is currently  evaluating the indication it intends
to request in the NDA for citicoline. The Company is unable to pedict whether or
when the NDA for  citicoline  will be accepted  for filing by the FDA or whether
the FDA will grant  authorization to market  citicoline in the U.S. based on the
available information.

     The remaining  expenditures  of all currently  planned  clinical trials and
related studies and the

                                      -12-





preparation of the NDA are  estimated,  based upon current trial  protocols,  to
aggregate  approximately  $23,000,000.  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.

     The Company is  currently  evaluating  the  commercialization  strategy for
citicoline, subject to required regulatory approvals. The Company is planning to
conduct  sole  direct  marketing  of the  product to  neurologists  and  certain
emergency room personnel but may consider contracting with certain companies for
the copromotion of the product or for a contract  salesforce for market segments
requiring  extensive  salesforce  coverage.  In the  event the  Company  markets
citicoline  directly,  significant  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 with Grupo
Ferrer ("Ferrer"),  a Spanish pharmaceutical  company,  requiring the Company to
purchase citicoline for commercial purposes at fixed prices,  subject to certain
conditions.  There can be no  assurance  the Company can or will  establish on a
timely basis, or maintain,  manufacturing or marketing  capabilities required to
obtain regulatory approval or successfully  commercialize citicoline or that any
facilities  used to produce  citicoline  will have complied,  or will be able to
maintain compliance, with U.S. Good Manufacturing Practices ("GMP") regulations.

      The Company has an exclusive  license from Ferrer based on certain  patent
and know how rights  relating to the use of  citicoline in the United States and
Canada.  The license provides for Ferrer to receive a royalty equal to 6% of the
Company's  net  sales  of  citicoline.  The  Company  has  also  filed a  patent
application relating to the use of citicoline to reduce infarct size.

     Redux

     On April 29, 1996, the Company's first  pharmaceutical  product,  Redux(TM)
(dexfenfluramine  hydrochloride capsules) C-IV received clearance by the FDA for
marketing as a twice-daily prescription therapy to treat obesity. The 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 copromotion agreements,  Redux is being
marketed in the U.S. by Wyeth-Ayerst Laboratories  ("Wyeth-Ayerst"),  a division
of American Home Products Corp. ("AHP") and co-promoted by the Company through a
salesforce of approximately 30 people.

     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


                                      -13-





the Company supplies the finished capsules of Redux to AHP. As of June 30, 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 procedures for descheduling.

     The following sets forth the applicable  "additional"  royalties payable to
the Company based on annual net sales for the twice-daily  formulation of Redux,
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.

     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  $100,000  per
salesperson  during the first year of the  agreement to $50,000 per  salesperson
during the second year of the  agreement.  As a result,  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  June  1996.  The   copromotion   agreement  is  cancelable  by
Wyeth-Ayerst  under certain  conditions.  There is no assurance the Company will
meet such conditions,  which include a minimum revenue  requirement  relating to
sales generated from the Company's copromotion of Redux.

     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  

                                      -14-





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
GMP-qualified  manufacturing  facility  for Redux.  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.  Current  labeling  for
Redux discloses this risk.

     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 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 Phase 4, or  post-marketing,  study
to examine subtle cognitive,  behavioral or psychological  changes, if any, that
may occur in  patients  taking  Redux.  Interneuron's  portion of this study and
related costs are currently  estimated to be  approximately  $12,000,000 and are
expected  to be  incurred  over an  approximately  three  year  period  from the
commencement  of the trial.  Wyeth-Ayerst  is responsible for 50% of the study's
costs.

     The Company has been working with the FDA  regarding  revised  labeling for
Redux (dexfenfluramine, the "left-handed" isomer of fenfluramine) in response to
a recent  description  by the Mayo  Clinic  of  potential  serious  heart  valve
disorders  that  have  been  reported  with the  combined  use of  (Pondimin(R))
(fenfluramine)  and phentermine.  The revised labeling may include a highlighted
("boxed")  warning about such possible  serious heart valve disorders which have
been  reported  with  the  combined  use of  fenfluramine  and  phentermine.  In
addition,   the   boxed   warning   may   include  a   warning   regarding   the
previously-mentioned association between Redux and PPH. The Company is unable to
predict  the future  impact of  safety-related  issues and  revised  labeling on
revenues  of Redux.  The Company is aware of  litigation  relating to the use of
certain prescription weight loss drugs,

                                      -15-





including  Redux.  The Company does not have sufficient  information to evaluate
the impact on it of such litigation.

     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 FDA has instituted a petition  period,
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.

     In August 1997, the Company  entered into  agreements  with AHP and Servier
for the development and  commercialization  in the U.S. of a sustained  release,
once-a-day formulation of Redux. See Item 5. Other Information.

     Redux is subject to  substantial  competition.  AHP also sells  Pondimin to
treat  obesity.  The FDA has issued an  "approvable"  letter for a BASF AG drug,
Meridia(TM),  and an FDA  advisory  panel has  recommended  approval  of a Roche
Holdings, Ltd. drug, Xenical(TM).  In addition, other drugs and technologies are
under development to treat obesity.

     Inventories  of  $4,149,000  at  June  30,  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 Redux sales,  sales forecasts provided by AHP, AHP's
management  of its inventory  levels,  production  planning by the Company,  and
production capabilities of Boehringer.  There may be fluctuations in Redux sales
as a result of many factors,  including seasonality,  promotion and advertising,
publicity,  the introduction of competitive products, the impact from regulatory
issues, and other factors. There can be no assurance that the manufacture of the
capsules and their sale to AHP will result in profits to  Interneuron.  Further,
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.  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 $7,135,000 at June 30, 1997.

Results of Operations

     Total revenues increased  substantially in the three and nine month periods
ended June 30, 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 $17,395,000 in
the three month period ended June 30, 1997  consisted of  $15,012,000 of product
revenue and  $2,383,000  of contract  and license  fees,  and total  revenues of
$54,861,000  in  the  nine  month  period  ended  June  30,  1997  consisted  of
$46,200,000 of product revenue and $8,661,000 of contract and license fees.


                                      -16-





     Product  revenue of  $15,012,000  in the three month  period ended June 30,
1997 consists primarily of royalty revenue of approximately $10,500,000 based on
AHP's  net sales of Redux  and  approximately  $4,300,000  of  revenue  from the
Company's sale of Redux capsules to AHP.  Product  revenue of $46,200,000 in the
nine month period ended June 30, 1997 consists  primarily of royalty  revenue of
approximately  $27,400,000  based on AHP's net sales of Redux and  approximately
$18,200,000  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.

     The Company expects Redux royalty revenue to decrease over the next several
quarters  due  to  the  resetting  of  the  royalty  rates  as a  result  of the
commencement of the second contract year in May 1997 and a downward trend in net
sales of Redux.  Revenue from the sale of Redux capsules to AHP is also expected
to decrease  as a result of  decreased  demand  from AHP which is  managing  its
inventory at decreased levels while  experiencing  lower net sales. As discussed
above  under   "Redux";   the  Company  is  unable  to  predict  the  impact  of
safety-related issues or the revised labeling on future revenues of Redux.

     Contract  and license  fee  revenue  increased  $1,316,000,  or 123%,  from
$1,067,000  for the three month period ended June 30, 1996 to $2,383,000 for the
three month period ended June 30, 1997 and  increased  $1,413,000,  or 19%, from
$7,248,000  for the nine month period ended June 30, 1996 to $8,661,000  for the
nine month period ended June 30, 1997. The increase in the three month period is
primarily  the result an up-front  license fee from Lilly.  The  increase in the
nine month period is primarily  the result of  Intercardia's  contract  payments
from Knoll, the Company's revenue from  Wyeth-Ayerst  supporting the Interneuron
Redux sales force pursuant to the copromotion  agreement with  Wyeth-Ayerst  and
recognition  of the up-front  license fee from Lilly,  offset by the  $5,000,000
initial  payment  Intercardia  received  pursuant to their  agreement with Astra
Merck in fiscal 1996.

     Total costs and expenses  increased  $17,389,000,  or 175%, from $9,913,000
for the three month period ended June 30,1996 to $27,302,000 for the three month
period ended June 30, 1997 and  $48,540,000,  or 153%, from  $31,754,000 for the
nine month period ended June 30, 1996 to  $80,294,000  for the nine month period
ended June 30, 1997.  Cost of product  revenue,  which  includes  the  Company's
royalty to Servier,  and which  minimally  existed in the fiscal  1996  periods,
comprised  approximately 49% and 62%,  respectively,  of the 1997 three and nine
month period  increases.  The three and nine month  periods  ended June 30, 1997
included  expense for the purchase of  in-process  research and  development  of
$286,000 and $2,547,000,  respectively,  resulting  primarily from the Company's
open  market  purchases  of  Intercardia  common  stock.  See Note F of Notes to
Unaudited  Consolidated  Financial Statements.  The nine month period ended June
30,  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  $2,150,000  for  InterNutria's  acquisition  of
technology  and know-how  related to PMS  Escape(TM)  which is being paid by the
issuance of Interneuron Common Stock.

     Research and  development  expenses  increased  $5,545,000,  or 112%,  from
$4,955,000 for the three month period ended June 30, 1996 to $10,500,000 for the
three month period ended June 30,


                                      -17-





1997 and $16,369,000,  or 141%, from $11,615,000 for the nine month period ended
June 30, 1996 to  $27,984,000  for the nine month  period  ended June 30,  1997.
Increases in the 1997 three and nine month periods reflect expenses  relating to
two pivotal Phase 3 citicoline  trials and preliminary  efforts preparing for an
NDA for citicoline,  the pivotal Phase 2/3 pagaclone clinical trial initiated in
the first quarter of fiscal 1997, certain new development efforts at the Company
and  Subsidiaries  including  expenses  relating to  LidodexNS,  and  additional
staffing  and related  expenses at the  Company and the  Subsidiaries.  The nine
month  period  increases  also include  certain  post-approval  clinical  trials
expenses relating to Redux and Intercardia's  expenses for once-a-day and tablet
formulations  of bucindolol.  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.  Future  periods  will include  significant
research and development expenses related to Phase 4 studies with Redux expected
to commence  shortly,  the  development  of a once-a-day  formulation  of Redux,
filing  of an NDA for  CerAxon  and  additional,  ongoing  clinical  testing  of
citicoline.

     Selling, general and administrative expenses increased $3,075,000,  or 72%,
from  $4,297,000 for the three month period ended June 30,1996 to $7,372,000 for
the  three  month  period  ended  June 30,  1997 and  $7,538,000,  or 67%,  from
$11,178,000 for the nine month period ended June 30, 1996 to $18,716,000 for the
nine month period ended June 30, 1997.  These increases are due primarily to the
cost of the Company's Redux sales force,  promotional  expenses incurred for PMS
Escape,   increased  personnel  costs,  additional  staffing,   consultants  and
insurance  relating to the Company's growth and increased  business  development
activities,  and  additional  facilities  costs at  Interneuron  relating to its
expanded  facilities  and at  Transcell  relating  to  its  move  into  expanded
facilities.  Partially  offsetting the nine month  increases was a non-recurring
expense  recorded in fiscal 1996 for severance and related  charges  incurred by
Transcell relating to certain management  changes.  The Company expects selling,
general and  administrative  expenses will increase in fiscal 1998, in part as a
result of increased  promotional expenses expected to be incurred by InterNutria
for a  national  launch of PMS  Escape,  and by the  Company  for the  launch of
CerAxon, if FDA approval is obtained. See "Liquidity and Capital Resources".

     Investment  income, net of interest expense,  increased  substantially over
the 1997 three and nine  month  periods  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.

Liquidity and Capital Resources

     Cash, Cash Equivalents and Marketable Securities

     At June 30, 1997, the Company had  consolidated  cash, cash equivalents and
marketable  securities  aggregating  $151,776,000,  compared to  $169,608,000 at
September 30, 1996. Approximately $9,800,000 of this decrease resulted from cash
used by operating  activities and  approximately  $6,800,000 of this decrease is
the result of the Company's open-market purchases of Intercardia and Interneuron
Common  Stock  (see  Note  F  of  Notes  to  Unaudited   Consolidated  Financial
Statements).



                                      -18-


     Clinical Studies

     The  Company is  expending  substantial  amounts  for the  development  and
regulatory approval of citicoline as discussed above under "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
utilize,  depending upon results,  as either a pivotal or supporting trial in an
NDA  submission.  The  Company  currently  estimates  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  approximately  the next three  years.  The  Company is unable to
predict with certainty the costs of any related or additional  studies which may
be required by the FDA,  whether any such clinical  trials will be successful or
result in FDA approval of the product. Further, in the event the Company markets
pagoclone  directly,   significant   additional  funds  would  be  required  for
manufacturing, distribution and selling efforts.

     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 any ongoing  current  preclinical
or  clinical  trial  will be  successful,  that  additional  trials  will not be
required,  that any drug under development will receive FDA approval in a timely
manner or at all,  or that  such  drug  could be  successfully  manufactured  in
accordance with good manufacturing  practice regulations or marketed in a timely
manner, or at all, any of which could materially adversely affect the Company.

     Analysis of Cash Flows

     Cash used by  operating  activities  during the nine months  ended June 30,
1997  of  $9,793,000  consisted  primarily  of a net  loss of  $17,955,000  (See
"Results of Operations") and changes in assets and liabilities as follows:

     (i) a decrease in accounts  receivable  of  $1,179,000  from  $4,338,000 at
September  30, 1996 to  $3,159,000  at June 30, 1997  primarily  resulting  from
collections from AHP and reduced billings to AHP.

     (ii) a decrease in inventories of $4,227,000  from  $8,376,000 at September
30, 1996 to  $4,149,000  at June 30, 1997,  reflecting a reduction in production
rate of Redux capsules and their sale to AHP.

     (iii) an increase of $7,022,000  in prepaid and other  current  assets from
$1,324,000 at September 30, 1996 to $8,346,000 at June 30, 1997 primarily due to
Progenitor's  approximately  $5,400,000 of prepaid and accrued costs relating to
its proposed  initial public  offering and Mercator  acquisition 



                                      -19-





and  advances to  Mercator  under a line of credit  arrangement.  (See Note G of
Notes to Unaudited Consolidated Financial Statements and Item 5. Other Events)

     (iv) an increase of  $6,273,000 in accrued  expenses and other  liabilities
primarily  due to  increased  accruals  relating  to  research  and  development
contracts,  and  Progenitor's  accrual of initial  public  offering and Mercator
acquisition costs.  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 nine months  ended June 30,
1997 of $73,086,000  consisted  primarily of purchases of marketable  securities
(investments purchased with maturities greater than three months) of $79,381,000
resulting  mainly from funds available from maturities of securities  classified
as cash  equivalents,  purchases of property and equipment of $3,258,000 and the
Company's $2,837,000 purchase of Intercardia stock.

     Cash used by  financing  activities  during the nine months  ended June 30,
1997 of $1,960,000 consisted of $3,978,000 used to purchase treasury stock which
was  partially  offset by inflows of  $1,317,000  from  issuances  of common and
treasury stock and  $1,050,000  from proceeds from sales and leasebacks of fixed
assets.

     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 June 30, 1997, the
Company had purchased  124,400  shares of  Intercardia  common  stock,  of which
20,000 shares were  purchased in the three month period ended June 30, 1997, for
an aggregate purchase price of approximately  $2,837,000, of which approximately
$286,000  and  $2,147,000  was recorded as purchase of  in-process  research and
development   in  the  three  and  nine  month  periods  ended  June  30,  1997,
respectively.  As a result  of  these  purchases,  the  Company's  ownership  of
Intercardia   increased  from   approximately  60%  at  September  30,  1996  to
approximately  61% at June 30, 1997 based upon the number of outstanding  shares
of Intercardia at each date.

     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 June 30, 1997, the
Company had repurchased  217,500 shares (of which 75,000 were repurchased in the
three month  period  ended June 30,  1997) for an  aggregate  purchase  price of
approximately  $3,978,000,  of which 40,665  shares were  re-issued  pursuant to
stock option exercises and an employee stock purchase plan.

     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 

 
                                     -20-



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 delivered.  The sale or potential sale of such shares
could have an adverse effect on the market price of the Company's  Common Stock.
Because the Company has the ability to settle call options  through  issuance or
receipt of Common Stock, the Company has accounted for the purchase and sales of
these call options as equivalent and offsetting noncash equity transactions. Any
gains  realized  from  purchased  call options  will be reflected in  additional
paid-in capital.

     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.

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

     While the Company  believes it has sufficient  cash for the next 12 months,
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  growth  beyond  the next  twelve  months.  In
particular, in the event citicoline receives regulatory approval in the U.S. and
the Company seeks to conduct marketing directly, the Company may seek additional
financing.  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.  In  August  1997,
Progenitor  completed  its  initial  public  offering.  See  Note G of  Notes to
Unaudited Consolidated Financial Statements and Item 5. Other Information.

     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

 
                                     -21-


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 Transcell and  InterNutria
and has funded the operations of Progenitor  until the closing of the Progenitor
IPO.  See  Note G of  Notes  to  Unaudited  Consolidated  Financial  Statements.
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 three and nine month  periods ended
June 30, 1997 was approximately 41% and 40%, respectively.

     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
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-a-day
development  costs which  relate to  development  solely for the  Territory  and
approximately  67% of  once-a-day  development  costs  which  have  a  worldwide
benefit.

     In May 1997, the FDA approved the use in the United States of carvedilol, a
competitive  drug being  developed by SmithKline  Beecham,  for the treatment of
congestive heart failure.  SmithKline Beecham is currently marketing  carvedilol
in the United States and a number of other  countries.  The Company is unable to
predict the impact of this product on  bucindolol,  if bucindolol 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 



                                      -22-



was reflected in contract and license fee revenue in the nine month period ended
June 30, 1997.  Progenitor may also receive from Amgen certain  development  and
regulatory  milestone  payments and potential  royalties on sales. In connection
with  this  agreement,  Amgen  purchased  Progenitor  common  stock in a private
transaction at the same time as the Progenitor IPO.

     On August 12, 1997,  Progenitor completed the Progenitor IPO. See Note G of
Notes  to  Unaudited   Consolidated  Financial  Statements  and  Item  5.  Other
Information.

     Transcell

     On  July  3,  1997  Transcell  and  Interneuron  entered  into  a  Research
Collaboration  and  Licensing  Agreement  with Merck & Co.,  Inc.  ("Merck")  to
discover and  commercialize  certain novel  antibacterial  agents.  Merck has an
option to extend the field of the  collaboration  and  license  to  include  all
antibacterial  pharmaceutical  products. The agreement provides for Transcell to
receive initial payments  totaling  $2,500,000 (which were received in July 1997
and which will be  recognized  as license fee revenue in the three month  period
ending  September 30, 1997) plus research  support during the first two years of
the  agreement.  Additionally,  Transcell  is entitled  to  payments  based upon
achievement of certain defined  clinical  development and regulatory  milestones
and royalties based upon net sales of products resulting from the collaboration.
Certain of the  rights  licensed  to Merck are based on  exclusive  licenses  or
rights held by Transcell and Interneuron from Princeton  University,  which will
be entitled to varying  percentages of certain  payments and royalties  received
from Merck.

     InterNutria

     InterNutria  recently  concluded  a  preliminary  analysis  of data  from a
clinical  evaluation of PMS Escape and intends to commence a national  launch of
PMS Escape in the fall of 1997. Selling and marketing costs associated with this
launch are estimated to be approximately $13,000,000 through early 1998 and will
be funded by Interneuron.



                                      -23-






PART II - OTHER INFORMATION

Item 2.  Changes in Securities:

     During the nine month  period ended June 30,  1997,  the Company  issued or
sold the following securities which were not registered under the Securities Act
of 1933, as amended (the "Act").

     In May 1997,  the Company  sold to Swiss Bank  Corporation,  London  Branch
(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 the  Company's
Common Stock.  In exchange,  the Company  purchased from SBC capped call options
giving the  Company 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 on  specified
dates.  See  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations."

     In March 1997, the Company  granted  warrants to purchase  25,000 shares of
the Company's Common Stock to a designee of Paramount Capital, Inc., exercisable
at $18.25 per share, in consideration of investment banking services.

     In December 1996, the Company granted warrants to purchase 25,000 shares of
the Company's Common Stock to a consultant, exercisable at $20.125 per share, in
consideration of consulting services.

     Each of these transactions was a private transaction not involving a public
offering,  was exempt from the  registration  provisions  of the Act pursuant to
Section 4(2) thereof, and was without the use of an underwriter.

Item 5.  Other Information:

Agreements with Servier and AHP

     In August  1997,  the  Company,  AHP and Servier  entered  into  agreements
relating  to the  development  and  commercialization  of a  sustained  release,
once-a-day  formulation of Redux(TM) for the management of obesity in the United
States.  Redux is currently marketed by AHP and copromoted by the Company in the
U.S. as a  twice-daily  prescription  drug for the  management  of  obesity.  In
connection  with the  transaction  (i) the Company and Servier  entered  into an
Amendment  (the  "IPI/Servier  Amendment")  to the Patent  and Know How  License
Agreement dated February 7, 1990, as previously amended; (ii) the Company, Orsem
(an  affiliate of Servier) and American  Cyanamid  Company,  a subsidiary of AHP
("ACC")  entered  into  an  Amendment  (the  "Trademark  Amendment")  to (x) the
Trademark  Agreement  between the Company and Orsem dated  February 7, 1990,  as
previously  amended,  and (y) the Trademark License Agreement among the Company,
Orsem and ACC dated November 19, 1992; (iii) the Company and AHP entered into an
Amendment Agreement (the "IPI/AHP  Amendment")  amending the Patent and Know How
Sublicense and Supply  Agreement  between the Company and ACC dated November 19,
1992;  and  (iv)  the  Company,  Servier  , ACC and  AHP  entered  into  Consent
Agreements (the  IPI/Servier  Amendment,  the Trademark  Amendment,  the IPI/AHP
Amendment and the Consent Agreements are collectively  referred to herein as the
"Agreements").



                                      -24-





     The Company agreed to pay Servier  $2,000,000 in connection  with execution
of  the  IPI/Servier  Amendment,  $1,000,000  upon  the  filing  of a  New  Drug
Application ("NDA") for the once-a-day  formulation of Redux and $1,000,000 upon
receipt  of FDA  marketing  approval  of the  once-a-day  formulation  of Redux.
Royalties  payable  by the  Company to Servier  on Net  Sales,  as  defined,  of
once-a-day  formulation of Redux are comparable to royalties  payable to Servier
on Net Sales of Redux,  and base royalties  payable by ACC to the Company on the
once-a-day  formulation of Redux (equal to the royalties  payable by the Company
to Servier) are  comparable to royalties  payable on Net Sales of Redux,  except
that  no  royalty  is  payable  for any  formulation  patent  on the  once-a-day
formulation of Redux and that minimum royalties on the once-a-day formulation of
Redux are double the minimum royalties on Redux.

     Additional  royalties  payable by ACC to the Company  based on Net Sales of
the once-a-day  formulation of Redux are based on the status of  dexfenfluramine
as a scheduled or descheduled drug. The additional royalties on Net Sales of the
once-a-day formulation of Redux are as follows:

                  Scheduled
                  First $50 million                      5.5%
                  Next $100 million                      8.5%
                  Over $150 million                     10.5%

                  Descheduled
                  First $150 million                     8.5%
                  Next $50 million                      10.5%
                  Over $200 million                     11.5%

     The  additional  royalty rates on the  once-a-day  formulation of Redux are
subject to a 50%  reduction  if generic  drugs  achieve a market share of 20% or
greater for two  consecutive  quarters of the number of total new  prescriptions
for the once-a-day  formulation of Redux. ACC agreed to make milestone  payments
to the Company based on Net Sales of the once-a-day  formulation of Redux in the
event the compound is scheduled.

     The  Company  agreed  to share  with ACC 50% of the  costs of the  clinical
development of the once-a-day  formulation of Redux,  including Phase 3 clinical
trials,  subject to  certain  conditions  and  excluding  Phase 4  studies.  The
Company's   portion  of  such  costs  are   currently   estimated  to  aggregate
approximately $15,000,000.  In certain cases, the Company will reimburse ACC for
50% of the costs of clinical trials for an expanded indication.  Currently,  the
Company's  portion  of such  costs  are  estimated  to  aggregate  approximately
$4,000,000.  The Agreements provide for ACC to be the sponsor of the NDA for the
once-a-day formulation of Redux.

     The Company will not supply ACC with the once-a-day  formulation  of Redux.
However,  royalties payable to the Company on the once-a-day formulation are .5%
higher  than on the  twice-daily  formulation.  Under  certain  conditions,  the
Company may be required to share in the cost of supply or  manufacturing  of the
once-a-day formulation of Redux.



                                      -25-





Progenitor IPO

         On August 12, 1997,  Progenitor  completed an initial  public  offering
(the  "Progenitor  IPO") of  2,750,000  units  at  $7.00  per  unit,  each  unit
consisting of one share of Progenitor  Common Stock and one five-year warrant to
purchase  one  share  of  Progenitor  Common  Stock at  $10.50  per  share.  The
Progenitor  IPO  resulted  in proceeds to  Progenitor,  net of  offering-related
costs, of approximately $16,600,000.  Interneuron purchased 500,000 units of the
Progenitor IPO for a total of $3,500,000.  Concurrent  with the Progenitor  IPO,
Progenitor sold 1,023,256 shares of Progenitor Common Stock to Amgen pursuant to
a stock  purchase  agreement  for a purchase  price of  $4,500,000 in cash and a
$1,000,000 promissory note. Concurrently with the closing of the Progenitor IPO,
Progenitor  completed a merger  with  Mercator  Genetics,  Inc.  (the  "Mercator
Acquisition")   for   approximately   $22,000,000  paid  with  the  issuance  of
approximately  3,441,000 shares of Progenitor  Common Stock, plus the assumption
of Mercator  liabilities  and  forgiveness  of debt relating to advances made by
Progenitor  to Mercator.  Interneuron's  ownership in  Progenitor's  outstanding
capital  stock  decreased  from  approximately  76% at  September  30,  1996  to
approximately  37 % immediately  following the  Progenitor  IPO and the Mercator
Acquisition.  As a result of the Company's decreased  percentage of ownership in
Progenitor,  the Company will no longer consolidate the financial  statements of
Progenitor but will include Progenitor using the equity method of accounting.

     In  connection  with  the  Mercator  Acquisition,   Progenitor  will  incur
non-recurring  charges to  operations  in the  quarter  and fiscal  year  ending
September  30,  1997,  related  to  the  purchase  of  in-process  research  and
development.   Interneuron  will  include  a  portion  (currently  estimated  at
approximately   $12,000,000)   of  these  charges  in  Equity  in  net  loss  of
unconsolidated subsidiaries, based on its ownership interest in Progenitor. As a
result of the  Progenitor  IPO and  Interneuron's  purchase  of  500,000  shares
thereof,  Interneuron  will  recognize  in the  quarter  and fiscal  year ending
September  30, 1997, a gain on its  investment  in  Progenitor  in the Company's
Additional  paid-in capital but not in the Company's  Consolidated  Statement of
Operations.

         As a result of the Progenitor IPO,  shares of Interneuron  Common Stock
potentially  issuable  under certain put protection  rights  exercisable in June
1998  have  decreased  from a maximum  of  approximately  2,181,250  shares to a
maximum of approximately 232,000 shares, if Interneuron's Common Stock is valued
at $2.00 per share or less.  Based upon the closing  market price of Interneuron
Common Stock on August 8, 1997 of $20.25,  the  Company's  potential  obligation
under these put protection rights could cause the Company to issue approximately
22,900 shares of its Common Stock.

         In  certain  circumstances,  Interneuron  has  the  right  to  purchase
additional  shares of  Progenitor  Common Stock at fair market value to maintain
Interneuron's  equity  ownership in Progenitor and Interneuron may purchase from
time to  time  through  open-market  transactions  Progenitor  common  stock  or
warrants.  As of August 13, 1997,  the Company has  purchased  20,000  shares of
Progenitor  common stock for approximately  $105,000.







                                      -26-






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


         (a) Exhibits

         10.92    -        Research  and  Collaboration  and  License  Agreement
                           effective  as of June 30,  1997 by and among  Merck &
                           Co.,   Inc.,   Transcell   Technologies,   Inc.   and
                           Interneuron Pharmaceuticals, Inc. (*)

         27       -        Financial Data Schedule


----------------


         * Confidential treatment requested for a portion of this Exhibit.

(b)      Reports on Form 8-K

         The Company filed Reports on Form 8-K reporting information under "Item
         5" on May 6, 1997, June 20, 1997, July 15, 1997 and July 28, 1997.






























                                      -27-






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


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


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





                                      -28-