INSMED INC, 424A, 2000-10-03

INSMED INC
424A, 2000-10-03
PHARMACEUTICAL PREPARATIONS

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<PAGE>

Filed Pursuant To Rule 424(a)
Registration No. 333-46552

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 2000

[LOGO OF INSMED INCORPORATED]
6,000,000 Shares

Common Stock

Insmed Incorporated is offering 5,000,000 shares of its common stock and
the selling shareholders are selling an additional 1,000,000 shares. Insmed
will not receive any of the proceeds from the sale of shares by the selling
shareholders. Insmed's common stock is traded on the Nasdaq National Market
under the symbol "INSM." The last reported sale price of the common stock on
the Nasdaq National Market on September 21, 2000, was $14.00 per share.

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

Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.

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<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.................................... $ $
Underwriting Discounts and Commissions................... $ $
Proceeds to Insmed....................................... $ $
Proceeds to the Selling Shareholders..................... $ $
</TABLE>

The Securities and Exchange Commission and any state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful and complete. Any representation to the contrary is a
criminal offense.

Certain of Insmed's existing shareholders have granted the underwriters a
30-day option to purchase up to an additional 900,000 shares of common stock to
cover over-allotments.

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

Robertson Stephens

Banc of America Securities LLC

Prudential Vector Healthcare
a unit of Prudential Securities

The date of this Prospectus is , 2000
<PAGE>

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus. In this prospectus, the "company," "Insmed,"
"Insmed Incorporated," "we," "us," and "our" refer to Insmed Incorporated, a
Virginia corporation.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 5
A Caution About Forward-Looking Statements............................... 17
Use of Proceeds.......................................................... 18
Market Prices and Dividend Policy........................................ 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 22
Business................................................................. 25
Management............................................................... 39
Certain Transactions..................................................... 46
Principal and Selling Shareholders....................................... 47
Description of Capital Stock............................................. 50
Shares Eligible for Future Resale........................................ 54
Underwriting............................................................. 55
Legal Matters............................................................ 58
Experts.................................................................. 58
Where You Can Find More Information...................................... 58
Index to Financial Statements............................................ F-1
</TABLE>

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SomatoKine(R) is a registered trademark of Insmed. This prospectus also
contains trademarks of third parties. Each trademark of another company
appearing in this prospectus is the property of its owner.

i
<PAGE>

SUMMARY

This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully.

We discover and develop pharmaceutical products for the treatment of
metabolic and endocrine diseases associated with insulin resistance. Insulin
resistance is a defect in the body which results in a decreased sensitivity to
insulin, the principal hormone that regulates glucose levels in the
bloodstream. Our lead product candidate, INS-1 is an orally-active insulin
sensitizer which restores tissue sensitivity to insulin. We are developing INS-
1 for the treatment of type 2 diabetes and polycystic ovary syndrome, commonly
known as PCOS. Our second product candidate, SomatoKine(R), is a recombinant
protein that we are developing as an injectible insulin sensitizer targeted
towards the management of both type 1 and type 2 diabetics who are less
sensitive to insulin therapy. We believe our product candidates address major
clinical needs in the management of the diabetic population.

We have completed seven clinical trials for INS-1 and seven clinical
trials for SomatoKine. In the trials involving INS-1, we have exposed over 500
patients generating approximately 60 years of cumulative patient experience and
we have observed no clinically relevant adverse events. In June 1999, we
presented to the American Diabetes Association's Annual Meeting data from our
first completed Phase II clinical trial with INS-1 for type 2 diabetes. In this
trial, which involved 110 patients with early stage type 2 diabetes, INS-1
showed statistically significant reductions in glucose and lipid levels, when
compared to placebo, in those subjects which had both abnormally high
circulating glucose and lipid concentrations. In April 1999, the New England
Journal of Medicine published the results from our first completed Phase II
clinical trial with INS-1 for PCOS. In this trial, which involved 44 women with
PCOS, administration of INS-1 improved insulin resistance and enhanced the
body's ability to respond to insulin and restore ovulation with statistical
significance compared to placebo. Based on the results of our clinical trials
to date, we believe INS-1 has a safety and efficacy profile superior to current
drugs in the market.

We have a comprehensive clinical program involving twelve additional
Phase II clinical trials, nine of which are currently in progress and three are
scheduled to begin by the end of 2000 or early 2001. These studies include five
Phase II trials with respect to INS-1 for the treatment of type 2 diabetes,
four Phase II trials with respect to INS-1 for the treatment of PCOS, and three
Phase II trials with respect to SomatoKine for the treatment of type 1 and type
2 diabetes.

Insulin resistance is an important metabolic disorder that precedes the
development of diseases such as type 2 diabetes and PCOS. It is frequently
asymptomatic and is thought to exist in approximately 25% of the general
population in the United States. Diabetes is a metabolic disease characterized
by an inability to properly store and utilize glucose and is caused by either a
deficiency of insulin or insulin resistance. The long-term dangers of diabetes
arise from organ damage caused by the sustained elevation of blood glucose
levels and are comprised of both life-threatening and severely debilitating
disorders, including kidney disease, blindness and cardiovascular disease.
According to the American Diabetes Association, diabetes is the sixth leading
cause of death by disease in the United States and is estimated to afflict 16
million Americans with approximately 800,000 new cases diagnosed annually. Each
year, approximately 200,000 Americans die from diabetes-related complications.
According to a recent report from the Centers for Disease Control and
Prevention, the current rapid increase in the prevalence of diabetes in the
United States should continue due to the increasing rate of obesity in the
population. The annual cost to the healthcare system for health-related
expenditures associated with diabetes in the United States is approximately
$100 billion. Diabetes is the leading cause of blindness in people aged 20 to
74 and approximately 40% of all new cases of kidney failure are caused by
diabetes. In addition, cardiovascular disease is two-to-four times more
prevalent in diabetics than in non-diabetics.

1
<PAGE>

lowering, drugs for the type 2 diabetic who has failed exercise and dietary
modification. Although these oral drugs generated revenues in 1999 of
approximately $3 billion, they have a number of significant limitations in
clinical use.

Insulin resistance is one of the primary underlying causes of PCOS. PCOS
is a major women's health disorder that affects approximately 6% of women in
the United States of reproductive age. PCOS is characterized by high levels of
testosterone and the absence of ovulation, and is the leading cause of female
infertility in the United States. Women with this disorder are often
overweight, have excess facial and body hair and have menstrual irregularities.
Studies have indicated that women with PCOS have a four-fold increase in the
risk of developing hypertension, a seven-fold increase in the risk of
developing type 2 diabetes and a seven-fold increase in the risk of having a
heart attack. In addition, women with PCOS have a higher risk of developing
endometrial cancer.

The mechanism of action of INS-1 is based on a fundamental understanding
of the regulation of insulin action in both normal cellular metabolism and the
abnormal condition of insulin resistance. We are presently characterizing
unique small molecular weight substances, called "mediators," which are
generated within the cell following insulin stimulation that mediate the
actions of insulin. We believe that an impaired ability of the cell to
synthesize these mediators is the primary defect that results in the insulin
resistant condition. INS-1 is a naturally-occurring chemical precursor of one
of these mediators which we believe acts as a building block to restore
mediator formation and enhance insulin sensitivity.

Our second product candidate, SomatoKine, is a therapeutic composition of
insulin-like growth factor, known as IGF-1, complexed to its primary binding
protein, BP3. In healthy individuals, IGF-1 circulates attached to BP3, which
regulates the biological activity of IGF-1 in the bloodstream. IGF-1 is known
to enhance insulin action in patients with diabetes; however, its
administration has generally been associated with significant side effects
which have limited its clinical use. Previous attempts at boosting IGF-1 levels
in the human body to improve insulin sensitivity have focused on delivery of
the molecule without BP3. We believe this method does not recognize the
importance that the binding protein plays in regulating the actions of IGF-1.
We believe that by combining IGF-1 with BP3, we can demonstrate the ability of
IGF-1 to enhance insulin action and limit side effects. In April 2000, the
Journal of Clinical Endocrinology & Metabolism published the results from our
first completed Phase II clinical trial with SomatoKine for type 1 diabetes.
This study demonstrated that SomatoKine showed a statistically significant
improvement in insulin sensitivity in patients with type 1 diabetes with no
clinically relevant adverse effects.

Insmed was incorporated in Virginia on November 29, 1999 to facilitate
the May 31, 2000 acquisition of Celtrix Pharmaceuticals, Inc. by Insmed
Pharmaceuticals, Inc. Insmed Pharmaceuticals, Inc., our predecessor, was
incorporated in Virginia on September 23, 1988 and Celtrix Pharmaceuticals,
Inc., was incorporated on July 24, 1990. Our principal executive offices are
located at 800 East Leigh Street, Richmond, Virginia 23219 and our phone number
is (804) 828-6893.

2
<PAGE>

The Offering

Common stock offered by Insmed.......... 5,000,000 shares
Common stock offered by selling 1,000,000 shares
shareholders..........................
Common stock to be outstanding after 32,150,197 shares of common stock
the offering..........................

Use of Proceeds......................... We expect to use the net proceeds
to fund our development of INS-1
and SomatoKine, and for working
capital, capital expenditures and
general corporate purposes.
Although we may use a portion of
the net proceeds to acquire
businesses, products or
technologies that are complementary
to our business, we have no
specific acquisitions planned. We
will not receive any of the
proceeds from the sale of shares by
the selling shareholders.

Nasdaq National Market Symbol........... INSM

The number of shares to be outstanding after this offering is based upon
shares outstanding as of September 15, 2000, and does not include:

. 1,334,783 shares of common stock issuable upon the exercise of
outstanding stock options as of such date, of which options to purchase
725,541 shares were then exercisable;

. 1,915,217 shares of common stock reserved for issuance under our stock
incentive and employee stock purchase plans; and

. 1,725,330 shares of common stock issuable on exercise of outstanding
warrants.

On July 28, 2000, we completed a one-for-four reverse stock split. Except
as otherwise indicated in this prospectus, all share and per share numbers have
been restated to reflect the split.

3
<PAGE>

Summary Financial Data

In the table below, we provide you with summary financial data. We have
prepared this information using the consolidated financial statements of Insmed
Incorporated or its predecessor for the five years ended December 31, 1999 and
for the six month periods ended June 30, 2000 and 1999. The acquisition of
Celtrix closed on May 31, 2000. The purchase method of accounting was used to
account for the transaction. Accordingly, the results of operations for Celtrix
are included in the historical financial information commencing June 1, 2000.
The financial statements for the five fiscal years ended December 31, 1999 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the six-month periods ended June 30, 2000 and 1999 have not been
audited.

When you read this selected historical financial data, it is important
that you also read the historical financial statements and related notes, as
well as "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 22 to 24.

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Statement of
Operations Data:
Revenues................ $ 380 $ 146 $ -- $ 100 $ 663 $ 403 $ 90
Operating expenses:
Research and
development.......... 877 1,302 2,604 3,769 6,320 2,700 6,689
General and
administrative....... 666 943 979 1,626 2,189 957 2,425
Purchased research and
development (1)...... -- -- -- -- -- -- 54,433
Non-cash stock
compensation......... -- -- -- -- 285 -- 3,564
------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 1,543 2,245 3,583 5,395 8,794 3,657 67,111
------- ------- ------- ------- ------- ------- --------
Operating loss.......... (1,163) (2,099) (3,583) (5,295) (8,131) (3,254) (67,021)
Interest income, net.... (43) 11 103 486 338 210 206
------- ------- ------- ------- ------- ------- --------
Net loss................ $(1,206) $(2,088) $(3,480) $(4,809) $(7,793) $(3,044) $(66,815)
======= ======= ======= ======= ======= ======= ========
Basic and diluted net
loss per share........ $ (0.86) $ (0.99) $ (1.39) $ (1.68) $ (2.47) $ (0.97) $ (8.85)
Weighted average
shares................ 1,406 2,099 2,497 2,868 3,155 3,140 7,550

<CAPTION>
December 31, June 30,
------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Balance Sheet
Data:
Cash, cash equivalents
and investments....... $ 60 $ 2,106 $ 2,050 $11,677 $ 4,635 $ 8,707 $ 37,575
Total assets............ 173 2,386 2,365 11,938 5,296 8,987 51,507
Convertible
participating
preferred stock....... -- 5,294 -- -- -- -- --
Stockholders' equity
(deficiency).......... (1,512) (3,093) 2,151 11,661 4,462 8,616 47,814
</TABLE>

--------
(1) When we prepared our June 30, 2000 financial statements, purchased research
and development in connection with the acquisition of Celtrix, was
estimated to be approximately $54.4 million. On September 15, 2000, the
valuation of acquired in-process research and development was completed by
an independent third-party appraisal company, and the value assigned to the
purchased research and development was approximately $50.4 million.
Accordingly, we will reduce the related expense by $4.0 million in our
third quarter financial statements and correspondingly increase goodwill by
$4.0 million.

4
<PAGE>

RISK FACTORS

An investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock.

If any of the following risks actually occur, our business, results of
operations and financial condition would likely suffer. In these circumstances,
the market price of our common stock could decline, and you may lose all or
part of the money you paid to buy our common stock.

Risks Related to Our Company

Because our products are in an early stage of development, we have not received
regulatory approval for any of our products nor have we released any products
for commercial sale, therefore we can give you no assurances that we will
succeed in commercializing our products.

Our long-term viability and growth will depend on the successful
commercialization of products resulting from our development activities,
including INS-1 and SomatoKine. All of our potential products and production
technologies are in the research or development stages and we have generated no
revenues from product sales. We will need to conduct significant additional
development, laboratory and clinical testing and invest significant additional
amounts of capital before we can commercialize our products. We can give you no
assurances that we will identify, develop or produce products with commercial
potential or that we will secure market acceptance for our products. The
failure to commercialize our potential products will adversely affect our
business, financial condition and results of operations. In addition, the
research, development, testing, clinical trials and acquisition of the
necessary regulatory approvals with respect to any given product will take many
years and thus delay our receipt of revenues, if any, from any such products.
In addition, potential products that appear promising at early stages of
development may fail for a number of reasons, including the possibility that
the products:

. may be ineffective;

. may cause harmful side effects; or

. may be too expensive to manufacture.

Our products may also fail to receive regulatory approval. In addition,
even after regulatory authorities approve our products, the products may fail
to achieve market acceptance or the proprietary rights of third parties may
prevent their commercialization.

Since we have a limited operating history, a history of operating losses and
expect to generate operating losses for the foreseeable future, we may not
achieve profitability for some time, if at all.

We are focused on product development and we currently have no sales.
Both of our operating subsidiaries have incurred losses each year of their
operation and we expect to continue incurring operating losses for the
foreseeable future. The process of developing our products requires significant
pre-clinical testing and clinical trials as well as regulatory approvals for
commercialization and marketing before we can begin to generate any revenue
from product sales. In addition, commercialization of our drug candidates will
require us to establish a sales and marketing organization and contractual
relationships to enable product manufacturing and other related activity. We
expect that these activities, together with our general and administrative
expenses, will result in substantial operating losses for the foreseeable
future. As of June 30, 2000, our accumulated deficit was $89.6 million. For the
year ended December 31, 1999, the combined net loss of our operating
subsidiaries was $18.3 million. Our net loss for the six months ended June 30,
2000, was $66.8 million.

Prior to May 31, 2000, Celtrix was a publicly-held biopharmaceutical
company focused on the development of SomatoKine to treat diabetes, severe
osteoporosis, including hip fracture surgery, and severe burns. From the date
of its incorporation in July 1990 through the closing of our acquisition on May
31, 2000, Celtrix had accumulated a deficit of approximately $144.4 million.

5
<PAGE>

We will need additional funds in the future to continue our operations, but we
face uncertainties with respect to our access to capital that could adversely
impact our business, financial condition and results of operations.

We will require substantial future capital in order to continue to
conduct the time consuming research and development, clinical studies and
regulatory activities necessary to bring our therapeutic products to market and
to establish production, marketing and sales capabilities. There can be no
assurance that our cash reserves together with any subsequent funding will
satisfy our capital requirements. The failure to satisfy our capital
requirements will adversely affect our business, financial condition and
results of operations. Our future capital requirements will depend on many
factors, including the progress of pre-clinical testing and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing and prosecuting patent applications and enforcing patent
claims and the establishment of strategic alliances and activities required for
product commercialization. We believe that existing cash reserves, together
with proceeds from this proposed financing, will sufficiently fund our
activities until at least the end of 2002.

We may seek additional funding through strategic alliances, private or
public sales of our securities or by licensing all or a portion of our
technology. Such funding may significantly dilute existing shareholders or may
limit our rights to our currently developing technology. There can be no
assurance, however, that we can obtain additional funding on reasonable terms,
or at all. If we cannot obtain adequate funds, we may need to significantly
curtail our product development programs and/or relinquish rights to our
technologies or product candidates.

If our products fail in clinical trials or if we cannot enroll enough patients
to complete our clinical trials there may be an adverse effect on our business,
financial condition and results of operations.

In order to sell our products, we must receive regulatory approval for
our products. Before obtaining regulatory approvals for the commercial sale of
any of our products under development, we must demonstrate through pre-clinical
studies and clinical trials that the product is safe and effective for use in
each target indication. Therefore, if our products fail in clinical trials
there will be an adverse effect on our business, financial condition and
results of operations. In addition, the results from pre-clinical testing and
early clinical trials may not be predictive of results obtained in later
clinical trials. There can be no assurance that our clinical trials will
demonstrate sufficient safety and effectiveness to obtain regulatory approvals.
A number of companies in the biotechnology and pharmaceutical industries have
suffered significant setbacks in late stage clinical trials even after
promising results in early stage development.

The completion rate of our clinical trials is dependent on, among other
factors, the patient enrollment rate. Patient enrollment is a function of many
factors, including:

. patient population size;

. the nature of the protocol to be used in the trial;

. patient proximity to clinical sites; and

. eligibility criteria for the study.

We believe our planned procedures for enrolling patients are appropriate,
however, delays in patient enrollment will increase costs and delay ultimate
sales, if any, of our products. Such delays could materially adversely affect
our business, financial condition and results of operations.

If we fail to obtain regulatory approvals for our products under development,
such failure may adversely affect our business, financial condition and results
of operations.

Because our products are in an early stage of development, none has
received regulatory approval or been released for commercial sale. The pre-
clinical testing and clinical trials of any compounds we develop and

6
<PAGE>

the manufacturing and marketing of any drugs produced from such compounds must
comply with regulation by numerous federal, state and local governmental
authorities in the United States, principally the Food and Drug Administration,
and by similar agencies in other countries. No product can receive Food and
Drug Administration approval unless human clinical trials show its safety and
effectiveness. There can be no assurance that clinical testing will provide
evidence of safety and effectiveness in humans or that regulatory agencies will
grant approvals for any of our products.

The regulatory process takes many years and requires the expenditure of
substantial resources. Data obtained from pre-clinical and clinical activities
are subject to varying interpretations that could delay, limit or prevent
regulatory agency approval. We may also encounter delays or rejections based on
changes in regulatory agency policies during the period in which we develop a
drug and/or the period required for review of any application for regulatory
agency approval of a particular compound. Delays in obtaining regulatory agency
approvals could adversely affect the marketing of any drugs our collaborative
partners or we develop. Such delays could impose costly procedures on our
collaborative partners' or our activities, diminish any competitive advantages
that our collaborative partners or we may attain, and adversely affect our
ability to receive royalties, any of which could materially adversely affect
our business, financial condition and results of operations.

If the FDA grants approval for a drug, such approval may limit the
indicated uses for which we may market the drug and this could limit the
potential market for such drug. Furthermore, if we obtain approval for any of
our products, the marketing and manufacture of such products remain subject to
extensive regulatory requirements. Even if the FDA grants approval, such
approval would be subject to continual review, and later discovery of unknown
problems could restrict the products future use or cause their withdrawal from
the market. Failure to comply with regulatory requirements could, among other
things, result in fines, suspension of regulatory approvals, operating
restrictions and criminal prosecution. In addition, many countries require
regulatory agency approval of pricing and may also require approval for the
marketing in such countries of any drug our collaborative partners or we
develop.

We cannot be certain that we will obtain any regulatory approvals in
other countries and the failure to obtain such approvals may materially
adversely affect our business, financial condition and results of operations.
In order to market our products outside of the United States, our corporate
partners and we must comply with numerous and varying regulatory requirements
of other countries regarding safety and quality. The approval procedures vary
among countries and can involve additional product testing and administrative
review periods. The time required to obtain approval in other countries might
differ from that required to obtain FDA approval. The regulatory approval
process in other countries includes all of the risks associated with obtaining
FDA approval detailed above. Approval by the FDA does not ensure approval by
the regulatory authorities of other countries.

If our products fail to achieve market acceptance for any reason, such failure
may adversely affect our business, financial condition and results of
operations.

There can be no assurance that any of our product candidates, if approved
for marketing, will achieve market acceptance. If our products do not receive
market acceptance for any reason, it may adversely affect our business,
financial condition and results of operations. The degree of market acceptance
of any products we develop will depend on a number of factors, including:

. the establishment and demonstration in the medical community of the
clinical efficacy and safety of our products;

. their potential advantage over existing treatment methods; and

. reimbursement policies of government and third-party payers, including
insurance companies.

For example, even if we obtain regulatory approval to sell our products,
physicians and healthcare payers could conclude that our products are not safe
and effective and physicians could choose not to use them to treat patients.
Our competitors may also develop new technologies or products which are more
effective or less costly, or that seem more cost-effective than our products.
We can give no assurance that physicians, patients, third-party payers or the
medical community in general will accept and use any products that we may
develop.

7
<PAGE>

We currently have no internal manufacturing or marketing capability which may
make commercializing our products difficult.

We have no internal manufacturing capability. Failure to successfully
manufacture and market our products could materially adversely affect our
business, financial condition and results of operations. We intend to enter
strategic alliances with other parties that have established commercial scale
manufacturing and marketing capabilities. There can be no assurance that we
will enter such strategic alliances on terms favorable to us, or at all. If we
are unable to establish and maintain relationships with third parties for
manufacturing sufficient quantities of our product candidates and their
components that meet our planned time and cost parameters, the development and
timing of our clinical trials may be adversely affected. In addition, there can
be no assurance that an adverse FDA inspection of a contractor's manufacturing
facilities would not impede our commercial supply capability. As an
alternative, we may choose to commercialize such products on our own, which
would require substantial additional funds.

If the FDA or any other regulatory agency permits us to commence
commercial sales of products, we will face competition with respect to
commercial sales, marketing and distribution. These are areas in which we have
no experience. To market any of our products directly, we must develop a
marketing and sales force with technical expertise and with supporting
distribution capability. Alternatively, we may engage a pharmaceutical company
with a large distribution system and a large direct sales force to assist us.
There can be no assurance that we will successfully establish sales and
distribution capabilities or gain market acceptance for our proprietary
products. To the extent we enter co-promotion or other licensing arrangements,
any revenues we receive will depend on the efforts of third parties and there
can be no assurance that our efforts will succeed.

Materials necessary to manufacture SomatoKine may not be available which may
adversely affect our business, financial condition and results of operations.

Only a few facilities make the recombinant proteins that comprise
SomatoKine. We believe we currently have sufficient quantities of the protein
necessary to produce SomatoKine in quantities sufficient to conduct our planned
clinical trials and have contracted with one of these facilities, BioScience
Contract Production Company, to produce product for additional clinical trials.
A shutdown or disruption in any of these facilities due to technical,
regulatory or other problems, resulting in an interruption in supply of these
materials, could delay our development activities and adversely impact our
business, financial condition and results of operations.

If the third-party clinical research organizations we intend to rely on to
conduct our future clinical trials do not perform in an acceptable and timely
manner, our clinical trials could be delayed or unsuccessful.

We do not have the ability to conduct all of our clinical trials
independently. We intend to rely on clinical investigators and third-party
clinical research organizations to perform a portion of these functions. If we
cannot locate acceptable contractors to run a portion of our clinical trials or
enter into favorable agreements with them, or if these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we
will be unable to obtain required approvals and will be unable to commercialize
our product candidates on a timely basis, if at all.

We need collaborative relationships for success.

We currently rely and may in the future rely on a number of significant
collaborative relationships, such as our license agreement with Taisho
Pharmaceuticals and our joint venture with Elan Corporation, plc, for our
research funding, clinical development and/or sales and marketing performance.
Reliance on collaborative relationships poses a number of risks, including the
following:

. we cannot effectively control whether our corporate partners will
devote sufficient resources to our programs or products;

. disputes may arise in the future with respect to the ownership of
rights to technology developed with corporate partners;

8
<PAGE>

. disagreements with corporate partners could delay or terminate the
research, development or commercialization of product candidates, or
result in litigation or arbitration;

. contracts with our corporate partners may fail to provide sufficient
protection of our intellectual property;

. we may have difficulty enforcing the contracts if one of these
partners fails to perform;

. corporate partners have considerable discretion in electing whether to
pursue the development of any additional products and may pursue
technologies or products either on their own or in collaboration with
our competitors; and

. corporate partners with marketing rights may choose to devote fewer
resources to the marketing of our products than they do to products of
their own development.

We are currently in discussions with Elan regarding the design, conduct
and funding of a Phase II clinical trial for SomatoKine for osteoporotic hip
fracture repair. No assurance can be given that we will reach an agreement with
Elan regarding these matters.

Given these risks, a great deal of uncertainty exists regarding the
success of our current and future collaborative efforts. Failure of these
efforts could delay our product development or impair commercialization of our
products.

Uncertainty regarding third-party reimbursement and healthcare cost containment
initiatives may negatively affect our business, financial condition and results
of operations.

If we succeed in bringing any of our proposed products to the market, we
cannot assure you that third parties will consider the products cost-effective
or provide reimbursement in whole or in part for their use. Our commercial
success will depend in part on third-party payers agreeing to reimburse
patients for the costs of products. Government health administration
authorities, private health insurers and other organizations generally provide
reimbursement. Third-party payers frequently challenge the pricing of new
drugs. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Therefore, third-party payers may not approve our
products for reimbursement.

If third-party payers do not approve our products for reimbursement,
sales will suffer as some patients will opt for a competing product that is
approved for reimbursement. Even if third-party payers make reimbursement
available, these payer's reimbursement policies may adversely affect our
corporate partners' and our ability to sell such products on a profitable
basis.

Moreover, the trend toward managed healthcare in the United States, the
growth of organizations such as health maintenance organizations, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products which could
adversely affect our business, financial condition and results of operations.

In addition, legislation and regulations affecting the pricing of
pharmaceuticals may change in ways adverse to us before or after the FDA or
other regulatory agencies approve any of our proposed products for marketing.
While we cannot predict the likelihood of any such legislative or regulatory
proposals, if the government or an agency adopts such proposals they could
materially adversely affect our business, financial condition and results of
operations.

9
<PAGE>

Our growth strategy includes acquiring complementary businesses or technologies
that may not be available, or, if available and purchased or licensed, might
not improve our business, financial condition or results of operations.

As part of our business strategy, we expect to pursue acquisitions and
in-licensing new products and technologies. Nonetheless, we cannot assure you
that we will identify suitable acquisitions or products or that we can make
such acquisitions, or enter into such license agreements on acceptable terms.
If we acquire businesses, those businesses may require substantial capital and
we cannot assure you that such capital will be available in sufficient amounts
or that financing will be available in amounts and on terms that we deem
acceptable. Furthermore, the integration of acquired businesses may result in
unforeseen difficulties that require a disproportionate amount of management's
attention and our other resources. Finally, we cannot assure you that we will
achieve productive synergies and efficiencies from these acquisitions.

We intend to conduct proprietary development programs with collaborators, and
any conflicts with them could harm our business, financial condition and
results of operations.

We intend to enter into collaborative relationships, such as our
arrangement with Taisho Pharmaceuticals and our joint venture with Elan, that
will involve our collaborator conducting proprietary development programs. Any
conflict with our collaborators could reduce our ability to obtain future
collaboration agreements and negatively influence our relationship with
existing collaborators, which could reduce our revenues and have an adverse
effect on our business, financial condition and results of operations.
Moreover, disagreements with our collaborators could develop over rights to our
intellectual property.

Certain of our collaborators could also become competitors in the future.
Our collaborators could harm our product development efforts by:

. developing competing products;

. precluding us from entering into collaborations with their
competitors;

. failing to obtain timely regulatory approvals;

. terminating their agreements with us prematurely; or

. failing to devote sufficient resources to the development and
commercialization of products.

If we fail to make payments required under the license agreement with the
University of Virginia Patent Foundation, then the Foundation may terminate the
license agreement and our rights to the patents licensed to us, which would
adversely affect our business, financial condition and results of operations.

We have a license agreement with the University of Virginia Patent
Foundation with respect to a number of our patents that obligates us to pay
license fees and royalties. We must also pay filing and maintenance costs for
the patent rights associated with the license agreement and any new patent
applications. If we fail to make payments required under the license agreement,
then the University of Virginia Patent Foundation may terminate the license
agreement and our rights to the patents licensed to us, which would materially
adversely affect our business, financial condition and results of operations.

We face uncertainties related to patents and proprietary technology that may
adversely affect our business, financial condition and results of operations.

Our success will depend in part on our ability to:

. obtain patent protection for our products;

. preserve trade secrets;

. prevent third parties from infringing on our patents; and

. refrain from infringing on the patents of others, both domestically
and internationally.

10
<PAGE>

Our patent positions are highly uncertain, and any future patents we receive
for our potential products will be subject to this uncertainty, which may
adversely affect our business, financial condition and results of operations.
We intend to actively pursue patent protection for products with significant
potential commercial value arising in the course of our research and
development activities. Nevertheless, it is possible that, in the patent
application process, certain claims may fail or achieve such limited approval
that the value of the patents would be diminished. Further, there can be no
assurance that any patents obtained will afford us adequate protection. In
addition, any patents we procure may require cooperation with companies holding
related patents. We may have difficulty forming a successful relationship with
these other companies.

We can give no assurance that a third party will not claim (with or
without merit) that we have infringed or misappropriated their proprietary
rights. A variety of third parties have obtained, and are attempting to obtain
patent protection relating to IGF-1 and/or BP3, their production and use. We
can give no assurances as to whether any issued patents, or patents that may
later issue to third parties, would affect our contemplated commercialization
of SomatoKine or INS-1. We can give no assurances that such patent(s) can be
avoided, invalidated or licensed. If any third party were to assert a claim for
infringement, we can give no assurances that we would be successful in the
litigation or that such litigation would not have a material adverse effect on
our business, financial condition and results of operation. Furthermore, we may
not be able to afford the expense of defending against such a claim.

Genentech has two issued United States patents, one directed to certain
DNA molecules encoding BP3 and another directed to the BP3 protein. We can
provide no assurance that we will not be found to infringe one or both of those
patents. Those patents might have an adverse effect on our ability to conduct
our business, and prevent us from making, using or selling certain products,
including SomatoKine, in the United States. A European counterpart of one of
those patents has also been granted, however, we successfully opposed it.
Genentech has recently appealed this decision in Europe. The appeal could
succeed and, if successful, we cannot determine what claims, if any, will be
reinstated or the breadth of such claims. If the patent is maintained in
Europe, it could adversely affect our plans for European commercialization, and
might prevent us from producing and/or using SomatoKine in Europe. In addition,
a patent has been issued to Genentech for the co-administration of IGF-1 and
BP3 by subcutaneous bolus injection to produce a greater anabolic state. We can
provide no assurance that we will not be found to infringe this patent.

We have been granted a European patent with claims to recombinantly
produced BP3, therapeutic uses of BP3 and therapeutic uses of SomatoKine.
Genentech has opposed this patent, but that proceeding is being held in
abeyance pending the outcome of the appeal of a related Genentech European
patent. We cannot provide any assurance that some or all of our patent claims
will not be revoked as a consequence of this opposition.

Third parties, including Genentech, Chiron and Amgen have United States
patents directed at the production of recombinant IGF-1, BP3 and/or recombinant
proteins in general. While we believe that we have developed a process that
avoids infringement of these patents, we can provide no assurance that a third
party will not assert a contrary position, and further that such a party will
not prevail.

Novartis, Beth Israel Hospital and Chiron have United States patents
relating to the use of IGF-1 for the treatment of diabetes, and Novartis has a
United States patent relating to the treatment of osteoporosis with IGF-1.
Fujisawa Pharmaceuticals Co., Ltd. has a United States patent that contains
claims to methods for treating insulin-resistant diabetes using an insulin-like
growth factor. We can provide no assurance that we will not be found to
infringe any of these patents. These patents might have an adverse effect on
our ability to conduct our business, and prevent us from making, using or
selling certain products, including SomatoKine in the United States.

We may have to undertake costly litigation to enforce any patents issued
or licensed to us or to determine the scope and validity of another party's
proprietary rights. We cannot assure that a court of competent jurisdiction
would validate our issued or licensed patents. An adverse outcome in litigation
or an interference or other proceeding in a court or patent office could
subject us to significant liabilities to other parties, require us to license
disputed rights from other parties or require us to cease using such
technology, any of which could materially adversely affect our business,
financial condition and results of operations.

11
<PAGE>

Third-party claims that our products infringe on their proprietary rights may
adversely affect our business, financial condition and results of operations.

We have entered into license agreements and may enter into future license
agreements with other parties to develop and market our products, and we cannot
assure that third parties will not claim that ourselves and/or our licensees by
practicing our technology for INS-1 and SomatoKine, current or future products
or manufacturing processes infringe their proprietary rights. If other
companies successfully bring legal actions against us or our licensees claiming
patent or other intellectual property infringements, in addition to any
potential liability for damages, a court could require us and/or our licensees
to obtain a license in order to continue to use the affected process or to
manufacture or use the affected products, or alternatively, require us and/or
our licensees to cease using such products or process. Such a result may have
an adverse effect on our business, financial condition and results of
operations. Any such claim, with or without merit, could result in costly
litigation or might require us and/or our licensees to enter into royalty or
licensing agreements, all of which could delay or otherwise adversely impact
the development of our potential products for commercial use. If a court
requires us to obtain licenses, there can be no assurance that we and/or our
licensees will be able to obtain them on commercially favorable terms, if at
all. Without such licenses, we and/or our licensees may be unable to develop
certain products. Our breach of an existing license, our failure to obtain, or
our delay in obtaining a license to any technology that we require to
commercialize our products may materially adversely impact our business,
financial condition and results of operations.

An inability to compete successfully would harm our business, financial
condition and results of operations.

We engage in a business characterized by extensive research efforts,
rapid developments and intense competition. We cannot assure that our products
will compete successfully or that research and development by others will not
render our products obsolete or uneconomical. Our failure to compete
effectively would materially adversely affect our business, financial condition
and results of operations. We expect that successful competition will depend,
among other things, on product efficacy, safety, reliability, availability,
timing and scope of regulatory approval and price. Specifically, we expect
crucial factors will include the relative speed with which we can develop
products, complete the clinical testing and regulatory approval processes and
supply commercial quantities of the product to the market. We expect
competition to increase as technological advances are made and commercial
applications broaden. In each of our potential product areas, we face
substantial competition from large pharmaceutical, biotechnology and other
companies, universities and research institutions. Relative to us, most of
these entities have substantially greater capital resources, research and
development staffs, facilities and experience in conducting clinical trials and
obtaining regulatory approvals, as well as in manufacturing and marketing
pharmaceutical products. Many of our competitors may achieve product
commercialization or patent protection earlier than we will. Furthermore, we
believe that our competitors have used, and may continue to use, litigation to
gain a competitive advantage. Finally, our competitors may use different
technologies or approaches to the development of products similar to the
products we are seeking to develop.

Rapid technological change could make our products obsolete, which could
materially adversely affect our business, financial condition and results of
operations.

Biotechnology and related pharmaceutical technology have undergone and
should continue to experience rapid and significant change. We expect that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Our future will depend in large part on our
ability to maintain a competitive position with respect to these technologies.
Any compounds, products or processes that we develop may become obsolete before
we recover any expenses incurred in connection with their development. Rapid
technological change could make our products obsolete that could materially
adversely affect our business, financial condition and results of operations.

We are dependent upon key personnel and others, the loss of which could
materially adversely affect our business, financial condition and results of
operations.

We highly depend on the principal members of our scientific and
management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development, or business objectives

12
<PAGE>

and would materially adversely affect our business, financial condition and
results of operations. Our success depends, in large part, on our ability to
attract and retain qualified management, scientific and medical personnel, and
on our ability to develop and maintain important relationships with commercial
partners, leading research institutions and key distributors. We face intense
competition for such personnel and relationships. We cannot assure that we will
attract and retain such persons or maintain such relationships.

We expect that our potential expansion into areas and activities
requiring additional expertise, such as further clinical trials, governmental
approvals, contract manufacturing and marketing, will place additional
requirements on our management, operational and financial resources. We expect
these demands will require an increase in management and scientific personnel
and the development of additional expertise by existing management personnel.
The failure to attract and retain such personnel or to develop such expertise
could materially adversely affect prospects for our success.

Our research and development activities involve the use of hazardous materials
and chemicals which could expose us to damages that could materially adversely
affect our business, financial condition and results of operations.

Our research and development activities involve the use of hazardous
materials and chemicals, including radioactive materials. We believe that our
procedures for handling hazardous materials comply with federal and state
regulations; however, there can be no assurance that accidental injury or
contamination from these materials will not occur. In the event of an accident,
we could be held liable for any damages, which could exceed our available
financial resources, including our insurance coverage. This liability could
materially adversely affect our business, financial condition and results of
operations.

We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of hazardous or
radioactive materials and waste products. These laws and regulations may
require us to incur significant costs to comply with environmental laws and
regulations in the future that could materially adversely affect our business,
financial condition and results of operations.

We risk liability from potential product liability claims that our insurance
may not cover which could materially adversely affect our business, financial
condition and results of operations.

In testing, manufacturing and marketing our products, we risk liability
from the failure of products to perform as we expect. Such risks exist even
with respect to those potential products, if any, that receive regulatory
approval for commercial sale. Although we currently have product liability
insurance and seek to obtain indemnification from licensees of the products,
obtaining additional insurance or indemnification may be inadequate,
unobtainable or prohibitively expensive. Our insurance policies provide
coverage for product liability on a claims made basis and general liability on
an occurrence basis. We must renew these policies every year. We may not be
able to renew our current policies or obtain additional insurance in the future
on acceptable terms or at all. Our inability to obtain sufficient insurance
coverage on reasonable terms, or otherwise protect ourselves against potential
product liability claims in excess of our insurance coverage, if any, could
materially adversely affect our business, financial condition and results of
operations.

We cannot guarantee that our present product liability insurance coverage
is adequate. Such existing coverage will not be adequate as we further develop
our products, and we cannot guarantee that we will obtain adequate insurance
coverage against potential claims in sufficient amounts or at a reasonable
cost.

Our management has broad discretion on how to use the proceeds of this offering
and may not apply the proceeds in a manner that increases the value of your
investment.

Our management will have broad discretion in applying the net proceeds of
this offering. Although we expect our management to use the net proceeds from
this offering to fund our development of INS-1 and SomatoKine and for working
capital, capital expenditures, and general corporate purposes, the net proceeds
have not been allocated for specific purposes. You will be entrusting your
funds to our management, upon whose judgment you must depend, with limited
information concerning the specific purposes to which the funds will ultimately
be applied. Our management may not be able to yield a significant return, if
any, on any investment of the proceeds.

13
<PAGE>

Risks Related to the Stock

You will incur immediate and substantial dilution of the value of your shares.

The offering price of our common stock is substantially higher than the
net tangible pro forma book value per share of our outstanding common stock. As
a result, investors purchasing common stock in this offering will incur
immediate and substantial dilution in the net tangible book value of their
common stock of $10.87 per share on a pro forma basis at June 30, 2000, based
on the assumed public offering price of $14.00 per share. In the past, we
issued options and warrants to acquire capital stock at prices significantly
below the public offering price. There will be further dilution to investors
when any of these outstanding options or warrants are exercised.

If a large number of shares of our common stock are sold after this
offering, or if there is the perception that such sales could occur, the market
price of our common stock may decline.

The market price of our common stock could decline due to sales of a
large number of shares in the market after this offering or the perception that
such sales could occur, including sales or distributions of shares by our large
shareholders. Any such sales could also make it more difficult for us to sell
equity securities in the future at a time and price that we deem appropriate to
raise funds through future offerings of common stock and could also make it
more difficult for us to pay in stock for any acquisitions we decide to pursue
in the future.

We expect that our stock price will fluctuate significantly.

Our common stock is listed on the Nasdaq National Market under the ticker
symbol "INSM." The stock market, particularly in recent years, has experienced
significant volatility particularly with respect to biopharmaceutical and
biotechnology based stocks. The volatility of biopharmaceutical and
biotechnology based stocks often does not relate to the operating performance
of the companies represented by the stock. Factors that could cause such
volatility in the market price of our common stock include:

. announcements of the introduction of new products by us or our
competitors;

. market conditions in the biotechnology sectors;

. rumors relating to us or our competitors;

. litigation or public concern about the safety of our potential
products;

. our quarterly operating results;

. deviations in our operating results from the estimates of securities
analysts; and

. FDA or international regulatory actions.

Future sales by existing shareholders may lower the price of our common stock
which could result in losses to our shareholders.

Future sales of substantial amounts of common stock in the public market,
or the possibility of such sales occurring, could adversely affect prevailing
market prices for the common stock or our future ability to raise capital
through an offering of equity securities.

Upon completion of this offering, we will have outstanding 32,150,197
shares of common stock assuming the issuance of 5,000,000 shares in this
offering and no exercise of outstanding options and warrants after the date
hereof and assuming no exercise of the underwriters' over-allotment option.
Substantially all of these shares will be freely tradable in the public market
without restriction under the Securities Act, unless these shares are held by
"affiliates" of our company, as that term is defined in Rule 144 under the
Securities Act.

14
<PAGE>

Directors, executive officers and certain shareholders who in the
aggregate own 10,398,747 shares of common stock have agreed to a 90-day lock-up
with respect to their shares. Robertson Stephens, Inc. may release shareholders
from the lock-up agreement at any time and without notice. Following the
expiration of this lock-up period, 10,398,747 common shares subject to the
lock-up agreements will become available for immediate resale in the public
market subject, in some instances, to the volume and manner of sale limitations
of Rule 144.

Subject to the lock-up agreements described above, our common shares are
eligible for sale into the public market as follows:

. Our affiliates own 10,870,706 shares that may be sold subject to
volume restrictions imposed by Rule 144. Our affiliates also own
options to acquire an additional 562,750 shares. The shares to be
issued upon exercise of these options have been registered and may be
freely sold when issued.

. Our employees and consultants who are not deemed affiliates hold
options to buy a total of 772,033 shares. The shares to be issued upon
exercise of these options have been registered and may be freely sold
when issued.

. We may issue options to purchase up to an additional 1,665,217 shares
under our stock option plans. The shares to be issued upon exercise of
these options have been registered and may be freely sold when issued.

. We have issued warrants to purchase 1,725,330 shares of our common
stock. The shares which may be issued upon the exercise of these
warrants will be "restricted securities," as defined in Rule 144.
These shares may only be sold in the public market if they are
registered or they qualify for an exemption from registration. We have
agreed under certain circumstances to register the shares acquired
upon exercise of such warrants.

Insmed Incorporated has never paid dividends on its capital stock and we do not
anticipate paying any cash dividends in the foreseeable future.

Insmed Incorporated has not thus far paid cash dividends on its common
stock. We currently intend to retain our future earnings, if any, to fund the
development and growth of our businesses and, therefore, we do not anticipate
paying any cash dividends in the foreseeable future.

Certain provisions of Virginia law, our articles of incorporation and amended
and restated bylaws make a takeover by a third party difficult.

Certain provisions of Virginia law, our articles of incorporation and
amended and restated bylaws could hamper a third party's acquisition of, or
discourage a third party from attempting to acquire control of us. The
conditions could also limit the price that certain investors might be willing
to pay in the future for shares of our common stock. These provisions include:

. a provision allowing us to issue preferred stock with rights senior to
those of the common stock without any further vote or action by the
holders of the common stock. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution
to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of the common
stock. In certain circumstances, such issuance could have the effect
of decreasing the market price of the common stock;

. the existence of a staggered board of directors in which there are
three classes of directors serving staggered three-year terms, thus
expanding the time required to change the composition of a majority of
directors and perhaps discouraging someone from making an acquisition
proposal for us;

. the amended and restated bylaws' requirement that shareholders provide
advance notice when nominating our directors;

15
<PAGE>

. the inability of shareholders to convene a shareholders' meeting
without the Chairman of the Board, the President or a majority of the
board of directors first calling the meeting; and

. the application of Virginia law prohibiting us from entering into a
business combination with the beneficial owner of 10% or more of our
outstanding voting stock for a period of three years after the 10% or
greater owner first reached that level of stock ownership, unless we
meet certain criteria.

16
<PAGE>

A CAUTION ABOUT FORWARD-LOOKING STATEMENTS

The matters discussed throughout this prospectus that are not historical
facts are forward-looking and, accordingly, involve estimates, projections,
goals, forecasts, assumptions and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.

These forward-looking statements may include, but are not limited to,
future capital expenditures, acquisitions (including the amount and nature of
acquisitions), future revenues, earnings, margins, costs, demand for new
pharmaceutical products, market trends in the pharmaceutical business,
inflation and various economic and business trends. You can identify forward-
looking statements by the use of words such as "expect," "estimate," "project,"
"budget," "forecast," "anticipate," "plan" and similar expressions. Forward-
looking statements include all statements regarding commencement of clinical
trials, expected financial position, results of operations, cash flows,
dividends, financing plans, business strategies, operating efficiencies or
synergies, budgets, capital and other expenditures, competitive positions,
growth opportunities for our proposed products, plans and objectives of
management, proposed relationships with third-party research organizations,
manufacturers and suppliers and markets for our stock.

These forward-looking statements are found at various places throughout
this prospectus. We caution you not to place undue reliance on these forward-
looking statements, which speak only as of the date they were made. We do not
undertake any obligation to publicly release any revisions to these forward-
looking statements to reflect events or circumstances after the date of this
prospectus or to reflect the occurrence of unanticipated events.

17
<PAGE>

USE OF PROCEEDS

We estimate that our net proceeds from the sale of 5,000,000 shares of
common stock we are offering will be approximately $65.2 million, at an assumed
public offering price of $14.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. We
will not receive any of the proceeds from the sale of shares of common stock by
the selling shareholders.

We expect to use the net proceeds of this offering to fund our
development of INS-1 and SomatoKine, and for working capital, capital
expenditures and general corporate purposes. Although we may use a portion of
the net proceeds to acquire businesses, products or technologies that are
complementary to our business, we have no specific acquisitions planned.
Pending these uses, we plan to invest the net proceeds in investment grade,
interest-bearing securities.

MARKET PRICES AND DIVIDEND POLICY

Our common stock began trading on The Nasdaq SmallCap Market on June 1,
2000. We moved from The Nasdaq SmallCap Market to the Nasdaq National Market on
August 8, 2000. Our trading symbol is "INSM." The following table lists, for
the periods indicated, the high and low sale prices per share for our common
stock as reported on The Nasdaq SmallCap and Nasdaq National Markets.

<TABLE>
<CAPTION>
Insmed
Common Stock
-------------
Fiscal Year 2000 High Low
---------------- ------ ------
<S> <C> <C>
Third Quarter (through September 21, 2000).................... $19.94 $11.00
Second Quarter................................................ $18.00 $11.25
</TABLE>

On September 21, 2000, the last reported sale price for our common stock
on the Nasdaq National Market was $14.00 per share. As of September 21, 2000,
there were approximately 650 holders of record of our common stock.

We have never declared or paid dividends on our common stock. We
anticipate that we will retain all earnings, if any, to support operations and
to finance the growth and development of our business. Therefore, we do not
expect to pay cash dividends in the foreseeable future. Any future
determination as to the payment of dividends will be at the sole discretion of
our board of directors and will depend on our financial condition, results of
operations, capital requirements and other factors our board of directors deem
relevant.

18
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000 on
an actual basis and as adjusted to reflect:

. the issuance and sale of 5,000,000 shares of common stock offered by
us in this offering at an assumed public offering price of $14.00 per
share less underwriting discounts and estimated offering expenses; and

. the application of the estimated net proceeds we expect to receive
from this offering.

<TABLE>
<CAPTION>
As of June 30,
2000
------------------
As
Actual adjusted
-------- --------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value; 200,000,000 authorized;
no shares issued and outstanding........................ $ -- $ --
Common stock, $0.01 par value; 500,000,000 shares
authorized, 27,039,988 shares issued and outstanding,
actual; 32,039,988 shares issued and outstanding, as
adjusted................................................ 270 320
Additional capital........................................ 137,148 202,323
Accumulated deficit....................................... (89,595) (89,595)
Accumulated other comprehensive loss...................... (9) (9)
-------- --------
Total stockholders' equity............................... $ 47,814 $113,039
======== ========
</TABLE>
--------
(1) 1,334,783 shares of common stock issuable on the exercise of outstanding
options as of June 30, 2000, of which options to purchase 748,797 shares
were then exercisable;
(2) 1,915,217 shares of common stock reserved for issuance under our stock
incentive and employee stock purchase plans; and
(3) 1,725,330 shares of common stock issuable on exercise of outstanding
warrants.

19
<PAGE>

DILUTION

Our pro forma net tangible book value on June 30, 2000 was approximately
$35.2 million, or $1.30 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities divided by the number of shares of common stock outstanding.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
our common stock immediately after completion of the offering. Assuming our
sale of 5,000,000 shares of common stock offered by this prospectus at an
assumed public offering price of $14.00 per share, and after deducting
underwriting discounts and estimated offering expenses payable by us, our pro
forma net tangible book value at June 30, 2000 would have been approximately
$100.4 million or $3.13 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $1.83 per share to existing
shareholders and immediate and substantial dilution in pro forma net tangible
book value of $10.87 per share to new investors purchasing shares of common
stock in this offering. The following table illustrates this dilution on a per
share basis:

<TABLE>
<S> <C> <C>
Offering price per share........................................... $14.00
Pro forma net tangible book value per share at June 30, 2000...... $1.30
Increase in pro forma net tangible book value per share
attributable to new investors................................... 1.83
-----
Pro forma net tangible book value per share after this offering.... 3.13
------
Dilution in pro forma net tangible book value per share to new
investors........................................................ $10.87
======
</TABLE>

The following table summarizes, on a pro forma basis, as of June 30,
2000, the number of shares, the total consideration paid and the average price
per share of common stock previously issued by us and amounts related to shares
in this offering. We have assumed an offering price of $14.00 per share, and we
have not deducted underwriting discounts and commissions and estimated offering
expenses in our calculation. The foregoing discussion and tables also assume no
exercise of any outstanding stock options or warrants.

<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- ---------------- Average Price
Number Percent Amount Percent Per Share
------ ------- -------- ------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 27,039 84.4% $137,418 66.3% $ 5.08
New investors..................... 5,000 15.6 70,000 33.7 14.00
------ ----- -------- -----
Total........................... 32,039 100.0% $207,418 100.0%
====== ===== ======== =====
</TABLE>

20
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The reorganizations of Insmed Pharmaceuticals and Celtrix as wholly-owned
subsidiaries of Insmed Incorporated occurred as of May 31, 2000. We have
presented pro forma consolidated financial information on pages F-2 to F-8.
Presented below is the historical financial data and management's discussion
and analysis of Insmed Incorporated.

In the table below, we provide you with selected consolidated financial
data. We have prepared this information using the consolidated financial
statements of Insmed Incorporated or its predecessor for the five years ended
December 31, 1999 and for the six month periods ended June 30, 2000 and 1999.
The acquisition of Celtrix closed on May 31, 2000. The purchase method of
accounting was used to account for the transaction. Accordingly, the results of
operations for Celtrix are included in the historical financial information
commencing June 1, 2000. The financial statements for the five fiscal years
ended December 31, 1999 have been audited by Ernst & Young LLP, independent
auditors. The financial statements for the six-month periods ended June 30,
2000 and 1999 have not been audited.

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Statement of
Operations Data:
Revenues................ $ 380 $ 146 $ -- $ 100 $ 663 $ 403 $ 90
Operating expenses:
Research and
development.......... 877 1,302 2,604 3,769 6,320 2,700 6,689
General and
administrative....... 666 943 979 1,626 2,189 957 2,425
Purchased research and
development (1)...... -- -- -- -- -- -- 54,433
Stock compensation..... -- -- -- -- 285 -- 3,564
------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 1,543 2,245 3,583 5,395 8,794 3,657 67,111
------- ------- ------- ------- ------- ------- --------
Operating loss.......... (1,163) (2,099) (3,583) (5,295) (8,131) (3,254) (67,021)
Interest income, net.... (43) 11 103 486 338 210 206
------- ------- ------- ------- ------- ------- --------
Net loss................ $(1,206) $(2,088) $(3,480) $(4,809) $(7,793) $(3,044) $(66,815)
======= ======= ======= ======= ======= ======= ========
Basic and diluted net
loss per share........ $ (0.86) $ (0.99) $ (1.39) $ (1.68) $ (2.47) $ (0.97) $ (8.85)
Weighted average
shares................ 1,406 2,099 2,497 2,868 3,155 3,140 7,550
<CAPTION>
December 31, June 30,
------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Balance Sheet
Data:
Cash, cash equivalents
and investments....... $ 60 $ 2,106 $ 2,050 $11,677 $ 4,635 $ 8,707 $ 37,575
Total assets............ 173 2,386 2,365 11,938 5,296 8,987 51,507
Convertible
participating
preferred stock....... -- 5,294 -- -- -- -- --
Stockholders' equity
(deficiency).......... (1,512) (3,093) 2,151 11,661 4,462 8,616 47,814
</TABLE>

--------
(1) When we prepared our June 30, 2000 financial statements, purchased research
and development in connection with the acquisition of Celtrix was estimated
to be approximately $54.4 million. On September 15, 2000, the valuation of
acquired in-process research and development was completed by an
independent third-party appraisal company, and the value assigned to the
purchased research and development was approximately $50.4 million.
Accordingly, we will reduce the related expense by $4.0 million in our
third quarter financial statements and correspondingly increase goodwill by
$4.0 million.

21
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion also should be read in conjunction with the
Consolidated Financial Statements and notes thereto.

Overview

We are a holding company formed in November 1999 to facilitate the
acquisition of Celtrix Pharmaceuticals, Inc., by Insmed Pharmaceuticals, Inc.,
which we completed on May 31, 2000. Insmed Pharmaceuticals, Inc., our
predecessor, was incorporated in September 1988 and has devoted substantially
all of its resources since inception to the research and development of INS-1
for the treatment of type 2 diabetes and PCOS. We have not been profitable and
have accumulated a deficit of approximately $35.2 million, exclusive of the
purchased research and development charge of $54.4 million attributable to our
acquisition of Celtrix, from the organization of Insmed Pharmaceuticals, Inc.
through June 30, 2000.

When we prepared our June 30, 2000 financial statements, purchased
research and development in connection with the acquisition of Celtrix was
estimated to be approximately $54.4 million. On September 15, 2000, the
valuation of acquired in-process research and development was completed by an
independent third-party appraisal company, and the value assigned to the
purchased research and development was approximately $50.4 million.
Accordingly, we will reduce the related expense by $4.0 million in our third
quarter financial statements and correspondingly increase goodwill by $4.0
million.

We expect to incur significant additional operating losses for at least
the next several years and until such time as we generate sufficient revenue to
offset expenses. Research and development costs relating to product candidates
will continue to increase. Manufacturing, sales and marketing costs will
increase as we prepare for the commercialization of our products.

On July 10, 2000, we signed a definitive agreement with Taisho
Pharmaceutical Co., Ltd. for the development and commercialization of INS-1 in
Japan and other Asian countries. The potential pre-commercialization value of
the collaboration is $32 million, which would include license fees and payments
upon achievement of certain development and regulatory milestones as well as a
completed equity investment of $3 million. Taisho will fund 20% of the
development costs of INS-1 in North America and Europe. We will receive
royalties on INS-1 sales in Japan and certain other Asian Countries covered by
the agreement.

Results of Operations

The Six Months Ended June 30, 2000 compared to the Six Months Ended June 30,
1999

For the six month period ended June 30, 2000, we recorded a net loss of
$66.8 million. The largest component of the net loss relates to a one-time,
non-cash charge of $54.4 million to write-off purchased research and
development resulting from the acquisition of Celtrix.

In the first quarter of 2000, we recognized an $8.4 million non-cash
charge for stock compensation. Approximately $4.8 million of this charge was
reversed in the second quarter of 2000. The major component of these non-cash
charges relate to stock options exercised with a non-recourse note. Generally
accepted accounting principles require that compensation be recognized in the
financial statements based on the difference between the current market price
of the underlying stock and the market price utilized in the previous reporting
period. We used the sale of stock to Taisho on March 28, 2000, to determine the
amount of the charge in the first quarter, as we had no quotable market price
at the time. The quoted market price of $13.00 per share on June 30, 2000 was
utilized to determine the amount of the credit in the second quarter. The non-
recourse note to which the majority of the charge relates was repaid on June
30, 2000.

22
<PAGE>

Revenues for the current and prior periods relate to grants under the
Small Business Innovation Research Program (SBIR).

Research and development expenses increased 148% to $6.7 million for the
six-month period ended June 30, 2000. The increase resulted primarily from a
higher level of clinical trial expenses, contract manufacturing, and salaries.
Expenses related to clinical site trial grants, contract research organizations
and other clinical trial expenses increased 267% over the six months ended June
30, 1999. Expenditures to manufacture INS-1 clinical trial material have more
than tripled over the prior six month period ended June 30, 1999.

General and administrative expenses increased 153% from $957,000 to $2.4
million for the six month period ended June 30, 2000. Salaries and benefits
account for the majority of the increase. We increased our general and
administrative staff to adapt to our public status and to manage our growing
portfolio of intellectual property. Legal fees were also incurred to finalize
the license agreement with Taisho and other corporate matters, and we incurred
fees to develop our new web site and other investor materials.

As of June 30, 2000, cash and cash equivalents increased $34.8 million
from December 31, 1999. The issuance of equity securities produced net proceeds
of $36.5 million and the acquisition of Celtrix provided an additional $5.4
million of cash. In addition, approximately $12.7 million of goodwill was
recorded as a result of the Celtrix acquisition. Current liabilities increased
from $834,000 at December 31, 1999 to $3.7 million at June 30, 2000. The
increase was caused primarily by clinical trial costs, professional services
related to the purchase of Celtrix, and INS-1 clinical trial material.
Stockholders' equity increased $43.4 million as a result of the acquisition of
Celtrix, the issuance of equity securities and option exercises. The
accumulated deficit increased primarily because of the $54.4 million non-cash
charge for the purchased research and development acquired from Celtrix.

Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998

For the year ended December 31, 1999, revenues were $663,000, compared
with $100,000 for 1998. Revenues for both periods consist primarily of SBIR
grants. The revenue recorded in 1999 relates to a SBIR grant to fund a Phase II
study in PCOS subjects. The revenue recorded in 1998 relates to a SBIR grant to
fund a Phase I study in PCOS subjects.

Research and development expense was $6.3 million for the year ended
December 31, 1999 compared to $3.8 million for the year ended December 31,
1998. The $2.5 million (66%) increase was caused by higher clinical trial
costs.

General and administrative expenses increased $819,000, or 50%, to $2.4
million for the year ended December 31, 1999. The increase can be attributed to
costs expended to obtain patent protection for technology in various countries,
expenses incurred to develop strategic relationships, salary and benefits for
the chief financial officer hired in May, and increases in travel and office
expenses. The increase is also related to the recognition of $285,000 of stock-
based compensation. Interest income declined $148,000 to $338,000 for the year
ended December 31, 1999. Lower average cash balances caused this decrease in
1999 compared to 1998.

Year Ended December 31, 1998 compared to Year Ended December 31, 1997

We recorded revenues of $100,000 for the year ended December 31, 1998. No
revenue was recorded in 1997. The 1998 revenue related to a SBIR grant to fund
a Phase I study in PCOS subjects.

For the year ended December 31, 1998, Insmed expended $3.8 million on
research and development. This was an increase of $1.2 million, or 46%, from
the year ended December 31, 1997, in which $2.6 million was expended. In 1998,
additional development personnel were hired to manage and conduct an increasing
number of clinical trials. The number of pre-clinical toxicology studies
increased significantly over the prior

23
<PAGE>

year. Additional lab space was necessary to accommodate the increase in
activity and Insmed utilized outside scientific consultants.

General and administrative expenses increased $647,000 to $1.6 million
from $979,000 for the year ended December 31, 1997. The two primary components
of the increase were additional salary and wages associated with an increase in
personnel and expenditures on investor relations.

In June 1998, Insmed received net proceeds of $14.0 million from the sale
of its Series B Preferred stock. This influx of cash caused an increase in the
average cash balance in 1998 resulting in interest income of $486,000 for the
year ending December 31, 1998, an increase of $383,000 over 1997.

Liquidity and Capital Resources

At June 30, 2000, our cash and investments were approximately $37.6
million and were invested in money market instruments and investment grade
corporate debt. During the first six months of the year, we completed two
equity financings. In March 2000 we sold Taisho Pharmaceuticals 93,413 shares
of our common stock. In May 2000 we sold to a group of investors 4,928,585
shares of common stock together with warrants to purchase an additional
1,725,330 shares of common stock. The warrants are exercisable for five years
at a price of $9.00 per share. We received aggregate net proceeds of $36.5
million from these two offerings. We believe that our current cash position
together with our net proceeds from this offering will be sufficient to fund
our operations until at least the end of 2002.

Our business strategy contemplates selling additional equity and entering
into agreements with corporate partners to fund research and development, and
provide milestone payments, license fees and equity investments to fund
operations. We will need to raise substantial additional funds to continue
development and commercialization of our products. There can be no assurance
that adequate funds will be available when we need them, or on favorable terms.
If at any time we are unable to obtain sufficient additional funds, we will be
required to delay, restrict or eliminate some or all of our research or
development programs, dispose of assets or technology, or cease operations.

Impact of Year 2000

We replaced and upgraded much of our information technology in the normal
course of business during 1999. Year 2000 failures have not had, and we do not
believe they will have, a material adverse impact on our company. The
incremental costs of the project were not significant.

Quantitative and Qualitative Disclosures About Market Risk

Insmed invests its excess cash in investment grade, interest-bearing
securities. At June 30, 2000, Insmed had $2.4 million invested in fixed rate
securities. Insmed's investments in fixed rate securities are subject to
interest rate and credit risk. Based on Insmed's policy of investing in highly
rated securities whose maturities at June 30, 2000 are all less than one year
minimizes the risk associated with its investment in fixed rate securities.
While a hypothetical decrease in market interest rates by 10 percent from the
June 30, 2000 levels would cause a decrease in interest income, it would not
result in a loss of the principal. Additionally, the decrease in interest
income would not be material.

24
<PAGE>

BUSINESS

Introduction

We discover and develop pharmaceutical products for the treatment of
metabolic and endocrine diseases associated with insulin resistance. Insulin
resistance is a defect in the body which results in a decreased sensitivity to
insulin, the principal hormone that regulates glucose levels in the
bloodstream. Our lead product candidate, INS-1, is an orally-active insulin
sensitizer which restores tissue sensitivity to insulin. We are developing INS-
1 for the treatment of type 2 diabetes and polycystic ovary syndrome, commonly
known as PCOS. Our second product candidate, SomatoKine, is a recombinant
protein that we are developing as an injectable insulin sensitizer targeted
towards the management of both type 1 and type 2 diabetics who are less
sensitive to insulin therapy. We believe our product candidates address major
clinical needs in the management of the diabetic population.

Medical Background

Insulin Resistance

Insulin resistance is a defect in the body's ability to properly respond
to insulin, the principal hormone that regulates glucose levels in the
bloodstream. Insulin resistance is an important metabolic disorder that
precedes the development of diseases such as type 2 diabetes and PCOS. It is
frequently asymptomatic and is thought to exist in approximately 25% of the
general population in the United States. Although the exact cause is unclear,
genetic and other factors such as obesity and a sedentary lifestyle are
contributing factors.

Diabetes

Diabetes is a metabolic disease characterized by an inability to properly
store and utilize glucose and is caused by either a deficiency of insulin or
insulin resistance. The diabetic population consists of two types. Type 1
diabetes, usually emerging during childhood, comprises between 5% and 10% of
the diabetic population and is caused by destruction of the cells of the
pancreas that produce insulin. In contrast, type 2 diabetes, which represents
between 90% and 95% of diabetes cases, usually emerges during middle age. The
common manifestation of both types of diabetes is a persistent state of
abnormally high levels of blood glucose, referred to as hyperglycemia. The
long-term dangers of diabetes arise from organ damage caused by sustained
elevations in the blood glucose level and are comprised of both life-
threatening and severely debilitating diseases, including kidney disease,
blindness and cardiovascular disease.

According to the American Diabetes Association, diabetes is the sixth
leading cause of death by disease in the United States and is estimated to
afflict 16 million Americans with approximately 800,000 new cases diagnosed
annually. Each year, approximately 200,000 Americans die from diabetes-related
complications. According to a recent report from the Centers for Disease
Control and Prevention, the current rapid increase in the prevalence of
diabetes in the United States should continue due to the increasing rate of
obesity in the population. The annual cost to the healthcare system for health
related expenditures associated with diabetes in the United States is
approximately $100 billion. Diabetes is the leading cause of blindness in
people aged 20 to 74 and approximately 40% of all new cases of kidney failure
are caused by diabetes. In addition, cardiovascular disease is two to four
times more prevalent in diabetics than in non-diabetics.

Current Therapies for Diabetes

There are few therapeutic options available for treatment of the diabetic
patient. The mainstay therapies consist primarily of insulin, particularly in
the type 1 diabetic, and oral hypoglycemic drugs for the type 2 diabetic who
has failed exercise and dietary modification. According to the American
Diabetes Association, 43% of all diabetic patients use insulin and a similar
amount use oral drugs.

25
<PAGE>

The current marketplace consists of the following oral drugs: Glucophage
and more recently, Glucovance, thiazolidinediones such as Avandia and Actos,
and sulfonylureas. In the last five years, the market for oral antidiabetic
drugs in the United States has grown from approximately $500 million to
approximately $3 billion in annual revenues. During 1999, the largest selling
products in the United States were Glucophage and Rezulin. Glucophage is a
product marketed by the Bristol-Myers Squibb company in the United States and
generated approximately $1.3 billion in sales in 1999. Rezulin was
manufactured by Parke-Davis, a division of Warner-Lambert Company and
generated approximately $625 million in sales in 1999. Rezulin was withdrawn
from the market on March 22, 2000, after being linked to liver damage.

Even though these drugs service a multi-billion dollar market, they have
several limitations in clinical use:

. sulfonylureas have been associated with increased cardiovascular
mortality and are capable of producing severe hypoglycemia, which is a
state of low blood sugar;

. thiazolidinediones may precipitate congestive heart failure and have
been associated with liver toxicity, specifically Rezulin has been
removed from the market for this reason;

. Glucophage has been associated with lactic acidosis which is a rare but
life-threatening complication; and

. Many of these agents cause weight gain and therefore exaggerate the
obese state which typically characterizes the type 2 diabetic
population.

The effectiveness of many of these products in lowering blood glucose has
been shown to decrease in many patients over time, necessitating insulin
therapy. In turn, many patients will ultimately lose sensitivity to insulin,
requiring larger doses and in time, will no longer achieve effective control
of their blood glucose level. In these patients, there are currently no
remaining therapeutic options to achieve optimal blood glucose control.

Polycystic Ovary Syndrome (PCOS)

PCOS is a major women's health disorder that affects approximately 6% of
women in the United States of reproductive age. PCOS is characterized by high
levels of testosterone and the absence of ovulation and is the leading cause
of female infertility in the United States. Women with this disorder are often
overweight, have excess facial and body hair and have menstrual
irregularities. According to an April 2000 Practice Committee Report published
by the American Society for Reproductive Medicine, clinical studies have
demonstrated that excess testosterone concentrations decrease and ovulation
resumes when insulin resistance is reduced by either drugs or by diet,
suggesting that insulin resistance is one of the primary underlying causes of
this disorder. Studies have indicated that women with PCOS have a four-fold
increase in the risk of developing hypertension, a seven-fold increase in the
risk of developing type 2 diabetes and a seven-fold increase in the risk of
having a heart attack. In addition, women with PCOS have a higher risk of
developing endometrial cancer.

Current Therapies for PCOS

There are currently no drugs approved that address the underlying cause
of this disorder, namely insulin resistance. While there are drugs that have
been approved for the treatment of PCOS, these drugs target the symptoms of
PCOS rather than directly addressing insulin resistance. Such treatments
include various fertility agents and cosmetic approaches to treat excess
facial and body hair. In addition, Glucophage, which is indicated for the
treatment of type 2 diabetes, is sometimes prescribed although it is not
approved by the FDA for the treatment of PCOS.

26
<PAGE>

Our Product Candidates

The following table describes our current drug candidates, their
indications and clinical trial status.

<TABLE>
<CAPTION>
Product Product Clinical Trial
Candidate Indication Description Status

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

<S> <C> <C> <C>
INS-1 Type 2 Diabetes Oral first line therapy Phase II

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

INS-1 PCOS Oral first line therapy Phase II

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

SomatoKine Type 1 and Type 2 Diabetes Injectable late stage management Phase II

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

SomatoKine Osteoporotic Hip Fracture Repair Injectable late stage management Phase II
</TABLE>

INS-1

Our lead product candidate, INS-1, is an orally active insulin
sensitizer. Insulin is the primary hormone that circulates in the bloodstream
to regulate blood glucose levels. Insulin, when released from the pancreas,
circulates in the bloodstream and binds to receptors located on the outer
surface of various organs and tissues, such as the liver, skeletal muscle and
fat. Following binding of insulin to a surface receptor on a normal
functioning cell, a key "insulin mediator" is generated from the cell membrane
which enters the cell and regulates and coordinates the effects of the hormone
inside the cell. Located inside the cell are various enzyme systems that
control the metabolism and disposal of glucose from the bloodstream; the
activation of these enzymes allows a tight regulation of blood glucose levels.

27
<PAGE>

Type 2 Diabetes

We have completed six clinical trials that indicate the potential safety
and efficacy of INS-1 in patients with type 2 diabetes. We have a comprehensive
clinical program for this indication involving five additional Phase II
clinical trials, three of which are currently in progress and two are scheduled
to begin by the end of 2000 or early 2001. The following table sets forth a
summary of our clinical trials of INS-1 for the treatment of type 2 diabetes:

<TABLE>
<CAPTION>
Study Trial Design Number of Patients Status Purpose
----- ----------------------- ------------------------ -------------- --------------
<C> <S> <C> <C> <C>
Phase I Randomized, double- 18 obese male volunteers Completed Safety
blind, placebo-
controlled
Phase I Randomized, open-label 12 healthy male Completed Safety
volunteers
Phase I Randomized, open-label, 14 healthy male Completed Safety
food interaction volunteers
Phase I Randomized, open-label 9 healthy male Completed Safety
volunteers
Phase I Randomized, open-label 9 patients with impaired Completed Safety and
glucose tolerance, 10 efficacy
patients with normal
glucose tolerance
Phase II Randomized, double- 110 patients with type 2 Completed Safety and
blind, placebo- diabetes efficacy
controlled
Phase II Randomized, double- 60 patients with In progress Safety and
blind, placebo- impaired glucose efficacy
controlled tolerance or impaired
fasting glucose
Phase II Randomized, double- 63 non-diabetic patients In progress Safety and
blind, placebo with dyslipidemia efficacy
controlled
Phase II Randomized, double- 242 patients with type 2 In progress Safety and
blind, placebo- diabetes currently on efficacy
controlled sulfonylureas
Phase II Randomized, double- Approximately 300 Upcoming Safety and
blind, placebo- patients with type 2 efficacy
controlled diabetes currently on
Glucophage
Phase II Randomized, double- Approximately 300 Upcoming Safety and
blind, placebo patients with type 2 efficacy
controlled diabetes inadequately
controlled by diet and
exercise
</TABLE>

In June 1999, we presented to the American Diabetes Association's annual
meeting data from our first completed Phase II clinical trial with INS-1 for
type 2 diabetes. This was a multi-center, double-blind placebo controlled study
involving 110 early stage type 2 diabetic patients with fifty-seven patients
randomized to receive INS-1 and fifty-three receiving placebo. When compared to
placebo, INS-1 showed statistically significant reductions in glucose and lipid
levels (p<0.01) in subjects which had both abnormally high circulating glucose
and lipid concentrations.

Based on the results of our clinical trials to date, we believe several
characteristics of INS-1 make it a desirable first line therapy for type 2
diabetes with a superior product profile to the existing drugs in the market:

. Efficacy Profile. INS-1 has demonstrated an efficacy profile which we
believe is superior to existing drugs for the treatment of type 2
diabetes. In contrast to existing drugs, INS-1 not only improved
glycemic control but also reduced the high lipid levels which are
often characteristic in this disease condition. In addition, INS-1 did
not cause weight gain during the course of therapy.

. Safety Profile. INS-1 is a naturally occurring molecule and has been
administered to over 500 patients generating approximately 60 years of
cumulative patient exposure. None of these studies have shown any
clinically relevant side effects associated with drug administration.
The side effects observed were similar to those described in the
patients receiving the placebo control.

28
<PAGE>

. Oral Administration. INS-1 achieves significant concentrations in the
bloodstream following oral administration. This method provides ease
of administration and facilitates patient compliance with the
recommended dosing regimen.

. Manufacturing and Product Stability. INS-1 is a simple molecule with
an excellent stability profile. It can be manufactured using
commercially available raw materials.

PCOS

We have completed one Phase II clinical trial that indicates the
potential safety and efficacy of INS-1 in patients with PCOS. We have a
comprehensive clinical program in support of this indication involving one
additional Phase I and four additional Phase II clinical trials, all of which
are currently in progress. The following table sets forth a summary of our
clinical trials of INS-1 for the treatment of PCOS:

<TABLE>
<CAPTION>
Number of
Study Trial Design Patients Status Purpose
----- ------------------------ ----------------------------------- -------------- ----------------
<C> <S> <C> <C> <C>
Phase I Randomized, open-label 24 pre-pubertal or late-adolescents In progress Safety
Phase II Randomized, double- 104 women with PCOS Completed Safety and
blind, parallel placebo- efficacy
controlled
Phase II Randomized, double- 220 obese women with PCOS In progress Safety and
blind, placebo- efficacy
controlled, multi-center
Phase II Randomized, double- 80 women with PCOS (comparison with In progress Safety and
blind, placebo- Glucophage) efficacy
controlled
Phase II Randomized, double- Approximately 294 women with PCOS In progress Safety and
blind, placebo- efficacy
controlled
Phase II Randomized, double- 88 women with PCOS In progress Safety and
blind, placebo- efficacy in
controlled conjunction with
standard
fertility
therapy
</TABLE>

In April 1999, the New England Journal of Medicine published the results
of our first completed Phase II clinical trial demonstrating that INS-1 was
effective in improving insulin resistance in women with PCOS. This data was
obtained from a double-blind single dose placebo controlled study involving 44
obese women with PCOS. In this study, 22 women received INS-1 and 22 women
received placebo. When compared to placebo, INS-1 showed statistically
significant reductions in insulin (p<0.07) and testosterone concentrations
(p<0.006) and an improvement in ovulation (p<0.001). The study was subsequently
extended to explore dose response for a total enrollment of 104 women.

We believe several characteristics of INS-1, specifically its safety and
efficacy in patients with PCOS, make it a desirable pharmaceutical product for
the treatment of the insulin resistant condition associated with PCOS. It is
our goal to develop INS-1 as a first-line therapy for the treatment of PCOS and
we believe INS-1 could be the first treatment specifically approved and
indicated for the treatment of this disorder.

SomatoKine

Our second product candidate, SomatoKine, is indicated for the treatment
of patients with type 1 and type 2 diabetes who are less sensitive to insulin
therapy. SomatoKine is a therapeutic composition of IGF-1 complexed to a
primary binding protein, BP3. In healthy individuals, IGF-1 circulates attached
to BP3 which serves to regulate the biological activity of IGF-1. IGF-1 is
known to enhance insulin action in patients with diabetes; however, its
administration has generally been associated with significant side effects
which have limited its clinical use. Previous attempts by other companies at
boosting IGF-1 levels in the human body to improve insulin sensitivity have
focused on delivery of the molecule without BP3. We believe this method does
not recognize the importance that the binding protein plays in regulating the
actions of IGF-1. We believe that by combining IGF-1 with BP3, we can
demonstrate an ability of IGF-1 to enhance insulin action, and limit side
effects.

29
<PAGE>

Diabetes

We have completed three clinical trials that indicate the potential
safety and efficacy of SomatoKine in patients with diabetes. We have a
comprehensive clinical program for this indication involving three additional
Phase II clinical trials, two of which are currently in progress and one is
scheduled to begin by the end of 2000 or early 2001. The following table sets
forth a summary of our clinical trials of SomatoKine for the treatment of
diabetes:

<TABLE>
<CAPTION>
Study Trial Design Number of Patients Status Purpose
----- -------------------------------- -------------------------------- ----------- -------------------
<S> <C> <C> <C> <C>
Phase I Single dose 12 healthy volunteers Completed Safety

Phase I Multiple doses 12 healthy volunteers Completed Safety
Phase II Double-blind, placebo controlled 12 patients with type 1 diabetes Completed Safety and efficacy
Phase II Randomized, open-label 32 patients with type 1 diabetes In progress Safety and efficacy
Phase II Randomized, open-label 32 patients with type 2 diabetes In progress Safety and efficacy
Phase II Randomized, open-label Approximately 80 patients with Upcoming Safety and efficacy
type 2 diabetes
</TABLE>

In April 2000, the Journal of Clinical Endocrinology & Metabolism
published the results of our first completed Phase II clinical trial with
SomatoKine for type 1 diabetes. This trial demonstrated that SomatoKine showed
a statistically significant improvement in insulin sensitivity in patients with
type 1 diabetes with no clinically relevant adverse effects. This data was
based on a double-blind placebo controlled study involving 12 patients with
type 1 diabetes. Specifically, data from this study revealed that when compared
to placebo, average daily insulin requirements were significantly reduced
(p<0.01), average daily blood glucose levels declined (p<0.02) and cholesterol
levels declined (p<0.05). Published results of previous studies by other
companies of IGF-1 administered alone indicate that patients frequently
reported jaw pain, muscular pain, headache and tissue swelling. There were no
reports of clinically relevant side effects in this Phase II trial of
SomatoKine.

We believe our clinical results indicate that SomatoKine offers potential
as a late stage therapeutic for improving insulin sensitivity in both type 1
and type 2 diabetics.

Other Potential Indications--Osteoporotic Hip Fracture Repair

We believe our therapeutic composition, SomatoKine, could prove to be
effective in the treatment of osteoporotic hip fracture. We believe SomatoKine
has the potential to substantially restore bone mineral density and improve
muscle strength, thereby reducing fracture risk and improving patient strength
and mobility.

Osteoporosis is a chronic, debilitating disease in which the bones become
increasingly porous, brittle and subject to fracture. According to the National
Osteoporosis Foundation, in the United States, approximately 10 million people
have the disease and it contributes to more than 1.5 million fractures per
year. These fractures have been shown to result in accelerated bone loss.
Studies estimate that one-half of all women over age 50 eventually will suffer
an osteoporosis-related fracture. This patient population consists largely of
post-menopausal women who already have lost up to 20% of their bone mass and
are at high risk of fractures of the hip, wrist or spine. Furthermore, the
National Osteoporosis Foundation reports that an average of 24% of hip fracture
patients age 50 and over die in the year following their fracture, and one-
fourth of those who were ambulatory before their hip fracture require long term
care afterward. While estrogens, calcitonin, bisphosphonates and other
therapies are prescribed for osteoporosis, these treatments are used primarily
to prevent further bone loss rather than to form new bone.

We have completed a multi-center Phase II clinical study using multiple
doses of SomatoKine to treat women with severe osteoporosis who had recently
undergone hip fracture surgery. This study evaluated 46 patients who received
either SomatoKine or a placebo over a period of eight weeks. We evaluated
several indicators of a patient's functional well-being, including muscle
strength, daily activities and bone mass. Hip fracture patients typically
suffer an accelerated loss of bone mineral density immediately post-fracture.
In patients treated with SomatoKine there was a statistically significant
reversal in this early loss of bone. In addition, muscle strength and physical
activities associated with daily living also improved in these patients.

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<PAGE>

We are currently in discussions with Elan Corporation, plc, our joint
venture partner, regarding the design, conduct and funding of a Phase II
clinical trial to evaluate the safety and efficacy of SomatoKine delivered by a
MEDIPAD Delivery System provided by Elan.

Business Strategy

We are a product-focused company whose goal is to become the leading
biopharmaceutical company treating metabolic and endocrine diseases. The key
elements of this strategy are listed below.

Focus on products to treat metabolic and endocrine diseases. We will work
to complete the development and approval of our products to treat diabetes,
PCOS and osteoporotic hip fracture. We believe these are largely underserved,
high-growth markets. Our management team has significant experience in drug
development and we will use this expertise to complete our clinical development
programs and, if successful, file for regulatory approval in the U.S.

Retain commercial rights to market products in selected markets. We
intend to market and distribute INS-1 for the treatment of PCOS in the U.S.
through a direct sales force. For our other indications, our goal is to retain
marketing rights to our product candidates until the development of the
products is essentially complete. We believe this approach will allow us to
negotiate optimal terms for any such marketing agreements.

Establish corporate partnerships in target markets. We plan to establish
corporate partnerships and other relationships to develop, market and
commercialize both INS-1 and SomatoKine for all indications outside of the U.S.
For example, we recently entered into a license agreement with Taisho
Pharmaceutical Co., Ltd., a Japanese company which has the exclusive right to
develop and market INS-1 for type 2 diabetes and PCOS in Asia and a semi-
exclusive right in China. We intend to establish corporate partnerships in the
U.S. to market INS-1 for the treatment of type 2 diabetes and to develop and
market SomatoKine for the treatment of type 1 and type 2 diabetes and
osteoporotic hip fracture surgery.

Outsource manufacturing to deploy resources efficiently. Our management
team has significant experience in negotiating and supervising contractual
arrangements with third parties for the manufacture of drug products on a cost
effective basis. To deploy our resources efficiently, we currently plan to
continue to outsource the manufacture of INS-1 and SomatoKine.

Acquire and in-license additional products and technologies. We intend to
acquire additional products and technologies which complement our activities
within the field of metabolic and endocrine diseases. We believe such
acquisitions in fields where we have expertise can be rapidly integrated into
our development programs.

Research and Development

We have devoted substantially all of our resources since we began our
operations to the research and development of pharmaceutical product candidates
for metabolic and endocrine diseases associated with insulin resistance. Our
research and development expenses were approximately $6.3 million, $3.8 million
and $2.6 million in 1999, 1998 and 1997 and approximately $6.7 million during
the six months ended June 30, 2000, respectively. Prior to its acquisition,
Celtrix incurred research and development expenses of $0.9 million,
$6.8 million, and $13.0 million for the years ended March 31, 2000, 1999 and
1998, respectively.

31
<PAGE>

Strategic Licensing Agreements

UVA Patent Foundation

Our core technology is based on more than 20 years of insulin resistance
research at the University of Virginia. Our license agreement with the UVA
Patent Foundation grants a worldwide, exclusive license, including the right to
grant sublicenses, to use and practice certain patents related to INS-1 for the
treatment of diabetes. The license extends for the full term of the patents.
The Patent Foundation may terminate the license upon untimely payment of
royalties or bankruptcy or insolvency of Insmed. We may terminate the license
upon ninety days notice to UVA Patent Foundation. Either party may terminate
upon a material breach by the other party.

In consideration for the license agreement, we are obligated to pay
minimum annual licensing fees of $100,000, as well as patent costs through the
expiration of the patent rights. We may also have to pay a royalty on net sales
of any therapeutic drugs covered by the agreement. Royalties earned by the
foundation will reduce licensing fees and, in the case of patent infringement,
we may use up to 50% of royalties otherwise payable to the foundation to pay
for expenses we incur to defend the patents.

Taisho Pharmaceutical Co., Ltd.

In July 2000, we entered into an agreement with Taisho Pharmaceutical
Co., Ltd. for the development and commercialization of INS-1 in Japan and
certain other Asian countries. We have retained the rights to INS-1 in the rest
of the world. The potential pre-commercialization value of the collaboration is
$32 million, which would include license fees and payments upon achievement of
certain development and regulatory milestones as well as a completed equity
investment of $3 million. Taisho will also fund 20% of the development costs
for INS-1 in North America and Europe. We will also receive royalties on INS-1
sales in Japan and the other Asian countries covered by the agreement. Taisho
may terminate the agreement upon six months prior written notice to Insmed.
Either party may terminate upon material breach or insolvency of the other
party. However, in the event of Insmed's material breach or insolvency, Taisho
may continue to research, develop and sell INS-1 pursuant to the agreement.

Elan Corporation, plc

In April 1999, our subsidiary, Celtrix, entered into an agreement with
Elan Corporation, plc to establish a joint venture for the development of
SomatoKine to treat severe osteoporosis using Elan's MEDIPAD Delivery System.
Celtrix has granted the joint venture an exclusive license for the treatment of
severe osteoporosis with SomatoKine. We own 80.1% of the joint venture and Elan
owns 19.9%. As part of the agreement, Elan purchased shares of Celtrix's
preferred stock which converted into shares of Insmed common stock in Celtrix's
merger with Insmed. Elan and we are in discussions regarding the design,
conduct and funding of the first clinical trial contemplated by this joint
venture.

Patents and Proprietary Rights

Proprietary protection is important to our business, and our policy is to
protect our technology by filing patent applications for technology that we
consider important. We intend to file additional patent applications, when
appropriate, relating to improvements in our technology and other specific
products that we develop. As with any pending patent application, there can be
no assurance that any of these applications will be issued in the United States
or in foreign countries. There also cannot be any assurance that United States
or foreign patents issuing from any of these applications will not later be
held invalid or unenforceable.

INS-1

We own three issued United States patents related to our INS-1
technology. In addition, we have exclusively licensed six issued patents from
the University of Virginia. We also own three pending patent applications and
five provisional patent applications covering the use and manufacture of INS-1
and additional

32
<PAGE>

defined compounds. We have filed or intend to file patent applications in many
of the major international markets for the majority of these patents and
pending patents.

The various issued patents cover use of compounds to treat insulin
resistance in type 2 diabetes reducing elevated blood sugar in humans, treating
metabolic diseases characterized by hyperandrogenism and/or anovulation,
methods for production of INS-1 and purified insulin mediators and purification
processes. Pending applications contain broader claims for use and manufacture
of INS-1 or related compounds.

The initial terms of such patents expire at various times between May
2009 and January 2018. The patent that claims the use of INS-1 for the
treatment of type 2 diabetes expires in 2009. The patent that claims the use of
INS-1 for the treatment of PCOS expires in 2018.

SomatoKine

We own 24 United States issued or allowed patents related to the
composition, production, antibodies and methods of use for SomatoKine,
including:

. One patent with claims to a BP3 composition-of-matter;

. Eleven therapeutic use patents for SomatoKine, IGF-1 or BP3, including
their use for the treatment of diabetes or osteoporotic hip repair;

. Ten patents regarding novel expression and production methods which
may be used for the manufacture of SomatoKine; and

. Two patents relating to methods of predicting drug response.

We also own 14 applications pending in the U.S. regarding the therapeutic
use of BP3, antibodies to BP3 and their uses, and therapeutic uses and
production of SomatoKine. These applications are in various stages of review.
We have filed or intend to file patent applications in many of the major
international markets for the majority of these pending patent applications. In
Europe, we have an issued patent with claims to:

. BP3 composition-of-matter;

. Certain therapeutic uses of that BP3; and

. Certain therapeutic uses of a complex of IGF-1 and BP3.

Genentech has two issued United States patents, one directed to certain
DNA molecules encoding BP3 and another directed to the BP3 protein. We can
provide no assurance that we will not be found to infringe one or both those
patents. Those patents might have an adverse effect on our ability to conduct
our business, and prevent us from making, using or selling certain products,
including SomatoKine, in the United States. A European counterpart of one of
those patents has also been granted, however, we successfully opposed it.
Genentech has recently appealed this decision in Europe. The appeal could
succeed and, if successful, we cannot determine what claims, if any, will be
reinstated or the breadth of such claims. If the patent is maintained in
Europe, it could adversely affect our plans for European commercialization, and
might prevent us from producing and/or using SomatoKine in Europe. In addition,
a patent has been issued to Genentech for the co-administration of IGF-1 and
BP3 by subcutaneous bolus injection to produce a greater anabolic state. We can
provide no assurance that we will not be found to infringe this patent.

33
<PAGE>

Through our joint venture, we have licensed five issued United States
patents, eight pending United States patent applications, nine granted foreign
patents and 32 foreign patent applications from Elan, all relating to systems
for administration of SomatoKine to patients.

The United States Drug Price Competition and Patent Term Restoration Act
of 1984, known as the Waxman-Hatch Act, provides for the return of up to five
years of patent term for a patent that covers a new product or its use, to
compensate for time lost during the regulatory review process. This period is
generally one-half the time between the effective date of an investigational
new drug application and the submission date of a new drug application, plus
the time between the submission date of a new drug application and the approval
of that application, subject to a maximum extension of five years. The
application for patent term extension is subject to approval to the U.S. Patent
and Trademark Office (USPTO), in conjunction with the FDA. It takes at least
six months to obtain approval of the application for patent term extension, and
there can be no guarantee that the application will be granted. Similar patent
term extensions are available under European laws. We intend to apply for such
patent term extension(s), where appropriate. However, we cannot provide any
assurance that we will receive such patent term extension(s).

The Waxman-Hatch Act also establishes a five-year period of marketing
exclusivity from the date of New Drug Application (NDA) approval for new
chemical entities approved after September 24, 1984. In order to obtain this
exclusivity, the NDA applicant must submit to the FDA, at the appropriate time,
the number and expiration date of any patent which claims the drug that is the
subject of the NDA, or which claims a method of using the drug that is the
subject of the NDA. Failure to submit this patent information at the
appropriate time to the FDA may result in loss of the right to this marketing
exclusivity.

During this Waxman-Hatch marketing exclusivity period, no third-party may
submit an "abbreviated" NDA or "paper" NDA to the FDA for the same product,
using data generated by the NDA holder. Similarly, in the case of non-new
chemical entities approved for new indications, no "abbreviated" NDA or "paper"
NDA which includes data collected by the original NDA applicant, may become
effective for three years from date of approval of any non-new chemical entity
NDA approved after September 24, 1984.

Finally, any abbreviated NDA or paper NDA applicant will be subject to
the notification provisions of the Waxman-Hatch Act, which should facilitate
our notification about potential infringement of our patent rights. The
abbreviated or paper NDA applicant must notify the NDA holder and the owner of
any patent applicable to the abbreviated NDA or paper NDA product, of the
application and intent to market the drug that is the subject of the NDA.

We intend to apply for such exclusivity, where appropriate. However, we
cannot provide any assurance that we will receive such exclusivity for any of
our products.

Manufacturing

We currently rely, and will continue to rely, for at least the next few
years, on contract manufacturers to produce INS-1 and SomatoKine for use in our
clinical trials. Our product candidates will need to be manufactured in a
facility by processes that comply with the FDA's good manufacturing practices
and other similar regulations. It may take a substantial period of time to
begin manufacturing our products in compliance with such regulations. If we are
unable to establish and maintain relationships with third parties for

34
<PAGE>

manufacturing sufficient quantities of our product candidates and their
components that meet our planned time and cost parameters, the development and
timing of our clinical trials may be adversely affected.

INS-1

We rely upon contractors for both the supply of raw materials and for
manufacturing finished product. We purchase raw materials from more than one
commercially established firm. Our necessary raw materials are currently
commercially available in quantities far in excess of the scale required to
complete all of our future planned Phase II and Phase III clinical trials.

We believe that we have established the methods used to produce the
finished drug product and, although they have not been applied to large scale-
up, we believe they will meet our commercial supply requirements. The
development of a commercial scale manufacturing process is complex and
expensive. We cannot assure you that we will be able to develop this commercial
scale manufacturing capability in a timely manner or at all.

We currently purchase both raw materials and finished drug products in
accordance with forecast-and-purchase order arrangements, which we expect to
replace by long-term, semi-exclusive manufacturing agreements. We intend to
secure contractual commitments from two primary suppliers.

The bulk drug product is currently produced in the United States under
current good manufacturing practices applicable to investigational prescription
drugs, at two sites: Catalytica Pharmaceuticals, Inc. in Greenville, NC; and at
Sigma-Aldrich Fine Chemicals of St. Louis, MO, in facilities registered and
subject to inspection by the FDA.

SomatoKine

SomatoKine is a complex of two proteins and is manufactured using
recombinant DNA technology. The manufacturing process is complicated and
involves expression of the two proteins by bacterial fermentation followed by
purification and combination of the two proteins.

We are supplying all of our pre-clinical and clinical Phase II study
requirements in 2000 and early 2001, with inventory of SomatoKine active drug
produced by our subsidiary, Celtrix Pharmaceuticals, Inc. We have contracted to
transfer and scale-up the production process at an FDA inspected manufacturer,
BioScience Contract Production Corporation in Baltimore, Maryland. The initial
scale-up and production contract is intended to supply active drug sufficient
to complete all of the currently planned Phase II clinical studies. Additional
scale-up and process optimization will be required to start producing Phase
III-scale clinical materials. We intend to negotiate this Phase III scale-up as
an amendment to our Phase II contract with BioScience.

We recognize that, assuming successful SomatoKine Phase III clinical
development for diabetes and osteoporotic hip fracture, a separate
manufacturing partner is likely to provide for commercial-scale fermentation
and purification capacity for the drug substance. To the extent that SomatoKine
manufacturing has not been performed previously beyond Phase II scale, we
cannot guarantee that the large scale-up of capacity for the commercial
marketing stage will be available.

Marketing and Sales

We currently have no sales, marketing or distribution capability. In
order to commercialize any of our product candidates, we must either internally
develop sales, marketing and distribution capabilities or make arrangements
with a third party to perform these services.

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<PAGE>

We intend to market and distribute INS-1 for the treatment of PCOS in the
U.S. through a direct sales force targeting the focused physician audience that
treats this condition. For our other indications, our goal is to retain
marketing rights to our product candidates until the development of the
products is essentially complete. We believe this approach will allow us to
negotiate optimal terms for any such marketing agreements. To market any of our
products directly, we must develop a marketing and sales force with technical
expertise and with supporting distribution capabilities.

In the United States, we do not intend to enter into co-promotion
arrangements or out-license our product candidates until any of our product
candidates are in the later stages of development, but at that point we may
promote our product candidates through marketing relationships with one or more
companies that have established distribution systems and direct sales forces.
In international markets, we intend to seek strategic relationships to market,
sell and distribute our product candidates.

Competition

We are engaged in an industry which is intensely competitive and
characterized by rapid technological progress. In each of our potential product
areas we face significant competition from large pharmaceutical, biotechnology
and other companies, and universities and research institutions. Most of these
have substantially greater capital resources, research and development staffs,
facilities and experience in conducting clinical trials and obtaining
regulatory approvals. In addition, many of these companies have greater
experience and expertise in manufacturing and marketing pharmaceutical
products.

Since all of our products are under development, we cannot predict the
relative competitive position of our products if they are approved for use.
However, we expect that the following factors will determine our ability to
compete effectively:

. safety and efficacy;

. product price;

. ease of administration; and

. marketing and sales capability.

Diabetes

In addition to insulin therapy, the primary existing oral therapies for
type 2 diabetes are Glucophage marketed by Bristol-Myers Squibb, Avandia and
Actos by Smith Kline Beecham plc and Eli Lilly and Company and Takeda
Pharmaceuticals America, Inc., respectively, and sulfonylureas marketed by
various companies, including Pfizer under the trademark, Glucotrol XL and
Glucotrol.

Glucovance, developed by Bristol-Myers Squibb, has recently received
approval to treat type 2 diabetes. In addition, we are aware of other products
being developed for the treatment of type 2 diabetes. These include sustained
release and generic formulations of Glucophage, inhaled and oral insulins and
new thiazolidinedione compounds.

PCOS

While there are a number of drugs available for the treatment of PCOS,
they focus on relief of symptoms rather than the cause of the disease. Such
treatments include various fertility agents and cosmetic approaches to treat
excess facial and body hair. In addition, drugs such as Glucophage, which is
indicated for the treatment of type 2 diabetes, are prescribed although they
are not approved by the FDA for the treatment of PCOS.

Osteoporotic Hip Fracture

Osteoporotic hip fracture is currently treated by estrogens, calcitonins,
bisphosphonates and other therapies which are used primarily to prevent further
bone loss. We are not aware of any treatment which

36
<PAGE>

enhances bone growth and improves recovery of muscle strength following hip
fracture, although there are several drug candidates designed to enhance bone
growth in the early stage of development.

Government Regulation

Government authorities in the United States and other countries
extensively regulate the research, development, testing, manufacture,
promotion, marketing and distribution of drug products. Drugs are subject to
rigorous regulation by the FDA in the United States and similar regulatory
bodies in other countries. The steps ordinarily required before a new drug may
be marketed in the United States are similar to steps required in most other
countries and include:

. Pre-clinical laboratory tests, pre-clinical studies in animals and
formulation studies and the submission to the FDA of an
investigational new drug application for a new drug or antibiotic;

. Adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug for each indication;

. The submission of a new drug application to the FDA; and

. FDA review and approval of the new drug application before any
commercial sale or shipment of the drug.

Pre-clinical tests include laboratory evaluation of product chemistry and
stability, as well as animal studies to evaluate toxicity. The results of pre-
clinical testing are submitted to the FDA as part of an investigational new
drug application. The FDA requires a 30-day waiting period after the filing of
each investigational new drug application before beginning clinical tests in
humans. At any time during this 30-day period or at any time thereafter, the
FDA may halt proposed or ongoing clinical trials until the FDA authorizes
trials under specified terms. The investigational new drug application process
may become extremely costly and substantially delay development of our
products. Moreover, positive results of pre-clinical tests will not necessarily
indicate positive results in clinical trials.

Clinical trials to support new drug applications are typically conducted
in three sequential phases, but the phases may overlap. During Phase I--the
initial introduction of the drug into healthy human subjects or patients--the
drug is tested to assess metabolism, pharmacokinetics and pharmacological
actions and safety, including side effects associated with increasing doses.

Phase II usually involves studies in a limited patient population to:

. Assess the efficacy of the drug in specific, targeted indications;

. Assess dosage tolerance and optimal dosage; and

. Identify possible adverse effects and safety risks.

If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials, also
called pivotal studies, are undertaken to further demonstrate clinical efficacy
and to further test for safety within an expanded patient population at
geographically dispersed clinical study sites.

After completion of the required clinical testing, a new drug application
is submitted. The FDA may request additional information before accepting a new
drug application for filing, in which case the application must be resubmitted
with the additional information. Once the submission has been accepted for
filing, the FDA has 180 days to review the application and respond to the
applicant. The review process is often significantly extended by FDA requests
for additional information or clarification. The FDA may refer the new drug
application to an appropriate advisory committee for review, evaluation and
recommendation as to whether the application should be approved, but the FDA is
not bound by the recommendation of an advisory committee.

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<PAGE>

If FDA evaluations of the new drug application and related manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter. An approvable letter will usually contain a number of
conditions that must be met in order to secure final approval of the new drug
application and authorization of commercial marketing of the drug for certain
indications. The FDA may refuse to approve the new drug application or issue a
not-approvable letter, outlining the deficiencies in the submission or the
manufacturing site(s) and often requiring additional testing or information.

If regulatory approval of any of our products is granted, it will be
limited to certain disease states or conditions. The manufacturers of approved
products and their manufacturing facilities will be subject to continual review
and periodic inspections. Because we intend to contract with third parties for
manufacturing of these products, the control of compliance with FDA
requirements will be incomplete. In addition, identification of certain side
effects or the occurrence of manufacturing problems after any of its drugs are
on the market could cause subsequent withdrawal of approval, reformulation of
the drug, additional pre-clinical testing or clinical trials, and changes in
labeling of the product.

Outside the United States, our ability to market our products will also
depend on receiving marketing authorizations from the appropriate regulatory
authorities. The foreign regulatory approval process includes all of the risks
associated with FDA approval described above. The requirements governing the
conduct of clinical trials and marketing authorization vary widely from country
to country.

Employees

As of August 31, 2000, we have 41 full-time employees. Of these
employees, 31 were engaged in research and development, and 10 in finance and
general administration. None of our employees are covered by collective
bargaining agreements. We consider relations with our employees to be good.

Facilities

We lease a total of 14,750 square feet of office and laboratory space in
Richmond, Virginia at an annual cost of approximately $369,000. Our leases
expire at various times through February 2002. We believe that our existing
facilities are adequate for our current needs. We believe that suitable
additional or alternate space will be available on commercially reasonable
terms when our lease expires or when we need additional space.

Legal Proceedings

We are not involved in any legal proceedings that, in our opinion, could
have a material adverse effect on our business or financial condition.

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MANAGEMENT

Executive Officers and Directors

The following table presents information about our executive officers and
directors. Our Board consists of three classes, with the initial term of office
of the first, second and third classes expiring at the first, second and third
annual meetings of the shareholders, respectively. Our bylaws currently provide
that the board of directors will consist of seven directors. The two vacancies
are for the class of directors whose term expires in 2003.

<TABLE>
<CAPTION>
Director Class
Name Age (expiration of term) Position
---- --- -------------------- --------
<S> <C> <C> <C>
Geoffrey Allan, Ph.D. .. 47 III (2003) President, Chief Executive
Officer, and Chairman of the
Board
Michael D. Baer......... 56 -- Chief Financial Officer
Robert A. Falconer...... 47 -- Vice President, Technical
Operations
Ronald D. Gunn.......... 40 -- Vice President, Business
Development
Kenneth G. Condon(1).... 53 I (2001) Member, Board of Directors
Graham K. Crooke, 41 II (2002) Member, Board of Directors
MB.BS(1)(2)...........
Steinar J. Engelsen, 49 I (2001) Member, Board of Directors
M.D.(1)...............
Edgar G. Engleman, 55 II (2002) Member, Board of Directors
M.D.(2)...............
</TABLE>
--------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.

Geoffrey Allan, Ph.D. has served as our President, Chief Executive
Officer and Chairman of the Board since our inception in November 1999. Dr.
Allan has been President, Chief Executive Officer and director of Insmed
Pharmaceuticals since 1994. Dr. Allan joined Insmed Pharmaceuticals in January
1994 and has 20 years of experience in pharmaceutical drug development. Prior
to joining Insmed Pharmaceuticals, Dr. Allan served as Vice President, Drug
Development at Whitby Research, Inc., a pharmaceutical company. Dr. Allan has
extensive experience in pre-clinical and clinical drug development and the drug
approval process. Before his association with Whitby Research, Dr. Allan was
the Head of the Cardiovascular Section at Wellcome Research Laboratories. Dr.
Allan received his Ph.D. in Pharmacology from Cornell University Medical
College.

Michael D. Baer has served as our Chief Financial Officer since our
inception in November 1999. Mr. Baer has been Chief Financial Officer of Insmed
Pharmaceuticals since May 1999 and became our Chief Financial Officer upon our
formation in November 1999 and in such capacity oversees all of our financial
activities. He has more than 25 years experience in financial management, most
recently from 1995 to 1998 as Controller, Vice President and Chief Financial
Officer of InSite Vision Incorporated, a biopharmaceutical company. He served
as Chief Financial Officer for the U.S. operations of Simsmetal Limited, a
publicly-held Australian recycling company, from 1993 to 1994, as the regional
Financial and Administrative Officer for the public accounting firm, Deloitte &
Touche from 1990 to 1993, and as the partner in charge of the Sacramento office
of Deloitte, Haskins & Sells from 1984 to 1990. He is a Certified Public
Accountant and holds an MBA in Finance from the University of California,
Berkeley.

Robert A. Falconer has served as our Vice President, Technical Operations
since our inception in November 1999. From October 1999 to November 1999, Mr.
Falconer served as Vice President, Technical Operations of Insmed
Pharmaceuticals. Mr. Falconer has over 25 years of experience in manufacturing,
regulatory and quality/compliance operations. Most recently, from February 1998
to October 1999, Mr. Falconer served as Vice President, Technical Operations
and from September 1995 to January 1998 was a

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<PAGE>

director of regulatory and technical affairs for Shire Richwood, Inc., a
specialty pharmaceutical company and a division of Shire Pharmaceuticals Group.
Previously, from March 1994 to August 1995, Mr. Falconer was principal of his
own consulting firm working in the area of drug development. Mr. Falconer
received a bachelor of arts in biology, with a minor in chemistry, from the
University of Connecticut.

Ronald D. Gunn has served as our Vice President, Business Development
since our inception in November 1999. From January 1999 to November 1999, Mr.
Gunn served as Vice President, Business Development and previously as Director
of Business Development and Clinical Operations at Insmed Pharmaceuticals and
has more than 14 years of experience in pharmaceutical drug development. Prior
to Insmed, Mr. Gunn served as Clinical Affairs Officer with Finnish bioscience
company, Leiras, Inc. Mr. Gunn received his M.S. and M.B.A. from Virginia
Commonwealth University.

Kenneth G. Condon is a director of Insmed. Mr. Condon has been a director
of the company since our inception in November 1999 and of our predecessor,
Insmed Pharmaceuticals, since 1997. Mr. Condon serves as the Vice President for
Financial Affairs and Treasurer at Boston University, a position he has held
from 1975 to present. He is also a Trustee of Newbury College and Chairman of
the Educational and Cultural Division of the United Way Mass Bay. He was
formerly Chairman of the Board of BayFunds, a $1.8 billion mutual fund family,
a former director of BayBank Harvard Trust, a former member of the BankBoston
Advisory Board, a former director of the BayBank Trust Board, a former director
of Seragen, Inc., a biotechnology firm, and a former director, Chapter
Secretary, Treasurer and President of the Financial Executives Institute of
Massachusetts. Before 1975, Mr. Condon was a Senior Accountant with the CPA
firm of Arthur Andersen & Co. in Boston. He received his B.A. degree in
Economics and Mathematics from Tufts University, and an MBA in Finance from the
Wharton School of Finance, University of Pennsylvania. Mr. Condon is both a
Certified Public Accountant and a Certified Financial Planner.

Graham K. Crooke, MB.BS is a director of Insmed. Dr. Crooke has been a
director of the company since its inception in November 1999 and of our
predecessor, Insmed Pharmaceuticals, since 1996. In April 2000, Dr. Crooke
joined Asset Management Company, a venture capital firm focusing on investments
in the information and biological sciences markets, as a partner. Previously,
from September 1997 to March 2000, Dr. Crooke was a partner at Ticonderoga
Capital, a venture capital firm, where he focused on biotechnology and
healthcare service investments. From April 1992 until September 1997,
Dr. Crooke was a vice president of Dillon Read Venture Capital, a venture
capital firm and predecessor to Ticonderoga. Prior to that, Dr. Crooke worked
with the healthcare practice of Booz, Allen & Hamilton, Inc., a management
consulting firm, was a product manager at Molecular Devices Corporation, a
developer of bioanalytical measurement systems, and, from 1984 to 1986,
practiced medicine at major teaching hospitals in Western Australia. Dr. Crooke
is also a director of Phytera, Inc., a biotechnology company, Centaur
Pharmaceuticals, Inc., a biopharmaceutical company, and Libritas, a business-
to-business communications services company. He received his medical degree
from the University of Western Australia and an M.B.A. from the Stanford
Graduate School of Business.

Steinar J. Engelsen, M.D. is a director of Insmed. Dr. Engelsen has been
a director of the company since our inception in November 1999 and of our
predecessor, Insmed Pharmaceuticals, since 1998. Since November 1996, Dr.
Engelsen has been a partner of Teknoinvest Management AS, a venture capital
firm based in Norway. From 1989 until October 1996, Dr. Engelsen held various
management positions within Hafslund Nycomed AS, a pharmaceutical company based
in Europe, and affiliated companies. He was responsible for therapeutic
research and development, most recently serving as Senior Vice President,
Research and Development of Nycomed Pharma AS from January 1994 until October
1996. Effective January 1, 2000, Dr. Engelsen was appointed acting chief
executive officer of Centaur Pharmaceuticals, Inc., a biopharmaceutical
company. Dr. Engelsen also serves as chairman of the board of directors of
Centaur. Dr. Engelsen is also a director of several privately-held companies.
Dr. Engelsen received a M.Sc. in nuclear chemistry and an M.D. from the
University of Oslo, and is a Certified European Financial Analyst.

Edgar G. Engleman, M.D. is a director of Insmed. Dr. Engleman has been a
director of the company since our inception in November 1999, and of our
predecessor, Insmed Pharmaceuticals, since 1999. Dr. Engleman joined BioAsia
Investments in 1997 and is currently a General Partner of BioAsia Investments,

40
<PAGE>

L.L.C., a venture investment company investing in life sciences and healthcare
information companies. Dr. Engleman has been a Professor of Medicine and
Pathology at the Stanford University School of Medicine since 1978. He is a co-
founder of biopharmaceutical companies Cetus Immune, Inc., Genelabs
Technologies, Inc., Dendreon Corporation and CellGate Technologies, LLC, as
well as of National Medical Audit, a medical consulting company. Dr. Engleman
serves on the boards of directors of InterMune Pharmaceuticals, Inc., a
biopharmaceutical company, and several privately-held companies. He received
his B.S. from Harvard University, and an M.D. from Columbia University School
of Medicine. Dr. Engleman completed post-graduate training at the University of
California, San Francisco and the National Institutes of Health. Dr. Engleman
is trained as an internist and immunologist.

There are no family relationships among any of our executive officers or
directors.

Committees

Our board of directors has an audit committee, a compensation committee,
an executive committee and a governance committee.

The members of the audit committee are Messrs. Condon (Chair), Crooke and
Engelsen. The audit committee consists of not less than three outside
directors. The committee primarily:

. recommends the selection of independent accountants and auditors;

. reviews the scope of the accountants' audit and approves any non-audit
services to be performed by the independent accountants; and

. reviews annual audits and accounting practices.

The members of the compensation committee are Messrs. Crooke (Chair) and
Engleman. The compensation committee consists of not less than two outside
directors. This committee reviews and makes recommendations to the board of
directors regarding the compensation and benefits of all of our officers and
reviews policy matters relating to compensation and benefits of our employees.

The board of directors has not yet appointed the members of the executive
committee. The executive committee will consist of the Chairman of the Board
and at least two directors free of any material business or professional
relationship with the company or its management, also known as outside
directors. The committee has all powers of the board of directors except that
it will not be authorized to:

. approve or recommend shareholder action;

. fill vacancies on the board of directors or committees;

. amend the articles of incorporation;

. amend or repeal the bylaws;

. approve a plan of merger;

. approve a distribution; or

. approve the sale or determine the rights or designations of stock.

The board has not yet appointed the members of the governance committee.
The governance committee will consist of not less than three outside directors
and the Chairman of the Board. The committee will primarily:

. review the composition of the board of directors to insure that there
is a balance of appropriate skills and characteristics reflected on
the board;

. develop criteria for director searches and make recommendations to the
board of directors for the addition of any new board members after
proper search and investigation;

41
<PAGE>

. review in consultation with the Chairman of the Board, each director's
continuation on the board every three years prior to that director's
standing for re-election;

. monitor procedures for corporate decision-making;

. evaluate shareholder proposals;

. review public policy issues that affect our image within our customer
service areas;

. recommend actions to increase the board's effectiveness; and

. review annually the format used by the corporation's management to
report to the board of directors.

Director Compensation

Our non-employee directors receive an annual director's fee of $10,000
plus $2,000 and expenses for each meeting of the board of directors attended
and options to purchase 10,000 shares of our common stock annually. Directors
who are officers or employees of the company do not receive any additional
compensation for their services as directors.

Executive Officer Compensation

Summary Compensation Table: The following table shows the compensation
received by each person serving as an executive officer of Insmed
Pharmaceuticals as of December 31, 1999. Other than our executive officers
listed below, none of our executive officers received total cash compensation
from Insmed Pharmaceuticals in excess of $100,000 for the fiscal year ended
December 31, 1999. Stock awards have been restated for the July 28, 2000, one-
for-four reverse stock split. The executive officers listed in the table below
are referred to as the named executive officers.

<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation(1) Awards
Name and Principal Fiscal ----------------- Options/SARS All Other
Position Year Salary(2) Bonuses Granted(1) Compensation(5)
------------------ ------ --------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Geoffrey Allan.......... 1999 $210,000 $90,000(3) 87,500 $1,470
Chairman of the Board,
Chief Executive
Officer and President

Michael D. Baer(4)...... 1999 103,125 30,000(3) 78,750 9,850
Chief Financial
Officer

Robert Falconer(4)...... 1999 6,251 -- 78,750 --
Vice President,
Technical Operations

Ronald Gunn............. 1999 131,253 30,000(3) 36,750 240
Vice President,
Business Development
</TABLE>
--------
(1) Except as disclosed in the table, there was no other cash compensation,
long-term incentive plan or restricted stock award that required
disclosure.
(2) Includes amounts earned but deferred at the election of the executive, such
as salary deferrals under the Insmed Pharmaceuticals retirement savings
plan.
(3) In addition to the amounts indicated, Dr. Allan received $120,000 and Mr.
Baer and Mr. Gunn received $50,000 when the reorganizations closed.
(4) Insmed Pharmaceuticals hired Mr. Baer in May 1999 as Chief Financial
Officer, and Mr. Falconer in October 1999 as Vice President, Technical
Operations.
(5) Relates to personnel use of a vehicle provided to Dr. Allan and life
insurance premiums for coverage in excess of $50,000. Mr. Baer's other
compensation relates to relocation expenses paid by Insmed Pharmaceuticals
on his behalf and life insurance premiums for coverage in excess of
$50,000. Mr. Gunn's other compensation relates to life insurance premiums
for coverage in excess of $50,000.

42
<PAGE>

Stock Option/SAR Grants in Last Fiscal Year. Each of the following
options relates to our common stock and does not include a related SAR.

<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------
% of
Total Options
Granted to Exercise Grant date
Options Employees in or Base Expiration present
Name Granted(#)(1) Fiscal Year Price($) Date value(2)
---- ------------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Geoffrey Allan...... 87,500 18.8% $0.916 1/01/2005 $41,125
Michael D. Baer..... 78,750 16.9 0.916 5/16/2005 37,013
Robert A. Falconer.. 78,750 16.9 0.916 10/15/2005 37,013
Ronald D. Gunn...... 19,250 4.1 0.916 4/01/2005 9,048
Ronald D. Gunn...... 17,500 3.8 0.916 10/15/2005 8,225
</TABLE>
--------
(1) All options listed vest and become exercisable in equal monthly amounts
over a four year period.
(2) The fair value of the stock options was estimated at the date of grant
using the Black-Scholes pricing method assuming a risk free interest rate
of 6.0%, no dividends, a volatility factor of 25%, and a weighted average
exercise life of four years. The application of this method resulted in a
fair value per option of $0.47.

Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End
Option Values. The following table sets forth information for the named
executive officers with respect to exercises, during the year ended December
31, 1999, of options to purchase our common stock, and the number and value of
unexercised options at fiscal year end.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal Year- In-the-Money Options
End at Fiscal Year-End
------------------------- -------------------------
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey Allan.......... 0 $ 0 258,307 239,714 $207,210 $165,686
Michael D. Baer......... 0 0 11,485 67,265 5,398 31,615
Robert Falconer......... 0 0 3,282 75,469 1,543 35,470
Ronald Gunn............. 0 0 35,363 43,387 31,693 24,675
</TABLE>
--------
(1) The fair value of the stock options was estimated at the date of grant
using the Black-Scholes pricing method assuming a risk free interest rate
of 6.0%, no dividends, a volatility factor of 25%, and a weighted average
exercise life between one and four years. The application of this method
resulted in a fair value per option between $0.00 and $1.00.

The Stock Incentive Plan

The purpose of the Insmed Incorporated 2000 Stock Incentive Plan is to
attract and retain executive officers, key employees, non-employee directors
and other non-employee advisors and service providers, and to align more
closely the interests of those persons with the interests of shareholders. This
summary is subject, in all respects, to the terms of the Stock Incentive Plan.

Administration. The Stock Incentive Plan is administered by our board of
directors and compensation committee (or such other committee of our board of
directors composed solely of persons who satisfy the "non-employee director"
and "outside director" requirements of Rule 16b-3 under the Exchange Act and
Section 162(m) of the Code). Our board of directors, compensation committee or
such other committee may delegate its authority and responsibilities under the
Plan to one or more of our officers, but our board of directors, compensation
committee or such other committee may not delegate authority with respect to
grants and awards to individuals subject to Section 16 of the Exchange Act. As
used in this summary, the term "Administrator" means our board of directors,
compensation committee or such other committee or a delegate, as appropriate.
The Administrator generally has the authority, within limitations described in
the Stock Incentive Plan:

. to establish rules and policies concerning the Plan;

43
<PAGE>

. to determine the persons who may receive stock options, awards of our
common stock and performance shares;

. to fix the number of shares of our common stock for each award;

. to set the terms of each award; and

. to accelerate, upon a change of control or at such other time as the
administrator determines in its discretion, the times for exercise,
transfer, forfeit and settlement of options.

Eligibility. Each of our employees, directors, employees and directors of
our subsidiaries, and each other non-employee advisor or service provider to us
or our subsidiaries is eligible to participate in the Stock Incentive Plan. The
Administrator selects the individuals who will participate in the Plan.

Options. A stock option entitles a participant to purchase shares of our
common stock from the company at the option price. The participant may pay the
option price in cash, with shares of Insmed common stock, with a combination of
cash and shares of Insmed common stock, or by instructing a broker to deliver
the exercise price to Insmed through the sale of shares of our common stock
purchased under the option.

Stock Awards. Stock Incentive Plan participants may receive shares of
restricted Insmed common stock and stock awards not subject to restrictions. A
participant's rights in a restricted stock award are nontransferable or
forfeitable or both unless the participant or the company, as the case may be,
satisfies certain conditions prescribed by the Administrator, in its
discretion. These conditions may include, for example:

. continued employment or service with Insmed or a subsidiary
corporation for a specified period; and

. achievement by Insmed or a subsidiary corporation of performance-
related objectives.

Performance Share Awards. The Stock Incentive Plan also provides for the
award of performance shares. A performance share award entitles the participant
to receive a payment equal to the fair market value of a specified number of
shares of our common stock or shares of our common stock or a combination
thereof if certain standards are met. The Administrator may base the
requirements for receipt of performance share awards on similar conditions as
those for stock awards.

To the extent an individual earns performance shares, the employee may,
at the discretion of the Administrator, settle his or her obligation:

. in cash;

. in shares of our common stock; or

. a combination of the two.

Share Authorization. Written agreements between the Stock Incentive Plan
participant and us describe the plan awards. The maximum number of shares of
our common stock issuable under the Stock Incentive Plan upon its adoption by
our board of directors is 3,000,000 shares. That maximum will increase each
January 1 during the term of the Stock Incentive Plan by a number of shares
equal to 1.0% of the number of shares of our common stock outstanding on the
preceding December 31. In no event, however, may the annual increases cause the
maximum number of shares issued under the Stock Incentive Plan to exceed
6,250,000 shares.

Termination and Amendment. No award may be granted under the Stock
Incentive Plan more than ten years after the earlier of the date of adoption of
the plan by our board of directors or the date of approval of the plan by our
shareholders.

Federal Income Taxes. A Stock Incentive Plan participant does not
recognize income at the time the company grants an option. If the option is an
incentive stock option (ISO), the participant will not recognize

44
<PAGE>

income upon exercise of the option. A participant recognizes income when he
disposes of shares acquired under an ISO. The company may grant ISOs only to
our employees and employees of our subsidiaries. The exercise of a nonqualified
option generally is a taxable event that requires the participant to recognize,
as ordinary income, the difference between the shares' fair market value and
the option price.

A Stock Incentive Plan participant will recognize income on account of a
stock award on the first day that the shares become either transferable or not
subject to a substantial risk of forfeiture. The amount of income recognized by
the participant equals the fair market value of the shares of Insmed common
stock received on that date.

A participant will recognize income on account of the settlement of a
performance share award. That income will equal any cash paid and the fair
market value of shares of our common stock (on the date that the shares are
first transferable or not subject to a substantial risk of forfeiture) received
in settlement of the award.

The employer, either Insmed or a subsidiary corporation, may claim a
federal income tax deduction on account of the exercise of a nonqualified
option, the vesting of a stock award and the settlement of a performance share
award. The amount of the deduction equals the ordinary income recognized by the
participant. The employer may not claim a federal income tax deduction on
account of the grant or the exercise of an ISO. The employer, however, may
claim a federal income tax deduction on account of certain dispositions of
shares of our common stock acquired upon the exercise of an ISO.

The Stock Purchase Plan

Under the Insmed Incorporated 2000 Stock Purchase Plan, our eligible
employees and employees of our subsidiaries, other than certain employees who
are also shareholders, may purchase our common stock directly from us.
Purchases may be made through payroll deduction, with an annual limit on
purchases equal to the lesser of 15% of an employee's base salary or a number
of shares with a fair market value (at the time the right to purchase shares is
made available) of $25,000. The price per share purchased under the Stock
Purchase Plan will be the lesser of 85% of the fair market value of a share of
our common stock at the beginning of each annual offering period, or 85% of the
fair market value on the date the purchase is made. Employees will not
recognize income at the time the common stock is purchased under the Stock
Purchase Plan, but the employee may recognize ordinary income, and the employer
may claim a corresponding federal income tax deduction, on account of certain
dispositions of shares acquired under the Stock Purchase Plan. Employees may
purchase a maximum of 250,000 shares of our common stock under the Stock
Purchase Plan.

401(k) Plan

We maintain a tax-qualified employee savings and retirement plan, our
401(k) plan, for our eligible employees. Participating employees may defer up
to the lesser of 25% of W-2 compensation or the maximum amount permitted by the
Internal Revenue Code, as amended. The 401(k) plan permits us to make matching
contributions on behalf of all participants who have elected to make deferrals
to the 401(k) plan, but we have not made any matching contributions to date.
Any contributions to the 401(k) plan by our participants or us are paid to a
trustee. The 401(k) plan, and the accompanying trust, are intended to qualify
under Section 401(k) of the Internal Revenue Code, as amended, so that
contributions and income earned, if any, are not taxable to employees until
withdrawn. At the direction of each participant, the trustee invests the
contributions made to the 401(k) plan in any number of investment options.

45
<PAGE>

CERTAIN TRANSACTIONS

On May 31, 2000 we and our predecessor, Insmed Pharmaceuticals, Inc.,
completed a merger with Celtrix Pharmaceuticals, Inc. Immediately prior to the
merger, Biotechnology Development Fund, L.P. and Biotechnology Development Fund
III, L.P. collectively owned:

. 917,500 shares of Insmed Pharmaceuticals Series B Preferred Stock; and

. 5,220,774 shares of Celtrix common stock.

One of our directors, Dr. Edgar Engleman, is a member of BioAsia
Investments, L.L.C. which is the general partner of both Biotechnology
Development Funds. In addition, at the time of the transaction, Dr. Engleman
was a non-voting observer on the Celtrix board of directors. He acknowledged
his position as a director of Insmed Pharmaceuticals and any possible conflict
of interest arising out of his association with both companies by absenting
himself from the process and discussions concerning the proposed merger with
Insmed Pharmaceuticals. At board meetings of Insmed Pharmaceuticals and Insmed
Incorporated, Dr. Engleman abstained on all voting matters related to the
merger.

As a result of the merger, Biotechnology Development Fund, L.P. and
Biotechnology Development Fund III, L.P. received an aggregate of 2,108,006
shares of Insmed Incorporated common stock.

46
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of August 28, 2000 by

. each person who beneficially owns more than 5% of the outstanding
shares of our common stock;

. each of our directors and executive officers; and

. all of our directors and executive officers as a group.

The number of shares of common stock deemed outstanding before this
offering includes:

. 27,076,215 shares of common stock outstanding as of August 28, 2000;
and

. shares issuable under stock options held by each person included in
this table that may be exercised within 60 days after August 28, 2000,
as set forth below.

The number of shares of common stock deemed outstanding after this
offering includes the shares of common stock that are being offered for sale by
us in this offering. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission, and includes factors such as
voting and investment power with respect to shares. Unless otherwise indicated
below, to our knowledge, all persons named in the table have sole voting and
investment power with respect to their shares of common stock, except to the
extent authority is shared by spouses under applicable law.

<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
the Offering(1) the Offering(1)
Name & Address of -------------------- Shares to -----------------
Beneficial Owner Number Percent be sold(2) Number Percent
----------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Pequot Capital Management,
Inc..................... 2,133,758(3) 7.9% -- 2,133,758 6.7%
500 Nyala Farm Road
Westport, Connecticut
06880

Ticonderoga Capital, Inc.
........................ 2,121,248(4) 7.8 212,817 1,908,431 5.9
20 William Street
Wellesley, MA 02481

Edgar G. Engleman......... 2,117,693(5) 7.8 308,572(5) 1,809,121 5.6
BioAsia Investments,
L.L.C.
575 High Street
Suite 201
Palo Alto, CA 94301

Veron International Ltd... 1,712,057(6) 6.3 215,931 1,496,126 4.7
Chinachem Golden Plaza
Top Floor
77, Mody Road
Tsim Sha Tsui East
Kowloon, Hong Kong

Elan Pharmaceuticals
Investments, Ltd. ...... 1,431,869 5.3 -- 1,431,869 4.5
102 St. James Court
Flatts, Smiths Parish
FL 04, Bermuda
</TABLE>

47
<PAGE>

<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
the Offering(1) the Offering(1)
Name & Address of --------------------- Shares to -----------------
Beneficial Owner Number Percent be sold(2) Number Percent
----------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Steinar J. Engelsen....... 889,063(7) 3.3 -- 889,063 2.8
Teknoinvest Management AS
Grev Wedels, Plass 5
P.O. Box 556 Sentrum
Oslo, Norway 0105

Kenneth G. Condon......... 755,521(8) 2.8 107,183(8) 648,338 2.0
Boston University Nominee
Partnership
147 Bay State Road
Boston, MA 02215

Quantum Partners, LDC..... 714,288 2.6 105,497 608,791 1.9
Kaya Flaboyan 9
Willemstad, Curacao
Netherlands Antilles

Geoffrey Allan............ 756,875(9) 2.8 50,000 706,875 2.2
800 E. Leigh Street
Richmond, VA 23219

Graham K. Crooke.......... 26,768(10) * -- 26,768 *
Suite 150
2275 East Bayshore
Palo Alto, CA 94303

Michael D. Baer........... 27,892(11) * -- 27,892 *
800 E. Leigh Street
Richmond, VA 23219

Ronald D. Gunn............ 49,579(12) * -- 49,579 *
800 E. Leigh Street
Richmond, VA 23219

Robert A. Falconer........ 19,689(13) * -- 19,689 *
800 E. Leigh Street
Richmond, VA 23219

Officers & Directors As A
Group (8 Persons)....... 4,643,080(14) 17.1% 465,755 4,177,325 13.0%
</TABLE>
--------
* Less than 1%.
(1) Shares subject to options and warrants that are currently exercisable or
exercisable within 60 days of August 28, 2000, are deemed to be
outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(2) If the underwriters exercise their over-allotment option in full, then
Ticonderoga Capital, Inc., BioAsia Investments, L.L.C., Veron
International Ltd., Boston University Nominee Partnership and Quantum
Partners, LDC will sell an additional 201,616, 292,332, 204,566, 101,542
and 99,944 shares, respectively.
(3) Includes 714,288 shares and a warrant to purchase 250,048 shares held of
record by Pequot International Fund, Inc. and 714,288 shares and a
warrant to purchase 250,048 shares held of record by Pequot Partners
Fund, L.P. Also includes 182,038 shares held of record by Pequot Private
Equity Fund, L.P. and 23,048 shares held of record by Pequot Offshore
Private Equity Fund, Inc. Pequot International Fund, Inc., Pequot
Partners Fund, L.P., Pequot Private Equity Fund, L.P. and Pequot Offshore
Private Equity Fund, Inc. are managed by Pequot Capital Management, Inc.
(4) Includes 2,121,248 shares owned by Ticonderoga Partners III, LP, of which
Ticonderoga Associates III, LLC is the General Partner and Ticonderoga
Capital, Inc. is the investment manager.
(5) Dr. Engleman, a director of Insmed Incorporated, currently has the right
to purchase 9,688 shares upon exercise of options. The number of shares
listed opposite Dr. Engleman's name includes 18,750 shares held by
BioAsia Investments, L.L.C. and the shares owned by Biotechnology
Development Fund, LP and Biotechnology Development Fund III LP. BioAsia
Investments, L.L.C. is the general partner of the funds and Dr. Engleman
is a member of BioAsia Investments, L.L.C. Dr. Engleman disclaims
beneficial ownership of these shares except to the extent of his
proportional partnership interest therein. The total number of shares to
be sold includes 198,478 shares owned by Biotechnology Development Fund,
LP and 110,094 shares owned by Biotechnology Development Fund III LP.

48
<PAGE>

(6) Includes 250,048 shares issuable upon the exercise of a currently-
exercisable warrant.

(7) Dr. Engelsen, a director of Insmed Incorporated, currently has the right
to purchase 14,063 shares upon exercise of options. The number of shares
listed opposite Dr. Engelsen's name also includes 875,000 owned by
Teknoinvest Management AS. Dr. Engelsen disclaims beneficial ownership of
these shares except to the extent of his proportional interest.

(8) Kenneth G. Condon, a director of Insmed Incorporated, currently has the
right to purchase 14,063 shares upon exercise of options. The number of
shares listed opposite Mr. Condon's name also includes 725,708 shares
owned by Boston University Nominee Partnership of which he is a partner
and 15,750 shares owned by Trustees of Boston University. Mr. Condon
disclaims beneficial ownership of these shares. The 107,183 shares to be
sold are owned by Boston University Nominee Partnership.

(9) Includes 330,009 shares issuable upon exercise of options, which options
are exercisable within 60 days of August 28, 2000.

(10) Dr. Crooke, a director of Insmed Incorporated, has the right to purchase
14,063 shares upon exercise of options. Also included are 12,705 shares
beneficially owned by Dr. Crooke, which shares are held by Warburg Dillon
Read LLC, as agent for Dr. Crooke. The number of shares listed opposite
Dr. Crooke's name no longer includes 2,121,248 shares owned by
Ticonderoga Partners III, LP, of which Ticonderoga Associates III, LLC is
the General Partner. Dr. Crooke was a consultant to Ticonderoga with
respect to Ticonderoga's ownership of Insmed stock until June 6, 2000,
and was a principal of that firm from September, 1997 until March, 2000.

(11) Includes 8,204 shares issuable upon exercise of options, which options
are exercisable within 60 days of August 28, 2000.

(12) Includes 24,506 shares issuable upon exercise of options, which options
are exercisable within 60 days of August 28, 2000.

(13) Includes 6,564 shares issuable upon exercise of options, which options
are exercisable within 60 days of August 28, 2000.

(14) Represents the shares referenced in footnotes (5) and (7)-(13).

49
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

This summary of the characteristics of our capital stock is qualified in
all respects by reference to our articles of incorporation and amended and
restated bylaws, and by the provisions of applicable Virginia law.

We have authority to issue a maximum of 500,000,000 shares of common
stock, par value $.01 per share, and 200,000,000 shares of preferred stock,
par value $.01 per share. As of September 15, 2000 we had 27,150,197 shares of
common stock outstanding. We have authorized the issuance of an additional
shares of common stock in connection with this offering. No shares of
preferred stock are outstanding.

Common Stock

Each share of our common stock entitles the holder to one vote in the
election of directors and on all other matters submitted to a vote of
shareholders. Holders of our common stock have no conversion or redemption
rights and no preemptive or other rights to subscribe for our common stock.
Shareholders have no right to cumulate votes in the election of directors.
Holders of Insmed Incorporated common stock are entitled to receive dividends
when, as and if declared by our board of directors out of funds legally
available for distribution. Upon our liquidation, holders of common stock will
be entitled, subject to the rights of the holders of any outstanding Insmed
preferred stock, to receive pro rata all assets, if any, of Insmed available
for distribution after payment of necessary expenses and all prior claims.

Insmed Incorporated is listed on the Nasdaq National Market under the
trading symbol "INSM."

Preferred Stock

We may issue the preferred stock, from time to time in one or more
series, and our board of directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, redemption
rights and terms, liquidation preferences, conversion rights, voting rights
and sinking fund provisions applicable to each such series of preferred stock.
If we issue a series of preferred stock in the future that has voting rights
or preferences over the common stock with respect to the payment of dividends
or upon liquidation, dissolution or winding up, this issuance may adversely
affect the rights of the holders of our common stock offered hereby. We may
amend from time to time our articles of incorporation to increase the number
of authorized shares of preferred stock. This type of amendment would require
the approval of the holders of a majority of the outstanding shares of each
series of preferred stock, if any, that the amendment adversely affects,
voting separately by group and the approval of a majority of all the voting
capital stock of Insmed Incorporated, voting as a single voting group. The
issuance of shares of preferred stock could be utilized, under certain
circumstances, in an attempt to prevent an acquisition of our company. As of
the date of this prospectus, we have no shares of preferred stock outstanding.

Warrants

As of September 15, 2000, there are stock warrants outstanding which
enable the holders to purchase 1,725,330 shares of common stock at a price per
share of $9.00. These warrants expire May 31, 2005.

Registration Rights

In January 2000, we, along with Insmed Pharmaceuticals, entered into a
purchase agreement with a number of private investors led by Cooper Hill
Partners, LLC and including funds managed by OrbiMed Advisors, Quantum
Partners and Vector Fund Management. In May 2000, these investors purchased
4,928,585 shares of our common stock and warrants exercisable for an aggregate
of 1,725,330 shares of our common stock in a private placement.

50
<PAGE>

In connection with this financing, we entered into a registration rights
agreement with the investors. When we propose to register our securities under
the Securities Act, these shareholders will be entitled to notice of the
registration and the right to include their shares in the registration,
provided that the underwriters for the proposed offering will have the right to
limit the number of shares included in the registration. In addition, if, at
any time the company qualifies under applicable SEC rules to file a
registration statement on Form S-3 or any successor form, those investors
holding at least 50% of the securities sold in connection with the private
placement may request that the company register their securities under the
Securities Act provided that the resulting offering would result in net
proceeds of at least $3,000,000.

Important Provisions of Virginia Corporate Law, Our Articles of Incorporation
and Bylaws

The following is a summary of certain important provisions of Virginia
corporate law, our articles of incorporation and our amended and restated
bylaws in effect as of the date of this prospectus, and is qualified in its
entirety by reference to Virginia law and to these documents, copies of which
may be obtained from our company.

Our Articles of Incorporation and Bylaws. The Virginia Stock Corporation
Act and our articles of incorporation and bylaws govern shareholder rights and
related matters. Provisions of our articles of incorporation and bylaws, which
are summarized below, may make it more difficult to change the composition of
our board of directors and may discourage or make more difficult any attempt by
a person or group to obtain control of our company.

Board of Directors. Under our articles of incorporation and bylaws, the
board will consist of seven directors. We have three classes of directors. One-
third of the directors will be in each class, and one class of directors would
be up for election at each annual meeting. Directors are elected by a plurality
of the votes cast by the holders of shares entitled to vote in the election of
directors at a meeting of shareholders at which a quorum is present. Under
Virginia law, vacancies, whether by resignation, death or removal or because of
an increase in the size of the board, may be filled by the remaining members of
the board of directors although less than a quorum. A director elected to fill
a vacancy will serve until the next shareholders' meeting at which directors
are elected. Virginia law provides that directors may be removed with or
without cause by the vote of a majority of the shares of the voting groups that
elected such director entitled to vote at an election of directors. However,
our articles of incorporation do require cause, as well as an affirmative vote
of 75% of the outstanding shares of capital stock entitled to vote, to remove a
director.

Advance Notice Requirements for Shareholder Proposals. Our amended and
restated bylaws require a shareholder desiring to bring a proposal before an
annual meeting of shareholders to give proper written notice to our Secretary.
Notice will be deemed proper if, in case of the 2001 annual meeting, it is
delivered by November 6, 2000, and in case of subsequent annual meetings, it is
delivered not later than 90 days nor more than 120 days before the first
anniversary of the date of mailing of our proxy statement in connection with
the last preceding year's annual meeting. The written notice delivered to the
Secretary must include the information, and be in the proper form, as specified
in our bylaws.

Limitations on Liability. Virginia law permits a corporation to provide
indemnification of reasonable expenses for officers, directors, employees or
agents of the corporation (or any such person serving in such capacities for
another entity at the request of the corporation) who are parties or are
threatened to be made parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), against expenses,
judgments, fines and amounts paid in settlement that are actually and
reasonably incurred. Virginia law permits indemnification in all instances,
except in the case of willful misconduct or knowing violation of the criminal
law. Our articles of incorporation provide for the indemnification of
liabilities of each person incurred by reason of serving as a director,
officer, employee or agent or by reason of serving as a director, officer,
trustee, or in some similar capacity, of another corporation in all instances,
except where the indemnitee engaged in willful

51
<PAGE>

misconduct or a knowing violation of the criminal law. Virginia law does not
permit indemnification in the following circumstances:

. proceedings by and in the right of the corporation, in which the
director is liable to the corporation; and

. transactions from which a director received an improper personal
benefit.

We currently have directors' and officers' liability insurance to provide
our directors and officers with insurance coverage arising from claims based on
breaches of duty, negligence, errors and other wrongful acts.

Advance Notice Requirements for Nomination of Directors. Our bylaws
require a shareholder desiring to nominate a director for election at an annual
meeting of shareholders to give proper written notice to our Secretary. Notice
will be deemed proper if, notice is given not later than 90 days nor more than
120 days prior to the first anniversary date of the previous year's annual
meeting. The written notice delivered to the Secretary must include the
information, and be in the proper form, as specified in our bylaws.

Meetings of Shareholders. Our bylaws permit the President, a majority of
the board of directors, or the Chairman of the Board to call a special meeting
of shareholders. The bylaws specifically deny the shareholders the right to
convene a special meeting of shareholders.

Amendment of Articles of Incorporation or Bylaws. Subject to Virginia
law, our articles of incorporation generally may be amended by the affirmative
vote of the holders of a majority of the outstanding votes entitled to be cast
by each voting group entitled to vote. However, certain provisions of the
articles of incorporation may only be amended or repealed by the affirmative
vote of the holders of 75% of the outstanding votes entitled to be cast by each
voting group entitled to vote. The bylaws may be amended or repealed by the
affirmative vote of a majority of the board of directors, unless otherwise
required by our articles of incorporation or Virginia law. If shareholder
voting is required for an amendment to our bylaws, 75% of the then outstanding
stock voting together as a single voting group must vote in the affirmative to
approve the amendment.

Mergers and Share Exchanges. Unless otherwise specified, any merger or
share exchange must be approved by an affirmative vote of more than two-thirds
of all the issued and outstanding shares of stock of each voting group entitled
to vote; provided, however, that shareholder action by the acquiring
corporation in a share exchange is normally not required.

Anti-takeover Provisions of the Virginia Stock Corporation Act. Virginia
law contains two statutory provisions that may have the effect of delaying or
discouraging a hostile takeover. Under the first statutory provision, if a
person acquires 10% or more of the stock of a Virginia corporation without the
prior approval of the corporation's board of directors, the person is deemed an
"interested shareholder" and may not engage in certain transactions with the
corporation, including a merger and a sale or exchange of greater than 5% of
the corporation's net worth, for a period of three years, and then only with
the specified supermajority shareholder vote, disinterested director approval
or fair price and procedural protections. The three year prohibition on an
affiliated transaction does not apply if before the affiliated transaction, a
majority of the disinterested directors and holders of at least two-thirds of
the outstanding voting shares other than shares beneficially owned by the
interested person approve the transaction. Virginia law permits a corporation
to exempt itself from this statutory provision by placing a statement to that
effect in its articles of incorporation. Furthermore, this statutory provision
regarding affiliated transactions does not apply to corporations with fewer
than 300 shareholders. Our articles of incorporation do not specifically
address the Virginia statute regarding affiliated transactions; therefore, we
are subject to this provision.

Under the second statutory provision, Virginia law requires an interested
person who acquires a threshold percentage of stock in the target corporation
to obtain the approval of disinterested shareholders before the interested
person may exercise its voting rights with respect to the acquired shares.
Under the Virginia statute, certain notice and informational filings and
special shareholder voting and meeting procedures must be followed prior to
consummation of the purchase of stock that will provide the interested
shareholder with the

52
<PAGE>

power to vote in excess of 20%, 33% or 50% of the outstanding voting stock of
the company. Assuming compliance with notice and information filing
requirements, the purchased stock will not provide the interested purchaser
with any voting rights with respect to the stock until a majority of the
outstanding disinterested shares vote to restore the voting rights to the
purchased stock. Our articles of incorporation provide that this second
statutory provision does not apply to our company; therefore, we are not
subject to this provision.

Transfer Agent and Registrar

The transfer agent and registrar for the shares of our common stock is
First Union National Bank.

53
<PAGE>

SHARES ELIGIBLE FOR FUTURE RESALE

Upon completion of this offering, we will have outstanding 32,150,197
shares of common stock assuming the issuance of 5,000,000 shares in this
offering and no exercise of outstanding options and warrants after the date
hereof. Other than the shares discussed in the following paragraph,
substantially all of these shares will be freely tradable in the public market
without restriction under the Securities Act, unless these shares are held by
"affiliates" of our company, as that term is defined in Rule 144 under the
Securities Act.

As of the date hereof, warrants to purchase 1,725,330 shares of our
common stock are outstanding. The shares which may be issued upon the exercise
of these warrants will be "restricted securities" as that term is defined under
Rule 144. We also have outstanding 30,000 shares which are restricted
securities. Restricted shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
under the Securities Act, as summarized below. We have agreed, pursuant to a
registration rights agreement, that under certain circumstances we will
register the shares acquired upon exercise of such warrants. For more
information on these registration rights, please see "Description of Capital
Stock--Registration Rights" on page 50.

Under the "lock-up" agreements between each executive officer, director,
the selling shareholders and several other substantial shareholders and the
underwriters, holders of 10,398,747 shares of the freely tradable shares
generally have agreed not to offer, sell, pledge or otherwise dispose of,
directly or indirectly, any of our common stock or security convertible into,
or exchangeable or exercisable for any security of our company for a period of
90 days from the date of this offering. However, holders may transfer any such
securities as a bona fide gift or as a distribution to partners or shareholders
of such holder provided the donee or distributee agrees in writing to the terms
of the lock-up agreement. We also have entered into an agreement with the
underwriters that we will not offer, sell or otherwise dispose of or announce
our intention to dispose of, common stock for a period of 90 days from the date
of this offering other than in connection with our equity compensation plans in
effect on the date hereof, provided that such shares are subject to
restrictions on transfer, and upon the exercise of options or warrants
outstanding on the date hereof.

In general, under Rule 144 as in effect at the closing of this offering,
an affiliate or a person, or persons whose shares are aggregated, who has
beneficially owned restricted shares for at least one year, including the
holding period of any prior owner who is not an affiliate, would be entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of 1% of the then-outstanding shares of common stock (approximately
322,000 shares immediately after this offering) or the average weekly trading
volume of our common stock during the four calendar weeks preceding the filing
of a Form 144 with respect to the sale. Sales under Rule 144 are also subject
to some manner of sale and notice requirements and to the availability of
current public information about us. In addition, our affiliates must comply
with the restrictions and requirements of Rule 144 other than the one-year
holding period requirement in order to sell shares of common stock which are
not restricted securities.

Under Rule 144(k), a person who is not deemed to have been an affiliate
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner who is not an affiliate, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

In meeting the one and two-year holding periods described above, a holder
of shares can include the holding periods of a prior owner of the shares who
was not an affiliate. The one and two-year holding periods described above do
not begin to run until the full purchase price or other consideration is paid
by the person acquiring the shares from the issuer or an affiliate.

54
<PAGE>

UNDERWRITING

General. The underwriters, acting through their representatives,
Robertson Stephens, Inc., Banc of America Securities LLC and Prudential
Securities Incorporated have severally agreed to purchase from us the number of
shares of common stock next to their respective names below. The underwriters
are committed to purchase and pay for all the shares if any are purchased.

<TABLE>
<CAPTION>
Number of
Shares
---------
Underwriter
-----------
<S> <C>
Robertson Stephens, Inc. ............................................
Banc of America Securities LLC.......................................
Prudential Securities Incorporated...................................
---------
Total.............................................................. 6,000,000
=========
</TABLE>

The underwriters propose to offer the shares of common stock to the
public at the public offering price set forth on the cover page of this
prospectus and to specific dealers at that price less a concession of $ per
share, of which $ may be reallowed to other dealers. After this offering,
the public offering price, concession and reallowance to dealers may be reduced
by the representatives of the underwriters. No reduction will change the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus. The common stock is offered by the underwriters subject to receipt
and acceptance by them and subject to their right to reject any order in whole
or in part.

Over-Allotment Option. The selling shareholders listed in footnote 2 on
page 48 have granted to the underwriters an option, exercisable during the 30-
day period after the date of this prospectus, to purchase up to 900,000
additional shares of common stock to cover over-allotments, if any, at the same
price per share as we will receive for the shares that the underwriters have
agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to limited conditions, to
purchase approximately the same percentage of these additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the total shares offered in this offering. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the shares offered in this offering are being sold. The
selling shareholders listed in footnote 2 on page 48 will be obligated to sell
shares to the underwriters to the extent the option is exercised. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of common stock offered in this
offering.

Underwriting Discounts and Commissions. The underwriting discount will be
an amount equal to the public offering price per share, less the amount paid
per share by the underwriters. The following tables show the per share and
total underwriting discounts and commissions that we and the selling
shareholders will allow to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
900,000 additional shares.

<TABLE>
<CAPTION>
Total
-------------------------
Per No Exercise Full Exercise
Share of Option of Option
----- ----------- -------------
<S> <C> <C> <C>
Public offering price......................... $ $ $
Underwriting discounts and commissions payable
by us........................................ $ $ $
Underwriting discounts and commissions payable
by the selling shareholders.................. $ $ $
</TABLE>

The expenses of this offering are estimated at $ and are payable
entirely by Insmed.

55
<PAGE>

liabilities arising from breaches of our representations and warranties
contained in the underwriting agreement. In addition, the underwriting
agreement contains a covenant that Insmed shall maintain Directors and Officers
liability insurance in the minimum amount of $10 million and cause Robertson
Stephens, Inc., on behalf of the underwriters, to be added to such policy such
that up to $500,000 of certain of its expenses shall be paid directly by such
insurers.

Lock-Up Agreements. Each executive officer, director, the selling
shareholders and several other substantial shareholders agreed with the
representatives for a period of 90 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock, any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock, owned as of the date of this prospectus or thereafter acquired
directly by such holders or with respect to which they have or hereafter
acquire the power of disposition, without the prior written consent of
Robertson Stephens, Inc., on behalf of the underwriters. Robertson Stephens,
Inc. may, in its sole discretion and at any time or from time to time without
notice, release all or any portion of the securities subject to the lock-up
agreements.

Future Sales. In addition, we have agreed that during the 90 days after
the date of this prospectus we will not, subject to certain exceptions, without
the prior written consent of Robertson Stephens, Inc., on behalf of the
underwriters, (1) consent to the disposition of any shares held by shareholders
subject to lock-up agreements prior to the expiration of the lock-up period or
(2) issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common stock or
any securities convertible into, exercisable for or exchangeable for shares of
common stock other than the sale of shares in this offering, the issuance of
common stock upon the exercise of outstanding options or warrants and the
issuance of options under our existing stock option and incentive plans,
provided that those options do not vest prior to the expiration of the lock-up
period.

Stock Market Listing. The common stock is quoted on the Nasdaq National
Market under the symbol "INSM."

Syndicate Short Sales. The representatives have advised us that, on
behalf of the underwriters, they may make short sales of our common stock in
connection with this offering, resulting in the sale by the underwriters of a
greater number of shares than they are required to purchase pursuant to the
underwriting agreement. The short position resulting from those short sales
will be deemed a "covered" short position to the extent that it does not exceed
the 900,000 shares subject to the underwriters' over-allotment option and will
be deemed a "naked" short position to the extent that it exceeds that number. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the trading price of the
common stock in the open market that could adversely affect investors who
purchased shares in the offering. The underwriters may reduce or close out
their covered short positions either by exercising the over-allotment option or
by purchasing shares in the open market. In determining which of these
alternatives to pursue, the underwriters will consider the price at which
shares are available for purchase in the open market as compared to the price
at which they may purchase shares through the over-allotment option. Any
"naked" short position will be closed out by purchasing shares in the open
market. Similar to the other stabilizing transactions described below, open
market purchasers made by the underwriters to cover all or a portion of their
short position may have the effect of preventing or retarding a decline in the
market price of our common stock following this offering. As a result, our
common stock may trade at a price that is higher than the price that otherwise
might prevail in the open market.

Stabilization. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Exchange Act of 1934, as
amended, certain persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market.

56
<PAGE>

. A "stabilizing bid" is a bid for or the purchase of shares of common
stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock.

. A "syndicate covering transaction" is the bid for or the purchase of
the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this
offering.

. A "penalty bid" is an arrangement permitting the representatives to
reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with this offering if the common stock
originally sold by such underwriter or syndicate member is purchased
by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate
member.

The representatives have advised us that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

Passive Market Making. In connection with this offering, certain
underwriters and selling group members, if any, who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in our common stock on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Securities Exchange Act of 1934, as amended, during
the business day prior to the pricing of the offering, before the commencement
of offers or sales of our common stock. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid for such security; if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.

From time to time the underwriters have performed and may, in the future
perform, investment banking or other services for us and the selling
shareholders.

One of the representatives, Prudential Securities Incorporated,
facilitates the marketing of new issues online through its
PrudentialSecurities.com division. Clients of Prudential AdvisorSM, a full
service brokerage firm program, may view offering terms and a prospectus online
and place orders through their financial advisors.

57
<PAGE>

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Hunton & Williams, Richmond, Virginia. Certain intellectual
property matters described in this prospectus will be passed upon for us by
Foley & Lardner, Washington, D.C. and Sterne, Kessler, Goldstein & Fox
P.L.L.C., Washington, D.C. Legal matters in connection with this offering will
be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.

EXPERTS

Ernst & Young LLP, independent auditors, have audited Insmed
Pharmaceuticals' consolidated financial statements at December 31, 1999 and
1998, and for each of the three years in the period ended December 31, 1999, as
set forth in their report. We have included our financial statements in this
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.

Ernst & Young LLP, independent auditors, have audited Celtrix's
consolidated financial statements at March 31, 2000 and 1999, and for each of
the three years in the period ended March 31, 2000, as set forth in their
report. We have included our financial statements in this prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, DC 20549. You can request copies of these documents, upon payment
of a duplication fee, by writing to the SEC. You may obtain information on the
operation of the SEC's public reference facilities by calling the SEC at 1-800-
SEC-0330. You can also access copies of such material electronically on the
SEC's home page on the world wide web at http://www.sec.gov. Reports, proxy
statements and other information concerning us are also available for
inspection at the National Association of Securities Dealers, Inc. at 1735 K
Street N.W., Washington, DC 20006.

58
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Insmed Incorporated

Unaudited Pro Forma Condensed Consolidated Statements of Operations...... F-2

Notes to the Unaudited Pro Forma Condensed Consolidated Statements of
Operations.............................................................. F-5

Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999....................................................... F-9

Condensed Consolidated Statements of Operations for the six month periods
ended June 30, 2000 and 1999 (unaudited)................................ F-10

Condensed Consolidated Statements of Cash Flows for the six month periods
ended June 30, 2000 and 1999 (unaudited)................................ F-11

Notes to Condensed Consolidated Financial Statements (unaudited)......... F-12

Insmed Pharmaceuticals, Inc.

Report of Ernst & Young LLP, Independent Auditors........................ F-15

Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-16

Consolidated Statements of Operations for the years ended December 31,
1999, 1998, 1997 and Period from September 21, 1988 (inception) to
December 31, 1999....................................................... F-17

Consolidated Statement of Stockholders' Equity for the Period from
September 21, 1988 (inception) to December 31, 1999..................... F-18

Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, 1997 and Period from September 21, 1988 (inception) to
December 31, 1999....................................................... F-21

Notes to Consolidated Financial Statements............................... F-23

Celtrix Pharmaceuticals, Inc.

Report of Ernst & Young LLP, Independent Auditors........................ F-30

Consolidated Balance Sheets as of March 31, 2000 and 1999................ F-31

Consolidated Statements of Operations for the years ended March 31, 2000,
1999 and 1998........................................................... F-32

Consolidated Statements of Stockholders' Equity for the years ended March
31, 2000, 1999, and 1998................................................ F-33

Consolidated Statements of Cash Flows for the years ended March 31, 2000,
1999, and 1998.......................................................... F-34

Notes to Consolidated Financial Statements............................... F-35
</TABLE>

F-1
<PAGE>

INSMED INCORPORATED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations reflect the accounting for our acquisition of Celtrix in accordance
with generally accepted accounting principles. Insmed Incorporated is a holding
company formed to facilitate the acquisition in accordance with the acquisition
agreement. The acquisition agreement provided that:

. each share of issued and outstanding common and preferred stock of
Insmed Pharmaceuticals was exchanged for 3.5 shares of Insmed
Incorporated common stock;

. each outstanding share of common stock of Celtrix was exchanged for
one share of Insmed Incorporated common stock; and

. the liquidation preference per share ($1,000) plus accrued but unpaid
dividends of Celtrix Series A Convertible/Exchangeable Preferred Stock
was convertible into Celtrix common stock at a price per share of
$2.006 and the holders of Celtrix Series A received shares of common
stock of Insmed Incorporated on an as converted basis.

The Unaudited Pro Forma Condensed Consolidated Statements of Operations are
based upon and should be read in conjunction with the historical consolidated
financial statements of Insmed Incorporated, Insmed Pharmaceuticals and
Celtrix, including the notes thereto, which begin on page F-9 in this
registration statement.

The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1999 gives effect to the acquisition of Celtrix by
Insmed and related transactions as if such transactions had occurred on January
1, 1999. Celtrix's fiscal year end is March 31. Therefore, for the purpose of
the historical data included in the Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the year ended December 31, 1999, the unaudited
financial data for the nine months ended December 31, 1999, was combined with
the unaudited financial data for the three months ended March 31, 1999.

The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the six months ended June 30, 2000, gives effect to the acquisition of Celtrix
by Insmed and related transactions as if such transactions had occurred on
January 1, 2000. The results of operations of Celtrix for the month of June
2000 are included in the Insmed historical results of operations.

For accounting purposes, the historical basis of Insmed Pharmaceuticals
assets and liabilities carried over to Insmed Incorporated. The acquisition of
Celtrix was accounted for using the purchase method of accounting, so the total
purchase costs of the acquisition were allocated to the tangible and intangible
assets and liabilities acquired based upon their estimated fair values. The in-
process research and development charge of $54.4 million included in the
purchase price allocation herein was based on a preliminary estimate. On
September 15, 2000, the valuation analysis was completed by an independent
third party. The final value assigned to the acquired in-process research and
development was $50.4 million. Accordingly, we will reduce the related expense
by $4.0 million in our third quarter financial statements and correspondingly
increase goodwill.

In addition, Insmed and Celtrix incurred costs directly attributable to the
acquisition of approximately $2.1 million and $1.4 million, respectively. The
$2.1 million of transaction costs Insmed incurred have been included in the
determination of the purchase price. The $1.4 million Celtrix incurred was
expensed as incurred and was excluded from the Unaudited Pro Forma Condensed
Statements of Operations as they are non-recurring.

F-2
<PAGE>

INSMED INCORPORATED
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1999
(in thousands, except per share data)

<TABLE>
<CAPTION>
Historical Pro
----------------- Pro Forma Forma
Insmed Celtrix Adjustment Combined
------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues:
Total revenues.................... $ 663 $ 763 $ -- $ 1,426
Costs and expenses:
Research and development........... 6,320 10,000 16,320
General and administrative......... 2,189 1,953 4,142
Non-cash stock compensation........ 285 -- 285
------- -------- ----- --------
8,794 11,953 -- 20,747
------- -------- ----- --------
Operating loss..................... (8,131) (11,190) -- (19,321)
Amortization of goodwill........... -- -- (635)(b) (635)
Interest income.................... 338 85 423
Proceeds from settlement
agreement......................... -- 600 600
------- -------- ----- --------
Net loss........................... $(7,793) $(10,505) $(635) $(18,933)
======= ======== ===== ========
Net loss per share--basic and
diluted(a)......................... $ (2.47) $ (1.61) $ (0.76)
======= ======== ========
Shares used in computing basic and
diluted net loss per share(a)...... 3,155 6,544 24,827
======= ======== ========
</TABLE>
--------
(a)Restated for the July 28, 2000 one-for-four reverse stock split.
(b)Amortization of goodwill over a period of twenty years.

F-3
<PAGE>

INSMED INCORPORATED
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 2000
(in thousands, except per share data)

<TABLE>
<CAPTION>
Historical Pro
-------------------- Pro Forma Forma
Insmed Celtrix(d) Adjustment Combined
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Revenues:
Total revenues................. $ 90 $ 128 $ -- $ 218
Costs and expenses:
Research and development........ 6,689 539 7,228
General and administrative...... 2,372 2,935 (1,156)(c) 4,151
Purchased research and
development.................... 54,433 -- 54,433
Non-cash stock compensation..... 3,564 -- 3,564
-------- ------- ------- --------
67,058 3,474 (1,156) 69,376
-------- ------- ------- --------
Operating loss.................. (66,968) (3,346) 1,156 (69,158)
Amortization of goodwill........ (53) -- (265)(b) (318)
Interest income, net............ 206 87 293
-------- ------- ------- --------
Net loss........................ $(66,815) $(3,259) $ 891 $(69,183)
======== ======= ======= ========
Net loss per share--basic and
diluted(a)...................... $ (8.85) $ (0.40) $ (2.56)
======== ======= ========
Shares used in computing basic
and diluted net loss per
share(a)........................ 7,550 8,165 27,039
======== ======= ========
</TABLE>
--------
(a) Restated for the July 28, 2000 one-for-four reverse stock split.
(b) Amortization of goodwill over a period of twenty years.
(c) Reversal of non-recurring transaction costs incurred by Celtrix through
June 30, 2000.
(d) For the period January 1, 2000 to May 31, 2000 (prior to its acquisition).

F-4
<PAGE>

NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

Note 1

The unaudited pro forma condensed consolidated statements of operations
reflect the conversion of all of the outstanding shares of Celtrix and Insmed
Pharmaceuticals common and preferred stock into shares of common stock of
Insmed Incorporated. The acquisition of Celtrix was completed on May 31, 2000.
Approximately 108 million shares of Insmed Incorporated common stock were
issued to former stockholders of Insmed Pharmaceuticals and Celtrix. At
closing, each share of Celtrix was exchanged for one share of Insmed
Incorporated common stock and each preferred and common share of Insmed
Pharmaceuticals received three and one-half shares of Insmed Incorporated
common stock. The aggregate par value and related dividends of Celtrix Series A
Preferred Stock were convertible into Celtrix common stock at a price per share
of $2.006; the holder of Celtrix Series A Preferred stock received shares of
Insmed Incorporated common stock on an as converted basis.

In connection with the purchase of Celtrix, we allocated approximately $54.4
million of the purchase price to in-process research and development. We
engaged an independent third-party appraisal company to perform a valuation of
the intangible assets acquired. On September 15, 2000, the valuation was
completed. The final value assigned to the acquired in-process research and
development was $50.4 million. Accordingly, we will reduce the related expense
by $4.0 million and correspondingly increase goodwill in our third quarter
financial statements. We expect to enter into various corporate collaborations
and agreements to manufacture, market, distribute, and develop the in-process
research and development acquired in the purchase of Celtrix. The terms and
conditions of these agreements could differ substantially from the assumptions
made by management. It is also likely that the terms and conditions of existing
corporate collaboration agreements could be amended or terminated, which could
also significantly affect the assumptions associated with the in-process
projects.

The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products; estimating the resulting net
cash flows from such projects; and discounting the net cash flows back to their
present value.

The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion and/or acceleration of existing development programs, including the
mandatory completion of several phases of clinical trials and the general and
administrative costs necessary to manage the projects and trials. Assuming
approval of the drug by the FDA, costs related to large-scale manufacturing,
distribution, and marketing of the drugs are included in the projection. The
resulting net cash flows from such projects are based on our estimates of
revenues, cost of sales, research and development costs, sales and marketing,
general and administrative, and the anticipated income tax effect.

The discounting of net cash flows back to their present value is based on
the weighted average cost of capital (WACC). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
that enterprise. The discount rates utilized in discounting the net cash flows
from purchased in-process research and development range from 33% to 45%. These
discount rates may be higher than the WACC due to the inherent uncertainties
surrounding the successful development of the purchased in-process research and
development.

The analysis utilized data and information available at the time of the
acquisition. The analysis was based upon internal product level forecast
information maintained by Celtrix management in the ordinary course of managing
its business. Insmed Incorporated management reviewed and challenged the
forecast data and related assumptions and utilized the information in analyzing
in-process research and development. The forecast data and assumptions are
inherently uncertain and unpredictable. However, based upon the information
available at the time of the acquisition, we believe the forecast data and
assumptions are reasonable. These assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and

F-5
<PAGE>

circumstances will not occur. Accordingly, actual results may vary from the
forecasted results. Any such variance may result in a material adverse effect
on our financial condition and results of operations.

In the allocation of purchase price to the in-process research and
development, the concept of alternative future use was specifically considered
for each of the programs under development. The acquired in-process research
and development consists of Celtrix's work to complete each of the identified
programs. The programs are very specific to the disease and market for which
they are intended. There are no alternative uses for the in-process programs in
the event that the programs fail in clinical trials or are otherwise not
feasible. The development effort for the acquired in-process research and
development does not possess an alternative future use for Insmed Incorporated
as defined by generally accepted accounting principles.

Below is a brief description of in-process research and development projects
including an estimation, at the time of the acquisition, of what revenues
management believed Insmed Incorporated may realize from the sale of these
products in their respective applications.

SomatoKine: Diabetes. Diabetes is typically characterized by the inadequate
production or utilization of insulin. Insulin is a vital hormone needed by the
body for normal control of blood glucose levels. The findings from a Phase II
study in 12 patients to treat patients with type 1 diabetes suggests that
SomatoKine is a potential therapeutic for improving insulin sensitivity in both
type 1 and type 2 diabetes and helping patients to manage their disease, thus
avoiding the complications which ultimately accompany the disease. Several
additional studies will be required to develop the product for this indication.
We have already resumed Phase II trials.

The valuation of this program assumed that Phase II studies would continue
until 2003, that Phase III studies would be completed by 2005, and that the
product would launch in 2006. A discount rate of 35% was utilized in
discounting these estimated cash flows.

SomatoKine: Recovery from Osteoporotic Hip Fracture. Osteoporosis is a
chronic, debilitating disorder in which the bones become increasingly porous,
brittle and subject to fracture. Management believes the findings from a Phase
II feasibility study in hip fracture patients present an argument for further
development of SomatoKine for recovery from osteoporotic hip fracture. The
Phase II study suggests that a relatively short period of treatment with
SomatoKine offers the potential to restore the patient's bone mineral density
and improve supportive muscle strength as opposed to current treatments which
are used primarily to prevent further bone loss. We expect to begin a second
Phase II study later this year.

The valuation of this program assumed that Phase II studies would continue
until 2003, that Phase III studies would be completed by 2006, and that sales
would be made in 2007. A discount rate of 34% was utilized in discounting these
estimated cash flows.

SomatoKine: Protein Wasting and Severe Burns. Many critically ill patients
suffer from serious protein wasting conditions, which contribute to physical
weakness and increase their risk of morbidity and mortality. The results for
the Phase II study conducted in burn patients demonstrates potential efficacy
for SomatoKine to treat serious medical conditions associated with muscle and
weight loss, and provides further evidence supporting the use of SomatoKine to
treat wasting diseases associated with cancer cachexia, AIDS and advanced
kidney failure. A discount rate of 45% was utilized in discounting these
estimated cash flows.

In persons suffering from traumatic burns over at least 20% of their body
surface, very low levels of IGF-1, along with major tissue damage are
associated with the disruption of biological processes that are essential for
healing and protections from burn complications. In a Phase II study conducted
within this population patients who received SomatoKine through two skin graft
cycles indicated substantial improvement in restoring the balance between
protein synthesis and degradation, which is a prerequisite for accelerated
wound healing and reduced hospital stay. A discount rate of 33% was utilized in
discounting these estimated cash flows.

F-6
<PAGE>

The valuation of these programs assumed that sales of SomatoKine could begin
in 2003 to treat severe burns and in 2006 to treat protein wasting. Because the
value of protein wasting and severe burn indications is low in relation to
diabetes and recovery from osteoporotic hip fracture, we will defer further
trials in these indications until we obtain additional data from the planned
studies for the more valuable indications.

TGF-beta-2: Dermal Ulcer. Celtrix entered into a product development,
license and marketing agreement with Genzyme in June 1994 for TGF-beta-2 to
commercialize this product. Under the terms of the agreement, Genzyme assumed
responsibility for all costs related to developing TGF-beta-2 for these
indications. Celtrix is entitled to receive milestone payments and royalties
related to the development and regulatory approval of TGF-beta-2 for wound
repair. The valuation of this program was based on receipt of milestone
payments of $1.5 million between 2001 and 2004, and royalties beginning in
2005. A discount rate of 34% was utilized in discounting these estimated cash
flows.

The total acquisition cost was approximately $71.7 million, determined as
follows (in thousands):

<TABLE>
<S> <C>
Fair value of Insmed Incorporated shares(1)........................... $59,823
Fair value of Insmed Incorporated Stock Options(2).................... 9,697
Insmed Pharmaceuticals transaction costs, consisting primarily of
financial advisory, legal and accounting fees(3)..................... 2,136
-------
$71,656
=======
</TABLE>
--------
(1) The fair value per share was calculated by averaging the Celtrix closing
price for the five days prior to and subsequent to the signing of the
definitive reorganization agreement on November 30, 1999. The result of
this calculation is $1.94886, which was multiplied by the shares
outstanding on an as converted basis as of November 30, 1999 of 30,696,461.
(2) Options and warrants outstanding at November 30, 1999 of 10,244,113 were
multiplied by the fair value of each grant. The fair value of these options
and warrants were estimated as of November 30, 1999 using the Black-Scholes
pricing method assuming a risk free interest rate of 6.0%, no dividends, a
volatility factor of .801, and a weighted average life of .33 to .50 years.
The application of this method resulted in a fair value per option and
warrant between $0.01 and $1.41.
(3) Under purchase accounting the $2.1 million in transaction costs Insmed
incurred are included in the determination of the purchase price. The $1.4
million in transaction costs Celtrix incurred were expensed as incurred.

Based upon the valuation of tangible and intangible assets acquired and
liabilities assumed, we have allocated the total cost of the purchase to the
net assets of Celtrix, as follows (in thousands):

<TABLE>
<CAPTION>
Pro forma Actual
--------- -------
<S> <C> <C>
Tangible assets acquired:
Cash........................................................ $ 5,373 $ 5,373
Other current assets........................................ 33 33
Property and equipment...................................... 394 394
In-process research and development......................... 54,433 50,434
Goodwill.................................................... 12,708 16,707
Liabilities assumed......................................... (1,285) (1,285)
------- -------
$71,656 $71,656
======= =======
</TABLE>

The Celtrix research and development programs in process were valued as
follows:

<TABLE>
<CAPTION>
Actual
-------
<S> <C>
SomatoKine: Diabetes................................................... $33,129
SomatoKine: Osteoporosis............................................... 12,649
SomatoKine: Severe Burns............................................... 1,223
SomatoKine: Protein Wasting............................................ 2,165
TGF-beta-2: Dermal Ulcer............................................... 1,268
-------
50,434
=======
</TABLE>

F-7
<PAGE>

We currently anticipate spending approximately $8.9 million in the second
half of 2000 to continue the development and clinical trial studies of
SomatoKine for its applications in diabetes and recovery from osteoporotic hip
fracture. The results of these trials will dictate the amount of future funds
and company resources that may be ultimately dedicated to these projects. These
results may lead management to decide to continue development or to revise,
postpone or, possibly, terminate the development of one or both of these
applications or pursue the development of alternate indications.

Note 2

Pro forma basic and diluted net loss per share amounts for the year ended
December 31, 1999 and the six months ended June 30, 2000, are based upon the
weighted-average number of shares outstanding for the applicable period. The
pro forma weighted-average shares outstanding used in the calculation of pro
forma basic and diluted net loss per share for the six months ended June 30,
2000, is Insmed Incorporated's actual weighted-average calculation for the
period. The impact of outstanding options and warrants is not included in the
calculation of basic and diluted net loss per share as the effect would be
antidilutive. All weighted-average share information has been restated for the
one-for-four reverse stock split which occurred on July 28, 2000.

F-8
<PAGE>

INSMED INCORPORATED
Condensed Consolidated Balance Sheets
(In thousands)

<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 35,139 $ 317
Marketable securities................................ 2,436 4,318
Other current assets................................. 496 43
-------- --------
Total current assets............................... 38,071 4,678
Property and equipment, net............................ 680 242
Goodwill, net.......................................... 12,656 --
Other assets........................................... 100 376
-------- --------
Total assets....................................... $ 51,507 $ 5,296
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 3,350 $ 723
Payroll liabilities.................................. 343 111
-------- --------
Total current liabilities.......................... 3,693 834
Stockholders' equity:
Series A Convertible Participating Preferred Stock... -- 61
Series B Convertible Preferred Stock................. -- 36
Common stock......................................... 270 39
Additional capital................................... 137,148 27,181
Notes receivable from stock sales.................... -- (64)
Accumulated deficit.................................. (89,595) (22,780)
Accumulated other comprehensive loss................. (9) (11)
-------- --------
Net stockholders' equity........................... 47,814 4,462
-------- --------
Total liabilities and stockholders' equity......... $ 51,507 $ 5,296
======== ========
</TABLE>

See accompanying notes.

F-9
<PAGE>

INSMED INCORPORATED
Condensed Consolidated Statements of Operations
(in thousands, except per share data--unaudited)

<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Revenues:
Total revenues........................................... $ 90 $ 403
Operating expenses:
Research and development.................................. 6,689 2,700
General and administrative................................ 2,425 957
Purchased research and development........................ 54,433 --
Non-cash stock compensation............................... 3,564 --
-------- -------
Total operating expenses................................. 67,111 3,657
-------- -------
Operating loss............................................ (67,021) (3,254)
Interest income........................................... 206 210
-------- -------
Net loss.................................................. $(66,815) $(3,044)
======== =======
Basic and diluted net loss per share....................... $ (8.85) $ (0.97)
======== =======
Shares used in computing basic and diluted net loss per
share..................................................... 7,550 3,140
======== =======
</TABLE>

See accompanying notes.

F-10
<PAGE>

INSMED INCORPORATED
Condensed Consolidated Statements of Cash Flows
(In thousands--unaudited)

<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(66,815) $(3,044)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 115 38
Loss on sale of marketable securities................... 7 --
Issuance of stock for services.......................... 541 --
Interest accrued on notes receivable from stock sales... (2) (1)
Non-cash stock compensation............................. 3,564 --
Purchased research and development...................... 54,433 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.............. (420) (69)
Other assets........................................... (100) --
Accounts payable....................................... 1,342 123
Payroll liabilities.................................... 232 --
-------- -------
Cash used in operating activities..................... (7,103) (2,953)
Cash flows from investing activities:
Purchases of marketable securities........................ (496) --
Proceeds from marketable securities matured and sold...... 2,373 --
Purchases of property & equipment......................... (107) (18)
Acquisition of Celtrix Pharmaceuticals, Inc............... 3,613 --
-------- -------
Cash provided by (used in) investing activities............ 5,383 (18)
-------- -------
Financing activities
Proceeds from issuance of common stock..................... 36,476 1
Repayment of notes receivable from stock sale.............. 66 --
-------- -------
Cash provided by financing activities...................... 36,542 1
-------- -------
Increase (decrease) in cash and cash equivalents........... 34,822 (2,970)
Cash and cash equivalents at beginning of period........... 317 11,677
-------- -------
Cash and cash equivalents at end of period................. $ 35,139 $ 8,707
======== =======
</TABLE>

See accompanying notes.

F-11
<PAGE>

INSMED INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
applicable Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. It is presumed that users of this interim financial
information have read or have access to the audited financial statements for
the preceding fiscal year contained herein. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for fair presentation have been included. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the full year.

From the inception of Insmed Pharmaceuticals in 1988 until 1999, Insmed
Pharmaceuticals was a development stage enterprise devoted primarily to raising
capital, recruiting personnel, identifying and acquiring drugs for further
research and development, and conducting preclinical and clinical development
of its product candidate. During 2000, the company recruited key management
positions, completed its acquisition of Celtrix Pharmaceuticals, Inc.,
completed a $34.5 million equity financing, closed a license agreement with
Taisho Pharmaceutical, Co., Ltd and accordingly, the Company is not considered
a development stage enterprise for accounting purposes.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
December 31, 1999 amounts have been reclassified to conform to the June 30,
2000 presentation.

2. Acquisition of Celtrix Pharmaceuticals

In November 1999, Insmed Pharmaceuticals, Inc. ("Insmed Pharmaceuticals")
entered into an agreement to acquire Celtrix Pharmaceuticals, Inc. ("Celtrix").
The transaction closed on May 31, 2000. At closing:

. Celtrix and Insmed Pharmaceuticals became wholly-owned subsidiaries of
the Company.

. Each common share of Celtrix was exchanged for one share of the Company's
common stock.

. The liquidation preference per share ($1,000 per share) plus accrued but
unpaid dividends of Celtrix Series A Preferred Stock was convertible into
Celtrix common stock at a price per share of $2.006. The holders of
Celtrix Series A Preferred Stock received shares of the Company's common
stock on an as-converted basis.

. Each preferred and common share of Insmed Pharmaceuticals was exchanged
for three and one-half shares of the Company's common stock.

. All options and warrants outstanding at the time of the transaction
converted into options and warrants of the Company.

Insmed Pharmaceuticals' management and board of directors became the management
and board of directors of the Company.

The purchase method of accounting was used to account for the transaction.
Aggregate consideration of $71.7 million, which includes $2.1 million in
transaction costs incurred by the Company, was allocated to cash

F-12
<PAGE>

INSMED INCORPORATED
Notes to Condensed Consolidated Financial Statements--(Continued)
(Unaudited)

($5.4 million), equipment and other assets ($427,000), accounts payable ($1.2
million), in process research and development ($54.4 million), and goodwill
($12.7 million). Goodwill is being amortized on a straight-line basis over
twenty years.

The purchase price allocation is preliminary and will be finalized upon the
completion of the valuation of acquired in process research and development.
The results of operations for Celtrix for the month of June 2000 are included
in the accompanying condensed consolidated statement of operations of the
Company.

Pro forma condensed consolidated statements of operations for the six months
ended June 30, 2000 and 1999 are included below. These statements give effect
to the acquisition of Celtrix by Insmed Pharmaceuticals and related
transactions as if such transactions had occurred on January 1, 1999. These
statements include the results of operations for Insmed Incorporated and
Celtrix for the periods presented.

<TABLE>
<CAPTION>
For the Six
Months Ended June
30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Total revenues........................................ $ 218 $ 484
Operating expenses:
Research and development................................ 7,228 11,281
General and administrative.............................. 5,307 1,994
Purchased research and development...................... 54,433 --
Non-cash stock compensation............................. 3,564 --
-------- --------
Total operating expenses.............................. 70,532 13,275
-------- --------
Operating loss............................................ (70,314) (12,791)
Amortization of goodwill.................................. (318) (318)
Interest income........................................... 293 246
Proceeds from settlement agreement........................ -- 600
-------- --------
Net loss................................................ (70,339) $(12,263)
======== ========
Net loss per share--basic and diluted..................... $ (2.60) $ (0.51)
======== ========
Shares used in computing basic and Diluted net loss per
share.................................................... 27,039 24,235
======== ========
</TABLE>

3. Issuance of Equity

On May 31, 2000 Insmed Pharmaceuticals sold 4,928,585 shares of its common
stock and warrants to purchase 1,725,330 shares of common stock of Insmed
Incorporated for $34.5 million. The warrants are exercisable for five years at
a price of $9.00.

4. Corporate Collaboration

On July 10, 2000, Insmed Pharmaceuticals signed a definitive agreement with
Taisho Pharmaceutical Co., Ltd. ("Taisho") for the development and
commercialization in Japan and other Asian countries of the Company's lead
compound, INS-1, for the treatment of Type 2 diabetes and Polycystic Ovary
Syndrome. The collaboration includes license fees and payment of certain
development and regulatory milestones. Taisho will fund 20% of the development
costs of INS-1 in the United States and Insmed Pharmaceuticals will receive
royalties on product sales in Japan and other Asian countries.

F-13
<PAGE>

INSMED INCORPORATED
Notes to Condensed Consolidated Financial Statements--(Continued)
(Unaudited)

5. Reverse Stock Split

On July 28, 2000, our shareholders approved a one-for-four reverse stock
split. Such split was effective at the close of business on July 28, 2000, and
shares of Company common stock began trading on the post split basis at the
opening of the Nasdaq on July 31, 2000. Stockholders' equity has been restated
to give retroactive recognition to the reverse stock split. In addition, all
references in the financial statements to number of shares and per share
amounts have been restated.

F-14
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Insmed Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Insmed
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1999 and
1998 and the related consolidated statements of operations and cash flows for
each of the three years in the period ended December 31, 1999 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the period from September 21, 1988 (inception) to December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Insmed
Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 and for the period from September 21, 1988
(inception) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States.

/s/ Ernst & Young LLP

Richmond, Virginia
January 13, 2000

F-15
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 316,901 $ 11,677,084
Marketable securities............................ 4,318,273 --
Prepaids and other current assets................ 43,207 15,499
------------ ------------
Total current assets........................... 4,678,381 11,692,583
Property and equipment:
Research and development equipment............... 335,758 262,328
Furniture and equipment.......................... 167,876 161,582
------------ ------------
503,634 423,910
Accumulated depreciation......................... (262,267) (178,554)
------------ ------------
241,367 245,356
Other assets..................................... 375,784 --
------------ ------------
Total assets................................... $ 5,295,532 $ 11,937,939
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 746,682 $ 186,133
Other current liabilities........................ 87,259 65,352
Notes Payable.................................... -- 25,919
------------ ------------
Total current liabilities...................... 833,941 277,404
Stockholders' equity:
Series A Convertible Participating Preferred
Stock, $.01 par value: authorized shares,
7,000,000; issued and outstanding shares,
6,144,599 in 1999 and 1998; aggregate
liquidation preference, $8,713,212.............. 61,446 61,446
Series B Convertible Preferred Stock, $.01 par
value: authorized shares, 5,000,000; issued and
outstanding shares, 3,581,761 in 1999 and 1998;
aggregate liquidation preference, $14,327,044... 35,818 35,818
Common Stock, $.01 par value: authorized shares,
20,000,000; issued and outstanding shares,
3,872,453 in 1999 and 3,587,699 in 1998......... 38,725 35,877
Additional capital............................... 27,181,327 26,562,158
Notes receivable from stock sales................ (64,079) (47,139)
Deficit accumulated during the development
stage........................................... (22,780,309) (14,987,625)
Accumulated other comprehensive loss............. (11,337) --
------------ ------------
Total stockholders' equity..................... 4,461,591 11,660,535
------------ ------------
Total liabilities and stockholders' equity..... $ 5,295,532 $ 11,937,939
============ ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-16
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Consolidated Statements of Operations

<TABLE>
<CAPTION>
Period from
Sept. 21,
1988
Year Ended December 31, (inception)
------------------------------------- to Dec. 31,
1999 1998 1997 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Sponsored research and
other operating
revenues................ $ 663,162 $ 99,819 $ -- $ 1,634,443
Operating expenses:
Research and
development............. 6,348,541 3,768,752 2,604,818 17,477,732
General and
administrative.......... 2,444,873 1,625,941 978,615 7,800,470
----------- ----------- ----------- ------------
Total operating
expenses............... 8,793,414 5,394,693 3,583,433 25,278,202
----------- ----------- ----------- ------------
Operating loss.......... (8,130,252) (5,294,874) (3,583,433) (23,643,759)
Other (income) expenses:
Interest expense......... -- -- -- 167,684
Interest income.......... (337,568) (486,180) (103,485) (980,299)
Minority interest in
losses of subsidiary.... -- -- -- (50,835)
----------- ----------- ----------- ------------
(337,568) (486,180) (103,485) (863,450)
----------- ----------- ----------- ------------
Net loss................. $(7,792,684) $(4,808,694) $(3,479,948) $(22,780,309)
=========== =========== =========== ============
Basic and diluted:
Net loss per share....... $ (2.16) $ (1.47) $ (1.22)
Weighted average shares.. 3,606,094 3,277,966 2,854,359
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-17
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Consolidated Statement of Stockholders' Equity
For the Period from September 21, 1988 (inception) to December 31, 1999

<TABLE>
<CAPTION>
Convertible
Series A Preferred Deficit
Convertible Series B Stock Notes Accumulated Accumulated
Participating Convertible ------------- Receivable During the Other
Preferred Preferred Series Series Common Additional from Stock Development Comprehensive
Stock Stock B A Stock Capital Sales Stage Loss Total
------------- ----------- ------ ------ ------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
430,000 shares
of common stock
for cash....... $ -- $ -- $ -- $ -- $ 4,300 $ 791 $ -- $ -- $ -- $ 5,091
Issuance of
55,000 shares
of common stock
in exchange for
services....... -- -- -- -- 550 10,450 -- -- -- 11,000
Issuance of
15,000 shares
of common stock
to licensor.... -- -- -- -- 150 2,850 -- -- -- 3,000
Net loss for the
period from
September 21,
1988
(inception) to
December 31,
1988........... -- -- -- -- -- -- -- (36,036) -- (36,036)
----- ----- ----- ------ ------- ---------- ----- ----------- ----- ---------
Balance at
December 31,
1988........... -- -- -- -- 5,000 14,091 -- (36,036) -- (16,945)
Issuance of
68,230 shares
of common stock
for cash....... -- -- -- -- 682 38,464 -- -- -- 39,146
Issuance of
40,000 shares
of common stock
in exchange for
services....... -- -- -- -- 400 400 -- -- -- 800
Net loss for
1989........... -- -- -- -- -- -- -- (81,124) -- (81,124)
----- ----- ----- ------ ------- ---------- ----- ----------- ----- ---------
Balance at
December 31,
1989........... -- -- -- -- 6,082 52,955 -- (117,160) -- (58,123)
Issuance of
120,195 shares
of common stock
for cash....... -- -- -- -- 1,202 155,180 -- -- -- 156,382
Issuance of
22,685 shares
of common stock
in exchange for
notes payable.. -- -- -- -- 227 28,582 -- -- -- 28,809
Issuance of
1,000 shares of
common stock in
exchange for
services....... -- -- -- -- 10 1,490 -- -- -- 1,500
Net loss for
1990........... -- -- -- -- -- -- -- (323,006) -- (323,006)
----- ----- ----- ------ ------- ---------- ----- ----------- ----- ---------
Balance at
December 31,
1990........... -- -- -- -- 7,521 238,207 -- (440,166) -- (194,438)
Issuance of
256,470 shares
of common stock
for cash....... -- -- -- -- 2,565 214,938 -- -- -- 217,503
Issuance of
51,485 shares
of common stock
in exchange for
notes payable.. -- -- -- -- 515 50,283 -- -- -- 50,798
Issuance of
14,740 shares
of common stock
in exchange for
services....... -- -- -- -- 147 8,213 -- -- -- 8,360
Issuance of
17,775 shares
of common stock
to licensor.... -- -- -- -- 178 26,485 -- -- -- 26,663
Net loss for
1991........... -- -- -- -- -- -- -- (303,083) -- (303,083)
----- ----- ----- ------ ------- ---------- ----- ----------- ----- ---------
Balance at
December 31,
1991........... -- -- -- -- 10,926 538,126 -- (743,249) -- (194,197)
Issuance of
303,794 shares
of common stock
for cash....... -- -- -- -- 3,038 644,962 -- -- -- 648,000
Issuance of
9,398 shares of
common stock to
licensor....... -- -- -- -- 94 22,038 -- -- -- 22,132
Net loss for
1992........... -- -- -- -- -- -- -- (689,794) -- (689,794)
----- ----- ----- ------ ------- ---------- ----- ----------- ----- ---------
Balance at
December 31,
1992........... -- -- -- -- 14,058 1,205,126 -- (1,433,043) -- (213,859)
Issuance of
327,159 shares
of preferred
stock for cash,
net of offering
costs of
$54,969........ -- -- -- 3,272 -- 923,169 -- -- -- 926,441
Issuance of
13,333 shares
of preferred
stock in
exchange for
notes payable.. -- -- -- 133 -- 39,867 -- -- -- 40,000
Issuance of
10,530 shares
of common stock
to licensor.... -- -- -- -- 105 31,485 -- -- -- 31,590
Net loss for
1993........... -- -- -- -- -- -- -- (721,478) -- (721,478)
----- ----- ----- ------ ------- ---------- ----- ----------- ----- ---------
Balance at
December 31,
1993........... -- -- -- 3,405 14,163 2,199,647 -- (2,154,521) -- 62,694
</TABLE>

F-18
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Consolidated Statement of Stockholders' Equity (Continued)
For the Period from September 21, 1988 (inception) to December 31, 1999

<TABLE>
<CAPTION>
Series A Convertible Deficit
Convertible Series B Preferred Stock Notes Accumulated Accumulated
Participating Convertible ---------------- Receivable During the Other
Preferred Preferred Series Series Common Additional from Stock Development Comprehensive
Stock Stock B A Stock Capital Sales Stage Loss
------------- ----------- ------- ------- ------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
154,885 shares
of common stock
for cash upon
exercise of
warrants....... $ -- $ -- $ -- $ -- $ 1,549 $ 230,777 $ -- $ -- $ --
Issuance of
68,331 shares
of common stock
for cash, net
of offering
costs of
$42,119........ -- -- -- -- 683 162,191 -- -- --
Issuance of
6,093 shares of
common stock to
licensor....... -- -- -- -- 69 20,640 -- -- --
Net loss for
1994........... -- -- -- -- -- -- -- (1,250,081) --
----------- ----- ------- ------- ------- ----------- -------- ------------ -----
Balance at
December 31,
1994 .......... -- -- -- 3,405 16,464 2,613,255 -- (3,404,602) --
Issuance of
119,353 shares
of preferred
stock for cash,
net of offering
costs of
$134,861....... -- -- 1,194 -- -- 222,094 -- -- --
Issuance of
89,331 shares
of preferred
stock for cash
upon exercise
of warrants.... -- -- 893 -- -- 222,435 -- -- --
Issuance of
68,331 shares
of preferred
stock upon
exchange of
common stock... -- -- 683 -- (683) -- -- -- --
Issuance of
6,456 shares of
common stock to
licensor....... -- -- -- -- 64 19,304 -- -- --
Net loss for
1995........... -- -- -- -- -- -- -- (1,206,131) --
----------- ----- ------- ------- ------- ----------- -------- ------------ -----
Balance at
December 31,
1995 .......... -- -- 2,770 3,405 15,845 3,077,088 -- (4,610,733) --
Issuance of
408,582 shares
of common stock
for 340,492
shares of
Series A,
Convertible
Preferred
Stock.......... -- -- -- (3,405) 4,086 (681) -- -- --
Issuance of
332,446 shares
of common stock
for 277,045
shares of
Series B,
Convertible
preferred
Stock.......... -- -- (2,770) -- 3,324 (554) -- -- --
Issuance of
285,758 shares
of common stock
in exchange for
shares of
preferred and
common stock of
subsidiary..... -- -- -- -- 2,858 582,222 -- -- --
Issuance of
4,072,504
shares of
redeemable
preferred
stock.......... 5,294,255 -- -- -- -- (101,275) -- -- --
Issuance of
125,953 shares
of common stock
to licensor.... -- -- -- -- 1,259 17,633 -- -- --
Issuance of
24,757 shares
of common stock
for services... -- -- -- -- 248 3,466 -- -- --
Net loss for
1996........... -- -- -- -- -- -- -- (2,088,250) --
----------- ----- ------- ------- ------- ----------- -------- ------------ -----
Balance at
December 31,
1996........... 5,294,255 -- -- -- 27,620 3,577,899 -- (6,698,983) --
Issuance of
295,834 shares
of common stock
upon exercise
of stock
options........ -- -- -- -- 2,958 41,417 (44,375) -- --
Issuance of
2,072,095
shares of
redeemable
preferred
stock.......... 3,418,957 -- -- -- -- (19,552) -- -- --
Elimination of
redemption
rights......... (8,651,766) -- -- -- -- 8,651,766 -- -- --
Issuance of
64,085 shares
of common stock
to licensor.... -- -- -- -- 641 12,176 -- -- --
Issuance of
13,846 shares
of common stock
for services... -- -- -- -- 139 17,861 -- -- --
Net loss for
1997........... -- -- -- -- -- -- -- (3,479,948) --
----------- ----- ------- ------- ------- ----------- -------- ------------ -----
Balance at
December 31,
1997........... 61,446 -- -- -- 31,358 12,281,567 (44,375) (10,178,931) --
<CAPTION>
Total
------------
<S> <C>
Issuance of
154,885 shares
of common stock
for cash upon
exercise of
warrants....... $ 232,326
Issuance of
68,331 shares
of common stock
for cash, net
of offering
costs of
$42,119........ 162,874
Issuance of
6,093 shares of
common stock to
licensor....... 20,709
Net loss for
1994........... (1,250,081)
------------
Balance at
December 31,
1994 .......... (771,478)
Issuance of
119,353 shares
of preferred
stock for cash,
net of offering
costs of
$134,861....... 223,288
Issuance of
89,331 shares
of preferred
stock for cash
upon exercise
of warrants.... 223,328
Issuance of
68,331 shares
of preferred
stock upon
exchange of
common stock... --
Issuance of
6,456 shares of
common stock to
licensor....... 19,368
Net loss for
1995........... (1,206,131)
------------
Balance at
December 31,
1995 .......... (1,511,625)
Issuance of
408,582 shares
of common stock
for 340,492
shares of
Series A,
Convertible
Preferred
Stock.......... --
Issuance of
332,446 shares
of common stock
for 277,045
shares of
Series B,
Convertible
preferred
Stock.......... --
Issuance of
285,758 shares
of common stock
in exchange for
shares of
preferred and
common stock of
subsidiary..... 585,080
Issuance of
4,072,504
shares of
redeemable
preferred
stock.......... 5,192,980
Issuance of
125,953 shares
of common stock
to licensor.... 18,892
Issuance of
24,757 shares
of common stock
for services... 3,714
Net loss for
1996........... (2,088,250)
------------
Balance at
December 31,
1996........... 2,200,791
Issuance of
295,834 shares
of common stock
upon exercise
of stock
options........ --
Issuance of
2,072,095
shares of
redeemable
preferred
stock.......... 3,399,405
Elimination of
redemption
rights......... --
Issuance of
64,085 shares
of common stock
to licensor.... 12,817
Issuance of
13,846 shares
of common stock
for services... 18,000
Net loss for
1997........... (3,479,948)
------------
Balance at
December 31,
1997........... 2,151,065
</TABLE>

F-19
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Consolidated Statement of Stockholders' Equity (Continued)
For the Period from September 21, 1988 (inception) to December 31, 1999

See accompanying Notes to Consolidated Financial Statements.

F-20
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
Period from
Sept. 21, 1988
(inception) to
1999 1998 1997 Dec. 31, 1999
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net loss.............. $(7,792,684) $(4,808,694) $(3,479,948) $(22,780,309)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization...... 86,574 78,256 54,925 499,342
Gain on sale of
property and
equipment.......... 1,326 -- -- (5,370)
Issuance of stock
for services....... 10,921 65,016 30,817 286,515
Interest accrued on
notes receivable
from stock sales.. (2,840) (2,764) -- (5,604)
Recognition of stock
compensation
expense............ 284,855 -- -- 284,855
Accrued interest on
stock for debt
conversion........ 12,696
Minority interest in
losses of
subsidiary......... -- -- -- (50,835)
Changes in operating
assets and
liabilities:
Prepaids and other
assets............ (277,229) (15,139) -- (292,368)
Accounts payable
and other
liabilities....... 455,741 62,636 29,616 782,945
----------- ----------- ----------- ------------
Net cash used in
operating
activities....... (7,233,336) (4,620,689) (3,364,590) (21,268,133)
Cash Flows From
Investing Activities:
Purchases of
marketable
securities........ (4,329,610) -- -- (4,329,610)
Purchases of
property and
equipment......... (109,378) (114,528) (152,449) (607,717)
Proceeds from sale
of property and
equipment......... -- -- -- 31,100
Other............... -- -- -- (9,379)
----------- ----------- ----------- ------------
Net cash used in
investing
activities....... $(4,438,988) $ (114,528) $ (152,449) $ (4,915,606)
</TABLE>

F-21
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Consolidated Statements of Cash Flows (Continued)

<TABLE>
<CAPTION>
Period from
Year Ended December 31, Sept. 21, 1988
------------------------------------ (inception) to
1999 1998 1997 Dec. 31, 1999
------------ ----------- ---------- --------------
<S> <C> <C> <C> <C>
Cash Flows From:
Payment of deferred
offering costs......... $ -- $ -- $ (106,710) $ (185,587)
Proceeds from borrowings
on notes payable....... -- -- -- 921,046
Principal payments on
capitalized lease
obligations............ -- -- -- (174,809)
Principal payments on
notes payable.......... -- -- -- (73,565)
Proceeds from issuance
of redeemable preferred
stock.................. -- -- 3,567,738 7,860,176
Proceeds from issuance
of preferred stock..... -- 14,085,906 -- 15,537,840
Proceeds from issuance
of common stock........ 312,141 276,716 -- 2,050,179
Proceeds from sale of
preferred stock of
subsidiary............. -- -- -- 565,360
------------ ----------- ---------- -----------
Net cash provided by
financing
activities......... 312,141 14,362,622 3,461,028 26,500,640
------------ ----------- ---------- -----------
Decrease (increase) in
cash and cash
equivalents............ (11,360,183) 9,627,405 (56,011) 316,901
Cash and cash
equivalents at
beginning of period.... 11,677,084 2,049,679 2,105,690 --
------------ ----------- ---------- -----------
Cash and cash
equivalents at end of
period................. $ 316,901 $11,677,084 $2,049,679 $ 316,901
============ =========== ========== ===========
Supplemental Cash Flow
Disclosures:
Interest paid........... $ -- $ -- $ 13,454 $ 93,289
============ =========== ========== ===========
Equipment acquired under
capital leases......... $ -- $ -- $ -- $ 174,809
============ =========== ========== ===========
Issuance of redeemable
preferred stock in
exchange for notes
payable and accrued
interest............... $ -- $ -- $ -- $ 742,037
============ =========== ========== ===========
Issuance of preferred
stock in exchange for
notes payable.......... $ -- $ -- $ -- $ 40,000
============ =========== ========== ===========
Issuance of common stock
in exchange for notes
payable/receivable..... $ 15,600 $ -- $ 44,375 $ 139,582
============ =========== ========== ===========
Issuance of preferred
stock of subsidiary in
exchange for notes
payable................ $ -- $ -- $ -- $ 58,522
============ =========== ========== ===========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-22
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999

1. Significant Accounting Policies

Insmed Pharmaceuticals, Inc. (the Company) is a development stage
biopharmaceutical company incorporated in September 1988 to conduct research
and development aimed at treating type 2 diabetes, polycystic ovary syndrome
and other diseases associated with insulin resistance. The following is a
description of the Company's more significant accounting policies:

Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiary, Insmed Diagnostics, Inc. All
significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents. The Company considers liquid investments with
maturities of three months or less when purchased to be cash equivalents.
Substantially all cash equivalents are held in a short-term money market
account with a bank.

Marketable Securities. Marketable securities consist of corporate debt
securities, all of which mature within one year. Management classifies the
company's marketable securities as available for sale. Such securities are
stated at market value, with the unrealized gains and losses included as a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other than temporary on securities available for
sale are included in investment income. The cost of securities sold is
calculated using the specific identification method.

Property and Equipment. Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over periods ranging
from three to seven years.

Stock-Based Compensation. The Company recognizes expense for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation cost is recognized for the excess of
the estimated fair value of the stock at the grant date over the exercise
price, if any. Disclosures regarding alternative fair value measurement and
recognition methods prescribed by Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation, are presented in
Note 2.

Stock options granted to non-employees are accounted for in accordance with
EITF 96-18, Accounting for Equity Instruments that are issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Accordingly, the estimated fair value of the equity instrument is recorded on
the earlier of the performance commitment date or the date the services
required are completed.

Revenue Recognition. The Company has received funding from the U.S.
government and certain corporations in support of research, in some cases in
return for permitting those corporations exclusive review of certain research
results for limited time periods. Revenues for 1999 consist primarily of
proceeds from a Small Business Innovation Research Program (SBIR) grant to fund
a phase II study in PCOS subjects. Revenues for 1998 consist of an SBIR grant
to fund a phase I study in PCOS subjects. Grant revenues are not contingent
upon any specified results of the studies. Grant revenues are recognized over
the duration of the study to which the grant relates as reimbursable costs are
incurred. A study's duration is generally six to twelve months. Revenue related
to future performance is deferred and recognized as revenue when earned.

In 1996, 1995 and 1994, the Company had an agreement where revenue from
achievement of milestone events was recognized when the results stipulated in
the related agreement were met and there were no remaining performance
obligations. There have been no other agreements of this nature since
inception.

F-23
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements--(Continued)

Net Loss Per Share. Basic net loss per share is computed based upon the
weighted average number of common shares outstanding during the period. The
Company's diluted net loss per share is the same as its basic net loss per
share because all stock options, warrants, and other potentially dilutive
securities are antidilutive and, therefore, excluded from the calculation of
diluted net loss per share.

Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements. There have been no recently issued
accounting pronouncements that would have a material impact on the company's
financial position or results of operations.

2. Pending Acquisition of Celtrix Pharmaceuticals

On November 30, 1999, the Company entered into an agreement to acquire
Celtrix Pharmaceuticals, Inc. ("Celtrix"). At closing, each common share of
Celtrix will be exchanged for one share of common stock in a newly formed
holding company (Insmed Incorporated). The aggregate par value and related
dividends of Celtrix Series A Preferred Stock are convertible into Celtrix
common stock at a price per share of $2.006. The holders of Celtrix Series A
Preferred Stock will receive one share of common stock of Insmed Incorporated
on an as converted basis. Each preferred and common share of the Company will
be exchanged for three and one-half shares of common stock of Insmed
Incorporated. All options and warrants outstanding at the time of the
transaction will convert into options and warrants of the holding company. The
acquisition of Celtrix by the Company is subject to approval by the
shareholders of both companies, as well as certain other conditions. The
Company's current management and board of directors will govern the holding
company.

The Company has incurred $375,784 of legal, due diligence and other costs in
1999 related to the acquisition. These costs are reflected in other assets and
will be included in determining the purchase price of Celtrix.

3. Commitment to Issue Equity

The Company entered into an agreement to sell 5,632,678 shares of its common
stock and warrants to purchase 6,901,344 shares of common stock of Insmed
Incorporated for $34.5 million. The warrants are exercisable for five years at
a price of $2.25. Such sale is contingent upon approval of the merger with
Celtrix by the shareholders of both companies.

The proceeds of the issuance of the shares and warrants are expected to fund
Insmed Incorporated's research and development activities for at least two
years. Continuation of the present level of research and development efforts is
contingent upon continued availability of adequate financing. If the Celtrix
acquisition and the equity issuance are not consummated, management of the
Company intends to pursue and believes it can obtain other financing
arrangements including private placements and strategic partnerships.

4. Stockholders' Equity

Preferred Stock. Series A Convertible Participating Preferred Stock has a
liquidation preference ahead of all other classes of capital stock, and Series
B Convertible Preferred Stock has a liquidation preference ahead of common
stock equal to its original issue price plus any unpaid dividends. Preferred
stockholders are entitled to receive noncumulative dividends if declared by the
board of directors and in preference to common stockholders.

F-24
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements--(Continued)

Each holder of the preferred stock can convert these shares into an equal
number of shares of common stock at any time. These shares will automatically
convert at the time of the merger with Celtrix or otherwise upon a public
offering with gross proceeds of at least $10 million (at a price per share of
at least $4.95) or the vote of at least two-thirds of the outstanding shares.

The preferred stock entitles the holders to vote in all corporate matters
and approval of certain matters requires the majority vote of the outstanding
shares.

In 1997, the holders of the Series A shares agreed to eliminate their
redemption rights to enable additional financing for the Company.

Common Stock. Periodically, the Company has issued shares of common stock in
exchange for services provided by stockholders and others. These issuances have
been recorded at their estimated fair value at the time of the respective
transactions and corresponding amounts have been reflected as expense in the
accompanying consolidated statements of operations or netted against additional
capital when the issuance involves costs directly related to the sale of equity
securities. The estimated fair values used in recording these transactions were
based upon recent issuances of equity for cash, principally the sale of
preferred stock, taking into consideration the aggregate liquidation
preferences of the preferred stock.

In 1992, the Company's board of directors declared a five-for-one common
stock split that was effected in the form of a stock dividend. All share
activity before the split and all stock option and stock warrant data have been
restated to reflect the stock split.

Stock Options and Warrants. In 1994, the Company's stockholders approved the
adoption of a stock option plan for its key employees, directors, and
consultants. The plan provides for issuance of options to purchase up to
2,000,000 shares of common stock. At December 31, 1999, 33,582 options remain
available for new grants under the plan. Options may be granted at the
discretion of the board of directors at exercise prices not less than the
estimated fair value of such shares at the date of grant. Before adopting this
plan, the Company granted other stock options to certain employees, directors,
and consultants pursuant to agreements approved by the board of directors.

F-25
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements--(Continued)

A summary of stock option activity since inception is as follows (as
adjusted for the stock split):

<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance at Inception, September 21, 1988
Granted............................................. 1,288,463 $1.39
Expired............................................. (107,500) 2.09
Relinquished........................................ (220,000) 3.50
--------- -----
Outstanding at December 31, 1996.................... 960,963 0.81
========= =====
Exercisable at December 31, 1996.................... 528,152 $1.23
========= =====
Weighted Average Fair Value of Options Granted...... $0.01
Balance, December 31, 1996............................ 960,963 0.81
Granted............................................. 412,234 0.43
Expired............................................. (30,000) 5.00
Relinquished........................................ (25,417) 1.83
Exercised........................................... (295,834) 0.15
--------- -----
Outstanding at December 31, 1997.................... 1,021,946 0.70
========= =====
Exercisable at December 31, 1997.................... 528,413 $1.18
========= =====
Weighted Average Fair Value of Options Granted...... $0.01
Balance, December 31, 1997............................ 1,021,946 0.70
Granted............................................. 590,501 1.18
Relinquished........................................ (76,993) 0.19
Exercised........................................... (102,590) 0.16
--------- -----
Outstanding at December 31, 1998.................... 1,432,864 0.95
========= =====
Exercisable at December 31, 1998.................... 850,320 $1.37
========= =====
Weighted Average Fair Value of Options Granted...... $0.08
Balance, December 31, 1998............................ 1,432,864 0.95
Granted............................................. 532,484 0.80
Relinquished........................................ (73,172) 0.38
Exercised........................................... (188,642) 0.99
--------- -----
Outstanding at December 31, 1999.................... 1,703,534 0.93
========= =====
Exercisable at December 31, 1999.................... 955,667 $1.16
========= =====
Weighted Average Fair Value of Options Granted...... $0.38
</TABLE>

F-26
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements--(Continued)

At December 31, 1999 and 1998, 1,521,333 and 1,108,666 of the above options
represented grants under the Company's stock option plan, respectively. The
following table summarizes information about stock options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
Outstanding Contractual Exercisable
Exercise Price Options Life Options
-------------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.15.................................... 386,687 2.56 311,310
$0.20.................................... 159,145 2.62 99,078
$0.50.................................... 290,754 2.39 134,274
$0.80.................................... 580,207 4.85 124,264
$1.21.................................... 1,005 7.00 1,005
$1.30.................................... 2,227 7.00 2,227
$1.65.................................... 64,085 4.35 64,085
$2.50.................................... 3,061 5.59 3,061
$3.00.................................... 105,587 0.73 105,587
$4.00.................................... 110,776 5.46 110,776
--------- ---- -------
1,703,534 3.47 955,667
========= ==== =======
</TABLE>

In 1999, the Company recorded $285,000 in stock compensation expense. The
primary component of this charge, $254,000, relates to the exercise by the
Chief Executive Officer of options for 295,834 shares of common stock purchased
with the proceeds from a non-recourse note. This option grant is a variable
award for which the change in the fair market value of the underlying stock is
recognized as compensation expense. The remainder of the charge relates to 1999
stock option grants to employees and non-employees.

If the Company had accounted for its employee stock awards under the fair
value based method, the net loss would have increased by approximately $48,000
for 1999, $16,000 for 1998, and $10,000 for 1997. The basic and diluted net
loss per share would have increased $.01 in 1999, $.00 in 1998, $.00 in 1997.
These pro forma amounts are not indicative of future effects of applying the
fair value based method since stock based awards granted may vary from year to
year and vesting periods of one to four years were used to measure pro forma
compensation expense. The fair value for these awards was estimated at the date
of grant using the Black-Scholes pricing method assuming a weighted average
volatility rate of 25%, risk-free interest rate of 6.0%, no dividends, and a
weighted-average expected life of the option of 4 years (2 years in 1998 and
1997).

The Company has an agreement with its founding scientist to grant options to
enable him to maintain a three percent interest in the equity of the Company as
new equity securities are issued. The exercise price for these options is equal
to the issue price of the new securities. The right to continuing options will
expire one day before the merger with Celtrix or before a public offering.

Warrants were issued periodically to certain stockholders, directors, and
consultants for the purchase of common stock. At December 31, 1999, warrants
were outstanding to purchase 10,000 shares of common stock at $3.00 per share.
All of the warrants are exercisable and will expire on January 31, 2002 or upon
the effective date of a registration statement for a public offering.

A total of 11,439,894 shares of common stock were reserved at December 31,
1999 in connection with stock options, stock warrants, and potential
conversions of the preferred stock.

F-27
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements--(Continued)

5. Income Taxes

Deferred tax assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The deferred tax assets of approximately $8.3 million and $5.5 million at
December 31, 1999 and 1998, respectively, arise primarily due to net operating
loss carryforwards for income tax purposes. Due to the Company's cumulative
losses, these amounts have been entirely offset by a valuation allowance.

At December 31, 1999 and 1998, the Company had net operating loss
carryforwards for income tax purposes of approximately $20.6 million and $14.0
million, respectively, expiring in various years beginning in 2003. Utilization
of these carryforwards will be limited due to changes in the ownership of the
Company's common stock.

6. Leases

The Company leases office and laboratory space under operating lease
agreements expiring in February 2002. The leases provide for monthly rent of
approximately $14,300 with a 2.5% escalation per year. The Company also leases
a vehicle, office equipment and additional laboratory space.

Future minimum payments on these leases at December 31, 1999 were as
follows:

<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2000............................................................ $227,858
2001............................................................ 216,278
2002............................................................ 35,362
--------
$479,498
========
</TABLE>

Rent expense for all operating leases amounted to $243,010 in 1999, $222,747
in 1998, $127,434 in 1997 and $842,081 on a cumulative basis since inception.

7. Employee Benefit Plan

In 1996, the Company adopted a defined contribution plan covering
substantially all employees meeting certain eligibility requirements.
Participants may elect to contribute a specified portion of their compensation
to the plan on a tax-deferred basis. The Company has never contributed to this
plan.

8. License Agreement

In 1988, the Company entered into a license agreement with The University of
Virginia Alumni Patents Foundation (the Foundation). The agreement, as amended
in 1991, provides the Company an exclusive, worldwide license to develop and
sell products related to certain patent rights for insulin resistance and
associated disorders.

In consideration for the license agreement, Insmed Pharmaceuticals is
obligated to pay minimum annual licensing fees of $100,000 as well as patent
costs through the expiration of the patent rights in 2018. Insmed
Pharmaceuticals must pay the Foundation a royalty on the net sales of
therapeutic drugs covered by the license agreement. Royalties earned by the
Foundation will reduce licensing fees and, in case of patent infringement,
Insmed Pharmaceuticals may use 50% of royalties payable to the Foundation to
cover expenses it incurs to defend the patents.

F-28
<PAGE>

INSMED PHARMACEUTICALS, INC.
(a development stage company)
Notes to Consolidated Financial Statements--(Continued)

Under the license agreement, the Company is required to issue shares of its
common stock each time shares of any class of stock are issued so that the
Foundation at all times has a 3% undiluted interest in the Company. As of
December 31, 1999, the Foundation had received 395,244 shares of common stock
under the license agreement. These issuances have been recorded at their
estimated fair value at the time of the respective transaction. Related
expenses of $110,921 in 1999, $165,016 in 1998, $112,817 in 1997 and $1,053,218
on a cumulative basis since inception have been included in research and
development expense in the accompanying consolidated statements of operations.
The right to receive such stock expires one day before the merger with Celtrix
or before a public offering.

The Company also provides support for research at the University of Virginia
(UVA) that contributes toward commercial development of its planned products.
Certain of the Company's research activities have taken place at UVA. The
Company has also supported the research through consulting payments to
individuals conducting additional research work beyond their commitments as
employees of UVA. Total expense for research support to UVA amounted to
$347,324 in 1999, $180,000 in 1998, $191,600 in 1997 and $1,501,975 on a
cumulative basis since inception.

9. Related Party Transactions

The Company retained one of its directors as general counsel until June 1996
and subsequently retained him as corporate secretary. Payments for these
services amounted to $38,806 in 1999, $18,060 in 1998, $12,952 in 1997 and
$266,865 on a cumulative basis since inception.

On October 15, 1997, the Company loaned $44,375 to its chief executive
officer which he used to purchase 295,834 shares of the Company's common stock
pursuant to a stock option agreement. The note is collateralized by the shares
purchased and is payable on September 30, 2002. Interest accrues at 6.23% per
annum. The principal and accrued interest are presented as a separate component
of stockholders' equity.

F-29
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Celtrix Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Celtrix
Pharmaceuticals, Inc. as of March 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Celtrix
Pharmaceuticals, Inc. at March 31, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States.

/s/ Ernst & Young LLP

Richmond, Virginia
June 2, 2000

F-30
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 6,700 $ 1,258
Receivables and other current assets.................. 115 172
--------- ---------
Total current assets................................ 6,815 1,430
Property and equipment..................................
Machinery and equipment............................... 170 164
Less accumulated depreciation and amortization........ (102) (63)
--------- ---------
68 101
Assets held for sale.................................... 346 416
Intangible and other assets, net of accumulated
amortization of $1,557 and $1,235 at March 31, 2000 and
1999, respectively..................................... 2,582 2,554
--------- ---------
Total assets........................................ $ 9,811 $ 4,501
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ -- $ 547
Accrued clinical expenses............................. 89 439
Accrued compensation.................................. 54 47
Other accrued liabilities............................. 388 188
--------- ---------
Total current liabilities........................... 531 1,221
Series A convertible / exchangeable preferred stock,
$.01 par value, authorized, 10,000 shares; 8,010 issued
and outstanding at March 31, 2000, liquidation
preference $8.01 million............................... 7,948 --
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000
shares; 33,843,770 shares and 25,061,053 shares
issued and outstanding at March 31, 2000 and 1999,
respectively......................................... 338 251
Additional paid-in capital............................ 142,656 133,437
Cumulative preferred stock dividend................... 382 --
Accumulated deficit................................... (142,044) (130,408)
--------- ---------
Total stockholders' equity.......................... 1,332 3,280
--------- ---------
Total liabilities, preferred stock and stockholders'
equity............................................. $ 9,811 $ 4,501
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales.................................. $ -- $ 10 $ 51
Revenues from related parties.................. 662 -- --
Licensing revenues and other................... 140 121 610
-------- -------- --------
802 131 661
Costs and expenses:
Cost of sales.................................. -- -- 1
Research and development....................... 857 6,830 13,006
General and administrative..................... 2,169 2,272 1,985
Restructuring costs............................ -- 5,160 --
-------- -------- --------
3,026 14,262 14,992
-------- -------- --------
Operating loss.................................. (2,224) (14,131) (14,331)
Equity in loss from joint venture.............. (9,137) -- --
Interest income, net........................... 107 132 681
Gain on sale of investments.................... -- -- 737
Proceeds from settlement agreement............. -- 600 --
-------- -------- --------
Net loss....................................... $(11,254) $(13,399) $(12,913)
======== ======== ========
Income available to common stockholders......... $(11,636) $(13,399) $(12,913)
======== ======== ========
Basic and diluted net loss per share............ $ (0.42) $ (0.58) $ (0.61)
======== ======== ========
Shares used in basic and diluted per share
computation.................................... 27,877 22,941 21,004
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)

<TABLE>
<CAPTION>
Cumulative
Additional Preferred Total
Common Paid-in Stock Accumulated Stockholders'
Stock Capital Dividend Deficit Equity
------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31,
1997................... $153 $118,152 $-- $(104,095) $ 14,210
Issuance of 5,721,876
shares of common stock
and warrants to
purchase 2,860,934
shares of common stock
in a private placement,
net.................... 57 13,274 -- -- 13,331
Issuance of 75,748
shares of common stock
under the Employee
Stock Purchase Plan.... 1 116 -- -- 117
Unrealized loss on
available-for-sale
securities............. -- -- -- (1) (1)
Net loss................ -- -- -- (12,913) (12,913)
---- -------- ---- --------- --------
Balance at March 31,
1998................... 211 131,542 -- (117,009) 14,744
Issuance of 4,000,000
shares of common stock
and warrants to
purchase 6,000,000
shares of common stock
in a private placement,
net.................... 40 1,872 -- -- 1,912
Issuance of warrants to
purchase 75,000 shares
of common stock and
options to purchase
50,000 shares of common
stock to non-
employees.............. -- 23 -- -- 23
Net loss................ -- -- -- (13,399) (13,399)
---- -------- ---- --------- --------
Balance at March 31,
1999................... 251 133,437 -- (130,408) 3,280
Issuance of 1,508,751
shares of common stock
for cash, net.......... 15 2,444 -- 2,459
Issuance of 7,092,754
shares of common stock
upon exercise of stock
warrants............... 70 6,356 -- 6,426
Issuance of 181,212
shares of common stock
upon exercise of stock
options................ 2 419 -- 421
Accrued cumulative
preferred stock
dividends.............. -- -- 382 (382) --
Net loss................ -- (11,254) (11,254)
---- -------- ---- --------- --------
Balance at March 31,
2000................... $338 $142,656 $382 $(142,044) $ 1,332
==== ======== ==== ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-33
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
(In thousands)

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................................ $(11,254) $(13,399) $(12,913)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write off of leasehold improvements............. -- 5,311 --
Write off of deferred rent liability............ -- (816) --
Reduction in deferred rent liability............ -- (74) --
Depreciation and amortization................... 361 1,036 1,660
Gain on sale of investments..................... -- -- (737)
Equity in loss from Celtrix / Elan joint
venture........................................ 9,137 -- --
Changes in operating accounts: -- -- --
Receivables and other current assets............ 57 4 (22)
Accounts payable, accrued compensation and
other accrued liabilities...................... (690) (992) 854
-------- -------- --------
Net cash used in operating activities........ (2,389) (8,930) (11,158)
Cash flows from investing activities:
Investment in Celtrix/Elan joint venture........ (9,137) -- --
Sales and maturities of available-for-sale
securities..................................... -- 7,575 40,497
Purchase of available-for-sale securities....... -- (1,270) (43,482)
Decrease in restricted cash..................... -- -- 520
Proceeds from sale of assets held for sale...... 70 600 --
Capital expenditures............................ (6) (84) (187)
Increase in intangible and other assets......... (350) (168) (394)
-------- -------- --------
Net cash (used in) provided by investing
activities.................................. (9,423) 6,653 (3,046)
Cash flows from financing activities:
Proceeds from the issuance of Series A
convertible/exchangeable preferred stock,
net............................................ 7,948 -- --
Proceeds from issuance of common stock, net..... 9,306 1,935 13,448
Principal payments under lease obligations...... -- (8) (320)
-------- -------- --------
Net cash provided by financing activities.... 17,254 1,927 13,128
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 5,442 (350) (1,076)
Cash and cash equivalents at beginning of year... 1,258 1,608 2,684
-------- -------- --------
Cash and cash equivalents at end of year......... $ 6,700 $ 1,258 $ 1,608
======== ======== ========
Supplemental disclosure:
Interest paid.................................. $ -- $ 1 $ 24
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-34
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
March 31, 2000

1. Summary of Significant Accounting Policies

Celtrix Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical company
focused on developing novel therapeutics for the treatment of seriously
debilitating, degenerative conditions primarily associated with severe trauma,
chronic diseases or aging.

The consolidated financial statements include the accounts of Celtrix and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Cash Equivalents and Short-term Investments. Celtrix considers all highly
liquid investment securities with maturity from date of purchase of three
months or less to be cash equivalents and investment securities with maturity
from date of purchase of more than three months to be short-term investments.

Property and Equipment. Property and equipment is stated at cost.
Depreciation and amortization of property and equipment is provided on the
straight-line method over the estimated useful lives (three to seven years) of
the assets.

Intangible Assets. Intangible and other assets consist primarily of patents.
Patents, carried at cost, are amortized using the straight-line method over the
estimated useful lives of the related intellectual property, generally 12
years. Celtrix regularly performs reviews regarding the carrying value of the
assets. The reviews look for the existence of facts or circumstances, either
internal or external, which may indicate that the carrying value of the assets
cannot be recovered. To date no adjustments have been made to the carrying
value of the assets.

Revenue Recognition. Licensing revenues are recorded when contractually
earned. Revenues are not refundable if the research effort is not successful.
The Company has no future performance obligations relating to these licensing
revenues. Revenue from product sales is recognized at time of shipment.

Stock-Based Compensation. The Financial Accounting Standards Board issued
SFAS 123, "Accounting for Stock-Based Compensation" in October 1995, which
encourages, but does not require, companies to record compensation expense for
stock-based employee compensation plans at fair value. The Company has elected
to follow the disclosure requirements of SFAS 123 for the fiscal years ended
2000, 1999 and 1998 (see Note 6) and will continue to measure stock-based
compensation to employees in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees."

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for employee stock option grants in accordance with
APB Opinion No. 25, and, accordingly, recognizes no compensation for the stock
option grants.

Recently Issued Accounting Standard. In April 1998, the Company adopted
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net loss or stockholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income. Total comprehensive income (loss)
approximates net loss for the fiscal years ended March 31, 2000, 1999 and 1998.

Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the

F-35
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements--(Continued)

amounts reported in the financial statements and accompanying notes. Actual
results may differ from those estimates.

2. Acquisition of Celtrix by Insmed Pharmaceuticals, Inc.

On May 30, 2000, the shareholders of the Company and the shareholders of
Insmed Pharmaceuticals, Inc. (Insmed Pharmaceuticals) approved Insmed
Pharmaceuticals' acquisition of Celtrix. Insmed Pharmaceuticals is a
biopharmaceutical company focused on the diagnosis and treatment of medical
conditions associated with insulin resistance, including type 2 diabetes and
polycystic ovary syndrome (PCOS). Each common share of Celtrix was exchanged
for one share of common stock in a newly formed holding company (Insmed
Incorporated). The newly formed holding company is a publicly traded company.
The liquidation preference per share ($1,000 per share) plus accrued but unpaid
dividends of Celtrix Series A Convertible/Exchangeable Preferred Stock was
convertible into Celtrix common stock at a price per share of $2.006. The
holders of Celtrix Series A received shares of common stock of Insmed
Incorporated on an as converted basis. Each share of Insmed Pharmaceuticals was
exchanged for three and one-half shares of Insmed Incorporated.

Each outstanding option, warrant or other right to purchase shares of
Celtrix or Insmed Pharmaceuticals, Inc. common stock converted automatically
into a new option, warrant or other right to purchase the number of shares of
Insmed Incorporated common stock equal to the number of shares of Celtrix
common stock or Insmed Pharmaceuticals common stock, as the case may be,
issuable under the old option, warrant or other right multiplied by one (1) in
the case of Celtrix stock options, and 3.5 in the case of Insmed
Pharmaceuticals stock options, warrants, or other rights. Shares of Insmed
Incorporated common stock reserved for future issuance in connection with the
exercise of Celtrix options were 1,229,510 shares.

Costs to the Company related to the acquisition by Insmed Pharmaceuticals
are estimated to be $1.5 million, of which $531,000 had been incurred and
expensed as of March 31, 2000.

3. Joint Venture with Elan Corporation, plc

On April 21, 1999, the Company entered into an agreement with Elan
Corporation, plc to establish a joint venture (Celtrix Newco, Ltd.), a company
incorporated in Bermuda for the development of SomatoKine to treat osteoporosis
using Elan's MEDIPAD Delivery System. The joint venture company is initially
owned 80.1% by Celtrix and 19.9% by Elan. The joint venture company has
licensed SomatoKine technology from Celtrix and MEDIPAD technology from Elan.
Celtrix initially invested $8.01 million in the joint venture and Elan has
invested $1.99 million. At the time of closing, Elan International Services,
Ltd. (EIS) purchased $8.01 million of Celtrix Series A Convertible/Exchangeable
Preferred Stock.

The Series A Convertible/Exchangeable Preferred stock could be exchanged for
an additional ownership in the joint venture at EIS's option. As a result, it
is presented outside of permanent equity on the consolidated balance sheet. The
Series A Convertible/Exchangeable Preferred stock pays a 5% annual in-kind
dividend and has a liquidation preference of $1,000 per share or $8.01 million
plus accrued and unpaid dividends.

Although the Company owns 80.1% of the joint venture, the joint venture is
accounted for under the equity method of accounting. Celtrix has not
consolidated the joint venture company because Elan has substantive rights that
give them the ability to block significant decisions proposed by the Company
and to participate in matters arising in the ordinary course of business, which
would not normally require board of directors approval or approval by Elan. In
addition, Elan actively participates in directing and carrying out the
operating and capital activities of the joint venture's business.

The agreement with Elan also provides, at Celtrix's option, for EIS to
purchase from time to time Series B Convertible Preferred Stock up to an amount
of $4.8 million, the proceeds from which sale will be used by

F-36
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements--(Continued)

Celtrix to fund its share of the joint venture's operating expenses. Celtrix
and Elan will be reimbursed by the joint venture for research and development
and administrative work performed on behalf of the joint venture. The Series B
Convertible Preferred Stock is convertible into Celtrix common stock at a price
of $2.006 per share and pays a 9% annual in-kind dividend. The obligation of
Elan to purchase Series B Preferred Stock terminated at the time of the merger
with Insmed. See Note 2.

Elan received a $10 million license payment from the joint venture for the
use of MEDIPAD technology while Celtrix will have an 80% share in any future
proceeds related to the further development and commercialization of the
osteoporosis product (e.g. upfront payments, milestones or royalties) received
by the joint venture, regardless of ownership, until Celtrix is paid $10
million. Thereafter, Celtrix and Elan will share the joint venture's proceeds
in accordance with their ownership interests.

In April 1999, in a separate transaction, the Company issued 1,508,751
shares of common stock to Elan International Services, Ltd. at a price of
$1.657 per share, amounting to $2.4 million (net of expenses).

The following summarizes financial information of Celtrix Newco, Ltd. (in
thousands):

<TABLE>
<CAPTION>
Year Ended
March 31, 2000
--------------
<S> <C>
Costs and Expenses:
Research and Development................................ $ 11,255
General and Administrative.............................. 189
--------
Net Loss.................................................. $(11,444)
========
</TABLE>

The Company's share of the net loss was $9.17 million.

<TABLE>
<CAPTION>
Condensed Balance Sheet
March 31, 2000
-----------------------
<S> <C>
Current liabilities.............................. $ 11,444
Stockholders' equity............................. $(11,444)
</TABLE>

4. Assets Held for Sale

As a result of the September 1998 restructuring and the discontinuation of
manufacturing, the Company is in the process of selling certain equipment and
other fixed assets. The assets held for sale are recorded at the lower of
carrying values or fair value, less costs to sell.

5. Debt and Commitments

As a result of restructuring the Company and discontinuing manufacturing
operations in September 1998, the Company terminated its office, laboratory and
manufacturing facility lease effective November 1998. The Company also
terminated certain equipment operating leases as a result of the restructuring.
The Company currently leases offices in San Jose under an operating lease which
expires in June 2000. Rent expense was $186,000, $600,000, and $1.1 million for
the years ended March 31, 2000, 1999, and 1998, respectively.

6. Incentive and Benefit Plans

In September 1997, the stockholders approved an increase in the number of
shares reserved for issuance under the Company's 1991 Stock Option Plan from
1,500,000 to 3,000,000 shares of common stock. Under the 1991 Directors' Stock
Option Plan, 200,000 shares of Celtrix's common stock have been reserved for
issuance.

F-37
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements--(Continued)

The exercise prices under these plans are determined by the Board of Directors
or its committee and may not be less than 100% of the fair market value of
Celtrix's common stock at the time of grant. The options expire ten years from
the date of grant, unless otherwise provided in the option agreement. The
options generally become vested and exercisable over four years.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.

Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
March 31, 1995 under the fair value method of that Statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 2000, 1999,
and 1998, respectively: risk-free interest rates of 5.43%, 4.88%, and 6.03%,
dividend yields of zero; volatility factors of the expected market price of the
Company's common stock of .831, .801, and .792; and an expected option life of
5 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility and
expected option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

In September 1998, the stockholders approved an increase in the number of
shares reserved for issuance under the Company's 1991 Employee Stock Purchase
Plan from 250,000 to 500,000 shares of common stock. Under the plan, employees
have an opportunity to purchase common stock of Celtrix at 85% of the fair
market value at the beginning or end of each 12-month offering period,
whichever is lower. The first offering period commenced January 1, 1994. As of
March 31, 2000, 176,880 shares of common stock have been issued to company
employees. There were no shares issued, and subsequently no fair value of
employees' purchase rights estimated, for 1999 or 2000. The fair value of the
employees' purchase rights for 1998 was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.59%; dividend yield of zero; volatility factor of the
expected market price of the Company's common stock of .792; and an expected
life of 1 year.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for net loss per share
information):

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss............................ $(11,535) $(13,391) $(13,275)
Pro forma net loss per share.................. $ (0.43) $ (0.58) $ (0.63)
</TABLE>

The weighted-average fair value of options granted during 2000, 1999, and
1998 was $0.70, $1.14, and $1.59, respectively.

F-38
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements--(Continued)

A summary of the Company's stock option activity, which includes the 1991
Stock Option Plan and the 1991 Directors' Stock Option Plan, for the years
ended March 31 follows:

<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------
Shares Weighted-
Available Number of Price Per Average
for Grant Shares Share Exercise Price
---------- --------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997... 707,468 960,358 $1.25-$11.50 $2.61
Shares authorized......... 1,500,000 -- -- --
Options granted........... (1,073,783) 1,073,783 $ 2.00-$2.94 $2.34
Options canceled.......... 272,450 (272,450) $ 2.44-$3.94 $2.60
---------- --------- ------------ -----
Balance at March 31, 1998... 1,406,135 1,761,691 $1.25-$11.50 $2.39
Options granted........... (211,084) 211,084 $ 1.06-$2.88 $1.62
Options canceled.......... 731,275 (731,275) $1.25-$11.50 $2.38
---------- --------- ------------ -----
Balance at March 31, 1999... 1,926,326 1,241,500 $ 1.06-$8.00 $2.26
Options granted........... (269,222) 269,222 $ 1.00-$1.25 $1.01
Options exercised......... -- (181,212) $ 1.06-$3.94 $2.32
Options canceled.......... 100,000 (100,000) $ 2.50 $2.50
---------- --------- ------------ -----
Balance at March 31, 2000... 1,757,104 1,229,510 $ 1.00-$8.00 $1.96
========== ========= ============ =====
</TABLE>

The following table summarizes information concerning outstanding options at
March 31, 2000:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted-
Average Weighted Weighted-
Options Remaining Average Options Average
Outstanding at Contractual Exercise Exercisable at Exercise
Range of Exercise Price Mar. 31, '00 Life Price Mar. 31, '00 Price
----------------------- -------------- ----------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$1.00-$2.50 891,593 7.8 $1.68 436,015 $1.88
$2.51-$4.00 336,417 6.3 $2.67 271,583 $2.68
$4.01-$8.00 1,500 2.2 $8.00 1,500 $8.00
--------- -------
1,229,510 709,098
========= =======
</TABLE>

Under Celtrix's 1991 retirement savings plan ("401(k) Plan"), employees may
elect to defer up to 20% of their total compensation, not to exceed the amount
allowed by applicable Internal Revenue Service guidelines. There were no
employer contributions to the plan for the years ended March 31, 2000, 1999 or
1998.

7. Stockholders' Equity

In November 1998, Celtrix sold 4,000,000 shares of common stock in a private
placement at $0.50 per share, which resulted in net proceeds to the Company of
approximately $1.9 million. Additionally, the Company issued a three-year
warrant to purchase 6,000,000 shares of Celtrix common stock at $0.55 per
share. As of March 31, 2000, warrants for 210,000 shares were outstanding.

In April 1997, the Company completed a private placement of 5,721,876 newly
issued shares of common stock at $2.438 per share. For every two shares of
stock issued, the Company also issued a warrant to purchase an additional share
of Celtrix common stock at $2.682 per share. The warrants are exercisable only
after the shares of stock are held for at least one year and as of March 31,
2000, there were 492,205 warrants outstanding related to this financing
(102,543 were canceled due to the sale of stock). The warrant expired

F-39
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements--(Continued)

in April 2000. The net proceeds to the Company, after fees and expenses of
approximately $619,000, were $13.3 million.

8. License and Collaborative Arrangements

In July 1994, Celtrix entered into a license agreement with The Green Cross
Corporation ("Green Cross"), covering the development and commercialization of
SomatoKine for the treatment of osteoporosis in Japan. Under the terms of the
agreement, Green Cross was to be responsible for all related research,
development and marketing, as well as manufacturing the product to support its
preclinical, clinical and commercial needs in Japan. The agreement provided for
Celtrix to receive licensing fees, milestone payments upon Green Cross
accomplishing specific product development activities and royalties on future
product sales. Celtrix retained full rights outside of Japan to SomatoKine and
also to related know-how and technology developed by Green Cross. In April
1998, Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. In
May 1998, Celtrix received notice from Yoshitomi of its intent to terminate
this license agreement. This license was terminated in March 1999 upon the
payment by Yoshitomi of $600,000 to Celtrix. Celtrix regained the rights to the
treatment of osteoporosis in Japan.

In June 1994, the Company entered into a product development, license and
marketing agreement with Genzyme Corporation ("Genzyme") on TGF-beta-2 which
includes equity investments, milestone payments and potential royalties to
Celtrix. As part of the agreement, Celtrix sold to Genzyme 1,550,388 shares of
Celtrix common stock in June 1994, and subsequently, in December 1995 Celtrix
exercised the option to receive an additional investment by Genzyme for
1,472,829 shares of Celtrix common stock resulting in $4.4 million of net
proceeds to the Company. Under recently amended terms, Genzyme has been granted
expanded worldwide commercialization rights for all systemic applications and
select local applications of TGF-beta-2 to include Japan, China, Korea and
Taiwan; in exchange, Genzyme released Celtrix from certain service and royalty
obligations under the original agreement. Celtrix has retained rights to select
applications of TGF-beta-2 and the Company has the option to reacquire rights
to other product applications not pursued by Genzyme. In December 1997, the
Company also entered into a new license agreement with Genzyme granting Genzyme
a worldwide exclusive royalty-bearing license to TGF-beta antibodies, and
license and sublicense rights to TGF-beta receptor. Under the terms of the
agreement, Genzyme will assume the licensing and royalty obligations of Celtrix
related to TGF-beta receptor.

Since inception, Celtrix has entered into various other research and
development and licensing arrangements. Some of these agreements contain
royalty and other obligations.

9. Restructuring Costs

During fiscal year 1999, the Company restructured to focus on the clinical
development of SomatoKine, cease manufacturing operations and reduce the cash
burn rate. As a result, the Company recognized a $5.2 million restructuring
charge in the quarter ended September 30, 1998 consisting of a $5.3 million
non-cash write-off of leasehold improvements partly offset by $816,000 non-cash
reduction of deferred rent liability, $358,000 in severance expenses, $250,000
related to non-cancelable operating lease obligations, and $75,000 in other
restructuring-related charges. As part of the restructuring, the Company
reduced its workforce by 69 employees, or approximately 90%. The reduction in
workforce affected all levels of staff in manufacturing and other functions. As
of March 31, 2000, the Company had no restructuring liabilities remaining to be
paid.

10. Gain on Sale of Investments

In June 1997, the Company sold 43,750 shares of Prograft Medical, Inc.
preferred stock, resulting in the recording of $737,000 of gain on investment.
These shares were held by Celtrix since 1993.

F-40
<PAGE>

CELTRIX PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements--(Continued)

11. Income Taxes

At March 31, 2000, the Company had net operating loss and research tax
credit carryforwards for federal income tax purposes of approximately $137.4
million and $4.5 million, respectively, expiring in the years 2006 through
2020. The federal net operating loss carryforward differs from the accumulated
deficit principally due to (i) the nondeductibility for tax purposes of the
charges for in-process research and development resulting from two
acquisitions, and (ii) timing differences in the recognition of certain revenue
and expense items for financial and federal tax reporting purposes (primarily
certain expenses not currently deductible). Approximately $8.8 million of the
total federal net operating loss is available only to offset future
consolidated taxable income to the extent contributed by one of the Company's
wholly owned subsidiaries.

Utilization of a portion of the net operating losses and credits is subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986.

Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31 are as follows (in
thousands):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 48,000 $ 44,300
Research credits....................................... 6,100 5,900
Research expenses capitalized for tax purposes......... 2,400 2,400
Other.................................................. (600) (1,400)
-------- --------
Total deferred tax assets............................ 55,900 51,200
Valuation allowance for deferred tax assets............ (55,900) (51,200)
-------- --------
Net deferred tax assets.............................. $ -- $ --
======== ========
</TABLE>

The valuation allowance increased by $4.7 million, $5.4 million, and $4.8
million during the years ended March 31, 2000, 1999 and 1998, respectively.

12. Revenues from Related Parties

Revenues from related parties are from the joint venture formed by Celtrix
and Elan Corporation, plc. These revenues cover services performed on behalf of
the joint venture and $550,000 for the reimbursement, at Celtrix's production
cost, of the anticipated total amount of SomatoKine drug substance provided by
Celtrix to the joint venture for use in the clinical trial currently planned by
the joint venture.

F-41
<PAGE>

[LOGO OF INSMED INCORPORATED]
<PAGE>

SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 2000

[LOGO OF INSMED INCORPORATED]

6,000,000 Shares

Common Stock

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

Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.

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

Certain of Insmed's existing shareholders have granted the underwriters a
30-day option to purchase up to an additional 900,000 shares of common stock to
cover over-allotments.

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

Robertson Stephens International

Bank of America International Limited

Prudential-Bache International

The date of this Prospectus is , 2000
<PAGE>

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING

General. The underwriters, acting through their representatives,
Robertson Stephens International, Ltd., Bank of America International Limited
and Prudential-Bache International Limited have severally agreed to purchase
from us the number of shares of common stock next to their respective names
below. The underwriters are committed to purchase and pay for all the shares if
any are purchased.

<TABLE>
<CAPTION>
Number of
Shares
---------
Underwriter
-----------
<S> <C>
Robertson Stephens, Inc...............................................
Banc of America Securities LLC........................................
Prudential Securities Incorporated....................................
<CAPTION>
International Underwriter
-------------------------
<S> <C>
Robertson Stephens International, Ltd. ...............................
Bank of America International Limited.................................
Prudential-Bache International Limited................................
---------
Total............................................................... 6,000,000
=========
</TABLE>

55
<PAGE>

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
<TABLE>
<CAPTION>
Total
-------------------------
Per No Exercise Full Exercise
Share of Option of Option
----- ----------- -------------
<S> <C> <C> <C>
Public offering price......................... $ $ $
Underwriting discounts and commissions payable
by us........................................ $ $ $
Underwriting discounts and commissions payable
by the selling shareholders.................. $ $ $
</TABLE>

The expenses of this offering are estimated at $ and are payable
entirely by Insmed.

Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters, the selling shareholders and us against identified
civil liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of our representations and warranties
contained in the underwriting agreement. In addition, the underwriting
agreement contains a covenant that Insmed shall maintain Directors and Officers
liability insurance in the minimum amount of $10 million and cause Robertson
Stephens International, Ltd., on behalf of the underwriters, to be added to
such policy such that up to $500,000 of certain of its expenses shall be paid
directly by such insurers.

Lock-Up Agreements. Each executive officer, director, the selling
shareholders and several substantial shareholders agreed with the
representatives for a period of 90 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock, any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock, owned as of the date of this prospectus or thereafter acquired
directly by such holders or with respect to which they have or hereafter
acquire the power of disposition, without the prior written consent of
Robertson Stephens International, Ltd., on behalf of the underwriters.
Robertson Stephens International, Ltd. may, in its sole discretion and at any
time or from time to time without notice, release all or any portion of the
securities subject to the lock-up agreements.

Future Sales. In addition, we have agreed that during the 90 days after
the date of this prospectus we will not, subject to certain exceptions, without
the prior written consent of Robertson Stephens International, Ltd., on behalf
of the underwriters, (1) consent to the disposition of any shares held by
shareholders subject to lock-up agreements prior to the expiration of the lock-
up period or (2) issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than the sale of shares in this
offering, the issuance of common stock upon the exercise of outstanding options
or warrants and the issuance of options under our existing stock option and
incentive plans, provided that those options do not vest prior to the
expiration of the lock-up period.

Stock Market Listing. The common stock is quoted on the Nasdaq National
Market under the symbol "INSM."

56
<PAGE>

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
pursue, the underwriters will consider the price at which shares are available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Any "naked" short position
will be closed out by purchasing shares in the open market. Similar to the
other stabilizing transactions described below, open market purchasers made by
the underwriters to cover all or a portion of their short position may have the
effect of preventing or retarding a decline in the market price of our common
stock following this offering. As a result, our common stock may trade at a
price that is higher than the price that otherwise might prevail in the open
market.

. A "stabilizing bid" is a bid for or the purchase of shares of common
stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock.

The representatives have advised us that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

From time to time the underwriters have performed and may, in the future
perform, investment banking or other services for us and the selling
shareholders.